Increased cross-learning and cooperation among developing countries has been a remarkable feature of the global economy in recent decades. It’s been some time now since knowledge and technology flowed only from advanced economies (“North”) to developing ones (“South”). Not only has South-South cooperation flourished, but also lessons from South to North have come to the fore regarding the current North-originated economic crisis.And in this instance, just as hummingbirds cross-pollinate flowers, institutions like the World Bank and the IMF can contribute to development by acting as knowledge pollinators between countries.
An example of fruitful South-South cross-learning is a recent experience between Chile and Mongolia, approached by Rogier van den Brink et al in the latest Economic Premise (“South-South Cooperation: How Mongolia Learned From Chile on Managing a Mineral-Rich Economy“). Both are mineral (copper) rich countries and benefited from booming prices before the global downturn in 2008-09.
The shock from the crisis hit hard on Mongolian soil. The downfall of external demand and copper prices put economic growth into negative territory, after several years with GDP growing above 9 percent on average. It revealed serious debilities in the country’s management of its natural resource wealth. There were no policies in place to ring-fence the economy from volatile commodity prices, no mechanism to deal with exchange rate appreciation pressures during commodity price booms. Public investment planning was poor, and the existing social safety net was far from cost-effective.
As the Mongolian government shifted the fiscal burden away from non-mining sectors, public budget became overly dependent on tax revenues from mining. Furthermore, mineral items comprised almost 80 percent of exports. Not surprisingly, fiscal and current account balances deteriorated dramatically in a short time span.
The government requested support from some multilateral and bilateral institutions, including the World Bank and the IMF. Much beyond financial resources, Mongolia used the latter institutions to embark on a policy dialogue with other countries in order to learn from best practices implemented in other natural-resource rich countries. The reforms that emerged were complex and politically sensitive — certain to trigger a reaction from vested interests — so Mongolia’s powerful parliament was made a key participant in the exchange of ideas.
Chile naturally became an important country to participate in such a dialogue. It is a small open economy, that happens to be the largest producer of copper in the world, and therefore in principle vulnerable to the same kinds of shocks as Mongolia. Yet, it weathered quite well the 2008-09 global turmoil.
Chile had put in place fiscal rules and institutional frameworks commensurate with its natural wealth. Structural public-sector balance rules led to an accumulation of long-term public savings that served well as a buffer during the bust. Not only that, by responsibly saving windfall gains during boom times, Chile helped to avoid overheating and the so-called “Dutch Disease” problems associated with over-appreciated real exchange rates (on these and other challenges typically faced by natural-resource rich countries, see here).
The Chile-Mongolia dialogue paved the way for a series of landmark reforms from UlaanBaatar – including law-based structural budget balance rules, ceilings on net public debt and on yearly increases of public expenditures, the creation of a Fiscal Stability Fund to be invested overseas and diminish Dutch Disease risks, a Public Procurement Law, a revamp of the social welfare system that laid the ground for a more efficient and cost-effective social protection, and others. Implementation will certainly have its challenges, as legislative steps are only the beginning. But Chile’s example has shown that moving along such a path may lead Mongolia to extract the largest bang from their natural-resource buck.
To a large extent, the World Bank and the IMF acted as knowledge pollinators between Chile and Mongolia. I can say that for us, World Bankers, it feels good to fly like a hummingbird.
First appeared at World Bank Growth and Crisis blog