Mongolia is one of those countries we've all heard of but know practically nothing about.
The world's second largest landlocked country is as inhospitable as it is hostile. Winters
can reach minus 40 degrees Fahrenheit and are sometimes so harsh that not even the local
livestock can withstand them. In the winter of 2009, for example, eight and a half million
cattle perished from the cold. One fifth of the country’s total.
As you can imagine, Mongolia is not a place where life is particularly easy. In fact,
its extreme climate has meant that throughout history very few people have settled in these
lands.
For example, despite being a territory almost three times larger than a country like Spain
and only a little smaller than Mexico, its population barely exceeds three million inhabitants.
That is, we are talking about one of the most sparsely populated places on the planet. One
of the least inhabited territories and also one of the poorest.
However, VisualPolitik fans, Mongolia's luck might be about to change. Or at least that's
what we were hoping for. All thanks to the gigantic treasure this country hides beneath
its depths.
Mongolia is one of the richest mineral countries in the world. We are talking about copper,
gold, uranium, oil... An immense wealth for a sparse population.
Precisely for this reason, at the beginning of this century, and as a way to escape from
poverty, the Mongolian government, taking advantage of the economic pull of China – a
huge devourer of natural resources – set to work to exploit this enormous wealth once
and for all.
In this way Mongolia became a promising mining power, which, unsurprisingly, directs about
90% of its production to the People's Republic of China.
Within a few years, money began to pour into the country and its economic growth rates
climbed above 10% per year.
The future looked promising. In a few years, Mongolia could be able to join the club of
Asia's richest countries.
But... This is 2021, so the question is: Has Mongolia really become such a rich and prosperous
place?
Well... Let's say that if you think that in Ulaanbaatar they have replaced water with
champagne and the traditional deel with a new Armani suit, you are very, very wrong.
Easy money is not always as profitable as we think it is. Plus, when virtually your
entire business is basically dependent on a single client, believe me when I tell you
that you're in a much more compromised position than you might think.
So the question is .... What exactly happened to Mongolia?
Listen up.
(THE MONGOLIAN DAWN)
OK, pay close attention to this graphic. What you are looking at is the evolution of
the GDP per capita of Mongolia, a very poor country whose economy has traditionally been
linked to a very rudimentary type of livestock and agriculture.
In addition, the fall of the communist bloc inflicted a heavy economic blow. Remember
that until 1992 Mongolia was a satellite state of the Soviet Union.
And yes, when it fell, a transition to a democratic free market model was set in motion, but many
of the Communist era political and productive structures survived.
To make matters worse, there was also the phenomenon of the oligarchs who took control
of former public companies at almost bargain prices.
In 1997, in an attempt to revitalize the economy and escape the post-Soviet crisis, the government
passed the Minerals Law.
And do you know what? It changed everything.
The law was intended to encourage private investment, particularly from foreign capital,
in the mining sector. A sector that until that time had been dominated mainly by small
producers with very little mechanization.
And so, between 1997 and 2002, the Mongolian government issued almost 3,000 exploration
licenses for the creation of new mines. And take note, because the licenses granted covered
almost four percent of the country's entire territory. A gigantic country. We are talking
about more than 23,000 square miles, a little more than 25% of the entire surface of a country
like the United Kingdom.
And no, most of these licenses did not end up in the hands of companies from the country
you all have in mind.
Look for example at the names of some of these companies: The Mongolian Resource Corporation,
South Gobi Resources, Kincora Copper, Garrison International?
They don't sound very Chinese, do they?
Well, the reason they don't sound Chinese is because they are not. Most of the companies
that got licenses to explore and exploit the Mongolian subsoil were companies from Canada
and Australia, with a few from the UK, Switzerland and various other countries.
In many cases these companies formed joint ventures with the Mongolian government itself,
so that the government would benefit from this activity not only through taxes and royalties
but also through its own share of the profits. It was a perfect business.
Even more so when almost all of these minerals that began to be exploited were exported to
a relatively close neighbour: China, especially to the iron and steel production centres that
consumed iron, coal and other minerals as if there was no tomorrow.
Optimism was sky high: in just a few years foreign investment skyrocketed from about
$10 million in the early 1990s to more than $800 million at the peak of the mining boom
in 2008. Also between 2003 and 2008, exports increased fivefold to more than $1.8 billion.
And don't forget that we are talking about a country with just over three million inhabitants.
In per capita terms these are huge figures. Especially if we take into account that Mongolia
was one of the poorest countries in the world. But that would soon change because now money
was pouring in and GDP was growing at breakneck speed. In just a decade the size of its economy
increased tenfold. Suddenly investment projects of all kinds began to spring up and construction
projects flooded the country. Mongolia's future looked bright.
