INTERNATIONAL SUPPORT MEASURES THE CASE OF MONGOLIA

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1 FOR PARTICIPANTS ONLY MPDD/CSN/HLAPPD/APOA/2013 ENGLISH ONLY 27 February 2013 ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC UNITED NATIONS ECONOMIC COMMISSION FOR EUROPE OFFICE OF HIGH REPRESENTATIVE FOR LDCS, LLDCS AND SIDS GOVERNMENT OF LAO PEOPLES DEMOCRATIC REPUBLIC ESCAP/OHRLLS/ECE/Government of Lao PDR Final Regional Review of the Almaty Programme of Action for the Landlocked Developing Countries 5-7 March 2013 Vientiane, Lao People s Democratic Republic DRAFT DISCUSSION PAPER 3 (B) INTERNATIONAL SUPPORT MEASURES THE CASE OF MONGOLIA TECHNICAL SESSION 3 Enhancing international support measures for inclusive and sustainable development of the LLDCs (Priority 4 of APoA) The views expressed in this draft discussion paper do not necessarily reflect those of the United Nations or any other landlocked developing country mentioned herein. This draft discussion paper has been issued without formal editing.

2 CONTENTS Page 1. INTRODUCTION OFFICIAL DEVELOPMENT ASSISTANCE: SOME RECENT TRENDS FDI FLOWS: CURRENT TRENDS AND PROSPECTS PROMOTING REGIONAL AND SOUTH-SOUTH COOPERATION LOOKING FORWARD CONCLUSION... 9

3 1. Introduction Mongolia has been one of the world s fastest-growing countries in recent years, with GDP growth accelerating to an unprecedented 17.3% in 2011, from 6.4% in 2010, and the economy has since continued to grow in double-digits, albeit at a slower pace. While most of this growth is inevitably tied to Mongolia s mining sector, its expansion is having a huge impact on the development of other sectors, including construction, agriculture, information technology, and tourism. The path towards Mongolia s sustainable prosperity is still long and problem-ridden. Despite advances in fighting unemployment and poverty, high inflation rate is reducing real wages, while internal migration is causing new social tensions. Sharply rising resource revenues and pro-cyclical fiscal policy could result in another boom-and-bust cycle, of the kind that Mongolia experienced before. 2. Official Development Assistance: some recent trends During the early years of the transition, Mongolia heavily relied on foreign aid. ODA was vital to bolstering democracy and economic growth, especially during the early years. Today foreign investment and trade have superseded foreign aid in underpinning economic development. In recent years, due to rapid economic growth, Mongolia s total net ODA as a percentage of GNI has steadily decreased from around 17% in 2001 to less than 6% in The total amount of ODA inflows has remained relatively stable at around US $200 - $300 million per year during the same period. In 2010, total grants to Mongolia amounted to US $215 million while gross loan equaled US $23.68 million. Figure 1 : Official Development Assistance in Mongolia 1

Source : http://www.aidflows.org/mn_beneficiary_view.

of Korea. Japan has consistently been the largest ODA donor to Mongolia since the early 1990s (table 1).

4 Source : The five top development partners of Mongolia in terms of average gross ODA disbursements are Japan, the Asian Development Bank, the World Bank, United States and Republic of Korea. Japan has consistently been the largest ODA donor to Mongolia since the early 1990s (table 1). The Asian Development Bank provides the largest amount of multilateral ODA to Mongolia, although the total size of multilateral ODA is smaller than bilateral ODA. Table 1: Top Ten Donors of gross ODA ( average) Countries (in million USD) 1 Japan 81 2 ADB Special Funds 55 3 IDA 49 4 United States 41 5 Republic of Korea 36 6 Germany 30 7 Switzerland 11 8 EU Institutions 9 9 Netherlands 9 2

10 Australia 7 Source: http://www.oecd.org/dac/aidstatistics/1882335.gif Economic infrastructure and services is the first priority for ODA to Mongolia (table 2).

