130822 AfonsoSchuknechtTanzi2005 Public Sector Efficiency an International Comparison 30026689

8/12/2019 130822 AfonsoSchuknechtTanzi2005 Public Sector Efficiency an International Comparison 30026689

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Public Sector Efficiency: An International ComparisonAuthor(s): Antnio Afonso, Ludger Schuknecht and Vito TanziSource: Public Choice, Vol. 123, No. 3/4 (Jun., 2005), pp. 321-347Published by: SpringerStable URL: http://www.jstor.org/stable/30026689.

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322indicators hat reflect the rule of law andpromoteequalityof opportunitynthe marketplace. Economic philosophersfrom Adam Smithto Hayek andBuchananhave stressed the importanceof rules of law in promoting"good"governmentandthe"wealthof nations".Naturally heyassumethatthe rulesare"good"rules.We will set these indicators in relation to the costs of achievingthem.Wewill, hence,derivesimple performance ndefficiencyindicators or 1990and 2000 for the public sectors of 23 industrialisedOECD countries. Theperformancendex is then also used in a FreeDisposableHull(FDH)analysis,a rarelyused non-parametric roductionfrontiertechniqueto estimate theextent of slack in governmentexpenditures.

Note, however, hat t is notonly public expenditurebut also tax andregu-latorypoliciesthataffect theefficiencyof thepublicsector.Whileexpenditureis also a relatively good proxyof the tax burden,we ignorethe compositionof tax revenueand othercharacteristics f tax systems.1Publicspendingmaybe closely related o regulationbecauselargecivil services,thatoften accom-panylarge public spending,are likely to generatemuchregulationand viceversa.

Thepaper s organisedas follows. In thenext twosectionson"public ectorperformance ndicators"andpublic sectorexpenditureefficiency analysis",we discuss and compute the PSP and PSE indicators. The fourth sectionextends theefficiency analysiswith thehelp of an FDH analysisand the fifthsectionprovidesconclusions.Public Sector Performance IndicatorsMethodologyand dataThestudy ooks at 23 OECD countries or which we compileddataon variouspublic expenditurecategories and socio-economic variables,reflectingtheeffects/outputs/outcomes f governmentpolicies.3Assume that PSP dependson the values of certain economic and socialindicators I). If thereare i countriesandj areasof governmentperformance,which togetherdetermine overall performance n countryi, PSPi, we canthen write

n

PSPi = LPSPij,j=1 (1)with PSPi/ = f(Ik).Therefore,an improvement n PSP dependson an improvement n thevalues of the relevantsocio-economic indicators:

APSPijlJ=E AIk. (2)i=k &Ik

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323Thegreater hepositiveeffect of public expenditureon anyof the selectedsub-indicators, he greaterwill be the envisaged improvement n the PSPindicator.Accordingly,the changes that might occur in the economic andsocial indicatorsmaybe seen as changesin PSP.As a firststep,we define seven sub-indicators f public performance.Thefirst four look at administrative, ducation, health,andpublic infrastructureoutcomes. A good public administration,with a well-functioningjudiciaryanda healthyand well-educatedpopulation,couldbe considereda prerequi-site for a level playingfield with well-functioningmarketsand secureprop-

erty rights, where the rule of law applies, and opportunitiesareplenty andin principleaccessible to all. High-qualitypublicinfrastructures conduciveto attainingthe same objectives.These indicators, hereby, ry to reflect thequalityof the interactionbetween fiscal policies and the marketprocess andthe influence on individualopportunitieshis has. Theycould be called"pro-cess" or "opportunity"ndicators. We adopt the latter terminology in thefollowing.The three other sub-indicators eflect the "Musgravian"asks for govern-ment. Thesetryto measure he outcomes of the interactionwith and reactionsto the marketprocessby government. ncome distribution s measuredby thefirstof these indicators.An economicstability ndicator llustrates he achieve-mentof the stabilisationobjective.The third ndicator ries to assess allocativeefficiency by economicperformance.The conceptualseparations of coursesomewhatartificial,as forexamplehealthand education ndicatorscouldalsobe seen as indicatorsof allocativeefficiency. Finally, all sub-indicatorsareput together n a PSP indicator.Beforeshowingtheresult, t is worthwhile llustratinghow we derivetheseperformancendicators.Figure1 shows thesocio-economicindices on whichgovernmenthas a significant f not exclusive influence andwhich, therefore,reflect as close as possible the outcomes of public policies (Annex TablesA and B provide primarydata).These indices formthe seven sub-indicatorsmentionedabove.In as much as possible we providedata for 1990 and 2000(or the nearest available year), and in some instances, 10-year averages.This is because we are not so much interested n annualfluctuationsbut instructural hanges in PSP.Manyindices reflect "stocks"which change onlyvery slowly over time so that observationsevery 10 years suffice to reflectsuch structural hanges.A case in point is for example per capitaGDP andsecondaryschool enrolment.Other ndices, such as inflationor GDPgrowth,vary stronglyand a 10-yearaverageseems the best way to capture ong-termtrendsand structural hanges.4The choice of the socio-economic indices, that form the seven sub-indicators,warrants urtherdiscussion. In this context,it is also worthstress-ing that the degreeof suitabilityof the indicators n proxyingthe outcome ofpublicsectoractivity s nothomogeneous.Theirselectionfroma vastpool of



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324Opportunityndicators StandardMusgravian"ndicators

Corruption DistributionIncomeshare of40%pooresthouseholds

RedtapeAdminis-trative Stability

SStabilityof GDPgrowth(coeff. ofvariation

QualityofjudiciaryShadoweconomy

Inflation10 yearsaverage)GDPper capita(PPP)

SecondaryschoolenrolmentEducation

Economicperformance

GDPgrowth 10yearsaverage)

EducationachievementInfantmortality

Health

Unemployment10yearsaverage)

Lifeexpectancy

Quality omm-unication&transportnfrast.