Suddenly, however, everything stopped. Mongolia stopped growing, investments stopped, and
the country fell into chronic stagnation.
The question is, why? What on earth happened to make it all go down the drain?
Well, let's take a look.
(MINING DEBACLE OR POLITICAL DEBACLE?)
One thing is clear: for Mongolia the mining boom had very significant benefits that are
ongoing. There is no doubt about that.
However, despite this, the frustration is more than evident.
The 2008 crisis put the entire Mongolian mining model on the ropes. The economic recession
halted the investment and export boom. In addition, demand and prices for key minerals
plummeted.
For example, the price of copper went from around $8,000 per tonne in 2007 to around
$2,500. A drop of almost 70%. And practically the same thing happened with the rest of their
raw materials, which meant that the government lost one of its main sources of income.
Suddenly surpluses turned into deficits, especially in terms of trade. Mongolia had specialized
in the mining industry, which financed a lot of imports.
Of course, this whole process triggered the public debt and above all the foreign debt,
which currently represents 240% of the size of the economy. In relative terms, it is the
largest foreign debt in the world.
Mongolia fell victim to what is known as Dutch disease. That is, the mining industry caused
capital to flood into the country, driving both prices and the local exchange rate through
the roof.
And because the productivity of the companies was generally very low, rising labour costs
and the unstoppable exchange rate caused many of these local companies to go bankrupt.
The Mongolian economy thus became terribly dependent on the commodity sector. And when
commodity prices collapsed, then the storm was unleashed.
But that's not all, VisualPolitik fans.
Look, according to a World Bank report, Mongolia has produced $28 billion worth of minerals
since 2004. Of this money, the State has taken in about $9 billion in taxes and fees over
15 years.
At the same time, however, the government has been borrowing almost the same amount,
$8.7 billion. The loans were secured by the mineral revenues themselves.
Remember that we are talking about a very poor country with a very small population,
so this is still a huge amount of money.
However, in 2019 there was barely $200 million in the sovereign wealth fund. $200 million
of the almost $18 billion dollars amassed since 2004 on account of minerals. And yes,
we already explained that after the 2008 crisis, the public budget went into the red, but still
the numbers do not add up.
So the question is, what on earth did the Mongolian government do with all the dough?
And pay attention because this is where the story gets interesting.
Okay, as you can probably imagine, corruption played an important role. Yes, Mongolia is
not the most transparent country in the world, and certainly not the most accessible, to
be able to estimate the true extent of corruption.
However, as a result of leaks, such as the Pandora papers, it has been proven that, for
example, the former Prime Minister was fond of buying properties around the world.
But no, the key to the missing cash lies not in corruption but in massive vote buying.
Vote buying has practically become institutionalized in Mongolian politics.
For example, the current president Ukhnaagiin Khürelsükh [Yes I know it's not the correct
pronunciation] came to power with the slogan "Mongolia owns its resources". However, far
from working on industrial investment plans or some political project to boost the economy,
the first measure this president took when he came to power was to shower pensioners
with money.
That had been his big election promise. To distribute a payout among pensioners financed
with loans guaranteed by raw materials.
Why? Because pensioners are by far the most significant voting demographic in Mongolia.
Firstly because there are a lot of them, secondly because they have common interests and thirdly
because their turnout is much higher than the rest of the voters. So in terms of votes,
their influence is enormous.
And, pay attention, because we are not talking about one remote exception. This way of doing
politics has become the norm for all political parties.
And yes, something similar could happen in almost every country in the world, but nowhere
else has the buying of votes with promises of hard cash been taken so far. Not even in
Argentina.
To give you an idea, of Mongolia's 3.2 million inhabitants, 2 million receive regular state
funding.
("The political parties don't need smart voters who are equipped with critical thinking. [...] They
need poor voters who are easily manipulated [with cash] when they need to be." – Gerelt-Od
Erdenebileg, political scientist at Mongolian National University of Education)
In other words, Mongolian politicians used the mineral windfall to gain power. The problem
is that the cow is running low on milk.
Far from boosting development or building a sovereign wealth fund, Mongolian politicians
have spent past, present and much of the future mineral rents on handing out cheques left,
right and centre. And I say future because loans have to be paid back.
All to finance checks that are basically financing imports in the absence of real reforms.
So VisualPolitik fans, the vast natural wealth gave Mongolia a chance to become a very rich
country. However, political greed robbed them of that dream.
But having got to this point, it's your turn: Have you ever thought that natural resources
could be a curse? How would you avoid it? Leave us your answer below in the comments.
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