An economy develops when it grows or changes and becomes more advanced, especially when both economic and social conditions are improved. Mongolia’s development is not only constrained by its landlocked geography, but also by its dependence on foreign-controlled transit routes. Most notably, its reliance on transit through China and Russia results in heavy dependence on external infrastructure to access global markets.
In an increasingly globalised world, trade costs matter as a determinant of a country’s export competitiveness and ability to integrate into global supply chains. However, overall trade costs remain high for Mongolia, whose main exports are mineral resources and textiles. In fact, costs to major partners in the Europe-3 economies average at around 200% of the goods’ original value. In addition, the primary port used for sea trade is Tianjin Port in China, 1500 kilometres away from Ulaanbaatar. The time taken to transport goods between the two locations can range between 5 to 10 days by rail, resulting in high transport costs and potential delays as well. These factors weaken the price competitiveness of Mongolian exports and suppress their demand, too; particularly damaging for low value-added goods and time-sensitive trade which rely on low prices and fast delivery.
Mongolia’s geography also sparks political risks such as policy changes between bordering nations, diplomatic tensions, and capacity constraints in China and Russia. As Mongolia exercises little control over these problems, uncertainty discourages foreign direct investment and long-term planning for infrastructure improvements, halting Mongolia’s sustained economic development. As a result of these infrastructural challenges, national economic activity has heavily concentrated in the capital, Ulaanbaatar, which accounts for around 40% of the country’s population and over 60% of its GDP. Such centralisation has escalated rural-urban migration and aggravated labour shortages in rural regions, deepening regional inequality. Development is constrained in this way as resources are inefficiently allocated to the capital, limiting the economy’s productive capacity.
These geographical and infrastructural imbalances also manifest at firm level. Mongolian companies are often hit by the adversity of establishing partnerships in foreign markets, with key constraints being skills and capital shortages, as well as limited access to modern technology because of high import costs from China caused by the high freighter costs. Furthermore, foreign transit reliance of these challenges amplifies their impact of complicating entrance to international markets for firms seeking to operate efficiently abroad. Over 79% of Mongolian imports and exports are traded directly with China, reflecting a challenge of diversifying trade partners.
Overall, Mongolia’s reliance on foreign transit shapes how fast its economy grows to a significant extent. Economic development is constrained by increased trade costs, limited export competitiveness, and exposure to political risks. Long-term growth prospects are reduced due to constrained foreign investment, mainly due to limited immediate trading partners, unless foreign infrastructure such as ports are used.
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