MDRC

Dr. Alicia Campi

U.S. – Mongolian Economic Relations in the 1990s

This year is the 20th anniversary of the establishment of U.S.-Mongolian official diplomatic relations on January 27, 1987. There has been a seismic change not only in Mongolia’s diplomatic and foreign policy during these two decades, but concurrently in its trade patterns. Mongolia in its transition from a command socialist economy to that of a democratic free market has expanded its economic ties with Western Europe, the U.S., Northeast Asia--particularly Japan and Korea, and especially its southern neighbor, China. As we know from the previous speakers, prior to 1991, 80% of Mongolia’s trade was with the former Soviet Union and another 15% with other Comecon  or CMEA countries. In 1990 Mongolia exported only $11 million worth of goods to China, as compared to $517.5 million to the USSR. By 2000 Mongolia shipped nearly 59% ($274 million) of its exports to China, and less than 10% ($45 million) to the Russian Federation. In 1990 the Soviet Union was Mongolia’s largest foreign investor by far. After 1997, China has been Mongolia’s largest investor (37.9% in 2004),  and largest overall trade partner since 1999.  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.

I am speaking on U.S.-Mongolian economic relations. One may wonder why I have chosen to concentrate on the decade of the 1990s for today’s presentation. As someone who lived and worked in Ulaanbaatar in 1990 and then created in 1991 a private American consulting company specializing in finding Mongol partners for American investors in all sectors of Mongolia’s economy, I have seen in over two decades many positives and some negatives in the United States’ economic relations with Mongolia. The U.S. Government’s donor policies and the activities of the early American investors in the 1990s established a foundation of practices and an overall business perception which is the legacy governing today’s Mongolian investment climate for American entrepreneurs. To some extent the 1990s were the heyday for American-Mongolian economic ties. The United States at one point in the 1990s was Mongolia’s largest foreign investor, because of the presence of SOCO Tamsag in the petroleum sector, which was sold in 2004 to the Chinese and Mongol Amicale in cashmere and camel wool.  In comparison, in 2006 it had slipped to 5th place. This story of the 1990s, what happened to cause the loss of momentum, and what lessons can be drawn from these experiences to revitalize American economic ties with Mongolia are the themes of my presentation.

When relations were established, the U.S. Government initially valued Mongolia only for its strategic and geographic position as a window on the Sino-Soviet relationship. For Mongolia, the new official relationship with the United State gave its political independence and sovereignty greater status, and expanded its foreign policy options. The United States at that time had no real trade volume with, nor serious trade expectations for Mongolia. In 1990 total trade turnover between the two countries was a mere $900,000, which were exports of mainly animal hair and animal by-products. There were almost no American imports reaching Mongolia.  In fact, when I was an officer posted to the U.S. Embassy in Ulaanbaatar in 1990, I was asked to go to the Mongolian stores to inventory American products in the capital city. I visited a few small government-run stores, two hotels, the National Department Store, and black market kiosks, and only found 5 American products available. They were Mars candy bars, Del Monte canned fruit and vegetables, Kodak film, Bic pens, and Schick razors.  American investment was represented solely by Mongol-Amicale, a cashmere joint venture established in 1990 by a large NYC men’s camel hair coat company with a Mongolian State enterprise, which procured cashmere and camel hair fibers from local Mongol herdsmen, but did not fully clean and comb these raw materials before shipping them out of the country for weaving into products. It now has moved operations to Inner Mongolia.

The U.S. Government established its first embassy in Ulaanbaatar in June 1988, but the first U.S. ambassador, Richard L. Williams, was not resident. The American Government started to expand relations primarily in the cultural and economic fields. In 1989 and 1990, a cultural accord, Peace Corps accord, consular convention, and Overseas Private Investment Corporation (OPIC) agreement were signed. In the spring of 1990, when Mongolia peacefully abandoned communism and embarked on its economic transition and democratization, the United States seriously modified its goals for its relationship with Mongolia.  This was symbolized immediately by the fact that the new ambassador, Joseph E. Lake, arrived in July to permanently reside in the country.

