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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

Year: 2017
Volume: Volume 38
Number: Number 1
DOI: 10.5547/01956574.38.1.jhas
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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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