Global Economies

Under Prime Minister Shinzo Abe, Japan has been looking to boost its global standing. In that effort, the country’s relationships with African states have become key. The most recent signs of Tokyo’s pivot to the continent came in late August, when Abe travelled to Kenya to attend the Sixth Tokyo International Conference on African Development (TICAD), a meeting convened by Japan, 54 African states, and several international organizations. At the conference, Abe pledged more than 30 billion USD in Japanese investment to infrastructure projects across the continent over the next three years—the largest such commitment in TICAD’s history.

Abe’s investment pledge reflected a broader shift in Japan’s policy in Africa: from aid to trade and from government to the private sector. Last month’s TICAD was not short of symbolism to this effect. The meeting was the first of its kind held in Africa instead of in Japan, and Abe, whose public remarks painted his country as an economic partner rather than a donor, brought more than a hundred Japanese businesspeople along for the conference.

For decades, Japan’s foreign policy in Africa revolved around the projection of soft power, mainly in the form of development assistance. But in recent years, economic pressure at home and competition with other foreign players on the continent have led Tokyo to reconsider.

The full article, which originally appeared on Foreign Policy, can be accessed here.

In the coming weeks and months, political campaigning will continue to touch more and more on key foreign policy issues, including the future of the fight against ISIS and how to deal with an increasingly assertive Russia. Yet one of the critical issues that needs to be addressed in a bipartisan and coherent manner is maintaining—and indeed strengthening—the trajectory of U.S. efforts to “rebalance” its resources and attention to the Asia-Pacific.

Up until this point, the Obama administration’s pivot or rebalance has enjoyed a relative reprieve from the acute bipartisan trench tactics on other issues, such as President Obama’s policies in the Middle East-North Africa region. The same unfortunately cannot be said of election rhetoric. Donald Trump, the Republican nominee, has been divisive and incoherent thus far with his messaging towards Asia. This has included statements that call into questions the value and purpose of Washington’s longstanding alliances in East Asia, notably those with Japan and South Korea. This bombast is both counter-factual and ignorant to the United States’ geopolitical interests in the region.

The full commentary can be accessed here.

"In the international context, oil at $40 USD would not allow for investment into increased capacity. Today there is a sharp reduction of investments into extraction. However, there has to be an adjustment for how strong the dollar is, compared to other currencies. The U.S. is no longer the largest oil importer, and the real price of oil in euros is not as low as it is in dollars.

However, there are solid reasons to consider $40 per barrel to be the optimal price for Russia to pursue economic reforms. It would allow Russia to maintain a certain level of production, as well as invest into extraction and refining projects.

At the same time, under the existing tax system for the oil industry, revenues from oil would be very minor, which would force the government to search for other sources of revenue. This was the case in the early 2000s, when the flat tax rate and other measures were made to increase the tax base.

What might become new sources of Russia's budget revenues in this case? First, there could be an increase of the industrial tax base and in the income tax. The budget revenues might also come from agriculture.

Should Russia weaken the ruble to encourage industrial production or to keep it strong? Well, there is rather a paradoxical situation currently, when a strong ruble co-exists with low oil prices. That’s why the budget deficit might reach above the benchmark of 3 percent of GDP. So, today one of the recipes could be to print more money and let it go to work in the economy. It could bolster a weakening economy."

Read the full report here.

Afghanistan’s image on the global stage is currently dominated by significant security and governance challenges, the faltering peace process and a lack of substantial economic development. These factors also make Afghanistan the second-largest country of origin in the current refugee crisis facing Europe. In light of this negative international perception of Afghanistan, a number of significant developments towards reconnecting the country to the economy of the region are largely overlooked. The EastWest Institute’s (EWI) high-level conference “Afghanistan Reconnected: Cross-Border Cooperation at a Critical Juncture,” held on June 3-5, 2016 in Istanbul, analyzed the ongoing progress in regional energy projects; the development of alternative shipping ports in Iran and Pakistan in cooperation with India and China, achievements and setbacks in terms of cross-border transit, and the growing role of joint chambers of commerce. The discussions among practitioners from the region produced recommendations on how governments, the private sector, and the international community should capitalize on opportunities to contribute to the stability and prosperity of Afghanistan and its neighbors.
 
