Allocative inefficiency, X-inefficiency, Bureaucracy and Corruption in Developing Countries

Economists have traditionally been concerned with allocative efficiency, that is, with trying to make sure that the various factors of production are allocated so that the cost of any given output is minimized. Thus, they have emphasized the importance of ‘getting the prices right’ so that these reflect the relative scarcities of inputs in the economy and give the right signals, as regards resource allocation, to economic decision-makers. From the mid-1960s, Harvey Leibenstein has drawn attention to what he has termed X-inefficiencies which derive from non-price factors such as protection/shelter of enterprises from competition, inertia on the part of managers and limited effort by workers. This article examines the relative importance of allocative inefficiency, X-inefficiency, bureaucracy and corruption in LDCs. It finds that X-inefficiencies in developing countries are far more important than allocative inefficiencies. In addition, the inefficiencies resulting from each of bureaucracy and corruption, whilst difficult to measure, are at the very least as important as allocative inefficiencies and probably much more important. It also appears that X-inefficiencies are easier and less costly to reduce than allocative inefficiencies.