ENKHBAIGALI Byambasuren

DOCTOR AND PROFESSOR |

UNEXPLOITED POTENTIAL


DIVERSIFICATION POSSIBILITIES OF MONGOLIAN ECONOMY: UNEXPLOITED
POTENTIAL



A growth miracle sustained for decades involves the
continual introduction of new goods, not merely
continued learning on a fixed set of goods
Robert Emerson Lucas, Jr.

Mongolians were one of the most innovative nation, according to some writers and historians, who
unprecented religous tolerance, had culture of meritocracy and rule of consensus, culture that believed
in the rule of law, diplomatic immunity for ambassadors, sponsored and supported international trade
and science and technology, invented money printed on paper, international postal system and speedy
logistics.
Even though for an innovative nation, structural transformation of economy and industrialization is not
an easy shift, which requires at least 5 to 30 years of good planning and hard work. It needs strategic
planning based on technological life cycle, clustering potential and strict planning while it also requires
faster learning, allocating resources efficiently and focused performance. Although new productions do
need support for competing in international market, strict rule of Laissez faire can prevent newly born
industries having space to develop in highly competitive international market environment.
Structural transformation has long been concern of many economists such as Karl Marx (1980), Colin
Clark and Jean Fourasti ( 2011), Wassily Leontieff, Nicholas Kaldor (1967), Lewis, W. Arthur (Lewis,
1954), recently Philippe Aghion, Peter Howitt, Ricardo Hausmann and Bailey Klinger (2006), Cesar
A.Hidalgo (2007) and many others.
On the other side, many economists noted that economic development is long term process, rather than
short time increases in scale or growth. Jay Wright Forrester (1969), (1971) analyzed long term process
of development. Joseph Schumpeter viewed innovation as the critical dimension of economic change
and suggested a model in which the four main cycles, N.D.Kondratiev (54 years), Simon Kuznets (18
years), Clement Juglar (7-11 years) (Juglar, 2005 ) and Joseph Kitchin (about 4 years) can be added
together to form a composite waveform.
Innovation has been considered a key driver of structural change and economic growth since Schumpeter
both at the level of national states and of sub-national territorial units (Verspagen, 2005). In last two
decades, economies started getting more interdependent or dependent from international market.
Therefore orientation of export, furthermore the concept of knowledge based economy is getting main
strategic goal of most countries in the long run.
Alongside the growth of the shadow banking system, there was another transformation in the character
of the financial system over the past fifteen years, with much of it taking place after the Asian crisis,
namely, the rise of financial globalization, with investors in each country holding large stakes in other
countries (Krugman, 2009). Besides financial globalization, restructuring of global economy also
brought regional clustering; clusters are not limited with country customs and boundaries. South East
Asian economies exporting to China for end-user export production are examples of regional clustering.
If we regard concept of cluster as a dimension for policies related to structural transformation and
development, it will have much broader meaning than Marshals definition of industrial district in 1890
1
,
and much similar to Joseph Schumpeters
2
. But it slightly differs from M. Porters diamond model by
means of not limited with boundary of one country, unlike predefined structure, as a form of self-
organization that offers competitive advantages. Functional purpose that facilitates the flows of tacit
knowledge and the unplanned interactions that are critical parts of the innovation process will be the
most important dimension
3
.
To analyze possible structural transformation of the economy, we follow approach of Ricardo Hausmann
and Bailey Klinger, Cesar A.Hidalgo. Input output matrix of Leontieff.W is the main tool used for
analyzing intersectoral dependence, technology cost norm and other indicators. However, calculating
technology cost norm lowering opportunities or clustering needs international market link. This is
related to globalized economy and increasing dependence of economics.
Based on idea that, factors of domestic economy
4
will determine ability to shift to new production and
opportunity will be dependent on international market factors, Ricardo Hausmann and Bailey Klinger,
C.A.Hidalgo method gives us opportunity to analyze structure of economy according to links with global
economy.
Write about domestic economy, resource potential

I. Structural Transformation
In this work, primary source of data is United Nations Commodity Trade Statistics for 2008. It uses data
at the 4 digit level of disaggregation under the SITC Revision 2 classification. We have been used 779
products in our analysis because of data available. For 2008 data of economy of Mongolia, we used
statistics of Mongolian Customs and National Statistical Office
5
. For years between 1975 and 2000, we
used World Trade Flows: 1962-2000 dataset (Feenstra, 2005) as used in
http://www.chidalgo.com/data.html.