PublicInfrastruc-ture

Totalpublicsectorperformance

Figure1. Totalpublicsectorperformance PSP)indicator.

variables eflectsourbestattempt see Annex TableD for acompleteoverviewof indices andsources).As to the"opportunityndicators", dministrative erformance f govern-ment is measuredas acompositeof thefollowingindices:corruption, edtape(concerning heregulatory nvironment),qualityof thejudiciary(concerningthe confidencein the administration f justice) and the size of the shadoweconomy (whichis undermininghe level playingfieldby beinguntaxedandunregulated).Thesevariablesstand orsecurityof property ights,rule of law,enforceabilityof contractsand a level fiscal andregulatoryplayingfield. Dataforcorruption, edtapeandefficient udiciarycome fromthe WorldEconomicForum.The informationon the size of the shadoweconomy is takenfromSchneider 2002), thatuses a currencydemandapproachn its computations.The education indicator contains secondaryschool enrolmentand theOECDeducationalattainmentndicators n order o measureboth thequantity



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325andqualityof education.Secondary chool enrolmentproxiesminimaleduca-tionstandardshatneed to be attained o haveequal opportunitiesn industrialcountries.Educationattainments a more mixed indicatorof opportunitythehighereducationstandardshe less likely the need for supplementary rivateeducation,whichonly thewell-off canafford)andefficiency(as a proxyforacountry'shumancapitalbase).For thisindicator,we use datafromthe OECDsurveyon test scores in reading,mathematicsand science [OECD(2001c)]PISAreport.The health performance ndicator contains infantmortalityand life ex-pectancy.These are well-knownindicators hat reflecthigh-qualityandalsorelatively equalaccess to healthservices across thepopulation.Basic health,in turn, is a prerequisite or equal opportunity n the marketprocess. Thepublicinfrastructurendicatorcontains a measureof thecommunicationsandtransportnfrastructure uality.It is a mixed indicator hatmeasuresoppor-tunity(in the absenceof roadsonly the rich can affordhelicoptersor planerides)andefficiency(as this infrastructurendicatorproxiestheprovisionofpublic goods). All these indicatorschange slowly so thatobservationsevery10yearsprovidea good impressionof changesover time. An exceptionis thecase of publicinfrastructure,whereperiod averageshave been used (forlackof morefrequentdata).As to the standard"Musgravian", eneral indicators less explanation sneededas the underlying ndicatorsarewell-established n the economic lit-erature.Income distribution s proxied by the income share of the poorest40% of the households. Economic stabilityis measuredby the stabilityofoutputgrowth(coefficientof variation)andaverageinflation(10-yearaver-age). Economicperformance omprisesper-capitaGDP (PPP),GDP growth(10-yearaverage)andunemployment 10-yearaverage).The totalPSP indi-cator combinesthe seven sub-indicators.Note that some indicesalso capturethe effect of regulationratherthan expenditurepolicies and some indicesare only partlythe result of governmentpolicies (for example, privatepro-vision andfinancingof healthandeducationplay an important ole in somecountries).

Computation f theperformance ndexWecompiletheperformancendicators rom the various ndicesgivingequalweightto each of them. Forexample,redtape, efficiencyof thejudiciary,cor-ruptionand size of the shadoweconomy,eachcontribute25% to the adminis-trativeperformancendicator.This of courseintroducesa strongassumption.For those indicators,wherehighernumbersare less favourable e.g., infantmortality,nflation),we use the inverse of the originalvalues. In orderto fa-cilitate the compilation,we normalised he values and set the averagefor allindicesequalto 1. The values for each countryarethenrecalculatedrelative



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Table1.Publicsector

performance

(PSP)indicators

(2000)

Opportunity

indicators

Standard

"Musgravian"

indicators

Totalpublic

Economic

sectorperformance

Country

Administration

Education

Health

Infrastructure

Distribution

Stability

performance

(equalweightsa)

Australia

1.17

1.02

0.94

1.00

0.87

1.31

1.00

1.04

Austria

1.21

1.00

0.98

1.10

1.22

1.28

1.01

1.12

Belgium

0.73

1.00

0.94

0.91

1.17

1.10

0.83

0.95

Canada

1.11

1.05

0.95

1.16

0.92

1.00

0.92

1.02

Denmark

1.16

1.00

1.03

1.03

1.19

1.10

0.91

1.06

Finland

1.26

1.07

1.04

1.18

0.75

0.73

1.01

France

0.72

1.03

1.03

1.01

0.90

1.12

0.70

0.93

Germany

1.02

0.98

1.01

1.01

0.98

0.91

0.81

0.96

Greece

0.60

0.94

0.93

0.81

0.97

0.55

0.69

0.78

Iceland

1.02

0.98

1.25

0.59

1.29

1.03

Ireland

1.06

0.94

0.88

1.00

0.89

1.22

1.40

1.05

Italy

0.52

0.96

0.93

0.84

1.10

0.76

0.69

0.83

Japan

0.87

1.09

1.12

1.09

1.20

1.40

1.18

1.14

Luxembourg

1.05

0.81

0.95

1.22

2.04

1.21

Netherlands

1.16

1.04

0.97

1.09

1.00

1.42

1.06

1.11

NewZealand

1.18

1.03

0.89

0.62

0.99

0.84

0.93

Norway

0.97

1.04

1.09

0.94

1.17

1.45

1.26

1.13

Portugal

0.54

0.94

0.90

0.75

0.92

0.64

0.92

0.80

Spain

0.77

1.00

1.10

0.86

1.02

0.82

0.67

0.89(Continued

onnextpage)

327



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329

0

1.50

1.25

1.00-

0.75

0.50

0.25 .

