The term “Dutch Disease” may have originally been
coined in relation to a gasfield in The Netherlands, but Mongolia is finding
out that it can just as well apply to coal. This “black gold” that
propelled Mongolia”s economic growth to a record 17.3% in 2011 is now in a
sudden glut and Chinese demand has dropped off a cliff, and the country”s new
government is learning the hard way about how reliance on a few commodities can
endanger the economy.

Mongolia shipped 21.1m tonnes of coking coal to China in 2011 worth $2.25bn, up
26% in volume and a staggering 155% in terms of value from the previous year.
The coal excitement reached its peak exactly a year ago in September 2011, when
2m tonnes were sent across the country”s southern border to rake in $380m for
those in on the deal. The country overtook Australia as China”s main coal
supplier and the previous government”s coffers began to swell with royalty and
tax revenue, which it swiftly dealt out to its citizens in preparation for the
elections in June this year. But the handouts didn”t work, and now a new
government has taken the reins.

Uphill battle

The Democratic Party has an uphill battle to keep the economy on track. It
takes office at a time when coal export prices have fallen to their lowest
level in 10 months and volumes have been cut sharply since June to around 1m
tonnes for August. The global slowdown has dulled investors” appetite for risk,
the country”s biggest project is under fire from resource nationalist fragments
of the party, and China”s hand has been slapped away from acquiring a mine in
the Gobi desert. “This country needs foreign direct investment now more
than ever,” says Jargalsaikhan Dambadarjaa, a Mongolian economist and
political commentator. “We need to use the mining revenues to diversify
away from mining.”

Dambadarjaa warns that “Dutch Disease” – where an increase in the
exploitation of natural resources is accompanied by a decline in the
manufacturing sector – is taking hold. “We are still fully dependent on
coal and copper – these two commodity prices are behind everything.”

To add fuel to the fire, parliament passed a new resource-nationalist
“Foreign Investment Law” in May in order to veto a bid by the
Aluminum Corporation of China (Chalco) for a Canadian-owned coal miner based in
Mongolia, SouthGobi Resources. The law”s intention was evident, but its
consequences have reached far beyond the single deal. The legislation states
that any investment over $75m designed to own over 49% of a Mongolian company
will be subject to approval by a government panel. Many investors have seen
this as a red light and reversed, leaving the new government short of cash.
“Any rational-minded Mongolian would oppose this law,” says
Jargalsaikhan. “We wanted them to cut the hair, not the head! We need
technology and know-how, but this will be a backwards step from
diversification.”

The new government has promised measures to deal with the slowdown. A four-year
plan was released mid-September outlining the policies that will drive its term
of office. Many of the clauses are encouraging, highlighting the importance of
“cooperat[ing] with foreign direct investors on a mutually beneficial
basis,” as well as an entire section on economic diversification.
“The key economic policy objective of the government is the reduction of
dependency on the mining sector, achievement of a long-term sustainable
development and creation of a competitive and diversified economy,” the
document states.

Plans have been drawn up to encourage industrialisation, wool and cashmere
production, livestock and meat, tourism, technology, import replacements and
services. Projects such as the Sainshand Industrial Park, which aims to add
value to export commodities before shipping them on to China, will be pushed
hard. Alongside these bold plans it”s mandated that inflation will be kept in
single digits and the state deficit will remain under 2%, yet August figures
showed annual inflation at 16.6% and the deficit already at 4.4% of 2011 GDP.

“What will be the government”s role in these efforts?” asks
Jargalsaikhan, referring to the Sainshand project. “I don”t believe the
government can do it. All state-owned enterprises are losing. CEOs are picked
politically, not on merit. It will not be competitive – this was the whole
reason for our transition.”

Indeed, government-funded companies operating in the cashmere sector show how
hard this will be to pull off. Loans were made to the sector at reduced rates,
hoping to spur growth, but while cashmere exports rose 20% in the first eight
months of this year, they still only account for 4.7% of the total exports in
dollar terms. “If you think one reform will solve everything, you”re
fooling yourself,” Dr James Riordan, former director of Chemonics
International, said at a recent economic development conference. “You have
to focus on the buyers. Diversification will come slowly, little by
little.”

Unfortunately, commodity crashes do not come slowly, and despite all the
naysayers Mongolia”s new government is promising a much brighter future than
the past left by their predecessors. As their world crumbles, the band keeps on
playing.

By Oliver Belfitt-Nash

http://www.bne.eu