This paper explores the relationship between government expenditures and economic development in Taiwan and also tests three hypotheses often found in the public economics literature: Wagner’s Hypothesis of increasing government activity; Peacock and Wiseman’s Hypothesis of the displacement effect; and Herber’s Hypothesis of relative change in government activity during the different phases of economic development.
The most important results of the regression analysis employed in the study are summarized below:
(1) The elasticity of total government expenditures with respect to income is significantly greater than unity. This result supports Wagner’s Hypothesis.
(2) Among the various government expenditures allocated for administrative affairs, the elasticity of expenditures for state-run enterprises is largest with respect to income; the elasticity of expenditures earmarked for social welfare is next.
(3) The elasticity of current expenditures with respect to income is significantly less than unity, but the elasticity of capital expenditures is significantly greater than unity.
(4) The elasticities of both central and local expenditures are slightly greater than unity and also very close to each other.
(5) By employing the Chow test for the period after 1973, we determine that the expenditures for economic construction and communications and also the expenditures for education, science, and culture are related to structural changes in the economy. Further, use of a dummy test for the same post-1973 period shows that an upward shift has occurred in the elasticity of the expenditures for economic construction and communications with respect to income.
(6) Using a t-test to compare the elasticities of government expenditures during the “primary import-substitution period” and during the “export-expansion period,” we find a significant upward shift in the elasticity of the expenditures for economic construction and communications, but the elasticities of expenditures for state-run enterprises and education, science, and culture shift downwards. Comparing the elasticities of government expenditures during the “export-expansion period” and during the “secondary import-substitution period,” we discern an upward shift in the elasticity of expenditures for general administration, foreign affairs, and defense, according to our t-test.
(7) The short-run elasticity of expenditures for nongeneral administration, foreign affairs, and defense with respect to income is 0.52, the coefficient of partial adjustment is 0.49, but the long-run elasticity equivalent is 1.07.