Improvement(+)Luxembourg Japan

Ireland. Switzerlan,Spain OsPortugalGreece EGroItaly

Worsening(-)0.25 0.50 0.75 1.00 1.25 1.50

1990Figure2. Public sectorperformance:1990 and2000.

addition o totalpublicspending,we looked ataveragespendingongoods andservices, transfers, unctionalspendingon education and health andpublicinvestment.Data for 1990 and2000 for these categoriesacross countriesarereported n Annex Table C. Public expendituresdiffer considerablyacrosscountries.Averagetotal spendingin the 1990s rangedfrom around35% ofGDPinthe UnitedStatesto 64% of GDP in Sweden. Thedifference s mainlydue tomore or less extensive welfareprograms.Publicspendingonhealthandeducationandongoodsandservices differmuch ess stronglyacrosscountries.Based on the framework f Equations 1) and(2), we nowcompute ndica-tors of PSE. Weweigh performanceasmeasuredbythe PSPindicators)bytheamountof relevantpublicexpenditure PEX), that is used to achieve a givenperformanceevel. The overallPSE indicator or anycountry , is given by:

PSPiPSEi - , (3)PEXiwith

PSPi n PSPijPEX- (4)PEXi I=PEXi)

Positivebutdecliningmarginalproductivityof PEX wouldimply:aPSEij _2PSEi0> 0, < 0. (5)aPEXij aPEX(



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330In order o computeefficiencyindicators,public spendingwas normalisedacrosscountries,with the averagetakingthe value of one for each of the sixcategories specifiedabove. We focus on averageexpenditureover the 1990s,as we would assume a lagged effect from spendingon performance.Forexample, public spendingon educationover thepreviousdecade,is assumedto affect educationalachievement n 2000.

Computation f theefficiency ndexBefore puttingPSP and expenditure ogether,it is worth stressingthat notall expenditurecategoriesareequally suitable indices for measuring he ef-ficiency with which a certainperformance s achieved. Goods and servicesspendingare a rathercrudeapproximationor what is needed to achieve ad-ministrativeefficiency.Health and educationspendingseem bettermeasuresof the publicsectorinputs n these domains.Noticehowever, hat t is noteasytoaccurately dentifythe effects of publicsectorspendingon outcomes andseparate he impactof spendingfromotherinfluences.Forinstance, t is difficult o assess to what extent does higher ifeexpectancyreflectpublic ntervention atherhanother actorssuch asclimate,dietaryhabits,and so on. The sameargument ould be maderegardingnfantmortality.Onthat ine of reasoning,adversegeographical onditionsmayalsoimpairon thequalityand cost of a countrycommunicationsnfrastructure.Transferssocialpaymentsonly) areprobablysuitableapproximationsorgovernmentspendingto promoteincome equality,andpublic investment slikely to be closely connected with infrastructure uality.8Total spendingmaybe a usefulproxyforgovernment tabilisation ffortsbecauseautomaticstabilisersarelarger n countrieswith "big governments"see, Bouthevillainet al., 2001; Van den Noord,2000). Totalspendingis generallyfinancedbydistortive taxation.It can, hence, be used as a proxy for the efficiency (orinefficiency)of the state in affectingeconomicperformance.Before turning oTable2, which reports he ratio of performanceand ex-penditurendices as so-calledPSEindicators, t is worthwhilestressinga fewcaveats.Publicspendingacross countries s notalways fully comparable venthoughmuchprogresshas been achieved in this regard.Forexample, somecountries' transferpaymentsare taxed, thereby overstatingpublic spendingcompared o countries where such benefits are not taxed. Nevertheless, t isnot possible to systematicallyassess and correct such problems.Moreover,comparingexpenditureratios across countriesimplicitly assumes thatpro-duction costs forpublicservices areproportionateo GDP per capita.Whilethis approximations likely to be quite good for labourintensive services(such as education or administrative fficiency), it is likely to be less so forinfrastructureuality.In the absence of cross-countrydataof differentpublicservice sectorcosts, this is nevertheless he best possible approximation.



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333We findsignificantdifferences n PSE acrosscountries.Japan,Switzerland,Australia, he United States andLuxembourg how the best values for over-all efficiency. Looking at country groups, "small"governments post thehighest efficiency amongst ndustrialised ountries.Differencesare consider-able as "small"governmentson averagepost 40% higherscores than"big"governments.9In summary,we find that differences in efficiency are much more pro-nounced than in performanceacross countries,with "small"governmentsclearly outrankinghe others.This illustrates hatthe size of governmentmaybe toolarge nmany ndustrialised ountries,withdecliningmarginalproductsbeingratherprevalent.Butgiventhe non-extremedifferences n performance

as outlinedabove, the incidence of "negative"marginalproductsof publicspendingmaybe more limited.

Measuring Input and Output Efficiency Via an FDH AnalysisTheFDH analysisIn a final step, we use the informationfrom previous sections to measurethe "wastefulness"of public spendingacross countries, i.e., the input andoutputefficiencyof expenditure.To thisend,we applya so-calledFDH anal-ysis, which is a non-parametricechnique hat was firstproposedby Deprins,Simar,andTulkens(1984).10In the FDH frameworkt is possible to ranktheefficiencyof producersby comparing ach individualperformancewith apro-ductionpossibilityfrontier.Along thisproductionpossibilityfrontierone canobserve the highestpossible level of output/outcomeor a given level of in-put.Conversely, t is possibleto determine he lowest level of inputnecessaryto attain a given level of output/outcome.This allows identifyinginefficientproducersboth in termsof inputefficiency and in terms of output/outcomeefficiency.There are a few other studies that apply FDH analysis to assess pub-lic spendingefficiency.Van den Eeckhaut,Tulkens,and Jamar 1993) stud-ied the efficiency of public spendingin Belgian municipalities,and Fakinand Crombrugghe 1997) assessed the efficiency of governmentexpendi-turesas regardssome specific public services in OECD and CentralEuropecountries.Guptaand Verhoeven(2001) use FDH analysis to measure theefficiency of government expenditureon education and health in a setof countries in Africa. Clements (2002) assesses the efficiency of edu-cation spending in the EuropeanUnion. Aubyn (2002) reportsresults ofFDH analysis applied to education and health spending in OECD coun-tries, while Afonso and St. Aubyn (2003) apply both FDH and DEA tothose two sectors. The FDH methodologycan be well illustratedgraphically(Figure3).



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334Y,indexofperformance

Y(A)=1O

Y(B)=5

A

C

D

B

X, spendingX(A)=100X(B)=150Figure3. Productionpossibilityfrontier.

Assume fourcountries,A, B, C and D that use a certainamountof publicexpenditures,measuredon the horizontalaxis inmonetaryunits.The countriesare then assumed to achieve a certain evel of public spendingperformance,measuredon the vertical axis.The efficiency of the four countries is obviously different.For instance,countryB uses more input than countryA [X(B) > X(A)], but producesless output[Y(B) < Y(A)]. Therefore,countryB is relativelyinefficient incomparisonwith countryA. On the other hand, countryA is efficient inrelation o countryB, and it is placedon the"production ossibilityfrontier".

