On measuring aggregate "social efficiency"

Invariably many of the things relevant to assessing a country's performance in promoting human development and reducing poverty are not directly observed by stakeholders. For example, governmental efforts in delivering social services to those in most need are not readily observable by the people who finance the spending and/or vote for those responsible. Efforts to make governments more accountable, and to make development assistance more performance driven, beg for reliable methods of assessing latent aspects of country performance. This would allow aid donors and domestic-tax payers to determine how much social outcomes might be improved by better use of an economy's existing resources. Thi s article provides a critical overview of the most common approach found in the literature. By this approach, one attempts to infer the "social efficiency" of an economy from the measured deviations of an observed social indicator - such as average life expectancy, the infant mortality rate, or the literacy rate - from an efficiency frontier, typically identified from the residuals of a regression of that indicator on control variables such as mean income and public spending on social services. The econometric tools used have largely been borrowed from the literature on measuring technical efficiency in production. The following section describes examples of these methods f ound in the literature. Section III then points to a number of concerns about the conceptual foundations and empirical reliability of these methods. Section IV elaborates on the specific sources of bias in estimates of social efficiency in the context of a simple expository model. Section V presents my conclusions. © 2005 by The University of Chicago. All rights reserved.