J Econ Finan

DOI 10.1007/s12197-014-9310-6

Determinants of public spending efficiency in education

and health: evidence from selected CEMAC countries

Dobdinga C. Fonchamnyo & Molem C. Sama

# Springer Science+Business Media New York 2014

Abstract This paper analyses the efficiency of public spending in the education and health
sectors of Cameroon, Chad and Central African Republic. It also examines the institution
and economic factors influencing spending efficiency in these sectors in the countries
selected for the period 2000–2012. The public sector efficiency scores are estimated in the
first stage by using the non-parametric Data Envelopment Analysis (DEA) approach while
in the second stage, the panel data Tobit and the Fractional Logit regression techniques are
used to determine the effect of institutional and economic factors on public spending
efficiency in the education and health sectors. The results from the estimation show that
Cameroon is more efficient than Chad and Central African Republic in its public spending
in education and health. Chad is least efficient in public spending in education, although it
spends more on education as compared to the other countries in the study. The results also
indicate that the quality of budgetary and financial management has a positive and
statistically significant influence on efficiency while corruption has a negative and signif-
icant influence on public spending efficiency in the education and health sectors. The
results put together recommend that efforts should be put in place to curb corruption and
improve on the quality of budgetary and financial management.

Keywords Public spending efficiency . DEA . CEMAC countries

JEL Classification H11 . C23

1 Introduction

In recent time, most African nations are faced with increased pressures on public balances
stemming from socioeconomic and political imperatives. It is very crucial that generated
public resources are used in the most efficient and effective way. Given that the resources
in the public sector are mostly generated through taxes and taxes create distortions in the

D. C. Fonchamnyo (*) : M. C. Sama

Department of Economics and Management, University of Buea, P.O. Box 63, Buea, S.W. Region,
Cameroon
e-mail: dfonchamnyo@yahoo.com
 J Econ Finan

allocation of resources and thus constrain economic growth, it is essential that public
expenditures are used to improve long-term growth perspectives and take equity consid-
erations into account. In effect, improved efficiency and effectiveness of public spending
does not only help to maintain the fiscal discipline but is quite instrumental in promoting
the structural reform agenda of most African countries. It also permits nations to achieve
the objectives set given their budget at lower levels of spending or increase the value of
money by achieving better outcomes at the same level of government spending.
Economic theory has recognized public expenditure as the engine of economic growth.
According to Lucas (1988), public spending in education increases the level of human
capital, which contributes to the knowledge-based economy and hence economic growth.
This is supported by Zagler and Dürnecker (2003), who argued that fiscal policy instru-
ments such as government spending on education, public infrastructure, research and
development, and health have long-run effects on the country’s economy. In this regard,
taxpayers demand efficient use of public spending, since it could be used as an indicator to
evaluate the effectiveness of government policy implementation on administration, edu-
cation, health, income distribution and economic stability. The fundamental question of
economics is concerned with the efficient use of scarce resources. This concern has shifted
towards empirical assessments of the efficiency and effectiveness of public sector activ-
ities (Afonso et al. 2003; Chan and Karim 2012)
Most of the previous empirical studies on public spending are based on a set of developed
countries or a mixture of both developed and developing countries. Hence, the conclusions
drawn from these studies cannot be directly extended to developing countries, due to the
significant differences in terms of composition of government expenditures and priority in
economic objectives between developed and developing countries. Unlike previous studies,
this paper assesses the determinants of the technical efficiency of public spending expendi-
ture using the opportunity indicators for selected countries in the CEMAC region.
Specifically, the study focuses on the technical efficiency in the health and educational
sectors for Cameroon, Chad and Central African Republic (CAR) due to unavailability of
data for the other member states (Congo, Gabon and Equatorial Guinea).
The rest of the paper is structured as follows; Section 2 presents the literature review.
Section 3 provides insights on how to measure input and output efficiency in public
sector activities. Section 4 presents the estimation methodology while Section 5 des-
cribes the data and presents the average efficiency scores for the countries. Section 6
presents and discusses the regression results. Section 7 concludes and draws some
inspirations from the findings.

