72946 POVERTY THE WORLD BANK REDUCTION AND ECONOMIC MANAGEMENT NETWORK (PREM) Economic Premise JUN 2012 SEPTEMBER 010 • Numbe 90 • Number 18 South-South Cooperation: How Mongolia Learned from Chile on Managing a Mineral-Rich Economy Rogier van den Brink, Arshad Sayed, Steve Barnett, Eduardo Aninat, Eric Parrado, Zahid Hasnain, and Tehmina Khan Mongolia’s mineral-rich economy was hit extremely hard by the global downturn during 2008–9, when copper prices plunged, external demand fell, and growth collapsed. The shock exposed serious underlying weaknesses in the manage- ment of the country’s natural resource wealth, particularly the lack of policies to insulate the economy from commodity cycles and real exchange rate appreciation pressures, an inadequate safety net, and poor public investment planning. These issues gained further urgency with the signing of a major copper mining deal in 2009 that further increased the country’s mineral dependence. As part of its reform efforts and with the assistance of the World Bank and the Interna- tional Monetary Fund (IMF), the government began an intensive south-south exchange, notably with Chile, another major copper producer, on strengthening the policy environment. The dialogue proved critical in the passage of several landmark laws within the space of a few years, including a fiscal stability law modeled after Chile, and the accompany- ing integrated budget and procurement and social welfare laws. These reforms will be crucial in managing the boom-bust cycle of mineral prices and mitigating Dutch disease effects by anchoring a prudent countercyclical fiscal policy, strength- ening public financial management, increasing savings, and providing a fiscally sustainable social safety net targeted to the poor. The Mongolian economy is currently on the brink of huge carry challenges of Dutch disease, whereby the nonmineral economic expansion as a result of the exploitation of its vast traded sectors of the economy lose competitiveness from large mineral assets. As the development of the Oyu Tolgoi (OT) mineral sector export and revenue inflows. copper-gold mine—one of the five largest in the world1—comes Mongolia has faced some of these risks, having suffered closer to completion, and as output from other deposits is from overheating pressures when global commodity prices scaled up, gross domestic product (GDP) is expected to more boomed during 2005–8 and subsequently plunged in than treble within the space of a few years. Large knock-on 2008–9 when the commodity price cycle turned. In a com- effects on other parts of the economy are also expected, nota- parison with other major copper producers, Mongolia was bly those related to transport, infrastructure and utilities, be- one of the hardest hit in 2008–9 (figure 1). With mineral cause these sectors also contribute to getting the minerals out revenues accounting for one-third of fiscal revenues and al- of the ground and to market. most 80 percent of exports, collapsing global commodity However, these ostensibly positive developments also prices and demand led to a sharp deterioration in fiscal and pose risks associated with volatility in commodity prices and current account balances (table 1 overleaf). The economy, 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise Figure 1. Mongolia’s GDP Growth Declined More Than Other Major spending on priority areas and extreme neglect of infrastruc- Copper Producers in 2008–9 ture maintenance.2 change in GDP growth 2008 With growth collapsing and beset by a financial sector cri- 6 �scal balance (2009) sis, the government turned to the World Bank, the IMF, the current account balance (2009) Asian Development Bank (ADB), and other donors in late 3 2008. The World Bank pledged US$60 million in early 2009 percent of GDP 0 (later raised to US$70 million) for budgetary support in part- -3 nership with the ADB (US$60 million), Japan (US$50 mil- lion) and Australia (US$3.5 million), while the IMF agreed to -6 an 18-month standby arrangement worth about US$235 -9 million for balance of payments support. The IMF would dis- burse about US$165 million during 2009. Out of the -12 MNG Peru Chile PNG Zambia US$180 million budget support pledges, US$130 million Source: IMF and World Bank. alone was disbursed in 2009. Helped by strong policy action Note: MNG = Mongolia; PNG = Papua New Guinea. by the government and the donor support programs, the economy turned the corner in 2010. The economic outlook which had registered growth of above 9 percent on average also improved in line with the rebound in commodity prices between 2004 to 2008, contracted by 1.3 percent in 2009, and with the signing of the OT mining investment deal. in turn triggering a crisis of confidence in a banking sector However, the need for medium-term reforms to enhance that had substantially overheated in the