ESCAPING THE ‘RESOURCE CURSE’ IN MONGOLIA

T. Gansuld, MBA Candidate for Master of Law in Mineral Law

ABSTRACT:

The dilemma of changing its quarry-state status has become a major topic for Mongolia since stakeholders involved in ‘Central Asian Eldorado of mines’ started raising most concerns for potential fears that come alongside the exploitation of rich minerals. Due to their distinctive nature, mines will eventually run out leaving the land rehabilitated in a good case. In the worst case, however, mountains of tail rocks, adversely enriched chemical sediments in the soil, and a chemically enriched lake from mine tailings will be left over untouched. Whether the results of mine exploitation make sense to the state economy is mainly the question to government conducts and its institutional capacity toward mining development. As its objective, the research searched after critical reasoning of prospective negative impacts and risk mitigation options. I have touched upon newly passed law for Human development fund, the legal framework for the first citizen fund in Mongolia. Does an imitation from foreign sovereign funds guarantees industrial development and promotes middle income society? Well, it is questionable. In addition to legal framework, the complete mechanism consisted with proper funding system, adequate fiscal and monetary policy must be on place to support industrial diversification and mitigate potential threats. And the ‘good governance’ is fundamental to lead this process.

1. INTRODUCTION

The dilemma to be a value-added producer has become a challenging topic for Mongolian policymakers. Oyu Tolgoi (OT) mining agreement, recently signed between Mongolian government, Canadian Ivanhoe Mines and Rio Tinto for the joint venture in a giant copper and gold deposit, provides to the investor a freedom to sell ore concentrates abroad1.  In the meantime, industry stakeholders have started raising concerns of risks that come along with the exploitation of rich natural resources. Prospective economic impacts and related risk mitigation procedures became a major topic on current mineral dialogues.

Distinctive feature of mine is that mineral deposit eventually runs out with the mine site left rehabilitated in a good case. At the worst case, however, mountains of tail rocks, adversely enriched chemical sediments in the soil of mines sites, and chemically enriched lake derived from mine tailings will be left over untouched. Whether the results of mine exploitation make sense to the local community and state economics is mainly the question to institutional capacity and government’s conducts toward mining industry.

The research objective is focused to answer whether and how the state can escape potential risks that come along with mining development. Beginning chapter provide an overall introduction of the state economics, its needs for industrial diversification as the main requisite to avoid mining related problems. In second chapter, I have touched upon newly passed law for Human Development Fund (HDF), a legal framework for the first citizen fund cheerfully greeted by policymakers2. 

Does an imitation of sovereign funds guarantees a solution for industrial developments and an upgrade in middle income society? Unfortunately, it does not. I conclude that the financing mechanism requires the appropriate monetary policy for managing exchange rate fluctuations brought by mineral exports. The comparative analysis on Chapter 3 concluded functional differences of three funds. Finally, the research concludes that economic risks can be mitigated though internationally competitive downstream industry established under balanced interests of host state and investors. Transparent and responsible business environment is the fundamental platform for desired industrialization to be fuelled by rich resources.

1.1 Introduction of the economy

Recent discoveries of Mongolian deposits of coal, gold, copper and uranium have considered among the largest in the world3 . Their strategic position to China, favourable market price, and foreign investment trend are current major topics in Mongolia mineral policy which plays a key role in the state economic growth. However, the state economy stands in a vulnerable transitional position due to its high reliance on volatile commodity prices which create significant imbalances in foreign trade, state budget and in domestic currency exchange rate. Minerals take a part of over 70% of total export. And they contribute to over 40 % of the state budget. Due to premature downstream industry and insufficient capacity of energy sector, over 80 % of non-fuel minerals exported in the form of ore concentrates except of gold and copper sheets which take a miniature part in mineral export counting approx 15%4. 

1.2 Weak downstream industry

Over its entire mining history, Mongolia has been a quarry state both in the planned economic blockade and in the free market economy. All extracted minerals except gold were exported as ore concentrates. Underdeveloped infrastructure sector is the major constraint for economic development, hence it requires large investment. Energy sector is another fundamental issue often arising between industry stakeholders and policymakers due to operating power generators are coal-fired plants all designed in the Soviet era. The sector regarded with its inefficiency and huge debt structure since the state controls energy price.

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