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

Author

Listed:
  • John Hassler
  • Per Krusell
  • Abdulaziz B. Shifa
  • 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 & Daniel Spiro, 2017. "Should Developing Countries Constrain Resource-Income Spending? A Quantitative Analysis of Oil Income in Uganda," The Energy Journal, , vol. 38(1), pages 103-132, January.
    • Handle: RePEc:sae:enejou:v:38:y:2017:i:1:p:103-132
    DOI: 10.5547/01956574.38.1.jhas
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    References listed on IDEAS

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