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Mongolia’s Rapid Economic Growth: A Blessing or a Curse?

July 30, 2012

Mongolia is experiencing a period of remarkable economic growth. While many economies are struggling with global financial uncertainty, Mongolia has become the world’s fastest growing economy. In 2011, its economy grew by 17%, nearly twice as much as China. Mongolia possesses untapped deposits of coal, copper, gold and uranium. Mining experts estimate that Mongolia possesses $1 trillion worth of untapped metals and minerals in 6000 sites across the country that can enrich its population of 2.9 million.

Some economic forecasters project Mongolia’s economic growth to reach 20% this fiscal year. If its informal economy is factored in, growth could reach an astounding 40%. Two sources at the forefront of this growth are the Oyu Tolgoi and the Tevan Togoi Mines. Oyu Togoi will produce 3% of the world’s copper, contributing $5 billion per year to the Mongolian economy and is expected to have a lifespan of 50 years. The Tevan Togoi coal mine is estimated to have a lifespan of 200 years and can generate $1.6 billion per year for the first 29 years.

Oyu Tolgoi Mine

In the midst of its economic boom, Mongolia has great potential. It houses a treasure chest of untapped geological wealth and it is right next to the biggest and fastest growing market for these minerals. Mongolia supply plus Chinese demand will result in Mongolians being rich beyond their imagination. A generation ago, Mongolia was an underdeveloped and largely ignored. Today, Mongolia has to potential to become the next Qatar or Brunei, where the population is small but rich. People are already feeling the benefits of Mongolia’s mining boom. Mining companies are offering competitive salaries and benefits to attract local workers. Educated Mongolians who have left home years ago are now returning to take up high level positions in the mining firms. Even civil servants have cause for celebration, they have just received a 50% pay raise.

Mongolia’s rapid economic development can be compared to the Persian Gulf States that transformed themselves by selling oil to the West. The tremendous growth in the Persian Gulf States such as Kuwait and Qatar resulted in amazing social achievements. Infant mortality was halved, life expectancy rose by more than 10 years and adult literacy went up substantially. Mongolia is going down a similar path and can see similar achievements. Mongolia is profiting off a Chinese twist to the same model that made the oil producing Persian Gulf States rich.

There is also however, a darker side to Mongolia’s rise. As a recent article puts it, Mongolia’s new profits are creating new developmental problems. The lure of the mining industry and the devastating winters of the past few years have attracted thousands of herders from the grasslands. They live on the outskirts of the booming cities in Yurts slums that are being dubbed Mongolia’s favelas. Electricity and drinkable water is scarce and unemployment is widespread.

Ulaanbaatar: The Dubai of Asia

Mongolia has reached a crossroad, people wonder whether Mongolia can avoid the corruption, political instability and the widening poverty gap that seem to plague many resource rich developing nations. In April, a scandal emerged as Mongolia’s former president, Nambaryn Enkhbayar was arrested under suspicion of corruption. Analysts say that if Mongolia’s leaders and transparent and just, Mongolia’s mineral wealth may create a wealthy middle class nation like Qatar. Or, Mongolia can be cursed like Nigeria, whose wealth from the oil boom in the 1970s was squandered away by corrupt officials leaving its citizens in poverty.

There are signs that Mongolia is trying to ensue that its new wealth will benefit the entire population. In 2008, Mongolia created the Human Development Fund (HD Fund) with the ambitious goal of bringing Mongolia’s human development status to the same level as developed nations by 2020. The HD Fund is expected to provide pension, educational, housing and health benefits to all citizens.

Though Mongolia’s recent economic achievements deserve recognition, experts are stressing that this resource driven method of development is not sustainable and Mongolia should diversify its growth. Since Mongolia depends almost entirely on Chinese exports, its economy might shutdown overnight if China’s economy takes a nosedive. There is also the pressing question, what happens when the mines eventually run empty?

Mongolia has the potential to propel itself to become the next Asian tiger, joining the ranks of Hong Kong, Taiwan, South Korea and Singapore. Ulaanbaatar is poised to become the Dubai of the East. However, Mongolia’s new found wealth can be a double edged sword. It faces many challenges in the years and decades to come. As mentioned in CGP’s previous blog, Mongolia must deal with environmental degradation, high inflation, public dissent, Dutch disease all the while fending off a Chinese economic takeover.

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