I deeply appreciate the opportunity to address this audience on the US-Mongolia commercial relationship.  This relationship has exceptional potential.  On its face Mongolia would seem an ideal platform from which to provide resources to the Asian region. From copper to cashmere, molybdenum to meat, American processors might be eager to source from Mongolia.

So why haven’t more Americans hit the trails to Mongolia?  Partly, it’s because our investors know relatively little about distant and exotic Mongolia.  But what they do know, from news reports and books, might give them the impression that Mongolia is a remote country with a potentially unstable business climate and frigid temperatures.  And why would anyone invest in such distant, risky place? 

Well, we can bring Mongolia closer by giving you some basic information.

First, let’s me tell you that Mongolia is closer than you think.

Mongolia is becoming increasingly easier to access by plane, or train.  Flying time from DC to Ulaanbaatar is about 17 hours -- not much more than to Tokyo, Beijing, or Seoul.

Cell phone and Internet links are available in each and every province of the country.  One can transfer information as easily as transferring funds – yes that means Mongolia’s telecommunications and banking systems are modernizing.

Mongolians are innovative, flexible, exceptionally friendly and accommodating. 

US-Mongolian relations are excellent: Mongolia calls the US its "third neighbor.”  Our relationship has developed rapidly to include humanitarian and technical assistance, business development, military to military relations and a host of smaller programs. In 2005 Mongolia successfully hosted the President of the United States George W. Bush, Speaker of the U.S. House of Representatives, Secretary of State, and the Secretary of Defense.  Mongolia is now squarely on the map from the U.S. government’s perspective and we anticipate more senior visits this year.

Mongolia has proven a reliable ally and has contributed peacekeeping forces to both Iraq and Afghanistan as well as to UN peace-keeping operations, including in Sierra Leone and Kosovo.

Regarding the business climate, we would really like to say that Mongolia offers the stable, risk-free environment that investors crave; a reliable safe harbor for investment in Central and North East Asia.  In fact, we can almost say this; but we have some reservations.  Mongolia has the bones or basic structures for a good business climate but needs to flesh out the details and then build a sound track record through positive, transparent practice.  If it does so, we are cautiously optimistic that it will make its business climate more attractive to American and other western investors than those of its regional competitors. 

Why would anyone want to come to Mongolia?  It has a relatively small population compared to almost any country in the region. It is a small market and bound to stay that way into any foreseeable future.  It has vast natural resources but then so does Eastern Russia or Kazakhstan. So what then is the attraction for investors?

Let me tell story about an American apparel maker that answers this question.  The firm came to Mongolia to take advantage of the quota system, but they maintained production in China, too.  In Mongolia they found it easy to set up the business, following the clear procedures set out by our friends at the Mongolian Foreign Investment and Foreign Trade Agency (FIFTA). 

After starting, they did have significant problems, however.  For example, they faced:

• Inconsistent imposition of  tax provisions, sometimes leading to seizure of accounts
• Problems with customs officers refusing to release shipments unless they received extra-legal payments – nice term for bribe
• Problems with health inspectors refusing to reveal what standards they were using to inspect the company cafeteria.

Sometimes the problems grew to such a pitch that the business almost faltered.  But they stuck it out and profited. Mongolia profited, too.
The firm employs several hundred workers, pays taxes to the central government, the city of Ulaanbaatar, the district in which it manufactures and sets a positive example for other firms to follow.  Good news all around.

When quotas ended in 2004, they decided to stay in Mongolia.  Given that quotas made it profitable for them to manufacture in Mongolia, their decision seems quite odd; and so, we must ask why did they stay?

What kept them in Mongolia despite the loss of quotas is the relative predictability and relative sense of security for their investment in Mongolia compared to their plant in China, which is more profitable.  In Mongolia they know what the rules are, what the tax burden will be, how much materials cost, etc. And they know that they can get redress from the government and courts if circumstances go awry.  Fearing that other nations in the region can’t or won’t offer these protections, the firm has made Mongolia its backup, its safe harbor and it gives them leverage.  

Other businesses tell us the same thing: What can and does make Mongolia more attractive to investors is its perceived commitment to crafting,  reforming, and refining both its legal and regulatory structures to offer a predictable, equitable, and consistently applied set of rules that will protect investments.

However, it is a fragile commitment, one which Mongolia has not completely fulfilled.  Mongolia hesitates to complete needed reforms because it faces hard and sometimes politically and economically painful choices.  In addition, Mongolia faces overheated expectations of free markets, growing corruption, and a misunderstanding of what investors—And I mean all investors, Mongolian, American, Australian, Canadian—need to put their money, manpower, and technological into Mongolia.

