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Wednesday
Jan102018

US-Mongol Construct 2000 Business Prospectus: Building a New Democracy | 2000


Researcher and Writer: David South

Consultancy: David South Consulting

Publisher and Client: USAID

Published: 2000

Background: This excerpted text is from a business prospectus prepared in 1999 for USAID to promote construction opportunities in Mongolia to the US construction industry. At the time, Mongolia was in the grip of a severe crisis, called one of "the biggest peacetime economic collapses ever". By 2012, Mongolia was called the "fastest growing economy in the world". It is proof the foundations for Mongolia's recovery from crisis were laid in the late 1990s.

“No other Asian country enjoys more political freedom today than Mongolia. And no other Asian country has shown greater commitment to open markets. But Mongolia has received little reward for its efforts.” Fortune Magazine, December 1998

Discover a New Democracy

Mongolians are some of the highest per capita donor recipients in the world: On average US $50 per person. The vast majority of this aid is targeted at infrastructure projects. Mongolia in 2000 is an opportunity waiting for American business. Democratic, with a free market economy, the country offers regulatory freedom, a belief in the private sector setting standards and a pro-Western attitude friendly to American companies. 

Mongolia's history is marked by the rise and fall of cities, the ebb and flow of political and economic systems. The country has experienced being the largest empire for its time in the 13th century, to being occupied by foreign powers. Economically and socially the country has lived through feudalism, communism and now, capitalism. The one thing that has remained stable throughout this rich history has been the nomadic way of life. Livestock remains to this day a major pillar of the economy and contributes to one of the country's major foreign currency earners, cashmere wool. 

After over 70 years of communist rule, Mongolians finally turned their backs on communism and robustly embraced free markets and democracy in 1996 with the election of the Democratic Coalition. A gradual opening up of the country had begun under the ruling Mongolian People's Revolutionary Party after the collapse of the Soviet Union and under pressure from peaceful public demonstrations.  

After the fall of the Soviet Union, the country suffered what many economists have called the largest peacetime economic collapse in the 20th century. 

While it is a fact that Mongolia's economy is severely underdeveloped, both in terms of infrastructure and diversity, it is also true the country is the freest in Asia. As Fortune Magazine noted in a December, 1998 issue, "No other Asian country enjoys more political freedom today than Mongolia. And no other Asian country has shown greater commitment to open markets. But Mongolia has received little reward for its efforts." Mongolia, for American business, offers a win-win situation, an opportunity to join in the building of a strong democracy in Asia while tapping the rich resources, both natural and in human capital. American businesses can enjoy a regulatory environment that is more flexible than in the United States, and a government that lets businesses do what they do best: serve the needs of customers and make money. 

Youthful

A Bright Young Future

Demographically, Mongolia is a very young country. A by-product of high birth rate policies during the communist period, 60 per cent of Mongolia's population are aged between 1 and 24, with 37.6 per cent between the locally accepted definition of youth of 15 to 34. In 1998 the New York Times Magazine called Mongolia "The youngest place on earth". Even a cursory glance at the streets of the capital, Ulaanbaatar (population 600,000), will reveal a young population taking their fashion and cultural cues from the West, and who hold correspondingly Western aspirations to own homes and start businesses. Mongolia enjoys exceptionally high rates of literacy ( 96 per cent), post-secondary enrolment (65,089 students in 1998) and the urban population quickly embraced Western consumer products as they became available. 

Growing

The Construction and Environmental Services Industry in Mongolia

Today, Mongolia officially has 100 architectural and engineering design companies and over 500 construction companies. Of these, 40 are considered large operations with their own in-house design and engineering outfits, or who have a close relationship with one or more companies that either manufacture or import construction materials. The country is a rich resource for raw materials for the construction industry, but this vast wealth remains under-utilised. According to geological surveys spanning the decades from 1930 to the 1990s, over 200 deposits were discovered that could be tapped for construction materials. 