1
The advantages of agglomeration of economic activities in terms of availability of a qualified workforce and specialization or a localized
thickening of inter-industrial relationship which is stable over time.
2
First, that innovations do not remain isolated events, and are not evenly distributed in time, but that on the contrary they tend to cluster, to
come about in bunches, simply because first some, and then most, firms follow in the wake of successful innovation; second, that innovations
are not at any time distributed over the whole economic system at random, but tend to concentrate in certain sectors and their surroundings.
(Schumpeter, 1939, p. 98) .
3
The Community Framework for State Aid for Research and Development and Innovation (2006/C 323/01) defines innovation clusters as
groupings of independent undertakings innovative start-ups, small, medium and large undertakings as well as research organizations
operating in a particular sector and region and designed to stimulate innovative activity by promoting intensive interactions, sharing of facilities
and exchange of knowledge and expertise and by contributing effectively to technology transfer, networking and information dissemination
among the undertakings in the cluster.
4
(the intensity of labor, land, and capital, the level of technological sophistication, the inputs or outputs involved in a products
value chain)
5
We collected all detailed data of export of Mongolia and classified according to SITC Revision 2 classification. There was no difference
between UNCOMTRADE data and data of Statistical Office of Mongolia. Only slight differences that caused by exchange rate change during
year, since we used raw data in tugrics.
Our approach and use of outcomes-based measure are based on the idea that used by C.A.Hidalgo,
B.Klinger, A.L.Barabsi, R.Hausmann (The Product Space Conditions the Development of Nations,
2007), (What you export matters, 2007) to analyze structural transformations of economy of Mongolia.
In calculations, we used Balassa definition; means that share of the countrys exports in that product is
greater than the countrys share of exports in all products
6
. Revealed comparative advantage (RCA) is a
ratio between share of product i in country c export and share of the product in world export, where x is
export of product i of country c in time period t. RCA is larger than one if the share of countrys export
on a given product is larger than the share of the product on global trade.
RCA =
Xval
c,i,t
/ Xval
c,i,t i
Xval
c,i,t c
/ Xval
c,i,t c i

When RCA of a country is higher or equal to 1, it means that the country c is exporter of the product I,
if not the country is not an effective exporter of the product. The basic assumption is if two goods need
the same capabilities, this means that the country have higher probability to have comparative advantage
in both.
Two approaches have been used to explain a countrys pattern of specialization according to A.Hidalgo,
B. Klinger, A.L. Barabsi, R. Hausmann (Hidalgo C.A, 2007). The first focuses on the relative
proportion between productive factors (i.e., physical capital, labor, land, skills or human capital,
infrastructure, and institutions). Hence, poor countries specialize in goods intensive in unskilled labor
and land, whereas richer countries specialize in goods requiring infrastructure, institutions, and human
and physical capital. The second approach emphasizes technological differences (5) and has to be
complemented with a theory of what underlies them.
Product level sophistication per capita income associated with commodity is multiplying sum of share
of a product in export and aggregates the value shares across all countries exporting the good by GDP
per capita. This index is a weighted average of the per capita GDPs of countries exporting a given
product, and thus represents the income level associated with that product. Then the productivity level
associated with product i, PRODYi,

= [

Another measure of sophistication in country level is EXPY. EXPY is the PRODY of each good (i) that
the country c exports, weighted by that goods share in the countrys export basket (c). It represents the
income level associated with a countrys export package.

= [

Not surprisingly, the level of income implied by a countrys export basket (EXPY) rise is correlated
with actual income. That is, rich countries produce rich country goods (Ricardo Hausman, 2007).

