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Public Spending and Outcomes: Does Governance Matter?

Author: A S Rajkumar and V Swaroop
Date: 2002
Size: 36 pages (220 KB)

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Summary

What is the link between public spending, governance, and outcomes? Can differences in efficacy of public spending be explained by quality of governance? This World Bank policy paper examines the role of governance—measured by level of corruption and quality of bureaucracy—and asks how it affects the relationship between public spending and outcomes. The role of good governance as a key to development effectiveness has been emphasised in recent years. For example, it has been argued that merely allocating public resources for the right goods and services may not lead to desirable outcomes if budget institutions—involving planning, management and execution—are malfunctioning. While this proposition seems straightforward and difficult to disagree with, no serious empirical work has been carried out to support it. This study by the World Bank and Georgetown University examines the impact of public spending on outcomes at different levels of governance. It looks at the link between specific budget allocations and outcomes, and sees how these relationships are affected by improved governance.

Until now, in cases where public spending is found to have low or negligible impact, two explanations are given. Failure is deemed to be due either to (1) poor targeting and/or institutional inefficiencies such as leakage in public spending and weak institutional capacity, or to (2) the 'crowding out' of provision by the private sector because of an increase in public provision. In providing assistance to developing countries, a common approach is to ask for increases in budgetary allocation for programmes on education and health. While, in most cases, this may be necessary it is certainly not sufficient to ensure enhancement or improvement in actual service delivery.

From this research, it is clear that public health spending lowers child and infant mortality rates in countries with good governance. Furthermore:

As countries improve their governance, public spending on primary education becomes effective in increasing primary education attainment
As the level of corruption goes down (or the quality of bureaucracy goes up), public spending on health becomes more effective in lowering child and infant mortalities
In countries that are rated as very corrupt, or as having an ineffective bureaucracy, public health spending at the margin will be inefficacious.

These findings have important implications for enhancing the effectiveness of public spending. The lessons are particularly relevant for developing countries, where public spending on education and health is relatively low, and the state of governance is often poor. It is clear that:

Simply increasing public spending on health and education is less likely to lead to better outcomes if countries have poor governance
It is easier to increase spending than to improve governance, but the easier option may not lead to achievement of these goals.

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Source: Rajkumar, A. S. and Swaroop, V. 2002, 'Public Spending and Outcomes: Does Governance Matter?' Policy research working papers, 2840. World Bank, Washington, D.C.
Organisation: The World Bank, http://www.worldbank.org