Research On Avoiding The Dutch Disease

Mongolia is gifted with abundant mineral resources which have been generating high levels of economic growth since the democratic reform of 1990.However,the country is now characterized by the natural resource curse phenomenon.The resource curse is a large and broad term which has three main attributes,including Dutch Disease,volatility risk,and rent seeking effect.Since 2009,when the “Oyu Tolgoi” mining project embarked,the Mongolian economy started experiencing some symptoms of Dutch Disease—the process whereby new discoveries of minerals leads to favorable price changes in one sector of the economy and in turn cause concerns in other sectors.Hence,the principle objective of this research is to find a possible solution to avert the Dutch Disease and contribute to the future development of Mongolia.With the aim of analyzing the Dutch Disease effect in Mongolia,the econometric model is used.Moreover,the research includes the history of four resource abundant countries' experiences of how they prudently used their mineral deposits and overcame the phenomenon.In order to fulfill the objective,in this study eight variables are used,namely GDP(Gross Domestic Product),IN(Industrial Sector),SR(Service Sector),MN(Share of Mining on Exports),AGR(Agriculture Sector),INF(Inflation Rate),FDI(Foreign Direct Investment),and UNP(Unemployment Rate),to explain the Dutch Disease hypothesis which is “Natural resource abundance has a negative influence on economic development in Mongolia”.The core theory of the research is based on the Rybczynski's theorem.The independent variable is the share of mining on exports(MN),and the other variables are dependent.According to the correlation and regression analysis,the result comes as the following.Firstly,the result of the correlation analysis determines how the eight variables are relevant to each other.As an outcome of the correlation analysis,the share of mining on exports and agricultural sector output,show the significant result of 84 percent.On the other hand,the correlation coefficient of the service sector is 26.8 percent,industrial sector 65 percent,FDI 72 percent,unemployment 63 percent,inflation rate 8.6 percent,and,GDP 58 percent respectively.Secondly,in the outcome of the regression analysis,five of the indicators showed positive regression with the mining exports,yet two of the indicators proved negative relation with the increase in mining exports,the service sector and inflation rate.The most relevant variable to the mining exports was the agricultural sector.The result depicts if the mining exports increase by 1 percent,the output of the agriculture sector will decrease by-0.232 percent.The agriculture sector was one of the biggest contributors to the GDP,before the mining sector.This outcome confirms that the Mongolian economy has already become dependent on mining sector.In consequence,there is a vital demand to diversify the economy.Furthermore,this thesis is demonstrating Mongolia's future opportunity for development and how to use its vast mineral resources efficiently and smartly through studying the other resource rich countries' experiences.Norway,Chile,Botswana,and United Arab Emirates,the countries different in geographical location and even culture,are chosen as great examples.The main connection between them is their success story related to the Dutch Disease.All four countries established a sovereign wealth fund in order to overcome the financial crisis and price volatility of mineral prices in the local market.In addition,fiscal laws of the four countries are prudent and their governments invested the mining revenues into infrastructure,human development,and future savings.In short,Mongolia has a full potential to surpass the natural resource paradox if it can take the right actions and change the current policy on mineral reserves.According to the result of econometric analysis,the agriculture sector is the most correlated with the mining sector.Therefore,there is a need to improve the agriculture sector.Thus,in the future in the short-term,establishing a sovereign wealth fund is one of the rational policies to utilize the mineral revenue.In the long-term,diversification of the economy is crucial for the country's future sustainable development.