Source: The Economist                       Date: 01 November, 2010

Mongolians were until recently wont to describe themselves as “beggars sitting on a huge pile of gold”. The country has vast but largely untapped mineral deposits. Until recently wages were low and jobs scarce. Shoppers in Ulaanbaatar were not spoilt for choice—unless they were in the market for dried meat, vegetables or furry hats.

But with the recent launch of several big mining projects, a transformation looms. It will present the government with a different set of problems; how to manage a promised economic boom without devastating the environment or destabilizing either the economy or the nation’s fledgling democracy.

Few doubt that the boom is coming. The IMF foresees a double-digit annual-growth rate for years to come; and a quadrupling of GDP per head—currently a measly USD2,000—by 2018. Two mines in Mongolia’s southern Gobi region are expected to provide much of the new wealth. One, called Oyu Tolgoi, which was given the green light last year, will tap an estimated 40 million tons of copper and also gold. The other is an existing coal mine, Tavan Tolgoi, to which new capacity has been added, including road and rail links to its main customer, China (surprise, surprise).

The government will be a big beneficiary of the boom: it owns a third of Oyu Tolgoi (a Canadian firm, Ivanhoe, owns the rest). Yet the country’s president, Mr. Ts. Elbegdorj, considers it potentially dangerous. “If we get much more income and much more profit in a bad system with bad governance, I think Mongolia is in trouble,” he says.

Mongolian politics is already based on patronage, with politicians invariably offering cash and other goodies for votes. Swollen government coffers could exaggerate these bad habits. Corruption could also thrive—as it did in the 1990s, on the back of a hasty privatization of state-owned businesses soon after the country emerged from the Soviet Union’s shadow and introduced democracy. Indeed, the involvement of many senior officials in mining makes this likely. And even virtuous public spending may push up inflation.

An economy hooked on a handful of commodities is also vulnerable to price shocks. A new fiscal stability law has been adopted, setting indices for commodity prices for budgeting purposes. When prices go above the index, excess revenue will be stored in a “stability fund”. If prices fall, the government can tap the fund to cover its costs.

Other precautions are being taken. New anti-corruption legislation has been passed. And Mr. Elbegdorj vows to help boost investments in non-mining sectors, including tourism, finance and outsourcing. He says that mining’s contribution to output should shrink from 70%, its current level, to around 20% within two decades.

That sounds unlikely. Yet there is hope that Mongolia’s current leaders, who are better educated than their predecessors, do at least understand the dilemmas involved in managing the coming riches and the rising expectations they will bring. “It’s a question of whether we become Nigeria or Chile,” says a senior government adviser, in a country accelerating away from its sleepy nomadic past.