Torquoise Hills

Editors note on our East Asia series:

East Asia is the most densely populated region on the planet.  With that comes growing economic clout but also significant development challenges.  Successful achievement of sustainability goals in East Asia will impact more lives than action in the rest of the world combined.  Because of this the actions of this region are important not only as examples for the rest of the world but also as the largest scale sustainable development actions in the world.  This series will focus on all of the sustainability challenges and opportunities in this area of the world that is rapidly becoming the most important locus of sustainable development.

Many are familiar with the infamous history of Genghis Khan; he united the countless Mongol tribes of the steppes, conquered the majority of Eurasia, and subsequently formed the largest contiguous empire in history, which now, 800 years later, is a country smaller than the state of Alaska. Fewer people, however, are familiar with the recent developments in mining and mineral extraction in Mongolia. In 2001 Ivanhoe Mines of Canada discovered what is known in Mongolia as Oyu Tolgoi, which means “Turquoise Hill”. In 2010 Rio Tinto, the British-Australian multinational metals and mining corporation that owns Ivanhoe Mines, assumed management of the Oyu Tolgoi project.

Oyu Tolgoi is the largest single investment in Mongolia’s history, and will drive unprecedented levels of economic growth for the country. In 2010 Mongolia had an economy worth around $6 Billion, since then Rio Tinto and the Mongolian government have invested that equivalent in the Oyu Tolgoi project. As of 2013, the Mongolian economy had nearly doubled to $11.6 billion, and growth is expected to continue on a gargantuan scale. From 2013-2020, it is estimated that Oyu Tolgoi alone will contribute 5% to growth annually.

While mining and mineral extraction will contribute massively to the country’s economic growth in the coming decade, it will also further imbalance the country’s already lopsided economy. Soon, minerals will account for 95% of Mongolia’s exports. Since minerals largely drive Mongolia’s economy, the country is extremely vulnerable to fluctuations in global commodity prices. From April 2008 to March 2009, copper prices plummeted by almost 65%. A decrease in external demand was coupled with this price shock as Mongolia’s major trading partners contracted their own economic activity. These two factors caused Mongolia’s economy to contract by 1.6%, compared to 8.9% growth the previous year.

Mongolia’s economic growth isn’t the only thing tied up in its soil; the country’s national identity and way of life are inextricably bound to its lands. Two years ago I was fortunate enough to spend three weeks living in a ger five hours outside of Ulaanbaatar. One of the first things I noticed while in Mongolia was that there weren’t any fences. The uninterrupted wide-open spaces, rolling hills, and beautifully massive skies offered a freedom that I had never quite experienced before. I imagined the land I felt and experienced was much the same as it had been when Genghis Khan united the region’s many nomadic tribes, whose way of life is still very present in every-day life. Despite the recent migration of over 500,000 Mongolian nomads to Ulaanbaatar, agriculture still comprises 33% of the country’s labor force. Herds of horses and goats still roam free, monitored loosely by a few herders, who are dressed head to foot in traditional garb. Fermented mare’s milk (a mare is a female horse), or Airag as the Mongolians call it, is still passed around and offered generously to foreigners, or at least those who are able to accustom themselves to its taste. So where does mining and mineral extraction fit into this image? Where do 3,000 recently issued mining licenses leave Mongolians who still herd livestock for a living and depend on unaltered rolling hills?  Mongolia’s recent economic development is at odds with its culture and heritage, which are still pervasive in many Mongolian’s lives.

Yes, Oyu Tolgoi will provide 10,000 Mongolians with jobs and will make a significant contribution to the economic growth of the country, but will it leave Mongolia with an undiversified economy, fewer resources, a polluted environment, and a subsequently compromised culture in 2050?

The Mongolian government is conscious of these repercussions, particularly the country’s economic vulnerability, and is taking steps to ensure a greater degree of security. In 2007 the Mongolian government established the Mongolian Development Fund and when the financial crisis struck in 2008, the IMF encouraged Mongolia to establish a sovereign wealth fund to help manage commodity price fluctuations. In 2009, the Mongolian government created the Human Development Fund, which replaced the Mongolian Development Fund.

The Mongolian Government, however, did not heed the IMF’s advice, choosing instead to focus its fund on domestic investment, not fiscal stability. As a result, the fund has been used for cash distribution and un-targeted social spending. These handouts have further destabilized and overheatedthe Mongolian economy and, as it turns out, government officials were simply attempting to buy political favor. In 2010, the Mongolian Government passed the Fiscal Stability Fund Act, which now has $300 million under operation, and is intended to absorb revenues from the Oyu Tolgoi project. This fund is enormously important to Mongolia’s development as it gives every citizen of Mongolia equal eligibility to own a share of the nation’s mineral wealth. Oddly enough, the fund has not yet been operated for long-term financial return. In fact, since the fund’s creation, all assets have been held in cash and the government hasn’t established any formal investment process.

A properly designed and operated sovereign wealth fund could be instrumental in Mongolia’s development. There are many examples of properly functioning sovereign wealth funds: the Alaskan Permanent Fund, the Government Pension Fund in Norway, and Chile’s two fund system comprising the Social and Economic Stabilization Fund and the Pension Reserve Fund.

The example of Chile’s two-fund system is especially pertinent to Mongolia because copper revenues provided its origin. In 2006 Chile passed the Fiscal Responsibility law, which created two new sovereign funds. The first of the two new funds is the Pension Reserve Fund, which is essentially a savings account. The government is not allowed to withdraw from the fund for a minimum of ten years. The fund started with an initial sum of $600 million and receives between .2% and .5% GDP annually. In 2007 the Chilean Government started their second fund, the Economic and Social Stabilization Fund, which receives fiscal surpluses above 1% GDP and began with approximately $5 billion. Chile’s sovereign wealth funds have already proven extremely valuable, as the country survived the Great Recession with ease, launching several public work programs after the collapse of the global market.

Sovereign wealth funds can provide a stability that inspires steady growth. The stability of a sovereign wealth fund could provide Mongolia the conditions it needs to solve its pending cultural crises. Poverty alleviation, decreased vulnerability to commodity price fluctuations, increased education, and sustainable growth are all possibilities if the wealth from mining is well managed. But proper management is crucial if Mongolians are to face the issues confronting their heritage in an informed way.


Image Credit: tpsdave via

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