How Large Is Public Procurement in Developing Countries?

Simeon Djankov (PIIE), Asif Islam (World Bank) and Federica Saliola (World Bank)

November 7, 2016 4:30 PM

How large is the share of public procurement to GDP in middle-income and low-income countries? If sizable, can public procurement be used as a policy tool to make markets more competitive, and thus improve the quality of government services? Can it be used to induce innovation in firms? Can public procurement regulation also be a significant way to reduce corruption?

Public procurement is the process through which the public sector purchases goods, services, or works from the private sector. The range of economic sectors concerned by public procurement is as wide as the needs of a government to properly function and deliver services to its citizens. Governments turn to the private sector to supply goods and services for the construction of schools, to purchase hospital supplies, to secure computer services in public buildings, renew public transportation fleets, or construct new roads.1

It is surprising that no attempt has been made to date to systematically collect reliable statistics on the size of public procurement in economies around the world. Data are publicly available for high-income countries. The European Union calculates the average share of public procurement in the GDP of its 28 member states to be 16 percent. The Organization for Economic Cooperation and Development also collects statistics on the share of public procurement in its 35 member countries, which averaged 12 percent of GDP in 2015. For the rest of the world, there is scarce data and analysis. The World Trade Organization estimates the share of public procurement in GDP globally to be between 10 and 15 percent, implying that public procurement is as used in middle-income and poor countries as in high-income ones. Is this actually the case?

To answer this question, we collect data on public procurement for 123 countries for 2015 or the latest available year. The data are from government sources or international development institutions and show that low-income countries have the largest share of public procurement in GDP, at 14.5 percent, followed by upper-middle income countries, at 13.6 percent (figure 1). In Eritrea, for example, public procurement is a whopping 33 percent of GDP, due to both significant inflows of development assistance that go through public procurement and the small size of its tax base, which makes government expenditures almost entirely dependent on development aid. In Angola, the share is 26 percent of GDP, for much the same reasons.

Some rich countries also have high shares of public procurement in GDP, for example the Netherlands at 20.2 percent and Finland at 18.5 percent. The ratio of government expenditure to GDP in these countries is twice as large as in most emerging economies, underscoring the significance of public procurement. High-income countries in the Middle East, however, show markedly lower shares of public procurement: Oman at 6 percent of GDP, and Bahrain at 8.2 percent.

Figure 1 Procurement as percent of GDP by country income level

Figure 1 Procurement as percent of GDP by country income level

Note: World Bank Income classification comprises 31 low-income countries, 51 lower-middle income countries, 53 upper-middle income countries, and 48 high-income countries. For 2016, low-income economies are defined as those with a GNI per capita of $1,045 or less, middle-income economies are those with a GNI per capita of more than $1,045 but less than $12,736, and high-income economies are those with a GNI per capita of $12,736 or more. Lower-middle-income and upper-middle-income economies are separated at a GNI per capita of $4,125.

Source: Data collected by the authors from country statistics.

Across regions, South Asia has the highest share of public procurement in GDP, at 19.3 percent, followed by sub-Saharan Africa at 14.9 percent (figure 2). India procures 20 percent of GDP publicly, Pakistan 19.8 percent. East Asia has the lowest share, 9.3 percent of GDP, largely driven by China, where only 2.8 percent of GDP is generated through publicly procured projects. The Philippines and Thailand also procure less than 3 percent of GDP publicly.

Figure 2 Procurement as percent of GDP by country location

Figure 2 Procurement as percent of GDP by country location

Source: Data collected by the authors from country statistics.

The figures suggest public procurement is indeed as important in developing countries as it is in advanced economies. This knowledge can be used to broaden efforts to improve the quality of public service delivery. If procurement regulation enhances competitive markets for government goods and services, consumers would likely benefit from higher quality and perhaps lower prices. Another consequence could be increased motivation to innovate, as firms would compete on prices and hence on finding better solutions in service delivery rather than trying to maintain the strongest lobbying power with governments. The ultimate benefit may be reduced corruption, as a transparent procurement process will weed out some of the more egregious methods sometimes used to secure public contracts.

Simeon Djankov is nonresident senior fellow at the Peterson Institute for International Economics, and Asif Islam and Federica Saliola are at the World Bank. This blog post is part of a larger project on measuring the quality of public procurement regulation around the world.

Note

1. World Bank, 2016, Doing Business 2017: Equal Opportunity for All.