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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.

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  • 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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    1. Jonathan Isham & Daniel Kaufmann, 1999. "The Forgotten Rationale for Policy Reform: The Productivity of Investment Projects," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(1), pages 149-184.
    2. Xavier Sala-i-Martin & Arvind Subramanian, 2013. "Addressing the Natural Resource Curse: An Illustration from Nigeria," Journal of African Economies, Centre for the Study of African Economies, vol. 22(4), pages 570-615, August.
    3. Vicente, Pedro C., 2010. "Does oil corrupt? Evidence from a natural experiment in West Africa," Journal of Development Economics, Elsevier, vol. 92(1), pages 28-38, May.
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    Cited by:

    1. Ragnar Torvik, 2018. "Should Developing Countries Establish Petroleum Funds?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    2. 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.
    3. 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.

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    • F0 - International Economics - - General

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