## 1. Trends in Health and Education Spending, 1995–2003

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### I. Introduction and main conclusions
- Policy challenge: improve performance of education and health systems while containing cost in G7 countries.
- Objective: assess whether G7 countries could achieve better education and health outcomes at current spending levels or the same outcomes at lower spending.
- Nature of analysis: exploratory; indicates need for follow-up work on data and other parts of the analysis.

Key conclusions from the quantitative analysis:
- Public spending on education and health systems varies greatly across G7 countries, and so do outcomes.
  - Spending is particularly high relative to outcomes in education and health in France, Germany, the U.K., and the U.S.
  - Canada’s education spending is relatively efficient; health spending is relatively efficient in Italy and Japan.
- Part of differences in spending efficiency attributable to exogenous factors: GDP, demographics, lifestyle.
- Policy and institutional correlates of efficiency:
  - High shares of budgets on wages and salaries → lower efficiency.
  - Lower student-teacher ratios → reduced efficiency in education.
  - Immunizations and doctors’ consultations (but not number of doctors per se) → positive correlation with health efficiency.
  - Greater autonomy for schools → appears to raise efficiency in secondary education.
- Reform emphasis: enhance efficiency, identify stage at which inefficiencies arise, balance devolution and competition with regulation and accountability.
- Cross-country studies useful but require further data and sectoral work.

### III. Spending and outcomes in education and health: empirical analysis — trends (1995–2003)
- Measurement notes:
  - Spending measured in equivalent U.S. dollars using GDP purchasing power parity (PPP).
  - Education: expenditure per student in PPP terms by level — primary, secondary (including post-secondary non-tertiary), tertiary; includes public and private funded spending.
  - Health: health spending per capita in PPP terms; public and private spending separately available.
  - Data sources: OECD (education and health statistics), OECD PISA database.

Findings on levels and trends:
- Total education spending (public and private) considerably higher in the U.S., particularly at the tertiary level.
- Average G7 spending on primary and secondary education near OECD average; G7 spends more on average on tertiary education.
- Public health spending highest in Germany and the U.S., lowest in Italy, Japan, and the U.K.
- Average public health spending in OECD countries is below G7 levels.
- G7 countries markedly increased overall (public and private) spending on education and health in real terms over the last decade.

Exact trend figures (1995–2003):
- Real overall spending (public and private, average annual increase in percent) — Education:
  - Primary and secondary education (average annual increase in real per student spending, public and private):
    - Canada: 2.2
    - Germany: 0.6
    - Italy: 1.2
    - Japan: 3.0
    - U.K.: 2.9
    - U.S.: 3.1
    - G7: 2.2
    - OECD: 3.6
  - Tertiary education (average annual increase in real per student spending, public and private):
    - Canada: 3.1
    - Germany: 1.0
    - Italy: 3.1
    - Japan: 1.7
    - U.K.: 0.0
    - U.S.: 1.2
    - G7: 1.8
    - OECD: 0.7
- Public spending (cumulative increase in percent of GDP) — Education:
  - Canada: -1.6
  - Germany: -0.1
  - Italy: -0.1
  - Japan: 0.0
  - U.K.: 0.3
  - U.S.: 0.4
  - G7: -0.2
  - OECD: 0.2
- Real overall spending (public and private, average annual increase in percent) — Health:
  - Canada: 3.4
  - France: 3.2
  - Germany: 2.0
  - Italy: 3.1
  - U.K.: 4.2
  - U.S.: 3.8
  - G7: 3.3
  - OECD: 5.2
- Public spending (cumulative increase in percent of GDP) — Health:
  - Canada: 0.4
  - France: 1.0
  - Germany: 0.2
  - Italy: 1.1
  - Japan: 0.8
  - U.K.: 1.0
  - U.S.: 0.8
  - G7: 0.8
  - OECD: 0.8

Additional trend notes:
- Between 1995 and 2003, real overall spending per student from public sources increased at an average rate of 2.2 percent per year in primary and secondary education and 1.8 percent in tertiary education.
- Spending trends differed across G7: Germany had relatively small increases; Canada and Japan increased spending well above G7 average.
- Average health expenditure from public and private sources increased by 3.8 percent per year in real per capita terms in the G7 over 1995–2003; increases larger for the U.K. and U.S. than for Germany.
- Public spending for health increased to 7.1 percent of GDP in 2003. This increase was highest for France, Italy, and the U.K.
- Public spending for education in the G7 declined slightly, from an average of 4.8 percent of GDP in 1995 to 4.6 percent of GDP in 2003.
- Canada’s public education spending fell from 6.2 percent of GDP in 1995 to 4.6 percent of GDP in 2003; rapid real GDP growth still allowed substantial increases in real spending per student in Canada.

