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World > Asia > Mongolia > Economy (Notes)

Mongolia - Economy (Notes)


ECONOMY
Economic activity in Mongolia has traditionally been based on herding and agriculture. Mongolia has extensive mineral deposits; copper, coal, molybdenum, tin, tungsten, and gold account for a large part of industrial production. Soviet assistance, at its height one-third of GDP, disappeared almost overnight in 1990-91 at the time of the dismantlement of the U.S.S.R., leading to a very deep recession. Economic growth returned due to reform embracing free-market economics and extensive privatization of the formerly state-run economy. Severe winters and summer droughts in 2000-2001 and 2001-2002 resulted in massive livestock die-off and anemic GDP growth of 1.1% in 2000 and 1% in 2001. This was compounded by falling prices for Mongolia?s primary-sector exports and widespread opposition to privatization. Growth improved to 4% in 2002, 5% in 2003, 10.6% in 2004, 6.2% in 2005 and 7.5% in 2006. Much of the growth was due to high copper prices and new gold production. Other than agriculture (20.2% of GDP), dominant industries in the composition of GDP are mining 20.4%, trade and service 24.8% and transportation, storage, and communication 12.2%. Mongolia?s economy continues to be heavily influenced by its neighbors. For example, Mongolia purchases 80% of its petroleum products from Russia. China is Mongolia?s chief export partner and a main source of the ?shadow,? or ?gray? economy. The gray economy is estimated to be at least one-third the size of the official economy. The actual size of this gray--largely cash--economy is difficult to calculate since the money does not pass through the hands of tax authorities or the banking sector. Remittances from Mongolians working abroad, both legally and illegally, constitute a sizeable portion. Money laundering is growing as an accompanying concern. Mongolia settled its large debt to Russia at the end of 2003 on favorable terms. Mongolia, which joined the World Trade Organization in 1997, is the only member of that organization to not be a participant in a regional trade organization. Mongolia seeks to expand its participation and integration into Asian regional economic and trade regimes.

Because of Mongolia's remoteness and natural beauty, the tourism sector has recently shown signs of rapid growth. With spiking international commodity prices, there has been a surge of international interest in investing in Mongolia?s minerals sector despite the absence of a policy environment firmly conducive to private investment. How effectively Mongolia mobilizes private international investment around its comparative advantages (mineral wealth, small population, and proximity to China and its burgeoning markets) will ultimately determine its success in sustaining rapid economic growth. Parliament passed a windfall profits tax on copper and gold that took effect in mid-2006, and major amendments to the minerals law allowing the government to take an equity stake in major new mines. It is unknown what effect these laws will have on mining activities in Mongolia, although major potential investors expressed considerable concern about the changes.

Parliament in 2006 passed four new tax laws: personal and corporate income, value-added and excise, intended to reduce the overall tax burden on taxpayers and stimulate the economy. Most provisions of the new laws took effect January 1, 2007. No projections of the economic effects are currently available.

Environment
As a result of rapid urbanization and industrial growth policies under the communist regime, Mongolia's deteriorating environment has become a major concern. The burning of soft coal by individual home or ?ger? (yurt in Russian) owners, power plants, and factories in Ulaanbaatar has resulted in severely polluted air. Deforestation, overgrazed pastures, and efforts to increase grain and hay production by plowing up more virgin land have increased soil erosion from wind and rain. With the rapid growth of newly privatized herds, overgrazing in selected areas also is a concern. Recent rapid and relatively unregulated growth in the mining sector for minerals (gold, coal, etc.) has become the focus of public debate. A great deal of public attention is being paid to non-transparency of the government process of awarding licenses, the equitable sharing of economic rents between foreign investors and the Government of Mongolia, and the potential impact on the environment. However, the real environmental concern is the sharp boom in the number of informal gold miners, who frequently illegally use mercury, which may lead to an epidemic of mercury poisoning.


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