At the beginning of the 20th Century, there were few permanent standing structures in Mongolia, apart from Buddhist monasteries and royal palaces. At the beginning of the 20th Century most Mongolians lived in the round ger felt tent. It wasn't until the communist revolution that construction of sedentary dwellings and buildings in the country picked up pace. In 1924, three years after the 1921 revolution, the State Committee for Construction was established (by 1926 it became the Construction Department of the Ministry of Industry), and undertook the large-scale construction of buildings based on European designs. 

From the 1960s the construction industry in Mongolia emerged as the country industrialised. Mongolia received aid from both China and Russia up to the Sino-Soviet dispute, and both countries were the main funders for construction projects. Many buildings in the downtown of the capital were built by the Chinese government.

Up until the election of the Democratic Coalition in 1996, all construction activities were conducted under the direction of the state. Building booms took place in the 1970s and 1980s as the communist government tried to meet the demand for apartments and other facilities. At its peak in 1989, the construction sector made up 10 per cent of the gross national product. With the collapse of the Soviet Union at the end of the 1980s, many building projects in Mongolia ground to a halt as Soviet subsidies were withdrawn.  Across the country it is possible to see the empty shells of apartment buildings, holiday resorts and half-built sports stadiums.

The Mongolian People's Revolutionary Party, under popular pressure for a change, began to gradually make the shift to free markets and democracy. The first state privatization programme began in 1993 under the direction of international experts. It wasn't until the election of the Democratic Coalition in 1996 that significant reforms were taken to fully introduce a free market economy. And it wasn't until 1997 and 1998 that the fruits of these measures started to appear.

The construction industry was fully privatised in 1998, with companies becoming limited or wholly owned entities. There now exists a mix of private and public companies in this sector. All of the companies are in the early stages of learning how to work and prosper in the free market.

The legacy of working under a command economy has left many companies ill-equipped and under-funded, many not operating at full capacity or not at all.

The private sector has shown itself to be capable of initiating real estate development projects, most commonly the building of private apartments, shopping complexes and small hotels.

Weaknesses in management and financing do lead to long delays, poor quality and in some cases, the abandonment of a construction project mid-way.  According to the State Statistical Office, the construction sector shrank from 1991 to 1994. In 1994, activity increased 26 per cent from 1993. Since then the gross national product has averaged growth of 3.3 per cent, but still has not caught up with the rate at the end of the 1980s. 

The environmental services sector has received a significant boost from international donors working in Mongolia. Various donor funded projects are building and renovating facilities using energy-efficient technology. These donors have also conducted training workshops and education campaigns for local construction companies. Being a very cold country, awareness is high over the financial and environmental benefits of energy-efficient techniques. Construction techniques, however, are weak and Mongolia has a long way to go in utilizing these technologies efficiently.  

It is a misnomer to think most Mongolians are wandering nomads. In fact the majority of the population of 2.4 million now live a sedentary lifestyle in small towns or in the big cities of Ulaanbaatar, Erdenet and Darkhan. Under communism these urban centres were economically dependent on state enterprises, many of  which now have either gone bankrupt, idle or have been privatized. There is currently a significant migration to the capital from these economically devastated communities. Officially the government was able to track 6,518 people, mostly between the ages of 18 and 39, moving to the capital in the first half of 1998 – a 60 per cent increase on 1997. Unofficial migration to the capital is believed to be far higher. 

At present a majority of the population still live in ger tents or sub-standard makeshift wooden housing. The construction industry cannot meet the high demand for modern housing, with amenities like running water, toilets and electricity.

