Mongolia Opens Doors for Foreign Investment

Foreign investment in Mongolia’s mining sector – coal, copper, gold and more – is fueling rapid growth. Like other developing nations, Mongolia wrestles with how to control the development and spread wealth throughout a dispersed population of 2.7 million in sustainable ways rather than passing it on to a handful of elites or creating a welfare state, explains journalist Steven Borowiec. He points out that Mongolia has long been squeezed by Russian and Chinese interests: China is the largest trade partner and investor for the former Soviet satellite, making it tough for Mongolia to compete. So far, job growth for Mongolians has not kept pace with revenues earned by the government from foreign investment; poverty, urbanization and inflation contribute to social problems. Mongolia seeks to diversify its trade partners, however the nation has a weakening system of checks and balances, merging business and political powers, and inconsistent applications of law or government functions, according to the US Agency for International Development. So Mongolia may not be ready for more trade partners.– YaleGlobal

Mongolia Opens Doors for Foreign Investment

In China’s shadow, Mongolia struggles to develop its mining sector, attracting foreign investors
Steven Borowiec
Friday, October 21, 2011

Golden dream: Mongolians in traditional costume pose before a Louis Vuitton shop in Ulan Bator (top); poor citizens dig for gold in the Gobi desert

ULAN BATOR: Mongolia’s resource riches are bringing it new attention. While activity in the extractive industries is creating a spike in government revenue, extreme winters are killing livestock and driving nomadic peoples into the slums of Ulan Bator. Mongolia is confronting the same question all resource-rich countries eventually face: how to distribute the spoils of resource wealth beyond a few well-connected elite.

Mongolia’s economy has been predicted by the European Bank for Reconstruction and Development to grow by 9 percent this year and 12 percent in 2012 as a result of increased activity in the mining sector.

Much of this growth stems from a rush of foreign investment. In August, Mongolia hosted officials from the US, China, South Korea and Finland in meetings touted by the Mongolian press as highly successful. The visitors left with plans to expand ties with Mongolia and gain further access to the country’s natural riches.

This increased interest raises the question of how Mongolia will be changed by foreign investment and whether its administration can handle the onslaught. Mongolia isn’t known for particularly shrewd management of its resources. Genghis Khan’s son Ogadei is said to have paid visiting merchants whatever price they requested. Jasper Becker, in his book Mongolia: Travels in an Untamed Land, describes Ogadei’s comment on a storeroom full of gold, “What profit do we get from storing this, since it has to be constantly guarded?”

But there are signs that the Mongolian government might be guarding its wealth more vigilantly. In a September 22 parliament session, the Mongolian government decided to seek to increase its share of the Oyu Tolgoi mine,currently controlled by Australian firm Rio Tinto and Ivanhoe Mines of Canada. Parliament members pushing to increase state control claimed the Mongolian state should claim a larger portion of mining profits.

Mongolia has spent much of its recent history squeezed by Russian and Chinese interests. It became a Soviet satellite after looking to the victorious Bolsheviks for protection from China. The Chinese administration at the time wanted to claim both Inner and Outer Mongolia as Chinese territory. Under communism, officially beginning in 1924, 95 percent of Mongolia’s trade was with the USSR, which bought Mongolia’s raw materials on the cheap and sold them on the world market at a large profit.

Now, Mongolia is striving to use its mineral wealth to establish ties with a wide range of partners and carve out an independent position.

As the anti-Chinese graffiti on walls throughout Ulan Bator would indicate, there is a lingering mistrust in Mongolia of China, its rival and partner. Regardless of how Mongolians may feel about China, they cannot afford to ignore its regional clout. China is Mongolia’s largest trading partner and investor. Mongolia is a major exporter of coal, copper and gold to China. Chinese demand mitigated the effects of the 2008 economic crisis on Mongolia.

During his August 26 meeting with Zhou Yongkang, a senior official of the Chinese Communist Party, Mongolian Prime Minister S. Batbold spoke of a coming “golden era” in Mongolian-Chinese relations, despite historical antagonism.  

