Should developing countries constrain resource-income spending? A quantitative analysis of oil income in Uganda

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

Research output: Contribution to journalArticle

2 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)103-131
Number of pages29
JournalEnergy Journal
Volume38
Issue number1
DOIs
StatePublished - Jan 1 2017

Keywords

  • Economic Development
  • Macroeconomic Dynamics
  • Oil
  • Resource Curse
  • Sovereign Wealth Fund
  • Uganda

ASJC Scopus subject areas

  • Economics and Econometrics
  • Energy(all)

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