Policymakers from both the U.S. and Mongolia saw strategic advantages in strengthening the bilateral relationship, especially political ties. During the early 1990s many Mongols, including the first democratically elected President, Mr. P. Ochirbat, believed it was very important to quickly establish a strong working relationship with the United States. Ochirbat visited the United States in January 1991 and met with President George Bush. President Ochirbat told his nation that “the U.S. public highly valued Mongolia’s democratic revolution of 1990 as an excellent example of reform and transition in a peaceful way.”

Secretary of State James Baker III visited Mongolia in August 1990 and in July 1991, initiating a peculiar but potent infatuation with Mongolia by the U.S. Congress and successive American administrations. President Clinton and President Ochirbat met in New York in 1995; Secretary of State Madeleine Albright and Mrs. Hillary Rodham Clinton visited Mongolia in 1998. These visits have snowballed in this decade with the visits of former Secretary of Defense Donald Rumsfield, Secretary of State Condoleezza Rice, and even President George W. Bush journeying to Mongolia in 2005. Former Mongolian President Bagabandi met President Bush in Washington, DC in 2004, and we are expecting that Mongolian President Enkhbayar will be making a very public state visit to the White House this fall. Of course, all these high-ranking visits have really advanced the closeness of U.S.-Mongolian political and military ties.

The U.S. sought to create a stable free market and democratic society in Mongolia that would positively influence the North Asian region, and be a model for other former socialist states making the same difficult transition. Economic activity in Mongolia in socialist times as well as today was based on herding and agriculture. Large-scale Soviet assistance disappeared almost overnight in 1990-91 at the time of the dismantlement of the U.S.S.R., leading to a very deep recession. The first goal of the U.S. and other western donors was to stabilize the collapsing economy that suffered widespread meat, milk, and power shortages. People fled the industrial cities of Darhan, Choibalsan, and the aimag capitals to pour into Ulaanbaatar.  The city of 300,000 exploded into one million, and concomitantly social problems such as alcoholism, hooliganism among the youth, homeless street children, and crime jumped. As the bankrupt state enterprises collapsed, unemployment and inflation soared.
The U.S. provided Mongolia emergency energy assistance back in 1991, then provided emergency butter and wheat in the mid-1990s, and finally was very active in supplying emergency aid during the harsh winter dzud disasters for three successive years from 1999-2002. In most years since 1993, the United States Department of Agriculture provided food aid to Mongolia under the Food for Progress and 416(b) programs.

For the United States, economic ties with Mongolia in the 1990s overwhelmingly meant donor assistance, rather than joint ventures and private investment. There was the perception by Mongolia and other foreign donors that the U.S. as well as the International Monetary Fund (IMF) set the development aid agenda for Mongolia during the decade, even though the planning sessions took place in Tokyo. It was the United States in its role as winner of the Cold War that took the lead in devising and implementing programs both to accelerate Mongolia’s political reforms and its transition to a free market economy. This strategy has been called “shock therapy,” and was quite controversial at the time.  However, from the beginning of the new relationship and throughout the 1990s, the U.S. was only the third largest provider of foreign donor assistance to Mongolia. Aid was dispensed at the rate of about $12-17 million a year through USAID and food aid.


