Can Mongolia finally get it right with a new Wealth Fund?

Mongolia is blessed with abundant natural resources, from coal and copper to gold and rare earths. But for decades, the landlocked nation has struggled to translate its mineral riches into lasting prosperity for its 3.3 million people. Now, policymakers are trying once again to square that circle with proposed legislation to establish a new Wealth Fund on the Norwegian model.

Photo by micheile henderson on Unsplash

The draft law, which is expected to be tabled in coming days and passed by May, envisions channeling up to 34% of profits from strategic mineral deposits like the Erdenet copper mine and Oyu Tolgoi gold-copper operation into a trio of funds. A Future Heritage Fund would accumulate savings for future generations by banking 65% of mining royalties until 2030. A General Savings Fund would maintain individual accounts for housing, education and health care expenses. And a Local Development Fund would underwrite regional infrastructure.

It is certainly an appealing concept. Mongolia's vast mineral endowment has been estimated at $1 trillion-3 trillion by the IMF. And the Norwegian model, which has amassed $1.5 trillion in 2023, shows how resource wealth can be transformed into a diversified portfolio of investments enhancing a nation's long-term prospects.

But Mongolia's stop-start efforts at prudent resource husbandry have prompted skepticism. The architects of the new proposal are mindful that prior laws calling for accumulating windfall revenues in a future fund were blithely ignored. When commodity prices rose during the 2000s mining boom, a cash-strapped government spent lavishly instead of saving – illustrating what economists call the "resource curse" of profligacy.

Indeed, Mongolia's uneven progress in spreading resource gains more broadly reflects paradoxes seen in many developing nations. According to the World Bank, over a fifth of Mongolians still live in poverty despite mining's expansion. 

Wealth has accrued to a relatively small elite while herders, urbanites and rural communities complain of environmental degradation, lost pastures and other downsides of mining's breakneck advance. Some experts blame cronyism in issuing mining licenses. Private insiders, rather than the state, have secured potentially lucrative concessions in deals like one transferring the giant Tsagaan Suvarga copper deposit to a company controlled by an aspiring opposition leader (Nomtoibayar). 

With parliamentary elections looming next year, such grievances could trigger growing resource nationalism. Rising calls to repatriate strategic assets, boost state mining equity or overhaul licensing procedures could follow if the perceived plundering of Mongolia's riches fuels populist anger. But there's also skepticism about whether the government can manage resources for the common good.

In shaping the new legislation, Mongolian policymakers have sought to absorb the hard-won lessons from other resource-dependent developing nations. Constitutional provisions establish the principle of conserving Mongolia's underground patrimony for present and future generations. The law aims to insulate the Wealth Fund from short-term political pressures by following the Norwegian model while also mandating disclosures, audits and other accountability measures.  

Whether such prudential restraints can be enforced remains to be seen. Managing mineral wealth requires a capable, ethical custodian – something Mongolia has lacked historically. Some economists argue the new Wealth Fund's structure remains too complex, at risk of being drained by multiple claimant purposes. Leading opposition figures contend the only solution is outright state ownership of strategic deposits like Tsagaan Suvarga so all Mongolians share the upside. Others call for parallel improvements to education, infrastructure, anti-corruption efforts and economic diversification so mining doesn't remain Mongolia's sole engine. 

For now, Mongolia can draw encouragement from the Norwegian example as well as resource funds like those operating successfully in Botswana, Chile and Peru. But finally making the leap will require the new Wealth Fund to be matched by broader reforms nurturing the accountability and competence critical to turning subsoil assets into sustained public good. 

One fund won't resolve Mongolia's resource paradox on its own. But it could mark a pivotal step by rallying the nation around smarter, more equitable resource stewardship. The challenge will be converting those aspirations into consistent deeds.