The EastWest Institute—with the support of the German Federal Foreign Office and in partnership with The Union of Chambers and Commodity Exchanges of Turkey (TOBB)—held the conference “Afghanistan Reconnected: Cross-Border Cooperation at a Critical Juncture” on June 3-5, 2016. Time and location of the meeting were chosen to make the conference a side event to the Istanbul convention of the intergovernmental “International Contact Group for Afghanistan” and to benefit from the interaction between interested government representatives and participants. Chaired by EWI’s Vice President for Regional Security Ambassador Martin Fleischer, the conference set the stage for experienced political and business leaders from Afghanistan, China, India, Iran, Pakistan, Tajikistan and Turkey to discuss necessary reforms to unlock Afghanistan’s, and the region’s, economic potential. The event sent an encouraging signal that business interaction can help bridge animosities between countries, promoting shared interests and a shared economic vision for the region. The main topics discussed included:

Trade and Transit
Afghanistan presents a number of opportunities for regional cooperation and connectivity. Resource-rich and strategically-located, the country could potentially provide both material and transit routes to enhance and facilitate regional and international trade. However, still-complicated relations between countries in the region impede what would otherwise be a natural use of Afghanistan’s resources and position. Nonetheless, progress has been made on a number of issues in the past three years, namely cross-border trade and transit. Between Pakistan and Afghanistan, problems with visa facilitation, goods declarations, insurance, and bank guarantees have been lessened through actions by national and trans-national chambers of commerce. For example, goods declarations are now transmitted electronically, and insurance claims generally yield much more compensation than they did prior to the intervention of the Pakistan Afghanistan Joint Chamber of Commerce and Industry (PAJCCI). Lengthy delays at ports have been reduced across the board, and partial shipments of Afghan imports are now allowed to cross the border. However, the current border crossing dispute and heightened tension between Afghanistan and Pakistan illustrate the fragility of this progress and demonstrate the necessity of serious efforts to ensure positive neighborly relations.

Numerous large Indian corporations have set up franchises in Afghanistan, though problems remain regarding the gathering and accessing of market information. To further stimulate foreign business investment, Afghanistan needs to make consistent and reliable information and documentation available to its trading partners and investors regarding its tax regime and policies on trade, foreign direct investment, and licensing, as well as ensure that its potential partners are aware of whom to approach for specific needs, such as land allocation. Gaps in this type of knowledge, as well as in the understanding of connectivity in the region, make fixing problems more challenging. Furthermore, the lack of an organized financial sector and poor performance of banks impedes foreign businesses looking to operate in Afghanistan; companies unable to find local sources of financing are often discouraged from doing business in the country.

Corruption on both local and national levels remains a prevalent problem in Afghanistan and in the region, hampering progress in numerous sectors. A system with laws that grant discretionary powers to specific officers, groups of officers, or agencies with little to no oversight or arbitration allows corruption to flourish. Introducing a system that involves tiers of officers and third-party arbitration—such as from a chamber of commerce—could help to curb this. 

The role played by chambers of commerce on a national and transnational level is significant and growing. Many issues facing businesspersons in Afghanistan and its neighboring countries—such as a limited awareness of policies and opportunities, an overwhelmingly negative international perception of the country, and a lack of engagement of the private sector across borders—could benefit from increased involvement and engagement of national and trans-national chambers of commerce. Participants stressed the effectiveness of trans-national chambers, such as PAJCCI, and advocated for the creation of a regional chamber of commerce, which would include Iran and India in addition to Afghanistan and Pakistan, to facilitate business-to-business resolution of problems. 

Mutual misunderstandings arise in the region because of minimal bilateral and multilateral connections with neighbors; business networks can play a valuable role to alleviate this and foster regional integration. Private sector participation can both facilitate Afghan growth and development and encourage and increase regional cooperation. However, at present, Afghanistan’s private sector is largely disorganized. Engaging the private sector creates connections, contributes to the alleviation of cross-border misunderstandings and enables the achievement of results beyond government’s reach. 

