Managing Mongolia’s resource boom.pdf

Managing Mongolia’s resource boom Asel Isakova, Alexander Plekhanov and Jeromin Zettelmeyer Summary With two very large mining projects expected to reach full production this decade, Mongolia is entering a commodity boom. History teaches us that commodity revenues offer unique opportunities for development but can also depress long-term economic prospects by increasing macroeconomic volatility, reducing incentives to invest in physical and human capital and undermining economic and political institutions. This paper surveys what Mongolia can do, building on reform steps it has already taken, to avoid a “resource trap”. It argues that (i) cash transfers to the general population should be linked directly to the performance of the underlying mining assets to create a domestic constituency for good governance in the mining sector; (ii) social spending should be de-linked from resource revenues, better targeted and fully incorporated into the budget; (iii) macroeconomic volatility could be reduced by operationalising the fiscal stabilisation fund, issuing GDP-indexed debt instruments, and through financial sector reforms; and (iv) major infrastructure and industrial development projects should seek private sector co-investments to ensure that public money is well spent. Keywords: natural resources, economic boom, institutions, financial development JEL Classification Number: Q32, Q33, O10, O16 Contact details: Alexander Plekhanov, European Bank for Reconstruction and Development, One Exchange Square, London, EC2A 2JN, UK. Email: plekhana@ Asel Isakova is a senior economic analyst, Alexander Plekhanov is a principal economist and Jeromin Zettelmeyer is Director for Research, all at the European Bank for Reconstruction and Development. The authors are grateful to Erik Berglöf and Ralph de Haas for valuable comments and suggestions. The findings, interpretations and conclusions expressed in this paper are those of the authors and do