There's gold in them thar steppes

WHO invented free trade? Was it the British economist David Ricardo, whose masterful explanation of the principles of comparative advantage has become a textbook favourite for economic students ever since? Well, Ricardo may have advocated free trade in theory but its origins in practice come from a more unlikely historical source.

On a recent trip to Mongolia, the airport economist learnt that it was in fact the famous Mongolian war lord Genghis Khan who first developed the principle of free trade when he abolished tariffs between the provinces of the Mongol Empire, which stretched all the way from China to Europe.

But the times in Mongolia may be a-changing. In fact, the airport economist happened to be in the capital Ulan Batar at an important historical moment in modern Mongolian economic history. While in the country, Ivanhoe resources  in which Rio Tinto has a strategic stake  announced its agreement with the Mongolian Government to develop copper and gold deposits in Oyu Tolgoi.

The agreement, which was seven years in the making, is expected to have a major impact on Mongolia's economic prospects. According to Chad Blewitt, Ivanhoe's chief financial officer (on secondment from Rio Tinto), the project will "double Mongolia's GDP of $US5 billion ($A5.6 billion) and the mine deposit will become one of the five largest mines in the world".

Blewitt believes "this place could be like Dubai in five years' time, but they've got to manage the revenues and ensure that they have the right skill mix in the labour market to make it all happen".

Jim Dwyer, from the Business Council of Mongolia, believes there will be a "ripple effect" with the services and infrastructure around mining. Dwyer, a former mergers and acquisitions specialist on Wall Street, believes the investment will attract other foreign investors and that Mongolia's financial system will allow other sectors to grow on the coat-tails of the commodity boom.

"I came in 2001, to lead a major transaction in the Mongolian banking sector. We've had our challenges for sure, but in my experience it's one of the most stable economies of the emerging world," Dwyer said.

Blewitt believes there are great opportunities for Australia in infrastructure, education and training. "The unis here really need help as Mongolia standards in mining engineering education are still stuck in the 1960s text books. The TAFE sector in Australia could do wonders in a place like Mongolia. Australia could also help Mongolia in terms of accounting standards, corporate governance. This would help avoid a skills shortage as the projects take off."

In terms of infrastructure, Leighton Asia is already there with West Australian Mark Bailey leading the charge. "We're building the mines, we've also picked up the railways and they'll be plenty more to come." Both Blewitt and Bailey believe that Australia has a good reputation and is well regarded in terms of our standards  especially in occupational health and safety and mine regulation.

"There used to be a lot of 'cowboy miners' here" described by a local Mongolian economist Altantsetseg Shilegmaa as "Ninja miners" "but fortunately Australia was not amongst them", added Blewitt.

Australia's reputation in Mongolia has been enhanced not just by the expatriate community but also by the "Mossies"  a group of Australian-educated Mongolians who still retain an affection for Australia. A leading "Mossie", J. Elbegsaikhan, Australia's honorary consul in UB, says the Mossies are influential and include some of the top decision makers in Mongolian society including the speaker of the Mongolian Parliament who is known amongst us as the 'chief Mossie'."

So the news in Mongolia is all about the mine and its associated knock-on or ripple effects. And if things go according to plan, we could well be looking at a new era for Mongolia.

As Blewitt says: "The mine is a country changer and I feel that I am witnessing economic history.

"After the straitjacket of communism and the erratic instability of immediate post-communist era, Mongolia is hoping the economy will be able to grow steadily and provide improved

living standards through the community."

Tim Harcourt is chief economist with the Australian Trade Commission and author of The Airport Economist (see theairporteconomist.com).