2 Literature review

Government spending has taken on a significant role in the recent global recession that
started in 2007 following the financial crisis in the U.S. This has raised fundamental issues
of whether government spending is (or can be) productive or not. The mainstream of
thought on this issue is based on the optimal government spending which was initiated by
Barro (1990), who presented an optimal policy model in the area of public spending. Also
Corsetti and Roubini (1996) made enormous contribution using a two sector model while
investigating the effect of government spending on productivity in the final goods sector
or the human capital accumulation sector.
J Econ Finan

It is often pointed out that government spending on investment, consumption, social

welfare improves economic growth (Afonso et al. 2005). In this light, some authors
have argued that public spending enhances a country’s competiveness through an
increase in human capital, which in turn enhances research and innovative activities
(Afonso et al. 2006; Zagler and Dürnecker 2003).
Several studies looking at public spending efficiency and effectiveness have focused
mostly on Northern America and Europe (Borger and Kertens 1996; Afonso et al. 2003,
2006; Haque and Osborn 2007; Rayp and Sijpe 2007). The results of these studies were
overwhelmingly conclusive that there is wide dispersion in government spending
performance. The results showed that per-capita income and education levels contribute
significantly to public spending efficiency. These findings are consistent with the study
by Gupta and Verhoeven (2001), whose results also showed that education spending in
Africa increased the efficiency level of public spending. The above findings collaborate
with the study of Feeny and Rogers (2008), where literacy and school enrolment are
considered as important determinants of public sector efficiency in developing nations
Other studies have shown that the size of the public sector plays an important part in
government spending efficiency. This finding is supported by Afonso et al. (2003) whose
results showed that countries with a small public sector appear to be more efficient. The
regulatory environments have also been directly linked to the efficiency in the public
spending. Berker (2008) showed that countries with clear and citizen-friendly regulatory
environments that are directly linked to their policy goals are relatively efficient in their
public spending, while Feeny and Rogers (2008) in their study on public spending efficiency
in SIDS and Sub-Saharan African countries found that governance and literacy are the most
important determinants of public sector efficiency. Rayp and Sijpe (2007) also found out that
development aid, civil liberty, and good governance contributes to higher efficiency of
government expenditure in the case of low and lower middle income countries.
Adam et al. (2008) study on 19 OECD countries for the period 1980 to 2000, showed
that the quality of governance is more important than the socioeconomic environment in
influencing public spending efficiency. These results also showed that countries that are
efficient in their public spending are characterized by citizen-friendly regulatory environ-
ments, strong transparency regulatory practices, cost effectiveness, and public spending
directly linked with policy goals. Another study by Angelopoulos et al. (2008) on public
sector efficiency in both developed and developing countries concluded that government
efficiency largely depends on investment and the openness of the country. From the
forgoing review, it is observed that the efficiency of the public sector depends
on a multiplicity of factors among which include; education, the regulatory environment,
quality of governance, cost effectiveness, investment and the openness of the economy.

3 A framework for measuring input and output

In this study we follow the study of Afonso et al. (2005) to divide public spending in to
two broad categories; namely Opportunity indicators and Musgravian indicators. On the
one hand, the opportunity indicators consist of spending on administration, education,
health, and public infrastructure. These variables reflect the quality of interaction between
fiscal policies and market processes. According to Feehan and Matsumoto (2002), public
infrastructure spending which include expenditures on infrastructure, communication, and
 J Econ Finan