Mongolia during the last decade of communism derived one third of its annual budget from Soviet assistance.  In the early years of the democratic era, with the crumbling of the socialist command economy, this dependency tradition continued as Mongolia became heavily dependent on official development assistance (ODA) from western nations and Japan.  In the 1990s 24% of Mongolia’s GDP came from foreign aid.  From 1991 to 2000 total ODA was almost US$1.9 billion, making it the 5th most aid dependent developing country in the world.  This pattern continued into the new millennia. For example, in 2005 Mongolia received $203.35 million in economic aid.  From 1990-2004, total ODA to Mongolia from bilateral and multilateral donors was $2.7 billion.
With this amount of assistance, growth was expected to be rapid.  Instead the growth of per capita income has been slow and in the second half of the 1990s the growth rate fell.  Instead of contributing to faster growth, foreign aid became a replacement for the Soviet aid of the socialist period, a substitute for taxation, a discouragement to savings, and mainly used to sustain consumption.  Economic expert Terry McKinley, who did a UNDP-funded study, asserted that “The problem is that the very large inflows of foreign aid and modest inflows of private foreign investment have had a low return, measured in terms of their impact on the growth rate. Donors either are not aware of this or are complacent.”  Because large inflows of foreign aid pushed up the exchange rate, Mongolia’s goods are less competitive in world markets and locally produced products are less competitive than imported goods.

Yet, the major goals of the foreign donor community to assist Mongolia in its transformation have remained quite consistent in these last 15 years.  The ADB, the single largest multilateral donor, consistently has emphasized “the promotion of economic growth for job creation and provision of better essential social services for the poor.”  The UNDP declares its funds for Mongolia will be used to further 1) democratic governance, 2) economic transition and poverty reduction, and 3) sustainable natural resource management.   At least as regards United States’ aid policy, there were some major revisions in focus throughout the decade.  The early years saw American assistance applied only to a few giant projects, such as procuring $5 million of Russian spare parts for the old-style Russian-built power stations in Ulaanbaatar through Raytheon and Morrison Knudsen.  The U.S. power companies hoped that their involvement in the power transmission and heating feasibility studies would lead to big new contracts funded by the ADB, but nothing has materialized, so these American companies have withdrawn from the Mongolian market. USAID also funded multi-year legal training and banking reform. All of the aid money was spent in Ulaanbaatar, widening the gap between urban and country life which accelerated the movement of population to Ulaanbaatar. Finally this negative outcome was recognized by U.S. aid officials, who began to devote some funding to rural development and empowerment projects. However, almost all the American aid benefited non-profit administrators and was not set up to assist American companies enter or work with Mongol partners in the Mongolian market.

Early in the decade political scientists became nervous about China’s potential for monopolizing Mongolia’s economy, as its northern neighbor, Russia had done in the communist period. As a result, a new foreign policy concept, first proposed for Mongolia in 1990 by U.S. Secretary of State James Baker,   called the ‘Third Neighbor Policy,’ was advanced. This strategy concept, which had political, military, cultural and economic components, meant that another large power, such as the U.S., Germany, or Japan, would act as a ‘Third Neighbor’ for Mongolia to counterbalance the traditional roles played by Mongolia’s border neighbors. Mongolian policymakers quickly were enamored by the concept and in the 1990s embarked on the task of ‘searching for the Third Neighbor.’   Another result was that Mongolian political scientists and economists supported Mongolian integration with the Northeast Asian region as the best chance for the country to develop and prosper, as well as to balance China’s economic and political influence.  Northeast Asia was called Mongolia’s natural economic territory,  as a ‘regional Third Neighbor.’  Many Mongolian policymakers embraced this concept, because it seemed a way to become part of the success of the Asia-Pacific economies.  Mongolian leaders did not believe the effects of the Cold War could be swept from the region in only a few years, but some predicted that Mongolia quickly would come strategically under the economic umbrella of the U.S., as well as the Japanese and South Koreans.
Unfortunately, in the second half of the 1990s decade the Asian economic crisis dashed hopes of this special role for Japan or South Korea. Germany was self-absorbed in its own reunification problems, so for Mongolia the only realistic choice was the U.S. At first, American officials dismissed the Third Neighbor concept because they viewed Mongolia as a friendly, but minor nation wedged between significant American rivals, Russia and China.
However, with September 11, 2001 and the rise of international terrorism, the U.S. recalculated its strategic interests and gradually embraced the Third Neighbor relationship. Today the U.S. Government and political scientists do not shy away from this term, but I question whether both sides are defining the term in the same way, or really acknowledging the other side’s point of view. 
When we examine economic relations between the United States and Mongolia, it is clear that these ties from the very beginning lagged seriously behind the momentum of development of political and military ties. There was in the early transition years some U.S. business interest in joint ventures, especially in the mining, oil, and camel hair sectors. While in 1993 there were only 3 American cashmere and camel hair joint ventures,  by the end of the decade there were over fifty U.S-Mongolian joint ventures (mostly in the textile field). Yet from the early 1990s, Americans in the cashmere and camel hair sectors already were complaining loudly that the Chinese were unfair competitors, and year by year the Americans did lose most of that market sector.  The U.S. Government and Embassy did not address this issue in a substantive way. When they in 2006 investigated the problem of Chinese monopoly in this market sector through a costly USAID study,  these American investments already had fled Mongolia. U.S. momentum in the decade continued its slowdown to the point where the Mongolian Ambassador to the U.S., Ravdangiin Bold, in August 2004 told a Mongolian reporter that American investment was stubbornly stagnant. For example, in 1995 U.S. investment in Mongolia was 7.5% of total foreign investment. In the 1990-2001 period this investment share was still 7.3%  of a total of $481 million.   In 2006 U.S. investment has fallen to  