Education and health outcome changes (selected figures):
- Education outcomes and health outcomes generally improved in G7 countries between the relevant periods.
- Selected country changes (percent differences or annual percent changes as reported):
  - Canada: PISA mathematics scores 1.9; Upper secondary graduation rate 3.4; Tertiary graduation rate 12.6; Standardized death rates -1.6; Infant mortality -1.5
  - France: PISA mathematics scores 1.2; Upper secondary graduation rate 14.3; Tertiary graduation rate 58.3; Standardized death rates -0.9; Infant mortality -2.5
  - Germany: PISA mathematics scores 3.7; Upper secondary graduation rate -1.2; Tertiary graduation rate -14.8; Standardized death rates -2.2; Infant mortality -2.9
  - Italy: PISA mathematics scores 2.7; Upper secondary graduation rate 23.1; Tertiary graduation rate 25.0; Standardized death rates -2.5; Infant mortality -4.8
  - Japan: PISA mathematics scores -1.1; Upper secondary graduation rate 0.0; Tertiary graduation rate 15.6; Standardized death rates -2.8; Infant mortality -4.4
  - U.K.: Upper secondary graduation rate 7.7; Tertiary graduation rate 20.7; Standardized death rates -1.9; Infant mortality -1.9
  - U.S.: PISA mathematics scores 1.2; Upper secondary graduation rate -1.1; Tertiary graduation rate 0.0; Standardized death rates -1.4; Infant mortality -1.2
- Aggregates:
  - G7: PISA mathematics scores 1.6; Upper secondary graduation rate 6.6; Tertiary graduation rate 16.8; Standardized death rates -1.9; Infant mortality -2.7
  - OECD (excludes Mexico and Turkey): PISA mathematics scores 1.9; Upper secondary graduation rate 8.2; Tertiary graduation rate 14.8; Standardized death rates -2.0; Infant mortality -3.7

Relationship between spending and outcomes:
- Trends in outcomes not closely related to spending trends across G7:
  - U.K.: above-average improvements in education outcomes with relatively modest real spending increases.
  - U.S.: less improvement despite larger resource increases.
  - Germany: more health gains with smaller increase in real health resources than Canada, the U.K., and the U.S.
- Need to investigate whether improvements reflect increased efficiency, changes in participation, or other factors (demographic or urbanization differences).

### Methodology for assessing relative efficiency
- Relative efficiency assessed using Data Envelopment Analysis (DEA) to estimate best-practice frontiers and relative efficiency across countries.
- DEA principle: countries achieving same or better outcomes with lower spending deemed most efficient and determine best-practice frontier.
- Caveats:
  - Heterogeneity across countries (GDP per capita, urbanization, demographics) affects spending-outcome relationships.
  - DEA results mix spending inefficiencies and sectoral policy differences; not an exact measure of technical efficiency but indicates outcomes per spending relative to comparable countries.
- Appendix I discusses DEA and intermediate outputs (e.g., school instruction hours, patient-doctor consultations).

### Key DEA findings and rankings
- General positioning:
  - Education and health spending in G7 generally not among most efficient in OECD sample.
  - Japan on best-practice frontier for HALE, standardized death rates, and infant mortality.
  - G7 countries generally rank in bottom two quartiles of OECD efficiency distribution, particularly France, Germany, the U.K., and the U.S.
  - Canada ranks relatively high in education efficiency; Italy and Japan rank relatively high in health efficiency.
- Table-derived summaries:
  - Canada’s education efficiency scores ranked, on average, at the 15th percentile (top 1–25 quartile).
  - Ratios of G7 to OECD average rankings (interpretation: ratio of 1 = OECD average; lower ratio = above average efficiency; ratio >1 = less efficient):
    - Secondary Education (Total spending efficiency / System efficiency):
      - Canada 0.4 / 1.2
      - France 0.8 / 1.7
      - Germany 1.0 / 0.1
      - Italy 1.1 / 1.6
      - Japan 0.7 / 1.4
      - U.S. 1.2 / 1.4
      - G7 average 0.8 / 1.2
    - Tertiary Education (Total spending efficiency / System efficiency):
      - France 1.1 / 0.6
      - Germany 1.3 / 1.5
      - Italy 0.8 / 0.1
      - Japan 1.2 / 1.7
      - U.K. 1.3 / 0.4
      - U.S. 1.8 / 0.8
      - G7 average 1.2 / 0.9
    - Health (Public spending efficiency / Total spending efficiency / System efficiency):
      - Canada 1.4 / 1.6 / 0.9
      - France 1.2 / 1.3 / 1.1
      - Germany 1.4 / 1.5 / 1.6
      - Italy 0.6 / 0.7 / 0.6
      - Japan 0.4 / 0.4 / 0.7
      - U.K. 1.5 / 1.1 / 0.1
      - U.S. 1.9 / 2.0 / 0.8
      - G7 average 1.2 / 1.2 / 0.8
- Interpretation:
  - Low average spending efficiency in G7 largely reflects cost effectiveness issues, particularly in tertiary education and health.
  - In secondary education, many G7 countries (except Germany) score worse on system efficiency than on overall spending efficiency.
  - Rankings robust to using overall vs. public health spending and choice of outcome indicator.

### Drivers of cross-country differences in efficiency
- Expenditure composition and institutional arrangements associated with efficiency:
  - Wage spending negatively associated with efficiency in education.
  - Health efficiency tends to be lower where there are more health workers.
- Intermediate output mix matters:
  - Lower student-teacher ratios associated with lower education efficiency.
  - Immunizations associated with higher health efficiency.
- Institutional and policy factors:
  - Greater autonomy for schools and emphasis on academic ability in student selection raise secondary education efficiency.
  - Decentralization and large out-of-pocket payments associated with lower health efficiency.
  - In tertiary education, efficiency negatively associated with decentralization and private spending.
- Exogenous factors: GDP, urbanization, socioeconomic background, lifestyle.