From a communist/social command-driven economy in 1990, Mongolia has embraced free markets as enthusiastically as any nation on earth.  Within a decade of ending socialism, the economy went from 0% to 80% in private hands.  I first visited Mongolia in October 1992 and it was bleak.  There were few goods, almost no stores or private enterprise, and a sense of drift, having just emerged as a democracy no longer dominated by the Soviet Union.  The transformation has been breath-taking.  Today, the stores are filled with goods, there is hustle and bustle of economic activity, and the streets are lined with stores. 

But as Mongolia adopted free market systems, people believed that the coming of free markets would end poverty and unemployment, but expectations have exceeded reality in nearly every sector.  For example, in mining, almost every Mongolian – from city dweller to country-side herder -- believes that mines are already yielding great returns, which should show up in state coffers and programs and trickle into their lives. That these returns have not appeared is taken as proof, by some, of malfeasance on the part of companies and self-interested politicians.  And some Mongolians, disappointed that the jobs and the revenues haven’t kept pace with the rhetoric, push politicians to impose tighter restrictions on markets and reclaim assets privatized by the state.  Much has been accomplished, but progress has been uneven across sectors of the society and in different regions. 

Corruption and unresolved conflicts of interest threaten the business climate.  There is a perception that many politicians have extensive business ties; that they will use legislation and the regulatory process to feather their own nests at the expense of the state or other investors.  Investors fear to tread where there is no level, predictable playing field, and they have other options and venues. 

Businesses will not invest in any country unless they can make a profit, and they flock to those having a secure, predictable business climate.  Businesses always grumble at paying of taxes or about following burdensome laws; but it’s not the paying of taxing or the following of laws and rules, per say, that scares off investors.  It’s if such things become unpredictable or rise to such a level as to approach expropriation by the state.

Consider mining in Mongolia, a sector which has great promise, but only if the public and the government get the legislative and regulatory matrix right. The current debate over amending the widely praised Minerals Law of Mongolia has sent shivers throughout the mining and indeed through the entire business community in Mongolia.  Individual miners privately tell us that some revisions of the mining law are probably inevitable. They also accept, with some grumbling, that having a wide-scale, open public debate will probably produce a bill acceptable to all parties. However, two issues remain absolutely non-negotiable—and these apply to any investor, in any sort of business:

• First, miners will not accept the GOM expropriating any slice of a mining asset without fair market-valued compensation. Should the GOM persist, it is likely, in our view, that they would pack up and leave.  Or to put it another way: How eager would a herder be to raise cashmere goats if he had to surrender half his flock, because his animals ate grass on government pasturage?  More widely why invest in shops, commercial and residential real estate, restaurants, distilleries, farms, dairies, or tanneries—anything—if the government can take it away.   There goes the investment, the technology, and the jobs.

• Second, mining investors stress that the GOM must craft a predictable, reliable system for administering mining rights and taxing mining revenues. Miners will not invest millions in exploration or billions in developing mines without a stable legal and regulatory environment.  Miners and any investor, whether Mongolian or foreigner, need to know what the costs of doing business will be over time to know if the business will be profitable. 

Mining firms want security and predictability—so would any business person considering investing in Mongolia.  There is no mystery here; just a simple, time-proven set of practices. 

Mongolians from all walks of life tell us they want western investment in general and US involvement in particular. They know that, in addition to making Mongolia a regional standout, a proper legal and administrative regime - predictable, transparent, and fair - would create a level playing field that would give western firms a leg up on regional competitors; who do not offer such open environments and do not work so well in open and transparent environments. Our American apparel maker certainly thinks so, and he is not alone in agreeing that the current business climate, shaky as it is, the key to his remaining in Mongolia.

Strengthening the business climate is certainly a win-win for Mongolia and any investor who can and will play by the rules. This is the system that Mongolia has embraced partially, but it needs to complete the embrace if it wants to the safe and reliable harbor for investment in North East Asia.

Finally, Mongolia is a stunningly beautiful country and the people are genuinely warm and friendly, especially toward Americans.  Two short tourism trips in the 1990’s led me to sign on for a two year hitch and I’m glad I did.  Last November President Bush was wowed by his trip to Mongolia.  So my suggestion is that you come see it for yourself – you’ll be glad you did.  Thank you.