Many schools of thought have discussed the importance of public spending on the status of the country’s economic development. Wagner’s law for example, argues that economic growth leads to an increase in public expenditure. According to the theory by the German economist, Adolph Wagner in late 1800s and early 1900s, an increase in demands of services from the public and growth in administrative activities pushed the government to spend more, which resulted in a cumulative increase of public expenses. Thus, Wagner’s law asserted that economic growth (e.g., generating more national revenues) translated and led to an increase in public spending (Dilrukshini, 2009; Musgrave, 1959). Alternatively, the Keynesian hypothesis deemed that government spending translates into economic growth by supporting public programs and projects. The Keynesian economists argue that government needs to intervene in the economy through spending more on social programs and government projects, where increases in public expenditures support economic activities and economic growth (Ageli, 2013; Dilrukshini, 2009). Therefore, one could argue that in both approaches, budget allocations are significantly connected to economic and sustainable development.
Thus, this study explores the relationship between economic growth and government spending in Middle East and North Africa (MENA) countries from 1980-2019 (This study includes the following countries: Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, West Bank and Gaza, and Yemen); which one influences the other (two-way relationship). One of the main purposes of this study is to see which above approaches (theories) are more applicable and applied to the economic status of the countries in the region. Accordingly, this study addresses the following questions:
à What is the connection between Economic growth (GDP/PPP) (annual %) vs. Government spending (% of GDP) for all MENA countries (collectively)?
à What is the connection between Economic growth (GDP/PPP) (annual %) vs. Government spending (% of GDP) for all MENA countries (for each country)?
à whether government spending influences economic growth or economic growth influences government spending in MENA countries (collectively and for each country)?
Economic growth (GDP/PPP) (annual %) = Gross domestic product per capita, current prices Purchasing power parity; international dollars
Government spending (% of GDP) = General government total expenditure (% of GDP)
Sources: World Economic Outlook Database
However, I am open to any suggestion; My proposal for the methodology is:
Structural break concept and tests, and techniques? as following:
Þ Transfer annual data into quarter data for all countries (using EViews for example)
Þ Deciding structural break points; running Bai-Perron structural break test (it might be good idea to limit the study to 4 significant structural break points)
Þ If we have 4 significant structural break points, then we have 8 periods (before and after each break point)
Þ Then we perform Unit rot test for each period
Þ Then we perform Cointegration for each period
Þ Then we do the Estimation for each period
In this case we will end up with a stable model, that could be used.