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

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

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.

Suggested Citation

  • John Hassler, Per Krusell, Abdulaziz B. Shifa, and Daniel Spiro, 2017. "Should Developing Countries Constrain Resource-Income Spending? A Quantitative Analysis of Oil Income in Uganda," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    • Handle: RePEc:aen:journl:ej38-1-spiro
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    Cited by:

    1. Sugra Humbatova, 2023. "The Impact of Oil Prices on State Budget Income and Expenses: Case of Azerbaijan," International Journal of Energy Economics and Policy, Econjournals, vol. 13(1), pages 189-212, January.
    2. Fridtjof Bahlburg, 2023. "The Local Impact of Mining in Peruvian Districts: Evidence of a Subnational Resource Curse?," International Journal of Energy Economics and Policy, Econjournals, vol. 13(4), pages 264-286, July.
    3. Ragnar Torvik, 2018. "Should Developing Countries Establish Petroleum Funds?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).

    More about this item

    JEL classification:

    • F0 - International Economics - - General

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