Following a drastic drop in foreign direct investments, Mongolia had to take a standby credit from the International Monetary Fund in May 2017. Trade between Germany and Mongolia also stagnated, with the annual volume of Mongolian exports to Germany amounting to a meagre 8.2 million Euro.
After the revolution in 1990, an overall stable democracy was established in Mongolia with a multiparty system, free elections and separation of powers. However, this positive development was accompanied by extremely frequent changes of government. Sixteen different governments held power over the last 29 years. Nevertheless, the transformation of this landlocked Asian country can be held up as an example of a state that has been successfully converted into a democracy. Mongolia also has enormous economic potential, counting among its resources some of the world’s biggest coal, copper and gold deposits, uranium, petroleum, zinc, and rare earth elements and metals.
A Lack of Foreign Investments
“Foreign investors have lost a great deal of confidence due to the policies, and we will have to struggle to regain it now. In addition, we need to continue with our efforts to diversify the economy,” says economist Lakshmi Boojoo, summing up the challenges. She is the director of the Economic Policy and Competitiveness Research Center, a Mongolian think tank dedicated to boosting the competitiveness of the national economy. A lack of investment security and corruption have led to the rapid erosion of foreign direct investment, which fell drastically from nearly 2.1 billion US dollars in 2012 to just 110 million US dollars in 2015. “Investors are holding back because they learned that, following a change of government, politicians do not always feel bound to honour prior agreements”, says Lakshmi. One ongoing political bone of contention is the contract concluded with the Rio Tinto Group in 2009 for the exploitation of what may be the biggest copper mine in the world, Oyu Tolgoi. There had been criticism regarding the agreed minority stake of the Mongolian state, which – at 34 per cent – is seen by some politicians and the public as exploitative. The dispute has been playing out publicly for years and is one main reason behind the lack of any major foreign investments at this time.
Konrad-Adenauer-Stiftung, a German political foundation, together with former Prime Minister Altankhuyag, initiated a series of events in Mongolia last year to promote a sustainable and social raw materials policy. One major issue is that, until now, the population has barely profited from the wealth of raw materials. This is evident from the labour market: although the raw materials industry accounts for around 90 per cent of exports, less than four per cent of Mongolians are employed in the sector. Many foreign investors brought along their own skilled workers. In response to this, the German-Mongolian Institute for Resources and Technology (GMIT) has been training Mongolian workers for specialised jobs in mining since 2013. Whether the initiative will be successful over the mid and long term remains to be seen.
Cooperating with China and Russia
Situated between the Chinese dragon and the Russian bear, Mongolia depends economically on its neighbouring countries to a large extent. According to statistics, around 90 per cent of Mongolian exports go to China. In line with its “third neighbour policy” of foreign relations, Mongolia has endeavoured to strengthen its connections mainly with the advanced democracies of the political West, particularly the EU, Japan and the U.S. However, President Battulga, in office since 2017, appears to be making a sharp reversal in foreign trade relations in the spirit of a new pragmatism. An experienced businessman, Battulga apparently believes that economic progress in Mongolia can only be achieved in cooperation with its two neighbouring states. In his speech at the Mongolia Economic Forum in June 2018, he called for the implementation of the National Security Plan, which outlines a close cooperation with Russian and China. Specifically, Battulga even foresees Mongolia’s potential membership in the Shanghai Cooperation Organisation (SCO). The SCO is an international organisation that includes China, Russia, Kazakhstan, Kirgizstan, Tajikistan, Uzbekistan, India and Pakistan as members.
It is unlikely, however, that Mongolia will become a member any time soon. Battulga’s plans unleashed a controversial domestic policy debate. Policymakers and the public have serious reservations about Mongolia’s membership. The majority in the country believes that, as a constitutional democracy, Mongolia should maintain a distance from the SCO in order to prevent risking the country’s sovereignty in foreign affairs. Nonetheless, Battulga has managed to launch successful initiatives in several areas, such as the modernisation of the outdated agricultural sector. Under his foreign policy leadership, close cooperation with China is planned for cashmere production, and plans to improve the infrastructure are currently under discussion with both neighbouring countries. At the same time, negotiations to cooperate with France and an agreement with Belarus on the purchase of agricultural machinery demonstrate flexibility.
Due to the increase in the price of raw materials and the resulting increase in export earnings, the Mongolian economy was recently able to recover and even recorded a growth of 6.9 per cent last year. “Whether Mongolia succeeds in stabilising this trend over the long term depends on whether it manages to credibly ensure investment security, combat corruption, and invest the revenues from the sales of natural resources with a view to the future”, says Rebecca Schmücking, executive director of Deutsch-Mongolischer Unternehmerverband (German-Mongolian Business Association – DMUV). The country’s most important economic task is to establish a broader position for its national economy and develop new sectors, thereby reducing its dependence on the volatile raw materials market. If it succeeds in doing so, we may very well see the return of the Mongolian tiger with double-digit growth rates.
About the Author:
Johann C. Fuhrmann heads the international office of the Konrad Adenauer Foundation in Mongolia. Prior to that, he was Head of Growth and Innovation at the Economic Council. As a scholarship holder of the German Academic Scholarship Foundation he obtained his Master's degree (MSc.) at the London School of Economics.