Determinants of the Time-Pattern of Government spending in the developing countries: The case of Iraq

Abstract

This study aims to examine the economic and sociopolitical factors determining the growth-pattern of public spending in Iraq. During 1921-50 the capacity of the Government to spend was constrained largely by its ability to collect taxation, particularly indirect taxes. The Government was unable to increase its revenue from oil since its bargaining position against the foreign oil companies was weak due to the terms of concessions. Evidence for 1950 to 1980 strongly supports Wagner's Law suggesting that public spending increases along with the level of development. Also, it shows that satisfaction of public needs has depended largely on the availability of financial resources, mainly oil receipts. As the revenue constraint relaxed in the early 1970's, government spending expanded substantially in relation to national income. Therefore, the rapid shift in government spending and its major categories was solely due to the "social upheaval" brought about by oil nationalization. Experience of economic planning since 1951 reveals that the main defect of economic policy was reliance upon crude oil export, which is determined by exogenous factors in an uncertain world market. Only in the late 1970's was fiscal policy able to contribute to the integration of the oil sector in the national economy and to curtail the dependence on oil receipts.