SERIES: Brookings East Asia Commentary | Number 56 of 86 « Previous | Next »

Mongolia’s Quest to Balance Human Development in its Booming Mineral-Based Economy

Mongolia—long ignored by Asia specialists as a sleepy nomadic ex-Soviet satellite—finally burst onto the world economic scene in 2011 when exploitation of its vast mineral deposits led it to a 6.7 percent economic growth rate that was 2nd highest in the world. During the fourth quarter of last year the economy was booming at a growth rate of close to 20 percent. Both the Asian Development Bank and the Economist Intelligence Unit are predicting a 2012 growth rate of 15 percent, and other forecasters contend that if Mongolia’s informal economy is taken into account the growth rate could approach 40 percent. Mining experts estimate that the country possesses as much as $1 trillion worth of untapped precious metals and minerals in at least 6000 sites. That works out to potentially over $333,333 per every man, woman and child in the country.[1] While this is undeniably a positive situation for Mongolia, the challenge facing the nation is to ensure that its mineral wealth benefits the whole nation rather than just certain sectors of society, as has been the case in some other resource-rich countries.

After wrenching economic difficulties in the 1990s caused by the collapse of its Soviet-inspired command socialist system, the Mongolian economy has grown by an average 7 percent a year since 2003. Foreign direct investment (FDI) has soared with the long-delayed but now operational large-scale western mining joint venture, the $4 billion Oyu Tolgoi (OT) copper and gold operation, now under development by Ivanhoe of Canada and multinational giant Rio Tinto. OT may hold as much as 32 million tons of copper and 1,200 tons of gold, according to government estimates. Annual output when the mines are developed is predicted to exceed 450,000 tons of copper and 330,000 ounces of gold. Per capita GDP in Mongolia has more than tripled to $2,200 in 2010 from $638 in 2004. Haruhiko Kuroda, president of the Asian Development Bank (ADB), has proclaimed that Mongolia is at “the threshold of prosperity,” while advising that further efforts must be made to make economic growth more inclusive to ensure that the benefits from high economic growth are distributed more broadly, and that people have equal access to opportunities and basic social services.[2]

In 2008 Mongolia’s Parliament [Great Khural] passed a National Development Strategy and created a Human Development Fund (HD Fund) with the ambitious goal of bringing Mongolia’s human development status to the same level as that of the developed countries by 2020. (The country has been ranked with a value of only 100th out of 169 countries by the United Nations Development Programme’s (UNDP’s) Global Human Development Report.[3]) This Fund made it legally possible for every citizen of Mongolia, for the first time in its history, to be equally eligible to own a share of the nation’s mineral wealth. In preparation for the establishment of the Fund, Mongolian economists looked at the $40 billion Alaska Permanent Fund, Norway’s sovereign wealth fund worth $410 billion, and Chile’s use of its copper resources to help drive growth. They also considered Canada and Australia as models for distribution of mineral revenues to alleviate poverty and avoid the so-called Dutch Disease, a curse afflicting some resource-rich societies.[4]

To avoid this destabilizing effect, in July 2009 the Mongolian Parliament passed a law, based on a similar Chilean act, that creates a mechanism for saving surplus revenue from mineral royalties when prices are high in order to stabilize the annual state budget when prices (and therefore mineral revenues) fall—as happened in 2008.[5]  The state budget each year sets a certain amount of money to be drawn from the HD Fund in anticipation of revenues to be earned; this draw is stated as an actual amount of Mongolian National Tugriks (MNT, the Mongolian currency), not as a percentage of the Fund’ value. The state budget must pay out the specified number of tugriks, regardless of whether the Fund has earned the money anticipated. The 2009 legislation is a way to keep the Government in compliance with the Parliament-approved annual budget while at the same allowing the flexibility to react to actual Fund earnings.

Initial capital for the HD Fund was drawn from the OT mine project, which is estimated will account for 30 percent of Mongolia’s GDP when completed and will generate $30 billion in tax revenue over 50 years.[6] Additional revenues for the HD Fund will be coming from development of Mongolia’s $2 billion Tavan Tolgoi (TT) coal deposit, the largest in the world. The country also has very rich uranium and rare earth mineral resources waiting to be exploited. The HD Fund’s other sources include income from sale of shares and dividends of state property connected with state-owned mineral deposits (because they were designated by law as large deposits of national strategic significance); fees for exploration and processing activities in these mining sites; advance payments and loans related to the exploitation of the strategic mining sites; and income from bonds, loan certificates, and savings interest from international and domestic financial markets for the Fund.

