The ‘Natural Resource Curse’ in Mongolia

“Mongolians were until recently wont to describe themselves as “beggars sitting on a huge pile of gold”. The country has vast but largely untapped mineral deposits. Until recently wages were low and jobs scarce. Shoppers in Ulan Bator, the capital, were not spoilt for choice—unless they were in the market for dried meat, vegetables or furry hats.

But with the recent launch of several big mining projects, a transformation looms. It will present the government with a different set of problems: how to manage a promised economic boom without devastating the environment or destabilising either the economy or the nation’s fledgling democracy.”

Source: The Economist, October 21 2010

Observations:

• Mongolia had a GDP of of $9.4bln in 2009. The benefits for the country from the Oyu Tolgoi copper deposit and the Tavan Tolgoi coal deposit will add many billions to the GDP, turning the trade deficit into a significant surplus.

Implications:

• The natural resource curse implies that the abundance of natural resources in a country hinders the development of stable government organizations, as it provides a reason for corruption and promotion of weak legislation. Mongolian government is trying to escape from this curse by strengthening anti-corruption legislation, taxation policies and by improving transparency of the dealings with foreign companies.
• Foreign mining companies investing in Mongolia (Ivanhoe, Rio Tinto and potentially Chinese partners) clearly need political stability. Key part of their entry strategy will have to be a non-market strategy: aiding the government to institute legislation, penalize corruption and build infrastructure. Reducing the risk of the projects in the long term is worth a good deal of money, given the foreign capital expenditure of over $4bln.

©2010 | Wilfred Visser | thebusinessofmining.com