Mongolia - Overview of economy

Mining, agriculture, and the processing of agricultural products are the 3 main sectors of the Mongolian economy. For centuries, the Mongolians have been engaged in animal husbandry, raising horses, sheep, goats, cattle, and camels. Since the vast prairie land could support millions of cattle and sheep, but not sustain crop cultivation, the Mongolians often bought wheat, barley, and oats from their neighbors, and crop production was of secondary importance for them. Animal husbandry and hunting provided other important sources of livelihood and products for trade, such as marmot and squirrels found in the rich forests of northern Mongolia.

The Mongolians long had close relations with neighboring China, which historically was one of its biggest trading partners. However, relations between Mongolians and Chinese were often interrupted by devastating wars and military conflicts and, gradually, the Chinese Empire established political control over Mongolia. These wars damaged Mongolian economic and social development. Consequently, Mongolia entered the 20th century as an underdeveloped, feudal country.

Most of the major economic and social changes in the 20th century came as a result of communist revolutions in neighboring countries. The Chinese Revolution of 1911 and the Russian Revolution of 1917, which were directed against imperial regimes and promised social justice, had profound effects on the Mongolian elite. In 1921, with Soviet assistance, Mongolia established an independent provisional government and declared independence from China. In 1924 the Mongolian People's Revolutionary Party came to power, remaining in control for the next 70 years. It introduced radical political and economic changes, state control, and central state planning, modeled on the Soviet political and economic systems. With Soviet assistance, the Mongolian government introduced large-scale farming centered around state-controlled collective farms. It also established light industry and mining operations. As in most socialist countries, almost all economic activities in Mongolia were state-controlled, and private entrepreneurial initiatives were limited. Until the 1990s, the Soviet Union and its eastern European territories remained Mongolia's main trading partners, the main market for its products, and the main source of foreign aid. According to the International Monetary Fund (IMF), the Mongolian economy grew at an average annual rate of 6.0 percent between 1979 and 1989, which was one of the highest growth rates in communist countries.

Major changes came in the late 1980s with the introduction of democratization and market-oriented reforms. These changes were largely peaceful since they were started by the ruling class under the influence of the neighboring Soviet Union and China. In early 1990s, the Mongolian government formulated its program of radical economic change (the so-called "shock therapy" approach) with the assistance of international organizations such as the World Bank and the IMF. This program was based on 3 main strategies: rapid privatization , rapid price liberalization , and currency reform. According to the IMF, Mongolia's economy declined at an average annual rate of 0.1 percent between 1989 and 1999.

The modern Mongolian economy largely relies on the export of raw materials to international markets. The country's main exports are copper concentrate (which accounted for almost 47 percent of its total export earnings in 1998), cashmere (the country produces almost 30 percent of the world's cashmere), and textile and meat products. Mongolia depends heavily on imports of machinery, fuels, industrial and consumer goods , and food products. Because of the transitional recession and disappearance of aid from the former USSR, Mongolia's economy increasingly relies on foreign aid and credits. Total external debt has reached almost US$738.8 million (1998), quite a large figure for a nation of only 2.6 million people.

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