Tradewise, Mongolian-made textiles found a big export market in the U.S. when Mongolia was granted free-trade status in 1999. Exports to the U.S. which totaled $900,000 in 1990 skyrocketed to $92.9 million in 2000, second only to China’s $274.3 million.  U.S. imported goods rose from zero in 1990 to $28.4 million by 2000 (ranked 6th). 

It is true that U.S. companies in the 1990s encountered significant problems.  The initial communist-style inefficient bureaucracy, lack of rule of law in enforcing of legal contracts, very poor infrastructure, and lack of experience in dealing with western accounting and accountability standards then gave way as the decade proceeded to increasingly corrupt, nontransparent decisionmaking, a highly public failure of a city casino operation, and general political instability. Despite the positive development of Boeing delivering a new commercial aircraft to Mongolia and Coca Cola opening Mongolia’s first international product bottling plant, the major American investments in oil and animal hairs became bogged down in constant legal disputes, which would lead them to sell out their investments. Wagner Asia became embroiled in a bitter court case involving $5 million in mining equipment, and the U.S. Embassy itself suspended disbursement of $3 million in aid over a disputed judicial process considering the theft of donated American wheat.  This experience left the U.S. Government more wary and unwilling to work directly with Mongol ministries and companies on development projects. Rather it favored using more non-profit intermediaries as monitoring agencies—which increased administrative costs for aid programs. These negative experiences eventually laid the foundation for recent years of embitterment which spread even to the North American-Mongolian Business Council, which is the major supporter of the bilateral economic relationship in the United States. Additional damage to the economic relationship in this decade was done by the passage in 2006 of unfavorable mineral investment legislation, and the resulting continual disputes with the Canadian mineral company Ivanhoe.

Such problems reinforced the tendency of the United States Government to be concerned mainly about establishing the legal framework for a market economy, and not about assisting specific American companies to do business, as Japanese and Korean Governments do. These governments and those of Western Europe waited for the U.S. to do this heavy lifting which all would benefit from, while they concentrated on more targeted goals which benefited their investors.  For example, the United States in the first decade of Mongolia’s democratic era guided Mongolia’s successful membership applications in 1991 to the IMF and the World Bank, and the WTO in 1997. It pressed for banking reforms, and restructured the largest Mongol bank, the Agricultural Bank, into the Khan Bank, retrained the judiciary on rule of law and civil law, promoted Mongolian non-governmental organizational (NGO) development, advocated quick privatization of state-owned entities and industries, championed the establishment of a free press, and assisted Mongolia’s positive rise on the international radar screen through participation in global and international organizations and conferences.

