Expenditure Efficiency and Fiscal Size: An Empirical Evidence From Developing Asian Countries

• Author: MARIA FAIQ JAVAID

Abstract. Efficiency of government expenditures has a significant role in achieving macroeconomic policy goals of the government. This research empirically investigates the relationship between efficiency of government expenditures and fiscal size. Performance of government sector in nineteen developing Asian countries is analyzed for six policy areas including administration, health, education, infrastructure, economic performance and economic stability. Results of the study show that medium-sized governments are relatively more efficient in all public policy areas as compared to large-sized government. There is a need to curtail wasteful expenditures and divert government resources towards sectors that strengthen market forces and help to create equal opportunities for the people.

Keywords: Technical efficiency, Public sector performance, DEA double bootstrap, Developing Asia

1. INTRODUCTION

   Public sector expenditure is an important source of satisfying collective needs of the society. Government addresses such societal needs by providing public goods and services and by correcting market failures. These goods and services are too costly to be delivered by the private sector. If the government does not spend at all, then the provision of basic facilities like infrastructure, security of property rights, and contract enforcement would become difficult. Therefore, government’s involvement in economic activity is sometimes indispensable for the economic and social well-being of the masses. According to World Bank (2005), the efficiency of government expenditures has a significant influence on attainment of government’s macroeconomic policy goals. Efficiency means the capability of a government to utilize its revenues in the production of goods and services in the best possible manner, to ensure attainment of desired benefits to the economy and enhancement of economic growth.

   After the onset of global financial crisis (GFC), many researchers are devising policy frameworks to minimize the effects of business cycles on the economy. Owing to the reduction in world inflation, many economies have followed monetary expansion which aimed at decreasing interest rates to boost economic growth. But paired with exchange rate depreciations, export-oriented countries could not take desired benefits. Provided with a little room for monetary policy in such a situation, a proactive fiscal policy is needed to combat economic fluctuations faced by both developed and developing countries.

   Therefore, many economies around the world favor the concept of government expenditures as a tool of fiscal policy for mitigating the harmful consequences of the economic crisis. The main drawback of such countercyclical expansionary stance in fiscal policy is rising fiscal deficits. These rise in deficits can sometimes cause harmful effects especially in case of low income countries. In many developing economies, this issue of high fiscal deficits has given rise to increasing debt to GDP ratio and debt overhang. International financial institutions, like IMF, have introduced fiscal adjustment programs in response to rising debt and fiscal deficits in developing countries.

   This scenario has led many researchers to focus on the allocative and distributive usefulness of public expenditures and its role in the stability of the economy. Studies by Mueller (1997), Shleifer and Vishny (1998), and Gwartney et.al (2002) concluded that if efficiency of government funds is improved then the size of government spending will be reduced. Measuring efficiency of government expenditures will, therefore, help to evaluate the usefulness of public spending and allow the optimal use of scarce government resources in such a way that unnecessary rise in public spending could be curtailed, market distortions could be minimized and fiscal deficits could be controlled.

   FISCAL POLICY TRENDS IN DEVELOPING ASIA

   In context of Asia, it is evident that this economy is significantly influencing the regional and global economic outlook. Although Asia was the first region to come out of global financial and economic turmoil of 2008-09, economic growth of this region is fragile since then. Asian countries are following expansionary stance in fiscal policy and 40 percent of the countries experienced growing fiscal deficits. (ADB, 2016). Two large economies of developing Asia i.e. China and India strongly influenced the growth pattern of the region. China has shifted its policies towards increasing consumption demand while India and Indonesia pursued more investment projects to build capital stock. Republic of Korea has undertaken additional expenditures of $13 billion in 2015 for job creation and social security services while in 2016 government spending grew at a rate of 3%.

   In Russia, even though government experienced reduction in revenues due to fall in international oil prices, expenditures in social sector payments and manufacturing sector support were raised. Philippines planned to double the budget allocated for development sectors. Spending was increased to 38%, 12% and 29% in health, education and infrastructure sectors respectively. (ADB, 2016)

   In Thailand, $4 billion stimulus package was introduced by the government which included support for farmers, developmental projects in villages and tax concessions for small-scale industries. (Abdon et.al. 2014). In Malaysia and Pakistan, where governments are running high deficits, the countercyclical fiscal stance is crucial. In Pakistan and many other South Asian countries large fiscal deficits are due to low tax buoyancy, therefore, tax net is required to be expanded.

