onship between our quality-adjusted measure of education in public administrations and a composite index that captures domestic financial sector standards, including regulation, supervision, and competition (Ostry, Prati, and Spilimbergo, 2009). This suggests that a more educated public administration workforce helps raise the standards of the domestic financial sector, in turn enhancing private sector development and economic growth.
Education versus institutions
One crucial issue is whether educational attainment of civil servants is the source of good governance or whether education is the result of robust institutions, such as checks and balances supported by an independent judiciary. If it is institutions that spur educational attainment, then public policies should focus on strengthening specific institutions to ensure that talented civil servants choose to join public administrations and that a country’s educational system enhances cognitive skills.
Recent research emphasizes the role of institutions in shaping economic outcomes. For instance, Acemoglu, Johnson, and Robinson (2001) demonstrate a causal relationship between the quality of institutional arrangements—such as those that aim to limit investors’ expropriation risk—and income per capita for a large cross section of countries. Arezki and Dupuy (2013) build on this approach with a theoretical model that shows an association between better-educated civil servants in the public sector and higher welfare for society as a whole. These findings suggest that decisions by talented civil servants enhance the quality of the delivery of public goods and in turn lead to economic growth.
The model yields two important theoretical predictions, which are supported by the data.
•More public-spirited agents work in the public sector than in the private sector when institutions are strong, all else equal. The reason is that stronger institutions limit the availability of public wealth that can be stolen by corrupt civil servants, which drives corrupt employees out of the public sector. Educated agents are typically public spirited and are better at delivering public goods because they have superior skills but also because they are better at judging when it is appropriate to leave the private sector alone. This prediction is consistent with the positive association between less corruption and higher educational attainment shown in Chart 2. When talent is tilted toward more educated agents in the public sector, the result is more public goods and higher economic growth.
Compensation that rewards public-spirited agents raises the well-being of society as a whole, especially when institutions are weak. Such compensation programs make the public sector more attractive to public-spirited individuals and, as a result, improve the delivery of public goods and economic growth. This is consistent with some of our empirical findings that merit-based compensation is associated with better-educated public administrators.
•From a policy standpoint, our findings suggest that improving government effectiveness may be achieved, for instance, through strengthening the judiciary system. An effective judiciary that enforces the law with fairness is likely to dissuade civil servants from trying to manipulate rules and regulations to enrich themselves at public expense and discourage individuals disposed to corruption from entering public service.
Moving to merit-based compensation can also help attract well-educated individuals. The policy debate on issues of compensation has so far focused narrowly on chief operating officers’ compensation in the private sector. Countries around the world, and especially developing economies, should focus on attracting educated people to their public administration to enhance the delivery of key public goods and boost economic development. Singapore, among other countries, has adopted merit-based pay, which has allowed the public sector to attract and retain quality staff and certainly played a key role in enhancing government effectiveness and eventually the