A critical reflection on Oyu Tolgoi and the risk of a resource trap in Mongolia: troubling the 'resource nationalism' frame.

Author:Lander, Jennifer


Oyu Tolgoi, Mongolia's National Development Strategy and the Resource Trap Thesis

Mongolia is the least densely populated country in the world; 2.7 million people live in a landlocked land mass approximately the size of Western Europe, almost 1.6 million square kilometres. In the early 1990s, Mongolia experienced a remarkable post-communist transformation with the collapse of the Soviet Union. While space constrains a full discussion of the particularities of Mongolia's transformation in the wake of the crumbling Soviet Union, scholars at the time observed with fascination its remarkable "success" in adopting the full range of reforms for democratisation and marketisation required by the country's acceptance of financial assistance from international financial institutions (IFIs). Though there is not space to do so here, scholars have gone to great effort to understand this surprising [i] (Anderson et. al, 2000; Kopstein and Reilly, 2000; Fish, 1998; Fish, 2001; Fritz, 2008) embrace of market democracy, analysing the manner and circumstances in which the traits of liberal market democracies--multi-party elections (Bayantur, 2008; Rossabi, 2005), high rates of public participation in political processes (Sabloff, 2002; Sumaadii, 2012) the separation of powers (Ginsberg, 2003), a written constitution (Sanders, 1992; Fish, 1996; Bedeski, 2006), human rights commitments (Landman et. al, 2005), privatisation (Korsun and Murrell, 1995), financial and trade liberalisation (Pomfret, 2000; Rossabi, 2005), and an active civil society (Bedeski, 2006)--have come to characterise Mongolia. While some aspects of reform were implemented more thoroughly than others (Anderson et al., 2000), Mongolia's transition has been widely perceived as an authentic process of democratisation and marketisation (Pomfret, 2000; Fritz, 2008) in contrast to its Central Asian neighbours who have settled in the 'foggy zone' (Schedler, 2002: 37 quoted in Bayantur, 2008: 6; Kopstein and Reilly, 2000) as post-Soviet autocracies, exhibiting the qualities of neither socialist authoritarianism nor capitalist democracy as classically defined.

One of the less successful--some would say catastrophic (Rossabi, 2005) - aspects of Mongolia's transformation in the 1990s was the sharp decline in living standards: over a third of the population experienced a sudden plunge into abject poverty (Rossabi, 2005; Nixson and Walters, 2006; Sneath, 2003; UNDP, 2000; World Bank, 2006). Unfortunately, there has been no significant transformation in this area; a recent UNDP Human Development Report (2013: 5) states that 'the intensity of deprivation--that is, the average percentage of deprivation experienced by people living in multi-dimensional poverty--in Mongolia was 41%.' While Mongolia has never been considered a wealthy country, the communist government provided a strong safety net and high levels of education (Rossabi, 2005); social welfare comprised 40% of the communist government's expenditure (ADB, 2008) and universal literacy had been achieved by the late 1980s. The economic shock of the collapsing Soviet Union and the sudden introduction of structural adjustment policies in the early 1990s through 'shock therapy' (Sachs, 1994; Klein, 2007) meant that real expenditure on health and education was reduced by 46% and 56% between 1990 and 1992 (Sneath, 2006: 149-150) and unemployment rose from 1.3% in 1989 to 20% in 1994 (World Bank, 1996; Rossabi, 2005). These statistics are really only scratching the surface in terms of indicating the social and economic upheaval experienced by Mongolians during the early 1990s, and in fact probably obscure the actual extent of change in social reality (Rossabi, 2005; Sneath, 2003). For example, the fact that 80% of the population are recorded as employed obscures the reality that the rural population doubled between 1990 and 1997 to comprise over a third of the total population and half of the working population as many urban Mongolians returned to herding to find subsistence in a contracting economy (Mearns, 2004). Thus, while the working population was recorded at 80%, half of this number was comprised of new herders seeking subsistence, which was a risky and precarious mode of employment in the transition years given the extensive deregulation of the pastoral economy (Mearns, 2004; Sneath, 2003; Upton 2010; Upton 2012). [ii]

Mongolia emerged from the 1990s with a highly liberalised, investment-oriented economy, a narrow industrial base and a scaled-back, uneven welfare distribution system (Nixson and Walters, 2006). While GDP growth was sluggish--hovering between 1-3% annually (World Bank Data, 2013)--and little progress had been made in terms of reducing poverty (UNDP, 2000), Mongolia was poised for investment into its natural resources in the early years of the new millennium. As Dierkes (2012: 3) argues, Mongolia's proximity to the Chinese market, democratic governance structures and well-educated, young workforce, not to mention its liberal regulation of mining activities, made Mongolia's natural resources an attractive prospect for mining companies. This external foreign interest coincided with the policy expectation that the exploitation of natural resources would be Mongolia's main vehicle for development (Tumenbayer, 2002).