Energy
Participants emphasized the importance of energy cooperation to the region, highlighting the potential for alleviating seasonal power supply scarcity issues and encouraging cooperation with economic incentives based around the cross-border transmission of energy. Strategic energy projects can be used to create political impetus to cooperate within the region. However, a lack of formal trans-border cooperation undermines efforts that are currently underway, and the fragile security situation in parts of Afghanistan places the safety of infrastructure in question. 

Regional energy projects should be backed by large energy-importing countries. In this context, Indian involvement in the regional energy equation is fundamental. With falling energy prices and the resurgence of Iran as a key energy supplier, exporting states should have a regional powerhouse able to absorb large quantities of primary energy. The diversification of energy exports from Central Asian states is imperative for these countries if they do not want to lose out to more competitive suppliers. A balanced regional energy equation will require the involvement of both China and India as energy buyers.

The Chinese “One Belt One Road” (OBOR) initiative stands to greatly contribute not only to trade and investment but also to the regional energy market; increased demand will be a positive factor for energy suppliers, particularly as the initiative will increase China’s demand for oil and gas on the basis of renewed growth in 10-15 years. OBOR has the potential to unlock Central Asia’s hydrocarbon resources and bring them to the international markets. New infrastructure linkages will create new interdependencies, which will mean a more conducive environment for the region as a gas exporter.

However, greater political stability and security will be necessary to attract investors and ensure the safety of the infrastructure projects. The Turkmenistan–Afghanistan–Pakistan–India (TAPI) pipeline is intended to go through fragile South-West Afghanistan and Pakistan’s unstable Baluchistan. TAPI is expected to cost 12 billion USD and will be partially funded by the Asian Development Bank (ADB). ADB will provide only a small fraction of necessary funds; the remainder is expected to come from the private sector. At this point, energy companies view TAPI as a gamble due to the operational uncertainty and high risks linked with security threats. It should be noted, though, that similar regional projects have been successful in other parts of the world if backed by political will and financial support, including from international donors. Once realized, these projects have contributed greatly to the stability of the host countries and have led to further interstate cooperation.

Progress on the Central Asia-South Asia-1000 (CASA-1000) electricity transmission project has been slow, as well. Afghanistan is presently working to change the project from a 3-converter to a 2-converter project, to overcome potential compatibility issues and extend the list of potential hardware suppliers. The government is also discussing the sovereign guarantee that is being demanded for the project; as a transit country Afghanistan must focus efforts on protecting the power supply coming into the country.

Demand for electricity in Afghanistan is expected to rise tremendously; at present, only 20 percent of Afghans have access to electricity and the government remains the main stakeholder and provider of funds in the power sector. Furthermore, properly enforced laws and regulations are needed to regulate the power sector in Afghanistan, and this should be accompanied by sovereign guarantees for the power plant and infrastructure companies. Private industry involvement in the form of construction, financing, and maintenance of infrastructure should be encouraged. Independent power projects and public-private partnerships represent an opportunity to meet the rising demand for electricity, but the government must give confidence to the investors that these projects will come to fruition.

Afghanistan represents opportunity in the regional energy market as both a supply state and a transit route. Additionally, Afghanistan’s integration into the regional market will be a win-win solution for both the country and South Asia. Trans-border pipelines and energy projects are crucial to regional integration and political cooperation. For instance, South and Central Asia face energy shortages and trans-Afghan energy projects can reduce the current energy deficit and contribute to the region’s energy security. Such energy projects also stand to help peace prospects for the country and increase the impetus for political cooperation within the region. 

