Capital city of Mongolia, Ulan Bator
Photograph: Photo by Dave, used under CC BY

Inside a cramped traditional tent dwelling called a ger, a formerly nomadic family sleeps and cooks around a coal stove in the polluted provincial capital of Bayankhongor.

They have relied on the eldest son’s military income since 2000, when a summer drought followed by a harsh winter in the central plains of Mongolia wiped out their herd of goats.

"We didn’t know how to live. We turned to ninja mining but did not find any gold," said the mother Ariunaa Zinameder, 54, referring to the practice of digging small, unauthorized mines for gold.

Since then, the family of eight has subsisted on 36 dollars worth of food stamps a month. They are part of Mongolia’s increasing number of impoverished, who have not benefited from the country’s resource wealth amid a steep drop in global commodity prices, stalled mining projects and domestic political disputes.

Mongolia was the world’s fastest-growing economy just a few years ago. Foreign direct investment fueled the boom, peaking at around 5 billion dollars in 2011, before dropping to nearly zero last year.  Unemployment in Mongolia reached nearly 12 per cent this year, compared to 5 per cent in 2012. Gross domestic product (GDP) growth slowed last year to 2.3 per cent, the weakest pace since 2009. Analysts now forecast GDP to grow at just 0.8 per cent in 2016.

Marcel Venhofen, executive director of the German-Mongolian Business Association in Ulan Bator, said it is rare for foreign companies to maintain offices in Mongolia.

"Many have kept strong ties with local contacts, but the market here is too small and a lot of companies prefer to fly in and out to do business. [German chemical company] BASF pulled out of production here after the decline of the mining boom," Venhofen told dpa.

Following a two-year dispute with the government, international mining company Rio Tinto finally gave approval in May for a 5.3-billion-dollar expansion of the Oyu Tolgoi copper mine in Mongolia. But experts say that will do little to improve the overall economic situation.

Some see Mongolia’s lackluster foreign trade as a failure in its “third neighbour policy” to improve relations with other countries to balance out the powerful influence of Russia and China.

As a country with a population of 3 million that depends on mineral resources, some Mongolians have an uneasy attitude toward interest from foreign investors. "A lot of investors’ thinking is that Mongolia is resource-rich and we have projects ready to hand out to foreign partners. But most of the projects are controlled by the private sector. This makes it harder [for the government] to encourage cooperation," said Sanjaasuren Oyun, a prominent politician and leader of the Civil Will Party.

"In order to expand our economy, we have to export, but unlike other resource-rich countries such as Canada and Australia, we lack a track record in the mining sector and have messed up with bad decision making," Oyun told dpa.

Part of the problem stems from the fact that Mongolia was focused on developing exploitation of coal deposits during the past few years. That backfired because of factors including climate change mitigation and China’s lowered demand for coal, according to experts. 

"Mongolia, like every other resource economy, might have prepared more diligently for the world commodity price downturn. Not only was the Mongolian government unprepared, it exacerbated it by policy decisions that scared foreign investment off," said Julian Dierkes, Mongolia expert at the University of British Columbia.

Dierkes cited a series of decisions before 2012 by the then-governing Mongolian People’s Party to regulate foreign investment that was seen as inhospitable to investors.

Prime Minister Chimed Saikhanbileg of the Mongolian Democratic Party came to power last year promising to revive the economy through foreign investment in the mining sector.

Saikhanbileg's party is expected to lose the parliamentary elections on June 29, since voters have seen no improvement in the economy. Relatively high rates of inflation over the last few years have combined with the decline of Mongolia’s currency, the tugrik, leading to rising unemployment and poverty, Dierkes noted.

As for Mongolia’s deposits of rare earths, it would take "five years or more to develop rare-earth extraction," according to Stefan Hanselmann, program director of the Integrated Mineral Resource Initiative.

The country currently extracts rare-earth minerals from four larger mines, which are used as components in the manufacture of high-tech products including aircraft engines, hybrid cars and telescope lenses.

"On a world scale, however, these deposits are not regarded as very significant ones," said Harald Elsner, economics geologist for Germany’s Federal Institute for Geosciences and Natural Resources.

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