The HD Fund is expected to provide pension, health, housing, and educational benefits as well as cash payouts to all citizens, and thus be a mechanism to distribute the wealth obtained from Mongolia’s minerals equitably among the populace. The Parliament in 2011 stipulated that MNT805 billion (roughly US$567 million) from the Fund should be distributed to all citizens for health insurance and to students for tuition fees,[7] with MNT21,000 (about US$15) per citizen for cash payouts. Although the per capita amount is small, the amount distributed in 2010 was 16 percent of the state budget―and in 2011 almost 40 percent. Both the IMF and World Bank have criticized the 2011allocation as too expansionary, and a cause of the high 14 percent inflation rate.[8] Most of these payout monies were in cash,[9] which is opposed by 87 percent of the people who preferred the benefits be in cashless form.[10]

Originally, the HD Fund’s resources were to be applied for investment and capital repairs, to reduce the budget deficit, and for social welfare systems.[11] However, its use has become embroiled in Mongolia’s volatile election politics. In the 2009 presidential election, the two main parties, the Democratic Party and the Mongolian People’s Revolutionary Party (now renamed the Mongolian People’s Party), pledged to distribute as much as $6 billion, or up to 1.5 million tugriks (US$1,060) for every citizen, from the country’s mining wealth. However, because of a sizable shortfall in actual revenues as opposed to anticipated revenues, the Parliament at the end of 2009 authorized only the distribution of MNT120,000 (approximately US$92) as a cash grant for each citizen of Mongolia. In the just-approved state budget for 2012, HD funds are to be distributed in July 2012, which is around the time of Mongolia’s parliamentary elections, so many observers believe the distribution plans are once again most likely exaggerated campaign promises designed to attract votes.

Mongolia’s Prime Minister, Sukhbaataryn Batbold, wrote in 2011 that “human development is at the center of government policy and we are taking all efforts to achieve this goal. Yet, Mongolia faces many challenges…such as unemployment, poverty and inequality are coupled with environmental problems such as climate change, pasture degradation, natural disasters, droughts, dzuds, water and forest resource depletion, air and soil pollution.”[12] He and other Mongolian leaders emphasized that although economic growth is considered essential for the wellbeing of the people, the human costs of the growth are of serious concern for the nomadic pastoral society and contribute to a sense of vulnerability. Therefore, the government is committed to promoting human development as a central strategy for achieving economic sustainability.

Mongol herders, although accustomed to an extreme climate, periodically suffer under dzud (harsh winter drought) which can decimate the nation’s 40 million head of livestock herds and make the nation vulnerable to food insecurity. National leaders increasingly are concerned by climate changes which affect the delicate ecosystems of the countryside’s inhabitants (over 40 percent of the total population of 2.8 million) who depend upon a traditional pastoralism based upon herding sheep, goats, cattle/yak, horses and camels; degrade the grasslands;[13] and pollute the country’s very limited water resources. Such factors negatively influence the local population’s view of mining and agricultural development.

As of 2008, an estimated 35 percent of the population was still living below the official poverty line. Inequality remains high both within cities and between those living in urban areas and those in the countryside. Although poverty assessment studies may be exaggerating rural poor versus urban poor, there is no doubt that the poor lack access to clean energy and heating sources, clean water and sanitation, and educational and healthcare facilities. The government, in consultation with international organizations and the United Nations, aims to utilize budget resources from FDI-generated taxes pouring into the HD Fund to reduce the nation’s carbon and ecological footprints by 20 percent within five years and significantly reduce the high air pollution that engulfs the nearly one-half of the national population that lives in the Ulaanbaatar capital area.

In light of these challenges, discussion of how to distribute the HD Funds has been a hot topic in Mongolia for years. All stakeholders, including the countryside and urban poor, have actively expressed their opinions via workshops, community groups, environmental protests, and in the vibrant Mongolian press. While it is clear that in the 20 years of the democratic era Mongolia has made much economic progress, income inequality, unemployment, and a failure to measurably reduce the poverty rate have incited much public criticism and compelled the UNDP to call for greater promotion of human development at the national policy level, protection of human rights, and greater transparency and accountability in use of HD Fund monies. Another major aspect to the whole discussion is centered around how poverty in Mongolia’s traditional pastoral society should be measured and compared to the previous socialist era. However, there is a national consensus that the government should utilize mining revenues to focus on improving access to basic services and housing conditions, reducing inequality in life expectancy and material standards of living, and maintaining environmentally sustainable income flows to transform mineral wealth into renewable assets for sustainable and broad-based growth to meet Mongolia's most significant development challenges.