information systems facilitate growth in the production function of the private sector as
well as reduce the transportation costs of private entities. Spending on education increases
the proportion of knowledge and skilled workers in the economy, which contributes to the
development of human capital. The importance of government spending on healthcare is
highlighted in the study of Zagler and Dürnecker (2003). They advocated that this
spending reduces illness and increases the quantity of labour. Hence, opportunity indica-
tors can boast productivity in a country’s economy. The input variables considered in our
study are expenditures on education and expenditure on health. The output variables for
education spending are school enrolment and literacy rate, while for health expenditure the
output variables are infant mortality rate, life expectancy at birth and immunization against
measles. The data for spending on infrastructure were not readily available, thus not
included in this study.
The Musgravian indicators on the other hand (though not captured in this paper) are
used to measure government performance in terms of allocation, distribution and
stabilization. According to Afonso et al. (2003) these indicators are used to measure
the outcomes of the interaction of economic growth with the responses taken by the
government in the market process. In this regard, the economic stability indicator is
used to achieve the stabilization objective of the government, whereas the allocation
indicator serves as a signal for allocative efficiency. Efficiency in terms of allocation,
distribution, and stabilization is crucial because it reflects the efficient use of public
resources and high-quality fiscal policies by a particular country (Afonso et al. 2006). A
sound fiscal policy is very crucial because it contributes to macroeconomic stability and
the sound policy mix of a country. It also creates expectations in the economy which
foster economic growth in the long run (Afonso et al. 2005).
The interaction of the two indicators to foster efficiency and effectiveness can be
presented as shown in the following stylized framework (Fig. 1) adapted from Mandl
et al. (2008).
From the figure above, efficiency is defined as the ratio between used input and
produced output. An activity is found to be more efficient if for a given input the greater
output is produced or if for a given output the lower input was used. It is important to
make a clear distinction between technical and allocative efficiency. Technical
efficiency measures the pure relation between input and output taking the production

Socio – Economic and Political factors

Allocative Efficiency Effectiveness

Input Output Outcome
Technical Efficiency

Opportunity and Musgravian indicators

Fig. 1 Conceptual framework of efficiency and effectiveness. Source: Adapted from Mandl et al. (2008)
J Econ Finan

possibility frontier into account, i.e. technical efficiency gains are movements towards
this production possibility frontier. However, Mandl et al. (2008) argued that not every
form of technical efficiency makes economic sense as is the case with allocative
efficiency, which introduces costs and benefits to the output achieved. They pointed
out that, the measurement of allocative efficiency requires an in-depth analysis of the
area in question as well as information on the broad country-specific strategies and
most notably information on input prices. By implication, a high degree of technical
efficiency achieved at the level of each individual input does not guarantee an efficient
functioning of public sector activities if alternative combinations of inputs would result
in higher outputs.

4 Estimation methodology

Measuring the efficiency of spending requires an assessment of the relationship between

spending inputs and outputs. Farrell (1957) introduces the concept of technical efficiency
as the ability of a firm to obtain maximum output from a given set of inputs. Today,
various techniques are available to measure efficiency scores. The most popular of which
include, the Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA).
The objective of the DEA and SFA is to estimate the maximum possible output given a set
of inputs or the minimum possible cost for a set of output.
The DEA is a mathematical, non-parametric, linear programming-based technique
designed to calculate relative efficiency based on the sample countries’ efficient produc-
tion frontier (Casu and Molyneux 2003). It assumes the existence of a convex production
frontier constructed using linear programming method and evaluates the distance of each
production unit to that frontier. Hence, countries that are most efficient operate on the
frontier, while those that are inefficient operate below the frontier. By implication,
economic growth can occur if a country is able to avoid inefficient use of resources and
move closer to the world production frontier (Koop et al. 2000). A detailed theoretical
introduction to frontier efficiency measurement techniques can be found in Charnes et al.
(1978) and Coelli, Rao, and Battese (1998), for both general and education specific
efficiency measurements.
The advantage of DEA compared to other statistical efficiency measurement methods
is that it is easy to incorporate several inputs and outputs into the analysis. Furthermore,
because of the nonparametric nature of the method, no strong assumptions about the
production technology are needed. Instead, it is determined from the data. The assumption
about the distribution of efficiency is also unnecessary. Hence, in this research, the DEA
framework has been used since it permits us to handle multiple inputs and multiple outputs
and doesn’t necessarily require relating the inputs to outputs. It also facilitates comparisons
among peers hence a systematic way of measuring relative efficiency within the sample
used. However, the key weaknesses of the DEA are that; it does not measure “absolute”
efficiency; the basic statistical tests are not applicable and above all it can suffer from
measurement errors.
This study employs the output-oriented Variable Return to Scale (VRS) model based
on the assumption that the government maximizes output in each economic sector given
a fixed amount of input expenditure. We adopt the model of Banker et al. (1984) for
calculating the technical efficiency. This model is presented as follows;
 J Econ Finan

maxθ
Subject to
Xn
λ j X i j ≤ X i0 ; i ¼ 1; 2; 3; …; m :
j¼1
X
n
λ j Y r j ≥ θY r0 ; r ¼ 1; 2; 3; …; s ð1Þ
r¼1
Xn
λj ¼ 1
j¼1