5 10 Australia 7 Source: Economic infrastructure and services is the first priority for ODA to Mongolia (table 2). In particular, the provision of adequate transport infrastructure is seen as an urgent priority in order to support stable and broad-based economic growth through higher productivity of key industries and rural development. The second priority area is social development. In particular, Japan s ODA mostly targeted enhancing food security and improving infrastructure for water, energy and transport. 1 Table 2: Gross ODA Disbursements by sector (in million USD) Source : 3. FDI flows: current trends and prospects Mongolia was the second largest LLDC recipient of FDI inflows in 2011, with 14% of total flows, only trailing Kazakhstan (37%). Inflows were equal to US$ 5.3bn (62% of GDP), more than double than in While the current account deficit has widened to 35% of GDP (from 14% in 2010), such record FDI inflows have proven sufficient to finance the gap. Foreign companies bring world-class expertise, knowledge, products and technology to Mongolia. The Oyu Tolgoi copper-gold project (OT) is the main FDI, having brought over US$ 2bn into Mongolia through technology, jobs, and other revenues in OT, one of the world s largest untapped copper reserves, is expected to come under steam in 2013 and is estimated to produce 500,000 tonnes of copper and 500,000 ounces of gold a year for the next 35 years. In addition, the Tavan Tolgoi (TT) mine is among the world s largest coking coal deposits. By nationality, China is the largest foreign investor, with slightly more than half cumulated flows since In addition, negotiation of the Economic Partnership Agreement with Japan may bring in more FDI to Mongolia (table 3). 1 See 3

6 Table 3: Top twelve investors in Mongolia (in million USD) Country % Total China , , Netherlands , UK Virgin Islands Luxembourg Singapore Canada Korea USA Hong Kong SAR Russia Japan Bermuda TOTAL , , , , Source: Foreign Investment Regulation and Registration Department of the Ministry of Economic Development of Mongolia. In its specific policies, laws, and general attitude, the government of Mongolia has tended to support FDI in all sectors and businesses, with no discrimination against foreign investors. There are however some concerns that regulatory and legislative trends initiated in 2009 in the areas of environmental law, taxation, and mineral rights are narrowing Mongolia s openness to FDI. In particular, the recently passed 2012 Strategic Entities Foreign Investment Law of Mongolia (SEFIL) potentially limits foreign ownership of assets and access to use rights in three key sectors, among them natural resource extraction. 2 Although the exact implications of SEFIL remain unclear, investors express concern that the law may bar them from participating in key sectors of the Mongolian economy or force divestment of Mongolian assets and equities in the affected sectors. The delays in striking deals on important coal projects, along with delays in reforming Mongolia s securities laws and equity markets, are additional issues that must be tackled in order for the government to execute multiple reforms and projects. If managed correctly, the medium-to-long term economic outlook should be bright. Although some clouds loom over the OT horizon, this marquee project continues to justify Mongolia s investment potential for most investors. However, legitimate concerns over resource ownership should not deflect attention from improving the business climate. If foreign investors were scared off, this would thus not only hurt the development of the economy, but also lead to a deterioration of the balance of payments. This would increase the vulnerability of Mongolia to poor economic performance of China and international commodity price fluctuations. Given Mongolia s large current account deficit and weak export structure in combination with its dependence on FDI inflows and donor aid to support the balance of payments, external liquidity risk is high. 2 accessed 12 November. 4

7 4. Promoting Regional and South-South Cooperation In the rapidly changing economic landscape, emerging economies including China, India and Brazil are stepping up their efforts to provide development assistance through South- South cooperation (SSC). Geographic proximity, cultural affinity and/or similarities in development context, as well as the quest for mutually beneficial growth opportunities, drive SSC programs. Mongolia is the only non-pivotal country to include specific related SSC outcome as a part of the UNDAF (United Nations Development Assistance Framework) country document. 3 For example, with help from the IMF and World Bank, the Mongolian government began an intensive South-South dialogue with Chile, the world s largest copper producer, to share best practices employed in resource-rich economies. The exchange led to important reforms, such as the fiscal stability law and the integrated budget and procurement and social welfare laws. 4 In addition, benefitting from its close proximity to China, Mongolia is engaged in deep and growing cooperation with China in almost all sectors. Most recently, Mongolia and China signed an agreement to further promote bilateral cooperation in the agricultural sector, under the South-South cooperation framework of the Food and Agriculture Organization (FAO). China will continue to provide technical assistance to help enhance Mongolia s agricultural production and will help Mongolia provide training and set up its organic product standards and certification systems. The two countries also agreed to boost cooperation in food safety and agricultural commodity trade negotiations. Russia is also actively cooperating with Mongolia in the energy sector, as Mongolia imports 95% of its petroleum products and a substantial amount of electric power from Russia. Mongolia and Russia currently have joint projects on the development of mineral deposits, transport, infrastructure and agriculture. At the eighth Trilateral Consultative Meeting in October 2012, China, Mongolia and Russia noted the development of the mining sector, the share of transit transport potential of the three countries, the infrastructure, tourism, environment and humanitarian exchanges as prior topics of cooperation and mutual interest. 5 The Turkish International Cooperation and Development Agency (TİKA) has been involved in Mongolia since The Turkish Monuments Project in Mongolia has contributed to the preservation of Orhun Monuments in Kharkhorin, 400 kilometers from Ulaanbaatar. TİKA has opened a program coordination office in Ulaanbaatar in 2004 and has conducted projects until today in the fields of education, health, culture and technical cooperation, which are worth around US$ 20m. In the field of education, more than Mongolian students are enrolled in different Turkish universities. 3 The other ones are Chile, China, Mexico, and South Africa (Mounir Zahran et al. 2011). 4 Economic Premise, September 2012, Number 90, World Bank accessed 7 November. 6 accessed 12 November. 5

