Mongolias Economic Development - Essay Example

? ………………….. ………………….. Mongolia’s Economic Development: the Promise of the Mining Sector Traditionally, when Mongolia’s economy is concerned, one would imagine herds of livestock grazing in the vast steppes, state and private-owned farms, and agricultural cooperatives, engaged primarily in animal husbandry and crop production, as well as some 15 million hectares of forests being exploited for timber enterprises, hunting, fur-bearing animals, etc. (Worden and Savada, n. pag.). However, Mongolian natural wealth, especially represented by its extensive mineral deposits, has attracted foreign capital and investments, and thus became the basis of an economic transformation, which marks the recent country’s development (CIA, n. pag.). This paper is intended to review the impact the booming mining industry makes on the overall economic performance of Mongolia, as well as the major opportunities and challenges faced by the sector, which inter alia would determine its future. The paper is organized in three main sections, the first of which provides accounts of the overall size, type and peculiar characteristics of Mongolian economy; the second provides a brief overview of the Mongolian mining sector; while the third section attempt an insight into the broadening horizons of Mongolia’s mining industry. Introduction to Mongolian Economy Following the dissolution of the USSR, Mongolia’s economy experienced both deep recession due to natural disasters and political inaction, and more or less noticeable growth, because of the economic reform, which included free-market orientation and extensive privatization of the dominant state sector (CIA, n. pag.). However, the massive livestock losses caused by severe winters and draughts, compounded by falling prices for the primary sector exports and widespread opposition to the privatization process, resulted in fairly anemic GDP (Gross Domestic Product) growth; between 2004 and 2008, the GDP growth was nearly 9 percent on average, mainly due to new gold production, as well as to high copper prices (CIA, n. pag.). As of 2008, the Mongolian economy suffered both a soaring inflation rate – actually the highest inflation rate in over a decade, reaching almost 30 percent – and an external shock caused by the global financial crisis, with a sharp drop in commodity prices, hence greatly slashed government revenues (CIA, n. pag.). A 236 million-dollar stand-by agreement was reached with the International Monetary Fund in 2009, which assisted the country to emerge from the crisis (CIA, n. pag.). Because of the harsh weather during the winter in 2009 – 2010, a massive loss of livestock occurred once again – this time over 20 % of the total number – doubling the meat prices and consequently shrinking the GDP by 1.9 percent. In 2010, the economy growth was 6.4 percent, while in 2011 – 17.3 percent; these results were mainly obtained by commodity exports in the neighboring countries, on which the Mongolian economy heavily relies (CIA, n. pag.). For example, Mongolia purchases 95 percent of the imported petroleum products and substantial portion of its electricity imports from Russia, while China receives over 90 percent of Mongolia’s total exports (CIA, n. pag.). Besides agriculture, which comprises production of wheat, barley, vegetables and forage crops, as well as horses-, sheep-, goats-, cattle-, and camels-breeding, the Mongolian economy’s main industries include construction, production of construction materials, mining (coal, copper, molybdenum, tin, gold, uranium, etc.), production of food and beverages, as well as processing of animal products; according to data of 2010, electricity production amounts to 4.313 billion kWh, whereas electricity imports are 262.9 million kWh (CIA, n. pag.). As of the same period, the overall industrial production growth rate is estimated at 37.3 % (CIA, n. pag.). According to 2011 data, Mongolia’s GDP is estimated at 13.28 billion dollars. Agriculture contributes 12.9 % of the total GDP, the industry share is 30.8 % and services sector accounts for 56.3 %. Mongolia’s exports consist of copper, coal, apparel, livestock, crude oil, animal products, including wool, cashmere, and hides, etc., estimated at 4.78 billion dollars in 2011, with main export partners as follows: China – 92.1 %, Russia – 2 % and Canada – 1.9 % of the total exports respectively (CIA, n. pag.). Mongolia’s imports, including machinery and equipment, oil and natural gas, fuel, chemicals, industrial consumer goods, building materials, tobacco products, etc., are estimated at 6.5 billion dollars in 2011; according to data of the same period, the country’s main import partners are China, with 30.7-percent share, Russia – 24.5 percent, the US – 8.1 percent, Japan – 7.4 percent, and South Korea, with 5.5-percent share of the total imports (CIA, n. pag.). The overall labor force of Mongolia, being comprised of 1.147 million people in 2010, is allocated to the economy’s sectors as follows – 33.5 % in agriculture, 11.5 % in industry and 55 % in services sector (CIA, n. pag.). Mongolian Mining Sector and its Impact on the Economy Previously, the Mongolian mining industry has been based on a fifty-year-old Soviet-built copper mine, small-scale oil production joint ventures with China, and artisan’s type gold mining; the discoveries of large deposits of copper, coal, and gold in the desolate areas of the Southern Gobi desert, however, have put the beginning of the industry’s transformation (Kohn, n. pag.). After over nine