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Published: June 2012
As the fastest growing economy in 2011 and with projections for a continued high growth rate, Mongolia is faced with the challenge of managing its mineral resources without falling prey to the resource curse. Munkhbaatar Davaasambuu, a native of Mongolia, provides insight into these issues.
SINCE THE COUTRY‘S BLOODLESS, democratic revolution in 1990, Mongolia has been embarking on the transition from a planned economy to an open market economy. During this period, Mongolia has experienced harsh economic hardships and was one of the worst hit countries in East Asia in the 2009 global financial crisis. Mongolia’s dependency on its mining sector made the economy vulnerable to price volatility in commodity markets. The price dive of minerals in the international market during the crisis resulted in a contraction of the economy. However, with the global commodity market stabilizing and the operation of two large mines in the near future, Mongolia is on the verge of entering a new period of high economic growth. However, such growth can only be achieved through transparent, accountable and responsible policies by the government. Escaping the ‘Dutch disease’ and preventing the so-called ‘resource curse’ will be the biggest challenge for the new government after the parliamentary election in June.
Oyu Tolgoi or “Turquoise Hill”, a large copper and gold deposit, is expected to begin production early next year after three years of construction. Tavan Tolgoi or “Five Hill”, a world-class coal deposit, is in its initial stage of development. These two projects in themselves will bring in a projected total of 10 billion USD, larger than the current annual GDP of the country of 2.7 million people. In addition, a great number of mineral deposits are being developed and are expected to reach their full-scale production in the coming few years. The government has been trying to implement large-scale infrastructure construction in order to accommodate the massive impending flow of commodity transportation. Due to the increasing exploration of resources and government expenditure on large projects, the economy of Mongolia has been growing at a high rate and medium-term economic prospects look very positive. Thanks to its vast mineral resources, Mongolia, which until recently attracted little attention from foreign investors, now appeals to the mining, banking and financial giants of the world.
The Mongolian economy experienced staggering growth in 2011—a whopping 17.3 percent—becoming the fastest growing economy in the world last year. This is not simply due to the increased amount of commodity export, as the manufacturing and construction sectors also experienced high growth. National exports increased dramatically; such increases can be contributed to the trade with People’s Republic of China due to its insatiable hunger for commodities and energy fuels. Thanks to the rising market price of coal and an increased production in Mongolian coal mines, the export of coal rose both in terms of value and volume.
Analysts predict Mongolia will continue its double-digit growth rates for a considerable amount of time. Official forecast rates for the next couple of years are 15 percent and 17.5 percent for 2012 and 2013, respectively. Beyond that, projections suggest that the growth levels will be above 10 percent, at least until the year 2017. This means the GDP per capita will be four times higher in 2013 than in 2009 and almost six times higher in 2017. The mineral sector is expected to remain the main driving force behind the economic growth.
However, not all bodes well for Mongolia. Experiences throughout the world have shown that natural resources can either bring wealth and prosperity or devastation. Mineral resources have always proven beneficial in the medium term, but not necessarily in the long term. Easy revenue from plain extraction of resources greatly reduces incentives to invest in physical and human capital, which are important for a country’s sustainable development. A huge inflow of cash would appreciate Mongolia’s currency and make tradable goods of manufacturing and agriculture sectors less competitive in the global market. These are the symptoms of the ‘Dutch disease’. The term was coined following the experience of the Netherlands in 1970s when the country’s mineral sector boomed due to natural gas production while the industrial sector lagged behind. Symptoms of the ‘disease’ are already visible in the Mongolian economy. In 2011, the mining sector share of GDP was 22 percent, but 90 percent of total export products were mining commodity goods. Moreover, the Mongolian tugrik was the best performing currency against US Dollars worldwide in 2010. These symptoms of overheating are already clearly visible in the economy.
Furthermore, incidents in other parts of the world suggest that there is danger, particularly in mineral-based economies, for income disparity within the population to widen. A small part of the population tends to reap a grossly disproportionate share of the benefits of growth. Resource extraction processes do not create much employment and the small number of people who are already employed in the sector earn salaries that are several times higher than the average wage in the labor market. Increasing income disparity, loss of competitiveness of non-mining sectors and the critical conditions produced by the Dutch disease can lead to the ‘resource curse’. The thesis was formulated by Richard Auty in 1993 in order to explain how resource rich countries had difficulties in using their resources to accomplish high economic growth and how these countries were actually experiencing lower levels of growth than countries that did not have abundant natural resources. In other words, the negative effects of abundance in mineral resources outweigh the benefits. He further argued that, in addition to economic weaknesses, the resource curse often leads to conflicts between the government and the people, i.e. domestic unrest, corruption, and clashes with neighboring countries or civil wars in extreme cases.
As a landlocked country sandwiched between two big countries, Mongolia has played a unique geopolitical balancing act with Moscow and Beijing. Although the two neighbors have not hesitated to try to meddle in the internal affairs of their smaller neighbor, Mongolia’s current situation suggests that its geopolitical policy has been relatively successful since its independence in 1911. However, natural resource abundance changes the geopolitical arena, as China hungers after energy fuels while Russia is primarily interested in Mongolia’s large uranium deposits. The rapidly growing country must accustom itself to dealings with less familiar actors, such as big financial corporations and transnational mining companies. Therefore, optimal policy formulation is essential to ensure that Mongolian people have a chance to benefit from these natural resources.
Exploration of the previously-mentioned two large deposits—in addition to 3000 mining licenses that have been granted to foreign and domestic companies—will be a blessing or a curse for the Mongolian people. 70% of the whole territory has yet to be surveyed with proper geological instruments, meaning that more mineral findings could be found in the future. Growth gives the government the opportunity to positively transform society, but it also carries with it the potential to bring disaster in the long-term. Will Mongolia remain a lower middle income country, heavily reliant on the mining sector? Or will Mongolia diversify its economic structure and ensure sustainable development to hedge against devaluations and the exhaustion of resources in the mineral sector?
Developing states with abundant mineral resources have been studied in depth and good governance proves to be the best measure to avoid catastrophe. Suitable use of resource rents and windfall taxes from the mining sector to finance development of other sectors can prevent the Dutch disease. Modern, democratic and independent governance will ensure transparency of state activities and raise accountability. Transparent, accountable and equal management of natural resource revenue will allow Mongolian society to capitalize on the mining sector growth. Such considerations should be in the minds of everyone when they vote for a new parliament this June. With election year behind it, the new government in power should avoid a populist approach in the handling of these important mining projects which will be in a critical stage of development in the next couple of years. Given its compliance with the Extractive Industries Transparency Initiative (EITI) and the award it received in 2011 for consistent improvement in EITI reporting, there are reasons to be hopeful. It remains to be seen, however, if Mongolia’s 20 year-old democratic institutions prove resistant to the Dutch disease.