Mongolian Economy and Trade
Mongolia is a landlocked country in the centre of the Asia and it is bordering with the People's Republic of China and Russian Federation. Mongolian population is 2,736.800. Mongolian capital is Ulaanbaatar and it is home to about 38% of the population.
Mongolia was a communist country before 1990, therefore Mongolia was a member of the USSR Council for Mutual Economic Assistance (COMECON) and had an economic support from USSR and other communist countries partners. It made a good condition to access the COMECON member counties markets at the same time contributed to create high levels of human development. The collapse of COMECON caused Mongolia to change its place in the world economy. Mongolia seeks new trading partners in a competitive environment which caused to its accession to the WTO. It provided benefits to Mongolia in terms of improved and more secure access to markets.
On the other hand, not exercised new market based economy contributed to a painful transition process market by economy recession like in rise of unemployment. While the collapse of the manufacturing sector was hastened by the demise of COMECON, the response served mainly negative impact on human development. In recent years the minerals sectors has grown and this has resuscitated some progress on economy and human development, but it is the case when other sectors of the economy make big leaps. Even when average growth rates look good, they conceal the persistence of poverty which is around “one third of the total population live in poverty.” Mongolia can reduce the poverty due to trade and underdeveloped manufactures, which will build up a strong and competitive economy and my question is to find out the way of the profitable development in Mongolia.
II. Economic Sectors
Economic activity in Mongolia is centred on nomadic livestock raising and mining. The country has some of Asia's richest deposits of minerals, such as copper, coal, molybdenum, tungsten, and gold. Starting in 1991, Mongolia made a rapid transition from a Soviet-style planned economy to a market economy. The Government made major reforms in the areas of price liberalisation, privatisation, agriculture, industry, and banking, as well as towards creating market-based institutions. The period from 1991 until the present in Mongolia can be characterized as a time of transition: political transition to democracy and institutional and economic transition to a market economy.
A parliamentary democracy was established, and the legal system was reformed to support the private sector and protect citizen's rights.
The government made major reforms in the areas of price liberalisation, privatisation, agriculture, industry, and banking, as well as toward creating market-based institutions.
Between 2003 and 2007, high rates of economic growth increased, and the poverty has gradually declined. The mining sector's contribution to revenues has sharply increased, due to increasing the price copper and gold during that period.
Mongolia further facilitates opening its economy and develops a close cooperation with its neighbors and other countries in the region. An active participation in international and regional organizations may become a key to success.
The agricultural and livestock sector is still the largest employer in Mongolia. Agricultural products include wheat, barley, vegetables, forage crops, sheep, goats, cattle, camels and horses.
Agriculture employs over half of the labour force in Mongolia and is the most importance source of income in rural areas. The total heads of livestock, including camels, horses, cattle, sheep and goats are now around 45 million. Regrettably, because our meat products are not internationally certified our neighbors import them at a very low price. In other words, there is little market access for Mongolian exports due to the lack of certification.Thus, we cannot revive the manufacturing sector without first rehabilitating the livestock sector, particularly veterinary and animal breeding services, raw materials and final products quality control.
Mongolia is rich with minerals, which at present remain unexploited. Mongolia's extensive mineral deposits include copper, coal, molybdenum, tungsten, and gold. The development of Mongolia's mineral resources over the next decade is expected to increase the real economy, eliminate unemployment and reduce the poverty in the country.Mongolia is ready to start the exploitation of strategic and other major mineral deposits, such as the Tavan tolgoi coking coal deposit, Oyo tolgoi copper-gold deposit, Tumurtei iron ore deposit, Tsagaan suvarga copper deposit and Asgat silver-mix metals deposit.
In the past, Mongolia was not able to develop or exploit discovered mineral resources because of a lack of infrastructure and capital investment. Since 1973, Mongolia, with financial and technical assistance from bilateral an multilateral donors, has set up and operated joint ventures to explore and develop major deposits of gold, copper, molybdenum, uranium, coal and fluorspar.
Mongolia is now becoming one of the largest producers of several of these metals and minerals. Mongolia produces nearly 15 percentof the world's fluorspar and is a major producer and exporter of copper, molybdenum and uranium.
