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Reverse Midas?

4 Jul 2012 By Martin Hutchinson

In much of the developing world, natural resources seem to offer a handy way out of poverty. But they also present a curse. Mongolia, where the center-right Democratic Party led last week’s elections on a wave of resource nationalism, would be wise to avoid the mistakes of Nigeria and other nations. Government and private fingers can get sticky, the bonanza wasted and non-resource activity burdened and disincentivized.

Mongolia is the world’s newest member of the commodity boom. The country wedged between Russia and China has enjoyed spectacular growth in GDP – close to 17 percent in the first quarter from a year earlier – largely on the back of exploration and construction related to its massive Oyu Tolgoi gold and copper mining project. From August, Oyu Tolgoi will begin producing revenue, and from 2013 it will turn into a massive cash generator with relatively low employment.

Nigeria’s sad example shows what can go wrong when such newfound wealth is misallocated. Current estimates are that more than $1 billion of oil per month is stolen from the Niger Delta fields and corruption remains endemic even under well-meaning President Goodluck Jonathan. Nigeria ranks 133rd on the World Bank’s Ease of Doing Business Index and 143rd on Transparency International’s Corruption Perceptions Index. True, high oil prices reversed 40 years of decline in living standards through 2000. And while GDP growth is slowing, it’s still expected to run at 6 percent to 7 percent this year. But with inflation in double digits and government expenditure budgeted to exceed revenue by 31 percent in 2012, Nigeria’s situation is unstable.

Mongolia’s election was fought on the issue of resource nationalism, with the Mongolian People’s Party wanting to renegotiate the foreign investment agreements covering Oyu Tolgoi and other mines and increase the cash handouts of around $16 per month to Mongolia’s people. The Mongolian People’s Revolutionary Party opposed foreign mining investment altogether. The Democratic Party’s slim lead is good news for foreign resource companies, but development problems remain.

Once Oyu Tolgoi comes on stream, state revenue will increase, even as the employment boom subsides. However, as in Nigeria, that will lead to greater opportunities for wasteful spending and corruption. Mongolians will only benefit if the government ensures its fiscal stabilization fund – built up from excess revenue – is inviolable for the long term and promotes a culture that rewards private thrift and legitimate business formation.


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