Policy Series: Typical Explanations for Policy Failures (II)

The following explanations are commonly offered to explain these faulty mining policies.

External Factors – In the absence of major international or regional armed conflicts and threats (conventional and non-conventional), politicians often highlight two external factors – the dynamics of the global market and the geopolitical interests of major powers. Understandably, these external factors constrain Mongolian policy-makers – who have limited capacity to deal with them.

 Dynamics of Global Market. In 1990s, Mongolia was, like its two neighbours, desperate for western investors, but few responded because of the unattractive market environment (especially, infrastructure), uncertain political and socio-economic development, and underdeveloped regulatory framework for foreign investors. From a broader perspective, China was not seen as a promising market for natural resources. There also were the economic sanctions following the Tiananmen Square incident. Being overwhelmingly aid-dependent and isolated from the global and regional markets, Mongolian politicians had very little choice except to create the most welcoming regulatory framework for Western investors. They were unable to constrain investments from Chinese small and medium enterprises that were mostly in joint nature. When the potential benefits from the mining activities increased from 2000, Mongolian politicians were overwhelmed with increased interests from foreign investors; resulting in high expectation for resource-based development among politicians. Because of this politicians began to lose their earlier visions of non-mining development strategies (e.g., agriculture, tourism) and the economy became highly dependent on the international commodity prices as well as Chinese buyers. Instead of calculating the commodity market dynamics, politicians are now cover their mining policy failures under the commodity boom and bust cycles. Therefore, the dynamics of the global market is not alone responsible for the mining policy failures. It does offer both a blessing and curse for mining policy making because the reliance on the mining sector and a few mega projects – along with inefficient distributive policies –increases the vulnerability of Mongolia’s economy.

 The Geopolitical Interests of Major Powers. Geopolitical interests also appeared to provide another reasonable external justification for politicians to evade public scrutiny for faulty mining policies. Since Mongolia is a small, weak, and peripheral state, all external actors – two powerful neighbours, distant major powers, their MNCs and SOEs, and IFIs – exercise strong, effective leverage over Mongolia. For the time being these external actors, except Russia on some issues, seem to be tolerant and respective for Mongolia’s domestic policymaking process.

In retrospect, Russia has been quite assertive in certain areas and has explicitly pressured Mongolian politicians to change their policies (Wachman, 2010; Radchenko, 2013).[1] The first is the railroad. For Mongolia, the railroad is the most critical infrastructure for mining. With its partial ownership of the Mongolian railroad, the Russian government is heavily involved in the railroad politics. This is seen by its (1) rejecting the Mongolian government’s attempt to accept the US Millennium Challenge Account funds ($188 million) for the railroad project; (2) advocating the linkage of major mining sites to the trans-Mongolian and trans-Siberian lines; and (3) delaying the linkage of major mining sites in southern Mongolia to the Chinese railroads. Uranium mining is another area. From 2009, Russia re-established its influence in developing uranium deposits in Mongolia by (1) establishing the joint liability company, Dornod Uran; (2) marginalizing the Canada-based Khan Resources Inc; and (3) agreeing to resume full-scale of cooperation with Mongolia in areas of uranium (e.g., education, training, and infrastructure). [2] The last are on and off attempts of Russian state-affiliated oligarchs to be involved in major mining activities (e.g., Tavan Tolgoi and Asgat) and infrastructure projects (e.g., a power plant, railroad). The first two, the railroad development and uranium mining, were explicitly advocated by the Russian state whereas the other issues have been advocated by Russian oligarchs.

In contrast, China has been more tolerant and less assertive in dealing with Mongolia – although it possesses strong leverage over Mongolian policymakers.[3] First, China did not openly retaliate against Mongolia’s inclinations to provide more opportunities for Western companies. This might be understood in the context of Chinese closer economic collaboration with the West. Second, China tolerated Mongolia’s protective measures against Chinese SOEs’ investment into mining, telecommunication, and banking sectors. For instance, Mongolian politicians cancelled the bidding of the Chalco, a state-own aluminum company, to buy the SouthGobi Sands coal mine and approved the Strategic Entities Foreign Investment Law. Third, Chinese companies appear to be accepting the mining policies, despite the unpredictable and unstable nature of these policies, and offering more flexible policies towards Mongolia, especially in the areas of joint development of infrastructure and access into Chinese transit networks and ports. This type of Chinese constructive behavior would certainly create a favorable market and investment environment for mining in Mongolia.[4]

Given these contrasting behaviors of Mongolia’s two neighbours Mongolia has attempted to attract political security and economic interests of the so-called ‘third neighbors’ – distant major and secondary powers, that are expected to support Mongolia’s efforts to maintain its sovereign statehood in a complicated neighborhood.   Mongolia has restructured its macroeconomy with assistance from these states and IFIs, entered into a series of agreements with them to increase trade and investment, and even offered various types of exemptions, ranging from visa to taxation, for these states. With the commodity boom, long-term stability of the Chinese market and Mongolian desires for engaging non-Chinese firms, private companies of third neighbor states appear to have some advantages over Chinese and Russian SOEs. Moreover, the democratic system also provides these multinationals with formal mechanisms to influence domestic policy-making process. As a result, we have witnessed these multinationals exert influence through various channels. This includes advocating government policies (e.g., the United States), IFIs – especially, the WB, IMF, EBRD, influential politicians (e.g., James Baker, Tony Blair), and local partners.