Empirical evidence on staffing, wages, and interaction effects:
- Education:
  - Strong negative association between overspending on compensation and efficiency.
  - Negative association between efficiency in achieving PISA test scores and student-teacher ratios suggests overstaffing may play a role.
  - Among G7, Japan, Germany, and Italy have high wage bills in education; Italy’s low student-teacher ratio drives high compensation costs; in Germany large classroom sizes and salary levels may contribute to inefficiencies.
- Health:
  - Health employment density and general practitioner density negatively correlated with efficiency for all health outcome indicators.
  - Numbers of doctors’ consultations and hospital beds positively associated with efficiency for infant, child, and maternal mortality.
  - Several G7 countries (Canada, France, Germany, and the U.S.) have substantially higher numbers of health practitioners than OECD average.
  - U.S. has relatively high number of health practitioners and markedly fewer doctors’ consultations per capita than other G7 and OECD countries.

### Policy implications and recommendations
- Staffing and wages:
  - Reforms should pay close attention to staffing and wages.
  - Overstaffing and large compensation shares may reduce efficiency; monitor capacity utilization (average class size, hospital bed occupation rates).
- Composition of spending:
  - Gear spending toward cost-effective intermediate outputs (e.g., immunizations yield large health benefits at relatively low cost).
  - Reducing student-teacher ratios often a relatively inefficient way to improve education outcomes.
- Targeting stage of inefficiency:
  - Distinguish lack of cost effectiveness (mostly in health and tertiary education) from system inefficiency (frequent in secondary education).
  - Cost effectiveness: increase competition among suppliers and address wage-bias in spending composition (moderate salaries, tackle overstaffing).
  - System efficiency: reforms promoting competition among institutions with appropriate accountability for quality.
- Devolution, competition, and accountability:
  - Balance devolution of responsibility and resources with market competition and regulatory frameworks ensuring accountability for results.
  - Shifting responsibility to private sector and subnational governments unlikely to achieve efficiency gains alone; pair with accountability measures.
  - Education: consider enhanced autonomy for schools to hire teachers and select on merit.
  - Health: provide incentives for cost savings while addressing equity concerns—disadvantaged groups often depend on public spending for access.
- Fiscal sustainability and competitiveness:
  - Reducing inefficiencies in health sector key for sustainable fiscal policies and overcoming obstacles to international competition in G7 countries.
  - Reforms must address accountability and equity to avoid reversal and protect access for disadvantaged groups.

### Data, DEA methodology, and second-stage analysis
- Data and inputs/outputs:
  - PPP-deflated spending used; GDP PPPs applied.
  - DEA benchmarks G7 against OECD (excluding Mexico and Turkey outliers).
  - Education links:
    - Total spending per student in secondary education → average PISA mathematics test scores, PISA score distribution (ratio of 25th to 75th percentile), secondary graduation rates.
    - Total spending per student in tertiary education → tertiary graduation rates.
  - Health links:
    - Public spending per capita on health → infant, child, and maternal mortality rates, HALE, population standardized death rates.
- DEA specifics:
  - Uses Farrell input-oriented efficiency score for one-input/one-output cases; best-practice frontier determined by most efficient units (efficiency score 1).
  - Finite-sample bias corrected via bootstrapping method of Simar and Wilson (2000).
  - In 1 input / 1 product cases convergence speed is n^-2/3; bias correction and confidence intervals feasible.
  - DEA chosen for parsimony; stochastic methods require larger, more heterogeneous samples and more model specification.
- Disaggregation and indices:
  - Spending → intermediate outputs (cost effectiveness) and intermediate outputs → outcomes (system efficiency).
  - Intermediate output indices:
    - Secondary education: index of ranks for student-teacher ratios, number of computers per student, average hours of compulsory instruction time.
    - Tertiary education: rank for student-teacher ratio.
    - Health: index of ranks for hospital beds, physicians per capita, health workers per capita, immunizations, doctors’ consultations.
  - System efficiency calculated using intermediate output index as input and associated outcomes.
- Second-stage analysis:
  - Correlations and regressions of bias-corrected efficiency scores on associated factors, conditional on GDP per capita.
  - Reformulated as differences of efficiency scores between dominating and dominated country pairs to boost sample size.
  - Bootstrapped truncated regressions (Simar and Wilson adjustments) used; cluster correction applied.
  - Limitations: small sample size and remaining serial correlation affect standard errors; paper focuses on correlation findings.