This means there are no othercountriesbesides countryA that deliver thesame level of outputwith a lower level of input. Similarly,countries C andD are efficient and are also on the productionpossibility frontier.No othercountry s inefficientcompared o them.11This frameworkallows the calculationof the"production ossibilityfron-tier",and input efficiency and output efficiency scores in order to rank thesample countries in terms of public spending efficiency. These efficiencyscores will be set between 0 and 1, and all the countriesplaced on the"productionpossibility frontier"will be assignedthe maximum score of 1.Note that this approachs likely to underestimatenefficiencies,as the coun-tries on the "production ossibility frontier"are efficientby definition(eventhough they too may have scope for savings). The input efficiency scoreof a given country ndicates how much less inputthis countrycould use toachieve the same level of output. Additionally,the output efficiency scoreof a given countrywould tell how much more outputthe country should



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335be able to producewith the same amount of resources that it is currentlyusing.12

FDH-basedexpenditure fficiencyanalysisWe now conduct an FDH efficiency analysis of public expenditureto oursampleof 23 OECD countries. Public spendingas a percentageof GDP in2000 measures the input and as outputwe use the PSP indicatoralreadydetermined n the section on public sector performance.The "productionpossibilityfrontier" or our set of countries s presentednFigure4.13Onecansee thatthe most efficientcountries,positionedon the"production ossibilityfrontier",are the United States, Japanand Luxembourg.Australia,IrelandandSwitzerlandcome veryclose to the frontier,while the othercountriesarefurther emoved and therefore ess "efficient".

The figure shows that the EU countries are mostly well inside the pro-ductionpossibilityfrontier.They mostly reporta muchhigherratioof publicexpenditure atio than the United States,but neverthelessoften report owerPSP indicators.The resultsboth for input efficiency and outputefficiency are presentedin Table3, wherewereportthe respective efficiency scores along with eachcountry'sranking.The Table shows thatinput efficiency scores startat 0.57 andoutputeffi-ciency scores at 0.65. The average nput efficiencyof the 15 EU countries s0.73 meaningthattheyshould be able to attain he same level of outputusingonly 73%of theinputsthey arecurrentlyusing (orabout35%of GDPrather

o

'-

0

t

Q0.

'o,

1.50

1.25

1.00

0.75

0.50

LuxemrnbouJapanUS

witzerlandAbstralia

AustriaSweden

GermanyGermanyItalyGreece

"Productionossibilityrontier"25 30 35 40 45 50 55 60

Total public expenditures/GDP (%)Figure4. Publicexpenditureandpublicsectorperformance,23 OECDcountries,2000.



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336Table3. Efficiencyscores:Publicexpenditures s a %of GDP in 2000 andPublicSectorPerformance ndicator see Table1)

Inputefficiency OutputefficiencyCountry Score Rank Score RankAustralia 0.99 4 0.92 7Austria 0.67 17 0.92 8Belgium 0.66 19 0.79 18Canada 0.75 12 0.84 13Denmark 0.62 21 0.87 11Finland 0.61 22 0.83 14France 0.64 20 0.77 20Germany 0.72 16 0.79 17Greece 0.73 14 0.65 23Iceland 0.87 7 0.90 10Ireland 0.96 5 0.93 6Italy 0.66 18 0.68 22Japan 1.00 1 1.00 1Luxembourg 1.00 1 1.00 1Netherlands 0.72 15 0.91 9New Zealand 0.83 9 0.81 15Norway 0.73 13 0.93 5Portugal 0.79 11 0.70 21Spain 0.80 10 0.78 19Sweden 0.57 23 0.86 12Switzerland 0.95 6 0.94 4UnitedKingdom 0.84 8 0.80 16United States 1.00 1 1.00 1Average 0.79 0.85EU15 average 0.73 0.82Non-EU15 average 0.89 0.92Smallgovernments1/ 0.98 0.96Mediumgovernments1/ 0.81 0.82Big governments1/ 0.65 0.83EU 15 2/ 0.72 0.78Euroarea 2/ 0.70 0.78The values in bold signal the countries located on the productionpossibilityfrontier.aSeenotes of Tables1 and 2.bWeightedaveragesaccordingto the share of each countryGDP in the relevantgroup.



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337thanclose to 50%).Theoutputefficiencyscoreimpliesthatwithgivenpublicexpenditures,PSP is 82%(or 18% ess) of what it could be if the EU was ontheproductionpossibilityfrontier andmore f the countrieson theproductionpossibilityfrontieralso havescope forexpenditure avings). By contrast, henon-EUOECDcountriesreportmoreefficientpublic expenditure.An averageinput efficiencyscoreof 0.89 impliesonly roughly 11%"waste".It is also nowpossible to focus on some specific interestingcases, such asSweden. It reportsa PSP indicatorof 1.04, above the averageof the countrysample. High public spendingpushes down the PSE indicatorto a value ofonly0.82, well below theaverage.Theinputefficiencyscore of 0.57 suggeststhat little more thanhalf the currentspendingwouldbe sufficientto achievethe same PSP.The situation s similar n some of theothercountrieswith"biggovernments", amelyFrance,GermanyandItaly,wherepublicexpendituresaccountfor around50%of GDP.Indeed,with the exceptionof Luxembourg,alltwo othercountries ocatedonor near heproductionpossibilityfrontierbe-long to thegroupof "smallgovernment" ountries,with a public expenditureratiobelow the 40% threshold.ConclusionWe developedindicatorsof public sectorperformance PSP) andefficiency(PSE) for 23 industrialisedcountries. For that purposewe used a numberof socio-economic indicatorsas proxies for performance,and total spend-ing and a number of spendingcategories as proxies for resource use. Wefind moderatedifferencesin the PSP indicatorsacross industrialisedcoun-tries. Unsurprisingly, ountries with small public sectors reportthe "best"economicperformance,while countrieswith large public sectors show moreequalincome distribution.

