Chinggis Khaanonomics – steppe-ing out in Mongolia

Who invented free trade? Was it the British Economist David Ricardo (whose masterful explanation of the principles of comparative advantage has become a text book favourite for economic students ever since)?

Well, Ricardo may have advocated free trade in theory but its origins in practice come from a more unlikely historical source.

On a recent trip to Mongolia, the airport economist learnt that it was in fact the famous Mongolian war load Chinggis Khaan, who can in some way, claim to be the father of free trade. In fact, Chinggis Khaan (popularly known in the west as Genghis Khan thanks to a faulty translation) was the father of many things and many people – around one quarter of Mongolians claim to be a descendant – so old Chinggis must have been a busy boy when we wasn’t fighting and conquering his neighbours.

In fact, the whole historical legacy of Chinggis Khaan is fascinating. While in Ulaan Bataar, the airport economist learned that Khaan first developed the principle of free trade when he abolished tariffs between the provinces of the Mongol empire. He also developed the world’s first ever passports (for all those travelling in his vast empire that stretched all the way from China to Europe) and the world’s first postal service, while basically conquering the world in his spare time.

His legacy is still apparent in Mongolia today. In fact you can’t miss him. When the airport economist arrived in the Mongolian capital, Ulaan Bataar (known as UB) of course, it was named Chinggis Khaan international airport. Then I had a couple of Chinggis beers at the hotel off Chinggis street, and bought a bottle of Chinggis vodka to give to a ger family (the nomadic people who live in tent like structures known as ‘gers’ that protect them from the harsh climate on the Mongolian steppes).

In this regard, some would say Mongolia is living a bit on its past glories in talking so much about Chinggis Khaan’s victories (a bit like St George does in the NRL or Melbourne in the AFL) but there’s no doubt that this historical figure still looms large in the Mongolian consciousness.

But what about modern Mongolia? It was of course a communist state from the 1920s to the 1990s, with a lot of Russian influence (and suspicion about Beijing). They went through a difficult period after the fall of communism, as did many former Soviet influenced states, with mass unemployment and a breakdown in institutions.

But the times in Mongolia may be a-changing. In fact, the airport economist happened to be in UB at an important historical moment in modern Mongolian economic history. While in the country, Ivanhoe resources – of which Rio Tinto has a strategic stake – announced its agreement with the Mongolian government to develop copper and gold deposits in Oyu tolgoi. The agreement, which was seven years in the making, is expected to have a major impact on Mongolia’s future economic prospects.

According to Chad Blewitt, Ivanhoe’s chief financial officer (on secondment from Rio Tinto), the project will “double Mongolia’s GDP of $US5 billion and the mine deposit will become one of the fifth largest mines in the world.” Blewitt believes “this place could be like Dubai in five years time, but they’ve got to manage the revenues and ensure that they have the right skill mix in the labour market to make it all happen.”

Jim Dwyer, Executive Director of the Business Council of Mongolia (BCM) believes there will be a ‘ripple effect’ with the services and infrastructure around mining. Dwyer, an American who was a mergers and acquisition (M&A) specialist on Wall Street before coming to Mongolia in 2001 (and “just fell in love with the place”) believes the investment will attract other foreign investors and believes that Mongolia’s financial system will allow other sectors to grow on the coat tails of the commodity boom.

“I came in 2001, to lead a major transaction in the Mongolian banking sector. We’ve had our challenges for sure, but in my experience it’s one of the most stable economies of the emerging world.”

Chad Blewitt believes there’s great opportunities to be had for Australia in infrastructure and education and training. “The unis here really need help as Mongolia standards in mining engineering education is still stuck in the 1960s text books. The TAFE sector in Australia could do wonders in a place like Mongolia. Australia could also help Mongolia in terms of accounting standards, corporate governance. This would help avoid a skills shortage as the project takes off.”

In terms of infrastructure, Leighton Asia is already there with affable West Australian Mark Bailey leading the charge. “We’re building the mines, we’ve also picked up the railways and they’ll be plenty more to come. Bailey has found Mongolia, a straightforward place to do business (although it’s a relationships-based business culture) and has – like Dwyer – fallen in love with the country. They’re fantastic people and the countryside is amazing with so much to do in term of exploring.”

