Does Wagner’s Hypothesis Explain the Dynamics of Health Expenditures in Transition Countries?

Abstract

The purpose of this study is to analyze the short and long run causal relationship between public health expenditure and GDP per capita in transition economies within the context of the Wagner hypothesis. For the period 2000-2020, the empirical analysis was conducted using a dataset covering 22 transition countries: Latvia, Belarus, Czechia, Georgia, Bulgaria, Hungary, Estonia, Croatia, Moldova, Bosnia and Herzegovina, Slovenia, Ukraine, Armenia, Lithuania, Russian Federation, Slovak Republic, Romania, Turkmenistan, Uzbekistan, Tajikistan, Kyrgyz Republic, and Kazakhstan. Wagner emphasizes that increases in government expenditure, considered an endogenous variable, do not drive GDP growth. In essence, Wagner argues that a rise in GDP leads to an increase in government expenditures. The study assessed the validity of Wagner’s hypothesis by applying the Panel Cross-Sectionally Augmented Autoregressive Distributed Lag model (CS-ARDL), developed by Chudik et al. (2016), using annual data. For the empirical analysis, panel data from selected transition countries underwent causality tests proposed by Juodis, Karavias and Sarafidis (2021) and Dumitrescu and Hurlin (2012). The stationarity of the series was assessed using a panel unit root test. Subsequently, the panel cointegration test developed by Westerlund (2007) was employed to ascertain the long run cointegration of the variables in the subsequent phase. The results suggest that the Wagner hypothesis holds true within the context of transition countries, as indicated by the outcomes of the CS-ARDL model. The causality test revealed a one-way causal linkage between GDP per capita and health expenditure. Recommendations for those who make policy decisions were made in light of the findings.