China column – Breaking the resource curse in Mongolia

While in Mongolia, China editor Paul French discovers a lucrative vein of mineral wealth – but can the locals benefit from its exploitation?

December is not the best time to visit Ulan Bator, the capital of Mongolia. The temperatures hover somewhere worse than -20C in daytime and then -30C at night. Nobody cares much about the precise temperature – once it’s that cold it doesn’t really make any difference.

However, despite the cold, Mongolia, and Ulan Bator particularly, is changing fast. Not so long ago it was a sleepy backwater of two million people spread across a country the size of western Europe. The almost forgotten former Soviet satellite state forged a vibrant democracy back in 1990, but has remained largely in the shadow of its two mighty neighbours Russia and China.

These days Ulan Bator is looking decidedly prosperous. Traffic jams snarl up the streets (nobody who can possibly afford not to wants to wait in a bus queue in these temperatures). A new Louis Vuitton store is reportedly outselling the branch in Lyons. New bars and restaurants are popping up, and prices are rising.

Just a few years ago you could drive out of downtown Ulan Bator and suddenly find yourself in the seemingly never-ending Mongolian grasslands. Now there are teeming suburbs that look like no others on earth. Endless rows of “gers”, the traditional Mongolians felt tents, are camped on the city’s fringes and forming new communities. And there are a lot more foreigners than there used to be.

The rising optimism is centred on Mongolia’s largely untapped mineral wealth. Everyone has known that Mongolia was, literally, sitting on gold – the reserves proven, the locations known – but exploiting it is a major political issue.
Everyone wants in on the action. Michael Aldrich, an international lawyer who’s been based in Beijing for a long time but is now working in Ulan Bator, puts it bluntly. He argues the Mongolian government has said it’s open for business and the customers are starting to flock.

But Mongolia is not a highly controlled one-party state like China, or a country producing crony capitalism and oligarchs, like Russia. Mongolia is a multi-party democracy with vibrant and sometimes hectic elections. There is a free and highly vocal press and a citizenry keen to see some rewards from their mineral wealth.
Hence the buzz phrase everyone is talking about, on TV, in the newspapers, on the shelves of the bookshops: “resource curse”. This refers to the paradoxical situation of the world’s resource-rich countries being among the poorest.

Honey pot

In the past the government held back from opening the floodgates. The perception of giving the wealth away had led to demonstrations, sometimes violent, and an angry populous. Still, the process has started – Canada’s Ivanhoe Mines and the Anglo-Australian Rio Tinto are licensed to start work in the massive Oyu Tolgoi field of copper and gold.

Limited liability companies have been formed, with the government holding a 34% interest. But worries persist. Is the government experienced enough to maintain a close watch on these new entities?

But Mongolia is not China. Bad practices will be made public and demonstrations will occur. Foreign miners entering Mongolia know that workplace safety is a major concern and both the government and the press are watching – public opinion is a factor in Mongolia. And to help ease concerns the government is encouraging local mining companies to modernise and compete.

Several deals were put on hold recently over concerns about corruption. The foreign miners are bringing a lot of money into what is still generally a poor country, so it’s interesting to note that the government has not simply grabbed the cash, but is remaining cautious. Similarly with the environment – new laws require that mining companies put in place reclamation projects at the end of the extraction process.

There will be more licensing and more miners entering Mongolia. Tavan Tolgoi is a massive deposit of coking coal in the south Gobi desert. China, reliant on coal-fired power stations, would like some of this. American, Japanese and Brazilian companies are also interested.

To help avoid the resource curse, NGOs and pressure groups are being formed to lobby for the wealth to be spent on social infrastructure – electricity, water and schools. But others worry and see elite groups of local politicians and foreign businessmen forming cartels.

There will, inevitably, be a learning curve but that with a free press, politicians who can be elected or deselected and a vibrant public debate, Mongolia could just become one country to escape the curse.

Based in Shanghai, Paul French is a partner in the research publisher Access Asia.

Source:www.ethicalcorp.com