6
Author did these calculations in scope of project Possible Structural Transformation of Mongolian exports and imports in context of
cooperation with China and Kazakhstan.
Figure 1. EXPY of Mongolia between 1997 and 2006 (ADB calculations)

Since EXPY represents the income level associated with a countrys export basket, one of reasons
declining EXPY between 1997 and 2006 would be explained by export of Mongolia did not diversify
or add new products, while countries acting in same product global market were increasing or their share
were increasing
7
. Our calculation of EXPY for 2008 is 5868.59, even lower than it was in 2006.
In this paper, we computed PRODY indexes using COMTRADE data for 779 product classes and 224
countries
8
. There are total 528 products that recorded in database of export of Mongolia by 2008. The
most of top EXPY supporters are non-sophisticated products like petroleum oils, wools, iron ores and
concentrates, crude petroleum oils, raw hides/skins, coal, copper, molybdenum ores, zinc ores, gold and
animal hair.
Another reason of declining EXPY would be a shift in structure and pattern trade. The foreign trade of
Mongolia tends to be entirely dependent on fluctuations of the world market prices. In November and
December, 2008 when the financial and economic downturn affected many countries in the world, and
the international prices of copper fell to its 2004 level due to weak demand for copper and copper
concentrate leading to reduction of sales of mineral products of Mongolia by about 50 percent compared
to September, 2008.
Import of petroleum products, machinery and some other consumer goods plays a significant role in
Mongolias economy. The average price of petroleum products in Mongolia in 2008 were 38-51 percent
higher compared to the average price of 2007. The fluctuation of world price directly affects government
budget and the entire economy.
The main idea of the product space is that the ability to export new product series depends on its ability
to product similar products. Similar production needs similar conditions and capabilities.

7
In this work, to calculate PRODY, EXPY, proximity and densities we used approaches of A. Hidalgo, B. Klinger, A.L. Barabsi, R. Hausmann
works.
8
For years from 1975 to 2000 we used RCA calculations used by Hidalgo et al (Hidalgo CA, B Klinger, A-L Barabasi, R Hausmann, Science
(2007)).
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4000
5000
6000
7000
8000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Figure 2. Network Representation of the Product Space with Nodes Painted Following the Classification
of Leamer.E. (Source: www.chidalgo.com)
Figure 5 shows illustration of product space. Different node sizes represents share of the product in total
world trade and colors of the lines that connect the nodes represent proximity (distance between pair of
products) red is the closest distance, dark blue, yellow and light blue are followed. Here we use Leamers
cluster classification of sectors by intensity. According to Leamer.E average proximity of products
belonging to the same cluster is always higher than those of proximities belonging to different cluster
products(E.Leamer, 1984). Not all clusters have same size.

Source: Authors calculations.
Before 1990s, Mongolian export basket was consisting of a wide range of products that were exported
only to the former socialist countries.
After the collapse of Soviet Union, many local factories were in deficit of raw materials, chemicals and
spare parts that were previously imported from the trade partners in the former socialist countries. Trade
relationships between those countries weakened due to harsh economic conditions and their own
difficulties with transition process into the market economy. Therefore, making a trade contract with
suppliers from the East Germany, Czechoslovakia, Romania, Bulgaria, Poland and other prior trade
partners was difficult for the local producers who had less access to the banking system and language
barriers. In addition to this, former soviet countries were also in deficit of raw materials and had no
intensive interest to make a trade with each other. Indeed, they were looking for an exit to the third
countries market.
For Mongolia, in the beginning of transition period, accessing third countries market was very
problematic due to several factors. Firstly, Mongolia had almost no trade experience with the rest of
world and only trade experience was accumulated from countries of socialist system. Secondly,
A. 1975 B) 1980
C) 1995 D) 2008
Figure 3. Product Spaces of Mongolian Economy A) 1975 B) 1980 C) 1985 D) 1990
production standards set for the import commodities in the third countries were very high for the
factories in Mongolia. Because of outdated technologies and expensive operating costs, upgrading a
standard of export commodities was impossible for the Mongolian producers. In addition to this, re-
export products RCA decreased.
Even though, there were many products did not lose comparative advantage through restructuring and
privatization process of state enterprises.
To visualize the degree of structural transformation of Mongolia, we highlighted using black squares,
the products in which the country has comparative advantage in 1991, 1993, 1995, 1997, 2000, 2008
(Figure 4. Product spaces of Mongolian Economy A) 1991B) 1993 C) 1995 D) 1997). The country had
comparative advantage for several textile products before 2000, trade in outer market was unrestrained,
had trained workers, and those advantages lost after WTO quota eliminating, and orders shifted to
countries with more favorable costs and other conditions.




