This is a joint post with Stephanie Majerowicz.
How should Uganda use its prospective oil revenues? Our recent paper on this question argued that choices should be considered with an eye towards both their development impact and the implications for governance. We are happy that the paper has sparked debate in Uganda, including discussions in the Daily Monitor by Tabu Butagira and Nick Young. As Nick Young correctly observes, the question of what to do with oil revenues should be debated in Uganda rather than in Washington. In hopes of provoking further informed debate locally, we wish to clarify a few points about our paper that seem to have been misunderstood.
We do not argue that direct transfers to individual Ugandans are necessarily the first-best option. Our paper recognizes Uganda’s acute infrastructural deficit and notes that a well-chosen and well-implemented investment program could help Uganda to overcome the so-called Dutch Disease by increasing the efficiency of non-oil sectors, including, as noted in the IFPRI study cited by Young, in agriculture. To quote from our paper, in principle “an investment path is perhaps a first-best in terms of direct potential material impact.” The question is the effectiveness of that investment, and the possible wider implications of such a path for governance, which are not all that promising. Other oil exporting countries, such as Nigeria, Venezuela and Algeria, have used oil resources to fund massive investment programs, but not necessarily with favorable economic outcomes – including on growth and the competitiveness of non-oil sectors.
A new index of the quality of management of public investment programs produced by the IMF provides some insight into this question. It is the first integrated assessment of the management of public investment across a large number of countries and deserves to be taken seriously, even though, of course, assessments are always subject to margins of error. Overall, oil exporters rank well below other countries; having resources to invest does not necessarily mean having the ability to manage them well. Though not yet an oil exporter, Uganda ranks quite low in the index, at number 41 out of 71 countries. It is rated as particularly weak in the critical areas of implementation (which includes procurement) and evaluation of the performance of investments. While holding a portion of the revenues offshore temporarily, as suggested by the IFPRI study, may be useful in smoothing any program of domestic spending, it will not necessarily address these problems. The IMF index and the experiences of other countries offer cautions for the future. Seemingly urgent investments alone are not sufficient; they have to be effective and coupled with policies that enable the private sector to take advantage of them.
The commentary also referred to the risk that transfer payments could be subject to corruption, with “ghost citizens” and other scams. These concerns are well taken; ghosts and scams have plagued public programs in many countries—including Uganda. But modern technology can help. In another recent CGD working paper we consider the use of technology, including biometric identification of recipients and electronic transfers, to implement such programs. This approach has great potential for reducing fraud since transfers can be tracked through the system down to the individual, and is being implemented by a number of programs around the world. It can also be used to underpin other service delivery; India provides several examples, including a health insurance program for the poor which is based on biometric smartcards and now covers over 24 million households.
The question of how best to use oil revenues and ensure that citizens can hold the state accountable for their use should indeed be on the table in Uganda. We welcome the discussion around our paper as contributing to this.