Syndicate content

Mongolia: Stretching your legs as far as the blanket allows

David Dollar's picture
Local meets global in Ulaanbataar: ice sculptures of Chinggis Khaan in front of the popular Grand Khaan Irish Pub.

It was more than 20 degrees below zero (centigrade) as we visited Ulaanbataar this week.  If you want to understand Mongolian culture and politics you have to visit this coldest of the world’s capitals in the dead of winter.  My wife joined me on this trip and provided some useful perspective since it was her first trip since summer 2005.  What struck her immediately was the absence of traditional Mongolian clothing, which had been prevalent four years before, and the explosive growth of cars and traffic, which had not.  Since 2005 Mongolia has undergone a mining boom as the price of its main export, copper, climbed from historical levels of about $2,000 per ton to a high of $8,685 in mid-2008. 

The commodity price boom meant that Mongolia earned far more dollars for roughly the same physical volume of exports.   This increased income reached a lot of the population through increased government spending and transfers and the real estate and construction booms.  People could afford a lot more imported products including cars, clothing, appliances, and an increasing share of their food. 

The boom has come to an end now because of the global slump.  The copper price has dropped two-thirds in the past few months, and prices of other exports such as cashmere and coal have fallen as well.  Within a short time Mongolia’s balance of payments swung from a surplus of 7% of GDP to a deficit of 7%.  During the good times Mongolia had built up some reserves so that it was able to maintain its exchange rate and import levels for a few months after the commodity prices started to drop.  But about half the reserves disappeared in a few months and it became clear that the exchange rate would have to devalue.

Devaluation is the classic adjustment mechanism for commodity exporters. 
Countries such as Australia, Chile, and South Africa saw devaluations of 30-50% as commodity prices dropped at the end of 2008.  Russia and Mongolia resisted the trend for a while, but are now devaluing as well.  Devaluation was one of the big topics of discussion among the population during my visit.  The Tugrik has devalued from 1100/dollar to 1500/dollar in a short period.  Everyone is unhappy because their salaries and savings no longer buy as much in terms of imports. 

Painful as this is, the adjustment is necessary.  First, it is unavoidable.  I learned a good Mongolian phrase this week: “you can stretch your legs as far as the blanket goes.”  Think of sleeping in a ger in 20 below zero weather, and you get the idea.  Well, Mongolia’s reserves are running low and it is impossible to support the currency any further than the reserves can stretch.

Standing in the middle of recently-developed Ulaanbataar traffic.

But a second, more important, point is that devaluation is a very powerful stimulus to the real economy in this kind of difficult circumstance.  During the boom time the production of all kinds of Mongolian products dwindled – clothing, food items like milk and eggs – because it was cheaper to import them with the earnings from commodity exports. (This is an example of the “Dutch disease” in which a boom in minerals reduces the incentives to produce other things.)  The drop in commodity prices and the subsequent devaluation reverse the Dutch disease.  Devaluation makes imported items much more expensive, and thus encourages the purchase and production of Mongolian goods.  The devaluation also encourages exports.  The global price of cashmere has dropped as part of the slump, but the devaluation means that what herders earn by exporting cashmere remains the same.

Mongolia has great potential outside of the mining sector.  With 15 head of livestock for each person, it could export a lot more meat, cashmere, and cashmere products.  Eco-tourism is just starting to take off.  Winter is daunting, but summer is paradise.  Global tourism will certainly be down this year, but Mongolia is a small economy in the part of the world that will do best this year.  If it can increase its share of tourism even a small amount, that would be significant growth.  Devaluation is a boon to all of these non-mining sectors.  Mining will come back some day, but hopefully Mongolia will have used the slump to diversify its economy in a way that will pay dividends for years to come.

 

Comments

Submitted by Ganzo on
The reasons why devaluation could not be beneficial for Mongolians are countless. Here are the few against your points. First, you made it right that devaluation was a big bolster to the economy encouraging Mongolian goods as such as milk, clothing and others, presumably meat. But not in the case of Mongolia. We do not export in quality but in quantity. We are the exporters of raw materials that already has globalized markets. In the cases of milk, meat and other food products we have embargos from China and Russia. In a classical economic theories of course this is not the case. But we are living in a real world. Second, devaluation discourages import products and encourages locally made products. If we were in US or China of course this is not true but how Mongolians compete with a Chinese shoemaker that made shoe for the past 50 generations??? If we are not talking about genetical inheritances are you against free trade? The fundamental idea for a free trade is a relative advantage, if I am correct. After all, being an insider of the economy any MNT devaluation means a burden on the common Dorj here living in suburban ger areas. What is an economy about? A Balance of payment? A rise in GDP that has no clear traces on personal incomes? OR An improvement in average Dorj's life and his children? We really need to defend Dorj at all costs. And our nice mining resources are there to justify this. Ganzo

