Take a lesson from Mongolia

Published Jul 27, 2012 04:49pm

There has been lots of talk lately of Pakistan's massive and largely untapped mineral potential. More specifically, Imran Khan, chairman of the Pakistan Tehreek-e-Insaf, has hinted at various rallies and forums that Pakistan’s future economic growth could be fueled by a natural resource boom supported by foreign direct investment. Pakistan boasts the world’s 5th largest reserve of coal along with substantial reserves of copper, zinc, lead, and aluminum. Dr. Shaukat Hameed Khan, a former physicist at the Pakistan Atomic Energy Commission, maintains that Pakistan’s copper reserves alone are large enough to restructure Pakistan from a cotton-producing economy to a copper-producing one. Therefore, as Pakistan looks to increase its natural resource exploitation, the country that it should closely monitor is Mongolia – which has mastered the strategy of mining-led growth.

Mining has propelled the land of Genghis Khan and nomadic herders to be one of the fastest growing economies in the world. While mining in Pakistan accounts for a meager 2.4 per cent of the GDP as of 2011, in Mongolia, mining is almost 16 per cent of the GDP. Mongolia's vast deposits of coal, copper and gold has led an investment boom in mining, driving economic growth to an unprecedented 17 per cent last year. While China and India are suffering from growth fatigue and economic overheating, Mongolia could see the size of its economy double every three or four years. The chart below illustrates Mongolia’s economic growth relative to other emerging economies, including Pakistan.

Data: IMF

Mongolia’s economic growth is primarily attributed to a surge in foreign direct investment (FDI). The net FDI inflows reached about $1.5 billion in 2010, increasing threefold from previous year. Below are Mongolia’s net FDI inflows from the year 2000 onwards.

Data: World Bank

Though the nature of the boom is primarily capital-intensive, it has provided employment opportunities for Mongolian workers. This has motivated more and more people to flock to the mine-rich area of the Gobi desert in search of jobs.

But there is one worry which keeps economists and policymakers awake at night. The natural resource boom is prone to what is referred to as the "Dutch disease” in economic lexicon. The increase in the exploitation of natural resource base leads to a decline in sectors like manufacturing and agriculture. In other words, a natural resource boom causes a rise in demand for the currency of the resource-rich country. The subsequent appreciation of the exchange rates makes exports more expensive, and it becomes difficult for other sectors to compete domestically and abroad. The result, of course is the perpetual shrinkage of the manufacturing and agriculture sectors. There are ways to mitigate the impact of the Dutch disease. The most common method is to deposit the earnings from the sale of natural resources to an offshore investment fund, known as a sovereign wealth fund. This would limit the amount of foreign currency inflows into the country. The interest earned on the sovereign wealth fund could then be repatriated and spent in the annual budget.

The long-run sustainability of the Mongolian economy rests largely on how Mongolia addresses and deals with its policy challenges. This would dictate whether Mongolia could actually become the Saudi Arabia of north Asia. However, the more important question here is if Pakistan could imitate Mongolia with equal, if not greater, success. Unlike Mongolia, the challenges facing Pakistan are many and multipolar in nature. But the most immediate issue is the lack of internal stability, actuated by armed conflicts and rampant corruption. Pakistan needs to address its internal security and bureaucratic bottlenecks to permit the expansion of natural resource exploitation and attract more foreign investment. The mining sector can no longer be afforded to be kept at the periphery. We need careful road-mapping to insure that mining contributes its fair share to the future economy. There is no reason to believe that Pakistan cannot be the next Mongolia (or better) of south Asia.

 


The author is a PhD student in economics at the University of Utah, United States. His areas of interest are development economics, structuralist macroeconomics, and game theory.  He tweets @zainrsidd


The views expressed by this blogger and in the following reader comments do not necessarily reflect the views and policies of the Dawn Media Group.


