The dynamic economies of the Pacific _ in both Asia and North America _ have much at stake if Mongolia is permitted to descend down the road toward resource nationalism and autarky, thus destabilising the broader region, writes J. PETER PHAM
The people of Mongolia recently completed another successful election, an important milestone for this nascent democracy. Any time the will of a nation is expressed at the ballot box is a healthy development. But in the election's aftermath, in which the ruling ex-communist party and Mongolia's Prime Minister Sanjaagiin Bayar strengthened their positions, Mongolia has erupted in violence and rioting. Clearly the elections also raised worrisome questions about Mongolia's future.
Given Mongolia's strategic geographic position _ nestled between rising China and resurgent Russia _ and given its vast deposits of minerals, the fate of Mongolia holds enormous consequences for political and commercial stakeholders throughout Asia.
Here is what has unfolded in recent months. Russia has begun broadening its sphere of influence to include Mongolia. As Russia re-emerges on the global scene, it is expanding trade ties, lending financial support to the Mongolian government, and seeking sweetheart economic deals to help the Kremlin.
At the same time China, motivated both by its burgeoning economy's need for resources as well as its concerns about other powers encroaching on its frontiers, has moved to forge ties throughout Central Asia.
Against this backdrop, Mongolia's political and economic situation has deteriorated in many respects over the past few years. Mongolia's ruling Mongolian People's Revolutionary Party (MPRP) and Prime Minister Bayar earlier this year borrowed a move from Russian Prime Minister Vladimir Putin's recentralisation playbook. The party sought to rewrite the laws that originally attracted foreign investors. These foreign firms, operating mostly in Mongolia's mining sector like Canada's Centerra Boroo Gold project, have already sunk enormous amounts of capital into building a local presence and developing previously untapped resources.
This is just but one of a series of disquieting steps. The Mongolian government has also threatened windfall profits taxes and pressured firms into handing over equity stakes in development projects. All of these measures have sent a clear signal to foreign investors _ Mongolia is not a welcoming place to do business and it has distanced itself from the world financial and political community. As such, it is increasingly targetted by Russia and China as a pawn to be used to further their own ambitions.
The stakes for the country are large. If Mongolia's natural resources can be harnessed efficiently, it would increase Mongolia's GDP substantially. This would go a long way toward ensuring its stability and thus broader regional stability.
But much of that is now in doubt given the shaky investment climate. Fitch Ratings, one of the most respected global statistical rating organisations, revised its outlook for Mongolia, cutting it from ''positive'' to merely ''stable''. Moody's now rates Mongolia as Ba2, two notches below investment grade. These actions forced the Trade and Development Bank of Mongolia to indefinitely postpone its planned sale of $100 million in three-year bonds.
This was the backdrop for the election at the end of June. Twelve political parties and one coalition as well as some 16 independent candidates vied for 76 seats in the unicameral parliament. At stake, however, was more than the control of the legislative function in Ulan Bator.
Previously the MPRP won three of the four elections. While it deserves credit for some of the progress made in the last 18 years, it is also responsible for much of the backsliding as well as the nationalist populism on which it ran the recent race.
Mongolian voters were effectively deciding whether they want to advance as a democratic model in an otherwise increasingly authoritarian neighbourhood or to follow the path of Putin's so-called ''sovereign democracy.'' Mongolians were deciding whether to embrace global free markets or to revert to a stagnant state-dominated economy.
Preliminary results indicate that the MPRP won at least 46 seats, an absolute majority. It's a result that should prompt some hard thinking throughout Asia.
Mongolia on the edge
While the election was fair and legitimate, there is little doubt that Mongolia is now approaching a precipice. Mongolia's prospects looked bright throughout the 1990s and early 2000s as it looked to emulate the success stories of other Asian nations, including Japan, Korea, Singapore and Thailand. These were all countries that embraced market reforms, adhered to the rule of law and welcomed foreign investment. With these reforms came economic growth and dynamism as well as integration into the broader global economy.
But in just the last few years, Mongolia has been flirting with a return to an earlier, failed model of political and economic development. The dynamic economies of the Pacific _ in both Asia and North America _ have much at stake if Mongolia is permitted to descend down the road toward resource nationalism and autarky, thus destabilising the broader region.
Prime Minister Bayar has a choice to make, between Russian-style statism and international pariah status, or toward openness and globally accepted norms. The fate of this predominantly Buddhist nation rests in the balance.
A big part of whether or not Mongolia succeeds will come with the choices it makes with respect to its mining sector. This will be the economic engine of a thriving Mongolia, but only if the Mongolian government adopts the right norms and institutions. Polls clearly show that Mongolians want large mining projects to move forward and that they want to benefit from the mining sector.
While both major parties campaigned on getting the benefits of mining to the people, the way forward is not through state manipulation or ownership _ the path that has been pursued in recent months. Instead it is through application of internationally recognised principles, property protection and proper investment incentives.
It is not too late for interested nations in Asia and elsewhere to help their friends in Mongolia. Sending a strong signal that backsliding on the rule of law and sanctity of contract won't be treated lightly would go a long way toward reminding Mongolian policymakers which way the future lies.
J. Peter Pham is director of the Nelson Institute for International and Public Affairs at James Madison University and a senior fellow at the Foundation for the Defense of Democracies.
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