When weighing performanceby the resourcesused to achieve it, thereare importantdifferences across countriesin the resultingPSE indicators.CountrieswithsmallpublicsectorsreportsignificantlyhigherPSEindicatorsthancountries with medium-sized or big public sectors. All these findingssuggestdiminishingmarginalproductsof higherpublicspending.The resultsthatwe get from theproduction-frontier-relatedDHanalysis,which uses the PSP indicators,are also in line with the aforementioned on-clusions. Smallgovernmentsendto show betterresults.Spendingbybiggov-ernmentscouldbe, on average,about 35% lower to attain he same PSP.Thecalculationsalsopointout thatEU 15 countriesshowrelatively ow efficiencywhencomparedwiththeUnited Statesandalso theaverageof theotherOECDcountries n the sample.EU 15 countries areusing 27% morepublic spend-ing than the "mostefficient" countries with similarPSP indicators.Spend-ing for the averageof the other OECDcountries s "only"11%higherthannecessary.



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338However,all these results have to be seen as indicative and need to be

interpretedwithgreatcarefor the reasonsoutlinedabove.Particularly,ne hasto be aware hat t is noteasy to accurately dentifythe effects of publicsectorspendingon outcomes andseparate heimpactof public spending rom otherinfluences.Thisnotwithstanding,we use alargenumberof indices andthe bestdataavailable hat s alsoapplied nthe relevant conomic andpolicyliteraturefor cross countrycomparisons o contain as much as possiblethisproblem.In our nterpretation,we mainlyfocussed on the overallPSP andPSE indi-cators o which we alsoapplied he FDHanalysis.This is appropriateogainanoverall mpression.Thecomparisonof the differentopportunity nd standard"Musgravian"ub-indicators cross countriesand the detailed assessment ofdifferencesmay providefurtherand morespecific insightsand lessons.It is alsoimportanto bear nmindthatbyusinganon-parametric pproach,and in spiteof FDHbeing an establishedand validmethodology,differencesacross countries are not statisticallyassessed. This can be considered as alimitationof suchmethodology.AcknowledgementsWe are gratefulto CarlosBarros,MarcColeman,Juergenvon Hagen,Jos6Marin,PierrePestieau, PhilippRother,Miguel St. Aubyn,Rolf Strauch,ananonymousrefereeandparticipants t theZEIWorkshop,Universityof Bonn,at the 2003 EuropeanPublic ChoiceSocietyconference nAarhus,at the 2003FrenchEconomics Asociation conference n Lille, forhelpfulcomments andGerhardSchwab for valuable researchassistance.Any remainingerrorsarethe responsibilityof the authorsThe opinionsexpressedherein arethose ofthe authorsanddo not necessarilyreflect those of the author'semployers.

Notes1. Forexample,tax collection may impose significantwelfare andcompliancecosts on tax-payers.2. However,Brennan 2000) and Tanzi(1998) haveargued hatregulationsandtaxexpendi-turescan also become a substituteof public spending,andtherebyarenegativelycorrelatedwith the size of thepublicsector as measuredby the level of public spending.3. One should be aware of the distinction between outputand outcome. The number ofhospital days per 1000peopleis anoutputbutfull recovery rom illness or life expectancyis an outcome. Even thoughwe tryto approximateoutcomes rather hanoutput (e.g. redtape, life expectancy)the distinction s not alwayspossible and we use both terms in aninterchangeableway.4. There are few instances where actual and trendgrowthdeviateby 0.4/0.5% for the 10-year averages.However,when using trendrather hanactualgrowth n the calculationofindices,resultschange very little even for the economicperformancendicator.5. For example, giving alternativeweights to the sub-indicatorsdoes not changemuch theresults in most cases. In the Appendix(TableAl) we presentthe results with alternativeweightingschemes.RankcorrelationsorPSP indicatorswith the testedchanges nweights



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339arein the (0.95-0.99) range.This weigthingof the variables s quite straightforwardndeconomicallyintuitive(even thoughit is still somewhatad hoc). It avoids theproblemoflack of economic justificationof a more complex statisticalapproachsuch as principalcomponentanalysisthatmightcome to mind in this context.6. One shouldbear n mindthatdataarenotfully comparable.E.g., some dataarenotavailablefor some countries. Forexamplethe OECDPISA reporton education achievementonlycovers 2000.

7. Proceeds rom the sale of UMTS mobiletelephone icences have been excluded from totalexpenditure ince theywere recordedas a temporarydecline in expenditure.8. Incomedistribution nd stabilisation s also affectedby theprogressivityof the taxsystem,but this effect is verydifficultto assess dueto the lack of comparableanddetailedenoughdata.

9. The PSE indicators are also quite robust to differentweightings as can be seen in theAppendix(TableA2).10. For an overview of the FDH analysis see for instance Tulkens (1993). Anothernon-parametricapproachthat might be used to assess public expenditureefficiency wouldbe Data EnvelopmentAnalysis (DEA). This technique, developed by Charnes,CooperandRhodes(1978), impliesa convexproduction rontier,a hypothesisthat s notrequiredin the FDHapproach.For an overview of non-parametric pproaches ee for instanceSimarand Wilson (2003).11. Guptaand Verhoeven 2001) would call countries such as C and D "independently ffi-cient",andcountryA "not ndependently fficient."12. Figure3 illustrates hatcountryB's input efficiency score is given by X(A)/X(B), whichis 0.5, smaller thanone, since B is the interiorof theproductionpossibilityfrontier.Thisimpliesthat heexcess use of inputsby inefficientcountryB is 50 percent of thenecessaryinputs o achievethe same evel of performance f countryA. CountryB's outputefficiencyscore is Y(B)/Y(A). In thiscase, the loss of outputof countryB relative o the mostefficientcountryturnsout to be also 50 percent (since forcountryB one can calculateY(B)/Y(A)= 5/10 = 0.5). Theproductionpossibilityfrontier or theexample nFigure3 is asfollows:

0, X < 10010, 100< X < X(C)(X)= (C), X(C) < X < X(D)Y(D), X > X(D)

13. Note that the termproductionpossibility frontieris somewhatmisleading, as the true"frontier"s unknown.Onemustalso be awareof the scalingwhen interpretinghe chart.A doubling n PSP is notnecessarilya doublingof welfare or utility.

