A wise Mongolian proverb reminds us that “times are not always the same; the iris is not always blue.” The changes to the Mongolian economy since my last visit here just over a year ago attest to the truth of this proverb. Then, the mining boom that spurred economic growth into double digits was still in full swing, and efforts focused on spending future profits or investing it in much-needed human and physical capital.
Today, the boom times and accompanying euphoria seem long ago. Growth has slowed considerably, foreign direct investment has fallen and inflation remains in double digits as Mongolia grapples with decreasing foreign exchange reserves and a widening fiscal deficit.
External factors, such as falling commodity prices and slower growth in Mongolia’s trade partners, contributed. Such vulnerability to market forces is a risk facing all natural resource-led economies. Successfully managing the cyclical nature of a resource-driven economy requires tough fiscal discipline when times are good. In dealing with the inevitable ups and downs, resource-rich countries that maintain discipline during good times have more resources and options for when things turn bad. This is easier said than done, as no one wants to imagine at the height of a boom that the good times will end. But end they eventually do, and countries that have saved for the future better manage the ups and downs of a natural resource-driven economy.
At the heart of such a strategy, however, is the need to build trust that the surplus from a natural resources boom will be used wisely and efficiently. Such trust is not easily attained, and all countries must struggle to retain it, but there are things that can be done. Deepening the progress that Mongolia has already made on governance will be essential. Strengthening transparency, managing conflicts of interest and fighting corruption all help to build the trust required for the necessary political and popular consensus to properly manage the natural resource-led macro economy.
In the end, though, development is about people and the betterment of the living conditions of the population. Supporting greater diversification of the economy would not only help reduce the amplitude of the boom-bust cycles of natural resources, but would also strengthen the link between growth, on the one hand, and job creation, poverty reduction, and trust, on the other hand.
The good news is that there are viable policy options to do so. Some countries such as Chile and Norway have shown how to successfully implement policies that optimize, in a transparent way, the impact of natural wealth for the population and over time. In addition, Mongolia can count on bilateral and multilateral parties such as the World Bank to assist in this effort.
A diverse and growing economy, one that helps people rise out of poverty, one that ensures that Mongolia’s prosperity is widely shared across the population, can again be within Mongolia’s grasp. It will take a concerted effort in adopting a policy package aimed at restoring macroeconomic stability, improving regulatory reform, and enhancing international competitiveness. The pay-off of this effort would be an iris that turns blue again.