Public Sector Efficiency and Economic Growth in Developing Countries

Our main contribution to this paper consists of analyzing the impact of public sector efficiency on economic growth. For this purpose, we based on a sample of seventy-five developing countries during the period 2000-2018. In the first step, we have estimated the countries' efficiency scores of public spending using data envelopment analysis (DEA). In the second step, we have incorporated them into a simple model of growth through government expenditure by applying a generalized method of moments (GMM). The results demonstrate that increasing government expenditure reduces economic growth in developing countries. However, when government expenditure is interacted with public sector efficiency, we find evidence for efficiency to boost the impacts of public spending on economic growth. Moreover, the empirical results show that above a critical threshold, efficiency lowers the optimal size of government expenditure required to maximize growth. Our findings can be useful for policymakers in order to set out a structural adjustment plan to improve the efficiency level of the public sector.