Three lessons from Mongolia’s ‘wolf economy’

Mongolia is, by all accounts, resource rich. Just one of its mineral deposits is said to be the size of Manhattan. As of 2011, its untapped precious metals and minerals were estimated at $1 trillion. Its capital Ulan Bator has a vibrancy reminiscent of South East Asia’s ‘tigers’ in the 1990s. It is clear that amid its vast potential mineral wealth, Mongolia is on the cusp of fully engaged economic and geopolitical relationships with its neighboring economic trading partners – no small feat considering they are Russia and China.

The staying power of the ‘wolf’ economy – Mongolia’s answer to the Asian tiger – will depend on how it uses its resources to sustainably promote equitable growth. At the heart of this is an ambitious infrastructural reform strategy with twin pillars: a five-fold railway expansion and wide-scale housing regeneration.  

The
railway expansion aims to be a game changer for economic transformation and is likely to bring structural benefits too. The Oyu Tolgoi and Tavan Tolgoi mineral deposits will be connected to its Sainshand industrial complex and will link to Russia and China, laying the foundation for Mongolia’s long-term industrial policy.

Housing regeneration in Ulan Bator will improve the quality of lives. Ulan Bator’s Ger district is home to 60% of the urban population of 1.4 million. There is no functioning sewage, water, electricity or heating system for its residents – most of whom live in Gers, or felt huts, giving the district its name.

On paper, these plans for spending resource windfalls look eminently sensible. Yet despite a 35-fold increase in capital spending between 2003 and 2013; translating these plans into a reality has proved difficult, demonstrated by the stalled railway expansion. What explains these difficulties?

Mongolia is grappling with a level of macroeconomic uncertainty likely to derail any longer-term reform plans. Like other resource-rich economies, it is acutely vulnerable to lower global commodity prices. It is also vulnerable to building global economic risks for low income and lower middle income economies. Mongolia’s capital account liberalisation fuelled a level of capital inflows that, in the absence, of a developed capacity to effectively channel them, has resulted in macroeconomic vulnerability.

A sharp drop in Mongolia’s terms-of-trade has exacerbated its ability to finance the latter stages of its infrastructural reform.
And at 25% of GDP, Mongolia’s current account deficit makes it highly dependent on global finance to start with.

High
government indebtedness has destabilised public finances and the ability to ring-fence future mineral revenue for infrastructure. Although the government expects significant long-term export revenues from its mineral deposits, at around 10% its fiscal deficit will limit potential economic stimulus.

Mongolia’s systems for managing public investments are also under strain. Pressures to cut ribbons on visible infrastructure investments are high everywhere, but even stronger in resource-rich countries, where resource wealth can seem like ‘manna from heaven’.
A World Bank study found many small uneconomic projects being financed, but failures to deliver large transformative projects. The construction sector has also been unable to keep up with demand.

So what can we learn from Mongolia’s efforts to build the ‘wolf economy’?

  • Money is not enough: decisions on what to build and how to build infrastructure matter. Unless constraints in government and construction sector are addressed, more money may just mean more waste.
  • Financing for infrastructure needs to be sustainable: the formation and usage of stabilisation funds during economic upswings is key. These will ensure that infrastructural reform agendas remain on track in the longer-term.
  • There are limits to what technical solutions at the national level can achieve. Improved global economic governance and information sharing is needed on the transmission of financial shocks, particularly when it comes to commodity prices

Phyllis Papadavid will speaking at the 2015 CAPE conference on how governments can avoid the mistakes of past periods of infrastructure booms. Sign up to watch online.

Authors

Research Associate
Phyllis leads the ODI's work in International Macroeconomics. She has over a decade of [...]
Senior Research Fellow – Head of Programme (acting)
Mark’s research focuses on how the international community engages on questions of public finance [...]