Economic Diversification and Growth

Chapter 4
Key Messages and Conclusions:
investment. Investment is needed to foster structural
economic transformation and build long-term capital,
but the increase is gradual to mitigate absorptive
capacity constraints. Accelerating investment
may become more feasible if public investment
management improves and policies stimulate a
strong response of the private sector.
The quality of investment is critical. Sound project
selection and efficient implementation are essential
to maximize the benefits of increased investment
spending. So far, Uganda gave priority to
infrastructure (mainly roads). Economic simulations
suggest that, initially, using oil revenue to address
urgent infrastructure needs, notably in transport and
energy, may have a stronger impact on growth than
education and health spending. However, the social
sectors influence the distributional impact of growth.
In addition, building up human capital is essential
to support the country’s economic diversification
agenda. Manufacturing and modern services depend
on the availability of a well-educated labor force.
Conclusions:
• Clear fiscal rules are essential. Uganda plans
to use the NONG fiscal deficit rule, with total
spending limited to the sum of domestic non-oil
revenue and the agreed deficit target. This is
a sensible approach if the target is fixed at a
prudent level.
• A fixed share of oil revenue should be deposited
into savings accounts. In 2015, Uganda decided
that all oil revenues should be deposited into a
holding account used to finance the budget or a
special savings fund. The act does not specify
the share of oil revenue to be saved.
into a long-lasting source of income. 1 Uganda should invest
strategically its oil revenues to ensure that they will not only
benefit the present generation but will also lift the country to
a new type of development for many generations to come.
4.2. Three different types of wealth can be distinguished:
produced capital, natural capital and intangible capital
(which includes human capital). Produced capital covers
machinery, structures, equipment and urban land. Natural
capital includes agricultural land, protected areas, forests,
minerals and energy. Intangible capital measures human,
social and institutional capital. While produced capital and
natural capital can be observed, intangible capital is derived
as the residual of the net present value of consumption
according to the equation described in Box 4.1. Using this
wealth accounting framework, it is possible to determine
whether countries are transforming their natural resources
into other forms of wealth which will allow them to continue
to grow in the future. Compared to the GDP which measures
the flow of income accruing to a country within a year,
wealth accounting measures the stock of assets a country
uses to generate its income. 2
4.3. In many parts of the world, natural resources greatly
contribute to faster accumulation of wealth and make
people permanently richer. This is what happens when
governments and citizens invest the rents from diminishing
natural resources in other forms of wealth. Botswana,
1. This argument was first put forward by Hartwick in the 1970s. He argued that
in resource economies, the declining stock of non-renewable resources had to
be offset by an increasing stock of other forms of capital to ensure that a society
would be able to maintain its standard of living indefinitely.
2. Another relevant measure of income flows is the Gross National Income
(GNI). GNI is the sum of value added by all resident producers plus net receipts
of primary income from abroad. It is often very similar to GDP, but in Uganda’s
case large transfers from abroad (in the form of grants) mean that there may be
significant differences between GDP and GNI.
for example, used the rents from non-renewable mineral
resources (mainly diamonds) to invest in other forms of
capital (including physical, human, and foreign assets) by
adopting a Sustainable Budget Index (SBI) rule. The SBI,
which is the ratio of public spending (excluding investment,
education and health) to recurrent non-mineral revenue,
must be less than unity. Under the SBI rule, Botswana was
able to greatly expand its total stock of produced capital
(buildings, roads, machinery) and intangible capital (knowledge
and human capital).
4.4. In many other resource economies the depletion
of natural capital did not lead to an increase in other
forms of capital, thus triggering a decline in overall levels
of wealth. To measure to which extent countries save
and invest in a sustainable manner, the wealth accounting
framework uses the concept of adjusted net savings (ANS),
which takes into account investments in different forms
of capital and their depreciation. Apart from the depreciation
of (produced) physical capital, the calculation of the
ANS also considers the effects of educational expenditures,
depletion of natural resources and damage to the environment
due to pollution. Educational expenditures are seen as
investments in intangible capital and depletion of natural
resources as a negative investment in the natural capital of
a country. 3 While Sub-Saharan Africa grew robustly at an
average annual rate of 5 percent since the turn of the century,
many resource rich countries have negative ANS rates. For
instance, the average GDP growth rate of Botswana, Nigeria
and Angola was more than 4 percent over the last decade
(due to rising natural resource commodity prices), and, as
3. Adjusted net saving approximates the changes in wealth over shorter periods.
ANS is estimated using the formula: ANS = GS = DFC + EDU – DNR – PD, where
ANS is Adjusted National Savings, GS is Gross Savings, EDU is Education Expenditure,
DNR depletion of Natural Resources and PD is Pollution Damages
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Uganda Country Economic Memorandum: Economic Diversification and Growth in the Era of Oil and Volatility