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Mongolia searches for a sustainable growth plan

Published on 24 October, 2006, Last updated at 10:36 GMT


This year marks the 800th anniversary of the once mighty Mongolian Empire. Images of the warrior-ruler Genghis Khan are found everywhere in the capital Ulaan Bataar, even one engraved on a mountain overlooking the city.

Today's Mongolia, in contrast with Genghis Khan's Eurasian domain, is one of the most impoverished countries in the world. Per capita GDP in this country of 2.9 million people is estimated at $1,900, and roughly two-thirds of the nation's population survives on about $2 per day. An economy that grew by 10.6 percent in 2004 and 6.2 percent in 2005 generates some optimism for Mongolia's future. But many experts question the sustainability of strong growth rates, given the economy's dependency on the mining sector for income generation.

Mongolia has a great, yet largely untapped mineral wealth, consisting of mainly copper and gold. International companies are rushing in to the country, seeking exploration and production rights. As a result, the annual volume of foreign direct investment entering the Mongolian economy, which was $50 million in 1990s, rose to $300 million last year.

The government is currently wrestling with ways to share the profits with international companies. In May, the Mongolian parliament approved a windfall profit tax on minerals, starting at a hefty 68 percent. Additionally, new income and value-added tax rates are scheduled to enter force on January 1, 2007.

Mongolia's official Economic Growth Support and Poverty Reduction Strategy emphasizes poverty reduction and narrowing the income gap. "The government and the civil society should focus on channeling the benefits of higher growth to the poor," the document states. Some observers suggest that the government should additionally stress diversification of the economy. Mining alone can create jobs, but the number of these jobs will never be sufficient to absorb the people living in tents of the slums of Ulaan Bataar, these experts say. In addition, there are instances in which rapid growth, achieved through the development of natural resources, can exacerbate income inequality, they add.

Expanding efforts to develop the agricultural sector would stand to benefit the broadest share of Mongolians. According to government data compiled in 2002, 257,000 households in Mongolia are involved in the agricultural sector, and for three-fourths of them it is their sole source of income. Roughly 40 percent of the workforce continues to engage in nomadic livestock herding.

Despite this, Mongolia is dependent on food imports. With more than 30 million sheep and cattle in the country, Mongolia has a potential to produce 60 million tons of milk a year, but actual production is only 7 million tons, not enough to meet domestic demand. The country likewise has 1.2 million hectares of arable land, but only one-sixth of this territory is being cultivated. Thus, of every 100 kilograms of vegetables consumed by Mongolians, 54 kilograms have to be imported from either Russia or China. In 2005, agricultural production actually fell 5.5 percent.

The agricultural sector is in bad need of investment. Small individual farms dominate the sector, and there is a shortage of processing facilities. Productivity is also hampered by the fact that existing facilities are functioning with outdated Soviet-era equipment. The Deputy Minister of Food and Agriculture, P. Ulaankhu, said that "over the last 20 years there has been no major agricultural innovation coming to Mongolia." He added that the ministry had three priorities: "restructuring the sector in large farms, renewing technologies and modernizing irrigation systems." The government has undertaken several reform initiatives in recent years, but they have all stalled due to a shortage of financing.

The Chamber of Commerce and Industry, the country's leading private-sector development group, is promoting a concept that its chairman, Sambuu Demberel, describes as the "5-Cs": a clean environment, clean food, clean production, a competitive education system and computers. The 5-C approach has been publicized in the capital, but funds are lacking for an awareness campaign in outlying regions, Demberel said.

Observers say there is hope that foreign investment in the agricultural sector will rise in the coming years. China, in particular, has expressed increasing interest in the Mongolian agricultural sector. Mongolian officials and entrepreneurs, however, are eager for other countries to invest. As a top executive of a Mongolian company planning to establish an animal-feed plant put it: "Mongolia does not want to rely only on China."


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