### Key statistics and indicators (selected exact figures)
- Education and health spending (Table 6, PPP dollars):
  - G7 total education spending per primary student: 6,239
  - G7 total education spending per secondary student: 7,773
  - G7 total education spending per tertiary student: 14,078
  - G7 total health spending per capita: 2,524
  - G7 public health spending per capita: 1,723
  - OECD (excluding Mexico and Turkey) total education per primary student: 5,761; secondary: 7,340; tertiary: 11,457; total health per capita: 2,012; public health per capita: 1,454
  - U.S. tertiary per student: 24,074; U.S. total health per capita: 4,497; U.S. public health per capita: 1,989
- Education outcomes (Table 7):
  - G7 PISA mathematics score average: 504.8
  - G7 PISA mathematics score distribution: 0.77
  - G7 upper secondary graduation rate: 85.7
  - G7 tertiary graduation rate: 32.1
  - OECD (excluding Mexico and Turkey) PISA average: 506.8; distribution: 0.77; upper secondary graduation rate: 84.7; tertiary graduation rate: 35.8
  - Japan PISA average: 534.1; Japan upper secondary graduation rate: 91.4; Japan tertiary graduation rate: 36.1
- Health outcomes (Table 8):
  - G7 HALE: 70.9
  - G7 standardized death rate (per 100,000): 582
  - G7 infant mortality rate (per 1,000): 4.7
  - G7 child mortality rate (per 1,000): 5.3
  - G7 maternal mortality rate (per 100,000): 6.5
  - OECD (excluding Mexico and Turkey) HALE: 69.8; standardized death rate: 651; infant mortality: 4.6; child mortality: 5.3; maternal mortality: 6.5
  - U.S. HALE: 68.1; U.S. standardized death rate: 670; U.S. infant mortality: 6.9; U.S. child mortality: 7.6; U.S. maternal mortality: 10.5
- Intermediate outputs in education (Table 9, selected):
  - G7 student-teacher ratio (primary and secondary combined index): 17.4
  - G7 averages for secondary student-teacher ratio: 13.7
  - G7 average computers per student in secondary education: 0.2
  - OECD secondary student-teacher ratio: 12.4; OECD computers per student in secondary: 0.2
  - Country examples:
    - Italy secondary student-teacher ratio: 11.0; net teaching hours per teacher (primary) 726; average hours of compulsory instruction time (primary 7–14 years): 980
    - U.S. primary student-teacher ratio: 15.0; net teaching hours per teacher (primary) 1080; secondary net teaching hours per teacher: 1080
- Intermediate outputs in health (Table 10, selected):
  - G7 total hospital beds (per 1,000): 6.8
  - G7 health worker density index (per 1,000): 11.6
  - G7 physicians (per capita): 2.5
  - G7 immunization for measles (percent of children 1–2 years old): 90.4
  - G7 number of doctors’ consultations (per capita): 7.1
  - Country examples:
    - Japan hospital beds (per 1,000): 14.6; doctors’ consultations per capita: 14.0; immunization measles: 100.0
    - Germany hospital beds (per 1,000): 9.0; physicians per capita: 3.3; doctors’ consultations per capita: 7.3
    - U.S. hospital beds (per 1,000): 3.5; health worker density index: 13.2; physicians per capita: 2.3; doctors’ consultations per capita: 4.0

_Italic: Source — _wp07263 - 1. Trends in Health and Education Spending, 1995–2003 (PDF chapter content provided)._

### 1. Trends in Health and Education Spending, 1995–2003.........................................................9

### 1. Trends in Health and Education Spending, 1995–2003

### I. Introduction and main conclusions
- A key policy challenge in G7 countries is to improve the performance of education and health systems while containing their cost.
- The paper assesses whether G7 countries could achieve better education and health outcomes at current levels of spending or the same outcomes at lower levels of spending.
- The analysis is exploratory and points to the need for follow-up work on data and other parts of the analysis.

Key conclusions from the quantitative analysis:
- Public spending on education and health systems varies greatly in G7 countries, and so do education and health outcomes. Spending is particularly high in relation to outcomes in education and health in France, Germany, the U.K., and the U.S.; that is, the question of how to increase the efficiency of spending on education and health is most relevant for these countries. On the other hand, Canada’s education spending is relatively efficient, as is health spending in Italy and Japan.
- Part of the differences in spending efficiency can be attributed to exogenous factors such as GDP, demographics, and differences in lifestyle.
- Policies and institutions are also associated with differences in efficiency:
  - Countries that spend a relatively large share of their education and health budgets on wages and salaries tend to be less efficient.
  - Lower student-teacher ratios are associated with reduced efficiency in the education sector.
  - Immunizations and doctors’ consultations (but not the number of doctors per se) are positively correlated with efficiency in the health sector.
  - Greater autonomy for schools seems to raise efficiency in secondary education.
- Effective education and health reform should aim at enhancing efficiency, taking into account the stage at which inefficiencies arise, and balancing devolution and enhanced market competition with regulation to ensure accountability.
- Cross-country studies can provide important insights, but further work on data and sectoral issues is needed.

### II. Education and health spending, outcomes, and economic growth: background and literature review
- Education attainment is a key driver of economic growth, with attainment at higher levels of education gaining importance as economies become more developed. Health status is also found to have a positive impact on growth.
- Evidence for a positive relationship between education spending and attainment is mixed; a number of studies find no statistically significant relationship. Similarly, there is limited evidence for a positive link between health spending and health status. Public spending has been found to benefit the poor by enhancing their access to health services.
- Selected policies, institutions, and environmental factors have a clear impact on education attainment:
  - Family background and teacher quality are important explanatory variables for student achievement.
  - School autonomy and emphasis on assessing student performance are likely to raise education attainment.
  - Teacher unions’ influence may have a negative impact.
  - The effects of class size, decentralization, and the relative importance of public and private education are ambiguous.
- Key factors for explaining health status include lifestyle (consumption of alcohol and tobacco, diet), income level, occupational and socioeconomic status, urbanization, medical technology, and education attainment.
- Improved achievement at lower levels of education promotes both equity and economic growth; improved achievement at higher levels of education may benefit the well-off most.
- In health, there is a strong tradeoff between policies aimed at enhancing cost effectiveness and improving equity of outcomes.

