How Chile saved Mongolia from economic collapse
Mongolia has gone from the brink of financial devastation to major expansion in three years, after following Chilean fiscal policy.
Friday, October 19, 2012
Continents apart, Mongolia and Chile both share dramatic landscapes and vast mineral wealth. Photo courtesy of Mongolia/Facebook.
Between 2005 and 2008, mineral rich Mongolia’s economy was storming ahead at an average of 9 percent growth, before the global downturn proved near fatal to the country’s finances. In 2009, the once booming global commodities market took a nosedive, and the Asian country’s economy contracted by 1.3 percent that year.
Fast forward to the present day, and Mongolia has managed a miraculous turnaround. The country is about to open one of the five biggest copper-gold mines in the world, and the economy is growing at an unprecedented, eye-watering 17.3 percent.
The reasons behind this incredible growth story have been attributed to the World Bank and the IMF encouraging Mongolia to employ fiscal measures based on Chile’s economy.
According to a report published by the World Bank last month, “The extensive, wide ranging dialogue with Chile, facilitated by a strong IMF and World Bank partnership, significantly helped Mongolian policy makers understand the challenges posed by Mongolia’s mineral wealth, learn from Chile’s success, and move decisively to enact appropriate reforms.”
Chile is the world’s biggest copper producer, and like Mongolia is sensitive to fluctuations in global commodities prices. However, solid fiscal rules allowed Chile to accumulate enough surplus to weather the global economic storm in 2009.
The report states that fiscal sustainability laws, an accurate copper price estimation system, and the Chilean Copper Stabilization fund, among other measures, have all contributed to Chile’s sound management of a commodities driven economy.
Furthermore, the report claims that the implementation in Mongolia of landmark laws based on Chilean policy will go a long way to prevent the Mongolian economy succumbing to “Dutch disease” where exploitation of natural resources leads to dangerous decline in the manufacturing sector.
“The dialogue with Chile was critical in building domestic political appreciation for the merits of the proposed reforms,” the report states. “[The reforms] represent an extraordinary opportunity for Mongolia to ensure that the economy is better able to cope with risks and challenges posed by rising mineral dependence through prudent fiscal policy.”
For more information on the collaboration between Chile and Mongolia, access the full report here.