STEVE INSKEEP, HOST:
The world's fastest-growing economy in 2011 was not one of the rising powers we hear about so often. It wasn't China nor India nor even Brazil. The fastest-growing economy belonged to China's northern neighbor, Mongolia. According to World Bank estimates, in 2011 the Mongolian economy grew at more than 17 percent. A mining boom has fueled that growth. That creates both opportunities and risks for a poor and landlocked country of fewer than three million people. NPR's Frank Langfitt reports.
(SOUNDBITE OF SHEEP AND POURING WATER)
FRANK LANGFITT, BYLINE: A powerful wind whips through the Gobi as a nomad pours water into an aluminum basin. Her cashmere goats climb over each other to drink.
(SOUNDBITE OF CLANKING BASIN)
LANGFITT: This is the sound of traditional Mongolia, the land of Genghis Khan, where two out of every five people make a living herding animals.
(SOUNDBITE OF MACHINERY)
LANGFITT: This is the sound of the new Mongolia, or Mine-golia, as many people here now call it. A giant digger tears into the walls of an open pit mine also in the Gobi. Beneath these sands lies a fortune in copper and gold. The mine is called Oyu Tolgoi. It's owned by the giant mining companies Rio Tinto and Ivanhoe, as well as the Mongolian government. And it's scheduled to produce its first copper ore next month. Cameron McCrae, the mine's CEO, says within the next five years...
CAMERON MCCRAE: We'll probably at that point become the third largest copper and gold mine in the world. At the moment, during construction, we probably make up 30 percent of the GDP of the country.
LANGFITT: Tuvshintugs Batdelger helps run an economic think tank at the National University of Mongolia. He says mining is driving the economy at an incredible pace.
TUVSHINTUGS BATDELGER: In the coming 10 years, for instance, average GDP growth will be more than 12 percent. So GDP in real terms more than doubles in just 10 years' time.
LANGFITT: You can see mining's impact everywhere in this county, which is wedged between China and Russia and is nearly the size of Alaska - from the Hummers roll past the Louis Vuitton store and columned Soviet facades in Ulan Bator, the capital, to the thousands of young Mongolians who moved to the middle of the Gobi to work at Oyu Tolgoi. After work each day, they hit the camp bar and down beer by the case.
UNIDENTIFIED PEOPLE: (Singing in foreign language)
LANGFITT: When workers celebrate a birthday, friends serenade them with Mongolian pop songs. Solongo Namjil is a self-described country girl from the Mongolian steppe. She came here six months ago to work as a clerk.
SOLONGO NAMJIL: Every Mongolian is doing their best for this project, which is enormous to Mongolia's future. So we all understand the significance of the project. We do hope that every Mongolian can benefit.
LANGFITT: But Solongo - Mongolians go by their first names - worries about mining's broader impact, particularly in the South Gobi and on the thousands of herders who live here. Many are struggling with water, and the mines need huge amounts to operate.
NAMJIL: Real, really concerned about that, that there won't be enough water for our children and children's children.
ROGER VAN DEN BRINK: I'm Roger Van De Brink. I'm lead economist in the East Asia and Pacific region of the World Bank.
LANGFITT: Van den Brink, who's worked closely with the Mongolian government, says building an economy on minerals presents other problems as well.
BRINK: The risks are basically - first of all, you make your economy dependent on a commodity whose prices fluctuate a lot.
LANGFITT: When the price of copper crashed during the global financial crisis, Mongolia's government had to call in the International Monetary Fund for help. But high prices for natural resources can strangle a county's other industries as well. Heavy demand drives up the value of a country's currency, which makes its exports more expensive and harder to sell. That's what happened after the Netherlands discovered natural gas in the 1960s. It became known as Dutch disease. Van den Brink, who's Dutch himself, remembers the damage.
BRINK: As a boy growing up in Holland, the impact of this was very stark to me. You know, sectors of the economy that we had long prided ourselves in, like the shipbuilding industry, we had to close them down.
LANGFITT: The World Bank wants Mongolia to avoid a similar fate and has helped parliament enact a law to enforce government savings and control spending and borrowing. Mongolia's landlocked so it doesn't build ships, but it has other businesses that could be hurt by the mining boom. At the Gobi Cashmere Company in Ulan Bator, more than a dozen workers stuff clumps of raw cashmere into bags for processing. The factory uses the latest technology, like these spinning machines, but it still makes pashmina scarves by hand on looms.
The company exports to more than 40 countries, including the U.S. It's already feeling the effects of the mining boom. Mongolia's new mineral wealth drove inflation to more than 12 percent last year, forcing Gobi to raise workers' wages by a third. Naranbaatar Davva, the company's 30-year-old chief operating officer, says raw material prices are up too.
NARANBAATAR DAVVA: (Through translator) Three years ago, we used to buy three kilograms of raw cashmere for $20. Today that figure is $60.
LANGFITT: Higher prices are good for Mongolian herders, but they're also cutting into Gobi's profits. And Naranbaatar says a special government policy is undermining herders' incentive to work. This year - an election year - the government is giving citizens up to $770 each in one-time cash payments. It's essentially a mining dividend - for many Mongolians, a lot of money.
DAVVA: (Through translator) Livestock herding is almost a 16-hour-a-day job. It's a hard job, so you don't see many young herders anymore. The government policy does not support herders. The government keeps giving out cash to people and they don't really have to work much because they get the cash.
LANGFITT: Naranbaatar says mining brings many benefits to Mongolia. He just hopes people don't lose sight of an old reliable industry like his.
DAVVA: (Through translator) Cashmere is a renewable resource and we can use it for thousands of years, if we cooperate with our herders and develop the livestock industry sustainably. Whereas the mining products may be finished in 50, 100, maybe even 20 years
LANGFITT: Back at the bar at Oyu Tolgoi, it's closing time. Workers pour outside and continue to drink beneath street lights. Many Mongolians worry that mineral companies and politicians will be the greatest beneficiaries of the mining boom. Solongo, the clerk, hopes some of her nation's new riches are used to improve the hard lives many Mongolians face.
NAMJIL: There's lots of poverty. It's like almost 40 percent in Mongolia, which is unbelievable with this natural resource. We should find the right way to distribute the benefit of this resource to everyone. They deserve it. They deserve it.
LANGFITT: Frank Langfitt, NPR News.
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INSKEEP: This is the start of a series by Frank. And tomorrow we'll hear miners and herders competing for water in Mongolia's Gobi.