Many challenges face Mongolia as it seeks to transform itself

With nations scouring the globe in pursuit of dwindling mineral supplies, the world"s attention has shifted to Mongolia, a country some are heralding as the next resource success story. Among the last places on earth with rich, untapped mineral deposits, this landlocked, underdeveloped country is expected to become one of the world"s fastest-growing economies over the next decade -- if, that is, it can address a set of daunting challenges and bring these resources to the market, says an article in Summit Business Media.

According to some estimates, there is about USD1.3 trillion worth of untapped coal, gold, silver, copper, uranium and zinc deposits in what is being called "Minegolia." The country"s GDP is expected to rise as much as 10 percent per year, from the current USD5 billion to USD30 billion by 2020, as a result of revenue from these minerals alone. Meanwhile, per capita income is expected to quadruple, from USD3,000 in 2008 to USD12,000 by 2015 -- or about what the average person in Shanghai currently earns.

This transformation is already under way. The government is currently in a joint venture with Ivanhoe Mines Ltd. and Rio Tinto PLC to exploit the Oyu Tolgoi mine in the south Gobi Desert. The mine is one of the world"s largest underdeveloped copper-gold projects, and could yield up to USD50 billion in revenue when production begins in 2013. Tavan Tolgoi, the world"s largest untapped coking coal site, is expected to generate up to 50 million tons of coal per year for 200 years once production is ramped up. And with a relatively open society and a fairly accommodating business environment, Mongolia is also fast becoming a popular investment destination for brands such as Louis Vuitton and Burberry. Companies listed on the Hong Kong Stock Exchange have also acquired almost USD1 billion in Mongolian resource assets through mergers and acquisitions.

Yet the country will have to overcome a set of formidable challenges if it is to realize its full resource potential. First, having been historically subjected to Chinese control until the early 20th century, and then under Soviet influence until the end of the Cold War, Mongolia will have to manage relations with its two neighbors deftly while preserving its sovereignty. Relations with Beijing will be an especially tough balancing act. China is the country"s top export market, accounting for 64 percent of Mongolia"s exports, and increasingly relies on Mongolia for energy. But there are lingering suspicions among Mongolians that the country is becoming overdependent on China.
When the government signed more than 66 percent of the rights to Oyu Tolgoi"s deposits over to foreign companies last year, the decision was denounced as a sellout. Some domestic critics remain convinced that these companies are bringing in experienced Chinese miners rather than hiring Mongolians. Similar concerns may also have motivated the government"s decision to cancel an equity-stake sale in Tavan Tolgoi to a foreign company in favor of full state ownership. (Chinese coal company Shenhua had been seen as one of the front runners in the bidding.) Ulaanbaatar has also tried to diversify its portfolio by strengthening its relations with other countries as well. Within the last few months alone, it has agreed to supply energy-hungry Japan with rare earths, reached out to Vietnam to exchange development experience, concluded an agreement with Canada to invest more than USD600 million and set up direct charter flights with Taiwan to promote tourism and trade.

The leadership must also ensure that the economic benefits derived from these resources are felt by the population at large, even as it confronts the country"s myriad development problems. Mongolia ranks 147th in the world in terms of nominal GDP, with a fifth of the population living on less than USD1.25 a day (measured in 2005 purchasing power parity terms). About 30 percent of the population is still nomadic or semi-nomadic. The country"s reliance on resources and agriculture makes it vulnerable to price fluctuations and natural disasters, and the combination of a harsh winter in 2009 and the global financial crisis reduced GDP growth last year from 8 percent to 2.7 percent. The government has issued cash handouts but cut child-benefit payments and subsidies for young couples, which has only caused inflation to spike, hitting the poor even harder. Mongolia also faces a massive urbanization crisis, with 40 percent of its population living in the capital alone and that number expected to swell even more in the future.

There are also concerns that the government is not adequately balancing economic and environmental imperatives. Decades of poorly regulated urbanization and industrialization have resulted in severe air pollution, overgrazing, deforestation and soil erosion. As a result, according to the United Nations Environment Program, more than 70 percent of Mongolian territory suffers from desertification, while wheat yields are about half those of the 1980s, and several rivers and lakes have begun to dry up. Yet the government has proven unwilling or unable to enforce regulations governing foreign mining companies, and reports of arsenic traces at sites and polluted rivers have begun to surface.

Frustrated environmental activists and farmers are increasingly taking the law into their own hands, and there have been six reported mining-related confrontations -- including one death -- so far this year. In the latest incident last month, four activists from the United Movement of Mongolian Rivers and Lakes opened fire on gold-mining equipment belonging to Chinese and Canadian firms, claiming that the companies had violated a law prohibiting exploration or mining at the headwaters of rivers.

The promise of Minegolia is clear, and the pressure for this resource-rich nation of steppes and deserts to develop is mounting. But the government"s ability to navigate a dizzying array of geopolitical, development and environmental obstacles to drive the country into a bright economic future is still unproven.