preceding boom the recovery and better manage a mineral-dependent econo- years. my remained. In the fiscal sector, the objective was to isolate The shock exposed serious structural weaknesses in the the budget from mineral price fluctuations, avoid excessive policy environment. In particular, the country’s fiscal posi- real appreciation of the currency, minimize “pork barrel� tion was highly reliant on mineral revenues. During the boom public spending, and raise the quality of public investment years (2005–7), the government shifted the fiscal burden planning and management. In the social sector, policy makers away from the nonmining sector, leaving the budget increas- aimed to provide a fiscally sustainable social safety net to en- ingly dependent on mining revenues. And while the govern- sure the poor were protected from the inevitable boom-and- ment did save part of its mining windfall during the boom bust cycles associated with mining economies. years, it also funded large increases in untargeted social expen- These reforms were made all the more urgent by the OT ditures, which proved unsustainable during the bust, the deal and other major mining projects on the horizon. While time when they were needed the most, as well as in wages, the development of the OT mine significantly transformed salaries, and poorly screened investment projects. Public in- the country’s medium- and long-term growth prospects, it vestment in particular suffered from extremely poor capital further increased the country’s dependence on mineral re- budgeting and planning, was burdened by excessive powers of sources. Moreover, although the sheer scale of revenue in- Parliament to insert projects, and suffered from insufficient flows—for example, fiscal revenues are expected to rise sixfold Table 1. Mongolia: Selected Economic Indicators Indicators 2004 2005 2006 2007 2008 2009 2010 GDP growth (%) 10.6 7.3 8.6 10.2 8.9 -1.3 6.4 Consumer price index (eop % yoy change) 10.9 9.6 5.9 14.1 23.2 1.9 14.3 Government balance (% of GDP) -1.8 2.6 3.1 2.7 -4.5 -5.0 0.0 Total expenditures (% of GDP) 33.5 27.2 30.7 35.3 37.6 35.2 36.6 Total revenues and grants (% of GDP) 31.8 29.9 33.8 37.9 33.1 30.2 36.6 Nonmining fiscal balance (% of GDP) -1.3 -7.3 -13.4 -14.1 -12.4 -10.5 Current account balance (% of GDP) 1.3 1.3 6.5 6.3 -12.3 -12.9 -14.3 Gross foreign exchange reserves (months of imports) 1.8 2.5 4.3 3.8 3.7 4.2 5.1 Exchange rate (MNT/US$, eop) 1,209 1,221 1,165 1,170 1,267 1,443 1,257 Sources: Mongolia National Statistical Office, IMF, and World Bank. Notes: yoy = year-on-year; eop = end of period; MNT= Mongolian togrog 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise Figure 2. Mineral Revenues Are Expected to Rise However, political commitment to the fiscal reforms was Sixfold by 2020 as the Mining Sector Expands greatly facilitated and deepened by the south-south exchange. Looking back, this stands out as a critical component of the mineral revenues (% of GDP) budget support operations. To achieve the south-south ex- 10,000 18 mineral revenues (MNT billions) change, the World Bank acted as a key convening platform for 9,000 16 8,000 dialogue with other governments, notably Chile, but also to 14 7,000 Eastern Europe (Estonia, Poland, Latvia), Africa (South Afri- MNT billions percent of GDP 12 6,000 ca and Botswana), and Canada. The World Bank worked to 10 5,000 build a political consensus among stakeholders across the po- 8 litical spectrum and in civil society in Mongolia. 4,000 6 For this purpose, the World Bank helped organize a series 3,000 2,000 4 of annual economic policy conferences centered on the eco- 1,000 2 nomic challenges facing Mongolia, as well as study tours to 0 0 different countries that provided examples of good interna- 2010 2015 2020 2025 2030 tional practice. Three such study trips were organized to Source: IMF and World Bank staff estimates. Washington, DC (jointly with the IMF), two to Chile, and one Notes: MNT = Mongolian togrog. each to Canada, Botswana, Estonia, Poland, and Slovenia. To fund these activities, the Bank mobilized substantial resourc- es, from its own budget, the Governance Partnership Facility, by 2020 (figure 2)—presented a major opportunity to build and by reallocating expenditures from the ongoing Economic the country’s human and physical infrastructure and capaci- Capacity and Technical Assistance Credit Project. ties, they also carried all the attendant risks of Dutch disease. These risks were further heightened by the planned develop- Why Chile? ment of other major mines, including Tavan Tolgoi, one of the world’s largest, undeveloped coal deposits, with an expected Because Chile has a small, open economy and is the world’s life of 200 years. largest producer of copper,3 it is vulnerable to the same shocks as Mongolia, especially volatility in copper prices, and subject