July 31, 2011
CHOOSE THE NORWAY MODEL:
The Luxury Frontier: What happens when a country previously hindered by vastness and foreign rule awakens to wealth on its doorstep? With Louis Vuitton on one corner and one of the world's largest gold deposits down the road, the previously nomadic society of Mongolia is putting down some rich (Maureen Orth, WSJ Magazine)
The fragile coalition government that is up for reelection next year is literally besieged on all sides. To hedge against inflation and to share the wealth, Parliament has passed a law creating a Sustainability Fund with money set aside from mining industry revenue including the Tavan Tolgoi coal profits; sometime in the future, all citizens will also be issued 10 percent of the shares of an IPO the government will offer on the Hong Kong and London stock exchanges. (The government has also established a more general Development Bank.) They know they cannot count on the fluctuating prices of commodities to sustain their long-term growth. When I spoke to Z. Gombojav, minister for foreign affairs and trade, he chose to spin the country's many immediate needs as "vast opportunities and room for investment in infrastructure, including roads and railways, energy, urban construction, light industry and food production."
The reality on the ground is more challenging. For example, Mongolia has the best cashmere in the world, but domestic producers who refine the wool say they are in danger of being put out of business because the government does not collect the 30 percent export tax from the Chinese, enabling them to buy vast amounts of raw wool from the herders at higher prices while domestic producers are fully taxed. According to D. Erdene-Ochir, head of sales for Goyo Cashmere, the government is sacrificing them to the herders. "It's terrible politics to treat herders badly. So there are no taxes and the Chinese manipulate the market. They are supposed to pay the government, but the government doesn't collect. Mongolian companies have to pay income and VAT taxes. . . . If I want to be elected, I cheat the producers not the nomads." He also accuses the Chinese of mixing the cashmere with wool, silk and cotton. "They mix it and call it anything they want. We will be extinct very soon."
There is no doubt that Mongolia is white-hot in multinational-investment circles. One night I attended GE's welcome reception celebrating Mongolia as the 130th country where it does business. GE will begin by selling MRI machines to the country's underequipped and overburdened hospitals. Caterpillar already has a $100 million business going there. "Mongolia is like baking a cake," says business consultant Jackson Cox. "All the ingredients are on the table. You've got everything you need in Mongolia to build a modern, prosperous economy. The only thing that's missing is the political leadership to make the tough decisions. You have to envision the Mongolia you want 25 years from now and then take on the decisions to plan the education, infrastructure and health care to get there."
Nevertheless, most of the Mongolian hands I dealt with seemed to believe things would somehow work out in the end, even though environmentalists rightly fear precious grasslands and watersheds could be destroyed in a country that so far has only been 25 percent geologically explored. As Graeme Hancock says, "There is a very, very active civil society. Companies don't get away with making a mess very long."
The looming question is what Mongolia will do once its finite treasures have run out. "Twenty years from now, if all this mineral wealth--which is not renewable--is not turned into renewable wealth, which is knowledge, then we will have missed the point," says newspaper columnist D. Jargalsaikhan. "This underground wealth needs to stay aboveground to suit our will and aspirations."
"Money without policy does more harm than good," says J. Od, who believes "we are only at the tip of the iceberg" in knowing how rich Mongolia really is.
Posted by Orrin Judd at July 31, 2011 8:16 AM