On a bilateral level, the U.S. sought signed a trade agreement in January 1991 and a bilateral investment treaty in 1994. Mongolia was granted permanent normal trade relations (NTR) status and generalized system of preferences (GSP) eligibility in June 1999, that boosted overall bilateral trade as the U.S. became the second largest trade partner in 2003.  But it would take another 5 years before the U.S. signed a Trade and Investment Framework Agreement with Mongolia in July 2004 to promote economic reform and more foreign investment.
Significantly, the U.S. parceled out its donor aid entirely as grants with no loans. This was a different policy from other foreign donors such as Japan. The U.S. Agency for International Development (USAID) played the leading role in providing bilateral American assistance. Its program emphasized two main themes: sustainable, private sector-led economic growth; and more effective and accountable governance. Total USAID assistance to Mongolia from 1991 through 2007 was about $170 million, all in grant form. About two-thirds of USAID Mongolia's current (2007) budget of $5.6 million a year promotes economic growth, and focuses on macroeconomic policy reform, energy sector commercialization, financial sector reform, strengthening the cashmere and tourism industries, and providing business development services to small and medium enterprises in both rural and urban areas. The other third focuses on judicial sector reform, electoral reform, parliamentary reform, and anti-corruption work.

Although Mongolia suffered through a painful economic restructuring in the 1990s, by the end of the decade, economic growth returned and inflation eased due to reform embracing free-market economics and extensive privatization of the formerly state-run economy. However, 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 copper exports and widespread public opposition to the privatization policies  which were fed by both the economic setbacks and the increasing dependency on China as a trade partner.
Many political and strategic scientists, especially in the U.S. and Mongolia, are concerned about the growing penetration of the Mongolian economy by China, and cautioned that this will have negative military and political implications. While they warned Mongolia to carefully sleep with its two giant neighbors and asserted that over time it will be important for Mongolia to achieve as balanced as possible relationship with China and Russia, they have not been proactive in encouraging in concrete ways bilateral economic relations. Despite American and other foreign donor institutions clearly understanding that Mongolia should diversify its trade partners for a healthier economy, donor policies were not and still are not structured to achieve that result. In fact, one could say the opposite was the case. The old dependency on Russian power has been propped up by pouring millions of American dollars into the failing power stations. And, many American aid programs and investment incentives promoted China as Mongolia’s optimal consumer and partner instead of helping Mongolia to balance this trend and develop imports from the U.S.

Now over 60% of Mongolia’s exports are going to China and China is Mongolia’s leading investor, which could have military and political implications negative to U.S. and Japanese interests if not carefully managed. Yet, while U.S. political scientists, government officials, and most Mongolians were concerned about China’s growing influence in the Mongolian economy, incongruously they also were overwhelmingly supportive of Mongolia pursuing an active policy of integration with Northeast Asia, claiming it is the best chance for the country to develop and prosper. But, how could such economic policies help Mongolia avoid economic domination by the Chinese and Russians, when these two nations are the dominant players sucking up investment dollars in the very same region?  In the 1990s a total of US$1.5 billion was invested in Northeast Asia--$520 million went to one province of China (Jilin), and another $530 million went to the Russian Far East.  Mongolia only received less than 1% of this FDI, second only to North Korea. Thus Mongolia’s integration into Northeast Asia did not produce positive results.

Even when Mongolian Parliamentarian and former Foreign Minister Renchinnyam Amarjargal argued that Mongolia needs a Free Trade Agreement from the U.S., he did so thinking it would increase Mongolian economic integration with Northeast Asia, not because the volume of U.S.-Mongolian trade requires it. Mongolian desire to have a Free Trade Agreement (FTA) with the U.S. is not matched by an American business or political community clamor for an FTA or dual taxation treaty. It appears that the U.S. business community agrees that: due to its geographical proximity and economic complementarities China is the best-positioned country to exploit the opportunities created by Mongolia’s new liberal legislations designed to create favorable environment for foreign investors.  China specialist from Mongolia’s Centre for Strategic Studies, Ms. Batchimeg, believes,

Economically, China has emerged the most influential country for Mongolia within the last ten years….[and that] developing close and friendly relations with China is the top priority of Mongolian foreign policy….while Mongolia’s increasing economic dependency on China is unavoidable, Mongolians are more fearful about China’s overwhelming economic influence in the country.

