Analysis of the “Dutch Disease” Effect and Public Financial Management of the Mongolian Economy

Abstract

AbstractThis study aims to analyze whether the Mongolian economy has been suffering from the “Dutch disease” or not by employing a vector autoregression (VAR) model with quarterly data from 2000 to 2017 of the National Statistical Office, Mongolia (NSO). Our results show that the Mongolian economy has probably been suffering from the “Dutch Disease” through the resource movement effect in that the mining sector boom has crowded out manufacturing activities. Moreover, our results indicate that the mining sector boom has not contributed to or even deteriorated the capital accumulation effect that alleviates the Dutch disease. Therefore, the Government of Mongolia should strengthen its public financial management to avoid the resource “curse.” Moreover, the current natural resource funds, named the “Future Heritage Fund” of Mongolia, could be one of the successful solutions for the Dutch disease. Conversely, the “fiscal stabilization fund” needs reform and independence from political pressures. Hence, as a policy recommendation, resource revenues should be utilized for education projects, human resource development, and economic infrastructure to accumulate capital and promote economic diversification and the future development of Mongolia.KeywordsDutch diseasePublic financial managementPublic investment