Dutch disease in Mongolia and Poland

Mining experience in Mongolia and Poland

The national economies of both Mongolia and Poland were at the same level in Soviet times. After Poland joined the European Union in 2004, its economy grew. Are there similarities between the mining industries of Poland and Mongolia, and what can we learn from them? How did Poland recover from Dutch disease?

Dutch disease is a phenomenon that affects countries that have plentiful oil, natural gas, or valuable mineral resources. It can have a big impact on a country with a small economy. Nigeria and South Africa, both with commodity intensive revenues, are considered to be representative of Dutch disease in some circles, and their economies are skewed toward supporting only specific sectors. It is suddenly realized that if market forces move against a specific industry in terms of revenues, there are no other profitable sectors that an economy can fall back on. Diversification is key.

Dutch disease in Poland

After 1970, the Polish economy experienced symptoms of Dutch disease. In the 1960s and 1970s, the communist leadership managed vast resources for the development of Poland and its already established coal mining sector. Together with a newly emerging sulphur and copper mining sector, large deposits were found. Investment was not exclusively related to mines, but also included harbors, technical universities, and heavy machinery manufacturing facilities.

Development efforts were focused on being able to export resources to Western countries that were paying in USD. During that time, the exchange rate was two to four times higher than it is today.

The result of this focused effort was that all other sectors of the economy were underdeveloped and underfinanced, and they lost their international competitive edge. The mining sector peaked and produced a record output for a number of years, after which a political transformation, the exchange rate dropped, and mining output plunged.

After the 1980s, the situation started to become more balanced, as free market forces started to take over in the post-communist democracy.

The key to avoiding Dutch disease in Poland was that there was a gradual increase in production, investment levels were controlled, and steep peaks in output were avoided, all while maintaining consistent and predictable regulatory oversight.

In contrast, the Mongolian mining industry is poor compared to Poland’s. Mongolia experienced the Dutch disease as the development of the mining sector in 1977 was relatively big for a country with a very small economy, and it has always been reliant on trade with its neighboring countries. According to World Bank statistics, Mongolia reached over 14 billion USD in foreign direct investment (FDI) from 1990 to 2013. The mining sector of Mongolia was considered a profitable sector, and foreign trade affected both the mining and agricultural sectors. The exchange rate for Mongolian currency against the U.S. dollar declined from 2008 to 2011. The growth in export of minerals and FDI affected the export of agricultural products.

Mongolia holds huge mineral resource capital estimated to be worth one to three trillion USD, with gold, coal, and copper being the nation’s principal reserves. Mongolia is home to 10 percent of the world’s known coal reserves. The Tavan Tolgoi coal mine is one of the world’s largest coking and thermal coal deposits.

The Mongolian government established a joint venture with Turquoise Hill Resources ( majority owned by Rio Tinto) to develop the Oyu Tolgoi copper and gold deposit in 2009. Oyu Tolgoi is the biggest foreign invested project in Mongolia, and it involved more than six billion USD (50 percent of GDP) in FDI for its first phase of development. Another five billion USD is in the pipeline for the second phase. Oyu Tolgoi began exploiting the deposit using open pit mining. Construction was completed and commercial production began in 2013. However, the second phase, which will exploit the deposit through underground mining, appears crucial to recovering the cost of the project. Cost recovery  has been stalled by disputes between the Mongolian government and Rio Tinto.

Mongolia needs to increase its GDP in order to encourage the FDI which influences the mining sector and implement laws to protect investors.