In a 2009 report, the US Agency for International Development found three major concerns in its assessment of governance in Mongolia: The weakening system of checks and balances, the coalescence of business and political power, and the inconsistent implementation of law and the execution of government functions.

These concerns are particularly acute at a time when new money is pouring in.  While government revenue is increasing, industries are not keeping pace with employing Mongoliansor committing to keeping earnings in the country. The Mongolian government recently announced plans to privatize Erdenes Tavan Tolgoi,, the state-owned firm that controls the world’s largest coal-exploration project.

Opponents accuse the plan as an open violation of a Mongolian law which states that all in-country assets cannot exceed one-third foreign ownership.

Mongolia ranked 116 out of 178 countries on Transparency International’s 2010 Corruption Index. In recent years its government has joined international anti-corruption regimes and protocols, such as the Anti-Corruption Plan of the Asian Development Bank, Organization of Economic Cooperation and Development, and the UN Convention Against Corruption. In 2006, Mongolia passed a new Anti-Corruption law and created an Anti-Corruption Agency, moves generally considered as ineffectual so far.

For its long-term prosperity, Mongolia will need a middle class with buying power to support domestic enterprise. Landlocked and next to China, competing in manufacturing or agriculture is difficult. With a poorly educated population, Mongolian officials have a long way to go in building a solvent middle rung.

The Mongolian government is looking to transfer payments to the poor to help narrow the gap between haves and have-nots. On August 27, Mongolian Finance Minister S. Bayartsogt announced that the government plans to invest a budget surplus into welfare measures designed to improve employment and health. In July, revenues were 248.8 billion tögrög, US$199.8 million, more than projected, due to big increases in industrial and mining production. The government will increase spending by up to ₮92.6 billion, US$74.4 million.

As Mongolia’s international profile grows, the slums on the outskirts of Ulan Bator are also growing, now believed to be home to more than 750,000. Mongolian herders struggle to adjust to life in the city where they have no experience living and little opportunity to find work. Many new arrivals turn to alcohol.

The government has provided primary schools and a system of daily water delivery, but climate and conditions pose a serious challenge to making the informal settlements more livable.

Other programs include ₮30 billion to boost employment and ₮10.3 billion, or $8.3 million, to improve transportation and health for vulnerable Mongolians, along with ₮1 billion – $800,000 – set aside to help Mongolian athletes prepare for the 2012 Olympic Games.

Welfare measures such as these lead to resentment and are unsustainable, explains Ha-joon Chang, Cambridge University professor of economics. Mongolia’s wealthy class may reach a point where they tire of supporting the poor.

The demand for government assistance is significant. Mongolia has a minimum wage of US$83 per month; an average salary is around US$250 per month.  That doesn't go far when a basic meal in a low-end restaurant costs US$3 and a one-bedroom apartment in Ulan Bator costs US$800 per month. Consumer prices in the capital are increasingly unaffordable, and many Mongolians lack basic services. According to the World Bank’s August 2011 Mongolia Quarterly Economic update, inflation in Ulan Bator was up 11.4 percent year-on-year in July, up from 5.5 percent in the previous month. Over the same period, core inflation increased by 13.7 percent on a year-on-year basis. That measure doesn’t include food or energy prices, both of which are volatile and consume much of poor Mongolians’ income.

Regular Mongolians will also be squeezed by their country’s advancement in less quantifiable ways. Any place that attracts large amounts of foreign direct investment is changed. The influx of capital and well-paid workers generally drives up prices and will likely further erode Mongolia’s traditional ways. Cities suddenly spring up around project sites. These new settlements are often thrown together with little planning or thought towards creating a cohesive community. 

The most significant question facing Mongolia’s leaders, and those who invest there, is how either through resource wealth or another channel, the majority of Mongolia’s population may maintain dignified lives that aren’t dependent on government assistance.

 

Steven Borowiec has written for the Guardian, the Toronto Star, Adbusters and other publications. Click here to read his blog.
Copyright © 2011 Yale Center for the Study of Globalization

Add new comment

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
CAPTCHA
This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.