Thursday, September 20, 2012

Per capita GDP after correcting for government inefficiency

In a new research note, WB's Francesco Grigoli and Eduardo Ley argue that correcting for wastage of government inputs from GDP would "significantly" reorder the living standards rankings. Below is the abstract of the paper (full text here).
It is generally acknowledged that a 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 value to input costs, but well-documented inefficiencies in government activities make this approximation questionable. One solution is to purge from gross domestic product (GDP) the fraction of government inputs that is wasted. This note illustrates such a correction, computing corrected per capita GDP on the basis of two studies that estimate efficiency scores for several dimensions of government activities. Results show that the correction could be significant and reorder the rankings of living standards.
The percentage of GDP losses due to public waste in education and health is estimated as high as 4.2 percent for Brazil!