Mongolia strikes it rich, but at what cost?

If you've never heard of Ulan Bator, that's about to change.

Mongolia, of which this ramshackle city is the capital, is on the cusp of cashing in on the planet's richest untapped store of copper, gold, other precious minerals, and coal. There could be enough underground wealth in the steppe to make every nomadic herder a millionaire.

Lucky Mongolians? Maybe. The kind of money that is going to start flowing here soon could buy an awful lot of consumer goods, not to mention more durable benefits such as schools, hospitals, roads, and wind farms.

But sudden floods of easy cash are not always a blessing. Ask the citizens of Nigeria or Papua New Guinea, most of whom seem to have experienced a tragic spiral of corruption, violence, and poverty in the wake of their resource booms.

Mongolia's Deputy Finance Minister Ganhuyag, who like most Mongolians uses only one name, likes to boast of his country's future as Asia's "alpha wolf economy," pointing out that the country's gross domestic product is currently growing by 16.7 percent a year, the fastest pace in the world.

But that is not the whole picture, acknowledges President Elbegdorj. "The government and the people are very aware of the risk of the 'natural resource curse,' " he says. "And we are also very aware that with bad government and corruption my country will be in trouble."

'Whether we want it or not'

Mongolia is in "a race" to build its institutional, political, and moral defenses "before large-scale revenues materialize," according to a recent report by the European Bank for Reconstruction and Development. There are "grounds for optimism," it found, but "remaining challenges are enormous."

As far as Munkhbayar is concerned, sitting in the yurt he has pitched in a meadow by the banks of the fast-flowing Tuul River, the damage has already been done.

A prominent environmentalist who has campaigned against the gold mines that have polluted Mongolia's rivers and lakes, Mr. Munkhbayar deplores how the mining boom means "people now are interested only in earning money, not in taking care of our motherland."

If he had his way, Mongolia would not dig holes in the ground at all – "our resources should be left where they are," he says – but rely instead on tourism and herding.

Though his position is extreme, his sensibilities are widely shared. "Most people in the countryside do not want mining here," says Oyun, a geologist and member of parliament for the centrist Civil Will-Green Party.

"But whether we want it or not," she adds, "we don't see many venues Mongolia can use except mining to expand our economy and integrate ourselves into the world economy. Like it or not, we have to use mining as the main engine for growth at this stage, and hopefully the revenues will be wisely spent."

Ms. Oyun, who heads a foundation commemorating her murdered brother, Zorig, a hero of Mongolia's democratic movement, is relatively sanguine.

Though it is too early to predict how the country will turn out, she says, she points to new laws on corruption, conflicts of interest, freedom of information, campaign finance, judicial reform, and environmental standards as hopeful signs.

"Most decisionmakers here realize that the main factors determining whether the resources are a blessing or a curse are strong institutions, good governance, and the rule of law," Oyun says. But laws are not always implemented. Munkhbayar staged a couple of publicity stunts in 2010 and 2011, opening fire on mining equipment at mines he thought should be shut in assaults he had announced at press conferences. No person was targeted or hurt. He has not been punished.

'Corruption is everywhere'

Nor is the law necessarily applied equally. A popular former president, Enkhbayar, was charged with corruption earlier this year and arrested just in time to stop him running for parliament against the ruling party.

Though Mr. Enkhbayar has a reputation for corruption, the timing of his arrest "appears to be arbitrary," according to a statement by Amnesty International at the time. "Our legal system works in some cases but not in others," says Sumati, who heads the Sant Maral polling organization. "It needs tuning."

Corruption is worsening, foreign businessmen and ordinary Mongolians report. The country's ranking in Transparency International's table stands at 120th of 183 nations. But the official anticorruption agency has picked up steam in recent months, taking on some high-profile cases; and citizens are speaking out more, local observers say.

"People are less accepting of the sort of easy corruption that happened 10 years ago," says Jonathan Addleton, the outgoing US ambassador. "They freely express their concern."

Uyanga, who lives with her husband, a manual laborer, and five children in a yurt in a shantytown outside the capital, has no doubt that "the people in government are taking the money for themselves. Corruption is everywhere."

Creating a 'rainbow economy'

Ms. Uyanga has benefited from monthly government handouts of $16 per family member, paid for from the government's mining income, but is not sorry they have just been stopped on the advice of economists, who warned they were inflationary and not really helping the poor.

Like 45 percent of the population of just under 3 million, according to a Sant Maral poll in April, Uyanga says she believes the government should be making the growing wealth gap a high priority and addressing social needs. "Instead of giving us cash, I'd rather the government did something useful like build more apartments," she says.

President Elbegdorj, too, says he wants to invest mining money in other sectors "to make our one-color economy into a rainbow economy."

One economic aspect of the "resource curse" is the way extractive industries crowd out other sectors and stunt their growth – a phenomenon already evident here, where tourist agencies have lost many of their English speakers to high-paying mining companies.

Elbegdorj has tried to take some of the heat out of the mining industry, whose poor environmental record has earned it few friends, by imposing a moratorium on exploration licenses. Three years ago miners were free to drill on 46 percent of Mongolia's territory. Today that proportion has dropped to 16 percent, the president says.

'Civil society' on the rise

"If growth and exploration happen too fast and too greedily, they will be a curse," warns Oyungerel, a human rights activist and newly elected parliamentarian for Elbegdorj's Democratic Party. "The new parliament's historic mission will be to regulate the pace and the environmental impact of mining."

Mongolia's democracy is vibrant; last month's parliamentary elections were the seventh since the country's Soviet-dominated puppet regime fell in 1990. And "civil society is on the rise," Mr. Sumati says. "Our population at large is more sophisticated and has a sounder approach than some politicians."

Those strengths, predicts Mr. Addleton, will serve Mongolia well. Dealing with the wealth that will start flowing when the $7 billion Oyu Tolgoi copper and gold mine comes on line in September "will mean huge challenges, and it will always be a challenge," he warns.

"But for all the detours and obstacles," Addleton adds, "I think Mongolia will make its way to a better place."