Both Blewitt and Bailey believe that Australia has a good reputation and is well regarded in terms of our standards – especially in occupational health and safety and mine regulation.

“There used to be a lot of ‘cowboy miners’ here” (described by a local Mongolian economist Altantsetseg Shilegmaa as ‘Ninja miners’) “but fortunately Australia was not among them,” added Blewitt.

Australia’s reputation in Mongolia has been enhanced not just by the expatriate community but also by the “Mossies” – a group of Australian educated Mongolians who still retain an affection for Australia. A leading “Mossie”, J.Elbegsaikhan, Australia’s Honorary Consul in UB, says “the Australian community itself is small but the Mossies are influential and include some of the top decision makers in Mongolian society including the speaker of the Mongolian Parliament who is known among us as the ‘chief Mossie’.”

In fact the speaker and chief Mossie recently got lost hiking in the Mongolian steppes just like the Victorian politician Tim Holding. (What is it about politicians and hiking nowadays?)

According to Jim Dwyer, “there’s only 150 key decision makers in Mongolia” so the Mossies do carry a bit of clout and this certainly has helped the mining project. The Australian influence is also helped by the addition of Australia’s Youth Ambassadors in Mongolia.

One Ambassador, Carl McIntyre has been assigned to help the Mongolian Chamber of Commerce, drawing on his experience in investment attraction in Brisbane. Coming to Mongolia for McIntyre, in his words “fulfils a life-long dream” and he is keen to help develop Mongolian industries in agribusiness, in areas such as meat processing, as well as in mining, tourism and professional services.

At the World Bank in UB, economist Altantsetseg Shililegmaa, believes that industry diversity will help Mongolia ride the commodity boom. She also believes that the Mongolian government “needs to target social welfare expenditure from the mining revenues ‘wisely and equitably’.”

Altantsetseg also notes that Mongolia’s ability to manage the proceeds “will be helped by the fact that Trade unions and civic movements play an important role in Mongolian society”, but she is concerned about skill shortages and the possible need for skilled migrants from China (as Mongolia only has a population of 2.7 million people) and the impact that may have socially. Battushig from Mongolia’s Foreign Investment and Foreign Trade is also concerned about skill shortages and says the county needs “more engineers not just lawyers and economists and translators”.

Altantsetseg believes that the role of women in Mongolia will play an important part in managing this economic transition. “Chinggis Khaan’s mother and wife played a strong role in his management leadership techniques and Mongolian women do this today thanks to their relatively high levels of education,” she explains. She also adds that “Mongolian women have great confidence, an ability to express themselves although they don’t fill all the top leadership positions in business and government which are still very traditional”.

She also pointed out that Mongolian women dress well and they have a great love of shoes! She’s right about that one. Walking around UB, fills like you’re on a Mongolian remake of Sex and the City, with an amazing variety of shoes, from high heels – that they wear even in the snow, to Mongolia’s famous fur lined boots. It seems after our World Bank discussion, that urban Mongolian women have a marginal propensity to consume on footwear that would make Carrie Bradshaw or even Imelda Marcos blush! Mind you the blokes are not far behind as Mongolian blokes like their shoes too, particularly riding boots (I wonder if RM Williams would do well here?)

But the news in Mongolia is all about the mine and its associated knock on or ripple effects. And if things go according to plan, we could well be looking at a new era for Mongolia. As Chad Blewitt says “The mine is a country changer and I feel that I am witnessing economic history”.

After the straightjacket of communism and the erratic instability of immediate post-communist era, Mongolia is hoping the economy will be able to grow steadily and provide improved living standards through the community. They hope they might even create an unprecedented level of prosperity if they manage this mining project right.

However, Mongolians don’t intend to conquer the world like Chinggis Khaan did in the 13th century (after all, he was voted man of the last millennium by Time magazine). But they certainly do seek a steady improvement in living standards in this millennium and they can leave conquering the world to the history books and the numerous Chinggis Khaan monuments around Ulaan Bataar and the vast steppes of the Mongolian countryside.

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Tim Harcourt is Chief Economist with the Australian Trade Commission and the author of The Airport Economist (www.theairporteconomist.com).