### III. Spending and outcomes in education and health: empirical analysis — trends (1995–2003)
- Measurement notes:
  - Spending is measured in equivalent U.S. dollars using GDP purchasing power parity (PPP).
  - In education, expenditure is measured per student in PPP terms by level of education: primary, secondary (including post-secondary non-tertiary), and tertiary. Per-student education expenditure data are available for overall spending funded both by public and private sources.
  - Health resources are measured as health spending per capita in PPP terms; data on public and private spending are separately available.
  - Data sources: OECD (education and health statistics), OECD PISA database; see Appendix I for more details on data issues.

Findings on levels and trends:
- Total education spending (including funded from private sources) has been considerably higher in the U.S. than in other G7 countries, particularly at the tertiary level.
- Average G7 spending on primary and secondary education is near average levels in the OECD but G7 countries spend more on average on tertiary education.
- Public health spending is highest in Germany and the U.S., and lowest in Italy, Japan, and the U.K.
- Average public health spending in OECD countries is below spending levels in G7 countries.
- G7 countries have markedly increased overall (public and private) spending on education and health in real terms over the last decade.

Exact trend figures (1995–2003):
- Real overall spending (public and private, average annual increase in percent) — Education:
  - Primary and secondary education (average annual increase in real per student spending, public and private):
    - Canada: 2.2
    - France: ... (not reported in the table excerpt)
    - Germany: 0.6
    - Italy: 1.2
    - Japan: 3.0
    - U.K.: 2.9
    - U.S.: 3.1
    - G7: 2.2
    - OECD: 3.6
  - Tertiary education (average annual increase in real per student spending, public and private):
    - Canada: 3.1
    - France: ... (not reported in the table excerpt)
    - Germany: 1.0
    - Italy: 3.1
    - Japan: 1.7
    - U.K.: 0.0
    - U.S.: 1.2
    - G7: 1.8
    - OECD: 0.7
- Public spending (cumulative increase in percent of GDP) — Education:
  - Canada: -1.6
  - Germany: -0.1
  - Italy: -0.1
  - Japan: 0.0
  - U.K.: 0.3
  - U.S.: 0.4
  - G7: -0.2
  - OECD: 0.2
- Real overall spending (public and private, average annual increase in percent) — Health (average annual increase in real per capita health spending, public and private over 1995–2003):
  - Canada: 3.4
  - France: 3.2
  - Germany: 2.0
  - Italy: 3.1
  - Japan: ... (not reported in the table excerpt)
  - U.K.: 4.2
  - U.S.: 3.8
  - G7: 3.3
  - OECD: 5.2
- Public spending (cumulative increase in percent of GDP) — Health:
  - Canada: 0.4
  - France: 1.0
  - Germany: 0.2
  - Italy: 1.1
  - Japan: 0.8
  - U.K.: 1.0
  - U.S.: 0.8
  - G7: 0.8
  - OECD: 0.8

Additional trend notes:
- Between 1995 and 2003, real overall spending per student from public sources increased at an average rate of 2.2 percent per year in primary and secondary education and 1.8 percent in tertiary education (Table 1).
- Spending trends differed considerably between G7 countries, with Germany posting relatively small spending increases and Canada and Japan increasing their spending at rates well above the average for the G7.
- Average health expenditure from public and private sources increased by 3.8 percent per year in real per capita terms in the G7 over the period 1995–2003. Increases in health spending were significantly larger for the U.K. and U.S. than for Germany.

### IV. Factors associated with efficiency differences (summary points captured in trends section)
- Exogenous factors affecting efficiency differences include GDP, demographics, and lifestyle differences.
- Policy and institutional factors linked to efficiency differences include:
  - Share of education and health budgets spent on wages and salaries.
  - Student-teacher ratios.
  - Immunization rates and doctors’ consultations.
  - School autonomy in secondary education.

_Italic: Source — _wp07263 - 1. Trends in Health and Education Spending, 1995–2003 (PDF chapter content provided)._

### 7.1 percent of GDP in 2003. This increase was highest for France, Italy, and the U.K. (see

### _wp07263 - 7.1 percent of GDP in 2003. This increase was highest for France, Italy, and the U.K. (see

### Trends in public spending on health and education
- Public spending for health increased to 7.1 percent of GDP in 2003. This increase was highest for France, Italy, and the U.K.
- Public spending for education in the G7 declined slightly, from an average of 4.8 percent of GDP in 1995 to 4.6 percent of GDP in 2003.
- Public education spending in Canada fell from 6.2 percent of GDP in 1995 to 4.6 percent of GDP in 2003; however, because of rapid increases in real GDP, this still allowed for substantial increases in real spending per student in Canada.

