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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.