Wednesday, February 12, 2014

Mongolia’s Future Framework

Mongolia’s Future Framework

Mongolia’s economic potential is significant, with vast deposits of copper and coking coal situated close to its main market in China. However, this potential is vulnerable as the country is increasingly reliant on two main commodities being exported to one country, making Mongolia susceptible to external shocks such as changes in commodity prices and demand in China.

Charting a course for the country from mineral wealth to long-term sustainable and diversified growth is a key task facing Mongolia’s leaders. Throughout 2013, the World Economic Forum engaged over 250 stakeholders and experts in a dialogue to explore three key strategic decisions on this path:

1. How should the development of the mining industry and its potential revenues be managed to maximize their benefit to the country?
2. What forms of economic diversification should be pursued and how?
3. What trade and investment relationships will be needed to achieve both?

Responding to these questions however, is not straightforward. Developments of mineral deposits and other diversified products and services require long lead times. This means the decisions must take into account not only present contexts but future ones, which are likely to be very different.

Future contexts will be shaped by highly uncertain forces in commodity demand and pricing, regional collaboration, mining investments, and social and environmental norms. These uncertainties will influence whether Mongolia finds it easy or difficult to produce and sell its main minerals (copper and coking coal) over the next few decades.

Similarly, uncertain forces influencing the ability of the country to access the necessary capital, knowledge and skills and compete in markets in which it has a competitive advantage will influence whether Mongolia is able to diversify its economy to produce and sell significant products and services beyond its main minerals.
The possible outcomes of these uncertainties are explored in three scenarios, helping Mongolia to learn and prepare for whichever future arises.

Regional Renaissance: North-East Asia becomes more politically integrated, with strong economic growth. This gives Mongolia the opportunity to sell its main minerals and achieve economic diversification, and the challenge of managing export revenues in a way that prevents economic overheating and social unrest.
China Greening: A revolution in environmental attitudes sees China lead the way in the “circular economy” and pioneering new products and services. This reduces demand for Mongolia’s main minerals, but opens up new opportunities to diversify into greenproducts and services.
Resource Tensions: Geopolitical tensions ravage the region; natural resources are used for political leverage, making trade difficult. Mongolia struggles to access finance and markets for its minerals and to pursue diversification opportunities, but this scenario presents opportunities to carve out a role as a neutral and respected neighbour.

Scenarios Framework

These scenarios suggest policy responses relevant to all three strategic decisions, such as developing a good investment and business climate, with public buy-in, for both minerals and other sectors; designing a form of sovereign wealth fund that can operate as an investment fund or development fund as needed; and actively engaging with neighbours in the region to forge strong political and economic relationships.
The individual scenarios suggest interesting choices for Mongolia to consider, for example facilitating cross-border infrastructure for regional economic cooperation in Regional Renaissance; joining regional supply chains for green and sustainable industries in China Greening; and locking in long-term contracts to hedge against regional instability in Resource Tensions.

 Charting a course for the country, from developing mineral wealth to long-term sustainable and diversified growth, is a key task facing Mongolia’s leaders. On this course, they need to explore and make three strategic decisions related to managing the mining industry and the wealth that it is expected to create, approaching the challenge of diversifying the economy, and building long-term trade and investment relations. The best inroads to these decisions are not straightforward and must take into account uncertain future contexts. Possible future contexts are explored in three scenarios intended to help Mongolia’s leaders to prepare and make the most of whichever future arises.

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