Appearance and disappearance of black squares observed in these years related to export instability, in
some years export of commodity diminishes and it leads to losing comparative advantage since RCA is
a ratio between share of product i in country c export and share of the product in world export
9
. The
reason of such instability was related to changes in regulations of other countries, difficulties of
transportation and many other factors. If export product is not closely connected to others in product
space, in other words, being not in dense part will not lead to successful diversification.
The product space is highly heterogeneous: in dense part, many products, particularly machinery,
chemicals, and other capital-intensive products are closely connected each other; while in the periphery,

9
RCA is larger than one if the share of countrys export on a given product is larger than the share of the product on global trade.
A. 1991 B. 1993
B. 1995 B. 1997
Figure 4. Product spaces of Mongolian Economy A) 1991B) 1993 C) 1995 D) 1997
Source: Authors calculations.
products such as natural resources and primary products are only weakly connected to others. This
means that products in core part of the product space involve capabilities that can be redeployed to
produce and export many other products; but those peripheries cant. Thus, countries that have already
established comparative advantage in well connected part of the product space can move to other
products with much more ease than those that have their export products in the periphery (Norio Usui,
2010).

In general, it seems that black squares processing raw materials domestically will have utmost
importance as they are peripheries those can be redeployed in short term. Mongolia has started
promoting industrialization since 1930. In initial phase, the main strategy was starting with small, public
enterprises and step by step upgrading them.
In 1960s, the second phase of industrialization had started. In this phase, the state policy was aimed to
transfer the agriculture based country into the industrialized-agricultural country. It can be said that the
period 1961 and 1966 was very crucial for the further development of Mongolia.
This was basically a result of lessons from industrial sector development experience of 40 years, from
1920 to 1960. It wasnt easy target for the country who had had restricted ability to connect to the world
and very much dependent on neighbors policies. Yet, having stronger foundation of heavy industry was
interest of the country. Mongolia had expressed its interest to industrialize the economy many times in
that time. For example, in 1971, authority of Mongolia asked building one or two car factories which
have medium capacity from Soviet partners (Ts.Gurbadam, 2004, . 178).
By 1980, Mongolian industrial sector made more than 30% of gross national income. In that time, all
the major cities were connected to the electricity and construction, mining, geology, and food industries
were flourished. Such as worlds 10
th
biggest cooper-molybdenum concentrate production industry
Erdened was operated in full course.
Figure 5. Product spaces of Mongolian Economy A) 2000, B) 2008
Source: Authors calculations
Statistical evidence shows that in 1980s, about 60% of export and 56.4 % of interior trade made by
domestic industries. Impact of industry on supply of food, fuel, electric, also infrastructure and
education sector has been increased even more.

Asar ix baigaliin baylag, gazar nutagtai, xyn amin bolovsrolin tyvshneer chamlagdxaargyi orni xuvid
ene ni xangaltgyi yzyylelt yum.
Gevch unuug xyrtel yildverjilttei xolbootoi, olon asuudluud shiidegdeegyi xeveer baina.

To visualize structural transformation of economy of Mongolia has had, we used
productspaceparser.exe and Cytoscape 4.3.1
10
. For years from 1975 to 2000, we used the data by
Hidalgo et al (Hidalgo CA, B Klinger, A-L Barabasi, R Hausmann, Science (2007)).