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Comments (28) Closed




Roh
Jul 27, 2012 11:40am
Saudi Arabia of north Asia? Is that supposed to be a compliment?
g.a.shirazi
Jul 27, 2012 05:37pm
as long as we have corruption at all levels no body is going to come to Pakistan for investment.
Devendra
Jul 27, 2012 01:36pm
The mining model to prosperity does not work for Pakistan for various reasons. One, no country will take the unacceptable risk of investing in Pakistan due to terrorism and no law. Second, Pakistani parties will never agree to a policy which will allow an investor a reasonable return on his investment. Even if they did, who will implement the policy? The corrupt beaurocrat and the equally or more corrupt politicians are enough to scare any hardy soul leave alone corporations who are very cautious, naturally.
Cyrus Howell
Jul 27, 2012 10:37pm
China and other nations would buy up supplies of cheaper copper when ever they hit the market.
M. Atif Khan
Jul 27, 2012 12:45pm
it is meant in economical prowess, obviously....
Qasim Abidi
Jul 27, 2012 01:20pm
They also are providing a share to a common man in the wealth generated from mining. Can Pakistan do that, given our history of how we exploited Balochistan and kept it the most backward province of the country. Pakistan could only benefit from such endevours if the rampant corruption could be curtailed, with improved law and order.
paki
Jul 29, 2012 11:06am
Pakistanis don't want westen help, we are better off without it, we don't want any foreign investment. Any rich Islamic country can help Pakistan to mine all the natural resources,, why do you want western help???We are muslim, we have won the half world on our own. This is the way, it's win-win for all the Muslim nation..
Cyrus Howell
Jul 27, 2012 10:50pm
It all could work out. The trend in Pakistan is more bullets and fewer ballots.
Nationalist
Jul 27, 2012 05:07pm
Our economy is more sophisticated than Saudis...despite our shortfalls and despite corruption of government - our private sector and banking is well rooted and established. We dont rely on one single commodity which we got for free and sell at profit.
vin
Jul 27, 2012 05:07pm
Is there a dark side?
srk
Jul 28, 2012 10:53am
Is law necessary at all ? Does any one care about law when it comes to export of iron ore from Karnataka ? Is Imaran kahn so naive to assume export of natural resource will benefit PAK ? sure there will one or two big fat cats benefitting.......
KhanChangezKhan
Jul 28, 2012 10:46am
Situation in Pakistan is worst. The overseas Pakistanis itself have billions of foreign exchange reserves and they want to invest in their countries but who will provide securities for their investment and safe profitable returns. They have no trust on each other too. Can we imagine that how some of the Indians have big super and hypermarkets in other countries? They have trust on each other. A super or hypermarket and even some small business establishments are running profitably by shared investments. These markets are not running by a single ownership. When someone opens a market, he collects big investment by individuals. A man invests a value of 1000 receives back his profit as per the terms without any break similarly a investor valued of 100,000 with the complete security of his basic investment. Can we do that? No! that's why no Pakistani has any supermarket or hypermarket in Saudi Arabia because we have no trust on each other. Everyone knows that the Kalagbagh dam is completely in the interest our countries but we are against it. We are crying for short of electricity power in the country but don't go for the solution that we have.
Jam kamal
Jul 28, 2012 10:38am
Being a small miner in this sector, There is no such need for FDI... Our local busineman should take interest in this sector and come forward by investing in better mining techniques, small level smerlters and refineries. Currently all mininng done in Pakistan is on a very basic and low intensity level. We are self suffecient in coal, gas, chromite, gupsum, copper, manganse, barite, soap stone, all building stone, cement, fertilizer industry products, Iron ore, salt and so many other minerals and their sister products which many nations dont have. Its just that the business community should become more of a brave businessman and take some chances in spending in this sector like they did in textile, garments, leather and other industries. Currently i know many of such people who from textile and other sectors have come towards mining field.
faisal
Aug 03, 2012 10:52am
just need to give acknowledgement to some big tyconcs like mansha group and lucy cement etc to come and invest at least there 25 25 percent and make a new company of mining or else to support economy to boost.
smj
Jul 27, 2012 04:49pm
You need expertise and machinery to search and extract the hidden potentials. The ground reality is --> with this security situation no one will come in, even if they do then the judiciary taking sou moto for everything before it is even started (see gold exploration in balochistan) is a nightmare for every company in exploration business. This would be just a dream unless government gets stronger and throw everything away if has a will to do right for the people.
abdussamad
Jul 27, 2012 05:07pm
You must really hate the Arabs? Does it make you angry if people look up to them?
Rajiv
Jul 28, 2012 04:00am
I am not sure why people are worried about foreign investment... wait for 10 years and afganistan would invest in mining industry in Pakistan... that's where the practical life is headed for.. like it or not..
Igloo
Jul 28, 2012 07:51am
Rampant corruption is a serious issue no doubt. But rampant corruption has not stopped China, Russia and India from booming. Nor did it stop the US from become the economic giant it is today. It must be something else - what it is I couldnt say...
masmanz
Jul 28, 2012 06:00am
Great comment! I think some people are just jealous.
Dr. yahya Khan
Jul 29, 2012 12:25am
Any such move can only be successful if there are stringent laws against corruption.
Asad Hamid
Aug 02, 2012 04:54am
But then what is the end to corruption? i think this can only be done when the top tier takes some strategic action against it and also avoids doing the same. Pakistan has long way to go, only if the people takes some serious plan of action
Mohammad
Aug 02, 2012 05:32am
Economically he meant......At least I hope :)
Mohammad
Aug 02, 2012 05:33am
No one looks up to the Arabs...give me 1 reason to do that !
dr vimal raina
Aug 10, 2012 05:08am
It is the shadow of the fanaticism that bites and takes any state to two levels of moral attitude, one of fake absolute righteousness and second of blatant lies ( that is your 'something else). This results into a predictable mess because it breeds fear on one side and arrogance mired with ignorance on other. In such an atmosphere in any society or state, there is no collective move towards progress either spiritual or economical. If the earth opens up as a sink hole and takes the debris with it, then the people at the periphery can start again, afresh. But if the cauldron goes on boiling as it is in Pakistan today, the talk of progress is far fetched. Sad and tragic but true.
dr vimal raina
Aug 10, 2012 05:41am
No, it does not make one angry when people look up to them, it is when they look down upon you, that makes you hate the Arabs.
dr vimal raina
Aug 10, 2012 05:43am
If Muslim countries had to help Pakistan they already would have. If they wanted to help Muslim countries, Afghanistan and the most of Muslim African countries would not be in a mess. The problem is that even the Middle East is in turmoil. They are not only making music, the Arabs kingdoms are facing it too!
dr vimal raina
Aug 10, 2012 05:49am
I think herein lies the solution to Balochistan. Pakistan has always said foreign powers are involved in bringing the mess to Balochistan. Why not award the mining rights to these 'rogue foreign powers' so that to protect their mining interests they stop meddling in Balochistan.
illawarrior
Aug 14, 2012 03:53pm
Natural resources can only ever be exploited in the short term, and the exploitation is almost always exploitation of poorer countries, by richer countries. At any / every point in history, Pakistan has been free to refuse foreign investment , as well as foreign aid, yet they have never done so. To the contrary, only yesterday I read items on Dawn News asking why foreigners are not fixing Pakistani electricity problems, or polio vaccination problems. If Pakistan wants to be independent ... no issue ... independent people / nations pay their own bills!