Governance Key in Unlocking Mongolia’s Massive Wealth
The world’s newest mineral-rich investment hotspot has surprises up its sleeves.
Mar. 3 – Governance was the main theme at the Mongolian Economic Forum being held in Ulaan Baatar, as the country begins to come to terms with its newfound status as a major global player in critical resources.
The country, which only overthrew the heavily Soviet-influenced Mongolian People’s Republic in 1990, became a democracy soon afterwards and has sometimes struggled with the transition from decades of mismanagement to its new status as a resource rich state sandwiched between two superpowers – China and Russia. Yet as an increasing volume of massive mineral reserves – ranging from massive oil, coal and iron ore deposits to the world’s largest copper, rare earths and uranium reserves – the country is undergoing a transition that could either be a great success story or lead it to the alternative national path, trodden by other nations, of its natural wealth becoming a curse.
The event, an NGO-sponsored platform inaugurated last year, has attracted major players such as Peabody, Rio Tinto, TDB, Goldman Sachs, Tenger, the IFC among other international organisations (I attend in my regional capacity with the UNDP), foreign governments and related trade, investment and commercial organisations, in addition to the highest office of the Mongolian government. It is intended not as a showcase, but as a genuine and critical examination of where and how Mongolia should be developing its newfound, and extraordinary wealth. For a democratic nation of just 2.5 million people, this has major implications.
First up, the good news. Coming from China, where when the government talks, everyone else listens and questions are largely brushed aside as irrelevant, the Mongolian plenary session included Prime Minister H.E. Batbold, a host of Cabinet officials, and the mayor of Ulaan Baatar. So far, so familiar. Unlike China, Mongolia being a democracy, the moderator was the outspoken, U.S. educated, pro-reform and anti-corruption lawyer, Jargalsaikhan. Being democratic, Mongolia certainly knows how to keep its politicians on their toes as awkward questions concerning government policies and performance were asked, including of the PM. This did not strike me as a country about to fall into cronyism anytime soon. When the somewhat hapless mayor of Ulaan Baatar – a city possessing the largest amount of Mongolia’s academic and institutional resources, and over 50 percent of the national population – was confronted with a litany of problems ranging from pollution to corruption and lack of public services, and then reminded his was not actually an elected position, sparks were going to fly, and the forum did not disappoint.
The jaded could argue that it was a show, and that Mongolia’s well known problems were being outed in a routine display of the government showing it was listening could be debated, but I don’t think this cynicism was the case. Rather, the exercise seemed more akin to a momentous change occurring in the country, and local politicians and lawyers being passionate about the outcome. This is a very positive sign.
Recognised also was the fact that in possessing such natural resources, Mongolia has emphatically joined the club of about 50 nations whose wealth largely depends upon natural resources. These range from Zimbabwe to Norway, however the path to sustainable prosperity still has to be laid down. The theme of “the curse of resources” cropped up time and again at the forum, and it is the responsibility of the government to ensure they get this right. To that end, Prime Minister Batbold described the need to “define boundaries” and introduce structures defining the influence of government between interfering, regulatory, support and when to stand aside. Such comments are wise.
Definition was also needed, he continued, to define the boundaries between public and private sector involvement, while calls were also made from the floor to better regulate Mongolia’s political parties to prevent them making election promises of financing that lay far beyond the country’s fiscal capabilities.
Indeed, the managing of Mongolian people’s expectations and the capabilities of the government to deliver were all discussed at some length. Your average Chinese investment seminar, with reams of statistics and well-rehearsed lines were far removed from what was going on in Mongolia’s Parliament building at this event.
Other issues, such as the mismatch of the Mongolian labour market, were also discussed. Mongolia exports large numbers of workers to Korea, yet imports labour from China, and has an unemployment problem. Training and education, in addition to labour law and the wages on offer in Mongolia all came to the fore in a debate that attracted much heartfelt participation. A statistic of note was that 20 percent of all Mongolian workers and engineers have work experience overseas.