Figure 6. UNEXPLOITED PRODUCTS IN THE PRODY AND DISTANCE IN SPACE.
Source: Norio Usui, Structural Transformation in the CAREC region. Central and West Asia
Department, Asian Development Bank, 21 October, 2009
The horizontal axis of Figure 8 is the inverse of density. The closer the density of a product is to 1, the
nearer the product is to the countrys current export basket. Means it is more likely to be exported in

10
Our approach and use of outcomes-based measure are based on the idea that used by C.A.Hidalgo, B.Klinger, A.L.Barabsi, R.Hausmann(The
Product Space Conditions the Development of Nations, 2007), (What you export matters, 2007) to analyze structural transformations of
economy of Mongolia.
the future with comparative advantage. Products toward the left side are nearby, need similar
capabilities used by current export basket.
Distribution of unexploited products of Mongolia is upward-sloping. According to Norio Usui and
Arnelyn May A.Abdon (2010, p. 10), upward-sloping of distribution of unexploited products suggests
tradeoff between distance and sophistication: the products that are closest to the current export basket
are the ones that should be easier to export, yet these products are not highly sophisticated. In case of
Germany and Republic of Korea, there is no trade of, therefore these countries can quickly upgrade their
exports, jumping to nearby and sophisticated products is easier to them. If there is tradeoff between
distance and sophistication, it means the capabilities embedded in the current export basket can hardly
be used and the country has not yet accumulated enough capabilities to jump into new sophisticated
products.
In calculations for 2008, we used raw data from COMTRADE and calculated RCAs using Balassa
definition. Proximities and PRODY, EXPYs has been calculated according to method used by
C.A.Hidalgo, B.Klinger, A.L.Barabsi, R.Hausmann (The Product Space Conditions the Development
of Nations, 2007), (What you export matters, 2007)
11
using data of 779 products of 224 countries.
The main difference compared to other countries seems to be very slow, merely no significant change.
Structure of the economy is not transforming rapidly.
Mongolia has just starting production of not many but some goods with higher income. In recent years,
economic downturn had slowing effect on new investments and production, the results of new initiatives
and shifts to new products will not be visible in short period. Since it is just starting, mainly initiated by
private companies, technology or, human resource capability is not yet ready to export, the results may
not be visible in macroeconomic data.
Compared with other countries, export set of Mongolia has three features. First, it has not been
developed in last decades. Before 1990s this is mainly related to unnatural process in economy, in
another words centralized economy policy. Even though, since 1990s there are yet no new products in
export. Second, products with high density or nearest are still unsophisticated products or raw materials.
Third is, these product density are low. It means Mongolia not yet have capabilities to jump to new
products or have significant changes in economy structure.
To analyze possible future development, we have been compared 2000 and 2008 product spaces for
different values of RCAs. This calculation has been made using the RCA data for years from 1975 to
2000, based on SITC Rev.2 4-digit classification. For 2008 we used export statistics of Mongolia,
nominal, USD values of export (see Appendix 2 for detailed map).
Using these product spaces for different RCAs we try to anticipate how a country will diffuse across
the product space. There was no critical value of proximity at that can be said Mongolia will be able to
diffuse across the product space.
The product spaces with different proximities did not show much change. The difference between 2000
and 2008 diffusion is related to textile and clothing sector change mentioned above. There was no
difference between cases of RCA bigger than one, 0.9, 0.8, 0.7, 0.6 for 2008 product space. In product
space with RCA>0.3, only two product appears, "food wastes and prepared animal feeds" (0819), "other
sporting goods and fairground amusements" (8947).

11
See page 7 to 15.
RCA>1

(2000)
RCA>1

2008)

RCA>0.8


(2000)

RCA>0.8


(2008)

RCA>0.5

(2000)

RCA>0.5

(2008)
RCA>0.3
(2000)
RCA>0.3

(2008)
Figure 7. Product Space Diffusion of Mongolia (for 2000 and 2008 years)
Source: Authors calculations.
This implies, instead of leaving to initiatives driven solely by market, to initiate policies that simulates
innovative clustering will be better option.
Each production requires different set of capabilities unexploited products have different spill-over
effect into other unexploited products. If we produce product C
5
successfully, it will create new set of
capabilities that firms also can produce unexploited products C4 and C3, strategic values defined as
following.