The World Bank has warned that although so far Mongolia has managed well the global economic downturn, it must devise management skills to reduce the impact of cyclical mineral prices on Mongolia’s increasingly mineral-based economy, use fiscal rules to manage monetary policy and the exchange rate, develop and maintain a competitive and stable regime for the mining and private sectors, and encourage economic diversification in its herding and tourism sectors to sustain balanced growth.[14] But it appears that Mongolia’s present policies are being well received by some of the international community: on December 19, 2011 Standard & Poor upgraded its outlook on Mongolia to positive, citing that Mongolia had introduced a fiscal responsibility law to limit budget deficits to 2 percent of GDP from 2012. In the upcoming 2012 parliamentary election season in Mongolia, it is certain that widespread debate will continue on the HD Fund and its use in Mongolia to ensure that the wealth flowing in from rapid development of national mineral resources benefits all Mongolian citizens. If the electorate is not generally satisfied with the government’s overall mineral development policy and plans for utilization of the HD Fund, it is highly likely that this coming spring will see a renewal of the nearly annual street protest demonstrations in the capital which were particularly violent in 2008.

Mongolia is blessed with this wonderful revenue stream, and at least some of its leaders have long-term ideas for how to use it (a reserve fund for re-investment in the mineral industry; improving the quality of life of the people; mitigating climate change and pollution). Two challenges will be constant. One is to insulate this revenue stream from corruption on the part of the various actors who have some degree of authority over it. The other is to protect it from the temptation of politicians to ignore some priorities (reinvestment and mitigation) in favor of more immediate but comparatively minor problems in an effort to win votes. 





[1] “Mongolia: Mineral Wealth Set to Transform country into “Minegolia”,” November 8, 2011, Eurasianet.org and Economic Intelligence Unit’s World in 2012 report.

[2] “ADB President Kuroda: Mongolia's Development Should Benefit Everyone,” October 10, 2011 beta.adb.org.

[3] Since its introduction in 1990, the Global Human Development Report publishes a human development index (HDI) as an alternative way to compare development performance of countries. Its modeling formula was reformulated in 2010 based on geometric mean and using gross national income (GNI) per capita, life expectancy index, and a new education index to take into account the expected years of schooling a child entering school age today can attain.

[4] Where a sudden surge in wealth invites a commodity boom and attracts so much foreign exchange that it raises the local currency’s value and makes domestic manufacturing less competitive and ultimately hampers expansion.

[5] Michael Forsythe, “Mongolian Harvard Elites Aim for Wealth Without ‘Dutch Disease,” February 15, 2010, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aONmVLraqtO8.

[6] Yuriy Humber, "Mongolia Seeks Balanced Growth to Avoid `Dutch Disease' From Mining Boom,” March 7, 2011, http://www.bloomberg.com/news/2011-03-08/mongolia-says-shifting-focus-to-balanced-growth-from-mining.html and “Mongolia Fund to Manage $30 Billion Mining Jackpot,” Sept. 11, 2009, http://www.swfinstitute.org/swf-news/.

[7] Montsame News Agency, August 31, 2011 report of a Mongolian Cabinet meeting which decided each student regardless of age would receive MNT500,000 for tuition fees.

[8] International Monetary Fund, “IMF Executive Board Concludes the Second Post-Program Monitoring with Mongolia,” Public Information Notice (PIN) No. 11/146, November 28, 2011 and quotes in the financial press in 2011 from Steven Bennett, IMF’s head of Mongolia coverage.

[9] United Nations Development Programme, Human Development Report of Mongolia 2011, From Vulnerability to Sustainability: Environment and Human Development: Environment and Human Development, “Box 1.3: The Human Development Fund,” 2011, 23.

[10] Badrakh, “Human Development Fund survey results revealed,” July 1, 2010, Business-Mongolia.com.

[11] B. Bat and Ts. Batsukh, “Some lessons of natural resource revenue management: The searching NRRM for Mongolia,” Ulaanbaatar, 2010, http://ic.ses.edu.mn/files/pdf/0202BatEn.pdf.

[12] United Nations Development Programme, Human Development Report of Mongolia 2011, xi.

[13] Ibid., 2. It is claimed that within Asia, Mongolia has the highest proportion of people living on degraded lands.

[14] See the World Bank’s Mongolia country overview for 2011 at http://www.worldbank.org/.

SERIES: Brookings East Asia Commentary | Number 56