The Government of Mongolia has recently signed an investment agreement with Ivanhoe Mines (a Canadian firm in which Anglo-Australian mining company Rio Tinto is a majority investor) to develop the Oyu Tolgoi copper-gold mine. Once in full operation, that Oyu Tolgoi copper-gold mine could make Mongolia one of the largest copper producers in the world.
Mongolia's existing and newly discovered natural resources are its comparative advantage. However, most of locally produced mineral products are being exported in the form of raw materials. The ultimate goal is to reduce the export of minerals in the form of raw materials and increase the production of higher value added mineral products for both domestic and foreign markets.
Foreign trade plays an important part in Mongolia's economy. Since acceding to the World Trade Organization in 1997, Mongolia has substantially liberalized its trade regime. This liberalization has involved the reduction of tariff rates and elimination of a number of import licensing requirements. Mongolia's overall trade policy objectives are to support economic growth through an effective trade policy, promote the industrial, agricultural and services sectors and increase exports.
More than 50% of our total trade accounts for trade with the Russian Federation and China. The main export products of Mongolia to Russia are mainly products of animal origin and minerals, including beef, horse meat, fluorspar and copper concentrates and gold and to China are copper and molybdenum concentrates, wool, cashmere, hides and skins. Due to the reason that exports to these countries are dominated by agricultural products, they are fragile to technical barriers of these countries. Besides, access to the Russian market is becoming more problematic, import duties on Mongolian traditional products are sharply increasing and external trade activities are becoming more costly in relation to Russia's accession process to the WTO. In particular, Russia's transportation costs and export taxes have been increased, which negatively affect Mongolia's trade as a whole, and bilateral trade deficit is increasing year by year. As of 2003, compared to 1995, trade turnover with Russia dropped by about 10%, whereas trade with China increased by 3.5 times. Within the framework of its accession to the WTO, Mongolia held bilateral negotiation with Russian negotiators on tariffs in goods since 2000, and the negotiation has successfully completed by the two parties in July 2005.
Mongolian exports are composed of few items, namely minerals such as copper, molybdenum and fluorspar concentrates and gold, textiles and animal originated raw materials such as wool, cashmere, hides and skins, meat and intestines. Minerals and textiles account for more than 60% of total exports. The country's main export destinations are the PR of China, the USA, the EU, the Russian Federation and Singapore. Mongolian export items enjoy preferential tariffs under the GSP schemes of the USA, EU, Canada, Japan and Russia.
The country's imports are more diverse and less centralized compared to its exports. For instance, heavy machinery, equipment, electrical appliances counted for 21% of total imports in 2003, “fuel-21%, vehicles-11%, textiles-10% and food and foodstuffs-8 %.” The imports of these goods account for more than 70% of total imports.
Mining, information technology, agricultural, infrastructure, tourism have been identified by the Government as priority sectors for development and FDI. The imports of some equipments and heavy machinery in these sectors enjoyed customs and VAT tax exemption.
The Government considers FDI as an important thrust in the economic development of the country. In reaching its objective to ensure a 6% annual economic growth, the Government in its Action Program stated to create an environment that protects FDI.
III. Focusing on Traditional Strength Products
In this chapter I would like to discuss the human development in rural Mongolia, and the possibility that trade policy could assist in addressing some of them. It focuses on wheat and milk two products that constituted the traditional strength of Mongolia in the past, but which have fallen into a state of disrepair over recent years. Although other factors have been in play such as privatization and bad weather trade policy remains part of any solution. A revival of these sectors by empowering rural women and men and increasing productivity would be an important step in reducing inequity in Mongolia.
Mongolia is classified as “off track or regressing” with respect to two targets of the first Millennium Development Goals of reducing the number of people in extreme poverty and the proportion underweight children. Over the past decade, rural poverty has increased disparities between urban and rural populations have widened and some agricultural practices are no longer environmentally sustainable. Farms in the socialist era benefited from free or subsidized inputs and even produced surpluses for export but they did so under a soft budget constraint and issues of economic viability then were nowhere as important as now under the market based system.