5
=

35

31
+
32
+
34
+
35

3
+

45

41
+
42
+
43
+
45

4


As in figure 10, strategic value of C5
represents how close the other
unexploited products (C3 and C4) are
to C5, and how sophisticated these
products are (PRODY3 and PRODY4).
Production of C5 will also enable
production capability of C3 and C4.
Products with high strategic values are
mainly not sophisticated. Special
purpose motor vehicles and refined
copper and copper alloys share in
exports are very low (0.246 and 0.731
percent each). Same is true for other
vehicles.
Hausmann and Klinger (2006) developed concept of open forest to measure how valuable a countrys
unoccupied trees are. The open forest is defined as

(1

)


The biggest question is how Mongolia will diversify its production structure, while products with high
density or nearest are still unsophisticated products or raw materials. Also product densities are low.
This situation has two sides, bad side is we are in initial stage of cluster development; good side is there
are many options and Mongolia can benefit the latest technology advances without trying all stages of
technology development other countries had to pass through. Policy makers must choose specific
targets or target clusters.
We selected the unexploited products with higher PRODY than national average EXPY. Since product
level sophistications per capita income associated with commodity determines EXPY, countrys
export basket sophistication, higher PRODY commodities will contribute it. There are 25 commodities
that contribute EXPY higher than average.
Contribution
to EXPY
/2008/
Export /2008/
(US$ 1000)
PRODY
/2008/
Copper ores and concentrates 1612.34 835666.600 4890
Coal; briquettes, ovoids and similar solid fuels manufactured from coal 867.25 182437.300 12049
Gold unwrought or in semi-manufactured forms 731.85 599883.000 3093
Crude petroleum oils 531.67 101936.600 13220
Zinc ores and concentrates 238.47 154617.400 3909
Molybdenum ores and concentrates 228.73 82344.300 7040
Felspar; leucite; nepheline and nepheline syenite; flourspar 217.29 59197.200 9303
Wool and fine or coarse animal hair, carded or combed 162.42 99169.600 4151
Hydrazine and hydroxylamine and their inorganic salts; other inorganic bases 101.63 26201.600 9831
1
5
2
3
4
Figure 8. Product C5 space illustration (example)
Special purpose motor vehicles (fire fight veh,crane lorry) 77.78 6232.100 31132
Petroleum oils, not crude 75.19 10646.600 17900
Fine or coarse animal hair, not carded or combed 71.44 809768.000 2236
Wool, not carded or combed 58.46 9342.700 15859
Iron ores and concentrates; including roasted iron pyrites 57.27 92284.700 15729
Refined copper and copper alloys, unwrought 52.25 18526.200 7149
Cars (incl. station wagon) 35.86 3075.100 29550
Meat of horses, asses or mules - fresh, chilled or frozen 34.87 10983.600 8046
Women's suits, jackets,dresses skirts etcandshorts 31.01 6587.200 11914
Sheep/lamb skin leather, other than leather of hd no4108/4109 24.77 26940.900 2331
Aluminum plates, sheets and strip, of a thickness exceeding 0.2mm 24.15 3434.900 17817
Salts of oxometallic or peroxometallic acids 23.63 6966.600 8588
Raw hidesandskins of bovine/equine animals 21.52 4460.300 12289
Women's blouses and shirts, knitted or crocheted 18.46 5321.800 8790
Prefabricated buildings 14.47 1455.000 25200
Carpets and o tex floor covg, woven, not tufted/flocked 14.18 2252.200 15962
Electrical parts of machinery/app, nes 13.94 1298.900 27201
Table 1. Products Contributing EXPY More Than National Average.
Source: Authors calculations.
In this situation, one of the options in short term is to export products that contribute EXPY more and
thereby contributing country EXPY basket. But it will not lead to diversification too. In middle and
long term, apparently there is need to explore new areas in product space, shifting to new and more
sophisticated technology .
Proximities of same group products seem to be different. Processing natural resources will need
investment in infrastructure while being capital intensive. Also different proximities means that
enough capabilities have not yet been accumulated and capabilities embedded in current export
basket is not enough to jump to new products. This means economy will need strong and consistent
policy firstly, and second the government has many options to decide which sectors and products will
have more importance.