AppendixIn order to assess the sensitivity of the results for PSP and PSE, we usedalternativeweightingschemes. WecomputedPSP andPSE indicators hatcangive moreweight to, interalia, opportunity, quality,stabilityand economicperformancesub-indicators.One could arguethat these indicatorsemulatepeoplewithdifferentntensitiesof preferences.Theresults,presentednTableAl and n TableA2, confirm hat heconclusionspresentedn the maintextaregenerallynot changed.Rank correlationswith the testedchangesin weightsare in the (0.95 0.99) rangefor PSPindicatorsandin the(0.96 0.99) rangeforPSE indicators.



21/28

340TableAl. Totalpublicsectorperformance PSP), 2000, differentweights

Weightingof sub-indicatorswithemphasison:EconomicCountry Baselinea Opportunityb Equalityc Stabilityd performancee

Australia 1.04 1.04 1.01 1.10 1.03Austria 1.12 1.11 1.14 1.15 1.09Belgium 0.95 0.94 1.00 0.99 0.93Canada 1.02 1.03 1.00 1.01 1.00Denmark 1.06 1.06 1.09 1.07 1.03Finland 1.01 1.05 1.04 0.96 0.95France 0.93 0.93 0.92 0.97 0.88Germany 0.96 0.97 0.96 0.95 0.92Greece 0.78 0.79 0.82 0.73 0.76Iceland 1.03 1.04 1.03 0.95 1.07Ireland 1.05 1.04 1.02 1.09 1.13Italy 0.83 0.83 0.89 0.81 0.80Japan 1.14 1.12 1.15 1.20 1.15Luxembourg 1.21 1.17 1.21 1.22 1.35Netherlands 1.11 1.10 1.08 1.18 1.09New Zealand 0.93 0.96 0.86 0.94 0.91Norway 1.13 1.11 1.14 1.20 1.16Portugal 0.80 0.80 0.83 0.76 0.83Spain 0.89 0.90 0.92 0.87 0.84Sweden 1.04 1.06 1.07 0.96 1.01Switzerland 1.07 1.09 1.04 1.01 1.07UnitedKingdom 0.91 0.93 0.88 0.88 0.89United States 1.02 1.02 0.96 1.05 1.06Average 1.00 1.00 1.00 1.00 1.00Small governments 1.07 1.06 1.04 1.09 1.09Mediumgovernments 0.97 0.97 0.97 0.95 0.97Big governments 1.01 1.01 1.03 1.01 0.97EU 15" 0.94 0.94 0.95 0.93 0.91Euro area* 0.93 0.94 0.95 0.94 0.90aEqualweightsassignedto each sub-indicator1/7), as in Table1.b2/3 assignedto opportunityndicatorsand 1/3 to "Musgravianndicators".This means1/6 assigned to each of the four opportunity ndicatorsand 1/9 to each of the three"Musgravianndicators".c1/3 assignedto the distribution ndicatorand 2/3 to the other ndicators.Thismeansthateach of the other six indicatorswill have a weightof 1/9.d1/3 assigned to the stabilityindicator and 2/3 to the other indicators.This means thateach of the other six indicatorswill have a weightof 1/9.e1/3 assignedto the economic performancendicatorand 2/3 to the other indicators.Thismeans that each of the other six indicatorswill have a weightof 1/9.*Weightedaveragesaccording o the shareof eachcountryGDPin the relevantgroup.



