PSPij= f(Ik).

Therefore, an improvement in public sector performance depends on an improvement in the values of the
relevant socio-economic indicators:

(^) ∑

Δ
∂
∂
Δ =
n
ik
k
k
ij I I
f
PSP. (2)
The performance indicators are of two kinds: process or opportunity indicators, and traditional or
Musgravian indicators. As a first step, they defined seven sub-indicators of public performance. The first
four look at administrative, education, health and public infrastructure outcomes. Each of these sub-
indicators can contain several elements. For example, “administrative” includes indicators for corruption,
red tape, quality of judiciary, and the shadow economy. These are averaged to give the value for
“administrative” performance. Health includes infant mortality and life expectancy etc. A good public
administration, a healthy and well-educated population, and a sound infrastructure could be considered a
prerequisite for a level playing field with well-functioning markets and secure property rights, where the
rule of law applies, and opportunities are plenty and in principle accessible to all. These indicators
thereby try to reflect the quality of the interaction between fiscal policies and the market process and the
influence this has on individual opportunities.
The three other sub-indicators reflect the “Musgravian” tasks for government.^5 These try to measure the
outcomes of the interaction with, and reactions to, the market process by government. Income
distribution is measured by the first of these indicators. An economic stability indicator illustrates the
achievement of the stabilisation objective. The third indicator tries to assess allocative efficiency by
economic performance. Once again each of these traditional indicators may be made up of various
elements. For example stability is made up of variation in output around a trend and inflation. Finally all
sub-indicators are used to compute a composite public sector performance indicator by giving the sub-
indicators equal weights. The values are normalized and the average is set equal to one. Then the PSP of
each country is related to this average and deviations from this average provide an indication of the
public sector performance of each of country.
However, these performances reflect outcomes without taking into account the level of public spending.
They ignore the costs in terms of public expenditure. To get some values of public sector efficiency
(PSE), the public sector performance (PSP) is weighted by the relevant category of public expenditures.
We weigh performance (as measured by the PSP indicators) by the amount of relevant public
expenditure that is used to achieve a given performance level. In order to compute these so-called
efficiency indicators, public spending was normalised across countries, taking the average value of one
for each of the six categories specified above. To get some values of public sector efficiency (PSE) the
public sector performance (PSP) is weighted by the public expenditures as follows:
i
i
i
PEX
PSP
PSE = , (3)
with
(^5) The conceptual separation between “opportunity” and standard “Musgravian” indicators is of course somewhat artificial
as, for example, health and education indicators could also be seen as indicators of allocative efficiency.