λ j ≥ 0; j ¼ 1; 2; …; n

θ denotes the efficiency score that measures the technical efficiency of one of the
units under evaluation for a given set of inputs and outputs, i.e. the distance between a
Producer or Decision Making Unit (DMU) and the efficiency frontier, defined as a
linear combination of best practice observations. Xi0 and Yr0 are the ith input and rth
output for DMU respectively. λ is n-dimensional vector of constants that measures the
weights used to compute the location of an inefficient DMU if it were to become
efficient. The inefficient DMU would be projected on the production frontier as a linear
combination, using those weights of the peers of the inefficient DMU.
The optimal value of θ* represents the distance of each country from the efficient
frontier. Hence, the most technical efficient country will have θ*=1 (i.e. the decision
unit is lying on the frontier) and when θ*<1, the decision unit is inefficient and placed
inside the frontier. The VRS model is a better representation of efficiency analysis with
the assumption that output levels cannot be reduced proportionately with the levels of
input. By solving the above mathematical programming problem, we are able to get the
public spending efficiency scores in education and health for each country in each year
for the period 2000–2012
Once the efficiency scores are estimated in the first stage using the DEA analysis,
the second stage estimation investigates the factors influencing the efficiency of each of
the sector’s public spending by using the Tobit estimation technique and the fractional
logit estimation technique of Papke and Wooldridge (1996). Our choice of the panel
data Tobit model is based on the fact that the efficiency scores take a value between 0
and 1. However, recent arguments have been advanced (see Papke and Wooldridge
1996 and 2008) to suggest alternative estimation techniques when the dependent
variable is fractional or proportional. In this respect, the fractional logit model is also
used for the estimation, to act as a robustness check for the tobit results obtained.
The following equation is estimated;

Efficiencyit ¼ α þ β1 Inflait þ β2 Growthit þ β3 BM Git þ β4 FIN it þ β5 Openit

þ β 6 Corit þ εit ð2Þ
Where
Efficiency is the efficiency score for country i at time t for a particular sector
Infla is the inflation rate
Growth is economic growth measured by GDP growth
J Econ Finan

Open refers to trade openness variable, which is the ratio of the sum of export
and import of goods and services to GDP
BMG is Broad money growth
FIN is Financial Management measured by the is CPIA Index for financial
management in the country
Cor measures the level of corruption in a country. The Corruption Perception
Index is used as a proxy to capture corruption.

5 Data description and average efficiency scores

The data for this study were obtained from the World Development Indicator (WDI) data
base of the World Bank. The summary statistics of key variables used in the analysis is
presented in Table 1 below. The table presents the averages of the variables used in the
estimation of Eq. (2) for the selected CEMAC countries for the period 2000 to 2012.
The average statistics of government expenditure on education as a percentage of GDP
clearly illustrates that Central African Republic spends the lowest yet is able to improve the
level of education. Statistics from WDI (2013) shows an improvement in the adult literacy
rate from 50.64 % in 2000 to 56.6 % in 2012. In Chad, where the average spending on
education is substantial than in Central Africa Republic, the average adult literacy rate is very
low just 29.8 %. In terms of growth between 2000 and 2012, it is observed that the literacy
rate improved substantially from 25.7 to 35.4 % (WDI, 2013). In Cameroon, statistics from
the WDI showed that the literacy rate improved from 68.4 % in 2000 to 70.67 % in 2012.
In terms of average expenditure and performance in the education sector, the table
shows that the highest average expenditure as a percentage to GDP is incurred by Chad
(4.4 %) followed by Cameroon (3.13 %) and Central African Republic (1.53).