22/28


23/28

Annex-Data

andsources

AnnexTableA.Opportunity

indicators

Quality

of

Shadow

School

Education

Infant

Life

PublicCommunication

Corruptiona

Redtapea

judiciarya

economyb

enrolmentc

achievement

mortality

expectancy

andtransports

quality

1990

2001

1990

2001

1990

2001

1989/90

1999/2000

1990

1998

1995

2000

19902000

1990

2000

1980-89

1990-95

Australia

6.57

8.21

4.13

4.94

7.84

8.51

10.1

14.3

78.6

88.9

519

530

8.05.3

78.8

78.9

3.5

3.0

Austria

5.24

6.92

4.86

4.12

7.33

9.04

6.9

9.8

91.1

88.2

514

7.84.8

77.9

78.2

3.3

Belgium

5.52

5.22

3.76

2.78

6.18

5.70

19.3

22.2

87.7

88.0

550

508

7.95.3

78.0

78.2

2.8

2.7

Canada

7.50

7.78

4.59

4.63

8.44

8.49

12.8

16.0

88.7

93.7

521

532

6.85.2

79.0

78.9

3.1

3.5

Denmark

9.16

9.03

4.74

5.04

8.42

8.59

10.8

18.0

86.8

89.5

497

7.54.3

75.9

76.4

3.1

3.1

Finland

7.79

9.53

5.46

6.38

8.42

8.70

13.4

18.1

93.0

94.8

540

5.64.2

77.3

77.5

France

6.03

4.22

4.09

1.76

6.20

5.85

9.0

15.2

85.8

94.2

507

7.34.4

78.5

78.9

2.8

3.0

Germany

7.58

6.91

4.81

3.87

8.17

8.23

11.8

16.0

87.8

487

7.04.5

77.0

77.4

3.4

3.0

Greece

2.82

3.00

1.90

2.34

5.00

6.15

22.6

28.7

82.7

86.4

460

9.75.4

77.9

77.9

2.6

2.4

Iceland

9.03

6.28

8.28

85.4

506

5.93.1

79.2

79.5

Ireland

6.98

5.54

5.30

5.64

8.09

7.57

11.0

15.9

79.9

77.0

514

8.25.9

76.1

76.3

2.8

3.0

Italy

2.56

3.53

2.76

1.97

3.16

3.56

22.8

27.1

88.3

491

473

8.25.3

78.3

78.7

2.3

2.5

Japan

5.46

4.27

5.32

2.62

7.76

6.25

8.8

11.2

96.8

98.6

581

543

4.63.8

80.6

80.7

3.5

3.3

Luxembourg

5.52

7.37

3.76

4.11

6.18

7.47

67.6

436

7.35.0

76.9

77.0

Netherlands

8.13

7.97

5.42

4.69

8.13

8.28

11.9

13.1

83.6

92.6

529

7.14.9

77.7

77.9

3.4

3.3

NewZealand

8.43

8.76

6.27

4.34

7.89

8.26

9.2

12.8

85.0

90.3

501

531

8.35.9

77.4

78.2

Norway

7.35

8.07

4.00

3.03

8.20

8.30

14.8

19.1

87.7

96.4

501

6.93.9

78.5

78.6

3.2

2.8

Portugal

4.51

3.89

3.32

2.22

8.03

2.70

15.9

22.7

87.6

456

10.9

5.5

75.4

75.6

2.0

2.2

Spain

3.78

5.57

3.18

3.97

2.89

4.43

16.1

22.7

91.6

487

7.63.9

77.9

78.2

2.3

2.6

Sweden

7.63

8.61

4.63

5.58

7.06

8.52

15.8

19.2

85.3

99.5

513

6.03.4

79.3

79.6

3.3

3.3

Switzerland

7.89

7.16

6.11

5.36

8.70

8.02

6.7

8.6

79.8

83.1

506

6.83.7

79.6

79.7

3.6

3.7

United

Kingdom

8.00

6.83

5.97

3.14

7.51

7.40

9.6

12.7

79.1

93.7

498

528

7.95.6

77.2

77.3

2.9

3.0

United

States

6.53

6.55

5.31

3.73

7.61

7.07

6.7

8.7

85.8

90.2

492

499

9.47.1

76.9

77.1

3.8

3.3

Average

6.4

6.7

4.5

4.0

7.1

7.2

12.7

16.7

85.7

89.3

520.2

518.2

7.54.8

76.2

78.1

3.0

3.0

aScale1-10.

bInpercentage

ofGDP.

cRatioofthenumber

ofchildren

ofofficial

schoolageenrolled

inschool,

tothepopulation

ofthecorresponding

official

schoolage.

342



24/28

AnnexTableB.Standard

"Musgravian"

indicatorsCoefficient

of

Average

Average

Income

distributiona

variation

ofgrowth

Average

inflation

Percapitaincomeb

economic

growth

Unemployment

1980sc

1990sc

1980s

1990s

1980s

1990s

1990

2000

1980s

1990s

1980s

1990s

Australia

15.5

17.9

1.2

2.5

8.4

2.5

15530

25420

3.1

3.6

7.5

8.9

Austria

25.2

1.6

2.3

3.8

2.4

15710

24690

2.4

2.4

3.3

5.2

Belgium

21.6

24.1

1.3

1.6

4.9

2.1

15530

24910

2.0

2.2

9.5

8.7

Canada

19.0

1.1

1.3

6.5

2.2

17400

27320

2.9

2.9

9.4

9.5

Denmark

17.4

24.5

0.8

1.5

6.9

2.1

15820

27070

1.6

2.3

7.1

7.4

Finland

18.4

24.2

2.1

0.5

7.2

2.2

15220

23200

3.1

2.1

4.9

11.9

France

18.6

2.2

1.4

7.4

1.9

15970

21980

2.5

1.9

9.0

11.2

Germany

20.1

1.2

1.3

2.9

2.6

17010

23630

2.2

1.9

6.8

7.7

Greece

19.9

0.3

1.3

19.5

11.1

8680

15250

0.7

2.3

6.6

9.5

Iceland

0.9

0.9

39.2

4.3

16210

27070

2.8

2.7

0.8

3.3

Ireland

18.3

1.5

2.1

9.3

2.3

10940

26610

3.6

7.3

14.2

12.0

Italy

18.8

22.7

2.1

1.4

11.2

4.2

15180

22890

2.3

1.6

8.4

10.7

Japan

21.9

24.8

3.1

1.0

2.5

1.2

16950

24920

4.1

1.5

2.5

3.0

Luxembourg

1.4

1.9

4.8

2.2

22320

43110

5.0

5.4

1.4

2.5

Netherlands

20.7

1.2

2.8

2.9

2.4

15390

26310

2.3

2.9

8.0

5.8

NewZealand

15.9

12.7

1.0

1.2

11.9

2.1

12360

18740

1.9

2.8

4.3

7.9

Norway

19.0

24.0

1.2

2.9

8.3

2.4

16220

30730

2.4

3.6

2.8

4.8

Portugal

18.9

1.1

1.3

17.6

6.0

9120

16590

3.3

2.8

7.7

5.6

Spain

21.1

1.5

1.6

10.2

4.2

11320

18230

2.9

2.7

17.5

19.6

Sweden

21.2

24.1

1.7

1.0

8.0

3.5

16320

22940

2.2

2.3

2.5

6.2

Switzerland

16.9

19.6

1.2

0.7

3.3

2.3

19670

28360

2.1

0.9

0.7

3.4

UnitedKingdom

16.4

1.4

1.3

7.4

3.7

14860

23290

2.7

2.3

9.6

7.9

UnitedStates

15.7

15.7

1.4

2.2

5.6

3.0

21340

35030

3.2

3.2

7.3

5.8

Average

18.4

20.6

1.4

1.6

9.1

3.2

15438

25143

2.7

2.8

6.6

7.8

aIncome

shareof40%poorest

households.

bGDPatmarketprices

perheadofpopulation

(in1000PPS).

cOrnearest

available

year.Precise

yearvariesanddepends

ondataavailability.

