Institutionalized Role for State in Emerging Resource Economies

By Julian Dierkes

The workshop on “The State’s Role in Large Resource Projects” CIRDI recently co-organized with the International Cooperation Fund of the Mongolian Ministry of Foreign Affairs was designed as an opportunity for Mongolians to share their experience in mining governance with international delegates (from Afghanistan, Kyrgyzstan, Laos and Myanmar), but also to spur discussions among Mongolians about the political and organizational decision that have been made on the state’s involvement in mining projects through State-Owned Enterprises (SOEs).

One aspect of the workshop that definitely worked was to expose the different approaches that countries are taking to the resource sector. In sociological parlance, these approaches seem to be highly institutionalized, meaning that they are governed by a set of taken-for-granted, implicit rules that show up as a striking uniformity across a population even when not explicitly mandated by laws or regulations.

Put very simply, these five resource economies take fairly different approaches to the state’s involvement in the resource sector. The contrast is particularly stark between Kyrgyzstan, Mongolia and Myanmar, while the Laotian resource economy seems to be mostly small scale and a bit of a mix of different governance models, and Afghanistan’s resource sector is still emerging from decades of civil war.

Patterns in the State’s Participation in the Mining Sector

For the three somewhat more developed resource countries, the pattern appears to be the following:

  • In Kyrgyzstan, direct state participation (investment and operation) in the resource sector is a given. Whether or not this is best understood in a post-Soviet political economy or rooted in other factors, Kyrgyz delegates were very clear that SOEs are the dominant model, but that these SOEs are also comprehensive enterprises in the style of a state socialist Комбинат (note that even Wikipedia acknowledges Erdenet’s status as an all-encompassing company-cum-town-cum-conception-of-modernization). Кыргызалтын‘s holdings thus include a health resort and a transport company. Governance issues have been a source of friction with Canadian miner Centerra Gold (also active in Mongolia, of course), around the Kumtor mine.
  • In Mongolia, Erdenet is the example of a state-operated and fully-integrated-into-policy project, while the model in the past decade has become to have minority stakes in resource projects. This taken-for-granted position has been enshrined in law through the designation as “strategic assets” that automatically trigger a state equity stake, but it has also been institutionalized in political discourse where only private sector representatives (foreign and domestic) seem to question it. The on-going turmoil around the co-ownership with Rio Tinto (via Turquoise Hill) of Oyu Tolgoi illustrates some of the governance challenges this poses, though Erdenes Mongol (the state holding company for assets other than Erdenet) is eagerly “normalizing” its position as a corporation, rather than a specific form of an SOE.
  • A foreign caricature of the Burmese resource sector would refer to (military) crony capitalism, Chinese investments, and a giant oil sector. But, the highly institutionalized form of government investment in the resource sector in Myanmar are production sharing agreements (PSAs). As a tool, these are very common around the world (including in Mongolia’s Dornod oil fields) in petroleum production, but not very common at all internationally in mining. PSAs are, very clearly, highly institutionalized in Myanmar.

Learning from Comparisons

The most fruitful discussion (in my mind) around these institutionalized alternatives for public participation in mining investments came around the Kyrgyz-Mongolian comparison. Clearly, The Kyrgyz and (Russian-speaking) Mongolians were very comfortable speaking to each other right from the beginning. A shared cultural history and legacy of nomadism and state socialism as well as a sense of common challenges reinforced this initial comfort through discussions. As one of the Kyrgyz delegates noted very memorably, “95% of the questions that you’re asking (in Mongolia), are the same questions in Kyrgyzstan”.

Yet, as the discussion showed, some of the answers are remarkably different. Mendee has been telling me for some time now that Erdenet is much more important to understanding contemporary mining governance, but also contemporary politics than is generally appreciated. As I mentioned above, Kyrgyz participation of the state in the resource sector follows a similar pattern to Erdenet. Yet, despite Erdenet’s apparent successes (long-lasting production, the creation of a mining city that has grown into a viable and livable (perhaps distant) alternative to Ulaanbaatar), this is not the pattern that Mongolia has followed over the past 20 years. In part, the alternative pattern grew out of the destitute mid-1990s when state investment was simply not a (financial option) and the door was flung wide open to foreign investment. By the time more serious governance questions arose in the negotiations over an OT investment agreement, perhaps notions of free markets had been ingrained enough that the pendulum only swung back to a financial minority investment, namely the current structure of stakes in “strategic deposits”. I don’t know enough about post-Soviet Kyrgyzstan to guess at the political economy of projects there with independence and its aftermath, but the paths between Kyrgyzstan and Mongolia have clearly diverged.

Best Practices?

As is often the case with highly institutionalized models, aspects of these models “make a lot of sense”, but when we step back for a broader/deeper analysis, it is not clear that there is much to recommend one model over the other. Clearly (and as emphasized by Matt Genasci in the workshop) different ways to participate in the resource sector offer different opportunities but also come with different risks and costs. While all forms of ownership can be mimicked by taxes and other regulations, ultimately, decisions about different governance models are made within the context of specific political economies. No well-meaning and unfathomably comprehensive (big data and AI, I’m looking at you) analysis can make the final decision on what model might fit a country best, so that institutionalized responses to the question “how does the nation benefit from resource endowments?” differ across different national contexts.

It certainly seemed that the workshop provided a meaningful opportunity for dialogue between international delegates and Mongolians, but also among the Mongolians that perhaps pointed to some of the consequences of choosing particular models and thus strengthens resource governance in a small way to lead to better decisions that lead to more equitable distribution and thus alleviation of poverty through the development of natural resources.

About Julian Dierkes

Julian Dierkes is a sociologist by training (PhD Princeton Univ) and a Mongolist by choice and passion since around 2005. He teaches in the Master of Public Policy and Global Affairs at the University of British Columbia in Vancouver, Canada. He toots
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