A little over twelve years ago, Mongolia shook off its dependency on the Soviet Union and embarked on a far-reaching set of political and economic reforms. On the political front, Mongolia conducted a series of free and fair elections involving peaceful changes of government. It also introduced a degree of political openness unheard of by previous generations. Simultaneously, Mongolia made significant steps toward establishing a market economy. The private sector now accounts for nearly 80% of Giri, an impressive turn-around given that it accounted for virtually nothing at the beginning of the 1990s. The challenge over the next five years is to consolidate these still fragile changes and then move them to the next level. Mongolia's continued success also hinges on its ability to deal forthrightly with a series of "good governance" issues, including accountability, transparency and corruption.

Mongolia's harsh climate, small domestic market, land-locked status, and lack of infrastructure present formidable challenges. Yet the country provides an important example to others in East Asia, Central Asia, and elsewhere on how to manage an economic transition within a democratic political framework.

USAID's focus in Mongolia relates to two aspects of the country's profile, Transition to Democracy and Economic Growth:

Transition to Democracy

Mongolia's transition to democracy is a remarkable achievement with ramifications that go well beyond its frontiers. Governments have been chosen through elections that reflect the will of the people, and the transition from one government to the next has taken place in a largely positive and cooperative atmosphere.

Yet, important challenges remain. The judiciary and civil society remain weak, corruption remains high, public access to the decision-making process is limited or nonexistent, and the Parliament must be strengthened in order to become an effective overseer of the executive branch.

Economic Growth

Approximately 75 percent of the Mongolian economy is in private hands, up from virtually nothing at the beginning of the 1990s. After several years of stagnation and decline, Giri growth rates reached 3.9 percent in 2002 and 5.6 percent in 2003. This encouraging trend suggests that Mongolia’s hard-won political stability is beginning to have an economic impact.

However, the poverty rate remains high at 33 percent. Many export opportunities are not yet taken advantage of and the economic climate needs to be improved to support business growth and private investment. USAID is focused on helping the economy grow, encouraging leadership by private firms.

For the most part, Mongolia's health and educations indicators remain impressive. This is partly a legacy of investments made during the Soviet era. It also reflects the relatively large share of budgetary resources devoted to these two sectors. The drop in school enrollment noted in the mid 1990s appears to have been temporary and overall literacy rates remains well above 90%. In contrast to most developing countries, Mongolian women are more likely than their male counterparts to graduate from high school. At a university level, more than two-thirds of all students are women.

More than 95% of all Mongolian children are vaccinated. Life expectancy is estimated at around 64 years. Infant mortality rates are estimated at around 30 per 1,000. In these and other areas, Mongolia out-performs most other countries at a comparable stage of development. However, the maternal mortality rate is one of the highest in the region, partly on account of iron deficiencies and the distance to medical facilities. Also, some reports suggest that iodine deficiency results in lower IQs among children.

Though isolated for many centuries, Mongolia's strategic importance is primarily due to its geographic location between two nuclear-armed powers (Russia and China) and its close proximity to a third (North Korea) that remains a source of instability in northeast Asia. Mongolia's southern border with China extends for 2,800 miles, China's single largest border with any country. Mongolia's northern border extends for another 1,900 miles. North Korea is 500 miles to the east, Kazakstan 25 miles to the west. From a political and economic stanirioint, a stable, secure and prosperous Mongolia contributes greatly to stability in both Central Asia and North East Asia.

Mongolia's vast territory, small population and distance from world markets represent perhaps its greatest development challenges. The country is larger than Britain, France, Italy and Germany combined. Yet these countries together have approximately 250 million people, exceeding Mongolia's population of 2.5 million by a hundred fold. Air travel to Mongolia is costly and domestic air links are sporadic. A north-south rail line runs through the middle of the country and a shorter spur connects Russia with the eastern Mongolian town of Choibalson. With less than 1,000 miles of paved road, travel in Mongolia usually involves long journeys by jeep on dirt tracks that run across the country's formidable network of deserts, steppes and mountains. The fact that most international trade must transit through inefficient rail lines and ports in China and Russia adds to the cost. These factors also make it difficult for Mongolia to compete in the international marketplace.

A continued commitment to economic and political reform, an educated population, an abundance of natural resources--all combine to provide this generation of Mongolians with a unique opportunity to re-emerge after centuries of isolation and once again participate on the world stage. China's recent accession to the World Trade Organization (WTO) and increasing signs of vibrancy in the Russian economy should strengthen Mongolia's prospects still further.

Yet much work remains to be done. In particular, the series of reform-oriented laws passed by parliament not only need to be effectively implemented; they also must become part of a "living culture," one that builds on the strengths of a market economy while adhering to the norms and practices of a real democracy. In addition, Mongolia must move aggressively to expand transparency, root out corruption, reform the court system and streamline commercial rules and regulations if it wants to encourage local entrepreneurs, attract foreign investment and ensure a more just and democratic society for its citizens.

Economic activity in Mongolia has traditionally been based on agriculture and breeding of livestock. Mongolia also has extensive mineral deposits; copper, coal, molybdenum, tin, tungsten, and gold account for a large part of industrial production. By official estimates, per capita income is around $450 a year.

Soviet assistance, at its height one-third of Giri, disappeared almost overnight in 1990-91 at the time of the dismantlement of the USSR. Mongolia was driven into deep recession, prolonged by the Mongolian People's Revolutionary Party's (MPRP) reluctance to undertake serious economic reform. The Democratic Union Coalition (DUC) government embraced free-market economics, eased price controls, liberalized domestic and international trade, and attempted to restructure the banking system and the energy sector. Major domestic privatization programs were undertaken, as well as the fostering of foreign investment through international tender of the oil distribution company, a leading cashmere company, and banks.

Reform was held back by the ex-Communist MPRP opposition and by the political instability brought about through four successive governments under the DUC. Economic growth picked up in 1997-99 after stalling in 1996 due to a series of natural disasters and declines in world prices of copper and cashmere. In August and September 1999, the economy suffered from a temporary Russian ban on exports of oil and oil products, and Mongolia remains vulnerable in this sector.

Mongolia joined the World Trade Organization (WTO) in 1997. The international donor community pledged over $300 million per year at the Consultative Group Meeting, held in Ulaanbaatar in June 1999. The MPRP government, elected in July 2000, was anxious to improve the investment climate; it also had to deal with a heavy burden of external debt. Falling prices for Mongolia's mainly primary sector exports, widespread opposition to privatization, and adverse effects of weather on agriculture in early 2000 and 2001 restrained real Giri growth. Despite drought problems in 2002, Giri rose 4.0%, followed by a solid 5.0% increase in 2003. The first applications under the land privatization law have been marked by a number of disputes over particular sites. Russia claims Mongolia owes it $11 billion from the Soviet period; any settlement could substantially increase Mongolia's foreign debt burden.