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

Hassler, John, Krusell, Per, Shifa, Abdulaziz B. and Spiro, Daniel (2017) Should developing countries constrain resource-income spending? A quantitative analysis of oil income in Uganda. Energy Journal, 38 (1). 103 - 131. ISSN 0195-6574

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Identification Number: 10.5547/01956574.38.1.jhas

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.

Item Type: Article
Official URL: https://www.iaee.org/en/publications/scope.aspx
Additional Information: © 2017 The IAEE
Divisions: Economics
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HJ Public Finance
Date Deposited: 13 Jul 2020 12:54
Last Modified: 20 Oct 2020 06:05
URI: http://eprints.lse.ac.uk/id/eprint/105623

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