South-South Exchange: World Bank and to similar Dutch disease pressures arising from a booming IMF Roles minerals sector. In Chile, the share of copper revenues in total fiscal revenues rose from about 5 percent of the total (or 1 Assisted by the World Bank and the IMF, the government em- barked on a sustained dialogue with other countries, notably percent of GDP in the early 2000s) to about 24 percent in the Chile, to learn best practices employed in natural resource– late 2000s (or roughly 6 percent of GDP), so the fiscal man- rich economies. The cooperation between the two countries agement of mining revenues was particularly important. If was aimed at increasing understanding of, building support these had been spent in real time, they would have significant- for, and disseminating information among key stakeholders— ly added to absorptive capacity pressures in the economy and notably Mongolia’s powerful parliament—on the complex and resulted in an appreciation of the real exchange rate to the politically sensitive reforms required to implement these best detriment of the nonmining traded sectors. practices. But unlike Mongolia, Chile had in place stringent fiscal Fiscal reforms were already a key part of the World rules and institutional frameworks. In 2001, Chile adopted a Bank’s budget support operations. The two Development structural balance rule that was eventually enshrined in legis- Policy Credit (DPC) operations in 2009 and 2010 both tar- lation in a fiscal responsibility law in 2006.4 The rule built on geted public investment planning and management with the the Copper Stabilization Fund adopted in the late 1980s, objective of increasing the efficiency with which future in- which enabled government outlays to move in line with sus- creases in mineral revenues were invested. The related prior tainable copper revenues, valued at the long-term copper actions also complemented other fiscal measures, notably the price. This was adjusted in 2001 to incorporate the business passage of a fiscal stability law (FSL) targeted by the IMF in its cycle so that the structural balance was defined not only in lending operations. terms of long-term mineral revenues, but also potential out- The IMF also provided extensive technical assistance put. Another significant innovation was the establishment of from its Fiscal Affairs Department. This included multiple a committee of experts in 2002, who were tasked with pro- visits by teams of experts to discuss the FSL, the integrated viding independent technical estimates of long-term copper budget law (IBL), and fiscal decentralization. A resident advi- prices and of potential output. sor on budget planning was also stationed in Mongolia for The long-term savings provided by the structural balance two years. rule also helped cover Chile’s contingent liabilities through 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise transfers to two sovereign wealth funds: the Pension Reserve ample opportunities for in-depth discussions on (but not lim- Fund5 and an Economic and Social Stabilization Fund.6 The ited to, see box 1) fiscal rules, the rationale for stability and latter was the rainy day fund to support continued spending pension funds, estimating long-run copper prices, and how in periods of slow growth and/or low mineral prices. the Chilean model on fiscal policy could translate to Mongo- These fiscal rules prevented the Chilean economy from lia. The Chilean part was highly effective because it allowed overheating during the commodity boom and allowed it to ef- the Mongolians to get information directly from the source, ficiently respond during the bust. Thus in the copper boom of including from fellow parliamentarians and government offi- 2003–8, the surge in copper prices was deemed temporary by cials. The Washington, DC, leg of the tour enabled the par- the panel of experts, therefore most of the revenue windfalls ticipants to then set the Chile case into its international con- had to be saved. With a structural balance surplus target of 1 text, while discussing the concrete fiscal rule options for percent, overall budget surpluses reached close to 9 percent Mongolia. (figure 3). By the end of 2008, the central government’s finan- Upon return, there was a daylong workshop with Mongo- cial assets equaled 20 percent of GDP. This in turn allowed lian members of Parliament (MPs) on October 31, 2009, in the government to significantly ease fiscal policy during the Ulaanbaatar. The meeting was organized by the parliamenta- bust. Not only did Chile weather the storm better than oth- ry leaders of the two main political parties and the Minister of ers, but its fiscal support package (of about 3 percent of GDP) Finance to include other MPs on the key presentations and was entirely domestically financed. discussions of the September study tour. The workshop