Regional Initiatives and New Opportunities
Major projects and international agreements, including TAPI and CASA-1000 as well as the Afghan Pakistan Transit and Trade Agreement (APTTA), remain a centerpiece for economic cooperation in the region. Participants agreed that the resulting economic incentives will continue to drive regional cooperation in a positive direction. The December 2015 breaking of ground on the TAPI pipeline was a significant achievement; however, slow progress on CASA-1000 and the failure of the APTTA negotiations to include Tajikistan and India indicate that much work remains to be done in this field. States involved in these initiatives should avoid disruptions due to political reasons; political and economic relations between states should be kept distinctly separate to ensure mutual economic progress and incentivize continued regional cooperation. However, a number of emerging initiatives look to offer a chance for new regional agreements. China’s OBOR initiative, currently involving Pakistan through the China-Pakistan Economic Corridor, seeks to revitalize the old Silk Road and presents an opportunity for Afghanistan to connect with the rest of the region. Participants recommended that Afghanistan should explore opportunities for linkages with OBOR. In addition, the reemergence of Iran as a player presents new opportunities for engagement in Afghanistan’s development process.

The opportunities presented by the new, growing involvement of China and Iran in the region stand to alter the realities of cross-border trade and transit, shifting the most expedient routes and providing better market access for Afghan exports. Development on Iran’s Chabahar port could potentially redirect some Afghan trade from Pakistan to Iran, through which Afghan goods could more easily reach the lucrative Indian market. The Chabahar port could indeed allow Afghan goods to reach New Delhi in five days total, nearly halving the transit time when sent through Pakistan. However, participants agreed that the developing ports of Chabahar in Iran and Gwadar in Pakistan should be viewed as complementary, and not as competitors. In fact, Pakistan’s geographical location and trading history with Afghanistan will likely allow it to remain the country’s most prominent commercial partner regardless of opportunities offered by other neighbors. Furthermore, the construction of a direct road connection from Gwadar to the Afghan ring road could provide an incentive for continued use of Gwadar. Connection to Gwadar would afford Afghanistan a linkage with projects related to China’s “One Belt One Road” initiative, and would contribute to the viability of the Gwadar port itself. In addition, Chinese administration of the Gwadar port could potentially allow many Afghan-Pakistani bureaucratic issues to be worked around. At the moment, there does not seem to be much Chinese interest in the construction of a straight road from Gwadar. However, if China truly has an interest in expanding its reach in the region, it could be an option they may eventually pursue. 

Background
Since 2013, EastWest Institute’s Afghanistan Reconnected Process has focused on promoting the win-win potential of enhanced regional economic and political cooperation in order to foster not only development, but also security and stability in Afghanistan and greater Central and Southwest Asia. EWI established a long-standing network of high-level representatives from governments, parliaments, and the private sector from Afghanistan, China, India, Iran, Kazakhstan, Kyrgyzstan, Pakistan, Tajikistan, Turkey, Turkmenistan, Uzbekistan, Europe, and the United States, as well as from regional and international organizations.

Through a series of high-level consultations, sponsored by the governments of the United Arab Emirates and of Germany, the Process provides this network with a platform to identify and overcome major obstacles to regional trade and transit. The practical recommendations for policy reform resulting from this process have been presented to the governments of Afghanistan, India, Pakistan and Tajikistan in the course of 2015.

The event in Istanbul is part of a review phase of the Afghanistan Reconnected Process, during which the EastWest Institute is taking stock and sharing the progress of the region with the international community, as well as future needs to support the stability and prosperity of Afghanistan and its neighborhood. A comprehensive report outlining policy recommendations derived from this process over the last four years will be issued in late summer of 2016. The next phase of the process will focus on engaging Afghanistan’s neighbors and addressing their strategic role, i.e. on the opportunities of a post-sanctions Iran, and on how to assure that China’s “One Belt One Road” policy also benefits Afghanistan.

For more pictures from this conference, click here.

The Trans-Pacific Partnership continues to be one of the critical unfinished issues as the Barack Obama administration wraps up its eight-year tenure. The regional trade agreement involves 12 nations and nearly 40 percent of global GDP—including the key economies such as the United States, Japan, Canada, Mexico, Australia and Vietnam.

The pact was signed in February at a ceremony in New Zealand, but has not yet entered into force as signatory members must first ratify the deal in their respective legislatures.

While TPP ratification faces challenges in many states, including Japan and Canada, the key to the agreement centres on Washington's ability to pass the TPP into law through Congress. The Obama administration has staked its reputation and the legacy of its "rebalance" strategy in large part on the realisation of TPP.

