[For another version of observations of the current situation in Mongolia, see my piece in the Wall Street Journal Asia on September 13. This piece has been posted on the World Economic Forum blog as well.]
For most of the past 100 years, Mongolia has existed in somewhat splendid isolation from global forces of politics and capitalism. Over the past two years it has been buffeted by the winds of global capitalism, jumping from the triumph of the issuance of oversubscribed Chinggis Bonds in late 2012 to its current crisis of a sputtering mining project that growth is almost entirely dependent on. More than ever before, Mongolia’s development path will depend on its decision-makers’ understanding of global dynamics and reaction to these dynamics.
Since gaining independence from Qing China in 1911 and then carrying out the world’s second socialist revolution in 1921, Mongolia existed under the Soviet Union’s economic and political wing until 1990. Even after its democratic revolution in that year and an increasing focus on its “third neighbours” beyond Russia and China, the world found little reason to take notice of Mongolia until 2011. Yes, well-connected Tibetan politicians and activities introduced their Mongolian co-religionists to policy-makers around the world in the 1990s and Mongolia’s success in establishing itself as Asia’s only post-state socialist democracy caught the attention of some international relations officials, but this attention remained quite limited in scope. The 2000s were a decade of mineral exploration in Mongolia that culminated in an Investment Agreement between Anglo-Australian mining giant Rio Tinto and the government of Mongolia in 2009 as a framework for production at the immense Oyu Tolgoi gold and copper deposit in the Gobi desert. Construction investment related to that and other mines pushed economic activities to such heights in 2011 that the country was declared the fastest-growing economy in the world. And the world took notice!
In 2012, as Oyu Tolgoi construction was fueling this rapid economic growth, Mongolian coal exports were generating income, tax revenue and employment. In the Fall, the issue of a first US$-dominated sovereign “Chinggis Bond” was massively oversubscribed. All this good economic news gave a boomtown feel to Ulaanbaatar. Riding on the elevators of new commercial buildings were 20-something Mongolians oozing confidence. Mongolia seemed poised to conquer the world – once again.
Then China’s manufacturing industry sneezed and Moncoalia caught a major cold. Just before catching this cold defenses were already weakened by the hasty passage of a foreign investment law that clarified little and created a lot uncertainty. Now, coal sales to China have tumbled, the giant Tavan Tolgoi coal project is no longer the object of transnational investment desires, and direct investment in Mongolian ventures other than Oyu Tolgoi seems to have evaporated. To add to these woes, Mongolian politicians have been wrestling with cost-overruns in the construction of Oyu Tolgoi and how they are to understand themselves as ⅓ part owners of that mine.These doubts have cast a pallor over this mighty project and financing for its on-going construction. Construction of underground portions of the mine has been suspended and at the end of August 1,700 workers were let go. The Tugrik lost approximately 10% of its value against major currencies in August. Confidence has been shattered and parliament will be meeting in an emergency session in the coming week.
While the government budget has expanded to a volume where such a downturn can be buffered, these measures require the mortgaging of future mining revenues. Mongolia’s ability to rely on foreign donors is disappearing quickly. As the country transitions from a developing country to an emergent resource nation numerous donors will reduce their activities or shift gears from grants to long-term loans.
International investment interest has been a boon to Mongolia’s aspirations and economic development. But it is also introducing pressures and an urgency that decision-makers and the public have been challenged by. Policy analysis capacity in government, but also in civil society, remains low. The press is free and active, but has struggled in adopting professional practices that inform public debates rather than fanning flames, all in the context of widespread political ownership of media.
Rather than developing long-term strategic visions Mongolian political leaders have been reacting to developments outside their own control. The recent presidential election campaign that saw the current president, Ts Elbegdorj, win re-election in late June, was devoid of alternative conceptualizations of Mongolia’s economic development and the impact this will have on social and political development.
The choices that Mongolia faces require much more domestic research and policy analysis capacity. Ideally, this could be built in a non-partisan fashion over the coming decade, possibly in lockstep with the need for capacity building in such areas as financial administration, mining regulation, and vocational education.
But Mongolia’s integration into regional and global dynamics of investment and economic integration also necessitate the consideration of scenarios for the country’s future. Next week, World Economic Forum Strategic Foresight will host a discussion of such scenarios just before parliament convenes in an extraordinary session to consider responses to the current crisis. Discussions of scenarios as well as consideration of changes to investment laws might lay the groundwork for less tumultuous development in coming years that could bring equitable and sustainable growth to this landlocked nation with its extraordinary nature and people.
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