Quality of Government and Living Standards: Adjusting for the Efficiency of Public Spending

22 Pages Posted: 1 Nov 2012

See all articles by Francesco Grigoli

Francesco Grigoli

International Monetary Fund (IMF)

Eduardo Ley

World Bank

Date Written: July 2012

Abstract

It is generally acknowledged that the government’s output is difficult to define and its value is hard to measure. The practical solution, adopted by national accounts systems, is to equate output to input costs. However, several studies estimate significant inefficiencies in government activities (i.e., same output could be achieved with less inputs), implying that inputs are not a good approximation for outputs. If taken seriously, the next logical step is to purge from GDP the fraction of government inputs that is wasted. As differences in the quality of the public sector have a direct impact on citizens’ effective consumption of public and private goods and services, we must take them into account when computing a measure of living standards. We illustrate such a correction computing corrected per capita GDPs on the basis of two studies that estimate efficiency scores for several dimensions of government activities. We show that the correction could be significant, and rankings of living standards could be re-ordered as a result.

Keywords: System Of National Accounts, Efficiency, Living Standards, Governance, Government Expenditures, General Aggregative Models

JEL Classification: H40, H80, H55

Suggested Citation

Grigoli, Francesco and Ley, Eduardo, Quality of Government and Living Standards: Adjusting for the Efficiency of Public Spending (July 2012). IMF Working Paper No. 12/182. Available at SSRN: https://ssrn.com/abstract=2169727

Francesco Grigoli (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Eduardo Ley

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

HOME PAGE: http://eWorldNet.org

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