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Oil debate needs to happen in Uganda, not Washington

August 19, 2011 - 9:00am -- Nick Young

Published in Kampala’s The Daily Monitoron August 19, 2011.

A working paper recently published by the Washington DC based Center for Global Development argues that Uganda’s future oil revenues should be distributed equally, in cash, to all Ugandan citizens.

Under such a scheme, during peak oil production—about six years from now—every Uganda man, woman and child would receive an annual cash payment of around USD 50, depending on the world price of oil. This would be a huge boost for low-income households, enabling those in or near poverty to consume more, to access education and health services, and to invest in farm production. All of this, the authors say, would benefit the economy as a whole and, over time, generate more tax revenue for government.

The authors urge this arrangement largely because of Uganda’s “deteriorating governance”. They fear that government’s apparent plans to invest oil revenues in infrastructure development will fall prey to corrupt rake-offs, and that “Oil rents, if unchecked, could simply turn into additional sources of patronage to perpetuate the regime.”

These concerns will be shared by the many Ugandan intellectuals, activists and ordinary citizens who are disillusioned with a ruling party that they see as bent only on regime survival.

But it is by no means certain that cash transfers would be immune to corruption: one can easily imagine money going to “ghost citizens” and many other scams. Also, local elites and ordinary people in the oil producing areas will likely feel that they deserve a bigger share of the proceeds. So the cash transfer idea is not a sure remedy for avoiding conflict.

Nor is it necessarily the best option for Uganda’s longer term development.

Another Washington based think-tank, the International Food Policy Research Institute (IFPRI), recently made a detailed—and highly technical—analysis of “options and challenges” in managing Uganda’s oil revenues. The study’s main concern is with the impacts of oil upon agriculture, and the risks, under various scenarios, of “Dutch disease.”

Holland is unlucky to be branded with this ailment, for it has afflicted many countries that experience a natural resource boom. Such booms strengthen national currencies. This makes imports cheaper, and exports in other sectors less competitive, undermining efforts at import substitution and export promotion. And when the resource runs out, the economy is left without other legs to stand on.

Right now the idea of a strong Ugandan shilling is hard to imagine, but the IFPRI researchers assert that real appreciation of the currency is “almost inevitable.” Dutch disease is impossible to avoid altogether, they say, and its brunt will be borne by “agriculture and the rural population.”

The impacts, the researchers say, can be mitigated by transferring some of the oil revenues to an offshore investment fund—an option apparently being considered by the government of Uganda. This would avoid too great a splurge of investment and consumption spending, spreading the benefits of increased revenues– and their adverse side-effects—over a longer period.

A cash transfer scheme, according to the IFPRI study, would initially “increase household welfare and accelerate poverty reduction efforts” while adding some momentum to agricultural growth. Yet it would also bring “the real danger of losing longrun competitiveness vis-à-vis foreign suppliers both on world markets for agricultural export commodities as well as on domestic markets for food products.”

Instead, the IFPRI researchers recommend public investment spending that is “biased in favor of agriculture and food processing.” According to the study’s statistical modelling, this would, among the mix of spend, save and investment options considered, be the best way to ensure future agricultural productivity and competitiveness. In this scenario, the study concludes, “poorer rural households will benefit the most, but without sacrificing urban poverty reduction.”

These are complex issues on which I am not qualified to pronounce. But there is clearly a debate that needs to happen, and it should be happening within Uganda, not just among foreign experts.

The government has so far proved rather coy about its policy plans and preferences, reluctant to share them beyond a very small group of senior politicians and technocrats. Even ruling party MPs appear uncertain and ill-informed about the options that are available.

There is a grave risk that the public information deficit, combined with political hostilities and manoeuvring for immediate gain, will lead either to bad policy choices or, equally fatally, to good policy choices that are contested and disowned by the population at large because they are not fully aired in public discussion.

The government of Uganda has reportedly been sitting for many months on a “draft oil communications strategy.” The time to roll this out was yesterday. In fact the time was last year.

Uganda’s intellectuals, media and civil society need to work their way around the information deficit not only by (justifiably) demanding transparency of government, but also by studying these complex issues, informing others and putting coherent policy proposals into the public domain.

And everyone needs to remember that this is not just about the next few years. The policies adopted now will shape the future of Uganda for many generations to come.