It is a supreme irony in a country once known as the land without fences. Stretching north from the capital, Ulan Bator, an endless succession of dilapidated boundary markers criss-cross away into the distance.

They demarcate a vast shantytown that sprawls for miles and is now estimated to be home to a quarter of the entire population of Mongolia.

More than 700,000 people have crowded into the area in the past two decades. Many are ex-herders and their families whose livelihoods have been destroyed by bitter winters that can last more than half the year; many more are victims of desertification caused by global warming and overgrazing; the United Nations Development Programme estimates that up to 90% of the country is now fragile dryland.

Yet with limited education, few transferable job skills and often no official documents, most end up simply waiting, getting angry with the government and reminiscing about nomadic lives past. Many take to alcohol.

"More and more people arrive every year and there are so few jobs available," said Davaasambuu after queueing for 30 minutes to collect his family's daily drinking water from one of 500 water stations that dot the slum. "Nothing has changed in my neighbourhood since the last election [in May 2009]. There have been no new jobs or improvements. One little bridge has been added in the last four years, that's it," he said.

The basic infrastructure is not in place to support such a large population, which expands by tens of thousands of people a year. Many of them still live in a ger – the traditional round felt tent they arrived with from the countryside and which gives the districts their name and also their sense of impermanence.

Davaasambuu's is not an easy life. The area around his home is falling into disrepair with rubbish piling high. Nightly fights between drunks are getting worse. But at least he can take comfort in the fact that he now has a job with which to support his family, unlike many of his neighbours.

"Not everyone in the ger district is dirt poor – some are doing OK – but it is a hard life," said Troy Tvrdik, whose educational and vocational training NGO, Flourishing Future, is based in the district. "Even when it is minus 40, you still have to go out to get water."

A World Bank report published last year highlighted the plight of ger district residents, most of whom have limited access to electricity and no running water, sewage or central heating.

The report found that during the long winter, when temperatures plummet into the minuses for up to eight months, poorer residents are forced to spend upwards of 40% of their income on wood or coal for heating, which adds to their financial burden as well as to the heavy clouds of pollution that hangs over the city. Roads are simple, unpaved mud paths and streets have no signs, streetlights or even names but are merely the gaps naturally placed between two rows of tents or shacks set up by newly arrived migrants without any input from the government.

"The quality of the infrastructure is a major problem," said Mesky Brhane, a senior urban specialist with the World Bank, who helped produce last year's report. "[People] are clearly frustrated by the lack of infrastructural improvements by the government.

Protesters, many from the ger districts, have repeatedly descended on the parliament over the past few years, including a large protest last April, demanding a better distribution of the country's mining wealth.

Despite the money pouring into the country from the mining of natural resources – Mongolia has a population of just 2.7 million yet has the world's largest mining exploration project and, in Tavan Tolgoi, the world's second largest coal deposit – little of that money makes its way to the residents of the shantytown.

Even in the more central ger areas, where many residents have lived for over a decade and built more permanent wooden or brick houses, running water and central heating are unavailable and the streets remain dark, mud roads with open sewage streams and rubbish piled high.

Another big concern is the level of unemployment. While tens of thousands of rural migrants flood the city every year looking for work, setting up their tents at the point where last year's migrants stopped, unemployment remains a critical issue, especially in the ger districts where the unemployment rate can be as high as 62%, compared with 21% in the more developed areas of the capital.

The Mongolian government has officially declared 2011 "employment support year" in an effort to create 70,000 new jobs, but so far few signs of improvement have been visible.

"One of the biggest problems is that there is very little economic activity within the ger districts due to inadequate infrastructure – everyone has to leave the area to work," said Brhane.

"One new project the World Bank is working on is looking at ways to generate local economic development so people can live and work there. It would make a tremendous difference to people's lives," she said.

"We have 12 people in our family and only two have work," said Dashkhord, 50. She and her family moved from the countryside five years ago after one harsh winter took away their entire herd of 100 animals. They arrived with next to nothing and simply pitched their tent on the outskirts of the sprawling shantytown.

"The first year was really difficult. It took me over a year to find my first job – cleaning at a hotel. I spent the first few months simply collecting plastic bottles to sell," she said.

Today Dashkhord earns £60 a month as a cleaner at a supermarket, a far cry from her pastoral background, while her eldest daughter looks after children for a wealthier family.

"My other daughter is also looking for a job helping look after kids but it is hard since there are so few jobs and they are so far away – also, all the job ads now say you must be over 1.7 metres [5ft 6in], beautiful and well educated," she said. "For me, I wish we stayed in the village, but for my daughter and grandkids it is better here," said Baasankhuu, 63, who moved to a ger district three years ago and whose £40 a month pension is barely enough for her and her family to live on.

"My grandchildren can get a better education in Ulan Bator and maybe have a chance at a real job and future."