Mention the name Mongolia to most Westerners -- what is their response? It is likely to be a Genghis Khan joke. Few have studied the country. But it is now attracting much praise. About half of Mongolia’s 3 million people are farmers raising goats, sheep, and other animals. The remainder are concentrated in the capital, Ulaanbaatar. During the post war era, they were mainly poor, with a communist political system under the Mongolian People’s Revolutionary Party (MPRP). Some 80 percent of all trade was with the USSR.
With the collapse of the Soviet Union, the country lost Russian subsidies and fell into a deep recession that the leftists ignored. According to Professor Stephen Noerper, a former professor of international relations at New York University and the National University of Mongolia, the country “found itself in the late 1980s with many of the shortages common in the Soviet Union [including] breadlines.”
A new revolution, a move to a market economy and liberal politics, “was necessary for people to survive.” Noerper adds that “democratization ushered in the ability to reform the economy.” A new constitution was adopted in 1992, leading to a multi-party government that included the Mongolian National Democratic Party (MNDP). At first, the new order it promoted was painful. Between 1990-93, triple digit inflation raged, joblessness soared, and a shortage of basic goods caused rationing. The economy actually contracted by a third.
Now the leading force for pushing ahead was the Democratic Union Coalition (DUC), under Punsalmaagin Ochirbat, between 1996-2000. It opted for market-friendly policies that favored privatization, loosened price controls, and also internal and foreign trade with an overall focus on exploiting the land’s gigantic reserves of minerals. The banks and energy sector were restructured, and foreign direct investment ushered in through the international tender of the national oil distributer, cashmere wool producer, and banks.
Opposition from the MPRP’s old guard hindered the changes -- but they were unstoppable. The GDP expanded by approximately 6 percent in 1996, predicated on a boom in copper prices. The year 1996 saw growth drop to 3.5 percent because of natural disasters and less demand for copper and cashmere. Then the Asian financial crisis, loss of livestock because of deadly weather, a Russian ban on oil imports, and an even lower sales of copper and gold saw GDP rate slouch to negative 1 percent in 2000, according to the CIA World Fact Book.
However, Mongolia’s new path -- outward looking and pro-reform -- took a big step during the turmoil when it joined the World Trade Organization in 1997. In fact, since 1990, over 1,500 foreign firms hailing from 61 countries have invested some US$338.3 million. By 2003, private firms comprised some 70 percent of the Mongolian GDP and 80 percent of its exports. A 2010 World Bank report entitled Doing Business in Mongolia ranked it 73rd in the world. Presently, three quarters of the economy is in private hands, so finds the domestic Montesame News Agency that covers Mongolia.
The sharp rise in investment propelled a rebound. By 2005, the GDP was growing at 10.6 percent. And where is Mongolia now? According to the World Bank’s Mongolia Quarterly Economic Update for August, a stunning 17.3 percent rate of growth was recorded versus 9.9 percent for the first three months. Interesting is the transport sector that expanded at 39.9 percent while construction was at 38.4 percent. As for mining, the mainstay activity, it came in at 8.3 percent. The unemployed constituted 13 percent of the workforce in December 2010, but that has shrunk to 8.7 percent as of June.
The report praises the government for “considerably” reducing poverty between the high growth years from 2002-8, but adds that inflation reduced the gains of the poor. Unfortunately, inflation leaped up 11.4 percent in July from 5.5 percent in June, attributed to a 27 percent increase in official spending and a spike in imports by 106 percent. Therefore, containing inflation “by reigning in excessive government spending and avoiding loose monetary policy” is necessary.
Here, the mining industry is a mixed blessing because it is most responsible for the purchasing of transport equipment and machinery, in particular at the Oyu Tolgoi copper mine. So the trade deficit grew to US$1.3 billion in July. Coal is the star performer for exports. It expanded 129 percent in July and now accounts for 38 percent of all sales, exceeding copper, the former number one. The one buyer remains China, which will procure more.
