Running on Empty Mongolia's Economic Crash
Mattis, Aaron, Harvard International Review
A financial crisis that began with a collapse in the American housing market has enveloped a country where half the people live in tents. Facing a budget shortfall and rising inflation, Mongolia has taken on a series of direct loans from other countries, as well as a US$229.2 million loan from the IMF, accumulating total debts of nearly US$1 billion. Mongolia took on this debt to ease widespread economic pressure resulting from a deep recession. From bankers to nomads, the landlocked country's three million citizens are struggling to cope with the familiar symptoms of a recession: joblessness, illiquidity, and uncertainty. Mongolia's political system is also in flux; Tsakhiagiin Elbegdorj of the Democratic Party defeated incumbent Nambaryn Enkhbayar of the Revolutionary Party to win the presidency in May. Consequently, Mongolia's economic policy is the subject of close international attention. Mongolia's prospects of repaying its loans and achieving long-term economic stability hinge on the government's ability to expedite the approval of important mining contracts that could significantly increase the country's economic output.
Prior to the worldwide recession, Mongolia's star was rising fast. Increased international demand for luxury clothing helped to grow Mongolia's cashmere industry, increasing the income of the country's many nomadic goat herders. Meanwhile, the bubble in commodities had a twofold benefit: both raising the profits of Mongolia's mining sector and increasing the value of the country's massive untapped mineral resources. As a result, Mongolia experienced robust economic growth. In 2007, real GDP increased by 9.9 percent; in the first quarter of 2008, it increased by 10.2 percent. The impact of this growth was a highly improved standard of living. As wages and social benefits increased, per capita GDP skyrocketed, more than doubling from 2005 to 2008. A boom in construction soon followed, as Mongolians tapped into their newfound wealth.
When the economic crisis hit, however, Mongolia's rise took on the trajectory of a falling star. Like many countries around the world, Mongolia was financially overextended, growing too quickly and taking on too much debt. Faced with 34 percent inflation, the government had no choice but to raise interest rates, making it more difficult to obtain loans. As a 50 percent drop in cashmere prices and a similar collapse in the international market for minerals hit Mongolia's two largest industries, the many Mongolians who had taken out loans to expand their herds, or to buy air conditioning for their tents, found themselves unable to repay their debts and unable to obtain more credit.
Faced with the prospect of foreclosure, many Mongolians have been forced to sell their livestock to avoid defaulting on their debts; these sales have flooded the market, lowering the prices the sellers would normally receive. As these economic shocks trickle through other sectors of the economy, such as construction, Mongolia is experiencing a dramatic increase in poverty and unemployment. Many are growing hungry, while a wave of former herders looking for work in the cities may cause economic dislocation and social unrest.
Mongolia has one way out of this downward cycle of poverty: resource development. …