Macroeconomic Challenges for Eastern Africa

About the Project 

KAPSARC is engaged in a long-term research project examining the dynamics of natural resource -driven growth in Eastern Africa. The principle research question we are seeking to answer is, how can natural resources be developed in a way that promotes inclusive economic development. We are answering this question through a comprehensive framework that examines macroeconomic issues of natural resource development, the impact of local content policies, and understanding the expectations of stakeholders in countries' oil and gas sectors.

Key Points

Recent Eastern African hydrocarbon discoveries bring opportunities hand-in-hand with challenges, including: 

•  ‘Dutch disease’, which results in reduced international competitiveness because the real exchange rate rises; 
•  The ‘resource curse’, where resource wealth adversely affects governance and leads to rent seeking behaviors. These may cause natural resource-rich economies to perform worse than others which remain resource poor. 
• Uncritical adherence to the ‘permanent income hypothesis’ (PIH), which advocates converting resource capital into non-resource assets, then spending only the income generated from it (in real terms), so the principal will be preserved for future generations. 
•  ‘Absorptive capacity’ constraints, which may limit the ability of workers and institutions to fully adopt and employ both new strategies and new infrastructure so the economy can expand. 

Our summary of the literature relating to these four challenges and their potential solutions lays the groundwork for two related KAPSARC research papers detailing a calibrated macroeconomic model of the Ugandan economy and a quantification of the scale of social benefits that might follow from oil development. These will help ground discussions in the context of Uganda's macroeconomic conditions.