An economic boom is under way in Mongolia, thanks largely to improving prospects for the country's all-important mining sector. The Economist Intelligence Unit forecasts that real Gross Domestic Product (GDP) growth will average a supercharged 13.4% a year in 2011-2012.

At the same time, the country needs to look beyond the coal and copper mines that are driving its economic boom to find a more balanced mode of growth. There are other sectors like cashmere and emerging industries such as tourism, food production and metal processing that need development.

Sandwiched by Russia's far east to the north and 1.3 billion-strong, resource hungry China to the south, the Mongolian government is looking for ways to lessen its vulnerability to competition from its giant neighbour and reduce its reliance as a customer.

Mongolia is very rich in iron ore, coal, copper, gold, oil, potash, uranium and rare earth minerals but it also has the capacity to produce 30 percent of the world's cashmere. Thirty-four percent of Mongolia's 1.1 million labour force work in agriculture, primarily tending livestock that includes the goats that yield cashmere fibres. Services employ 61 percent, with industry accounting for 5 percent. In contrast, industry provides 30 percent of gross domestic product and agriculture 21 percent. As well as raw materials and unprocessed animal products, Mongolia also sells apparel and leather goods and the government aims to support textiles, infrastructure, tourism and food production.

More than a third of Mongolians live below the poverty line, and per head income in the nation of 2.7 million is U.S.$ 2,111, the International Monetary Fund said in 2010. China accounts for 80 percent of Mongolia's imports and buys about 85 pecent of its exports, according to Mongolia's central bank data. While Mongolia trade turnover surged 54 percent to US$ 6.2 billion last year, imports exceeded exports by US$ 379 million. 

All the ingredients for Mongolia to become this decade's success story are present,  now it is imply a case of blending the right mix of ingredients together to obtain a performing economy. The will to move in the right direction is clearly demonstrated by the new generation of Mongolia's politicians who are fast becoming a formidable force.

Mongolia's main weakness has always been isolation, landlocked between two enormous powers. With the correct exploitation of its resources, Mongolia has now the opportunity to turn that weakness into strength and take advantage of both neighbours. This will require a tricky political balancing act. Mongolia's position is not an easy one. Russia is keen on maintaining  political assertiveness with Mongolia while China seems to be primarily concerned with securing easy and cheap access to the resources Mongolia is so abundant in and that China do desperately needs.

The best way for Mongolia to leverage its enormous resources against its neighbours is to use what has now been termed "The Third Neighbour Policy", essentially a loose understanding that whenever possible and advantageous, Mongolia will deal with countries or entities that are neither Chinese nor Russian. Mongolia's favoured third neighbours have traditionally been considered to be Japan, Korea, India, the USA and sometimes a few of the European counries. This policy allows Mongolia to indiscriminately pick and choose the most suitable partner for each project.

The business environment of Mongolia is still good but can be further strengthened with more comprehensive, transparent and accessible information to foreign investors. Improving political stability is a longer term goal but is part of the greater understanding required on the part of Mongolia as to what is essential for the country to remain competitive in an increasingly globalised world.

On the flip side, if the third neighbour policy becomes truly effective, it may well anger its two very large and powerful neighbours who feel they are missing out and see their influence diminish within Mongolia. Mongolia depends on those neighbours for its survival as they are (China in particular) Mongolia's major trading partners. Furthermore, Mongolia could be perceived as setting a bad example for its neighbours; a democratic and successful economy on their doorsteps might set a dangerous precedent, in particular for the inner Mongolian region of China.

How Mongolia handles this potential and economic backlash from both countries is the most interesting of questions. Most people are confident that Mongolia will manage this difficult balancing act well, it will of course make mistakes along the way but as long as it retains a fair system of checks and balances, it will be able to recover from those mistakes and forge ahead.



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