The rebalance is framed on three key—and interconnected—pillars of U.S. engagement in the Asia-Pacific region: economic, diplomatic and security.

The trade agreement has been described by the Obama administration as a strategic linchpin that would ensure that the region adopts standards and rules guided by established trade norms.

The alternative has been described—often in overly pejorative terms—as a green light for Beijing to "write the rules" in the region.

The TPP has also been framed in a security lens, with senior officials in Washington describing it as "important as another aircraft carrier".

Despite the TPP's significance, and its notional support from the Republican-led Congress, the pact is now caught up in heated electoral politics with both nominees—Hillary Clinton and Donald Trump—indicating their disapproval of the agreement.

On the Republican side, this has resulted in Senate Majority Leader Mitch McConnell and House Speaker Paul Ryan maintaining a non-committal approach to TPP ratification.

This follows a gruelling political battle last year, through which Congress eventually authorised the Trade Promotion Authority (TPA), which allows the Obama administration the ability to "fast track" the approval process in Congress, by receiving either a Yes or No vote on the signed deal.  

The TPA was an essential step for Washington's leverage in TPP talks as its negotiators could look to conclude the deal without the looming concern of Congress coming back with amendments.

Now there are serious concerns that the deal will not get through before the Obama administration leaves office and will be either held up, re-opened or become redundant under the next president.

The Obama administration is facing pressure from a number of groups opposed to the deal and—like the case in most free trade agreements—will have to make a number of side deals with internal stakeholders to garner sufficient support to get the legislation through Congress.

Key opposition from the Republican side revolves around biologics and the fact that the TPP doesn't contain the 12 years of data protection for biologic medicine.

This protection was made law through the Biologics Price Competition and Innovation Act of 2009, which serves to strengthen intellectual property protections for pharmaceutical companies in the U.S.

Orrin Hatch, the Senate Finance Committee chairman, is one their key backers and will be an important player for the administration to have on-side if it wants to get the TPP put into force before its mandate ends.

In an ideal world, the Obama administration would look to get the deal ratified during its "lame-duck" session—immediately following the election in November and before the new president-elect takes office in January.

Obama's top trade envoy Michael Froman has taken a sanguine view that the deal be put into force, noting: "There is a pathway forward here and what we're trying to do right now is just maximise the likelihood that we’ll be able to walk down that path successfully." 

But while there is cautious optimism in the Obama administration, the timelines and sensitivities attached to election politics do not portend well for the deal being struck by the end of the year.

It will require political capital that is needed on other key priorities such as the confirmation of Merrick Garland to the Supreme Court.

Despite the fact that the TPP was largely pushed under her watch as Secretary of State, Clinton has been forced to distance herself from it due to concerns that her base has on its impact on U.S .jobs.

The Republicans are similarly boxed in with the presumptive nomination of Donald Trump, who has blasted the deal. This has tempered their support for the TPP due the timing and the signal its ratification might deliver. Despite the strategic imperative of ratifying the pact, it appears that deal's approval is hanging by a thread.

The article first appeared in Al-Jazeera and can be found here.

India-U.S. ties have been transformed in recent years, best exemplified with the newly declared global strategic partnership between the two countries. Yet, what is the reality of the partnership in terms of achievements on the ground? And, what could be future expectations?

For starters, the Pakistan policy towards the U.S. remains a problematic issue. The objective of the two countries to advance regional security together is impeded by the continuation of U.S. military aid to Pakistan. This is done through presidential waivers to overcome the provisions of the Kerry-Lugar legislation, which require Pakistan to act verifiably against terrorist groups on its soil before U.S. aid can be released.

Furthermore, the U.S. does not consider the Taliban as a terrorist organization. The U.S. is, in reality, engaged in an effort to accommodate the Taliban politically in Afghanistan in a Pakistan-brokered deal, which is a risk to India’s security. It is thus difficult to see how, in these circumstances, the counter-terrorism partnership between India and the U.S. can be a defining one for the 21st century.