Consequently, from the perspective of the Mongolian government, the 2001 discovery of the extensive Oyu Tolgoi copper and gold deposits in the southern Gobi region signified a turning point in terms of the country's role in the global economy in finding a natural resource base and, critically, an opportunity to finally shake the poverty that had shadowed the 1990s. In addition to the 2001 Southern Oyu discovery, three additional deposits were discovered (2002-2008) which comprise

the current Oyu Tolgoi mining complex (Rio Tinto, 2013; Kohn and Humber, 2013). In addition to immense gold deposits,[iii] Oyu Tolgoi is now estimated to contain 46 billion pounds of copper, with additional inferred sources estimated at 55 billion pounds (Turquoise Hill Resource, 2013). The impact of the investment from the Oyu Tolgoi exploration was swift: the mineral sector's share of GDP grew from 10% in 2002 to 33% in 2007 (Combellick-Bidney, 2012: 273). While it was no surprise that Mongolia had vast copper and gold reserves (Dierkes, 2012), the concentration of this mineral wealth within one mining area and under the auspices of one licensed company suggests that Oyu Tolgoi marked a turning point for Mongolia in terms of engaging with large-scale, long-term foreign investment (Macnamara, 2012). Oyu Tolgoi ("Turquoise Hill") is now one of the world's largest gold and copper mines, and its investment agreement is the largest in Mongolia's history (Oyu Tolgoi LLC, 2013). Oyu Tolgoi is estimated by the International Monetary Fund (IMF) to boost Mongolia's GDP by 35% by 2021 with over U.S. $6.2 billion invested between 2006 and 2013 in the first phase of construction (Rio Tinto, 2013). The operational life of the mine is projected to be at least 59 years (Fisher et al., 2011: 20), which has the potential to dramatically affect Mongolia's long-term economic trajectory.

The introduction of a new development strategy in 2007--the 'MDG-Based Comprehensive Development Strategy for Mongolia 2007-2021' (NDS)--reflects the heightened development aspirations inspired by the discovery of Oyu Tolgoi. The NDS heightens the expectations of development from the 1990s to the ambitious goal of achieving the status of a middle-income country with an industrialised knowledge-based economy, and a high standard of human development based on the MDGs by 2021 (Mongolia, 2007). The language of the NDS, however, does not simply reflect the rhetoric of the international MDG development agenda; its vision is linked from the outset of the document to the increased capacity of the Mongolian economy in light of 'mineral deposits of strategic importance,' (Mongolia, 2007: 5) a catch-phrase associated with the discovery of Oyu Tolgoi. The NDS contains a clear policy shift with specific development targets to undergird these heightened aspirations, evidently based on optimistic forecasts for economic performance.

For example, the first and second priority areas (Mongolia, 2007: 5) to 1.) 'provide for all-round development of the Mongolian people' and 2.) 'intensively develop export-oriented, private sector-led, high technology-driven manufacturing and services to create a sustainable, knowledge-based economy' relies upon the critical third: to 'exploit mineral deposits of strategic importance, generate and accumulate savings, ensure intensive and high economic growth, and develop modern processing industry.' The priorities of the NDS and the goal of achieving middle-income country status by 2021--notably the year Oyu Tolgoi is expected to reach full production (Rio Tinto, 2013)--would seem exaggerated unless the Mongolian government had reason to believe that the profits of resource extraction would be sufficient to diversify the economy and dramatically improve social welfare across the entire population. While the NDS suggests an optimistic sense of the development opportunity of mineral exploitation for Mongolia, the priorities placed upon economic diversification and effective distribution also suggests that Mongolia's leaders recognised the serious risks associated with development strategies based on mineral extraction.

The "resource trap" is a widely recognised thesis in development literature that problematises the puzzle of 'skewed economies' and public impoverishment in many countries with extensive natural wealth (Collier, 2007; Humphreys et al., 2007; Auty, 2000; Auty, 2001; Bebbington et al., 2008; Rosser, 2006). The signs of a country at risk of a resource trap are exhibited in an impeded inability, known as Dutch Disease, to invest in other economic sectors beyond primary extraction, particularly in...

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