Should Developing Countries Constrain Resource-Income Spending? A Quantitative Analysis of Oil Income in Uganda

John Hassler, Per Krusell, Abdulaziz B. Shifa and Daniel Spiro

International Association for Energy Economics

Photo: International Association for Energy Economics

Published in:

Energy Journal, Volume 38, p. 103-131, 2015

DOI: http://dx.doi.org/10.5547/01956574.38.1.jhas 

 

Abstract:

A large increase in government spending following resource discoveries often entails political risks, inefficient investments and increased volatility. Setting up a sovereign wealth fund with a clear spending constraint may decrease these risks. On the other hand, in a capital scarce developing economy with limited access to international borrowing, such a spending constraint may lower welfare by reducing domestic capital accumulation and hindering consumption increases for the currently poor. These two contradicting considerations pose a dilemma for policy makers in deciding whether to set up a sovereign wealth fund with a spending constraint. Using Uganda's recent oil discovery as a case study, this paper presents a quantitative macroeconomic analysis and examines the potential loss of constraining spending through a sovereign wealth fund with a simple spending rule. We find that the loss is relatively low and unlikely to dominate the political risks associated with increased oil spending. Thus, such a spending constraint appears well warranted.

Published July 13, 2016 2:31 PM