Nov. 21 (Bloomberg) -- U.S. President George W. Bush became the first American head of state to visit Mongolia, a country wedged between China and Russia whose embrace of democracy has made it a model for how to get U.S. aid.

It also has been an example of the political and economic changes that Bush has extolled during a weeklong trip across Asia. The problem is, the transition to democracy a decade ago hasn't fulfilled the promise of prosperity yet, leaving the country of 2.8 million people dependent on aid from overseas.

Bush is overhauling the way the U.S. donates to countries like Mongolia that have difficulty attracting private capital and making existing government assistance pay off. His one-day stop in Ulaanbaatar comes at a critical time for the Mongolian government, an Iraq war ally of the U.S. that has spent more than a year on an application for almost $300 million in aid.

``Mongolia has made rather spectacular strides both toward public democracy and toward reducing corruption,'' said U.S. Representative Jim Kolbe of Arizona, chairman of the House subcommittee on foreign aid appropriations. ``It is the kind of country that we think not only is worthy of U.S. support but where, because those underlying changes have taken place, increase the likelihood that the money will be well spent.''

Bush met for talks and cultural ceremonies with the Mongolian President Nambar Enkhbayar and Prime Minister Tsakhya Elbegdorj before leaving for Washington later today. Part of the reason for the stop is that Mongolia was among the 40 countries that supported the U.S.-led coalition that ousted former Iraqi president Saddam Hussein in March 2003.

`Challenge' Grants

Bush and Enkhbayar issued a joint statement saying they agreed to work together to help Mongolia develop political, economic and financial structures and to cooperate against human trafficking and organized crime. Enkhbayar said he was pleased to welcome the American president as the leader of a ``third neighbor,'' a reference to Russia and China.

Along the two-lane road Bush traveled down from the airport to the capital -- a dry place with little foliage where rivers are already frozen and over which smog hangs -- a billboard paid for by the Mongolian International Jockey Club welcomed the presidential delegation. Mongolian and American flags lined the main road into town.

``In just 15 years, you have established a vibrant democracy and opened up your economy,'' Bush said at a government administration building. ``The transition to liberty has not always been easy -- and Americans admire your patience and determination.''

Mongolia was among 16 countries Bush picked last year for a new aid program called the Millennium Challenge Corp., his administration's answer to decades of U.S. assistance that critics deride as long on good intentions and short on results.

Corruption and Donor Ignorance

The MCC rates nations in categories such as justice and economic openness. Mongolia ranks among the highest scorers of the group. About 75 percent of the economy is in private hands, and after 70 years under Soviet-backed communist rule the Democratic Union Coalition took power in a 1996 election. Ten local and national elections have taken place since.

Still, a third of the country's citizens live in poverty. When ranked by gross domestic product per person, Mongolia comes 178th out of 230 nations, according to U.S. government figures.

Aid in the past has been squandered in Mongolia.

``Every side is looking for a scapegoat instead of answering the question: What went wrong?'' Enkhtuya Oidov, the general-secretary for Mongolia's National Council for the MCC, said in an e-mail response to questions. ``Rightly or wrongly Mongolians blame both -- not only corrupt politicians but also donors who were so ignorant about where the money goes.''

The Millennium Challenge, which added seven nations to the eligibility list this month, is intended to end that cycle.

U.S. Aid

``Mongolia is a young and successful democracy,'' Stephen Groff, managing director of the MCC's Eurasia program, said in an interview. ``If we have a limited amount of development resources that we can invest in countries, those resources have a better probability of bringing the poor out of poverty and into a better situation.''

Mongolia's MCC proposal, submitted last month after the government spent almost a year on revisions, calls for construction of a railway line to ease bottlenecks, upgrades to housing and sanitation systems, and better health-care services. The country's request for $292 million is a sizeable amount given the largely agricultural and mining-driven economy in 2004 totaled $1 billion -- about the same amount as its foreign debt, according to U.S. figures.

Bush said today he would work with Mongolia to sign a new aid package ``as soon as possible`` under the MCC program.

Promises and Reality

The U.S. is the third-largest donor nation to Mongolia after Japan and Germany. The U.S. Agency for International Development, the main distributor of U.S. foreign aid, had a budget for Mongolia of about $10 million in 2005.

With an MCC deal, Oidov said ``we are talking about a big amount of money, which has potential to solve problems identified by the Mongolian public as main constraints to the country's development.'' The Mongolian government wants to reach a deal for the grant by July 2006, when the country will celebrate its 800-year anniversary, Oidov said.

Mongolia also is a test case for whether Bush's new approach to foreign aid can work and be sustained.

In a March 2002 speech in Washington, Bush pledged to boost U.S. foreign aid by $5 billion to $15 billion a year by 2006. Almost four years later, that amount has failed to materialize, as Congress this year funds only about a third of what he wanted.

``The administration has not moved this program along as quickly as they should have,'' said Steve Radelet, a former U.S. Treasury official and a senior fellow at the Center for Global Development, a research group in Washington. ``The next year or so is going to be very important because people on Capitol Hill are tired of hearing promises and want to see some realities.''

To contact the reporter on this story: Brendan Murray in Ulaanbaatar, Mongolia, at brmurray@bloomberg.net

Last Updated: November 21, 2005 03:59 EST