### Education and health outcome changes (summary of Table 2)
- Education outcomes (PISA mathematics scores, upper secondary graduation rates, tertiary graduation rates) and health outcomes (standardized death rates, infant mortality) generally improved in G7 countries between the relevant periods covered.
- Selected country changes (percent differences or annual percent changes as reported):
  - Canada: PISA mathematics scores 1.9; Upper secondary graduation rate 3.4; Tertiary graduation rate 12.6; Standardized death rates -1.6; Infant mortality -1.5
  - France: PISA mathematics scores 1.2; Upper secondary graduation rate 14.3; Tertiary graduation rate 58.3; Standardized death rates -0.9; Infant mortality -2.5
  - Germany: PISA mathematics scores 3.7; Upper secondary graduation rate -1.2; Tertiary graduation rate -14.8; Standardized death rates -2.2; Infant mortality -2.9
  - Italy: PISA mathematics scores 2.7; Upper secondary graduation rate 23.1; Tertiary graduation rate 25.0; Standardized death rates -2.5; Infant mortality -4.8
  - Japan: PISA mathematics scores -1.1; Upper secondary graduation rate 0.0; Tertiary graduation rate 15.6; Standardized death rates -2.8; Infant mortality -4.4
  - U.K.: PISA mathematics scores ...; Upper secondary graduation rate 7.7; Tertiary graduation rate 20.7; Standardized death rates -1.9; Infant mortality -1.9
  - U.S.: PISA mathematics scores 1.2; Upper secondary graduation rate -1.1; Tertiary graduation rate 0.0; Standardized death rates -1.4; Infant mortality -1.2
- Aggregates:
  - G7: PISA mathematics scores 1.6; Upper secondary graduation rate 6.6; Tertiary graduation rate 16.8; Standardized death rates -1.9; Infant mortality -2.7
  - OECD (excludes Mexico and Turkey): PISA mathematics scores 1.9; Upper secondary graduation rate 8.2; Tertiary graduation rate 14.8; Standardized death rates -2.0; Infant mortality -3.7
- Notes on interpretation:
  - Except for Japan, all G7 countries posted increases in average PISA mathematics scores between the 2000 and 2003 rounds.
  - Improvements in participation are gauged by comparing graduation rates of successive cohorts (difference between age groups 35–44 and 25–34 in 2004).
  - France, Italy, and the U.K. posted the highest gains in education attainment; the U.S. showed no substantial progress and Germany showed a loss in education attainment.
  - In health, standardized death rates and infant mortality improved in all G7 countries between 1995 and 2003, with most progress in Germany, Italy, and Japan.

### Relationship between spending and outcomes
- Trends in education and health outcomes are not closely related to spending trends in G7 countries:
  - The U.K. achieved above-average improvements in education outcomes with relatively modest increases in real spending.
  - The U.S. achieved less improvement despite larger increases in resources.
  - Germany achieved more health gains with a smaller increase in real health resources than Canada, the U.K., and the U.S.
- The paper identifies the need to investigate whether improvements reflect increased efficiency, changes in participation, or other factors (e.g., demographic or urbanization differences).

### Methodology for assessing relative efficiency
- The relative efficiency of education and health spending is assessed using Data Envelopment Analysis (DEA) to estimate best-practice frontiers and relative efficiency across countries.
- DEA principle: countries achieving the same or better outcomes with lower spending are deemed most efficient and determine the best-practice frontier.
- Caveats noted:
  - Heterogeneity across countries (GDP per capita, urbanization, demographics) affects spending-outcome relationships.
  - DEA results mix spending inefficiencies and sectoral policy differences; they do not provide an exact measure of technical efficiency but indicate whether outcomes per spending are low relative to comparable countries.
- Appendix I provides a detailed discussion of DEA and definitions, including intermediate outputs (e.g., school instruction hours, patient-doctor consultations).

### Key DEA findings and rankings (summary of Figures and Tables)
- General positioning:
  - Education and health spending in G7 countries are generally not among the most efficient in the OECD sample.
  - Japan is on the best-practice frontier for health-adjusted life expectancy (HALE), standardized death rates, and infant mortality.
  - G7 countries generally rank in the bottom two quartiles of the OECD efficiency distribution, particularly France, Germany, the U.K., and the U.S.
  - Canada ranks relatively high in education efficiency; Italy and Japan rank relatively high in health efficiency.
- Table 3 (quartile distribution of efficiency rankings among OECD countries):
  - Canada’s education efficiency scores ranked, on average, at the 15th percentile (top 1–25 quartile).
  - Rankings are based on point estimates of input-oriented bias-corrected efficiency scores.
- Table 4 (ratios of G7 to OECD average rankings; interpretation: ratio of 1 = OECD average; lower ratio = above average efficiency; ratio >1 = less efficient than OECD average):
  - Secondary Education (Total spending efficiency / System efficiency):
    - Canada 0.4 / 1.2
    - France 0.8 / 1.7
    - Germany 1.0 / 0.1
    - Italy 1.1 / 1.6
    - Japan 0.7 / 1.4
    - U.S. 1.2 / 1.4
    - G7 average 0.8 / 1.2
  - Tertiary Education (Total spending efficiency / System efficiency):
    - France 1.1 / 0.6
    - Germany 1.3 / 1.5
    - Italy 0.8 / 0.1
    - Japan 1.2 / 1.7
    - U.K. 1.3 / 0.4
    - U.S. 1.8 / 0.8
    - G7 average 1.2 / 0.9
    - (Note: Canada and U.K. have "..." entries for some tertiary education fields in the table)
  - Health (Public spending efficiency / Total spending efficiency / System efficiency):
    - Canada 1.4 / 1.6 / 0.9
    - France 1.2 / 1.3 / 1.1
    - Germany 1.4 / 1.5 / 1.6
    - Italy 0.6 / 0.7 / 0.6
    - Japan 0.4 / 0.4 / 0.7
    - U.K. 1.5 / 1.1 / 0.1
    - U.S. 1.9 / 2.0 / 0.8
    - G7 average 1.2 / 1.2 / 0.8
- Interpretation emphasized in the text:
  - The relatively low average spending efficiency in G7 countries largely reflects issues of cost effectiveness, particularly in tertiary education and health.
  - The majority of G7 countries have better system efficiency in education and health than other OECD countries on average (G7 average ratio smaller than 1 for system efficiency in some cases).
  - The U.K. shows very high system efficiency in selected measures.