343



25/28

AnnexTableC.Expenditure

categories

(%ofGDP)

Totalexpenditurea

Goodsandservices

Education

Health

Socialtransfers

Publicinvestment

1980s

1990s

1980s

1990s

1980s

1990s

1980s

1990s

1980s

1990s

1980s

1990s

Australia

37.4

36.7

19.1

18.6

5.1

5.1

5.0

5.6

7.2

8.6

3.0

2.5

Austria

49.7

53.8

19.4

19.9

5.6

5.6

5.1

5.8

19.6

19.6

3.6

2.6

Belgium

57.9

52.5

22.6

21.2

5.5

4.6

6.1

6.6

24.6

19.3

2.6

1.6

Canada

45.1

45.9

21.7

21.2

6.6

6.7

6.2

6.7

9.8

12.0

2.9

2.5

Denmark

56.3

58.3

26.6

25.9

7.1

7.8

7.5

6.9

16.9

19.2

2.0

1.8

Finland

43.4

56.3

20.3

23.0

5.2

7.1

5.6

6.1

14.7

20.8

3.7

3.0

France

50.3

53.6

23.0

23.6

5.5

5.8

6.4

7.3

21.0

20.0

3.2

3.2

Germany

47.1

48.2

19.8

19.5

4.7

4.7

6.1

7.7

17.0

18.4

2.5

2.3

Greece

40.5

47.3

15.0

14.7

2.2

2.7

4.9

4.7

13.8

15.4

3.0

3.4

Iceland

41.2

41.7

18.8

22.0

4.6

5.5

6.8

7.0

7.5

4.3

4.1

Ireland

46.1

37.7

18.9

16.0

5.5

5.1

5.6

5.2

14.6

11.8

3.3

2.5

Italy

50.6

52.2

18.9

18.8

4.5

4.4

5.6

5.9

17.3

17.9

3.5

2.5

Japan

31.9

36.2

13.7

15.0

5.1

3.6

4.7

5.3

11.2

10.0

5.1

5.7

Luxembourg

46.6

44.0

18.8

17.7

4.8

3.5

5.4

5.7

20.5

15.4

4.7

4.5

Netherlands

56.3

50.1

25.5

23.5

6.4

5.1

5.7

6.3

26.7

18.7

2.3

2.6

NewZealand

46.4

41.7

19.2

18.5

5.3

6.9

5.8

6.1

13.4

13.6

2.1

2.1

Norway

46.8

49.3

20.1

21.5

6.4

7.7

6.3

6.8

13.1

15.3

3.4

3.3

Portugal

39.5

43.7

14.5

18.9

3.8

5.2

3.4

4.7

10.7

12.7

3.6

3.9

Spain

39.0

43.4

15.6

17.9

3.5

4.5

4.6

5.5

13.6

14.1

3.4

3.6

Sweden

60.8

63.5

28.0

27.8

7.4

7.6

8.0

7.1

18.5

20.4

2.9

2.8

Switzerland

34.1

38.2

13.9

15.1

5.0

5.6

5.3

7.0

8.4

11.2

3.7

3.1

UnitedKingdom

42.3

40.9

20.9

19.5

5.0

5.2

5.0

5.7

12.0

13.7

1.9

1.6

UnitedStates

35.3

34.5

17.4

15.4

5.7

5.1

4.4

6.0

9.9

11.3

2.5

2.6

Average

45.4

46.5

19.6

19.8

5.2

5.4

5.6

6.2

14.8

15.1

3.2

3.0

aAllgeneral

government,

averages

fortheperiod.

344



26/28

AnnexTableD.Variables

andseries

Indices/variables

Sources,

notes

Seriesandexplanations

Corruption

WorldEconomic

Forum:

TheWorldCompetitiveness

Report

1990,item

Values

divided

by10forbettercomparison.

"10.22

Corruption

(for1990)

WorldEconomic

Forum,


Yearbook

2001,

item2.3.16

Bribing

andcorruption

(for2001).

Redtape

WorldEconomic

Forum:


Report

1990,item

Values

divided


"6.21Regulatory

environment

(for1990)

WorldEconomic

Forum,


Yearbook

2001,

"Bureaucracy"

(for2001).

Efficient

judiciary

WorldEconomic

Forum:


Report

1990,item

Values

divided


"10.04

Confidence

inadministration

ojustice"

(for1990)

WorldEconomic

Forum,


Yearbook

2001,

"Justice"

(for2001)

Sizeshadow

economy

Schneider

(2002)

Currency

demand

approach,

(in%ofofficial

GDP),

reciprocal

value(l/x).

Secondary

school

enrolment

BasedonWDI2001

Secondary

school

enrolment

Education

achievement

OECD,

Education

ataglance,

2001

Mathematical

achievement,

gradeeight(page309).

PISAreport,

2000

Simple

average

ofreading,

mathematics

andscience

scores.

Infantmortality

WDI2001

Mortality

rate,infant(per1,000livebirths),

reciprocal

value(l/x).

Lifeexpectancy

WDI2001

Lifeexpectancy

atbirth,total(years).

Communications

andtransport

quality

Center

forInstitutional

Reform

andtheInformal

Sector

(IRIS)

Basedonreports

fromBusiness

Environmental

RiskIntelligence

(BERI).

Income

distribution

Worldbank:

WorldDevelopment

Report

1995,2000/2001

Poorest

40%(when

twosurveys

within

thetimerangeof86-98

wereavailable

the

average

wascalculated).

2000Annual

Report

(for1990),2002Annual

Report

(for2000).

Coefficient

ofvariation

ofgrowth

European

Commission,

Ameco

BasedonGDPatconstant

market

prices(1.1.0.0.ovgd),

reciprocal

value(l/x).

Standard

deviation

ofinflation

OECD,

MainEconomic

Indicators

Based

on"CPI,allitems"

(CPALTT01.IXOB),

reciprocal

value(l/x).

Percapitaincome

European

Commission,

Ameco

Ameco,

GDPatcurrent

market

pricesperheadofpopulation

(in1000PPS)

(1.0.212.0.hvgdp).

Average

economic

growth

European

Commission,

Ameco

BasedonGDPatconstant

market

prices(1.1.0.0.ovgd).

Unemployment

OECD,

Economic

Outlook

Unemployment

rate(UNR),

reciprocal

value(l/x).

Totalpublic

expenditure

European

Commission,

Ameco

Totalexpenditure;

general

government

(UUTG/UUTGF).

Goods

andservices

European

Commission,

Ameco

Finalconsumption

expenditure

ofgeneral

government

atcurrent

prices(UCTG).

Public

education

BasedonWDI2001

Public

spending

oneducation,

total(%ofGNI,UNESCO).

Public

health

OECD,

SocialExpenditure

database

Public

expenditure

onhealth(item11)(for1980-1999).

Transfers

andsubsidies

European

Commission,

Ameco

Social

transfers

otherthaninkind(UYTGH/UYTGHF)

Public

investment

European

Commission,

Ameco

Grossfixedcapital

formation

atcurrent

prices;

general

government

(UIGG).

345



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