As for credit in the banking sector, it is racing. In July, the stock of outstanding loans increased 46 percent. The World Bank cautioned the Bank of Mongolia that it must enforce “prudential norms [to] maintain adequate buffer capital to absorb potential losses.” The total of non-performing or toxic loans was pegged at about 10 percent in July, but “the volume of outstanding loans is rising fast,” so caution is required. As for the future, the World Bank sounds another claxon: the boom in public expenditures could constitute “a pro-cyclical fiscal stance” of too much capital spending, a dangerous public debt. Therefore, the Fiscal Stability Law (FSL) of 2010 promotes counter-cyclical policies, but it only takes effect in 2013.
World macroeconomic factors will also influence the country. Another global recession will punish Mongolia’s small, open economy. If Beijing is as effective as it was in 2008/9, however, and it keeps gulping down Mongolia’s minerals as expected, the cost will be ameliorated. Also, Mongolia must “capitalize on its excellent long-term prospects by continuing the reform agenda it embarked on during the 2008/9 crisis,” insists the World Bank.
Renaissance Capital, a cardinal investment bank, has a more rosy outlook. Recently it declared that Mongolia could be the world’s fastest-growing economy in the next decade. “We think Mongolia may be able to position itself as the next Asian tiger or, as they prefer, Mongolian wolf, rather than the latest central Asian resource supplier,” strategists Roland Nash and Ovanes Oganisian predict. The great kick upward has started as foreign mining companies tear away the steppes and mountains to bring some of the world’s biggest mineral deposits into the sunlight.
For instance, Ivanhoe Mines and the Rio Tinto Group are developing the US$ 4 billion Oyu Tolgoi copper-gold project. Rio deems it the world’s biggest. Investment there equals 10 percent of Mongolia’s current gross domestic product, finds Renaissance Capital.
Most analysts concur that the boom will rest on domestic and foreign companies wrenching these minerals, so that aspect of the economy demands more attention. According to the Mongolian Mining Directory, in 2009, minerals earned over 75 percent of all export revenues. Almost all of copper concentrate, molybdenum, coal, and zinc end up in China, also the leading trade partner; Russia, the US and Ukraine receive flourspar; and gold ends up in Canada, the United States, the United Kingdom, and China. Mining accounts for over 40,000 jobs, which is more than 4 percent of the eligible workforce, although farming still leads here, occupying some 34 percent of Mongolians.
Overall, Mongolia boasts the world’s most massive copper reserves and holds the ninth-largest coal supplies alongside uranium, rare-earth metals, gold, lead, and zinc, so the elements for continued prosperity exist. Coal output is projected to double in the next half decade, while gold will triple and copper will quadruple, says Renaissance Capital. It asserts that the economy will likely increase 100 percent by 2014 or grow by at least 8 percent under the International Monetary Fund’s more conservative way of calculating. Exports will expand by more than 400 percent by 2014, so predicts Business Monitor International.
As for the impact on the people’s lives, Noerper observes that already, “a [new] middle class has sprung up.” But there are downsides, because although “people are much better off... one-third of the population remains in poverty and the rich-poor divide is growing.” The greatest concern is a widening gap between a wealthy elite and poor masses in a society where per capita GDP stood at US$ 3,200 in 2009. Also, “there could have been greater transparency in land privatization,” observes Noerper. In moving forward, Mongolia has shifted its foreign policy. Noerper notes that “it is looking at Chile and other nations that have seen rapid economic success. Mongolia deals well with its large neighbors, Russia and China, and its Third Neighbor policy encourages diversification among the United States, Korea, Japan, the EU, and others.” Future reforms necessitate a large scale overhaul of the national finance system. In fact, the stock exchange has undergone this based on help from the London’s bourse. A Mongolian Investment Bank and a sovereign wealth fund are also being planned. After that, the government will retail over 100 SOEs, mainly through IPOs. The profits will be divided. About half will directly flow to the government, another 30 percent will be split between the Mongolian Investment Bank and the sovereign wealth fund. There is some talk that the rest will be given for free to Mongolian citizens. Therefore, the government is analyzing the policies of Qatar and the United Arab Emirates, with 16 global banks advising the government on redistributing this wealth.
So the land-locked country famous for being among the world’s flattest place geographically now presents a surprised world with an economy that the World Bank’s World Development Indicators Database assessed at US$32.2 billion in 2000, but that hit US$58.1 billion in 2009. Its shape now resembles a mountain pushing upward based on an ambitious reform program that is producing a new nation close to the size of Western Europe.
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