Moving on, it was announced that Mongolia would be investing in a Heavy Industry Development Zone based in Sainshand, in the South Gobi. The site is expected to cover 3,500 hectares, and provide a base for mining exploration, heavy industry, in addition to added value productions such as manufacturing and components in addition to the export of readymade final products. The government is committed to public/private partnerships, as in the Indian model and is actively seeking investors. Coal/coke, oil, copper, and iron ore are all expected to be the key products for the Sainshand Zone.
In terms of competitiveness, the government had commissioned an independent study, comparing Mongolia with other countries of similar size, economy, political situation and resources – in total some 55 nations. This report is apparently available in English and was released on February 28 this year (we will try and source a copy as soon as we are able). Apparently, Mongolia scores well on matters concerning the role of women in society, decision making, and education. However, to close the circle for this article, governance remains poor.
It is obvious that major changes, some of which will affect the global supply of important commodities, are happening to Mongolia. The international community is well aware of this, and appears committed to ensuring Mongolia does not experience “the resource curse” – where corrupt officials take power and divert resources away for the building instead of family dynasties or short term gains. Quite how Mongolia will adapt, with a relatively small and inexperienced government, both struggling with, yet at the same time fiercely proud of its democracy, has still to be flushed out. But on the basis of today’s performance, I’d suggest there’s more right with Mongolia’s move towards governance than there is wrong.
I shall report tomorrow in greater detail on the regulatory environment and opportunities for investors interested in Mongolia.
Chris Devonshire-Ellis is the principal of Dezan Shira & Associates, Asia’s largest independent foreign direct consultancy practice with 17 offices throughout Asia. The firm specializes in foreign direct investment due diligence, investment law, tax and related matters. He is also the vice chairman of the business advisory council for the Greater Tumen Initiative, a UNDP body responsible for North China, Mongolia, Eastern Russia, North Korea, and South Korea with Japan as an observer nation. Chris may be contacted at chris@dezshira.com for advice about investing in Mongolia and the region.
Mar. 3 – Governance was the main theme at the Mongolian Economic Forum being held in Ulaan Baatar, as the country begins to come to terms with its newfound status as a major global player in critical resources.
The country, which only overthrew the heavily Soviet-influenced Mongolian People’s Republic in 1990, became a democracy soon afterwards and has sometimes struggled with the transition from decades of mismanagement to its new status as a resource rich state sandwiched between two superpowers – China and Russia. Yet as an increasing volume of massive mineral reserves – ranging from massive oil, coal and iron ore deposits to the world’s largest copper, rare earths and uranium reserves – the country is undergoing a transition that could either be a great success story or lead it to the alternative national path, trodden by other nations, of its natural wealth becoming a curse.
The event, an NGO-sponsored platform inaugurated last year, has attracted major players such as Peabody, Rio Tinto, TDB, Goldman Sachs, Tenger, the IFC among other international organisations (I attend in my regional capacity with the UNDP), foreign governments and related trade, investment and commercial organisations, in addition to the highest office of the Mongolian government. It is intended not as a showcase, but as a genuine and critical examination of where and how Mongolia should be developing its newfound, and extraordinary wealth. For a democratic nation of just 2.5 million people, this has major implications.
First up, the good news. Coming from China, where when the government talks, everyone else listens and questions are largely brushed aside as irrelevant, the Mongolian plenary session included Prime Minister H.E. Batbold, a host of Cabinet officials, and the mayor of Ulaan Baatar. So far, so familiar. Unlike China, Mongolia being a democracy, the moderator was the outspoken, U.S. educated, pro-reform and anti-corruption lawyer, Jargalsaikhan. Being democratic, Mongolia certainly knows how to keep its politicians on their toes as awkward questions concerning government policies and performance were asked, including of the PM. This did not strike me as a country about to fall into cronyism anytime soon. When the somewhat hapless mayor of Ulaan Baatar – a city possessing the largest amount of Mongolia’s academic and institutional resources, and over 50 percent of the national population – was confronted with a litany of problems ranging from pollution to corruption and lack of public services, and then reminded his was not actually an elected position, sparks were going to fly, and the forum did not disappoint.
