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Poverty, Inequality, and the Negative Effects of Mongolia’s Economic Downturn

June 25, 2014

Asia Foundation 60th anniversary seriesFor the last four years, Mongolia has had one of the fastest growing economies in the world, clocking double-digit growth on the back of a mining boom. The effects of this growth are obvious, especially in the capital, Ulaanbaatar, where cranes dominate the skyline and luxury stores compete for space to attract customers. However, the economic tide seems to be turning, with growth predictions showing a single-digit growth of 9.5 percent according to the ADB, which corresponds to a declining trend starting at a high of 17.5 percent in 2011, dropping to 12.3 percent in 2012 and 11.7 percent in 2013.

For the last four years, Mongolia has had one of the fastest growing economies in the world, clocking double-digit growth on the back of a mining boom. The effects of this growth are obvious, especially in the capital, Ulaanbaatar. Photo/Mathew Pendergast

For the last four years, Mongolia has had one of the fastest growing economies in the world, clocking double-digit growth on the back of a mining boom. The effects of this growth are obvious, especially in the capital, Ulaanbaatar. Photo/Mathew Pendergast

There are several reasons for Mongolia’s decelerating growth. As an economy fueled by the mining sector, Mongolia has suffered from the global drop in prices of coal and copper, two of its main export products, resulting in a corresponding drop of export revenues by $800 million. Another factor is the drop in foreign direct investment of 54 percent last year due to conflicts over mining agreements and licensing and insecurity of investors over the stability of the regulatory framework.

While the economic downturn presents pressing immediate challenges, one of the main long-term challenges for Mongolia has been to ensure that growth is inclusive. Although Mongolia’s economic growth has helped to reduce poverty by more than 11 percent in recent years (from 38.7% in 2010 to 27.4% in 2012), it is clear that some are benefiting more than others from Mongolia’s mineral wealth. There is a perception among many people of rising inequality in terms of income distribution, but also in terms of access to opportunities such as a good education, a good job, or just to get decent healthcare.

Poverty is higher in the rural areas (35.5%) compared to the urban areas (23.2%), as herders in the countryside struggle to survive as their traditional livelihood dissolves, and there are few job opportunities for young generations. Newly introduced Local Development Funds are meant to promote economic development and improved livelihoods at the local level through the involvement of citizens in decision-making. Nevertheless, urbanization is high with many people leaving the countryside and moving to Ulaanbaatar, home to 60 percent of the population, in the hopes of better economic opportunities. Many of these migrants settle in the outskirts of the ger districts, large unplanned settlements, which lack access to basic services such as water, sanitation, heating, schools, and kindergartens. However, given the lack of qualified skills training, these new residents are faced with fewer opportunities in the formal job sector, including the mining sector, and often find themselves unemployed or forced to work in informal jobs where wages are low. As a result, poverty in Ulaanbaatar stood at 19.8 percent in 2012.

As the economy slows, the question now is what the impact will be on poverty levels and income inequality. High inflation averaging 12.4 percent in 2013 has increased living costs in Ulaanbaatar where prices of food, consumer goods, transport, housing, and services such as electricity have risen significantly. Insulating low-income residents from the worst of the impact of high inflation and enabling their full participation in economic development through greater employment and access to basic public services are essential issues that Mongolia’s government will need to address as part of its efforts to get the economy back on track.

In April, Mongolia’s Prime Minister, Altankhuyag Norov, launched a “100-day action plan” aimed at reviving the economy. The prime minister’s 50-point agenda, which was approved by Parliament in May, promises to boost infrastructure, mining, manufacturing, and the development of small- and medium-sized businesses. Proposed actions include the establishment of free economic zones, improving debt management, and flexible provision of services such as credit and leasing. An economic council has been tasked to monitor the implementation of the agenda and provide recommendations to the Prime Minister on key reforms.

If urbanization trends continue, Ulaanbaatar is likely to grow further in size and economic importance, becoming a key economic actor in its own right. While the prime minister’s plan is an important step toward salvaging the economy in the short-term, long-term economic planning will need to be improved to diversify the economy and ensure the sustainability of growth.

The Asia Foundation is supporting the City Municipality of Ulaanbaatar in its economic development planning as well as in improving urban services in the ger districts in order to ensure socially inclusive growth for all residents. Read more about our work there.

Tirza Theunissen is The Asia Foundation’s deputy country representative in Mongolia. She can be reached at tirza.theunissen@asiafoundation.org. The views and opinions expressed here are those of the individual authors and not necessarily those of The Asia Foundation.

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