# WPS3645

## **Efficiency of Public Spending in Developing Countries: An Efficiency Frontier Approach**<sup>**1**</sup>

Santiago Herrera Gaobo Pang

## _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 crosscountry 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._

## World Bank Policy Research Working Paper 3645, June 2005

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org._ 1 The paper is a draft of work in progress that carries the names of the authors and should be cited accordingly. The authors thank Antonio Estache, Jorge Garcia, April Harding, Ulrich Lachler, Vikram Nehru, John Rust, and participants at seminars of the Economic Policy and Debt Department of the World Bank., the Banca d’Italia Workshop on Public Finance and the Economics Department at the University of Maryland for helpful comments on earlier drafts of the paper. The dataset, specific-country results, and programs are available in the World Bank PRMED (Economic Policy and Debt Department) website.