was attended by 35 MPs, roughly half of all MPs. It turned out to South-South Exchange in Practice be an intense question and answer session, involving the gov- South-south exchange between Mongolia and Chile began in ernment, the World Bank, and the IMF on the full range of earnest with a study tour of Chile in September 2009 by six economic problems facing Mongolia. Mongolian parliamentarians, including the leaders of the two The final key part of south-south exchange was the 2009 coalition parties, the Deputy Minister of Finance, and the Economic Policy Conference held in late October, represent- World Bank’s lead economist. This was immediately followed ing another important opportunity for cross-country knowl- by a visit to Washington, DC, for a series of workshops jointly organized by the IMF and World Bank. Eduardo Aninat—for- Box 1. Topics Discussed during September 2009 Study Tour merly Minister of Finance of Chile and Deputy Managing Di- of Chile rector of the IMF—organized the Chilean leg of the tour. The 1. Role of the Congress in the budget process; legal envi- Chileans provided the Mongolian delegation their expertise on ronment; role and responsibility of Congress for improv- their own political economy and excellent fiscal framework. ing fiscal sustainability environment. The study tour was designed to provide key Mongolian 2. Fiscal rules and budget and fiscal sustainability laws. policy makers and legislators with cross-country, cross-insti- 3. Fiscal audit process. tutional, cross-regional, and cross-sectoral knowledge on how 4. Intergovernmental fiscal regulations and related law and procedures. best to manage a mineral-dependent economy. It provided 5. Features of budgeting in case of natural force majeure and others, including in the economic crisis. Figure 3. Chile’s Fiscal Rules Allowed It To Accumulate Large 6. Copper price estimation and Chilean Copper Stabiliza- Surpluses, Enabling Policy Easing during the 2008-9 Global tion Fund. Crisis 7. Pension reforms and Chilean pension fund. 9 18 8. General review of budget procedures: budget expendi- overall balance ture ceilings, how enforced for different spending units, structural balance 15 and violations. percent of year on year real exp. growth 9. Program budgeting: (i) types of budget classification— 6 12 (% yoy) if program classification is used in budget process and percent of GDP 9 how it is used in making appropriations and controlling 3 6 expenditures; (ii) nonfinancial indicators and how they are used for funding different levels of line ministries, 3 how collected, and by whom; and (iii) how performance 0 0 management works. 10. Investment budgeting. -3 11. Medium-term budgeting and macroeconomic and fis- 02 03 04 05 06 01 07 08 20 20 20 20 20 20 20 20 -3 -6 cal projections: how are macroeconomic and fiscal pro- jections estimated? 12. Budget execution controls. 09 20 Source: World Bank. Source: Daban 2011. 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise edge transfer, but now to a wider audience. The conference—a Structural balances were to be defined using the long-term public economic forum organized jointly by the government price of copper derived from publicly available IMF forecasts and the World Bank to bring international knowledge to bear and from an independent, internationally reputable financial on Mongolia’s economic challenges—was opened by the presi- institution. The second rule set a ceiling of 40 percent of dent of Mongolia. Its objective was to widen and extend the GDP on the net present value of public debt, and the third policy debate to other stakeholders, including the general rule restrained annual increases in public expenditures to a public. Discussions were led by representatives from the sustainable level. In addition, the FSL required that annual World Bank, the Ministry of Finance of Chile, the Nether- budgets be consistent with medium-term budget frame- lands Ministry of Finance (on Dutch disease, naturally), the works. Bank of Mongolia, and the IMF. This annual conference has The new law also mandated saving excess structural rev- since continued to provide an important avenue for the gov- enues in a Fiscal Stability Fund. A portion of these funds were ernment of Mongolia and representatives of Mongolian soci- to be invested overseas, helping to reduce Dutch disease pres- ety to learn from local and international experts and policy sures on the economy. The remaining mining sector revenues makers. would be invested in domestic infrastructure to meet the sub- A second tour for MPs was held in March 2010, but the stantial infrastructure needs of the economy. These rules will visit was limited to Washington, DC, on account of an earth- be key to Mongolia’s efforts in constraining fiscal spending to quake that occurred at the time in Chile. The delegation in- prudent and