U.S. President Barack Obama’s affirmation in 2010 that “the United States looks forward to a reformed UN Security Council that includes India as a permanent member” was viewed as a major evolution in the U.S. position. Yet up to now, the U.S. has not clearly defined its position on the expansion of the United Nations Security Council, due to the fact that U.S. openness to India’s hope for permanent membership on the council remains at a declaratory stage.

Similarly, while past joint U.S.-India statements have repeatedly spoken about India’s membership in the four export control regimes, and, India has been declared ready for Missile Technology Control Regime (MTCR) as well as Nuclear Supplier Group (NSG) membership, so far no tangible progress has occurred. Breakthrough understandings at the governmental level on national tracking and liability issues have removed political roadblocks in the way of civilian nuclear cooperation.

However it is now for the U.S. companies to take a call, as the larger question of the commercial viability of U.S. supplied nuclear reactors remains. With India ratifying the Convention on Supplementary Compensation, an international nuclear liability regime governed by the International Atomic Energy Agency, it appears that the decks have been cleared for progress within a year on the project to supply six Westinghouse nuclear reactors to India. Nevertheless General Electric, another supplier, continues to hold out. Without a strong U.S. leadership role, progress is unlikely to happen early.

In the past, the U.S. had virtually no defense ties with India. Today, apart from a renewed Defense Framework Agreement, the U.S. has become a large supplier of defense equipment to India, and even the biggest in the last few years, with contracts worth almost $13 billion. In addition, the largest number Indian joint military exercises are with the United States.

Robust language has appeared in joint India-U.S. statements in 2013, 2014 and 2015 on defense cooperation. However, so far, less than expected progress has been made in the area of defense manufacturing under the so-called Defense Technology and Trade Initiative (DTTI). During President Obama’s visit to India, four “pathfinder” projects under the DTTI rubric involving relatively minor technologies were announced. Contacts between the two sides under this U.S. initiative continue.  Two other projects of note, one on aircraft carrier technology and the other on jet engine technology, are also under discussion.

U.S.-China tensions are growing, and, India too has longstanding disputes with China. The 2015 U.S.-India Joint Strategic Vision for the Asia-Pacific and Indian Ocean Region specifically addresses maritime territorial disputes involving China and, among other things, affirmed the importance of safeguarding maritime security and ensuring freedom of navigation and freedom of the air throughout the region, especially in the South China Sea.

U.S. trade and financial relations with China are vast; India too seeks stable and economically productive ties with China. India has the difficult task ahead of managing the China threat by both engaging closely with the United States and reaching out to China. At the same time, the credibility of the U.S. rebalance to Asia and the Pacific is yet to be tested.

As part of closer India-U.S. understandings on the Indo-Pacific region, India and the United States have decided to include Japan in the bilateral India-U.S. Malabar naval exercises. The trilateral India-U.S.-Japan political dialogue has also been raised from the official to Ministerial level.

However, India’s problems with China are principally related to ongoing border disputes arising from a boundary disagreement and Beijing’s deepening relationship with Islamabad. In both cases, India cannot count on the United State to take a position supportive of India. This points to the limits of the strategic partnership as such a partnership falls short of supporting India’s territorial sovereignty.

When it comes to deepening bilateral economic relations between the two countries, progress has been mixed. For one thing, U.S. businesses remain reluctant to invest in India because of their beliefs that the Indian government has not yet delivered on promises to ease doing business in India including taxation issues, and implement general economic reforms in the country.

Nevertheless, the IT sector has brought the knowledge economies of India and the United States closer together and it constitutes the strongest link Washington has with the drivers of India’s modernization and innovation. However, the United States is unfortunately targeting this sector with higher visa costs and increased restrictions.

What is the way forward when it comes to bilateral economic relations?

Among other things, the India-U.S. collaborative economic agenda should include co-production and co-development of defense products under the Make in India program, coal gasification technologies, and the issuance of a non-FTA country waiver in order for India to gain access to U.S. fossil fuel reserves.

The bilateral economic agenda should also extend to partnerships in the area of agricultural technology, the civil aviation sector, life sciences, infrastructure financing, and green financing, among others. Bilateral dialogues should also address visa issues in the IT/ITES (i.e. outsourcing services) sectors, focus on exporting synergies in the biotech and pharmaceutical sectors, and find means to support university and other skill development exchanges.

