May 2005

FOREIGN DONORS PROMOTE POLICIES FAVORING MONGOLIAN-CHINESE RELATIONS AND DE-EMPHASIZING MONGOLIAN-CENTRAL ASIAN RELATIONS

Dr. Alicia Campi, Burke, Virginia USA

Mongolia, a strategically placed Eurasian nation with only 2.5 million in population, is often seen as a relatively successful posterchild among former communist countries for simultaneously and enthusiastically transitioning to democratic governance and free market economic principles. In January 1997, it became the first newly acceding country in transition to join the WTO--a major step towards integration into the global marketplace. Yet Mongolia also experienced the collapse of the CMEA, dismantlement of its command economy, and a slump in the demand for Mongolia’s major export, copper. It became heavily dependent on official development assistance (ODA) from western nations and Japan. In the 1990s, 24% of Mongolia’s GDP came from foreign aid. From 1991 to 2000 total ODA was almost US$1.9 billion, making it the 5th most aid dependent developing country in the world.

There also was a seismic change in Mongolia’s trade patterns during the transition era, but not towards free markets in Europe, the U.S., Central Asia or Japan, but towards its southern neighbor, China. Prior to 1991, 80% of Mongolia’s trade was with the USSR and 15% with other CMEA countries. However, with the collapse of the Soviet Union, Russia has not been able to afford Mongolian products, and its internal economic weakness is likely to continue for at least a decade. China since 1999 has become Mongolia’s largest investor (37.9% in 2004), and in 2005 over 60% of Mongolia’s exports go to China. Many political and strategic scientists, especially in the U.S. and Mongolia, are concerned about the growing penetration of the Mongolian economy by China, and caution that this will have negative military and political implications. They assert that over time it will be important for Mongolia to achieve as balanced as possible relationship with China and Russia, although no one is able to predict when Russia will be able to reassert itself as a major partner. These same analysts also minimize the necessity of any strong political or economic relationship with the Central Asian Republics.

The major goals of the foreign donor community to assist Mongolia in its transformation have remained quite consistent in these last 15 years. The ADB, the single largest multilateral donor (from 1991-2003 it provided 34 loans worth $568.7 million), consistently has emphasized the promotion of economic growth for job creation and provision of better essential social services for the poor. The UNDP on its website declares its funds for Mongolia will be used to further 1) democratic governance, 2) economic transition and poverty reduction, and 3) sustainable natural resource management.

Japan, Mongolia’s largest bilateral aid donor, has provided more than $120 million in grants and loans since 1991, and is the coordinator of international assistance to Mongolia. Its assistance was centered on power maintenance and poverty alleviation, but now includes improving mining industry infrastructure, telecommunications, and upgrading transportation links, particularly the rail to China. At the end of the socialist era, Mongolian exports to Japan were valued at $7.6 million. Although in 1995 exports jumped to $46.7 million, by 2000 they fell back to $8.1 million. Japanese imports, while expanding 7 times from 1990 figures to $73.3 million by 2000, do not come close to matching China’s $125.8 million.

Mongolia’s second largest aid partner is Germany, which took over many old East German projects. This aid is mainly provided for agriculture, commodity aid, energy, telecommunications, business promotion, and education. Mongolia considers Germany its main partner in Europe, yet as of early 2005 only 30 German firms had invested in the country. In 2003 Germany received only 0.8% of Mongolian exports worth US$4.6 million, far less than the $13.7 million in minerals and animal byproducts exports in 1990. Mongolia imported German products of about the same value ($37 million) in 2003 as in 1990.

The EU, the sixth biggest trading partner of Mongolia, provided 8% of Mongolia’s imports and purchased 10% of its exports in 2001. TACIS, the assistance program of the European Union set up for the Commonwealth of Independent States, has been in active in Mongolia since 1994, providing a total of about EUR 50 million. The 2004-2006 Programme, now called the External Assistance Programme of the EC for Asia (ALA), focuses on poverty reduction credits and enhancing meat exports, but does not deal in trade promotion because this is handled by Member States. TACIS admits that Mongolia, while formally a part of its Central Asian regional programs, has never been very actively involved in their activities.

