Ethnic Diversity and the Efficiency of Public Spending in Developing Countries

Abstract

This paper examines the effect of ethnic diversity on the efficiency of public spending in a set of developing countries. For this purpose, we use Data Envelopment Analysis to assess the efficiency of public spending in the sectors of health, education and infrastructure in 77 developing countries over the period 1996-2012. Further, we investigate the effect of ethnic diversity on the cross country variation in efficiency. Two main findings emerge. First, barely 12% of the sample of countries under study makes an efficient use of public expenditure. Second, no matters the level of aggregation, ethnic polarization is positively associated with higher efficiency. In contrast, ethnic fractionalization does have a negative or at the best no effect on efficiency, especially at the finest level of disaggregation.