Public spending, voracity, and Wagner’s law in developing countries Bernardin Akitoby, Benedict Clements, Sanjeev Gupta * , Gabriela Inchauste International Monetary Fund, Washington, D.C., 20431, USA Received 12 July 2005; received in revised form 30 November 2005; accepted 8 December 2005 Available online 18 January 2006 Abstract An examination of the short- and long-term relation between government spending and output in 51 developing countries reveals evidence consistent with cyclical ratcheting and voracity reflected in a tendency for government spending to increase over time. The main components of government spending are procyclical in some 40% of countries. Output and government spending are cointegrated for at least one of the spending aggregates in 70% of countries, implying a long-term relationship between government spending and output consistent with Wagner’s law. In contrast, prior studies have found only weak support for Wagner’s law for developing countries, although somewhat stronger support for industrial countries. D 2005 Elsevier B.V. All rights reserved. JEL classification: E62; H50; H60 Keywords: Fiscal policy; Voracity; Business cycles; Wagner’s law 1. Introduction Various studies including Velasco (1993), Perotti (1996), and Tornell and Lane (1998, Tornell, 1999) conclude that institutional influences and the underlying power structure of an economy explain overspending of transitory increases in fiscal revenues. 1 The spending 0176-2680/$ - see front matter D 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.ejpoleco.2005.12.001 * Corresponding author. Tel.: +1 202 623 8872; fax: +1 202 589 8872. E-mail address: sgupta@imf.org (S. Gupta). 1 Liquidity constraints can also play a role in limiting the capacity for countercyclical policy: during economic downturns, countries often face a loss of market confidence, and thus intensified borrowing constraints. The loss of market access makes it impossible to run a countercyclical fiscal policy, at least in periods of sharp contractions in output. However, as Talvi and Ve ´gh (2000) point out, it would be somewhat far-fetched to argue that most developing countries have lost access to international credit markets during recessions on a systematic basis over the past three decades. European Journal of Political Economy 22 (2006) 908 – 924 www.elsevier.com/locate/ejpe