   To give a comprehensive overview of the situation, Table 1 reports fiscal deficits experienced by developing Asian countries over the years 2010 to 2015.

   TABLE 1 Budget Deficit (%GDP)

   Years 2010 2011 2012 2013 2014 2015

   Bangladesh -2.8 -3.6 -3.2 -3.3 -3.1 -3.2

   Cambodia -8.8 -7.6 -6.8 -7.1 -3.8 -2.6

   China -1.7 -1.1 -1.6 -1.9 -1.8 -3.5

   Hong Kong 4.2 3.8 3.2 1.0 3.7 0.6

   India -4.8 -5.9 -4.9 -4.5 -4.1 -3.9

   Indonesia -0.7 -1.1 -1.8 -2.2 -2.1 -2.5

   Jordan -2.42 -7.27 -4.24 -3.29 -2.39 -3.19

   Kazakhstan -2.4 -1.9 -2.8 -1.9 -2.7 -2.2

   Malaysia -5.3 -4.7 -4.3 -3.8 -3.4 -3.2

   Maldives -14.4 -6.6 -7.7 -4.1 -2.9 -6.9

   Nepal -1.9 -2.4 -2.0 0.6 0.9 -0.7

   Pakistan -5.9 -6.3 -8.6 -8.1 -4.2 -4.1

   Philippines -3.5 -2.0 -2.3 -1.4 -0.6 -0.9

   Sri Lanka -7.0 -6.2 -5.6 -5.4 -5.7 -7.4

   Tajikistan -7.1 -5.8 -3.1 -4.8 -3.7 -6.5

   Vietnam -2.1 -0.5 -3.4 -5.0 -4.4 -4.6

   All the countries except Hong Kong have run high fiscal deficits over time. The highest fiscal deficit was experienced by Sri Lanka i.e.7.4 percent of GDP, while lowest value was of Nepal i.e. 0.7 percent of GDP in 2015. Almost all the countries in this region have reasonable fiscal space, thus there is a need for constant evaluation of fiscal policies in line with the macroeconomic goals set by the government.

   This study is aimed at analyzing the performance of government sector in six policy areas i.e. administration, health, education, infrastructure, economic performance and economic stability for selected developing Asian countries. Efficiency of government expenditures is measured through Data Envelopment Analysis (DEA) double bootstrap procedure. This study also intends to highlight the pattern of relationship between government size and its efficiency for the selected panel of countries. This research is very important in context of Asian countries because there is a marked emphasis on the role of fiscal policies in keeping the countries’ economies in check after GFC. In many developing Asian countries, IMF has launched fiscal adjustment programs that require phenomenal reduction in government expenditures especially investment spending. It improves the government budgetary position but at the cost of future economic growth.

   In such a case, measuring efficiency of government expenditures will help to achieve optimal utilization of public resources in achieving high economic growth rates and lower fiscal deficits.

2. LITERATURE REVIEW

   The issue of measuring efficiency of government expenditures is gaining marked importance among researchers so that policies can be formulated in line with governments’ objective of achieving high and stable economic growth rates.

   Grossman et.al. (1999) defined technical inefficiency as, given the combination of selected inputs, any level of production which is lower than the maximum output that can be produced. They used Stochastic Frontier Analysis (SFA) to estimate technical inefficiency in local government sector in U.S. They collected samples of 49 local governments in U.S and found that different local governments that are larger in size were having various degrees of technical inefficiencies that changed with estimated degrees of competitive pressures.

   Evans et. al. (2000) conducted a pioneer study by measuring efficiency of health sector in 191 countries using data over 1993-1997 and employing SFA fixed effect model. They selected mortality and ill health to proxy output indicator and total health expenditure per capita PPP to measure input indicator. The results indicated that Sri Lanka and China had the most efficient health care system among all other developing countries. Oman could significantly reduce child immortality over last 25 years. France on the other hand, had the highest score in provision of health care facilities. Results also revealed that efficiency of health sector is directly related to percentage expenditures on health.

   In an investigation, Gupta and Verhoeven (2001) measured government efficiency in health and education sectors for African countries. They selected 37 African Countries and used data from...