Terrence Edwards in Ulaanbaatar -

Prior to the fall of the Soviet Union, Mongolia served as a satellite state that produced shoes and clothing as well as food staples. After 25 years of capitalism, the factories and equipment that produced many of these items have fallen into disrepair. But a downturn in mining is pushing Mongolia's government towards encouraging the return of such industries.

Mongolia ended up falling 4.4 percentage points short of the International Monetary Fund's economic growth forecast for 2013 of 15.7%. Delays to the expansion of Mongolia's $6.5bn Oyu Tolgoi copper mine because of a disagreement over a $4.2bn financing package played a large role in the shortfall, as did a decline in coal prices and slowing growth in China, where over 90% of Mongolia's minerals are sent.

Standoffs between the Mongolian government and mining companies over various projects have caused foreign direct investment to fall. The outflow of foreign investment pushed the currency down 26% against the US dollar at the start of April compared with the year before. The depreciation has exacerbated inflation, recorded at 12.4% nationwide in March, because the country is so dependent on imported goods.

Still, there are few who sympathize with the mining industry's current problems. Despite the fact that mining is the largest contributor to the economy, at 20% last year, Mongolians are not always thrilled at being best known for the wealth under their feet – principally coal, copper as well as some gold and iron ore. “It interferes with the nomadic lifestyle,” says Surenjav Odbayar, a mining analyst for local brokerage National Securities. “The water resources are not so huge either, and they take away from the drinking resources from the herders.”

At the extreme end, a backlash against mining has resulted in the rise of hardline nationalist and environmental groups, which some accuse of establishing racketeering rings that extort miners for cash. The country's most celebrated environmentalist, the 2007 Goldman Environmental Prize winner Tsetsegee Munkhbayar, has since been sentenced to seven years in prison for leading an environmental protest group that sometimes resorted violence. A rifle was fired in front of the country's parliament house and police said they found bombs planted in a government building by Munkhbayar's group.

Made in Mongolia

The latest prescription by the government to cure Mongolia's socio-economic ills is the establishment of domestic production to replace the huge amount of imports and create a more diverse portfolio of exports.

“Let's Create in Mongolia” was the slogan for this year's Mongolian Economic Forum held on March 4 – an event largely inspired by the forum held in Davos each year. For the second year in a row, the chief focus was on the need to encourage the growth of domestic industry in a nation known more for its nomadic herders and vast mineral wealth than for luxury clothing brands or tech start-ups.

The prime minister and other officials argued that Mongolia needs to open up new industries to ease the country's dependence on mining and prevent the kind of currency swings seen in the past year. There is also the danger of existing domestic industry being further hit by the so-called Dutch Disease, whereby non-resource industries are hurt by the increase in wealth generated by the resource-based industries. “Today, the nation is rarely manufacturing final products, importing 88% of commodities, and mostly exporting raw materials, in turn. This wrong direction of traffic must be fixed so as to avoid an economic deadlock,” said Prime Minister Norov Altankhuyag in his opening remarks at the forum.

Odbayar says Mongolia in March announced it was spending MNT270bn (€110m) to finance light industry start-ups and to expand areas such as small manufacturing and textiles, as well as MNT22bn into construction. By comparison, mining investment from the government received MNT18.3bn. “It says a lot about the government's thinking,” Odbayar remarks on the size of investments made by government.

But what, if anything, can Mongolia bring to the table that can generate the kind of income that the country's mines do?

Stephen Kreppel, director of the Mongolian National Marketing Coordination Office, says that labour costs and operational expenses are already too high to compete with countries such as Malaysia for manufacturing, so it will need to find products that consumers will buy based on their merits rather than price. As such, Kreppel argues high-end products derived from the country's cultural roots, such as organic meats and luxury cashmere clothing, would be ideal. “The winter itself is a marketing advantage for Mongolia,” he says of a place where temperatures reach minus 30°Celsius and beyond. “And when it's coupled with 100% organic, 100% faulty free, 100% natural, and scientifically warranted, you've got a world beater.”

Herding in investors

In charge of attracting investment into Mongolian industry is Demberel Irmuun, director of the division for promotion and consultancy services at the newly formed Invest Mongolia Agency. Irmuun says he has about six meetings a day with potential investors, such as an Italian group that recently visited that was interested in exploring options for the production of textiles in Mongolia.

The agency models itself after groups such as InvestHK, to facilitate the establishment of overseas companies in Mongolia. To encourage the development of various sectors of the economy, one strategy is to publish a series of investment guidebooks to instruct investors on where to invest and with what offices they must register. Although still in the early stages, Irmuun said one forthcoming book would cover Mongolia's budding green energy industry.

Last year Mongolia commissioned the 52-megawatt Salkhit wind park, which today provides Mongolia with 5% of its power. That was Mongolia's first wind park, but already the country has two more wind farm projects under development by Turkey's Aydiner Global and German firm Ferrostaal Industrial Projects. In 2012, Japan's SB Energy formed a joint venture with Mongolia's Newcom Group for Clean Energy Asia, which plans to be a regional player for the transmission of renewable energy.

That fits in with one of three scenarios for Mongolia developed by the World Economic Forum earlier this year in Davos, which envisages the country carving out a role for itself in China's move toward developing a greener economy. "A revolution in environmental attitudes sees China lead the way in the 'circular economy' and pioneering new products and services. This reduces demand for Mongolia’s main minerals, but opens up new opportunities to diversify into green products and services," the WEF said.

However, given that the other two scenarios presented focus squarely on mining and commodities, it shows how far the country needs to travel in what the WEF terms "charting a course for the country from mineral wealth to long-term sustainable and diversified growth."

“When the politicians go abroad, they say mining is still a major component of the economy, but when they're campaigning to the voters they talk all about diversifying the economy,” says Odbayar. “This kind of behaviour leads one to the conclusion that Mongolia is still not giving up on the mining sector."