Behind the scenes
“When the Russians left and they pulled out all their support for the country – it was bad. Food was rationed and children who grew up or [were] born in those years are smaller and underdeveloped compared to other generations. That is how bad it was. Then the ‘IMF, Harvard University and Goldman Sachs type of development gurus’ decided to experiment and introduce a shock therapy by starting simultaneous political and economic transition to a market economy. Just as the economy was beginning to stabilise and grow, the World Bank decided to push the Mongolian economy towards growth based on mineral extraction. All the mining produce goes to China: Mongolia has been made fully dependent on a single industry and a single market. The IMF bailing out Mongolia for the sixth time in 2017 is what mining does to the economy.” – Sukhgerel Dugersuren, Oyu Tolgoi Watch – source
Mongolia and its historically nomadic population have gone through a tremendous economic transformation over the past three decades. Following the disintegration of the Soviet Union and Mongolia’s regained independence in the 1990s, the International Monetary Fund (IMF), World Bank and Asian Development Bank, amongst others, stepped in to provide financial and policy support – but this support came with a lot of strings attached.
Economic shock therapy
These strings came in the shape of austerity measures that were implemented in order to transform the centrally planned economy into one that favoured the market and reduced public control over resources by privatising state assets and downsizing and decentralising the public sector. By 1995, 95% of Mongolia’s public assets in livestock, trade and services had been privatised. The ‘shock therapy’ re-regulated the Mongolian economy in order to pave the way for foreign public and private investment – putting in place an institutional framework facilitating foreign direct investment so as to fully capitalise on mining as a central revenue source for the Mongolian economy.
This entailed deregulating the mining sector, allowing for extensive private property rights, and a corporate-friendly fiscal policy including a lowering of tax rates and mining royalties. Less state control and increasing funds made available by the international financial institutions attracted mining firms like BHP and later Rio Tinto to seek access to Mongolia’s substantial mineral wealth. The accompanying market relations and privatisation clashed with Mongolia’s historically communal use of resources, resulting in what even the IMF called a “painful transformational recession”
These policy reforms resulted in an institutional framework that was strongly conducive to foreign direct investment, including a series of loans from International Financial Institutions (IFIs). Two decades of focus on mining, demanding huge foreign investment, left Mongolia with a crippling debt and an excessive budget deficit.
In 2017, Mongolia received its sixth IMF bailout since 1990 – substantially increasing the country’s external debt and bringing with it a number of challenging conditions, including wage freezes and other austerity measures.
At the mercy of mining companies
The dependence on commodities such as copper, gold and coal has made the Mongolian economy vulnerable to volatile price fluctuations. This left the government politically at the mercy of mining companies’ demands and contributed to reduced public control over resources.
This diminished state control has attracted mining firms seeking access to Mongolia’s mineral wealth. And this backdrop has paved the way for the mining giant Rio Tinto’s arrival on Mongolian soil – the odds were stacked strongly against Mongolia when it came to negotiating a fair agreement right from the outset.