Submitted by Anonymous on
Ganzo, with many aspect you might be right, but don't underestimate the ability and our economy behavior despite we are sandwiched between two giant different-rule-awkwards. I have noticed after we have made the devaluation to our Tukrik, there are growing appearance of local product in the market with competitive price reasonable quality. After all, I would say, chinese cheap (used to be) and low quality products are proven to be expensive now and many individual importers have learned or at least have a clue how to produce because in many cases, they needed to improve the quality before sale after importing. So we still can produce, I believe. Our bad reputation black market (not actually black, they pay tax and controlled under the law of state except some pickpockets) has a huge potential of know-how and there are better flexible than the decision makers in Governmental crew. Our mistakes mostly are underestimate and undervalue ourselves.

Ganzo, you are right that devaluation makes ordinary people poorer in that they cannot buy as many imported products. Mongolia is not the only country in this situation. I mentioned that all the commodity exporting countries have devalued. Also, my country – America – has been consuming too much in recent years. I expect that the U.S. dollar will gradually devalue against other major currencies and that Americans will not be able to consume as many imported products. It is hard to see any way out of this adjustment for Mongolia. Half of the international reserves have been used up quickly propping up the currency. As reserves decline, it is not possible to maintain the old exchange rate. Also, I still think devaluation provides some real stimulus to the economy. You mention that there are some restrictions on Mongolia’s exports: that is true, and unfortunate. But still, Mongolia exports meat to Russia and cashmere to China. The devaluation means that the herders that export will earn more Tukrik for their products – and that is a stimulus to them and to the economy. And you are right that there are many products that Mongolia does not make. So the country will go on importing many things from China and others. But there are some products that are produced both in Mongolia and elsewhere. The devaluation gives an advantage to the Mongolian producers of these items in the local market. People will turn away from imports to some extent and buy more Mongolian products. Firms that produce things for sale in the domestic market understand this and are always happy to see devaluation – it makes it harder for imports and favors domestic producers.

Submitted by Salman Anees on
Many thanks for sharing this perspective from Mongolia. Your original post was clear and informative. Please do revisit this topic in a few months to see how Mongolia's adjustment proceeds.

Submitted by Ganzo on
Mongolian parliament has just approved the stimulus plan of 1.1 bln without having any money at their disposal. The problem from my point is two-folded and I want to get your comments. First: Government had no real backing of data - Now we are paying the toll for not having established good statistics, something that was missed since the destruction of socialist cultures or heritages. For example, without knowing how many people will be fired from construction sector and mining sector, how can government devise a stimulus plan? Without knowing real real estate prices and retail sales figures I doubt the plan. Second: The plan mostly directs at long term goals - When we look at the plan it sounds stunning and surprising. I am amused to learn how our government is strategically minded. But after first impression I questioned how those long term plans would help now crippled economy. Well of course 10 years later improved legislative structure would help us very much but what to do with those thousands of seasonal workers now at stake who were supposed to start working from this March?

Ganzo, poor quality data is practically the definition of a developing country. I agree with you on importance of improving good, timely statistics. World Bank is working with other donors to help Mongolia improve overall national statistics. Meanwhile, policy makers cannot wait. My understanding is that some of the stimulus plan concerns outer year expenditures. For the immediate future, parliament has approved an amended budget that is good compromise between the need to maintain key services and the difficult financial condition of the country. In this situation it is not helpful for the government to spend beyond its reasonable borrowing capacity, but I think the final budget for Mongolia in 2009 will be fine, David

Submitted by Ganzo on
David, Though all IBORs including LIBOR are questionable at this moment, I still believe in speculative nature of the pricing mechanis involved in those market benchmarks. I tend to think money market dealers sitting in the banks are the ones who first feels the squeezes and abundances. It seems like UBIBOR is providing some kind of leading sense. If you do have an access through Reuters you can check the website of Mongolian financial markets association. Ganzo

Add new comment