There is not much economic research in Mongolia and the lack affects proper decision making. To redress the situation, a team from the Economic Institute of Mongolia took up a programme of applied economic research a year ago. N.Ariuntuya asks B.Tuvshintugs, Ph.D., Director of the institute, about the work and its relevance. What benefits do you expect when major mineral projects such as Oyu Tolgoi and Tavan Tolgoi start commercial operation? These are very projects in relation to the size of the Mongolian economy, which will double when OT starts working to full capacity. As regards TT, the projection is that it will be much ger than even OT after 20-30 years. Exporting 200 million tons of coal a year is a thing for any country.
It is clear that our economy will be largely dependent on the mineral sector, both directly and indirectly. Increased production will directly raise the GDP, and will considerably increase the Government budget revenue. Once the budget revenue grows, demand will rise, and budgetary investment in construction, education, health sectors will increase. That will lead to overall economic growth. It is a cycle, in that growth creates demand and, in its turn, increased demand means further economic growth. Our projection is that the GDP will grow by 25% between now and 2017.
Most of the talk about OT revolves around politics. Tell us what economic benefits the project promises to the Mongolian economy. First, we have to define what we mean by benefit. If Mongolia establishes a Stability Fund where revenue from OT and TT is to be put, that will add to Mongolia’s resources. Obviously, not all the money can be kept in store, and some of it will be spent on developing infrastructure, health and education, among others. The question is: how does an average Mongolia benefit from this. If the life of the general population improves, the projects will be seen to have provided economic and social benefits. However, if that does not happen, and only certain sections of the people claim most of the advantages and privileges, widening the gap between the poor and the rich, then the benefits of the projects would not be much. In recent times, the idea of “beneficial growth” has become very popular. This will depend on the policy we adopt and its implementation. Seen from that perspective, issues like percentage of ownership, or customs and royalty rates do not have much significance. The critical issue is the inclusiveness of the policy and how the cash flow reaches the average person. This is the main issue that we have to focus on.
Investing in education is essential as it means investing in the future. It is also right to invest in infrastructure. That supports economic growth and diversification. Another issue is proper management of the Stability Fund. Global prices of minerals will always fluctuate, and as they are our mainstay, the fund is our protection against times when prices are low. We have to set out norms governing best utilization of the funds. These should determine what percentage is invested in education and infrastructure. It would not make sense to spend a lot of money in many different sectors and then be left with nothing. So the answer to your question is that the benefits from OT will depend on the socio-economic policies adopted and on appropriate and efficient management of the monetary inflow.
But the dispute on ownership of 34% or 50% does not go away. Is the percentage issue really that crucial?
Honestly speaking, the shareholders’ agreement should be brought out from its sealed covers and made public. As I said, the percentage of ownership looks like a technical issue. The main concern is proper utilisation of the inflow of money. USD1 billion is a amount but only if it is spent wisely. If not, even a few billion USD will be of no use. If Mongolia’s ownership goes up from 34% to 50%, its receipts from OT will be USD30 billion, not USD29 billion, so there is not much difference, certainly not to an average person.
The OT management claims that production there would be so cost effective that the project would be profitable even if copper prices went down very low. Is it really likely?
Study material provided by OT management says production cost can be kept at USD2,200 per ton. This is the break-even point. If the market price is lower, there is unlikely to be any profit, but any price higher than USD2,200/t will mean profits, and, of course, the higher the price rises, the more will be the profits.
Has any regular study been made on how economic growth will benefit an average Mongolian?
No. So far, there has been no study on how OT and TT will impact poverty alleviation, but I am sure this will be a major research topic in the future. Poverty is the main concern of the Mongolian economy, and its prevalence indicates that the average person is not benefiting from the country’s economic growth. The average person could be a schoolteacher, a doctor, a taxi driver or a small business entrepreneur. Official figures reveal that their lives have not been improved proportionately to the economic growth. The economy has grown 3.6 times since 2004, but the National Statistics Commission puts the official number of people below the poverty level at 39%, which means almost 4 out of 10 Mongolians are poor.
This shows that the policy followed until now has not benefited the general masses. And this is likely to continue for a long time. There has been no new thinking on alternative policies other than the law on budgetary stability. The social welfare programme should not be so huge. It should be restricted to selected groups so that better results are achieved. At present, everybody receives MNT21,000 a month and will get MNT1.5 million. If the policy continues in this illogical manner, the high growth expected in the future will produce meagre results only. The policy must be modified to offer more benefits to the average citizen and improve their livelihood. It is encouraging that serious discussions are being held between Mongolian policy makers and international financial institutions like the World Bank and the IMF on how to instal models of beneficial growth. The Asian Development Bank President also raised the issue during his visit here.
What should be done to ensure that the benefits of economic growth reach more people?
Unfortunately, there is no ready recipe. Both the approach and the implementation of the policy have to be correct. There has to be coordination between the monetary policy and the economic policy. The budget is growing large and will lead to price increase. Controlling inflation is the main task of the Mongol Bank which thus has no other choice but to follow a stringent monetary policy. At the moment there is no correlation between Parliament or the Government and the central bank. There is obviously something wrong with the policy behind the budget if it leads to price increase and instability. A stringent monetary policy is an inevitable corrective to this wrong policy, but restricting monetary supply also means cutting off the average consumer’s access to loans. It would make more sense to review the budgetary policy so that Mongol Bank does not have to take extreme steps.
Secondly, policies have to be defined well. The right budgetary policy will see that the economy does not get overheated, that only select groups come under social welfare programmes, and that the returns from investment in infrastructure are the highest possible. Controlling inflation has to be the focus of the monetary policy and the currency rate policy should also be linked to the money supply policy.
A correct policy calls for a balanced approach where relative priorities are clearly defined. If you have MNT100, you should not spend it all on making a building for a school. You should make provisions for building a road, for running expenses, and also for some savings. It is not easy to do all this simultaneously but the first step has been taken with the National Development and Innovation Committee taking up the work of formulating a medium-term strategy. This will be the development roadmap of Mongolia until 2016, indicating policy, direction and investment priorities.
Do we really need education, health and infrastructure? Yes, of course, we do. Unfortunately, Mongolia does not have unlimited money, so we have to decide how much we spend where, and how much we keep in hand. The principle of delineation also should be very clearly comprehended.
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