Although all these external actors – all simply pursuing their pure business interests (maximize the gain, minimize the cost) – contribute to competitive political and business environment for Mongolian politicians, none of these actors, except Russia in some areas, have demonstrated explicit manipulation of Mongolian policymakers in developing and implementing the mining policy. Therefore, it is not sufficient to point out external factors – the dynamics of global market and geopolitical interests of major powers – as key explanations for the mining policy failures of Mongolia.

Domestic Factors – Politicians also point to two specific domestic factors for causing the policy failures. One is private business interests, which are expressed by political and business factions and business interest groups. The other is civil society activists, which have been labeled by politicians as “populists” a problematic term in Mongolia.

Private Business Interests. Like any other democracies, including the developed ones, businesses have all possible channels to influence the policy-making process in Mongolia. In order to advance their business interests (i.e., to increase and protect their wealth), businesses always complicate the policy-making process – unless politicians, parties, and bureaucracies create and maintain the predictable and just business environment. This is the most complicated, especially during the transition period and also in a developing state like Mongolia. Starting from the gold rush period (1992) and privatization of state properties, natural resources contributed to the emergence of a new capitalist class. Many mining companies and individuals obtained mining licenses and privatized the state-owned mining enterprises, some jointly with foreign investors. This process was pushed forward by the coal-mining boom and increased foreign mining interests in Mongolia. All businesses wanted to capitalize on these ad-hoc opportunities. Some of them established the mining consortium to operate in the largest coal mine deposit (i.e., Tavan Tolgoi), some entered into a competition to disadvantage each other (e.g., MSC vs. Jenco), others quietly bargained over major mining projects (e.g., MAK) and still others competed for the supply side businesses (e.g., equipment, fuel, food, services and so forth). Today these competitions have became more intensified and are formally and informally institutionalized in Mongolia’s political processes. Just a quick glimpse of the composition of the parliament, cabinet, and political parties demonstrates how much these private business interests are entrenched into the policy-making process. Therefore, this is clearly one of the influential factors for the policy failures, although all other democracies face this influence of business interests.

Civil Society Activists and Movements. Politicians also blame civil society activists and environmental movements for mining policy failures. Like private business interests, politicians, parties, and bureaucracies cannot escape from the pressure of civil society movements. Until the main causes of the public discontent are sufficiently addressed and/or assured with reasonable medium and long term solutions, civil society activists and movements will not decline. In any democracy, the government would expect the public discontent and social mobilization when the government cannot provide important public goods, especially justice. This also applies to the Mongolian case. Since 1990 the civil society space has remained open for civil society activists, organizations, and movements. A few main themes – corruption, injustice, and environmental degradation – have been advocated by these actors. The growth of the mining industry simply intensified the public discontent for three main reasons. First, corruption, revolving around the natural resources, provides much stronger justification for the public discontent than the corruption involving foreign aid. The public is more concerned with the mining issues. This is because (1) the land and natural resources are considered the public, national property; (2) mining activities have the most visual impacts on the environment, society, economy, and politics; (3), especially in the Mongolian case, the public is concerned about non-transparent governmental debts (e.g., borrowing loans and bonds in anticipation of operating large scale mines with foreign investors). Second, the environmental damage, especially from artisanal mining, arouses a stronger sympathy from the public in comparison to other major social issues (World Bank, 2006; Swiss Agency for Development and Cooperation, 2011). Third, major mining investment projects provide an effective leverage for the public to pressure politicians, parties, and bureaucracies since political instability increases the risk for large-mining investment deals. Unlike authoritarian regimes, we would expect similar types of public discontent in other democracies, especially in developed ones, if the mining industry contributes to corruption, injustice, and environmental degradation. Any politicians, parties, and activists would pursue the populist politics for multiple purposes (e.g., morale, political, and rent-seeking). Therefore, like private business interests, civil society activism (plus populist politics) also is considered one of the influential factors for mining policy failures, although it is not the cause.

[1] Mongolia is overly dependent on fuel imports from Russia and transit routes to Europe while Russia maintains a significant percentage (49-51) ownership of Mongolia’s key infrastructure (i.e., railroad), industry (i.e., Erdenet copper plant), and other joint ventures – such as Mongolrostsvetment LLC (the 4th largest fluorspar mining; potential silver mine).

[2] “Uranium in Mongolia,” October 2014, World Nuclear Association, available at www.world-nuclear.org

[3] Mongolia is also dependent on Chinese investment, market, and infrastructure (esp., railways and seaports).

[4] However, these Chinese behaviors have been regarded suspiciously in Mongolia.

About mendee

Jargalsaikhan Mendee is a Deputy Director of the Institute for Defense Studies of Mongolia. He holds a PhD in Political Science from the University of British Columbia, and MAs in International Relations from the US Naval Postgraduate School and in Asia-Pacific Policy Studies from the Institute of Asian Research of the University of British Columbia.
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