Mongolia’s Economic Crossroads: A Path Beyond Mining

Mongolia must diversify its economy beyond mining to ensure sustainable growth. A World Bank report highlights the challenges and opportunities, suggesting a focus on high-productivity service sectors.

Mongolia’s economy has long been synonymous with its abundant mineral wealth. From vast coal deposits to rich veins of gold and copper, the nation’s resources have fueled growth and helped reduce poverty. Yet, as the 21st century progresses, Mongolia stands at a pivotal juncture. A recent report by the World Bank, titled “Diversification Paths: What Can Mongolia Learn from the Export Trends of Other Resource-Dependent Countries,” by Gordon Betcherman and Mohammad Muaz Jalil, the time has come for Mongolia to chart a new course toward a more diversified and sustainable economic future.

The Heavy Weight of Minerals

For years, Mongolia’s economy has leaned heavily on its mining sector. Minerals account for a substantial portion of the country’s GDP, exports, and government revenues. This dependence, however, is not without its risks. The volatility of global commodity prices, environmental concerns, and the inevitable decline in demand from major buyers like China pose significant challenges to the sustainability of this growth model. The report highlights these issues, pointing out that while mining has historically driven Mongolia’s development, the sector alone cannot ensure long-term prosperity.

Challenges and Opportunities in Diversification

Diversifying away from a resource-dependent economy is no small feat. Many developing nations, particularly those rich in natural resources, struggle with this transition due to limited economic complexity and transferable skills. The World Bank report underscores these challenges, emphasizing the need for structural changes that shift focus from low-productivity activities to high-productivity sectors, notably industry and services.

The Growth Identification and Facilitation Framework (GIFF) is employed in the report to analyze export trends in countries similar to Mongolia but at a slightly higher level of development. This methodology reveals both the hurdles and potential pathways for Mongolia’s diversification. The experiences of countries like Chile, Kazakhstan, Russia, Malaysia, Australia, and Canada provide valuable insights into what Mongolia might expect on its journey.

Lessons from Comparator Countries

The report’s analysis of these comparator nations offers a mixed bag of lessons:

Chile has seen its export basket become even more concentrated on resources, particularly copper, over the past two decades.

Kazakhstan remains heavily reliant on oil and gas, with little evidence of significant diversification into industrial exports.

Russia continues to dominate in oil and gas exports, showing minimal movement toward a more varied industrial sector.

Malaysia, however, presents a more positive example, with a relatively diversified export basket that includes significant industrial products, although still reliant on resources.

Australia and Canada also demonstrate a high dependency on resource exports, despite being more developed.

While these nations illustrate the difficulties of moving away from resource dependency, they also highlight potential areas of growth, particularly in high-productivity and tradable services.

A Promising Future in Services

One of the report’s most optimistic findings is the potential for Mongolia to develop its high-productivity service sectors. Comparators like Malaysia have shown that investing in services such as business services, telecommunications, and information technology can offer viable paths for diversification. These sectors not only provide new economic opportunities but also align well with Mongolia’s existing capabilities and geographic constraints.

Strategic Recommendations

To navigate this complex transition, the report offers several strategic recommendations:

Leverage Existing Capabilities: Focus on sectors where Mongolia has natural comparative advantages. Develop policies to attract global investors and scale up self-discovery in these sectors.

Address Constraints: Identify and remove binding constraints that hinder diversification. Strengthen intangible capital, such as human development and economic complexity.

Promote High-Productivity Services: Invest in high-productivity and tradable services. Explore opportunities in business services, telecommunications, and information services.

Mongolia’s path to economic diversification is fraught with challenges but also filled with potential. By learning from the experiences of other resource-dependent countries and focusing on high-productivity service sectors, Mongolia can build a more resilient and sustainable economy. The World Bank report provides a roadmap, urging Mongolia to take bold steps towards a diversified future.