II. Conclusions

In case of Mongolia, there is a big unused potential. Having no production started yet could mean that
using the latest, more Eco-friendly technology and having more efficient policy choice based on
international experience. The two biggest barrier of firms seems to be weak inter-sectoral linkage that
causes high technological cost norm and luck of up to date information about technology and
international standard. For helping private sector to jump into new products macro environment,
especially sectoral clear policy, product aimed policy are also necessary.
Sectors are strongly dependent from import of raw materials, equipments. High production cost, high
risk, depending import from few market reduces firms interest to invest in technology. Meanwhile
private companies seem to be ready to invest if information about technology, latest tendencies about
international market, financial support for adopting new tehcnology, and clear sectoral policy.
For helping private sector to jump into new products macro environment is necessary. One of the
biggest challenges in jumping to a new product is lack of competition and small size of domestic
market. Firms have to catch up international standard once to export and they have to ain
international market, instead of domestic market.
Policies for supporting structural transformation aimed to increase export income will have crucial
role
12
. Parliament of Mongolia have been approved Investment Law and many other policy other
documents. The new investment law has three main differences from the old one. Firstly, there are no
differences between domestic and foreign investors, they will be regarded as equal and will have the
same condition. Secondly, as investment increases tax level will be reduced, Mongolia was the lowest
tax rate country for foreign investment in Asia, now it is even low. Thirdly, investor will not need to
have an official permission from government for investing, many barriers, procedures, and uncertainty
have been reduced significantly.
Mongolian economic forum has been held in 2014 March 24-26, disgussung how to create, how to
increase productivity, how to diversify the economy. Increase in export income and added value will
be criterias of economic growth.
Oil processing will reduce imports significantly, which is now 25.5 percent of import, and it will be
helpful for reducing costs of production and transportation. Reliable and sufficient energy source will
allow initiating production far from city and near to resource places.

12
Institutional differences, such as the adequacy of banking and stock markets and the legal
infrastructure, size of organizations, are important in affecting the supply of long-term credit and capital
accumulation according to Demirguc Kunt (The Role of Long-Term Finance:Theory and Evidence,
August 1998). L.Satao, H.Edison also studied commonly used determinants such as ratio of stock prices
and bank credits (i), ratio of registry value of capital and bank credit (ii), ratio of short term and total
credit (iii), turnover of capital (iv) and sophistication of sector, openness of stock market (3538 non
financial organizations of 18 countries are included). Conclusion of this study was it depends legal
infrastructure, financial institutions, environment of macro economy, and sectors level of sophistication,
size of organizations (IMF, 2002, p. 98). Role of supportive macro environment cant be undervalued.
Projects related to development of mining sector and heavy industry are mainly processing raw
materials from mining and these projects should be cores of product space
13
. Adding value to raw
materials and ores by processing will be part of initial stage.
Slaughtering 10 million animals every year and not using all of the raw material, Mongolia has to
spend for clearing unused raw materials spending money. If used and processed it is huge source of
protein, collagen, chemical industry inputs, medical products, technical clue, jelatin, animal food, and
other products.
Table. Export of animal origin protein contained products, GDP, animal number, 2011
Country Popu
lation
Farm animal
numbers
E
x
p
o
r
t

