How to Develop a Country: Part I

One of the responses I received from last week’s column was something along the lines of: how can Mongolia be developed? That depends on what you mean by developed. Many people think that simply increasing output and GDP (Gross Domestic Product) is a good measure of development. It generally is not. There are many countries in Africa who have had large growth rates of their GDPs, but not much else was happening in them to develop their people. Until the recent shutting down of oil exports from South Sudan and the conflict developing between Sudan and South Sudan these countries were growing, on average, very well. On average is a key point. Many people in these countries remained dreadfully poor and so no real improvements in their lives. Most of the GDP growth was from the increase in oil prices and oil output over the previous years.Similar things could be said about Angola, Equatorial Guinea, and many other resource states in Africa. Their oil, gas, and other mineral outputs were increasing, and until 2008 metals prices were booming, so it seemed these countries were doing well. They were not for most of their people. The average life of the average Angolan and average Equatorial Guinean is just awful. They are poor. Most have no access to electricity. Many have no sewage or clean water access, and most live on less than $2 a day. Over the years since oil was first produced in Nigeria possibly as much as $650 billion in oil revenues were made, but by whom? The life of the average Nigerian seems to be much worse now than a couple of decades ago. 

The environment of the oil regions near Port Harcourt is just plain awful. (A friend of mine who worked there for many years is a chain smoker. He told me he would rather put out his cigarette in the gasoline-topped bilge of the boats he was in rather than try to put it out in the oil-topped creeks he was riding in.) Gabon boasts one of the most expensive cities on earth to live in: its capitol, Libreville, where most of the food and other things are imported into the country from places like France. The banana plantations in Gabon have gone to waste in most places. Most people would rather work in the oil business or related businesses or get income from businesses subsidiary to oil and natural resources, like driving, security, hotels, etc.

These countries are not developing. They have spurts of GDP growth if resources output increases and especially when the prices of those resources are going up. They are very uneven economies and are terribly reliant on oil revenues. One of the worst for this, especially given the closure of its oil output by government decree due to a disagreement with its neighbor to the north, Sudan, on the pipeline charges they needed to pay. 98 percent of the government revenues of South Sudan came from oil revenues. About 60 percent of Sudan’s government revenues came from oil. 

Only about 30-40 percent of the government budget of Mongolia is from mining, which could be a good thing if this is kept fairly stable. However, as mining income takes off I could easily see the government budget of Mongolia from mining increasing to 50 or even 60 percent (or more) if other parts of the economy and tax base do not similarly grow. 

The Mongolian government at many levels is sending money to entrepreneurs and others from small to large enterprise to help develop these sides of the economy. I suggest, respectfully, that the Mongolian government at the country, regional, and city levels put a lot of the money being brought in from mining over the coming decades to giving support to entrepreneurs with good business plans to develop a more balanced economy. 

I say good business plans because there have been times in the past in Thailand, Indonesia, and other countries when loans were handed out to people without good business plans. The loans went bad. And the country was harmed by them. Of course, part of the development of entrepreneurship and small to large industrial businesses is that the people who will plan and run them are educated and trained to do so. I also respectfully recommend that Mongolia put a lot of its funds from mining into this sort of investment. A strong investment in improving business schools and building and developing new one in collaboration with the best business schools in the world could also help. 

Some practical vocational training in plumbing, electrical work, carpentry, masonry, etc. could also help a great deal. Development is a practical matter that needs to be handeled at practical as well as intellectual and political levels. 

Almost all of Mongolia’s exports are from mining. This sort of reliance on mining could bring troubles in the future. There are all sorts of talks and papers about 8-10 percent growth rates for Mongolia for the near future. This may sound good at face value, but this is not growth rates like in China, which were based on construction, industrial production, export of industrial goods and more productive activities. Mongolia’s growth rates in the future will likely be almost completely dominated by the output of mining and the prices of the products mined and exported. 

About 85 percent of those exports go to China. China might be seeing a slow period sometime in the near future. Mongolia not only has a huge reliance on mining for its economic growth, it is hugely reliant on what happens in the Chinese economy for its exports. Mongolia is also hugely reliant on the prices of minerals. When they dropped precipitously during the recent financial crisis, Mongolia fell into some difficult economic times. 

Mongolia needs to diversify its economy and this is altogether possible. One thing Mongolia really has going for it is its high savings and investment rates: about 30-40 percent for each. As financial capital and savings pools grow in the country much of it will go to mining, because that is the, excuse me, easiest way to make money. The harder ways are through entrepreneurship and developing new ideas. This takes time, patience, and some long-term planning. 

Mongolia is a young country with most of its population being under 30 years old. It has huge amounts of mining, land, and other resources and human resources. It human resources could turn out to be its most valuable natural resource. To that we can turn in the next article. 

Surely, I cannot answer all the questions on development of a country in such small articles, but I can send out ideas for doing so. Over the next few weeks I will focus on various aspects of how development has worked and how it has not in some countries and try to apply these lessons to Mongolia and other places. 

One of the most complex intellectual and practical exercises of a country could be its economic developments happening at the same time as its human developments. Many countries have failed. Some have succeeded. I hope to educate on both.