Efficiency of Public Spending in Developing Countries: An Efficiency Frontier Approach
World Bank, Poverty Reduction and Economic Management Network, Economic Policy and Debt Department, 2005 - Children - 67 pages
Government spending in developing countries typically account for between 15 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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Explaining Inefficiency Variation Across Countries
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1econda 4evel AFR EAP ECA average Bahrain Bangladesh Bank WDI World coefficients correlation Data Envelopment Analysis Data Source DEA FDH DEA developing countries EAP ECA LAC ECA LAC MNA education and health education attainment Education Expenditure efficiency frontier Efficiency Output Efficiency efficiency scores Envelopment Analysis DEA expectancy at birth factors of production FDH DEA FDH GDP per capita Gini Coefficient gross primary health and education Health Attainment Health Expenditure Immunization DPT Immunization Measles inefficient Input Efficiency Output inputs public expenditure LAC MNA SAS learning scores Lesotho literacy of adult Literacy of Youth Multiple Inputs Multiple Outputs Namibia non-parametric OECD Orthogonalized Public output indicators Output-Efficiency scores outputs life expectancy primary enrollment private spending production possibility frontier public spending returns to scale sample School Enrollment second level complete Secondary Enrollment Single Output Table teachers per pupil WDI World Bank World Bank WDI