sustainable levels. cluded six MPs, including the chairman of the Budget Com- Since 2011, as required by the FSL, the budget has been mittee, and three members of government including the based on estimates of structural mineral revenues, with the director of the Debt Management Division in the Ministry of difference between actual revenues and structural revenues Finance. Over a three-day period, senior economists and ex- (Tog. 241billion in 2011, or around 2.2 percent of GDP) perts from the IMF and the World Bank debated and dis- saved so far in a Fiscal Stability Fund. The expenditure and cussed a comprehensive range of issues with the Mongolian debt ceilings act as circuit breakers, first by limiting absorp- delegation, including developing a fiscal rules’ framework, di- tion and overheating pressures in the economy when struc- versification challenges posed by rising mineral dependence, tural revenues are rising fast (as would happen when the OT and the operational aspects of fiscal decentralization and debt management. Finally, during 2010 and 2011, other groups of parlia- Box 2. Key Provisions of the Fiscal Stability Law mentarians and government officials went on study tours to 1. A ceiling on the structural deficit of 2 percent of GDP. The Chile, Canada, and Washington, DC: Botswana to study min- structural deficit is defined as total expenditures minus ing policies; Estonia, Poland, and Slovenia to study organic structural revenues, with the latter calculated by using budget laws; and the Philippines to study conditional cash the moving average price of major minerals—currently transfers. The study tours provided opportunities to discuss copper and coal—over 16 years (past 12 years, current key policy reforms relating to social welfare; fiscal decentral- year, and future three years). This helps to insulate the ization; public investment planning and management; invest- budget from commodity price volatility and prevents fis- ment strategies for stabilization funds; and development cal policy from transmitting the shocks to the rest of the strategies for natural resource–based economies. These study economy. The provision takes effect in 2013. tours increased the understanding of, and reinforced the 2. A cap on expenditure growth based on the nonmineral commitment to, the government’s policy reforms among key GDP growth rate and determined as the greater between parliamentarians. its 12-year moving average value and the budget year’s GDP growth rate. Spending growth that is too fast can Key Reforms have negative consequences in terms of overheating and inflation, and is also difficult to manage without reduc- This intensive collaboration yielded major reforms in fiscal tions in quality and efficiency. This provision is meant to management, public investment planning, fiscal decentraliza- prevent excessive spending growth when structural rev- tion, and social protection. First, a landmark Fiscal Stability enue is growing fast, and also takes effect in 2013. Law (FSL) was passed by a bipartisan majority of Parliament 3. Net present value of public debt cannot exceed 40 per- in June 2010. There were three fiscal rules legislated (box 2); cent of GDP. The provision takes effect starting in 2014, one adopted a structural balance similar to the Chile exam- with a transition period specified for the preceding years, ple. The rule committed the government to using long-term and is meant to safeguard against the government bor- copper and coal prices as the basis for the mining revenues rowing excessively against future wealth. Sources: Law of Mongolia on Fiscal Stability (passed June 24, 2010), and beginning in 2011 and specified ceilings on government World Bank, EASPR. structural deficits (2 percent of GDP, binding in 2013). 5 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise mines starts to produce), and second by ensuring that the gov- ects (for example, schools and hospitals) financed from the ernment does not borrow excessively against future mineral national budget. wealth. The most novel aspect of the revised law is the new role Second, Parliament passed the Integrated Budget Law for civil society organizations in both bid evaluation and con- (IBL) in December 2011. This is a comprehensive law that tract monitoring, with the latter potentially including both significantly strengthens budget processes; improves the com- monitoring the implementation of ongoing contracts as well prehensiveness of the budget; strengthens the public invest- as gauging end-users’ satisfaction with completed contracts. If ment planning and capital budgeting process; and ensures ef- implemented effectively, these provisions will make Mongolia ficient financial management. The law contains a range of unique among developing countries in institutionalizing civil measures and penalties to support fiscal