Efficiency of Public Spending on Human Capital, Public Debt and Income Inequality in Selected African Countries

Abstract

The study assessed the effect of public spending efficiency on human capital, public debt, and income inequality in Africa. Specifically, the study computed technical efficiency scores for public spending on education and health and examined its effect on public debt and income inequality. Data Envelopment Analysis and DEA Bootstrapping models were used to investigate the relative technical efficiencies and their correlates in Africa. System GMM was used to examine the relationship between public spending, public debt, and income inequality while Lind and Mehlum U-shaped test approach was used to determine the turning points. The data was sourced from the World Bank’s World Development Indicators, World Governance Indicators, and Standardized World Income Inequality database from 2006 to 2017 for African countries. The study found public spending on health and education to be inefficient. The countries (DMUs) were found to be more efficient in health spending than in education spending. Factors such as government expenditure, economic growth, urbanization, trade openness, and institutional quality were found to influence efficiency of public spending on human capital. Institutional quality of at least 50% increases efficiency of public spending on education. Efficiency of public spending on health of at least 70.62% was found to reduce public debt while efficiency of public spending on education of at least 77.1% and 77.4% were found to reduce public debt and income inequality respectively. The study recommends that governments should ensure high levels of efficiency of public spending on human capital to reduce public debt and income inequality by ensuring institutional quality, trade openness, and growth in urbanization.