The India-U.S. relationship is being increasingly consolidated. However, like in any such relationship--especially between the world's foremost political, military, economic and technological power and a large developing country advanced in certain sectors of the knowledge economy, but beset with serious problems of poverty as well as at unequal stages of development internally-- differences are normal.

Much work lies ahead to make the India-U.S. relationship a “defining one” in the 21st century, but we are headed in the right direction.

To read this article on The Diplomat, click here. 

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As a commodities-exporting country deeply linked to the Chinese market, Mongolia faces heightened risks from the current commodities slump and China’s economic slowdown. In an email interview, Jonathan Berkshire Miller, director of the Council on International Policy, discusses the impact of the commodities slump on Mongolia.

WPR: How important are commodities for Mongolia’s economy, and what effect have falling commodities prices had on public spending and, by consequence, political stability?
 
Jonathan Berkshire Miller: Commodities, and their prices, remain a critical valve for the Mongolian economy. After years of soaring economic growth, the Mongolian economy has precipitously cooled over the few past years with a sharp decline in GDP growth and a looming deficit of foreign direct investment (FDI). Indeed, Ulaanbaatar remains heavily dependent on the mining sector for its economic fortunes, which have been battered over the past three years due to the sinking price of coal as global supply outpaced demand. But while the demand for coal is once again slated to surpass supply in the coming years, Mongolia’s FDI numbers remain low. The fall in prices has impacted public spending on critical infrastructure and filling crucial capacity gaps.

In addition to these issues, the government is also struggling, under the brunt of decreased revenue, to keep up a steady flow of fuel subsidies to offset the cost of energy. Energy costs have an effect more broadly, but it is especially acute toward businesses and large consumers of energy in Mongolia. That said, the last budget, approved in November 2015, for the most part did not touch fuel subsidies and social welfare benefits. Going forward, however, it will be difficult for Ulaanbataar to maintain this position if growth continues to be limited. 

WPR: How effectively did Mongolia use the revenue windfalls of the commodities boom to develop infrastructure and address poverty and social welfare issues?
 
Miller: During its boom years, Mongolia did take significant efforts to develop its infrastructure, especially in the “key need” areas such as energy, water, transportation and telecommunications. The problem is that the need and capacity gap is so large that these efforts, spearheaded by both the private and public sector, remain insufficient. Infrastructure capacity remains poor in Mongolia, and while there have been improvements, universal access to water and especially electricity remains a distant goal. In addition to the lack of potable water supply, there are also major infrastructure issues with regard to access of adequate sewage collection and waste disposal. Ulaanbaatar similarly lacks the necessary infrastructure on railways and roads, critical for the transit of goods. The problem of transportation infrastructure needs to be addressed in order to facilitate commodity trade between Mongolia and its two neighbors, China and Russia. 

On social welfare issues, the government has a well-established system, but it has underperformed due to a poor targeting strategy. According to the World Bank’s most recent report, the poorest 20 percent of people in Mongolia received 34 percent of total social welfare transfers, while approximately 30 percent of the benefits were received by the richest two quintiles. This standard lags behind other countries in Central Asia and Europe. ?

WPR: What steps has Mongolia taken to diversify its economy, and how effective have they been?
 
Miller: Diversification of the Mongolian economy is desperately needed in order to reduce its exposure to commodity price shocks. While it will be impossible to eliminate this exposure, lessening the blow is achievable with more diversification. Right now, Mongolia remains highly vulnerable due to its export dependence. Mining continues to dominate the export sector and represents a large share of the Mongolian GDP. The government has been looking at diversifying and recognizes the need to skirt the “resource curse.” Some targeted areas have been effective, especially in sectors such as agriculture and tourism, which account for a combined 25 percent of Mongolia’s GDP. Ulaanbaatar should focus even more efforts on boosting tourism, especially as an eco-tourism location. On agriculture, there is a need for new capacity on biotechnology as well as for learning best practices from international companies. Diversification of its energy supply is another area of interest, with the question of potentially looking at nuclear power in the future.

To read this article on World Politics Review, click here.