CHAPTER ONE INTRODUCTION 1.1 Backgrounds To The Study
Adolph Wagner (1835-1917) was a German economist, politician, and public finance scholar. He put forward his law of increasing public expenditures in 1893 known as wagners hypothesis (WH) or Wagners law (WL). Adolph Wagner was perhaps the first to offer a direct economic account of the increasing public expenditures. Musgrave and Musgrave (1988) noted that he anticipated the trends to be realized fifty to hundred years later that development of modern industrial society would give rise to increase political pressure for social progress and a continuous increase in public sector.
Wagners law was derived from the historical experiences of the early stages of industrialization in Europe and Germany in particular. Wagner identified three main factors for increased government spending. First, administrative and protective role of government will increase as a countrys economy develops. Secondly, with the expansion of economy, government expenditures on culture and welfare would rise, particularly on education and health. Finally the technological progress of the industrialized nations requires government to undertake certain economic services for which private sector is shy (khan, 1990).
Wagners law since its emergence has been the subject of intensive and extensive investigations. In particular, after the Second World War (1939-1945), when public consumption declined in favour of the private activities development. In other words, Wagners law states that government expenditure grows because there is an increasing demand for public goods and for the control of externalities caused by growth and development of the economy. In effect, the law also suggests that causality runs from national income to public expenditure, indicating that public expenditure is considered endogenous to the growth of national income.