On Government Spending

The biggest problem in how the government spends money is not corruption. Instead, it is inefficiency – the spending of money on the wrong things, writes Karthik Muralidharan in Accelerating India’s Development.

 

For example, 50% of public spending is tied to salaries, pensions and interest payments. That leaves only 50% to spend on providing real services to the people. Even within that 50%, less is spent on investments (roads, schools etc) that boost future productivity. Instead, more is spent on subsidies.

 

Muralidharan acknowledges that welfare schemes must exist, but they need better targeting. Both inclusion and exclusion errors (including the wrong people and excluding some of the right people) need to be reduced. (A broader definition of inclusion error includes not differentiating rich and poor farmers.)

 

Another problem is leakage. It refers not just to corruption, but also over-invoicing (billing for non-existent individuals) and under-payment (supplying very quality grains). A broader definition of leakage includes payment of salaries to teachers and health workers who never show up, thus effectively denying services (education, health) that the government was trying to provide.

 

Some services need to be designed better. Providing subsidized food often results in very poor quality grains reaching the poor. Transferring cash to the poor would be a better option. This is a good example of why Muralidharan says that the “design cost of subsidies are different from their fiscal cost.”

 

Even in spending on infrastructure development, the choice of location is often poor. A bidding system that only looks at cost (and not quality of work) results in under-bidding to first get the contract, then asking for more later when the project is partially done at which the government has no real option. Poor quality work also produces opportunities for later day maintenance payments.

 

To top it all, funds have to pass through many points before they reach the intended recipient. Each step delays the transfer to the next level (set aside bribe seeking, the process itself slows down transfers). If funds reach a school close to the end of the school year, it is of no use.

 

The depth of his analysis is very informative indeed.

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