The effects of Mongolia's booming mining industry on its agricultural sector: A test for Dutch disease

Abstract

Abstract Dutch disease occurs when currency strengthening associated with a booming sector of an economy crowds out a lagging trade‐dependent sector. In this study, a Keynesian‐style model is specified to deduce hypotheses about how increased foreign direct investment (FDI) aimed at Mongolia's mining sector affects its agricultural sector. A key finding is that while econometric results suggest the increased FDI strengthened Mongolia's currency, its adverse effect on Mongolia's trade‐sensitive agricultural sector is not sufficiently strong to cause the sector to decline. Although Dutch disease was not detected, the posited mechanism clearly is important. Specifically, when currency strengthening is ignored the reduced‐form elasticity of agricultural value‐added with respect to FDI is 2.7 times larger than when currency strengthening is taken into account (0.103 vs. 0.038). Also, FDI‐induced currency strengthening causes the Keynesian multiplier to drop from 2.40 to 2.00 and the FDI multiplier to drop from 3.05 to 1.89.

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