### Analytical next steps signaled in the chapter
- The analysis proposes disentangling the stages linking spending to outcomes by:
  - Separating the impact of spending on intermediate outputs (cost effectiveness).
  - Separating the impact of intermediate outputs on final outcomes (system inefficiency).
- Appendix I contains further details on these decompositions and the DEA methodology.

*Italic: Source — IMF staff calculations; OECD Education at a Glance 2006; OECD Health Data 2006; OECD PISA (data described in source content).*

### Appendix I). Indicators and data for key intermediate outputs are listed in Tables 9 and 10.

### _wp07263 - Appendix I). Indicators and data for key intermediate outputs are listed in Tables 9 and 10.

### Efficiency findings and robustness
- G7 average results imply that lack of cost effectiveness is a major driver of spending inefficiencies in the G7 in tertiary education and health.
- In secondary education, G7 countries (except Germany) score worse on system efficiency than on overall spending efficiency.
- Rankings of G7 countries do not change very much if overall health spending is used in the efficiency analysis instead of public spending.
- Findings are not substantially affected by outliers or choice of outcome indicator.
- The paper’s findings are broadly consistent with other research, though some differences arise from methodology, measure choice, and sample selection.

### Drivers of cross-country differences in efficiency
- Expenditure composition and institutional arrangements are associated with efficiency:
  - Wage spending is negatively associated with efficiency in education (Tables 11 and 13 correlations/regressions).
  - Health efficiency tends to be lower in countries with more health workers (Tables 12 and 14 correlations/regressions).
- Intermediate output mix matters:
  - Lowering student-teacher ratios in education is associated with lower efficiency.
  - Immunizations are associated with higher health efficiency.
- Institutional and policy factors:
  - Greater autonomy for schools and emphasis on academic ability in student selection raise efficiency in secondary education.
  - Decentralization and large out-of-pocket payments are associated with lower efficiency in health.
  - In tertiary education, efficiency is negatively associated with decentralization and private spending.
- Exogenous factors affecting efficiency include GDP, urbanization, socioeconomic background, and lifestyle.

### Empirical evidence on staffing, wages, and interaction effects
- Education:
  - The negative association between overspending on compensation and efficiency is strong (see Table 11).
  - Negative association between efficiency in achieving PISA test scores and student-teacher ratios suggests overstaffing may play a role.
  - Among G7, Japan, Germany, and Italy have high wage bills in education; Italy’s relatively low student-teacher ratio is a key driver of high compensation costs; in Germany classroom sizes are relatively large and salary levels may contribute to inefficiencies.
- Health:
  - Health employment density and general practitioner density are negatively correlated with efficiency for all health outcome indicators.
  - Numbers of doctors’ consultations and hospital beds have a positive association with efficiency of spending for infant, child, and maternal mortality.
  - Several G7 countries (Canada, France, Germany, and the U.S.) have substantially higher numbers of health practitioners than the OECD average.
  - The U.S. has relatively high number of health practitioners and markedly fewer doctors’ consultations per capita than other G7 and OECD countries.

### Policy implications and recommendations
- Staffing and wages:
  - Education and health reforms need to pay close attention to issues of staffing and wages.
  - Countries with overstaffing and large compensation shares may face reduced efficiency; monitor capacity utilization (e.g., average class size and hospital bed occupation rates).
- Composition of spending:
  - Gear spending toward cost-effective intermediate outputs (e.g., immunizations yield large health benefits at relatively low cost).
  - Reducing student-teacher ratios is often a relatively inefficient way to improve education outcomes.
- Targeting the stage of inefficiency:
  - Distinguish lack of cost effectiveness (mostly a problem in health and tertiary education) from system inefficiency (frequent in secondary education).
  - Cost effectiveness issues can be tackled by increasing competition between suppliers and addressing wage-bias in spending composition (moderating salaries, tackling overstaffing).
  - System efficiency can be improved by reforms promoting competition among institutions with appropriate accountability for quality.
- Devolution, competition, and accountability:
  - Balance increased devolution of responsibility and resources with enhanced market competition and regulatory frameworks that ensure accountability for results.
  - Shifting responsibility to private sector and subnational governments is unlikely to achieve efficiency gains alone; pair with accountability measures.
  - In education: consider enhanced autonomy for schools to hire teachers and selection on merit.
  - In health: provide incentives for cost savings while addressing equity concerns—disadvantaged groups often depend on public spending for access.
- Fiscal sustainability and competitiveness:
  - Reducing inefficiencies in the health sector is key for achieving sustainable fiscal policies and overcoming obstacles to international competition in G7 countries.
  - Reforms must address accountability and equity to avoid reversal and protect access for disadvantaged groups.