o
f

a
n
i
m
a
l

o
r
i
g
i
n

p
r
o
t
e
i
n

c
o
n
t
a
i
n
e
d

p
r
o
d
u
c
t
s
,

U
S
D

P
r
o
p
o
r
t
i
o
n

o
f

e
x
p
o
r
t

o
f

t
h
e

c
o
u
n
t
r
y

t
o

m
M
o
n
g
o
l
i
a

s

e
x
p
o
r
t

R
a
t
i
o

o
f

E
x
p
o
r
t

i
n
c
o
m
e

a
n
d

G
D
P

o
f

M
o
n
g
o
l
i
a


R
a
t
i
o

o
f

a
n
i
m
a
l

n
u
m
b
e
r

t
o

M
o
n
g
o
l
i
a

s

a
n
i
m
a
l

n
u
m
b
e
r

protein contained
export products
produced with
animal origin
11
millio
n
2,745,000.0 127,022,374,140.0 1,394.5 14.9 7.6% Surgery materials,
medicine, hydrolizate
of protein
6
millio
n
5,601,000.0 35,094,754,964.0 385.3 4.1 15.4% Animal food, chemical
industry input
2.7
millio
n
36,335,781.0 91,087,500.0 No process of protein,
wool, cashmere, skin
Resource: Authors calculation based on UNCOMTRADE data, according to foreign trade classification.
If Mongolia could process only 1/5 or 20 percent of the current side raw materials of animal
slaughtering GDP per capita might increase by USD16000. Initial processing factories are not new to
Mongolia, they have been collapsed before 1990s due to lack of raw material and chemicals. Further
steps, preparing biotechnology human resource will be essential for next 3 to 5 years, in order to
advance.
This is only one example of cluster that could be developed in Mongolia. Processing copper, steel, oil
and coal projects are in agenda and some of them has already been started.


13
In 2009, government of Mongolia approved the list of big projects will be implemented between 2008 and 2012. The list
included following projects:
1) Projects related to development of mining sector and heavy industry
a) OyuTolgoi Project
b) Tavan Tolgoi Project
c) Copper concentration processing factory
d) Coking Coal and Chemicals Factory
e) Oil Processing Factory
f) Coal and Chemicals Factory with clean coal technology
g) Complex for black metallurgy
h) Construction Materials Factory
2) New railroad project
3) Fifth source of energy project.



III. Conclusions



In this paper we have analyzed structural transformation in economy of Mongolia in relation to
international trade. Level of sophistication in export commodities basket is low and Mongolia had not
yet has capabilities to jump to new products or have significant changes in economy structure. One more
conclusion is that it is clear that the economy is not likely to evolve in short term through diversification
in product space from diffusion analysis. Therefore Mongolia needs good policy setting that stimulates
innovative clustering. Policy needs to be realistic, easy to monitor, and measure.
Economic diversification activities can be classified as long term goals, middle term objectives and short
term milestones. It doesnt mean trade of between short and long term priorities. The consistency in long
term orientation and middle term objects to accomplish longer term vision. Long term goals related to
economic diversification should be based on available capability accumulation and available
improvement in capability. Since main goal of structural transformation is economic development in
long run and it needs time, future diversification possibilities should be main focus, considering both
existing capability and international market opportunities.
Focusing on clear objectives, setting milestones to have or accumulate necessary capability and going
step by step through building bigger cluster will be essential. It has to be done strategically. Since uman
resource capability is increasing speedy, it does not seem to be difficult as it was before. Mining did
have strong effect of attracting highly capable human resource, but in recent 3 years backstream has
been observed. Unless there are processing and higher technology, the mining sector will not be more
attractive anymore for young people.
Focusing both of specific products and public inputs will have importance. Each product needs specific
capabilities, including public inputs, therefore meeting private stakeholders trying to enter the same
product category, instead of meeting firms from different sectors will be helpful. Improving public
inputs such as research and development support, industrial collaboration, technology import,
monitoring and evaluation mechanisms, and so on will contribute firms productivities and interest to
jump to new products. Especially, product focused activities must be time bounded and should be
initiated with clear objectives.
As we mentioned above, structural transformation in countries shifted to export oriented economy
successfully has three main components: first policy consistency, coherency, and co-ordination, second
absorbing technology and innovation while upgrading workforce skill, accumulating capacity, third
working close to international market, using opportunities and facing some challenges. Absorbing
technology and innovation, upgrading workforce skill are one of major activities that help
diversification. Government roles in this process are firstly to create favorable framework conditions,
secondly to facilitate knowledge exchange and networking, thirdly providing strategic information of
international market and technology insight. The fourth role of government is monitoring and making
the process transparent for public.




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