Methods of Development | Mongolia as a Cop(per)-Out

Mongolia has long been forgotten amidst the development processes of the other Asian tigers. Its three million people still rely on ancient herding practices for livelihood and have only recently begun to urbanize and industrialize. While Mongolia is perfectly poised for rapid “wolf-like” economic growth due to a new mining project that will spur the economy, it is also at risk for significant obstacles that may prevent such outrageously high projected growth rates.

Map of Mongolian Mines | Source: The Economist

The key to Mongolia’s growth is the natural resources obtained via mining, with two key locations in Tavan Tolgoi and Oyu Tolgoi, both in the Gobi desert. Abundant in yet-un-mined natural resources, Mongolia will be able to export significant amounts of coal and copper to nearby Russia and China. This will be instrumental in keeping pace with projected growth rates of 14 to 22.9% per year.

However, with such neighbors, Mongolia is wary of an economic takeover. China already has vested interest in the success of the project—supplying workers, electricity, and assisting with the transportation of supplies to begin structural development. As such, Mongolia is also looking to other neighbors as trade partners and investors. This should create a fairly diverse trade portfolio for Mongolia to build upon, assuming it has plans to target other sectors for economic growth as well.

That, critics fear, is the main deterrent to mining in Mongolia. By focusing so much energy, and substantial resources into the mines (and the infrastructure necessary to sustain, utilize, and work them), Mongolia may contract a little thing called Dutch Disease. Or the dreaded “resource curse,” whichever you prefer.

So far, the plan to specialize in mining and exporting copper and coal seems ideal. After all, Mongolia does not need the amount of energy that China does. In fact, copper seems to have a steady demand in world markets, despite having potentially volatile price fluctuations. However, with developed and developing countries looking to more sustainable and alternative forms of energy, relying on coal and copper to sustain economic growth through 2020 seems dicey. Furthermore, an integral caveat of the resource curse is the possibility of high inflation and high prices, leaving Mongolians unable to engage in economic activity.

Oyu Tolgoi Gold and Copper Mine | Source: Bloomberg Businessweek

Indeed, the effects on the environment and nomadic groups are already prevalent and causing problems. Pollution from the heavy industrial equipment is staggering, and people dependent upon the resources of the Gobi have noticed dried waterbeds. Infrastructure to compensate for these environmental effects has not yet been developed, promising devastating and long term results if nothing is done soon.

Politically, the mining plans may cause devastation as well. With Mongolia depending on a 20-year old democracy to maintain order, some are wary of the impact of foreign interests. For example, foreign investment in Mongolia is set to skyrocket with foreign companies obtaining mining contracts. However, with the government reliant on the mining and export revenues to appease any public dissent (currently in the form of stocks and initial and monthly government stipends), the mining companies are rather safe from any barriers to progress with initial plans.

Work Around the Mines in Mongolia | Source: EPA / The Economist

So what does this mean for Mongolia’s long-term growth potential? Well, that depends. As long as Mongolia enjoys sustained economic growth and uses the resource revenues to develop other sectors of its economy, it should be fine. But, if Dutch Disease takes its course and Mongolia suffers (environmentally, financially, what have you) as a result of heavy industrial growth and not much else, then it will most likely face greater difficulties to overcome the damage that has been done. Regardless, Mongolia should at least experience significant short term results, showing the world what an Asian Wolf is capable of.

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