Mongolia's challenge

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President Bush is visiting Africa this week, where he will tout the success of the Millennium Challenge Corp. (MCC) in helping poor nations across the globe. That's the 4-year-old program created to transform America's foreign aid efforts. Under this new approach, grants are designed to encourage reforms that foster the economic growth critical to reducing poverty in developing nations.

But a few recipient countries, including a key U.S. ally, are on the brink of flouting the MCC's aims. It's a direct challenge to one of Mr. Bush's signature foreign policy efforts. How the U.S. government responds will send an important signal to other countries that receive American aid.

The advent of the MCC, one of the Bush administration's most innovative programs, marked a critical shift in aid policy. As Mr. Bush noted in a recent speech, the MCC has "revolutionized the way we approach development" by treating countries assisted "as equal partners, asking them to set clear goals, and expecting them to produce measurable results."

The key to this new strategy is, as Mr. Bush puts it, America "serving as an investor, not a donor" with its development aid. The U.S. links eligibility for funds from its Millennium Challenge Account (MCA) to a potential recipient's demonstrated commitment to promoting political and economic freedom, funding education and health, reining in corruption and respecting civil liberties and the rule of law. President Bush has said MCA assistance will go to countries that "live by three broad standards — ruling justly, investing in their people, and encouraging economic freedom."

The question is what to do when the results in some of the initiative's partner countries fail to measure up. A critical test case today is Mongolia.

Strategically wedged between Russia and China, Mongolia is of enormous geopolitical significance. The country has made tremendous strides since a peaceful 1990 revolution overthrew the Soviet-aligned communist dictatorship that had ruled since 1924.

Today Mongolia is a U.S. ally that has committed troops to Afghanistan and Iraq. Friendship with the United States has brought the nation benefits, including a five-year $285 million MCC compact, signed last fall by Mr. Bush and his Mongolian counterpart, Nambaryn Enkhbayar.

But there are worrying signs that the country's rulers are starting to again take cues from their immediate neighbors. By the MCC's own scorecard for the country, Mongolia has declined in virtually all its indicators in recent years, reflecting a rapidly deteriorating investment and governance climate.

What has triggered this democracy's downward spiral? Recent discoveries of copper, gold and other valuable natural resources seem to play a role.

These discoveries have transformed the political landscape in the country in the few short years since Mongolia was named eligible for MCA funds in 2004. Ruling elites are eager to seize these resources for themselves. The governing ex-communist Mongolian People's Revolutionary Party (MPRP) now threatens to break the country's binding contracts with private companies under the nation's Mineral Law.

In other cases the MPRP has simply refused to move projects along that are important to the country's economic well-being. Mongolian politicians eager to jettison the rule of law are betting that populist appeals to nationalism might be the wave to ride to the elections scheduled for June.

In a series of moves straight out of the playbook of Vladimir Putin's recentralization program in Russia, the Mongolian government first slapped a staggering 68 percent windfall profits tax on holders of the copper- and gold-mining licenses previously granted.

Then it has pressured investors to "offer" it shares in their operations and other inducements. It pressured the Toronto-based Centerra's Boroo Gold to renegotiate certain terms in the longstanding stability agreement it first negotiated in 2002 and has demanded 100 percent of a large coal-mining project. Other firms like Canada's Ivanhoe Mines and the Anglo-Australian Rio Tinto Group, which negotiated new agreements with the government last year, have nonetheless found their deals have not been ratified as the politicians dithered, seeking marginal financial and electoral advantages.

Some analysts fear that behind it all is a not-especially-subtle attempt to wear down the international investors — the suspended operations of the two firms just mentioned are costing them up to $40 million per month — and, once they withdraw, to turn things over to the MPRP's old friends in Moscow. The Russian government already owns a 49 percent stake in Mongolia's largest existing mine, a Soviet-era development.

More than $180 million in MCA funds is budgeted for improving Mongolia's rail system. It would be both ironic and tragic if this U.S. aid creates an infrastructure which makes it easier to not just haul minerals to Mr. Putin's Russia or Communist China, but to leave ordinary Mongolians on the platform, missing the chance to break out the trap of bad governance and poverty. Indeed, the stalled capital investment by the mining sector alone would roughly equal the country's entire GDP.

Russia again is flexing its muscles on the world stage and trying to reassert its traditional spheres of influence. Already, the U.S. has lost the foothold it had secured after September 11, 2001, in the former Soviet Central Asian republics. The Shanghai Cooperation Organization — a regional group led by Moscow and Beijing in which Mongolia was the first country to be accorded observer status while the U.S. application was rejected — is increasingly looking like an anti-American bloc.

The United States should not sit by idly while all this happens. And if America is destined to lose Mongolia as a partner, we certainly shouldn't shovel hundreds of millions of taxpayers' dollars there as the Mongolian government thumbs its nose at the very principles underlying the MCA.

If President Bush is serious about bringing in market concepts to transform America's approach to development assistance, the MCC must act more like a prudent investor and, when necessary, be prepared — in something close to real time — to cut off financing when trends go negative.

J. Peter Pham is director of the Nelson Institute for International and Public Affairs at James Madison University in Harrisonburg, Va.