Economic activity in Mongolia has traditionally been based on agriculture and the breeding of livestock. Mongolia also has extensive mineral deposits: copper, coal, molybdenum, tin, tungsten, and gold account for a large part of industrial production. Soviet assistance, at its height one-third of GDP, disappeared almost overnight in 1990–91, at the time of the dismantlement of the USSR. Mongolia was driven into deep recession, which was prolonged by the Mongolian People's Revolutionary Party's (MPRP) reluctance to undertake serious economic reform. The Democratic Union Coalition (DUC) government, 1996–2000, has embraced free-market economics, easing price controls, liberalizing domestic and international trade, and attempting to restructure the banking system and the energy sector. Major domestic privatization programs have been undertaken, as well as fostering of foreign investment through international tender of the oil distribution company, a leading cashmere wool company, and banks. Reform has been 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. Public revenues and exports collapsed in 1998 and 1999 due to the repercussions of the Asian financial crisis. In August and September 1999, the economy suffered from a temporary Russian ban on exports of oil and oil products. Mongolia joined the World Trade Organization (WTO) in 1997. The international donor community pledged over $300 million per year at the last Consultative Group Meeting, held in Ulaanbaatar in June 1999.
The rapid political changes of 1990–91 marked the beginning of Mongolia's efforts to develop a market economy, but these efforts have been complicated and disrupted by the dissolution and continuing deterioration of the economy of the former Soviet Union. Prior to 1991, 80% of Mongolia's trade was with the former Soviet Union, and 15% was with other Council for Mutual Economic Assistance (CMEA) countries. Mongolia was heavily dependent upon the former Soviet Union for fuel, medicine, and spare parts for its factories and power plants.
The former U.S.S.R. also served as the primary market for Mongolian industry. In the 1980s, Mongolia's industrial sector became increasingly important. By 1989, it accounted for an estimated 34% of material products, compared to 18% from agriculture. However, minerals, animals, and animal-derived products still constitute a large proportion of the country's exports. Principal imports included machinery, petroleum, cloth, and building materials.
In the late 1980s, the government began to improve links with non communist Asia and the West, and a tourism sector developed. As of January 1, 1991, Mongolia and the former Soviet Union agreed to conduct bilateral trade in hard currency at world prices.
Despite its external trade difficulties, Mongolia has continued to press ahead with reform. Privatization of small shops and enterprises has largely been completed in the 1990s, and most prices have been freed. Privatization of large state enterprises has begun. Tax reforms also have begun, and the barter and official exchange rates were unified in early 1992.
Transition to a market economy
Between 1990 and 1993, Mongolia suffered triple-digit inflation, rising unemployment, shortages of basic goods, and food rationing. During that period, economic output contracted by one-third. As market reforms and private enterprise took hold, economic growth began again in 1994–95. Unfortunately, since this growth was fueled in part by over-allocation of bank credit, especially to the remaining state-owned enterprises, economic growth was accompanied by a severe weakening of the banking sector. GDP grew by about 6% in 1995, thanks largely to a boom in copper prices. Average real economic growth leveled off to about 3.5% in 1996–99 due to the Asian financial crisis, the collapse of the Russian ruble in mid-1998, and worsening commodity prices, especially copper and gold.
Mongolia's GDP growth fell from 3.2% in 1999 to 1.3% in 2000. The disappointing results can be attributed to the loss of 2.4 million livestock in bad weather and natural disasters in 2000. Prospects for development outside the traditional reliance on nomadic, livestock-based agriculture are constrained by Mongolia's landlocked location and lack of basic infrastructure. Mongolia's best hope for accelerated growth is to attract more foreign investment. Since 1990, more than 1,500 foreign companies from 61 countries have invested a total of $338.3 million in Mongolia. Many believe this number could be dramatically increased if the vague 1993 foreign investment law were rewritten to provide investors with more confidence that their investments would be adequately protected