The U.S. is the third largest foreign donor (providing over $100 million in the last seven years). In 2004, the U.S. was Mongolia’s third largest trade partner ($267 million Mongolian exports) and third largest foreign investor (totaling $135.4 million). The U.S. Government’s AID strategy has been oriented around the consolidation of Mongolia’s democratic transition and strengthening of an environmentally sound private sector. Mongolia was granted most favored nation status and GSP eligibility in June 1999. Future aid for Mongolia through the newly created U.S. Millenium Challenge Account will be granted for eradicating poverty and developing good governance, health and education, and open markets and entrepreneurship.
Other significant donors include Australia (AUS$2.9 million aid in 2003-2004 with bilateral trade worth only $16 million), Italy, Sweden, and South Korea. The Czech Republic has made Mongolia its largest foreign assistance recipient (EUR 1.1 million). Canada, the second largest investor in Mongolia, has an aid program of around CAN$2 million.

This impressive list of foreign donors obscures the fundamental tension that exists between foreign aid program developers, economic planners and investors, and the vast majority of foreign political scientists and Mongolian policymakers. All of these groups view Mongolia and Mongolia’s relationship with China through the prism of the re-emergence of China as a great power in the post-Cold War world. Concerns about Mongolia’s relationship to China are considered within the context of the larger debate on whether a strong and assertive China in the Asia Pacific will contribute to regional and global prosperity because China is restrained by its global economic interdependence, or rather will tempt China to use its military power to assert its territorial and historical claims for hegemony in the Asian region. This debate has been termed by British political scientist Dr. Rex Li, the ‘realist’ versus the ‘liberal’ interpretation of Chinese power.

‘Realists’ are exemplified by international strategic scientist Dr. John Mearsheimer of the University of Chicago in his prize-winning book The Tragedy of Great Power Politics and Asia Pacific Center for Security Studies’ Taiwan specialist Dr. Denny Roy, who believe that the Chinese are seeking to use economic expansion to enlarge their sphere of influence to redress wrongs of history. The late Gerald Segal of the London-based International Institute for Strategic Studies advocated China’s “containment”. Roy similarly calls for China’s “enmeshment”, including developing and strengthening security relations with its neighbors, to slow Chinese growth. Such a position defines the strategic thinking of Mongol officials including the present Prime Minister, Ts. Elbegdorj. Mongolia and China throughout history had a highly antagonistic relationship. Even 60 years of peaceful co-existence has not obliterated the memories and suspicions on both sides. Mongols remember that Mao himself raised claims to Mongolia with Khruschchev in 1954, even though four years before he had recognized Mongolian independence. Mao was reflecting the fact that China has always defined Chinese sovereign territory based on its succession from the Qing dynasty, and Chinese histories indicate that Mongolia was unjustly separated in 1911 at the collapse of the Qing.

The ‘liberals’, including Brookings Institution’s China expert Dr. David Shambaugh and University of Michigan’s political expert on China Dr. Kenneth Lieberthal, insist that if a country is more interested in economic development and trade, it is unlikely to invade its trading partners, and that when China creates strong economic linkages to neighbors like Mongolia, it will avoid military confrontation. Dr. Li restates this as China will make a calculation about future military action based on the assessment of the expected value of war versus the expected value of trade, and usually choose trade. Lieberthal and Shambaugh are opposed to containing China, rather they urge comprehensively engaging China.

A recent bilateral conference examining the U.S.-Mongolian relationship organized in Washington, DC by the Mongolian Embassy, Heritage Foundation, Georgian Technology University, and the Mongolian Centre for Strategic Studies revealed that the ‘realist’ vs. ‘liberal’ view of China is important for understanding foreign donor perception of the Sino-Mongolian relationship. ‘Realists’ would warn Mongolia against greater Chinese involvement in its economy and society, while ‘liberals’ would see the greater integration of the two economies as a way to avoid potential military conflicts.

