Washington’s Dangerous New Consensus on China
Don’t Start Another Cold War
Mongolia’s presidential election on June 26 comes amid economic turmoil, and the corruption, inequality, and poverty that have plagued the country since 1990 will significantly influence how the public votes. Just two weeks ago, a parliamentary working group charged that the Mongol Bank had lost approximately $1.5 billion, or about 50 percent of the government budget, within four years. Its reserves declined from $4.1 billion in 2012 to $1.3 billion in 2016. Nonperforming commercial loans to 45 companies that did not spend the funds on their specific projects, a tight monetary policy aimed at price stability, and outright fraud appear to explain the deficit.
It is no surprise, then, that the euphoria associated with past growth and earlier optimistic economic forecasts has disappeared. The 17.3 percent increase in GDP in 2011 has come and gone, and the inaccurate International Monetary Fund (IMF) projections of 15.7 percent in 2013 turned out to be 11.7 percent; by 2015, the rate of growth had slipped to 2.3 percent, and the estimate for 2017 is now negative 0.2 percent growth. As I’ve previously written in Foreign Affairs, the astonishing increase in GDP back then was largely based on the export of coal, copper, and gold, “making Mongolia highly dependent on the vagaries of global demand for minerals and ores and, perhaps even more important, increasingly reliant on China.” Over the past five years, China’s rapid economic growth has stalled and its demand for minerals has declined, precipitating an economic crisis in Mongolia.
Even the earlier 17.3 percent GDP growth was illusory because most of the profits accrued to foreign mining companies and to a small Mongol elite. Since the communist system’s collapse in 1990, economic inequality has continued to increase. The capital city of Ulaanbaatar now boasts a Shangri-La Hotel, Louis Vuitton and other luxury stores, high-rise office buildings, and expensive condominiums. Yet it is surrounded by so-called ger districts, where residents live in traditional Mongolian tents, or occasionally in sheds, without paved roads or streets, sufficient access to running water, regular sanitation pickups, or electricity. The residents of these communities include unemployed workers, vagrants with little or no source of income, and former herders who lost their livelihoods after government support dwindled post-1990.
A BAD SHOCK
The IMF and other international financial agencies’ prescription of so-called shock therapy in the early 1990s, in return for loans, prompted some of these problems. This policy entailed immediate privatization of state assets, closing of unprofitable enterprises, minimalist government, and liberalization of prices. Austerity and the ending of subsidies resulted in unemployment, greater poverty, and a rising incidence of alcoholism and domestic abuse. Minimalist government translated into cutbacks in education, medical care, and environmental protection. The reduction or elimination of tariffs in 1997 permitted the arrival of a flood of Chinese goods, undermining the boot, leather, and textile industries, which employed tens of thousands of Mongolians. And the rapidity of privatization allowed a few individuals to gain control over and make substantial profits from previously public assets, as was the case in the herding economy and in formerly state-owned factories.
Consultants, advisers, and in-country representatives of the Asian Development Bank, World Bank, and IMF eventually conceived of mining as the proper path for Mongolian economic development. The Mongolian government agreed with this assessment and focused on reaching agreements with foreign mining companies because it did not have the capital or expertise to initiate mining projects on its own. Chinese and Russian companies leased land for exploration, but Ivanhoe Mines, a Canadian company, secured the largest amount of territory. Robert Friedland, its controversial owner, alienated the Mongolians with statements about the outrageously high profits to be made from the Oyu Tolgoi mine he had leased, as well as his lack of concern about environmental degradation. Pressure to improve his notorious public image prompted him to sell his assets to Rio Tinto, the Australian-British mining company that has had its own conflicts with the Mongolian government over taxes, royalties, percentage of ownership for each side, and a Mongolian demand that foreign companies use Mongolian banks for deposits.
