Mongolia is a country rich in natural resources. Its estimated mineral wealth is $1–3 trillion, with coal, copper and gold making up the primary reserves (Fisher et al. 2011). According to data from the Mongolian National Statistical Office (NSO), real GDP grew at an average rate of 9 per cent annually over the past decade, peaking at 17.5 per cent in 2011 and bottoming out at −1 per cent in 2016. These events were the result of expansion and volatility in the mining sector and associated foreign direct investment (FDI). In recent years, according to the NSO, the Mongolian mining sector has accounted for about 20 per cent of GDP, more than 90 per cent of exports and more than 20 per cent of government revenue, but about 3.6 per cent of total employment. According to the Invest Mongolia Agency (2017), more than 73 per cent of all FDI since 1993 has been directed toward the mining sector. This implies that the economy is highly dependent upon the mining sector and immensely vulnerable to commodity-price and FDI shocks. According to the IMF (2017), the annual rate of growth of the Mongolian GDP is projected to average 6 per cent between 2018 and 2022. The impetus of such rapid growth will, again, be the mining boom and FDI. This includes, for example, the second phase of the Oyu Tolgoi copper-and-gold-mining project, developments in the Tavan Tolgoi coal mine (railways, a power plant and a coal-washing facility), and other large-scale mining projects.
This paper evaluates the impact of swings in commodity prices on the Mongolian economy, using a computable general equilibrium (CGE) model. CGE models have attractive features as a policy analysis tool (see Yao and Liu 2000; Devarajan and Robinson 2005), as they can capture the impacts of changes in the commodity prices on the different sectors of the economy and income redistribution among institutions, given their nature and the data they use. In other words, our approach is generous in providing results on a great number of economic variables which may be beyond the limits of typical macroeconomic and econometric models.
We are interested in two alternative scenarios. In the first scenario, we consider a moderate boom in which domestic production and export of coal increase in response to an increase in the world coal price.1 Specifically, we consider the average changes in the price (14 per cent increase) and production (19 per cent increase) of coal between 2010 and 2017. In the second scenario, we analyze the impact of a 20 per cent decline in the world price of metal ores, which is the standard deviation of the copper price between 2009 and 2016. This scenario is an attempt to assess the vulnerability of the Mongolian economy to a highly volatile international copper price. Both scenarios consider the Keynesian (short-term) closure in which the nominal wage rate is fixed and the level of employment is determined endogenously. In general, we find that the moderate boom in the coal sector increases macroeconomic variables – GDP, consumer price index, exports, imports, investment, employment of both skilled and unskilled workers, and the consumption of poor and non-poor households.
The Dutch disease effect is insignificant – i.e., negative effects on the production of the manufacturing and agriculture sectors are small and the production of other sectors increases. In the second scenario, macroeconomic variables, the production of almost all sectors and almost all prices decrease with different magnitudes. A social accounting matrix (SAM) captures the structure of the economy which may have changed slightly in Mongolia over the commodity price cycle in the recent years. In that sense, our simulation results could be considered as year-specific – i.e., the same shocks with a SAM in different years could yield different results.