Mongolia succumbs to the ‘resource curse’

At the end of September Mongolia’s Prime Minister Erdenebat Jargaltulga announced that his country would be seeking IMF assistance to help stem its continuing economic woes. This plea for help finally confirmed what many suspected: Mongolia has succumbed to the dreaded ‘resource curse’. On the surface level the idea of a resource curse seems to be paradoxical. A state finds a windfall of non-renewable resources (coal, oil, minerals) that can provide a foundation for economic growth and expansion. Over time, however, the initial economic boom fades, the state tends to fall behind in economic growth compared to similar states and then begins to stagnate. The question then becomes: why do states fall into this trap? In the case of Mongolia there are three crucial factors: resource dependency, global commodity volatility and institutional failure.

Mongolia is rich in three core resources: coal, copper and gold. Exploitation of these resources allowed the economy to reach a growth rate of 18% in 2011, with coal exports making up a third of mining’s overall contribution to GDP by 2012. However, this is where the first issue of resource dependency arises. In August this year the World Bank noted in an update that the mining sector had now taken a 20% share of overall GDP. This unhindered development of natural resources means that as dependency arose, ideas of diversifying the economy halted. As resource development increases, the intoxicating benefits brought about by declines in poverty rates and political popularity that comes with a booming economy work together to hinder political power structures from changing the status quo. Evidence of this can be seen in dramatic declines in poverty (17.2% decline in four years), a record US $4.7 billion in foreign direct investment in 2011 and a two-party system in which mining policy is the significant focus. Once an economy has become resource dependent, commodity volatility begins to play its role.

Having a resource dependent economy means state budgets revolve around the flows of commodity pricing. From their peaks around 2008-2009, coal and copper prices have at least halved on global markets with little recovery whilst gold has lost around 35% of its value since 2011. The impact of commodity price declines has been stark. Mongolia’s growth rate will fall to roughly 0.3% in 2016, the budget deficit will double to US $826 million, foreign reserves have begun to deplete as the government tries to stabilise currency rates, interest rates have risen to 15% and a new government has been swept into office. A government that will have to confront debt reduction strategies with the IMF whilst committing to implement vital infrastructure development. Overall, what this shows is that dependency and volatility provide the catalyst and ignition sources for the ‘resource curse’. However, one must also ask what allows the catalyst to develop unchecked. The role of institutional failure is crucial in this regard.

What is meant by ‘institutional failure’ essentially has two parts: firstly, the inability to hold the state accountable as they make decisions; and secondly, overall political incompetence. In November 2015 the OECD released a report into Mongolian political corruption. Throughout the report there are significant issues raised which emphasise the scale of the problem. Firstly, laws around defamation have significantly repressed investigative journalism. The repression of investigative journalism hinders the role of ‘fourth estate’ in the democratic process. A prime example of this is the explosion in political party financing corruption. Party financing in Mongolia has had little supervision or media scrutiny and existing laws have provided little resistance to circumvention. This has led to concerns that actors such as international mining companies and state-owned companies have been or are trying to gain control over government policy. Repression of journalism to toe a particular political line or simply overlook corruption has ultimately hampered political accountability.

In regards to incompetence, Mongolia’s institutions have also suffered under the weight of immunity laws and nepotism. The OECD report into immunities has found that they are applied excessively. Trying to appeal such immunities borders on impossible, cultivating incompetence within institutions as there is no way to reform them. When people can act with impunity, good governance is replaced with corrupted governance that seeks to benefit a select few. There is no better example of this than the Mongolian judiciary. The OECD report underlined the role played by nepotism and the pervasive incorporation of political entities into the judiciary in cultivating incompetence in institutions. So where does Mongolia go from here?

The path forward is to re-evaluate the political role of mining in the economy. While mining will be a core piece of Mongolia’s potential economic prosperity, diversification will provide new avenues for growth and expansion. Secondly, in working with the IMF, Prime Minister Erdenebat Jargaltulga must not assume that harsh austerity and saddling the country’s poor with the majority of cuts will solve all the budgetary issues. Lastly, in what could be the most important reforms for Mongolia, allowing journalism to become freer and reforming the judiciary must form an important priority in this new parliament. Progress in these areas will slowly allow Mongolia to escape the ‘resource curse’ and set it back on a pathway to sustainable growth.

Charles Bryant is the International Trade and Economy Fellow for Young Australians in International Affairs.

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