Broader horizons: The state looks to diversification to further strengthen the economy

Operators of the Oyu Tolgoi copper and gold mine forecast that its copper production alone could account for a third of Mongolia’s GDP by 2020. This highlights mining’s importance to the economy, as well as the need for greater diversification. The global economic crisis of 2008-09 amply demonstrated the imperative of spreading out, as Mongolia was hit hard by falling commodity prices. While a repeat of that situation seems unlikely, there is still a need to develop other sectors to broaden the economic base.

OPPORTUNITIES: Mongolia is in the fortunate position of having the resources to support diversification efforts and the time to develop advantageous sectors based on international models of best practice. “We should follow the Chilean example and diversify following a strategy based on in-depth research of where we have competitive advantages in resources, geography and expertise,” a prominent Mongolian economist and blogger D. Jargalsaikhan told OBG. “We need to ensure infrastructure is in place to support the sectors we choose to develop. There are real concerns about the practicalities of diversification, but I believe we can do it.”

Diversification will build on other areas of existing strength or potential, including: cashmere and clothing; agricultural products such as food and leather; and tourism. These sectors could provide considerable opportunities for foreign direct investment (FDI), which is currently rather concentrated, according to Sergey Gromov, the chairman of Chinggis Khaan Bank. “It seems that 75% of all foreign investors are interested in mining and 24% in real estate and property,” he told OBG.

OFFICIAL MOVES: In 2011 the government stepped up its efforts to support diversification. Prime Minister S. Batbold has said rising mining revenues should be seen as a chance to invest in other job-creating industries. “It is important to have a good mining industry,” he told Bloomberg in March 2011. “But it is a tool of moving many other things forward. What we want to focus on [is] creating jobs in many other industries. We would like to focus now on value-added products.”

In September 2011 the Ministry of Finance offered MNT300bn ($234m) in bonds to raise funds to support the wool and cashmere sectors. Of the money raised, MNT150bn ($117m) will go to supporting small and medium-sized enterprises, MNT100bn ($78m) to producers of wool and cashmere products, and MNT50bn ($39m) to camel and sheep herders supplying local factories. By mid-September more than a third of the bonds had been sold, with the revenue to be distributed to recipients through loans from commercial banks.

AIMING HIGH: The Mongolian National Chamber of Commerce and Industry (MNCCI) argues that the country should focus on high-value, high-quality goods. It takes the view that the continuing rise of the tugrik means that Mongolia is finding it ever harder to compete on price, and so it must put an emphasis on goods for which demand is less price elastic, and for which foreign consumers are willing to pay a premium. Stephen Kreppel, the director of the National Marketing Coordination Office at the MNCCI, is proposing a strong brand for Mongolia that will be recognisable, unique and an indicator of quality. “The examples of Germany, Sweden and Switzerland show that it is possible to have a strong currency and still be an export power,” he told OBG. “We need to target low-volume, high margin, niche industries and get set up to export to high-income markets such as Europe, the US and Japan.” Kreppel suggested that the cashmere and textile, food, and animal product industries are among those in which Mongolia can develop its competitive advantages to offer “proper, quality-branded products that consumers will pay for, and that could not be made anywhere else”.

As Eurasia Capital, a Hong Kong-based investment bank, noted in its 2011 preview of the Mongolian economy, infrastructure bottlenecks have hampered diversification in the past. However, with new large-scale investments, these are starting to ease. The government and private sector are throwing their weight behind non-mining development, with an enthusiasm for innovation which should stand the country in good stead.

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The Report: Mongolia 2012

Economy chapter from The Report: Mongolia 2012

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