At the recent World Economic Forum’s “Strategic Dialogue on the Future of Mongolia” I heard a lot of talk about the need for the Mongolian government to shed its direct involvement in the economy, but also the recommendation to rely on a Sovereign Wealth Fund for investments to spur sectoral diversification. As I argue on the World Economic Forum’s blog, you can’t have both, economic liberalization and an active investment policy that selects winning companies/industries.
Yet, sectoral diversification beyond the mining industry is absolutely essential to Mongolia’s long-term economic and thus also its social and economic development. The case for such diversification is based on the recognition that a) natural resources are finite, and b) market oscillations in commodity prices makes dependence on resources an inherently risky state.
How to Achieve Sectoral Diversification
This is certainly not an area that I specialize in, so what I am offering here are some interested musings.
Clearly, a (neo)liberal world order has restricted the options for an industrial policy that are available to modern states, and it is an industrial policy that is really needed in the case of Mongolia to move beyond mining and its associated industries. In the days of classic developmental states like postwar Japan through the 1980s, states had access to tools such as control over credits, foreign currencies, etc. that allowed them to direct the economy. Some states were good at this (Japan and S Korea stand out as examples) while others imitated such strategies, but were not as successful. One of the main doubts about the success of developmental policies has always been that it assumes that the state and its representatives is able to “pick winners”, that is to pick sectors and firms that will be growing and successful.
Clearly, contemporary China is also pursuing developmental policies through its state-owned enterprises and somehow is able to mask subsidies under this set-up to be immune to WTO interdiction.
However, many observers would agree that the Mongolian state is not ideally situated to engage in an active industrial policy for two reasons: 1. a lack of policy analysis capacity, and 2. a close intertwining of business interests with government, or in more extreme cases, corruption.
What options might remain:
- invest in basics
- tax credits?
- top-up venture fund for crowdfunding
Investments in Education, R&D, Applied Research
In the absence of an active industrial policy that targets particular technologies, sectors, or firms, many states strive to create the pre-conditions for innovation and the emergence of industries.
These preconditions include education and research, as well as the physical infrastructure to enable new industries.
In the Mongolian case this would suggest an increased focus for funding in education and research. The state universities are currently funded (almost?) entirely by tuition, though systems for research funding are under discussion or emerging. Stepping up such efforts now might lead to business opportunities in the long-term, especially when coupled with international best practice on supporting commercialization of research, etc.
Perhaps the role of the Academy of Science could be re-thought in this context. While largely a legacy of the state-socialist era when teaching in higher education and research were separated institutionally into the universities and the Academy and its institutes on a Soviet model, the institutes of the Academy could be re-invented as research institutes that focused specifically on applied research on the model of the German Fraunhofer Institutes.
Investment into applied research on minerals and minerals processing could be combined with similarly-structured efforts in other fields, particularly fields where Mongolia’s territory, location and climatic conditions might offer potential for future growth. Examples could be superconducting electricity transmission that would enable an alternative energy export industry for Mongolia (as partly envisioned by the Desertec Foundation [despite the horrifying terminology of "Greater East Asia"], see also Karl-Friedrich Lenz’ writings on Mongolia). Other examples might seek to capitalize on Mongolia’s cold temperatures as a condition for certain industrial processes.
Investments in Infrastructure
There are entire fields of research that examine the success of innovation incubators, industrial clusters and the like. A thorough search of these literatures would likely yield some lessons for the particular Mongolian context and how to provide the infrastructure that makes the emergence of new industries more likely.
From my point of view, some of the candidates for such industrial sectors that are often mentioned in discussions in Mongolia are highly implausible, though there’s always luck involved in these developments. Implausible scenarios (and thus areas where investment would not seem obvious to me):
- Ulaanbaatar as a finance centre: Asia already has Hong Kong, Singapore, Tokyo, and whatever centres might emerge from China
- IT industry: at such a generic level, there’s nothing about Mongolia that makes this more likely and the tiny domestic market and small number of potential entrepreneurs make this unlikely in my mind
Sectors that I find much more plausible:
- organic agriculture/meat: the world is turning to healthier food and Mongolia is ideally positioned in this regard for super-organic production. This is a sector that definitely requires infrastructure investment
- tourism: yes, but, this will always be specific niches
- transport hub: railroads (keeping in mind the dreaded question of gauges), but I even find the airport as a hub between Europe and Asia vaguely plausible, though that requires massive and highly concentrated investment.
I’m certainly open to suggestions/discussions of other sectors or different views on the sectors I’ve mentioned here. I certainly also believe that investment into building research capacity on this question in Mongolia should be a priority NOW and not just in the medium or long term
Infrastructure investment could also come in areas where such investment aims to create commercial resources rather than bricks-and-mortar facilities. Stephen Kreppel has thus been involved in a national brand strategy for Mongolia that would ideally offer a Mongolian branding that would benefit any industry or sectors, as difficult as such unified messaging might be to achieve.
A classic in the arsenal of policies that is acceptable under WTO rules, but Mongolian taxes (personal and corporate) are so low already that it’s unclear that there are massive incentives to be found in this area.
With some of the excitement around crowdfunding and crowdsourcing theses days, perhaps these concepts could be adapted for industrial policies. Again, I’m mostly thinking out loud here, but could state investment not come in the form of matching grants to crowdfunded projects? In such a scenario the crowdfunding serves as the mechanism to “pick winners” relying on the distributed intelligence of the crowd rather than bureaucrats and simply super-charges such crowdfunding to enable commercial developments. Obviously, this is a bit faddish at the moment and might not be a permanent economic institutions, but the concept of crowdsourcing decisions about diversification opportunities may be applicable.
Thoughts? Ideas? Go ahead and use the Comment function below!