I would position myself with strategic security specialists Dr. Robert Scalapino of the University of California at Berkeley, and Rear Admiral Eric McVadon, who served as U.S. military attaché in Beijing in the early 1990s. We, together with Mongolian foreign policy experts such as Ts. Batbayar of Mongolia’s Institute of Asian Studies and R. Bold from Mongolia’s Centre for Strategic Studies, are ‘realists’, who are worried about Chinese economic penetration and potential political domination.

Meanwhile, my colleagues in the foreign donor aid and business/investment communities, including Steve Saunders, Executive Director of NAMBC, the major American and Canadian organ promoting business with Mongolia, must be called ‘liberals’, because they see the only way for Mongolia to develop its infrastructure, lower poverty, and integrate itself into the global economy is to more closely align itself to the Chinese economic powerhouse and readily supply the Chinese market with minerals and other trade goods. In the early 1990s, American and European businessmen in Mongolia, especially in the cashmere and camel hair sectors, complained loudly that the Chinese were unfair competitors. Today, major western companies such as American SOCO Oil and Canadian mining corporation Ivanhoe, see themselves as the middlemen to the Chinese market. They are not concerned about the national security ramifications for Mongolia of greater reliance on and trade with the Chinese.

For political scientists nervous about China’s replacement of Russia in Mongolia’s economy, a new foreign economic concept, first proposed for Mongolia in 1990 by U.S. Secretary of State James Baker, has become crucial. This suggests that another large power, such as the U.S., Germany, or Japan, would act as a ‘Third Neighbor’ for Mongolia to counterbalance the traditional roles played by Mongolia’s border neighbors. Mongolia in the 1990s embarked on the task of ‘finding the Third Neighbor.’ Unfortunately, in the second half of the decade the Asian economic crisis dashed hopes of this special role for Japan or South Korea; Germany was self-absorbed in its own reunification problems; and the U.S. viewed Mongolia as a friendly, but minor nation wedged between significant American rivals, Russia and China.

As a result, leading political scientists and economists from these democratic nations supported Mongolian integration with the Northeast Asian region as the best chance for the country to develop and prosper, as well as to balance China’s economic political influence. For example, Dr. Scalapino at a March 2005 bilateral conference in Washington, DC stated that Northeast Asia was Mongolia’s natural economic territory, as a ‘regional Third Neighbor.’ Many Mongolian policymakers, including three former Foreign Ministers--L. Erdenchuluun, Kh. Olzvoy, and M. Dugersuren--have embraced this concept, because it seemed a way to be a part of Asia-Pacific economic success.

The scenario that Mongolia should look westward to Central Asia, Tibet, and even India, for the ‘Third Neighbor’ to renew its traditional cultural and religious ties and find immediate markets for its meat and animal byproducts was promoted by former Mongolian Prime Ministers Byambasuren and Enkhbayar, and the Mongolian historian B. Baabar. I myself have been a proponent of Mongolia as a bridge between East and Central Asia, in order to lead Mongolia to higher-end markets in the Middle East and Europe for diversification of its foreign trade. In this way, the traditional economic monopoly of China or Russia over Mongolia could be somewhat balanced by capitalizing on Mongolia and Central Asia’s common nomadic/Silk Road heritage, relatively close geographical position, and similar Soviet-era business structures and experiences. I believe a pro-Central Asian policy would be more realistic than the false expectation of garnering great profits only from integration in Northeast Asia. In fact, in analyzing economic statistics for Mongolia in the 1990s, I found that although US$1.5 billion has been invested in Northeast Asia, $520 million was place in only one Chinese province (Jilin), $530 million went to the Russian Far East, and Mongolia’s share was less than 1%--the smallest in the region except for North Korea! Thus it is certain that following a pro-Northeast Asian integration policy so far has not benefited Mongolia economically, nor provided a necessary counterweight to China’s growing penetration and control.

