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Efficiency of public spending in developing countries : an efficiency frontier approach

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Author Info
Herrera, Santiago
Pang, Gaobo

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Abstract

Government spending in developing countries typically account for between15 and 30 percent of GDP. Hence, small changes in the efficiency of public spending could have a major impact on GDP and on the attainment of the government's objectives. The first challenge that stakeholders face is measuring efficiency. This paper attempts such quantification and has two major parts. The first part estimates efficiency as the distance between observed input-output combinations and an efficiency frontier (defined as the maximum attainable output for a given level of inputs). This frontier is estimated for several health and education output indicators by means of the Free Disposable Hull (FDH) and Data Envelopment Analysis (DEA) techniques. Both input-inefficiency (excess input consumption to achieve a level of output) and output-inefficiency (output shortfall for a given level of inputs) are scored in a sample of 140 countries using data from 1996 to 2002. The second part of the paper seeks to verify empirical regularities of the cross-country variation in efficiency. Results show that countries with higher expenditure levels register lower efficiency scores, as well as countries where the wage bill is a larger share of the government's budget. Similarly, countries with higher ratios of public to private financing of the service provision score lower efficiency, as do countries plagued by the HIV/AIDS epidemic and those with higher income inequality. Countries with higher aid-dependency ratios also tend to score lower in efficiency, probably due to the volatility of this type of funding that impedes medium term planning and budgeting. Though no causality may be inferred from this exercise, it points at different factors to understand why some countries might need more resources than others to achieve similar educational and health outcomes.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3645.

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Date of creation: 01 Jun 2005
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Handle: RePEc:wbk:wbrwps:3645

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Keywords: Environmental Economics&Policies; Health Monitoring&Evaluation; Economic Theory&Research; Pharmaceuticals&Pharmacoeconomics; Financial Crisis Management&Restructuring;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. António Afonso & Miguel St. Aubyn, 2004. "Non-parametric Approaches to Education and Health Expenditure Efficiency in OECD Countries," Working Papers 2004/01, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
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  6. Nancy Birdsall & Stijn Claessens & Ishac Diwan, 2003. "Policy Selectivity Forgone: Debt and Donor Behavior in Africa," World Bank Economic Review, Oxford University Press, vol. 17(3), pages 409-435, December.
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  7. Andrew C. Worthington, 2001. "An Empirical Survey of Frontier Efficiency Measurement Techniques in Education," Education Economics, Taylor and Francis Journals, vol. 9(3), pages 245-268, December. [Downloadable!] (restricted)
  8. Sen, Amartya, 1981. "Public Action and the Quality of Life in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 43(4), pages 287-319, November.
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  12. Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Aggregating governance indicators," Policy Research Working Paper Series 2195, The World Bank. [Downloadable!]
  13. Isabelle Joumard & Per Mathis Kongsrud & Young-Sook Nam & Robert Price, 2004. "Enhancing the Effectiveness of Public Spending: Experience in OECD Countries," OECD Economics Department Working Papers 380, OECD, Economics Department. [Downloadable!]
  14. Nadeem Ul Haque & Sunil Sharma & M. Hashem Pesaran, 1999. "Neglected Heterogeneity and Dynamics in Cross-Country Savings Regressions," IMF Working Papers 99/128, International Monetary Fund.
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  15. Farasat A.S. Bokhari & Yunwei Gai & Pablo Gottret, 2005. "Government Health Expenditures and Health Outcomes," Working Papers wp2005_02_01, Department of Economics, Florida State University, revised May 2006. [Downloadable!]
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  16. Le Grand, Julian, 1987. "Inequalities in health : Some international comparisons," European Economic Review, Elsevier, vol. 31(1-2), pages 182-191. [Downloadable!] (restricted)
  17. Jayasuriya, Ruwan & Wodon, Quentin, 2003. "Measuring and Explaining Country Efficiency in Improving Health and Education Indicators," MPRA Paper 11183, University Library of Munich, Germany. [Downloadable!]
  18. Eric A. Hanushek, 2002. "The Failure of Input-based Schooling Policies," NBER Working Papers 9040, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Cazals, Catherine & Florens, Jean-Pierre & Simar, Leopold, 2002. "Nonparametric frontier estimation: a robust approach," Journal of Econometrics, Elsevier, vol. 106(1), pages 1-25, January. [Downloadable!] (restricted)
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  25. Laurens Cherchye & Thierry Post, 2003. "Methodological Advances in DEA: A survey and an application for the Dutch electricity sector," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 57(4), pages 410-438. [Downloadable!] (restricted)
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  27. Sebastian Galiani & Paul Gertler & Ernesto Schargrodsky, 2005. "Water for Life: The Impact of the Privatization of Water Services on Child Mortality," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 83-120, February.
  28. Ravallion, Martin, 2003. "In measuring aggregate"social efficiency"," Policy Research Working Paper Series 3166, The World Bank. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Antonio Estache & Marianela González & Lourdes Trujillo, 2007. "Government Expenditures on Education, Health, and Infrastructure: A Naïve Look at Levels, Outcomes, and Efficiency," City University Economics Discussion Papers 07/03, Department of Economics, City University, London. [Downloadable!]
    Other versions:
  2. David Hauner, 2007. "Benchmarking the Efficiency of Public Expenditure in the Russian Federation," IMF Working Papers 07/246, International Monetary Fund. [Downloadable!]
  3. Tatjana Slavova, 2008. "A rank order and efficiency evaluation of the EU regions in a social framework," Empirica, Springer, vol. 35(4), pages 339-367, September. [Downloadable!] (restricted)
  4. Lucas Novaes & Enlinson Mattos & Fabiana Rocha & Paulo Arvate & Veronica Orellano, 2008. "Economias de escala na oferta de serviços públicos de saúde: um estudo para os municípios paulistas," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807181429220, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  5. Etibar Jafarov & Victoria Gunnarsson, 2008. "Government Spending on Health Care and Education in Croatia: Efficiency and Reform Options," IMF Working Papers 08/136, International Monetary Fund. [Downloadable!]
  6. Antonis Adam & Manthos D. Delis & Pantelis Kammas, 2008. "Fiscal Decentralization and Public Sector Efficiency: Evidence from OECD Countries," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  7. Christopher Faircloth & Benedict J. Clements & Marijn Verhoeven, 2007. "Public Expenditure in Latin America: Trends and Key Policy Issues," IMF Working Papers 07/21, International Monetary Fund. [Downloadable!]
  8. Adam, Antonis & Delis, Manthos D & Kammas, Pantelis, 2008. "Public sector efficiency: Leveling the playing field between OECD countries," MPRA Paper 16493, University Library of Munich, Germany. [Downloadable!]
  9. David Hauner & Annette Kyobe, 2008. "Determinants of Government Efficiency," IMF Working Papers 08/228, International Monetary Fund. [Downloadable!]
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