8 Mongolia has also been very active in promoting cooperation among land-locked developing countries. By September 2012, six countries including Afghanistan, Armenia, Ethiopia, Lao PDR, Niger and Paraguay agreed to back the Mongolian initiative to establish an international think-tank for landlocked developing countries. 5. Looking forward (a) Market access Strengthening and deepening commercial ties with the world has been a constant preoccupation during Mongolia s journey from a communist economy to a market-based economy. The trade environment, however, still presents many critical elements. The overall Enabling Trade Index calculated by the World Economic Forum ranks Mongolia at the 114 th ranking globally, with problems concentrated in market access and border administration (table 4). In relative terms, at least, Mongolia s performance is better on transport and communications infrastructure and the business environment. Table 4. Mongolia s Enabling Trade Environment Variable Ranking Value Best-ranked Value Overall Singapore 6.1 Subindex A: Market access Singapore Domestic and foreign market access Singapore 6.2 Subindex B: Border administration Singapore Customs administration efficiency Singapore Import-export procedures efficiency Singapore Border administration transparency New Zealand 6.7 Subindex C: Transport & Singapore 6.1 communications infrastructure 5. Availability and quality of transport France 6.3 infrastructure 6. Availability and quality of transport Singapore 6.1 services 7. Availability and use of ICTs Netherlands 6.3 Subindex D: Business environment Finland Regulatory environment Singapore Physical security Finland 6.5 Source: World Economic Forum, The Global Enabling Report Exporters complain about the lack of appropriate production technology and skills and the difficulty in identifying potential markets and buyers; technical requirements and standards abroad and difficulties in meeting quality/quantity requirements of buyers are additional worries. For importers, the most problematic factors are in the order corruption at the border, high transport cost and delays, burdensome import procedures and tariffs and non-tariff barriers. 6

9 Various initiatives have been organized with trading partners to overcome these obstacles. Selected examples include: The EU project towards green products development and labeling, aimed at strengthening the business support network on the development and promotion of sustainable Mongolian products. U.S.-Mongolia Business Forums to promote partnerships between U.S. and Mongolian businesses and organize U.S. trade missions to Mongolia. The signing of the Memorandum of Understanding (MOU) on Trade and Economic Cooperation between the U.S Commerce Department and the Ministry of Foreign Affairs and Trade of Mongolia in Exchanges between the Standards Council of Canada and the Mongolian Agency for Standardization and Metrology (MASM) to reduce trade barriers through the standardization of infrastructure, building on the MOU signed in Japan has financed the new Ulaanbaatar International Airport construction project, as the existing Chinggis Khaan International Airport is surrounded by mountains and topographical and climate conditions restrict take-off and landing, thus causing frequent delay and cancel of flights. (b) Technology transfer (green technology) Mongolia leadership sees as green growth as offering real opportunities for achieving more inclusive growth while protecting the environment. Actions being taken to put the green agenda at the forefront of national development policies recognize the country s economic, institutional and geographic specificities. In particular, authorities have turned their attention to decreasing air pollution, triggered by over-population and coal usage, in Ulaanbaatar, the capital of Mongolia. In addition, a satellite-city is under construction near Ulaanbaatar to limit coal-burning in the capital; population decentralization is promoted; and incentives exist to increase the use of thermal stoves. Mongolia is also exploring ways to utilize solar power, especially in the sparsely populated Gobi region. In recognition of these efforts, in 2012 UNEP awarded President Tsakhia Elbegdorj the Champion of the Earth Award for Policy Leadership. The Global Green Growth Institute is partnering with the Mongolian Ministry of Nature, Environment and Tourism (MNET) to promote programs and joint activities that foster green growth. This will require capacity development and financial support. Some specific examples include: Five projects currently in operation under the East Asia Climate Change Partnership initiative of the Korean government. They are a water resource management project in the new town of Yarmag in Ulaanbaatar; a solid waste management project; mine hazards investigation and establishing a related database; setting up heat and hot water systems; and a forestation and biomass project. 7