### Data, DEA methodology, and second-stage analysis
- Data:
  - PPP-deflated spending is used to eliminate unit cost differences across countries; GDP PPPs are used.
  - DEA benchmarks G7 against OECD (excluding Mexico and Turkey outliers).
  - Inputs and outcomes linked:
    - Total spending per student in secondary education → average PISA mathematics test scores, PISA score distribution (ratio of 25th to 75th percentile), and secondary graduation rates.
    - Total spending per student in tertiary education → tertiary graduation rates.
    - Public spending per capita on health → infant, child, and maternal mortality rates, HALE, and population standardized death rates.
- DEA:
  - Uses Farrell input-oriented efficiency score for one-input/one-output cases; best-practice frontier determined by most efficient units (efficiency score 1).
  - Finite-sample bias corrected via bootstrapping method of Simar and Wilson (2000).
  - In 1 input / 1 product cases convergence speed is n^-2/3; bias correction and confidence intervals feasible.
  - DEA chosen for parsimony; stochastic methods require larger, more heterogeneous samples and more model specification.
- Disaggregation:
  - Paper disaggregates spending→intermediate outputs (cost effectiveness) and intermediate outputs→outcomes (system efficiency).
  - Intermediate output indices:
    - Secondary education: index of ranks for student-teacher ratios, number of computers per student, average hours of compulsory instruction time.
    - Tertiary education: rank for student-teacher ratio.
    - Health: index of ranks for hospital beds, physicians per capita, health workers per capita, immunizations, doctors’ consultations.
  - System efficiency calculated using intermediate output index as input and associated outcomes; system rankings compared with spending efficiency.
- Second-stage analysis:
  - Uses correlations and regressions of bias-corrected efficiency scores on associated factors, conditional on GDP per capita.
  - Regression model reformulated in differences of efficiency scores between dominating and dominated country pairs to boost sample size.
  - Bootstrapped truncated regressions (Simar and Wilson algorithm adjustments) used to address serial correlation; cluster correction applied.
  - Limitations: small sample size and remaining serial correlation affect standard errors; the paper focuses on correlation findings.

### Key statistics and indicators (selected exact figures from Tables 6–10)
- Education and health spending (Table 6, PPP dollars; data notes included in source):
  - G7 total education spending per primary student: 6,239
  - G7 total education spending per secondary student: 7,773
  - G7 total education spending per tertiary student: 14,078
  - G7 total health spending per capita: 2,524
  - G7 public health spending per capita: 1,723
  - OECD (excluding Mexico and Turkey) total education per primary student: 5,761; secondary: 7,340; tertiary: 11,457; total health per capita: 2,012; public health per capita: 1,454
  - U.S. tertiary per student: 24,074; U.S. total health per capita: 4,497; U.S. public health per capita: 1,989
- Education outcomes (Table 7):
  - G7 PISA mathematics score average: 504.8
  - G7 PISA mathematics score distribution: 0.77
  - G7 upper secondary graduation rate: 85.7
  - G7 tertiary graduation rate: 32.1
  - OECD (excluding Mexico and Turkey) PISA average: 506.8; distribution: 0.77; upper secondary graduation rate: 84.7; tertiary graduation rate: 35.8
  - Japan PISA average: 534.1; Japan upper secondary graduation rate: 91.4; Japan tertiary graduation rate: 36.1
- Health outcomes (Table 8):
  - G7 HALE: 70.9
  - G7 standardized death rate (per 100,000): 582
  - G7 infant mortality rate (per 1,000): 4.7
  - G7 child mortality rate (per 1,000): 5.3
  - G7 maternal mortality rate (per 100,000): 6.5
  - OECD (excluding Mexico and Turkey) HALE: 69.8; standardized death rate: 651; infant mortality: 4.6; child mortality: 5.3; maternal mortality: 6.5
  - U.S. HALE: 68.1; U.S. standardized death rate: 670; U.S. infant mortality: 6.9; U.S. child mortality: 7.6; U.S. maternal mortality: 10.5
- Intermediate outputs in education (Table 9, selected):
  - G7 student-teacher ratio (primary and secondary combined index): 17.4 (aggregate reported as G7 17.4, with G7 averages for secondary student-teacher ratio 13.7)
  - G7 average computers per student in secondary education: 0.2
  - OECD secondary student-teacher ratio: 12.4; OECD computers per student in secondary: 0.2
  - Country examples:
    - Italy secondary student-teacher ratio: 11.0; net teaching hours per teacher (primary) 726; average hours of compulsory instruction time (primary 7–14 years): 980
    - U.S. primary student-teacher ratio: 15.0; net teaching hours per teacher (primary) 1080; secondary net teaching hours per teacher: 1080
- Intermediate outputs in health (Table 10, selected):
  - G7 total hospital beds (per 1,000): 6.8
  - G7 health worker density index (per 1,000): 11.6
  - G7 physicians (per capita): 2.5
  - G7 immunization for measles (percent of children 1–2 years old): 90.4
  - G7 number of doctors’ consultations (per capita): 7.1
  - Country examples:
    - Japan hospital beds (per 1,000): 14.6; doctors’ consultations per capita: 14.0; immunization measles: 100.0
    - Germany hospital beds (per 1,000): 9.0; physicians per capita: 3.3; doctors’ consultations per capita: 7.3
    - U.S. hospital beds (per 1,000): 3.5; health worker density index: 13.2; physicians per capita: 2.3; doctors’ consultations per capita: 4.0

*Source: Appendix I, _wp07263 (data, DEA methodology, and second-stage analysis).*

### REFERENCES

### REFERENCES

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- Glied, Sherry, 2003, “Health Care Costs: On the Rise Again,” The Journal of Economic Perspectives, Vol. 17, No. 2, pp. 125–48.

*Source: _wp07263 - REFERENCES (PDF).*

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