Time to be resolute on prudent and productive management of promised mining revenues

The suspense is over. The musicians are set. Soon the orchestra will start producing notes for which the audience has been eagerly waiting. The Mongolian mining sector is about to enter a more productive and business like mode. Everybody is agreed that soon large flows of revenue will stream from the mining sector into the national economy. Sounds great! 

The sense of satisfaction calls for some serious thinking on how we are going to manage the flow efficiently, so that most people benefit in the best way. There is a clear division among resource-rich nations depending on their success in using their wealth optimally. Some that have succumbed to the “Dutch disease” have entered economics textbooks as case studies in failure. Their failure lay in their inability to transform the mining revenues into long-term capital assets. The same Dutch disease is now knocking at our door, a loud reminder that it is time we started discussing how to properly manage the mining revenues. Mongolia needs to develop a vaccine against it and have it ready in good time.

Our main target is obvious. Revenues from the mining sector must be used to boost the national economy. There can be no economic growth without macro-economic stability. This much is clear, but how exactly will the bags of money labeled “from copper”, “from coal”, “from gold” be emptied to end up as something so intangible as economic growth?

The profits from mining must be made sustainable, meaning that they have to be utilized to generate a regular, long-term and steady flow of revenue from other sources. Many countries have put this money into so-called sovereign funds, for various purposes. Some funds deal with pensions, or other forms in which governments take care of their ageing citizens. They use varied mechanisms to enrich pension funds. One of them is to supplement the people’s own contributions, compulsory or voluntary, to their own pension fund, as social insurance payment or in some other form.
Another popular way of using this revenue is to set up an investment fund. In Mongolia, we had something like this until recently, named the Development Fund. The little money we had in it allowed us to keep our national economy afloat during the worst of the global recession. Now the Development Fund has been liquidated and substituted by a more ambitious Human Development Fund. It has been envisioned as an instrument to distribute cash allowances. Gone are the days of the pink and blue payment record sheets, with digital technology making its entry. Payments are already being made to children, elders, and the disabled. The rest of the people have been promised payment before Naadam.

Other countries appear to have found more productive uses for the money in such human development funds. They had a saner and sharper sense of national priorities and determined their targets after informed public debate. The people of Alaska in the USA spent five long years debating how they would spend the money to go into the Alaska Fund, often held up as a model. The final consensus required even an amendment to the Constitution. This Fund distributed US$ 1,200 to each state resident in 2008. However, our enthusiasm for this model must be tempered by a later development. The fund has since gone almost bankrupt, felled by the global economic crisis.

Coming back to Mongolia, we still do not have any clearly defined list of purposes for which money from the Human Development Fund can be used. We could not carry our discussion beyond whether the distribution of the allowance would start before or after the Lunar New Year and beyond which sections of the population would get it first. The whole thing was like giving away prizes after a noisy and crowded festival. A major, if unspoken, consideration was certainly how much would, could, or should be distributed before the next general election. Quite funny how the Human Development Fund is being used for nothing to do with development, individual or national!

All indications are that the current Law on Special Funds, under which the present distribution is being made, will be amended in the very near future. We can only hope our lawmakers will be less short-sighted then.

Except for the Alaska Fund, no similar fund in any other country distributes cash to people. In Alaska the decision was taken as a sort of reward or “thank you” gift to those brave enough to live in the harsh sub-Arctic climate there, far away from the mainland and markets. Other countries do not give away cash as they invest it in education, health and other areas of human resource development. Economic growth can come only if stringent regulations are enforced on how the money can be spent. Transforming bank notes smelling of oil, gold and copper into long-term value added assets requires hard work and hard decisions.

Funds are not trees that flower automatically. Nor are they magical barrels of honey that never empty. On the other hand, depreciation in the value of idle money is a fact of economic life. Investments like purchase of securities in markets, management fees paid to outside companies etc. have to be carefully considered. Any sovereign fund will have its own balance sheet. If all revenues are distributed without providing for investments that will give returns, the fund will be in the red in no time. We must quickly disabuse the public mind of its perception that the Human Development Fund is a cash vending machine, a kind of ATM, so to say. The “Curse of Mineral Wealth” lurks around us, ready to pounce.

There are signs of hope. There are strong demands to have an economic and social stability fund. The Draft Law on Fiscal Stability, which will lay down the basis for the operation of such a fund, is currently being discussed at Parliamentary Standing Committee level. Many countries have set up this type of fund because it helps the economy manage sudden mid-way hurdles and ensures long-term national economic security.
The basic regulations of such a fund are clear and uncomplicated. If the state budget has a surplus, this is put into the stability fund. At times of deficit, the shortfall is made up by money in the fund, without a mad rush to cut down on productive investments. Long-term development programs can be taken up in the certainty that money required for them will be available.

We in Mongolia have now had enough time to develop a better understanding of how mining revenues are to be managed. The people’s fear that greedy foreigners will take away all our mineral wealth will prove unfounded only when we Mongolians are able to devise ways of not squandering our share of the wealth and, instead, of increasing it. Some areas of priority spending suggest themselves automatically. The infrastructure in our country is not well developed, undermining our competitive advantage and stifling economic growth. We need to decide how much to spend on infrastructure development and how much on human development. The two are not mutually exclusive and we shall have enough for both, with prudent management.
The Lunar New Year is a time to take new resolves.