“The business atmosphere in Mongolia is inviting and [our] partnership has faced very few obstacles while entering the market. Based on our positive experience here, we plan to continue and expand our presence in the Mongolian marketplace.” Mrs. Bolormaa Reiner, Representative Johnson and Johnson-Mongolia

Foreign Aid

Economic Prospects for the Country

Large donor community

Along with the collapse of the Soviet Union, Mongolia also lost significant economic subsidies, which contributed to the severe crisis of the early 1990s. The World Bank has estimated these subsidies reached a third of Mongolia's GDP in the late 1980s. Since then international donors have played a key role in helping to restructure the Mongolian economy to adapt to the demands of a market economy.  

Infrastructure has always been a weak point for Mongolia, and it was considered the most isolated and underdeveloped of the former Soviet bloc countries. International donors have placed infrastructure development at the top of their agendas. Since 1997 foreign aid in the form of grants and loans has hovered around US $250 million, with the vast majority of this aid going towards infrastructure development. Priority areas are highways and transportation, power stations and communications. By sector the aid breaks down as follows: 30 per cent to mining, 27 per cent to energy, 19 per cent to transport, eight per cent to communications, five per cent to social security and three per cent to other areas. The donor community and the Mongolian government want to dig the country out of decades of underdevelopment, which currently hampers the budding private sector from becoming more sophisticated. 

These large-scale infrastructure projects offer enormous opportunities for US firms experienced in working in cold-weather conditions. There are also opportunities to develop world class office space for these international donors, something that is currently lacking in Ulaanbaatar.  

Foreign investment to date

Actual large-scale foreign investment to the country has been slow coming and still doesn't represent a major economic opportunity. The major players in direct foreign investment outside of development aid have been Mongolia's old neighbours, Russia (20 per cent) and China (33 per cent). This decade the country has attracted US $200 million in foreign investment and registered 840 jointly owned or wholly owned ventures.

New-found affluence

It is estimated that around five per cent of the capital's population fit into a middle or upper income category. The late 1990s have seen the emergence of a new breed of affluent Mongolians. Many of these affluent Mongolians struck it rich trading in once-unobtainable consumer products or servicing the expanding foreign community. This class of traders have developed a sophisticated taste for all things Western – Mercedes Benz cars, four-by-four jeeps and western fashions. Vehicle registrations have steadily risen since the introduction of a market economy. In 1996 the number of vehicles was 65,020; by 1997 it was 70,088. 

New home owners

In 1998 50,000 families became homeowners as a result of privatization of apartments. All the apartments are of Soviet era and do not meet the aspirations of the growing middle class. Many of these new homeowners immediately set about renovating these apartments, installing modern appliances and furniture. A significant minority is renovating apartments with the intention of selling them on to wealthier Mongolians or foreigners. The high number of renovations and additions to buildings in the capital is also indicative of other things: the economy has changed and existing buildings do not meet the new demands, and that people have money to pay for the renovations. 

Business Opportunities

USAID has identified the following opportunities in the Mongolian construction sector:

- Donor-funded projects: Large-scale infrastructure projects that are funded by loans or grants from international donors, are a safe bet. These projects require management and technical expertise that is often difficult to find locally. This includes projects that require an international tender.  

- Fully funded foreign projects: Any project requiring a building that meets international standards. International companies have little choice when it comes to finding adequate office or retail space.

- Low-cost labor: The Mongolian workforce is highly literate and often speak a second language, usually Russian amongst older workers, and English amongst the young. Unemployment levels are high in Mongolia and workers are keen to get a job. Generally salaries are as follows:

- Manager: US $250

- Accountant: US $200

- Engineer: US $150

- Secretary: US 100

- Driver: US $100

- Qualified worker: US $100

Source: FIFTA

- Donors: Many large-scale projects are directly funded by donor grants or loans and therefore are a low-risk, reliable source of income. At the June, 1999 donors meeting in Ulaanbaatar, US $320 million was pledged, the largest amount in eight years of donor funding. Most of these pledges are targeted at “hard” infrastructure and private sector development. 

- Imports rule: Imported construction materials dominate the marketplace and will continue to do so for the foreseeable future. Many of the materials are poor quality and from China. American companies can attract customers with their obvious advantages in both quality and innovation.