Table 1 Summary Statistics of key variables

Variable Cameroon Central African Chad

Republic (CAR)

Life expectancy at birth, total (years) 52.43 45.65 48.01

Immunization, DPT (% of children ages 12–23 months) 68 54.08 34
Public spending on health, (% GDP) 1.21 2.004 1.67
Enrolment 33.91 15.11 17.75
Literacy rate, adult total (% of people ages 15 and above) 70.13 53.63 29.8
Public spending on education, (% GDP) 3.13 1.53 4.4
Inflation, consumer prices (annual %) 2.533 3.33 3.45
GDPG 3.564 4.19 9.13
BM, Broad money (% of GDP) 18.109 16.33 10.89
CPIA quality of budgetary and financial management rating (1 3.08 2.23 2.27
= low to 6 = high)
Openness 55.25 35.72 83.57
Corruption Perceptions Index (score) 4.01 3.93 2.97

Source: Computed by Authors using data from WDI

 J Econ Finan

However, in terms of performance, Cameroon achieved the best performance in terms

of enrolment and adult literacy rate, followed by CAR and Chad.
The table also shows the statistics of government spending on health as a percentage
of GDP and health effectiveness indicators such as life expectancy and Immunization for
the selected countries. The statistics indicate that Cameroon spent the least amount on
health from its income but was able to achieve the highest average immunization and life
expectancy from 2000 to 2012. This demonstrates Cameroon is relatively efficient in
public spending on health. As opposed to Cameroon, the average health expenditure for
Central Africa Republic is 2.004 %, but it has the lowest life expectancy at birth among
the three countries, indicating relatively less efficiency in health spending (Fig. 2).
The above figures and facts on performance is supported by Figs. 2 and 3 showing the
average technical efficiency scores for the education and health sectors, respectively.
Figure 2 presents the average efficiency scores for education for each country for the
period 2000 to 2012.
Cameroon is most efficient in public spending on education with an efficiency score
of 95.4 %, followed by Central Africa Republic with a score of 89.95 % and lastly by
Chad with an efficiency score of 55.4 %.
In terms of the efficiency in public spending on health (Fig. 3), the results showed
that Cameroon is most efficient among the three countries with an efficiency score of
91.8 %, followed by Chad with a score of 71 % and by Central Africa Republic with an
efficiency score of 48.19 %.
From the above discussion, it can be observed on the one hand that, among the
three countries, Cameroon is the most efficient in its public spending expenditure
in both the education and health sectors. On the other hand Chad performs worst
in its public spending expenditure in education while Central Africa Republic is
worst in its public spending expenditure on health.

6 Presentation and discussion of regression results

Table 2 presents the estimation results of the factors that influence public spend-
ing efficiency in both the education and health sectors. The tobit and fractional
logit estimation results are presented.

Fig. 2 Average Efficiency Scores for education. Source: Computed by Authors

J Econ Finan

Fig. 3 Average Efficiency Scores for health. Source: Computed by Authors

The results from Table 2 show that inflation has a negative effect on public
spending efficiency for both the education and health sectors, albeit statistically
insignificant for education. This implies that during periods of high inflation
public spending efficiency drops. This may be accounted for by the economic
instability cause by increasing prices.
Economic growth and broad money (% GDP) both have a positive influence on
public efficiency in the education and health sector. This is indicative of the fact
that an economy that grows fast foster growth in its education and health sectors,
thus improves the efficiencies in these sectors.
Trade openness is found to be negatively related to government spending efficiency
in the education and health sectors. A result which shows that an increase in the
openness will lead to a decrease in the efficiency scores of the government in the
two sectors. This negative effect, albeit statistically insignificant is consistent with those
of Hauner and Kyobe (2008).
The results for financial management illustrate that good budgetary and financial
management is positively related to public spending efficiency scores in the education
and health sectors. This might be due to the fact that good budgetary and financial
management enable the creation of more transparent government, which contributes to
public service efficiency. Moreover, a financial sound budgetary and management
sector encourages capital inflow and investment opportunities from foreign countries
in to the host country. This result falls in line with those of Berker (2008) and Feeny
and Rogers (2008), whose results showed that a more transparent environment im-
proves the efficiency of public spending.
The corruption perception index has a negative and statistically significant influence
on public spending efficiency in both the education and health sectors. This result is
consistent with those of Wang and Eskander (2011) and Hauner and Kyobe
(2008), who also found out that corruption has a negative and statistically signi-
ficant effect on government spending efficiency in OECD and Asian Countries.The
result shows that a corrupt society is more likely to mismanage both financial and
material resources which can negatively influence the allocation of public resources in
the different sectors of the economy. In addition, a corrupt society drives away resources
and investment from donors which magnify the negative effect on public spending
efficiency.
 J Econ Finan

