A tipping point for Mongolia's democracy?

Sandwiched between the giants of Russia and China, Mongolia is looking to develop its vast mineral wealth. How will this affect one of the most stable democracies in the region, and what will happen to the benefits of development?

Alex Franquelli Luigi Creazzo
9 October 2013

Pan-Africanism has acted as an umbrella containing diverse attempts to democratise the newly decolonised sub-Saharan continent, whether through the efforts of domestic forces or external aides, albeit with mixed results. Internal pressure groups, as well as transnational forces (especially international donors, banking institutions and multinationals) may help explain the various fates encountered by the single countries on their path to democratisation. Local variables, together with regional trends and international organisations can therefore provide a vaguely reliable model of behaviour for most of the developing countries. But, is democratisation achievable at all latitudes regardless of distinct regional peculiarities?

Whatever the approach, what happens when a nation reaches an acceptable democratic standard (i.e. free multi-party elections, a network of independent media and so on) and its mineral resources provide enough material reasons for a relatively positive outlook? Once an initial consolidation of democratic and liberal values has taken place, what happens next? Is there a stage at which the development of a nation reaches a tipping point beyond which it cannot possibly go either in terms of economic development or political advancement? Mongolia represents a unique case in this context.

Mongolia: between two authoritarian states

Landlocked between two champions of authoritarianism like Russia and China, this steppe territory with the Altai mountain range in the West and the Gobi desert in the south detached itself from the Soviet yoke and changed its Constitution in 1992, when it went from being a “people’s Republic” to a multiparty state. The transition was not without issues but, 20 years later, Mongolia still represents an anomaly to scholars of democratisation. The only nation of its region to be ranked as ‘Free’ in Freedom House’s “Freedom in the World 2013 Index”, Mongolia never fell in the autocratic trap the way Kyrgyzstan and Turkmenistan did and its geostrategic position between two nuclear powers has not posed a real threat in the last two decades. On the other hand, its vast territory (roughly the size of Western Europe) is home for less than three million inhabitants, half of which live in the capital Ulan Bator, while the other half continue living as steppe nomads.

Mongolia is therefore a stable democracy despite these preconditions, rather than thanks to them. But the big engine of economic development is undeniably its soil, with its extensive mineral deposits that have recently seen the government enter a partnership with mining giant Rio Tinto to exploit the mines in the south.

In a country that in recent years has experienced a strong economic growth. The development of mining projects like Oyu Tolgoi (capable of extracting, at full capacity, 430,000 tons of copper and 425,000 ounces of gold per year on average, as well as silver and molybdenum, according to estimates made by Rio Tinto) in the south of the country, would lead one to think that the economic future of this country can be deemed if not bright, at least hopeful. The Mongolian government has structured the exploitation of this mine in such a way that it fits into the shareholding organisation of the joint venture, while still enjoying the tax revenues generated by this activity. Classically, one would be lead to think that the cash flows arising from Oyu Tolgoi would be reinvested in developing Mongolia's infrastructure in order to diversify production, thus making the country, over time, more resilient against price fluctuations of commodities that it produces. In addition, the inflow of Foreign Direct Investment and the reduction of unemployment suggest that the mine could contribute to the growth of per capita income, thus letting more complex indicators such as the United Nations’ Human Development Index (based on level of education, of income and life expectancy) predict, for Mongolia, a degree of development with no equal in the region.

Is future development possible?

So, will everything be OK? Not really. The development undertaken by the country may involve a number of risks, due to the typicality of the predominant economic sector, but more importantly to Mongolia's demographic and social features. Concerns about the development of the nation may in fact lie in its own peculiar topographic arrangement. Apart from the capital city, no other urban settlement exceeds the 90.000 settlers, with most city centres consisting of an average of 20.000 residents. This, combined with the large distances between one place and the next creates a layout that discourages investments in mobility or transport infrastructures. The question of whether or not Mongolia could further develop once the wealth generated by the big mining projects will start to flow, puzzles analysts and politicians alike.

This derives in particular from the nature of Mongolia’s main source of income; minerals. The minerals market is, in fact, a sector prone to the volatility of international exchanges in which there is no chance of monopolisation and wherein the production of a country is fungible with the one of another. The investments and their performance in this area are heavily influenced by international prices which could change at any time, making a project less profitable, and at risk of closure. As in the case of Mongolia, a country with high growth, it is common to observe high inflation - a phenomenon that tends to increase the operating costs -, which affects the profitability of the investment, too.

Strength in economic diversity

In this context, manufacturing and agriculture, already weak and affected by the exodus of labour and capital towards the mining sector, cannot act as a shock absorber, and in the worst cases, the country is bound to experience problems of stagnation. To prevent this situation of ‘quasi-Dutch Disease’ happening, it is clear that the proceeds of the dominant sector should be immediately invested in the industrial diversification of the country. But, the peculiarity of Mongolian economy, one where for instance, even the traditional investment in transport infrastructure such as highways and railways are not a priority, due to low urban density demographic structure and social traditions, limit the value of this form of investment.

Mongolia will therefore soon face a dilemma in terms of economic and social growth. How far can a country on the verge of an economic boom of epic proportions go to prevent its economy from being hijacked by not only external interests and trends, but also by the lack of an economic cycle that could harmoniously drive its growth? Also, is it possible to achieve an acceptable development standard in a country with almost no infrastructure and half its population leading a nomadic lifestyle that pre-dates Genghis Khan’s Mongol Empire? The answer, as always happens with Mongolia, can be found nowhere else than in Mongolia.

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