years of negotiations, the introduction of legislation concerning an investment agreement in order to develop what is considered one of the world’s largest copper-gold-porphyry deposits – the Oyu Tolgoi mine in the South Gobi Desert (CIA, n. pag.; Storry and Ashikhimina, GBR, 55) – is generally considered to have brought the era of isolation to an end (Kohn, n. pag.). Particularly demonstrative of this fact appear the words of the investment banker Bold Bataar, stated at a conference in Ulan Bator, in 2011 – “Mongolia has finally arrived on the global mining scene” (Kohn, n. pag.). The cost of the Oyu Tolgoi mine construction, which has been started by the Canada-based Ivanhoe Mines, in 2011, is estimated at 5 billion dollars; while the copper deposits of the site are seen as potentially one of the three top copper producing mines in the world (Kohn, n. pag.). The mine is described as the biggest economic undertaking in the country’s history, whose annual production is forecasted to reach 450 000 tons of copper and 330 000 ounces of gold; while the overall reserves are estimated to support the full-capacity operation of the mine for between 40 and 50 years (Storry and Ashikhimina, GBR, 56; Rio Tinto, n. pag.). Following the acquisition of control of Ivanhoe Mines by Rio Tinto, the multinational mining giant continued the construction of Oyu Tolgoi mine, which is scheduled to start operating in 2012. Another mega-project within Mongolian mining sector is the Tavan Tolgoi coal mine, where the state-owned Erdenes Tavan Tolgoi holds the mining license, thus appearing the project owner (Kohn, n. pag.; Swanepoel, n. pag.). The site’s deposits are estimated at 7.5 billion tons, with expected production capacity of over 6 million tons during the second operational year, and up to 15 million tons after the whole mine and transport infrastructure have been established (Swanepoel, n. pag.). In 2011, the Australian project house Macmahon Holdings was awarded a 500-million-dollar contract for large-scale open-cut mining operations in Tavan Tolgoi deposit area, namely in the Eastern Tsankhi area, in a joint venture with Germany’s Operta GmbH (Swanepoel, n. pag.; Macmahon, n. pag.); mining commenced in January 2012, and the mine is currently producing at a rate of 2.5 million tons per year (Macmahon, n. pag.; Reuters, n. pag.). The Mongolian government is holding talks with a consortium of companies from China, Japan, South Korea, Russia and the United States, in order to develop the Western Tsankhi area of the Tavan Tolgoi deposit; while the Tavan Tolgoi project-owner – the state-owned Erdenes Tavan Tolgoi – planned to list 29 % of the company in London and Hong Kong by May 2012, which is expected to raise about 3 billion dollars, after Mongolia’s parliament passes a securities law (Reuters, n. pag.). The net effect of Oyu Tolgoi mine alone on the Mongolian economy is believed to be a boost to GDP by one third (Kohn, n. pag.); it is also thought to have brought a lot of additional positive development in terms of new technology, including a completely new mining method – block caving, new infrastructure, training and skills for the workforce, and jobs for the local community – according to Rio Tinto, apart from the mining jobs, local businesses will benefit between 500 and 800 million dollars per year from selling goods and services to the mine (Rio Tinto, n. pag.; Storry and Ashikhimina, GBR, 56). The growing energy demand in China, especially in the northern part of the country, along with the fact that coal is used for generating about 70 % of Chinese energy, coal appears the most important commodity in Mongolian exports to China (Storry and Ashikhimina, GBR, 49); thus, making the coal deposits in the South Gobi desert, like Baruun Naran coal deposit measuring 4 486 hectares in size, the Ukhaa Khunad deposit – within Tavan Tolgoi coal formation, developed by the MCS Group-owned Energy Resources, or the Eastern Tsankhi area, developed by Macmahon Holdings and Operta GmbH, extremely valuable assets of Mongolia’s economy (Storry and Ashikhimina, GBR, 49). The mine at Ukhaa Khunad reached some 1.8 million a year, with a trend toward raising this up to 10 million tons in the long run; as a part of the project, Mongolian Mining Corporation (MMC) is building a coal handling and processing plant (CHPP), in collaboration with Sedgman Engineering Technology (Storry and Ashikhimina, GBR, 50; Mongolian Mining Corporation, n. pag.). Given its proximity to the Russian border, namely 10 km, and its 208-million-tons resource of 5 204 kcal/kg low-ash and low-sulphur thermal coal, the Ulaan Ovoo coal mine, run by Prophecy Resource Corporation, is another important asset of the Mongolian mining sector; there are also other Prophecy’s projects, like Chandgana – a massive 1-billion-mt property, and the planned construction of a power plant nearby, etc. (Storry and Ashikhimina, GBR, 53). Challenges Faced by the Sector and Negative Effects The major challenges faced by the thriving Mongolian mining sector are considered to be connected with the national business environment; according to Porter, for example, Mongolia suffers from weak government effectiveness, along with certain political instability, as well as high levels of corruption (Porter, 7). The civil service ineffectiveness, in turn, is thought to have impacted the government ability to create and deliver the necessary environment that would foster a competitive private sector (Porter, 7). As for corruption, the World Bank Investment Climate Survey indicates