The great majority of Mongolian policymakers so far are not convinced that promoting ties with Central Asian nations will help them. They privately denigrate these countries as too Turkic, Muslim, and ‘Soviet’ in mentality. Much of this psychology appears to come from the negative biases against Central Asian peoples promoted by the Russians in socialist times. Today, Mongolian leaders are likely to prefer to look east (‘forward’) to the Pacific Confucian-influenced nations, rather than west (‘backward) to the Central Asia of nomadism and socialism. For example, Dr. Ts. Batbayar in his book on Mongolia’s Foreign Policy in the 1990s: New Identity and New Challenges sees that the choice between Northeast Asia and Central Asia has a developmental aspect: “This choice implicitly concerns the struggle between the nomadic identity of Mongols vs. its road to modern twenty-first century. It also concerns the vital question of sources for necessary technology and know-how in order not only to overcome the transition period but to make the country self-sustainable and competitive in coming years and decades.”

The argument about Mongolia’s regional orientation might have been settled if not for the impact of September 11, 2001 and the subsequent war on terrorism. Now in the post 9-11 world, the U.S. sees Mongolia in a different light--as a gateway to Central and Inner Asia in the war against terrorism. Extensive U.S. basing and operations from some Central Asian states have led military strategists, such as Admiral McVedon, “to envision Mongolia as a possible link to stability across the region ... or at least a unique observation post. Mongolia’s geo-political situation makes the perspective from Ulaanbaatar a valuable lens through which to view and project factors that may give us insight into the coming decade.”

Mongolia’s National Security Concept adopted in 1994 underlines that economic security represents independence and sovereignty for the country, and warns against too much dependence on any one country in trade of vital resources. In addition, the document’s third priority advocates securing constructive participation in the political and economic integration process of Northeast and Central Asia. Mongolia already seems to understand that it must raise its profile and participate actively in the global anti-terrorist struggle. It is active in U.N. peace-keeping activities in Afghanistan and is sending troops to bolster Coalition forces in Iraq. There has been formalized cooperation with Kazakhstan’s National Security Council since the 1990s, and relations have grown with Turkey since a 1999 Military Cooperation Agreement permitted military training of Mongol officers. However, it is obvious that much more must be done to more closely integrate Mongolia’s defensive policies into the Central Asia region. In the economic field, former Prime Minister Enkhbayar’s proposal to build an east-west highway known as the Millenium Road would facilitate more trade with Central Asia. But, Western donors never have been supportive of this plan, preferring to finance north-south roads which would only benefit Sino-Mongolian trade.

When Soviet President Gorbachev pulled troops out of Mongolia and the USSR collapsed, China revised both its economic and strategic security plans for Mongolia. To take advantage of the Russian retreat, Chinese President Yang Shangkun visited Mongolia in 1991-1992. High level bilateral visits have continued ever since. More recently, Chinese concern over Muslim extremism and terrorism along the shared western border has led to increased Chinese commitment to regional stability through mechanisms like the Shanghai Cooperation Organization (SCO), which granted Mongolia observer status in 2004, and to promotion of cross-border economic relations.

Western donor countries have not comprehensively tackled the tough issues involved in Mongolia’s relationship with China, and how much their development policies structure the terms of the relationship. China expert for the Mongolian Centre for Strategic Studies, M. Batchimeg this year wrote, “Due to its geographical proximity and economic complementarities China is the best-positioned country to exploit the opportunities created by Mongolia’s new liberal legislations designed to create favorable environment for foreign investors….Therefore, like it or not, China’s investment is going to play a key role in Mongolian economy for the next decades.”

This may be true, but do the foreign donors really care about increasing Chinese control over Mongolia’s economy, or link this control to the likelihood of greater Chinese political and military influence there? It appears that foreign business and economic development advisers may in fact be advocating trade policies with China that could be counterproductive to their governments’ Asian regional interests, as well as harmful to their goals for Mongolian democracy building, free market transparency, and national security interests. During the past 15 years, we have watched China expand into the Mongolian market with a sense of inevitability, and done little to actively support the Mongols in diversifying their trade to partners in Central Asia. Such continued passivity surely will lead to economic domination over Mongolia by the Chinese and other more precarious ramifications which will not enhance stability in the Northeast Asian region.