Key U.S. economic experts on Mongolia such as Steve Saunders, Executive Director of the North American-Mongolian Business Council, and Alfonse La Porta, U.S. ambassador to Mongolia in the late 1990s, have maintained that the only way for Mongolia to develop its infrastructure, lower poverty, and integrate itself into the global economy is to more closely align itself to the Chinese economic powerhouse and readily supply the Chinese market with its copper, oil, coal, and other minerals.  U.S. companies would only act as intermediaries. Batchimeg’s view of the situation is “that Sino-U.S. relations, not Mongolia-China relations or Mongolia-U.S. relations is the main determinant factor of the bilateral relations among the three nations”  She argues that like it or not, Chinese investment is going to play a key role in Mongolian economy for the next decades, and developing close and friendly relations with China is the top priority of Mongolian foreign policy, because Mongolia’s increasing economic dependency on China is unavoidable.

The debate on whether or not this economic vision is true is going on now in Mongolia.  What other choices does Mongolia have for attracting foreign investment and expanding trade beyond the nearby, hungry market of China? Should the U.S. accept the rapidly expanding Chinese economic influence in Mongolia or devise a new bilateral economic strategy for Mongolia before Mongolia is economically controlled by its southern neighbor? In today’s environment of mineral and oil exploration, demand for high tech consumer goods, and projected energy development, American and western companies rightly see themselves as the middlemen to the Chinese market.  Only textile sector investors look to sell goods into the U.S. market, but increasingly these investors are Chinese-owned entities not American. It appears that past and present American economic development policies in our global world in fact are adverse to U.S. and Mongolian interests in building a transparent, monopoly-free, free market for Mongolia.
Are United States’ policymakers prepared to help American companies compete in Mongolia’s market, or just continue to watch impassively, with a sense of inevitability, the takeover by China of the Mongolian market?   From the experience of the last twenty years, we can predict that such continued passivity surely will lead to economic domination over Mongolia by the Chinese, which will have ramifications for stability in the Northeast Asian region. 

Conclusion
Mongolia is a strategically placed Eurasian nation with only 2.5 million in population.  In the 1990s it was often seen as a relatively successful posterchild among former communist countries for simultaneously and enthusiastically transitioning to democratic governance and free market economic principles.  In January 1997 it became the first newly acceding country in transition to join the WTO—a major step towards integration into the global marketplace. Mongolia in 2003 settled its $11 billion debt with Russia on favorable terms.  But, ultimately Mongolia has a responsibility for its own economic future. How effectively Mongolia mobilizes private international investment around its comparative advantages of mineral wealth, small educated population, and proximity to Asian markets will determine its success in sustaining rapid economic growth and keeping its economy free from monopoly by any one neighbor.
U.S.-Mongolian bilateral trade over the last twenty years has been very limited, despite Mongolia having most favored nation status, and U.S. investment is only slowly growing. Today, American companies, particularly in mining and mineral exploration and energy, see themselves as middlemen to the Chinese market. The U.S. Government’s aid strategy has been oriented around the consolidation of Mongolia’s transition to a democratic society and transparent free market economy.  Its aid policies have evolved to some extent based on lessons learned in the 1990s. Instead of just pouring money into failing power stations and market restructuring mechanisms, the U.S. Government is devoting more resources to rural training to alleviate poverty and spur job creation. For example, the monetized proceeds of food aid ($3.7 million in 2005) currently are used to support programs bolstering entrepreneurship, herder diversification, better veterinary services, and disaster relief. USAID supported the Last Mile Initiative which deploys voice over internet communications to herder communities in remote areas. In 2006 USAID claimed to have created or helped 1250 small businesses and assisted 2500 people (including 1500 women) find jobs.

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