Trade in agriculture remains at the forefront of global and regional trade agreements both from an offensive perspective of securing new export markets and defensive perspective of ensuring food security and safeguarding the livelihoods of vulnerable people.
A revitalized dairy sector can provide higher incomes and greater employment opportunities to herders. Women are expected to particularly benefit as they have traditionally been involved in the processing of milk. Demand for dairy products in Northeast Asia is expected to grow rapidly with milk equivalent imports of 100 billion kg forecast for 2015.The market strategy could thus focus more on quality control and branding. In this regard, two types of Mongolian milk saihan airag made of Bulgan's mare's and camel milk from Omngobi aimag, have been registered as Geographical Indications. All these measures should ideally form part of an export strategy for milk products that emphasis quality high safety standards and shelf life.
Promoting Mongolian Meat
Mongolia is an eminently pastoral country with a tradition of meat production from horses, sheep, goat, cows, yaks and camels. For the herders to derive income form world markets there are several necessary hurdles to cross. First there is a need to empower herders to meet the SPS requirements in export markets with the aid of modern equipment and technology. Second it will be necessary to enhance the reputation of their product. Third, it would be vital to negotiate improved access to export markets addressing both tariff and non-tariff barriers including those related to the adminidtration of veterinary and sanitary regulations.
The Russian Federation imports 90% of Mongolian meat exports, followed by Japan the Republic of Korea and Kazakhstan. Mongolian companies export meat in the form of low value added products such as frozen carcasses of mammal.
Status and Trends
Mongolia has rapidly embraced free trade and currently has one of the open economies in the world. In 1997, it joined the World Trade Organization and imposed 5.0 percent tariff on most imports and a modest tax on exports of a small number of raw materials. In 2003 the foreign trade volume exceed 1.0 billion US dollars.
Mongolia is trading with more than 80 countries of which the People's Republic of China, the Russian Federation and the USA are the main trade partners.
IV. Improving the Trading System
As I discussed in the first chapter poverty increased dramatically in the early years of transition as national income plummeted, unemployment increased, inflation soared and social spending fell. There is insufficient data on the period up to the mid-1990s. And due to principal differences in survey methodology the data for 1995 and 1998 living standards measurement surveys are incomparable.
Other data on changes in real income per capita, food consumption and herd size among the poor have shown improving trends since 1995. However a reversal took place in 1999 when severe Zud or winter calamities, struck large areas in Mongolia. Many rural people lost their animals and were left without the means to sustain their livelihood. A high in-migration rate has been observed to Ulaanbaatar, Darkhan and Erdenet. Ensuring access to health and education services became a pressing issue not only for rural people, but even more for urban population in the suburbs of the cities. Since then, economic growth slowed down to 1.0-1.1 per cent in 2000 and 2001 due to sharp decline in agricultural sector, which procedures more than 1/3 of the GDP. However, acceleration was recorded as 4.0 per cent in 2002 and 5.5 per cent in 2003 respectively.
As a result of privatization of agricultural farms and manufacturing sector in the 1990s, the quantity unemployed people was raised. In this connection the quantity people, who is living below the poverty line was increased.
36.3 percent of Mongolians-or 828,000 people lived in poverty in 1995. The people, who lived in poverty in rural areas was 43, 4 percent and urban areas was 30, 3 percent in 2002-2003. At the same time, the labour-force participation rate was 64, 2 percent in the country.
I think to reduce poverty and unemployment in Mongolia, Mongolian Government should take the following measures:
- Revitalize the manufacturing sector to provide new employment for displaced
workers and young people and growth the number of job place
- Create favorable business environment for the young people
- Remove trends toward greater inequalities in Mongolian society
- Promote rural development and enhance food security
- Increase regular income for herder households in agriculture
- Develop labor market system in complex, train officials and workers in line with market demand, improve their practical skills;
- Protect citizen's right to work, increase their salary
- Increase the number of students in vocational training centers
- Increase the average family income and increase he number of citizens receiving middle income
- Reduce the unemployment rate
- Increase the volume of employed persons above 35 years
- Increase the quality and accessibility of social welfare services
- Allocate financial aid and welfare to newly-weds, children and new-born babies
- Provide social and medical insurance for every herder.
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