Efficiency of Public Spending in Developing Countries: An Efficiency Frontier Approach

69 Pages Posted: 26 Jul 2005

See all articles by Santiago Herrera

Santiago Herrera

World Bank

Gaobo Pang

Northern Trust Asset Management

Multiple version iconThere are 3 versions of this paper

Date Written: June 2005

Abstract

Governments of developing countries typically spend 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 one 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.

Suggested Citation

Herrera, Santiago and Pang, Gaobo, Efficiency of Public Spending in Developing Countries: An Efficiency Frontier Approach (June 2005). World Bank Policy Research Working Paper No. 3645. Available at SSRN: https://ssrn.com/abstract=757387

Santiago Herrera (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Gaobo Pang

Northern Trust Asset Management ( email )

50 South LaSalle Street
Chicago, IL 60603
United States
3126306980 (Phone)

HOME PAGE: http://www.northerntrust.com

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