sustainability, and in society oversight over government public expenditure man- particular, the successful implementation of the FSL. It agement. strengthens the public investment framework by requiring The passage of the Social Welfare Law in January 2012 appropriate feasibility studies and alignment with national was also a major accomplishment: it laid the foundation for a priorities for all public investment projects. The law is there- more efficient, cost-effective social welfare system in Mongo- fore an important step in permanently locking in prudent lia that better protects the poor and is more fiscally sustain- countercyclical fiscal policies and mechanisms in the future able. The law includes three key features: (i) substantial con- alongside the FSL, as well as addressing long-standing struc- solidation of categorical benefit programs; (ii) introduction of tural weaknesses in the execution of the capital budget. the poverty-targeted benefit based on proxy means testing The IBL also set in motion major fiscal decentralization targeting; and (iii) longer-term fiscal sustainability of social reforms by significantly increasing the authority and financial welfare. The program is likely to cover the population in the resources of local governments, and strengthening account- bottom 20 to 30 percent of income distribution. This will ability through participatory budgeting. In particular, the au- mean a more streamlined and rational system of social trans- thority of local governments has been significantly enhanced, fers that target the poor. The reformed system will be more with the capital city and aimag governments responsible for coherent in terms of its design and structure and more effec- key public services such as basic education; primary health tive in protecting the poor at a lower cost to the budget. care; urban planning and construction; social welfare services; Finally, the challenge of implementation looms large. water supply and sewerage; public transport; urban roads and One of the key lessons emanating from Chile, and also from bridges; and municipal services. These functions will be fi- the Netherlands since it found the cure for Dutch disease, was nanced through local taxes and fiscal transfers (an equaliza- that political commitment to sound fiscal management be- tion grant) from shared taxes from the central government, tween the main economic stakeholders was of paramount im- with the transfer formula based on factors such as population; portance. Recall that Chile implemented the structural bal- population density; remoteness and size of the local govern- ance rule long before there was specific legislation in place. ment; and level of local development. Only the capital city And in the Netherlands, the economic cure for Dutch disease, government is allowed, with the approval of the Ministry of the 1983 political Wassenaar pact between government, la- Finance, to borrow from capital markets to finance public in- bor and business on fiscal and wage restraint, proved to be vestment projects, with the debt limited to the previous year’s more important than the legislative enactment of a set of fis- revenue and debt service limited to 15 percent of the previous cal rules (Khan and van den Brink, 2009). In Mongolia, the year’s revenue. implementation of the new laws is already being severely In addition, the Public Procurement Law of Mongolia tested by politicians’ attempts to spend the mining revenues (PPLM) was passed in January 2011. The PPLM, which will off budget through special funds and new development fi- go into effect January 2013, introduces radical changes in nancing institutions. Time will tell whether the new legisla- the public procurement system in Mongolia. It takes pro- tive framework is underpinned by the type of political com- curement responsibility away from line ministries and gives mitment that is able to enforce the rules during the boom it to a new Central Procurement Agency (CPA) for national- period—when they are actually most needed—to ensure the level projects and to local governments for local-level proj- sustainability of public expenditures during the bust. ects. The CPA will be responsible for all procurements for Conclusion large projects—inter-regional roads, power plants, and so forth—as well as for establishing framework agreements for Mongolia’s mineral wealth is an economic blessing, which if common-use items (such as office supplies) that will then be managed well has the potential to lead to lasting prosperity. purchased by line ministries. Local governments will be re- The extensive, wide-ranging dialogue with their Chilean sponsible for all procurement of works, goods, and services counterparts, facilitated by a strong IMF and World Bank to be financed from the local budget, as well as for local proj- partnership, significantly