that bribes and unofficial payments for mining licenses account for about 40 % of the official fees; Porter, in turn, points out three levels of corruption – at the micro level, in the form of supplements for low-level social services, at the government level, with known cases of suspending licenses for political or economic gains, and at the private sector level where corruption, however, is not seen as a significant hindrance to business (Porter, 7). Another major challenge to the rapidly growing mining sector is presented by the infrastructure, insofar as might require significant investments in order to meet the various needs of the mining centers, including new towns development – housing, drinking water, waste water, solid waste services, electricity and heating, etc.; some estimates indicate that an investment of 1.4 billion US dollars is required for the aforesaid purposes (International Bank for Reconstruction and Development/The World Bank, iii). Additionally, the inadequate transportation infrastructure, combined with Mongolia’s landlocked geographical location, would pose a considerable, even critical constraint on the sector, if not addressed (Porter, 10). On the other hand, the mismatch between the skills possessed by the labor force and the ones required by the employers is also considered an important issue to be dealt with; while the ‘import’ of Chinese workers, who to work on infrastructure projects, as against about 10 % official unemployment rate, could aggravate the societal climate (Storry and Ashikhimina, GBR, 62). The probable and existing negative effects of the mining boom could be classified in three major groups – negative effects on the natural environment, on the society, and such on the economy. The adverse effects of the first group are almost immediately visible, with probable far-reaching implications, insofar as aquifers are being tapped for mining purposes and the bio-diversity in the region could be disrupted (The Economist, n. pag.). The second group of negatives is connected with distorting the traditional lifestyle, migration of large groups of the population into the mine areas and new towns, and ensuing neglect of other places and areas. The economy-related negatives could ensue due either to distortion of the local economy, or the so-called by economist “resource curse” or “Dutch disease” (The Economist, n. pag.). The probability of overheating the Mongolian economy also persists, especially considering the effect of Oyu Tolgoi mega-project on the economy. Nevertheless, the future of the Mongolian mining sector looks bright enough – Mongolia’s position in close proximity to China and Russia, along with the availability of significant natural mineral deposits, would appear an enormous advantage, especially in regard to Chinese demand for energy and raw materials, (Kohn, n. pag.); while the international mining experience and expertise, and, most notably, long-term investments, would benefit the sector’s future. Conclusion Not only the Mongolian mining sector is subjected to great change and transformation, but also the country itself appear to be transformed by the sector – whether in dreams for the future, envisioning Mongolia as rich as no one have ever imagined before, or in attitudes toward international capital and way of doing business. According to GBR, however, if Mongolians directly see the benefits the mining sector could bring to them, which is the role of the government and politicians, along with a long-term engagement of the international business, which also to cater to Mongolian concerns, the sector would play a crucial role in the development of the country (Storry and Ashikhimina, GBR, 62). References CIA, The World Factbook: Mongolia Economy, 2011, N. pag., Web., 28 March 2012, International Bank for Reconstruction and Development/The World Bank. “Southern Mongolia: Infrastructure Strategy.” 2009. P. iii Web. 30 March 2012. Kohn, Michael. “Mongolia Targets Global Mining Role as Investments Soar.” 20 April 2011. BBC News/Business. N. pag. Web. 29 March 2012, Macmahon, “Tavan Tolgoi, Mongolia.” January 2012. N. pag. Web. 29 March 2012. < http://www.macmahon.com.au/International/Tavan-Tolgoi> Mongolian Mining Corporation. “Coal Handling and Processing Plant.” 2010. N. pag. Web. 30 March 2012. < http://www.mmc.mn/projects-coal.html> Porter, Michael E., “Mongolia’s Mining Services Cluster.” 5 May 2010. P.7. Web. 30 March 2012. < http://www.isc.hbs.edu/pdf/Student_Projects/Mongolia_Mining_Services_2010.pdf> Rio Tinto, “Our Products: Oyu Tolgoi.” 2012. N. pag. Web. 29 March 2012, Reuters, “Mongolia’s Tavan Tolgoi May Need to Raise Up to $400 mln pre-IPO.” 22 March 2012. N. pag. Web. 29 March 2012. < http://www.reuters.com/article/2012/03/22/tavantolgoi-idUSL3E8EM3V020120322> Storry, Mark and Ashikhimina, Alexandra, Global Business Reports. “Mongolia Open for Business.” July/August 2010. Engineering and Mining Journal (2010): 44-62. Web. 30 March 2012. < http://www.gbreports.com/admin/reports/EMJ_MongoliaReport2010.pdf> Swanepoel, Esmarie, “Tavan Tolgoi to Start Mining in January.” 14 October 2011. N. pag. Mining Weekly.com, Web. 29 March 2012. < http://www.miningweekly.com/article/tavan-tolgoi-to-start-mining-in-january-2011-10-14> The Economist, “Booming Mongolia: Mine, All Mine.” 21 January 2012. N. pag. Web. 30 March 2012. < http://www.economist.com/node/21543113> Worden, Robert L. and Andrea M. Savada, Eds. Mongolia: A Country Study, Washington: GPO for the Library of Congress, 1989. N. pag., Web. 28 March 2012, Read More