The jaded could argue that it was a show, and that Mongolia’s well known problems were being outed in a routine display of the government showing it was listening could be debated, but I don’t think this cynicism was the case. Rather, the exercise seemed more akin to a momentous change occurring in the country, and local politicians and lawyers being passionate about the outcome. This is a very positive sign.
Recognised also was the fact that in possessing such natural resources, Mongolia has emphatically joined the club of about 50 nations whose wealth largely depends upon natural resources. These range from Zimbabwe to Norway, however the path to sustainable prosperity still has to be laid down. The theme of “the curse of resources” cropped up time and again at the forum, and it is the responsibility of the government to ensure they get this right. To that end, Prime Minister Batbold described the need to “define boundaries” and introduce structures defining the influence of government between interfering, regulatory, support and when to stand aside. Such comments are wise.
Definition was also needed, he continued, to define the boundaries between public and private sector involvement, while calls were also made from the floor to better regulate Mongolia’s political parties to prevent them making election promises of financing that lay far beyond the country’s fiscal capabilities.
Indeed, the managing of Mongolian people’s expectations and the capabilities of the government to deliver were all discussed at some length. Your average Chinese investment seminar, with reams of statistics and well-rehearsed lines were far removed from what was going on in Mongolia’s Parliament building at this event.
Other issues, such as the mismatch of the Mongolian labour market, were also discussed. Mongolia exports large numbers of workers to Korea, yet imports labour from China, and has an unemployment problem. Training and education, in addition to labour law and the wages on offer in Mongolia all came to the fore in a debate that attracted much heartfelt participation. A statistic of note was that 20 percent of all Mongolian workers and engineers have work experience overseas.
Moving on, it was announced that Mongolia would be investing in a Heavy Industry Development Zone based in Sainshand, in the South Gobi. The site is expected to cover 3,500 hectares, and provide a base for mining exploration, heavy industry, in addition to added value productions such as manufacturing and components in addition to the export of readymade final products. The government is committed to public/private partnerships, as in the Indian model and is actively seeking investors. Coal/coke, oil, copper, and iron ore are all expected to be the key products for the Sainshand Zone.
In terms of competitiveness, the government had commissioned an independent study, comparing Mongolia with other countries of similar size, economy, political situation and resources – in total some 55 nations. This report is apparently available in English and was released on February 28 this year (we will try and source a copy as soon as we are able). Apparently, Mongolia scores well on matters concerning the role of women in society, decision making, and education. However, to close the circle for this article, governance remains poor.
It is obvious that major changes, some of which will affect the global supply of important commodities, are happening to Mongolia. The international community is well aware of this, and appears committed to ensuring Mongolia does not experience “the resource curse” – where corrupt officials take power and divert resources away for the building instead of family dynasties or short term gains. Quite how Mongolia will adapt, with a relatively small and inexperienced government, both struggling with, yet at the same time fiercely proud of its democracy, has still to be flushed out. But on the basis of today’s performance, I’d suggest there’s more right with Mongolia’s move towards governance than there is wrong.
I shall report tomorrow in greater detail on the regulatory environment and opportunities for investors interested in Mongolia.
Chris Devonshire-Ellis is the principal of Dezan Shira & Associates, Asia’s largest independent foreign direct consultancy practice with 17 offices throughout Asia. The firm specializes in foreign direct investment due diligence, investment law, tax and related matters. He is also the vice chairman of the business advisory council for the Greater Tumen Initiative, a UNDP body responsible for North China, Mongolia, Eastern Russia, North Korea, and South Korea with Japan as an observer nation. Chris may be contacted at chris@dezshira.com for advice about investing in Mongolia and the region.
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