Policy recommendations to reduce the growth of public spending are haunted by the inevitability of two factors. First Wagner's law, the hypothesis that with economic development an increasing share of GDP is devoted to public spending, and secondly, Baumol's effect, that as economies develop, public sector prices rise faster than prices in the general economy. Neither of these hypotheses has adequately been tested, largely because consistent public sector prices are unavailable for most developing countries. This paper proposes that the unavailability of consistent public sector price deflators can be overcome by econometrically estimating these series with the help of data on public spending and the widely available GDP deflator. This paper presents an anaylsis of time series data from 71 countries. The paper finds that although data support Wagner's law in the majority of developing countries, the degree of support varies with the level of development. Similarly, the average income elasticity of public spending drops from the low income economies through to the industrial economies. In the long run, the size of the public sector tapers off as the economies develop.
Details
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Author
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Document Date
1990/05/31
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Document Type
Policy Research Working Paper
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Report Number
WPS423
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2010/07/01
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Disclosure Status
Disclosed
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Doc Name
Relative price changes and the growth of the public sector
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Keywords
government expenditure;cost per unit of output;relative price;measure of government size;real gross national product;early stage of development;increase in government expenditure;annual average growth rate;public sector price;high productivity growth;nominal government expenditure;industrial market;relative price movement;national tax journal;access to capital;gdp deflator;current account balance;central government expenditure;general government expenditure;real growth rate;public sector wage;purchase of goods;wages and salary;social security scheme;middle income economy;european socialist country;living standard measurement;cost of capital;implications for policy;government wage policy;differences in results;private consumption expenditure;portion of total;relative price change;middle-income economy;
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Citation
Khan,M. Shahbaz
Relative price changes and the growth of the public sector (English). Policy, Research, and External Affairs working papers,no. WPS 423 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/292251468764733514/Relative-price-changes-and-the-growth-of-the-public-sector