The Impact of Fiscal Openness on Public Spending Technical Efficiency in Developing Countries

Abstract

This study examines the impact of fiscal openness, defined as fiscal transparency and public participation in budget processes, on public spending technical efficiency in developing countries. Fiscal openness is expected to improve public spending technical efficiency by curbing political and bureaucratic corruption. However, beyond a certain limit, more fiscal openness may undermine public spending technical efficiency because of the excessive administrative costs and politicization of public spending decisions that lead to a throwing money effect. We combine a data envelopment analysis and regression analysis to calculate the efficiency scores in developing countries and test the hypothesis of an inverted U-shaped relationship between fiscal openness and public spending technical efficiency. Our results support the existence of an inverted-U relationship between the fiscal transparency aspect of fiscal openness and the public spending technical efficiency in developing countries, whereas the effect of public participation is found to be statistically insignificant.

Keywords:

• Developing countries
• fiscal openness
• fiscal transparency
• public participation
• public spending technical efficiency

Disclosure statement

No conflict of interest has been declared by the authors.

Notes

1 Developing countries include middle- and low-income countries according to the World Bank’s classification. The list of countries covered in our analysis is given in the appendix.

2 Technical efficiency is sometimes referred to as productive efficiency (e.g., Andrews & Entwistle, 2013) or economic efficiency (e.g., Geys & Moesen, 2009).

3 Using an aggregate public sector performance indicator as the output in measuring PSTE was developed by Afonso et al. (2005). We will depend on a similar indicator in our empirical analysis, and this will be explained in Section 3 in more detail.

4 When irreconcilable conflicts over the allocation of public resources arise, it is better that politicians have some flexibility in forming political coalitions to resolve conflicts; however, this can be hampered by higher levels of fiscal openness (Hood, 2001).

5 PSTE is sometimes referred to in these studies as government efficiency or public sector efficiency.

6 We put them on the same scale by subtracting the mean and then dividing by the standard deviation for each observation.

7 This assumption is more realistic for real-world applications (Geys & Moesen, 2009; Tran & Dollery, 2021). In contrast, the constant returns to scale (CRS) assumption means that a one percent increase in input results in a one percent increase in output.

8 Results remain unchanged when all control variables are added.

9 De Simone et al. (2019) argue that the risk of presence of an endogeneity problem is low because fiscal transparency changes at a slow pace. Therefore, it is more logical to believe that fiscal transparency affects the politicians’ and bureaucrats’ behavior by encouraging them to spend more efficiently, and not the reverse.

10 In contrast, other instruments for fiscal transparency that are used in previous studies such as political competition, type of government, and rule of law are explicitly mentioned as determinants of PSTE (Hauner & Kyobe, 2010; Montes et al., 2019; Ríos et al., 2017).

Additional information

Notes on contributors

Nada Azmy Elberry

Nada Azmy Elberry is a doctoral researcher in the Department of Public Governance and Management at Ghent University, Belgium. Her research focuses on fiscal openness, public spending efficiency, budget credibility, and public debt management. Her research has been published in Journal of Economic Surveys and Journal of Forecasting.

Frank Naert

Frank Naert is emeritus professor at Ghent University. His research topics include public finance and European integration. His interests more specifically are in the accountability issues of European public finance issues and, involving such issues as the new EU economic governance.

Stijn Goeminne

Stijn Goeminne is associate professor in the Department of Economics of Ghent University, Belgium. His research focuses on the impact of political and institutional features of local governments on their fiscal policy and public service performance. His research has been published in e.g. Public Administration Review, Journal of Economic Surveys and Journal of Forecasting.