The Resource Nationalism Tightrope

Type the word “resource nationalism” into the Google search engine, and “Mongolia Picks Resource Nationalist Gankhuyag As Mining Minister” comes up on the first page with links to the article from both Reuters and Yahoo. However, what resource nationalism means is different in every country, from Botswana to Zimbabwe, from France to Venezuela, from the United States to Mongolia. Foreigners and Mongolians are both faced by a single question from which they need to know different answers.

The definition of resource nationalism varies, but the term is used to define a national government’s desire o improve its stake in the profits of mining interests by altering laws, tax systems, and contracts in its own favor.

The question: What does Mongolia’s new government intend to do with resource nationalism?

Foreign Thoughts

Foreign investors need to know what the rules of investing in Mongolia are going to be to determine if it is reliable and profitable. A February 2012 article in The Economist suggested that Botswana and Zambia were two countries that got the equation of resource nationalism right. These countries allow foreigners to make a healthy profit while increasing government revenues from the mining industry. An article from Mining.com in May 2012 unfavorably posited that Mongolia was headed toward the opposite direction, that of the failed experiment in resource nationalism one finds in Zimbabwe where hyperinflation destroyed the local currency.

Research journals point out that resource nationalism is cyclical, and follows the cyclical demand for natural resources globally. When natural resources are in higher demand, and mining companies need all that they can produce, countries can increase the share of profits they demand from mining companies. However, as natural resource prices fall, mining companies can choose to do business with the countries where they get the best deal. Thus, strength at the negotiating table between foreign investors and nations depends upon global demand for resources.

Natural resource prices peaked in 2009. Thus, the trend of increasing resource nationalism should be reversing in the coming years allowing mining companiesto be more selective about where they invest capital and do business.

Thus, from a foreign perspective, it becomes challenging to justify putting capital to work in a country that plans to add 39 more mines to the list of strategic mines. Most of Mongolia’s mining assets are still in the ground. If the government makes the environment too challenging for foreigner investors, Mongolia’s natural resources will stay in the ground until government policy becomes more favorable.

What About The Citizens?

The new Democratic Party led government may prove adept at negotiating a middle ground that increases Mongolia’s stake in the profits of mining companies while not deterring further mining investment by foreigners. The question then comes again: What does Mongolia’s new government intend to do with resource nationalism?

Mongolia’s business elite and political elite are closely tied, and sometimes the same people. Good business practices adopted by the leaders of the country could be very good for all the people of Mongolia by gain ingadditional government revenues from resource nationalism. The government could put additional government revenues into: infrastructure spending; education spending;protection & government support for Mongolian agriculture, Mongolia’s traditional crafts, professions, & innovations; and development of Mongolia’s sovereign wealth. If it finds the right balance, today’s DP government could secure a bright future for Mongolians for generations to come.

The alternative is, of course, that resource nationalism does not benefit the people of Mongolia, but only the government officials of Mongolia.

Simple Risks

The risks of resource nationalism are simple. First, if the country demands too much, the country may lose foreign investment. Second, even if the country maintains foreign investment, the elite of the country may not share the wealth with the citizens of its country equitably.

Mining is a capital-intensive risky business that requires expertise. If the benefits are better elsewhere, both the capital and the expertise will go elsewhere.

Resource Nationalism Is Normal

Paul Stevens in a June 2011 edition of the Journal of World Energy Law & Business points outs, “Canada and Australia are cited in the literature as classic examples of countries where ‘resource nationalism’ has ruled.” Elements of resource nationalism exist in all countries. From a populist political perspective, resource nationalism is driven by a population’s desire to realize the benefits of their nation’s natural resources.

Resource nationalism can work when: (1) governments do not demand too much from foreign companies; (2) act transparently enough that the policy is clear to foreign investors; and (3) use the economic windfall for the good of all. It sounds simple. Yet, the equation is fragile.

Mongolia Must Mine

As long as foreign capital and mining interests are in Mongolia, the economy will grow for the next 30 years. 

However, if foreign capital and mining interests decide to cease investing in Mongolia, it will take many years to convince those investment dollars to return again.

If the government of Mongolia has the right balance to keep those investment dollars under its brand of resource nationalism, misuse of funds remains a risk for the people of Mongolia who support resource nationalism today. It is instructive to remember that under communism: Mongolians had a higher rate of literacy than they do today, Mongolians had better regional health clinics throughout the country than they do today, Mongolia had better infrastructure than it does today, and Mongolia had better agricultural production than it does today. More than 20 years removed from communism, Mongolia fundamentally requires the success of its mineral wealth to give the government enough funds to make the country stronger and better for all its people than it was under communism.

For Mongolia’s mineral wealth to be exploited, foreign investment is still required. The government must make clear what its brand of resource nationalism will be in order to maintain foreign investment. The success of Mongolia’s resource nationalism thus depends upon the moderation and clarity ofthe government’s policies.

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