Table 2 Regression results of factors influencing public efficiency in education and health

Education efficiency Health efficiency

Tobit estimation Fractional Logit Tobit estimation Fractional Logit

Coefficient (t- Coefficient (z- Coefficient (t- Coefficient (z-
statistics) statistics) statistics) statistics)

Inflation −0.0073 −0.8764 −0.017* −1.7634*

(−0.85) (−0.02) (−1.68) (−1.65)
Growth 0.1841** 3.1453* 0.0142** 1.4323*
(2.54) (1.98) (2.50) (1.86)
BMG 0.0474*** 1.9161** 0.0576*** 2.0143**
(2.61) (2.12) (3.37) (2.57)
CPIA Financial 0.2004** 0.8345* 0.294** 0.9803**
Management (2.28) (1.98) (2.63) (2.87)
Openness −0.2067 −1.1265 −0.213 −1.5301
(−1.48) (−0.98) (−0.92) (−1.08)
Corruption −0.011* −0.5543** −0.464** −1.3425**
(−1.61) (−2.57) (−2.62) (−2.87)
Constant 0.7237 5.7863** 1.726* 9.2341*
(1.08) (2.39) (1.73) (1.90)
Number of observations 36 36

***, **, and * significant at 1 %, 5 % and 10 % level of significance. The t-statistics and z-statistics are
calculated using robust standard errors to control for potential heteroscedasticty

The results of the fractional logit model are presented in column 2 and 4 for the
education and health sectors, respectively. The results are quite consistent in terms of
signs with those of the tobit estimation technique. The results reveal a positive and
statistically significant effect of economic growth, broad money and index of financial
management on the technical efficiency in both the education and health sectors. The
results also show that corruption has a negative and significant effect on the efficiency
in the education and health sectors. Openness has a statistically insignificant effect on
both efficiencies, while inflation has a statistically insignificant negative effect on the
educational efficiency and a statistical significant negative effect on the health sector
efficiency.

7 Conclusion

The main objective of this paper is to analyze the public spending efficiency in the health
and education sectors and to examine the effect of institutional and economic factors on
the public spending efficiency in selected CEMAC countries for the period 2000–2012.
By employing the DEA in the first stage estimation and in the second stage, the Tobit
and fractional logit regression analyses, the study shows that Cameroon is relatively
more efficient in public spending on education and health, than CAR and Chad. The
J Econ Finan

relative efficiency of Cameroon can be demonstrated by the fact that she spent the least
amount on health from its country’s income but was able to achieve the highest life
expectancy and DPT immunization between 2000 and 2012. Likewise, Cameroon also
experienced the best performance in terms of the efficiency of public spending on
education, though it did not spend the most. On the other hand, Central Africa
Republic spends the most in terms of government expenditure on health but performed
worst in terms of health indicators and efficiency, while Chad performed worst in terms
of education efficiency though it spent the most on education among the three countries
selected from the CEMAC zone.
The results also showed that the quality of budgetary and financial management
plays a positive and important role in influencing the efficiency in both the
education and health sectors. The results further revealed that corruption as
captured by the Corruption Perception Index has a negative effect on government
spending efficiency in both the health and education sectors of the selected
countries in the CEMAC region. These two results showed the crucial role that
accountability and transparent can potentially play in influencing efficiency in
public spending. The results put together suggest that governments should strive
for corrupt free society, improved accountability and transparency in the budgetary
and financial management. There is also need to stabilize prices to foster eco-
nomic stability and hence efficiency.

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