The current economic crisis confirms that for Mongolia, mining is too volatile an industry in which to place its faith for economic development. Each of the three presidential candidates (representing Mongolia’s three most prominent political parties) offers a different solution for what the country’s new strategy should be in the face of these problems, and each has faced unconfirmed charges of corruption. Miyegombyn Enkhbold, of the Mongolian People’s Party, which broke away from the traditional communist Mongolian People’s Revolutionary Party, is the most renowned politician of the three and is favored to win. He chairs the Mongolian People’s Party and has served in a variety of positions, including as mayor of Ulaanbaatar from 1999 to 2005 and as prime minister from 2006 to 2007. His party won a smashing victory in the 2016 parliamentary elections, gaining 65 of the 76 seats.
Although Enkhbold and his party helped to negotiate a $5.5 billion loan from the IMF to reduce the considerable deficit the government has faced over the past three years, the burden of the austerity that the IMF has demanded in return falls heavily on Mongolians who did not benefit from the mining bonanza and who did not cause the crisis. Reductions in child and pension payments, in social welfare benefits, and in salaries for government employees; user fees on liquor, tobacco, and gas; and a higher income tax have antagonized much of the population. Enkhbold has also promised to increase the amount of land in Mongolia that mining companies can explore from the current 9.6 percent to 20.9 percent. Since mining has not proved effective in dealing with poverty and income inequality, the public’s hostility toward these economic policies may prove challenging for a politician already associated with them.
The Democratic Party, which was in power from 2012 to 2016 and is supportive of a democratic political system and market economy, was viewed as ineffective, and some of its representatives were perceived as corrupt because they had substantial wealth hidden in offshore accounts, in either their own names or those of their relatives. The party negotiated a 2016 agreement that resolved its dispute with Rio Tinto over the development of the underground Oyu Tolgoi mine, but it compelled Mongolia to assume additional debt to fund the new construction. This substantial debt limited the profits Mongolians could receive from mining.
Still, the Democratic Party presidential candidate, Khaltmaa Battulga, is an unusual choice. An artist and former wrestler who still practices judo, Battulga never attended university and instead began a career importing products from Russia and China to sell to Mongolians during a time of scarcity in the early 1990s. He went from one business success to another, eventually developing a fleet of taxis and buying the Bayangol Hotel, one of the two oldest hotels in the country. He achieved renown for the construction of an enormous statue outside the capital of Genghis Khan riding a horse.
Having become quite wealthy, Battulga ran for and became a member of Mongolia’s parliament, the Great Hural, in 2004. Over the next decade, he served in the cabinet as well. He is an ardent supporter of railway construction, the building of value-added mineral-processing plants, and diversification of the economy beyond mining as ways to promote growth. During his presidential campaign, he stated that Mongolia’s mineral resources belong to the people and should not be the domain of politically well-connected businessmen. He has expressed concern about overdependence on China as a trade partner. As a result, foreign mining companies and some representatives of the international financial agencies have accused Battulga and other Mongolians of “resource nationalism,” but such charges appear to reflect their own self-interests. From the Mongolian perspective, Battulga is defending his country’s interests and has expressed a desire to use mineral wealth to reduce the country’s income gap. A more serious but as yet unproven charge, leveled in April 2016, involves money laundering.
The Mongolian People’s Revolutionary Party has nominated Sainkhuu Ganbaatar, a popular figure who has been one of Rio Tinto’s most formidable critics. He has campaigned on a renegotiation of the agreement with the mining company in order to elicit more taxes and higher royalties and profits from the Oyu Tolgoi mines. His party is associated with Nambaryn Enkhbayar, who has served as minister of culture, Speaker of the parliament, prime minister, and president from the early 1990s on. Enkhbayar has criticized the Mongolian People’s Party for its abandonment of socialism and social welfare. In 2012, under murky circumstances, he was charged and convicted of graft, but in 2013, President Tsakhiagiin Elbegdorj pardoned him. He cannot seek public office, however, until October 2017 because of the conviction—hence the Ganbaatar nomination.
Although polls in Mongolia are notoriously unreliable, Enkhbold appears to be the favored candidate because of his long career in government and because his party occupies over 80 percent of the seats in the parliament. But Battulga’s platform and concern for income disparities, as well as Ganbaatar’s support for Mongolia’s economic interests, have wide appeals. The popularity of their platforms shows that the people are fed up with austerity. How much so, it is hard to say, but it is possible that the vote on June 26 will reflect that discontent.