10 JICA s river basin management project targets the Ugii nuur, a lake close to Ulaanbaatar, to conserve its wetland and ecosystem and promote its sustainable utilization. (c) Productive capacity development For Mongolia to grow at a high and sustained rate for a long period of time, record a high rate of technological change and productivity growth, generate jobs creation, and therefore rapidly reduce poverty it is necessary to accelerate the pace of productive diversification and transformation. The policy space for industrial policies has shrunk in the recent past, as a result of negative experiences with extensive state ownership and partly because trade agreements have outlawed the use of some of the instruments that were widely used in the past. Mongolia has made considerable progress in introducing cross-cutting measures to improve the enabling environment for sustainable enterprises. According to Doing Business (table 5), it was the seventh global top improver in the past year. Mongolia enhanced the ease of doing business through three reforms, making it easier to start a business (by eliminating the minimum capital requirement for limited liability companies), get credit (by guaranteeing borrowers right to inspect their personal data) and protect investors (by increasing the disclosure requirements for related-party transactions). Nonetheless, its distance to the frontier, which represents the world s highest performance, remains considerable and has come down very slowly since In fact, to take the two countries that precede and follow Mongolia, respectively, in alphabetical order and share some historical and institutional traits, both Moldova and Montenegro were faring worse in and have overtaken Mongolia in the intervening period. Table 5: Doing business in Mongolia Topic Rankings DB 2013 Rank DB 2012 Rank Change in Rank Doing business Starting a business Dealing with construction permits No change Getting electricity Registering property Getting credit Protecting investors Paying taxes Trading across borders Enforcing contracts No change Resolving insolvency Source: In addition, the authorities have also use institutional, incentive and partnership measures to promote productive transformation and diversification in sectors with high growth and 8

11 job creation potential. The European Bank for Reconstruction and Development, with EU funding, has launched a 5-year project in support of the sustainable development of a competitive micro, small and medium sized enterprises sector, through the enhancement of the business enabling environment and the strengthening of the relevant institutions. In March 2012, the prime ministers of Mongolia and Japan established the Economic Partnership Agreement (EPA) to boost cooperation in the development of natural resources and infrastructure. EPA is a wide-ranging free trade agreement that includes intellectual property rights protection, liberalized investment rules and free movement of labor and will mark the first-ever FTA for Mongolia. 6. Conclusion Twenty years ago, Mongolia embarked in a difficult transition, as Soviet aid disappeared almost in an instant, pushing the country into an unprecedented economic crisis. It took years for the country to recover from this crisis and transform itself. If managed properly, mineral riches can now become bases for sustainable development and put Mongolia on the road to economic prosperity. Achieving these goals requires creating a transparent and predictable business environment, strengthening the rule of law, reducing corruption, and utilizing best international practices. Against this backdrop, the need remains clear to provide financial, institutional and technical support and preferential trade-related treatments, on conditions that are of mutual benefits to Mongolia and its development partners. 9

12 References Andersen, John (2012), Market Access and Compliance, address to the 15 th Annual NAMBC Investors Conference, Ulaanbaatar, 16 October. Mounir Zahran,, M., Enrique Roman-Morey and Tadanori Inomata (2011), South-South and Triangular Cooperation in the United Nations System, Joint Inspection Unit, JIU/REP/2011/3, Geneva. U.S. Embassy (2012), Mongolia Investment Climate Statement, Ulaanbaatar. 10

MONGOLIA S FOREIGN INVESTMENT POLICIES AND PERSPECTIVES

MONGOLIA S FOREIGN INVESTMENT POLICIES AND PERSPECTIVES Mr. ENKHBOLD Vorshilov, Director General, Department of Foreign Trade and Economic Cooperation, Ministry of Foreign Affairs, Mongolia KEY FIGURES