Global Glance: December 12, 2016
A quick look at intriguing international stories
By John Bostwick, Managing Editor, Radius
Mongolia: A Case Study in the Risks of Resource-Dependent Economies (And Why the NFL Should Send Scouts There)
Commodity price flucutations can play havoc on an economy that relies on extracting and exporting natural resources. Today’s Mongolia provides a good if bleak case study.
First, a little history. Mongolia’s heyday came in the 1200s under Genghis Khan, who (according to the CIA’s World Factbook site) united Mongols and “established a huge Eurasian empire through conquest.” The empire experienced a slow decline, falling under Chinese control in the 1600s. Mongolia won Soviet-backed independence from China in 1921, installed a one-party system in 1924, and peacefully transitioned to a democratic system of government in 1990.
Situated between Russia to the north and China to the south, the country as it exists today is large — the 19th largest in the world by surface area, or about the size of Iran — and contains “vast quantities of untapped mineral wealth.” It is sparsely populated, however, and home to only 3 million people, most of whom are Buddhists and about 40 percent of whom still live a nomadic existence, herding livestock on the country’s near-limitless plains (or steppe).
As recently as 2014, we noted in another post that Mongolia was expected to be the world’s fastest-growing economy going into that calendar year. A 2012 piece on National Public Radio titled “Mineral-Rich Mongolia Rapidly Becoming 'Mine-golia’” helped explain why. At that point, the country was coming off a year in which it had in fact boasted the world’s fastest-growing economy, with a staggering growth rate of 17 percent. The surge was fueled by Mongolia’s stores of coal, copper and gold, which are mined by international corporate behemoths such as Rio Tinto. One economic expert quoted in the 2012 NPR piece predicted that “in the coming 10 years, average GDP growth will be 12 percent” in Mongolia.
That article was right to caution that any economy built largely on selling natural resources is necessarily tenuous since it “becomes dependent on commodity prices that fluctuate.” Obviously, a plunge in prices can be crippling. But even high commodities prices can hurt such economies. Increased demand can, for instance, take business away from other domestic industries, in part by increasing the cost of local currency and making domestic goods less appealing to foreign buyers.
The combined syndrome, the article notes, is often called “Dutch Disease,” referring to an economic crisis in the Netherlands following the 1959 discovery of natural gas reserves there. One Dutch citizen who experienced that crisis first-hand explains, “Sectors of the economy that we long had pride in, like the shipbuilding industry, we had to close them down.”
A more recent NPR piece, published just last Monday, indicates that the 2012 predictions for a decade-long run of robust economic growth in Mongolia were wrong. Last week’s article reports that Mongolia’s economy “has quickly gone from the world's fastest growing to one of the slowest,” with the World Bank now forecasting growth at less than 1 percent. Drops in coal and copper prices in particular have battered Mongolia: the country’s mining industry and government are both “bleeding money;” its unemployment rate is unofficially between 30 and 40 percent; and the local currency (the tugrik) “is in a free-fall.” Many rural Mongolians are so destitute and devoid of economic options that they’re risking their freedom and lives by mining outside a corporate apparatus, digging in abandoned Soviet-era mines “on their own to make ends meet.”
For its part, the Mongolian government is in trouble mostly because of infrastructure-related expenditures brought on by the growth of a few years ago and by then-current rosy predictions for more of the same. The NPR article also hints at government mismanagement that bordered on corruption. The government’s debt situation is complicated by the fact that some of it is owed to China, “whose economic and political influence many Mongolians fear, but seems poised to loan even more money to Mongolia.”
An article in The New York Times sheds light on Mongolia’s predicament, including its dependence on its southern neighbor. The Times points out that the Mongolian government is “seeking a $4.2 billion loan from Beijing to pull the country out of a deep recession” and is “running out of hard currency to repay foreign debts.” Mongolia’s position is further weakened by the fact that it exports about 90 percent of its goods to China.
Mongolia’s government assumed even more risk last month by welcoming the Dalai Lama to its capital of Ulan Bator. The exiled Buddhist leader is regarded by China as a Tibetan separatist, and any country that welcomes him necessarily antagonizes Beijing. Mongolian leaders publicly insisted the visit was strictly for religious purposes, but the Times notes that “the trip could have repercussions for Mongolia’s relationship with China, which protested previous visits by the Dalai Lama by briefly closing its border in 2002 and temporarily canceling flights from Beijing in 2006.”
Given these stakes, it’s hard not to admire Mongolian leaders for moving ahead with the Dalai Lama visit even after explicit calls from China’s Ministry of Foreign Affairs to deny him entry. The Times explains that Mongolian Buddhism is allied with Tibetan Buddhism and that many Mongolians revere the Dalai Lama. During his recent visit, “some of his followers traveled hundreds of miles to see him while braving the coldest November weather in a decade.”
Regrettably, the visit seems to have triggered near-immediate negative consequences for Mongolia. The Financial Times reports that it led Beijing to cancel a meeting with Mongolian officials and (perhaps) prompted Chinese towns on the border with Mongolia to increase transport surcharges on coal and copper. Whatever the reason or combination of reasons for the surcharges, they’ve led Rio Tinto to suspend its shipments from Mongolia to China. Mongolian leaders estimate that the surcharges “on coal alone will cost it 30bn tugriks ($12m) a year,” which would be an unsustainable burden on a government already pleading for foreign aid.
While it will do little to alleviate the nation’s larger problems, Mongolia’s hardscrabble environment has led to dominance in one peculiar niche of the global economy: Sumo wrestling. For more on this, check out the excellent “How Mongolia Conquered Japanese Sumo,” published last month in The Wall Street Journal. The Journal notes that professional sumo wrestling exists only in Japan, but that Mongolians are now so successful that they are virtually pushing their domestic counterparts out of the sport. Incredibly, according to the article, Mongolians won 56 of the 58 pro sumo tournaments from January 2006 to January 2016. This success has come despite local regulations that “effectively [ensure] that Japanese trainees outnumber foreign recruits 43 to 1.”
The article attributes the Mongolian wrestlers’ success largely to economic factors. The average Mongolian earns the equivalent of about $4,900 a year, far less than the average Japanese worker. A highly successful sumo wrestler earns about $400,000, which isn’t much of an incentive to the average young man in Japan, considering the years of sacrifice involved and slim chances of success. But $400,000 is a king’s ransom to your average Mongolian.
Given the success and evident physical talents and grit of Mongolian sumo wrestlers, I wouldn’t be surprised if an enterprising NFL team in need of interior linemen sends a scout to that remote region. There would be plenty of incentive for the local talent — the median NFL player salary last year was $860,000.