helped Mongolian policy makers 6 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise understand the challenges posed by Mongolia’s mineral international financial coordinator and adviser to the Minister wealth, learn from Chile’s success, and move decisively to en- of Finance of Chile, he built strong institutional arrangements act appropriate reforms. Between June 2010 and January for the management of Chilean government resources. Zahid 2012, four major laws were passed that overhauled and re- Hasnain is a Senior Public Sector Specialist at the World Bank placed existing fiscal and public sector management laws and and has been extensively engaged in the public investment set the basis for a comprehensive strengthening of fiscal man- planning and management reforms in Mongolia. Tehmina agement and policy frameworks, fiscal decentralization, and Khan is an economist covering Mongolia in the East Asia and social welfare. Pacific, Poverty Reduction and Economic Management (PREM) The dialogue with Chile was also critical in building do- Network of the World Bank. mestic political appreciation for the merits of the proposed Notes reforms and enhancing the likelihood that the associated leg- islation, notably the FSL and IBL, would be passed. Although 1. When commercial production begins at OT in 2013, it is these laws are in the process of being implemented, they rep- expected to produce 0.5 million tons of copper, 0.65 million resent an extraordinary opportunity for Mongolia to ensure ounces of gold, and 3 million ounces of silver per year, on aver- that the economy is better able to cope with risks and chal- age, during its first 10 years. In comparison, Escondida, the lenges posed by rising mineral dependence through prudent world’s largest copper mine located in Chile, produced 0.82 fiscal policy. The FSL and IBL will also ensure that Mongolia’s million tons of copper in 2011 and 1.09 million tons in 2010. mineral wealth is invested prudently and that these invest- 2. The crisis also exposed weaknesses in other reform areas ments are productive, efficient, and aligned with national pri- including the banking sector, social welfare, and mining. orities and that the poorest people in the country are protect- 3. Chile accounts for some 35 percent of global copper out- ed from commodity boom-bust cycles in a fiscally sustainable put and 40 percent of global reserves. manner. 4. The existing fiscal legislation prevented parliament from adding expenditures to the government’s budget proposals About the Authors without identifying off-setting revenues. This simple but ef- Rogier van den Brink was Lead Economist for Mongolia at the fective rule empowered government to start the implementa- World Bank and was Task Team Leader for the two Develop- tion of the structural balance rule without having to initiate ment Policy Credit (DPC) loans provided to Mongolia during new legislation. the crisis and recovery period (2009-2010). He is currently 5. Funded through minimum annual contributions of 0.2 Lead Economist for the Philippines. Arshad Sayed was former- percent of GDP (to be made even if the government was run- ly the World Bank Country Manager in Mongolia and current- ning an overall deficit), which can be raised to 0.5 percent if ly serves as President of Peabody, Mongolia and India. Steve there is a fiscal surplus of at least 0.5 percent. Barnett was formerly an IMF Mission Chief for Mongolia and is 6. This replaced the Copper Stabilization Fund set up in the currently Assistant Director, Office for Asia and the Pacific at the 1980s. It was funded by the structural surpluses left over af- IMF. Eduardo Aninat was formerly Deputy Managing Director ter the necessary transfers had been made to the Pension Re- of the IMF and Minister of Finance in Chile and is currently a serve Fund and to recapitalize the Central Bank. consultant for various international financial institutions, in- Reference cluding the IMF and World Bank, as well as advising govern- ments on fiscal policy. Eric Parrado is a consultant for the Daban, Teresa. 2011. “Strengthening Chile’s Rule Based Fiscal Framwork.� IMF Working Paper No. 11/17, Washington, DC. World Bank, International Monetary Fund (IMF), and other Khan, Tehmina, and Rogier van den Brink. 2009. “The Dutch international financial institutions and is currently advising a Disease: Some Lessons for Mongolia.� An Eye on East Asia and number of governments, including Mongolia, on fiscal policy Pacific 13 (World Bank, East Asia and Pacific Region, Poverty and the management of sovereign wealth funds. As a former Reduction and Economic Management). The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. They are produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at: www.worldbank.org/economicpremise. 7 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise