Based on the construction of two indicators to assess the relative

effectiveness and efficiency of European welfare policies, we show that the

variability of efficiency cannot be explained only by the amount of resources

devoted to social policies but also by the institutional environment. The OLS

regression shows that institutional variables- such as accountability and

honesty of public officials- have high significant effects on the efficiency

Antonelli, MARIA ALESSANDRA

DE BONIS, Valeria

English

Based on the construction of two indicators to assess the relative
effectiveness and efficiency of European welfare policies, we show that the
variability of efficiency cannot be explained only by the amount of resources
devoted to social policies but also by the institutional environment. The OLS
regression shows that institutional variables- such as accountability and
honesty of public officials- have high significant effects on the efficiency

Antonelli Maria Alessandra

De Bonis Valeria

Archivio della ricerca- Università di Roma La Sapienza

 E-PFRP N. 35 2018          ISTITUTO DI ECONOMIA E FINANZA                 PUBLIC FINANCE RESEARCH PAPERS Efficient social policies with higher expenditure: an analysis for European countries  MARIA ALESSANDRA ANTONELLI                        VALERIA DE BONIS  Public Finance Research Papers 2  E-PFRP N. 35 2018    Maria Alessandra Antonelli  Sapienza University of Rome Email: alessandra.asntonelli@uniroma1.it Valeria De Bonis Sapienza University of Rome Email: valeria.debonis@uniroma1.it                    Please cite as follows: M. A. Antonelli and V. De Bonis (2018), “Efficient social policies with higher expenditure: an analysis for European countries”, Public Finance Research Papers, Istituto di Economia e Finanza, DIGEF, Sapienza University of Rome, n. 35 (http://www.digef.uniroma1.it/ricerca).    3  E-PFRP N. 35 2018        Efficient social policies with higher expenditure: an analysis for European countries                                Maria Alessandra Antonelli                                             Valeria De Bonis  Abstract. Based on the construction of two indicators to assess the relative effectiveness and efficiency of European welfare policies, we show that the variability of efficiency cannot be explained only by the amount of resources devoted to social policies but also by the institutional environment. The OLS regression shows that institutional variables- such as accountability and honesty of public officials- have high significant effects on the efficiency.   Key words: Social policies, European welfare policies, Social public expenditure, Efficiency, Institutional framework, Accountability.  JEL codes:  H53, H89, I 38    4  E-PFRP N. 35 2018  1. Introduction In the last years, the political and socio-economic debates have often addressed the issue of the efficient use of public resources. Some empirical analyses point out a positive correlation between the dimension of the public sector and inefficiency. Afonso et al. (2005) find this result for a sample of 23 industrialized OECD countries. Dutu and Sicari (2016) also implement an efficiency analysis considering the per capita public spending on general services in 29 OECD countries; they show that there is a group of countries with potential efficiency gains achievable with a reduction in public spending. Other analyses have also focused on specific sectors of public intervention as health care and education (Afonso and St. Aubyn 2005; Agasisti 2011). In this framework, Herrera and Pang (2005) show that higher efficiency spending characterizes countries with lower expenditure levels in the sample considered1. Therefore, policy implications often suggest measures of spending cuts also due, for European countries, to the European constraints on national finances. Italy, for example, has witnessed since 1986 a succession of commissions entrusted to implement a spending review process. With the same aim France is implementing la Revue Générale del Politiques Publiques since 2008. Given the heterogeneity in qualitative and quantitative characteristics of different sectors of public spending, a disaggregated analysis of its outcomes can be useful to perform an effectiveness and efficiency analysis. To this purpose, we use two synthetic indicators summarizing the Performance and the Efficiency of public social expenditure in a comparative perspective. As a second step, we investigate the correlation between institutional variables and the efficiency of social policies.                                                                        1 They consider a sample of 140 developing countries in the period 1996-2002 5  E-PFRP N. 35 2018  2. The Social Protection Performance Index and Efficiency Following Antonelli and De Bonis (2017, 2018) we propose a composite performance index for all sectors of social protection, as specified in the OECD Social Expenditure Database (SOCX): family, health, labour market, elderly, disabled, unemployment, and inequality for 22 European countries (2013 OECD data2). Then, we select outcomes indicators for each sector: maternal employment and net disposable family income for the family’s policies; life-expectancy at birth for the health sector; the unemployment rates for labour market; the net replacement rates for the elderly and the unemployed; the average monetary benefits for disabled; the Gini index and the poverty index. As a second step, we aggregate the selected sectoral outcomes to construct a synthetic index representing the social benefit provided – on average – to citizens through public social policies. Our Social Protection Performance Index (SPPI) is such that higher values represent better results. Finally, we propose an efficiency index (SEEI) as the ratio of net social per capita expenditure to the performance index3. We use economic variables net of fiscal measures as a more appropriate measure of the benefit produced by social public expenditure. Table 1 summarizes the results and Figure 1 shows the correlation between Efficiency and Social Public Expenditure.                                                                             2 The last year for which it is possible to construct a complete database. 3 For the reference data and the methodological notes about the SPPI see Antonelli and De Bonis (2017; 2018a; 2018b, 2018 c). 6  E-PFRP N. 35 2018  Table 1 Social protection performance index and efficiency index (2013) countries  SPPI  SEEI Austria 5,44563 0,592148 Belgium 4,66809 0,505517 Czech Republic 4,22247 0,492013 Denmark 6,26494 0,68136 Estonia 2,12361 0,260486 Finland 5,12133 0,565107 France 4,76798 0,514526 Germany 4,67597 0,509464 Greece 1,96281 0,30026 Hungary 3,26386 0,387846 Ireland 3,36137 0,369684 Italy 3,76974 0,418354 Luxembourg 6,13577 0,632443 Netherlands 5,94269 0,653232 Norway 6,34456 0,681662 Poland 2,65613 0,323229 Portugal 3,46175 0,398094 Slovak Republic 3,65407 0,437929 Slovenia 4,62833 0,534846 Spain 3,00292 0,335238 Sweden 4,97201 0,543739 United Kingdom  2,72018 0,303011                                     Source: Antonelli and De Bonis (2018c)         7  E-PFRP N. 35 2018  Figure 1 Social expenditure efficiency index and social public expenditure  Source: Elaboration on OECD data  Higher efficiency characterizes countries with higher social expenditure levels: Nordic (Finland, Denmark, Sweden and Norway) and Continental (Austria, Belgium, France, Germany, Luxembourg and Netherlands) welfare systems. This could suggest that spending on social protection has not reached the diminishing marginal product phase, at least in the countries under consideration (Antonelli and De Bonis 2018). In general, Figure 1 also shows some inter-country variability of the efficiency level. Some Mediterranean countries (Italy and Spain) and the Anglo- Saxon countries (Ireland and UK) associate high expenditure levels (above the average level equal to 8,81) to low efficiency (below the average level equal to 0,47).  Consequently, the amount of resources cannot be the only explicative variable of efficiency.   3. Investigating inefficiency Antonelli and De Bonis  (2018) carry out an efficiency analysis for the same set of countries and show that GDP and the education level have a positive 8  E-PFRP N. 35 2018  effect on efficiency, while the country dimension (i.e. population) and some institutional variables -such as bureaucratic red tape, corruption and the selectivity degree of the welfare system- have a negative impact. It is known that institutional, political and organizational variables represent a potential source of inefficiency called “organizational inefficiency“ or “X inefficiency” (Leibestein 1976). Among the main factors on which to invest to reduce this kind of inefficiency there are: the accountability of officials managing public policies and the citizens’ control trough their voice power to promote best practices. While the first point mainly requires ex ante investment in Education and Ethics, the second requires the improvement of the process to acquire information to exercise the ex post control. The public choice literature has analysed in a wide perspective the inefficiency of the public sector focusing on the opportunistic behaviour of public officials (Niskanen 1975; Migué and Bélanger 1974) mainly deriving from the difficulty to define a precise relationship between inputs and outputs, asymmetric information and organizational design. These contributions have highlighted a positive correlation between inefficient management of public policies and institutional and political elements. In this framework, Adam et al. (2011) consider institutional and political variables- such as voters turnout and fiscal decentralization - showing that they are highly significant in explaining the efficiency of general public services in 19 OECD countries in the period 1980-2000.  In this paper we extend the previous analysis (Antonelli and De Bonis 2017, 2018) investigating the correlation between the efficiency of social spending (SEEI) and a new wider set of institutional variables representing the accountability of public officials and the tools making the voice power of citizens effective. To this purpose, we use survey data from the Global Competitiveness Index database4  relative to the following institutional variables: ✓ The appropriate use of public funds measuring the use of public funds for institutional goals; ✓ The pursuit of the institutional goals by public officials, that is, how much government officials’ decisions do not result in favoritism to lobbies and individuals when deciding upon policies and contracts;                                                                     4 To our knowledge, the more complete database on these institutional variables.  9  E-PFRP N. 35 2018  ✓ Transparency, representing how easy it is for citizens to obtain information about policies or procedures from public institutions. The first two variables can both be considered alternative proxies for the accountability of public officials. In addition we also consider: ✓ Honesty (or ethics), summarizing how widespread are non- corrupt  behaviours of public officials and the ethical standards of politicians’ behaviours (in other words, it can be considered a sort of the inverse of corruption). Honesty can also be interpreted as  an alternative indicator of accountability, but it covers a wider range of agents’ behaviours.  Figure 2 shows the relationship between efficiency (SEEI) and accountability.  All data are calculated as the average value 2009-2013.  Figure 2 Accountability and Efficiency Source: elaboration on OECD and GCI data  10  E-PFRP N. 35 2018  To better investigate the correlation between the institutional framework and efficiency, we estimate the following regression equation by OLS: Effi = αXi +εi Where Effi is the vector of the efficiency indicator (SEEI), Xi is a vector of socio-economics and institutional variables, α is the vector of the coefficients to be estimate and εi is the errors vector. In the regression the following socio-economics and institutional variables are considered: • Per capita GDP as a proxy for the resources devoted to social policies; • The share of secondary school graduates within the population aged 25-64, as a proxy for the competence of bureaucrats managing social policies as well as for the citizens’ ability to control and highlight inefficient practices; • An index of Accountability calculated as a linear combination of the two variables “appropriate use of funds”  and  “institutional goals of public officials”; • The transparency of public institutions as defined above; • The honesty of public officials as defined above. Table 2 summarizes the results:            Table 2 OLS results (dependent variable: SEEI)         Model  1            Model 2           Model 3              Model 4                 GDP 3,95 (2,034) 4,04 (1,71) 4,06 (1,751) 3,94 (1,88)  *  **  **           **  Accountability 0,07 (0,018) 0,04 (0,018) 0,04 (0,018)    ***  **       **    School   0,28 (0,093) 0,31 (0,134) 0,31 (0,14)    ***  **           **  Transparency     0,006 (0,022) 0,004 (0,02)          Honesty       0,04 (0,02) 11  E-PFRP N. 35 2018      Notes: St. errors in brackets.  *, **, *** are significant at the 10, 5 and 1% levels, respectively GDP per capita: average value 2009-2013. Source: OECD  Schooling: graduates in secondary school (25-64 years). Source: OECD  Accountability: source GCI average value (2009-2013) of the items “Diversion of public funds” (code 1.3) and “Favoritism  in decisions of government officials” (code 1.07)  Transparency: source GCI average value 2009-2013 “Transparency of government policymaking” (code 1.12)   Honesty: source GCI average value 2009-2013 “Ethics and corruption” (code 2)   We find that GDP and schooling affect the efficiency of social spending in all considered specifications. The sign of “accountability” is positive and significant in all models. To evaluate the strength of the result, we have also run the model replacing the “accountability” variable with the item “Honesty” from the survey data in the Global Competitiveness Index. This variable is inversely correlated with corruption and its results is significant at the 5% level with a positive coefficient. The transparency of public organizations is not significant in the analysis. A possible interpretation could be that the ex-ante investment on education and ethics to increase the accountability is a more effective tool to improve efficiency than relying on the ex post control of citizens made possible by more information.   4. Conclusions  In this paper we show that the institutional framework affects in a significant way the efficiency of public social policies. The econometric analysis points out that, rather than the socio-economics variables (per capita GDP and education), the accountability of policy-makers and bureaucrats managing social public policies has an explanatory effect on the efficiency. In particular, some variables as “appropriate use of public funds” and “public officials’ goals consistent with the institutional ones” (both summarized in the “accountability” variable) have a significant positive effect on efficiency. Honesty, as an alternative measure of  accountability, also results highly significant. Also the investment in education and ethical standard seems to be relevant to improve the efficiency use of public resources.             **  No. of obs. 22  22  22  22  12  E-PFRP N. 35 2018  References Adam, A., Delis, M., and Kammas, P. Public sector efficiency: levelling the playing field between OECD countries. Public Choice. 2011, 146:163-183. Afonso, A., and Aubyn, M. St. Cross-country efficiency of secondary education provision: a semi-parametric analysis with non-discretionary inputs. Economic Modelling. 2006, 23(3): 476-491. Afonso, A., Schuknecht, L., and Tanzi,V. Public Sector Efficiency: An International Comparison. Public Choice. 2005, 123: 321-347. Agasisti, T.Perfor mances and spending efficiency in higher education: a European comparison through non-parametric approaches. Education Economics. 2011, 2:199-224. Antonelli, M. A., and De Bonis, V. Social Welfare, Spending and Redistribution: A Comparative Analysis of 22 European Countries. Modern Economy. 2017, 8: 1291-1313. Antonelli, M. A., and De Bonis, V. Welfare State and Social Spending: Assessing the Effectiveness and the Efficiency of European Social Policies in 22 EU countries. Public Finance Research Papers. 2018 a), No. 32, Sapienza University of Rome. http://www.digef.uniroma1.it/ricerca  Antonelli, M. A., and De Bonis, V. Assessing the performance of social spending in Europe. Central European Journal of Public Policy. 2018 b), 12(1): 1-15.  Antonelli, M. A., and De Bonis, V.  The efficiency of social public expenditure in European countries: a two-stage analysis. Applied Economics. 2018 c).  Dutu, R., and Sicari, P. Public Spending Efficiency in the OECD: Benchmarking Health Care, Education and General Administration. OECD Economic Department Working Papers. 2016,  No. 1278. Herrera, S., and Pang, G. Efficiency of Public Spending in Developing Countries: An Efficiency Frontier Approach. Policy Research Working Paper. 2015,  No. 3645, World Bank.  Leibenstein, H. On the Basic Proposition of XEfficiency Theory. American Economic Association . 1978, 328-332.  Migué, J. L., and Bélanger, G. Towards a general theory of managerial discretion. Public Choice. 1974, 17: 23-43.  Niskanen,W. A. Bureaucracy and representative government. 1971, Chicago: Aldine. 13  E-PFRP N. 35 2018                            14  E-PFRP N. 35 2018                       Public Finance Research Papers are a publication of the Istituto di Economia e Finanza, DIGEF, Sapienza University of Rome – http://www.digef.uniroma1.it/pubblicazioni Contact: e-pfrp@uniroma1.it 

Efficient social policies with higher expenditure: an analysis for
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Efficient social policies with higher expenditure: an analysis for European countries

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