A test of the Wagner's hypothesis for the Fiji islands

Abstract

In this article we examine Wagner's law for Fiji for the period 1970 to 2002. Using the Johansen (1988) test for cointegration, we find one cointegration relationship between national output and government expenditure. Using five different long run estimators, we find robust results on the impact of national income on government expenditure. The elasticity ranges from 1.36 to 1.44, implying that a 1% increase in income leads to a 1.36–1.44% increase in government expenditure. Moreover, we find that in the long run national income Granger causes government expenditure. While these results are consistent with Wagner's law, we warn policy makers that because Fiji's total debt stands at around 69% of GDP, in future the bulk of expenditure will go towards debt financing at the expense of productive sectors.

Notes

¹ Some key features of the Fiji Islands can be summarized as follows. First, Fiji currently has one of the highest levels of total debt in the world; equivalent to 69% of gross domestic product. A recent study by Narayan and Narayan (2003) warn that Fiji's current account is not entirely sustainability, and in the light of this expanding total debt, it is fair to claim that if remedial action is not taken urgently then Fiji stands on the brink of bankruptcy. Second, since the first coups in 1987, Fiji's economy has struggled to grow at respectable rates (see Narayan, 2004a; Narayan and Narayan, 2004a, b, c). Coups have also dented trade liberalization efforts in Fiji (Narayan and Smyth, 2004), and coups have negatively impacted Fiji's tourism industry, on which the economy is largely dependent for foreign exchange earnings and employment (see Narayan, 2004b, c, 2005a, b). Narayan and Smyth (2003) have shown that coups have led to out migration of skilled and professional human capital from Fiji (see also Narayan and Prasad, 2003).