Insufficient government spending on cost-effective activities

In many developing countries, too little of the very limited resources is allocated to cheap and cost-effective services. In education there is a pressing need to expand and improve primary education, the socially most profitable form of investment, particularly in the poorest countries. The problem of resource allocation for health and education is partly the result of large across the board subsidies and the lack of any pricing mechanism, particularly in centralized systems. Because of subsidies the private rate of return to higher education for all developing countries exceeds 20%, namely about twice the social rate of return for higher education.