Wednesday, July 11, 2012

Estimating Government Waste

Oh boy, I know a lot of people are going to have a field day with this one (abstract):

Quality of Government and Living Standards: Adjusting for the Efficiency of Public Spending
Grigoli, Francesco ; Ley, Eduardo

Summary: 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.

Note what they’re saying about the current system of measurement – inputs are taken as proxies for outputs. In Econoenglish: the more the government spends, irrespective of whether that spending is socially useful or not, the greater the calculated GDP. That’s how spending on for example defence equipment, which serves no productive purpose at all, expands both investment and GDP. Wars, provided you’re on the winning side, are good for GDP under these principles.

What this paper does is to make a preliminary attempt at taking measures of public inefficiency and using those to correct for wasted public sector inputs in the national accounts. For a sample set of 24 countries and looking only at education and health, the estimated correction is about 4.1% of GDP i.e. on average, GDP for these countries should be 4.1% smaller after accounting for government waste (for Singapore, as you might imagine, the adjustment is 0%; at the opposite extreme, Portugal’s is a mind-boggling 7.8% of GDP).

The illustrative example they use shows that about one-third of the resources expended on education and two-thirds of public health spending are wasted.

To underscore the point, citing from one of their references, “they conclude that on average countries could use 45 percent less resources to attain the same outcomes, and deliver an additional third of the fully efficient output if they were on the efficiency frontier.”

I don’t need to translate that, do I?

None of the numbers quoted above should be taken as solid, as this and other papers on the subject are really the first steps towards better measurement of public sector output. But I’d encourage anybody with an interest in the subject to read this paper – it’s short and non-technical, and the discussion of the measurement of public sector output in the national accounts is pretty insightful and a useful primer.

Technical Notes

Grigoli, Francesco & Eduardo Ley, "Quality of Government and Living Standards: Adjusting for the Efficiency of Public Spending", International Monetary Fund, Working Paper no 12/182, July 2012


  1. As a taxpayer, I'd agree but I have to admit I do appreciate and use a lot of public goods here.

    As an economist educated in Keynesian orthodoxy, I at least have to say that the multiplier effect tends to change during different economic conditions. I'm not going to agree with most Germans by saying that Greece's past public spending is so inefficient that it's more a hindrance to growth during periods of high unemployment (i.e. negative output gap).

    To say that a certain proportion of Government spending is always (emphasis is on the word "always") a wastage is a bit hard to swallow.

    1. In fact, I just remembered the Khazanah paper a few months back at MOF that talked about this point.

    2. Jason
      Care to share the Khazanah paper you mentioned? Thanks.

      Economics Malaysia Readers

      If any one of you have the paper, please share. Thanks

      Economist Kampong.

  2. Thank you for the link on the technical paper Hisham.