- Large resource base: Mongolia's large wealth of mineral resources is inefficiently utilized, with many mines and factories working under capacity or not at all. These resources could be tapped to produce construction materials locally for the domestic market, or more lucratively, for the booming Chinese market hungry for resources. 

- Very cold country: Mongolia's capital, Ulaanbaatar, is the coldest capital in the world. Mongolia's winters dip below minus 40 Celsius, and for those who live in apartment buildings, this can be a difficult time. Many apartments are inadequately insulated, and dip below zero when the central heating system is disrupted due to poor maintenance. There is an urgent need for high-quality aluminium and plastic windows and doors. Budgets are tight in Mongolia yet many organizations spend vast sums to heat buildings. It has been proven that during the course of the winter heating costs can be reduced from Tg 4,200 (US $4.20) per square metre, to Tg 280 (US $0.28) in an energy efficient dwelling. 

-  Windows are expensive: Mongolia must import all windows and glass products. When the cost of freight is added, windows become an unnecessarily expensive portion of any construction bill. This is a business opportunity for any company who can domestically produce glass products and windows at a cheaper price than imports. A National Code for Insulation of Buildings is being revised and none of the existing windows and doors meet this requirement.

- No chemical industry: While Mongolia exports oil to China for refining, the country does not have a domestic chemical industry, and consequently plastic and rubber is imported for construction purposes. Stone tiles like marble are currently also imported from outside, despite this resource being available in Mongolia.  

- Central heating and water unreliable:  For those who live in apartment buildings, the regular disruptions to both the water and heating supply are not only inconvenient, but also bad for business.  Technology that can by-pass relying on the central system (common to many Soviet-era cities, this system is wasteful and subject to regular breakdowns), is urgently needed. Alternative energy sources like solar power and wind can bring electricity to those who are not on the grid.  

- Free trade zones: The towns of Sukhbaatar (Russian border) and Zamyn-Uud (Chinese border), both served by rail, are the focus of Mongolian government attempts at increasing cross-border trade. At Zamyn-Uud Japan has upgraded the customs house facilities and trans-shipment facility. On the Chinese side, a major trading market has been constructed and a boom is taking place based on trade with Mongolia.  

“Arthur Andersen has had representation in Mongolia since 1993. We have been very active in the development of the accounting and auditing profession in Mongolia. January 1999, Arthur Andersen opened Arthur Andersen Mongolia Audit LLC.” Mr. C. L. Ruddell, Representative Arthur Andersen-Mongolia

What Do Mongolians Say They Need?

In interviews conducted by USAID, Mongolian government officials and construction companies detailed what they felt were the most urgent priorities: 

- Education and training: The vast majority of engineers and managers in the Mongolian construction industry received their training under communism. They were trained to work under a centrally planned economy, and will need to learn how to thrive in a free market situation where there are no guarantees. The Construction Training Institute currently only offers courses to managers and engineers. Its curricula is out-of-date and awareness of modern construction techniques and standards is weak. Exposure to computer-assisted construction methods is urgently required as well as training in foreign languages. 

- Awareness of International Standards: No Mongolian companies can offer state-of-the-art consulting on construction projects. 

- Licensure, apprenticeships and guilds: Standards are very weak in the construction sector and there is not a highly developed mechanism to ensure construction managers, engineers and workers meet a minimum qualification.     

- Being Earthquake-proof: While the National Design Codes and Regulations do stipulate that buildings must meet minimum requirements against earthquakes (Mongolia is located in a seismically active region, and severe earthquakes have happened), most buildings post-1989 fail to meet these requirements. 

- Weak infrastructure: Developing the transportation infrastructure of Mongolia will be key to future improvements in the economy. The rapidly developing Chinese economy offers many opportunities to Mongolia if roads and highways can be upgraded.  

- Better coordination and promotion: Working with FIFTA or the Foreign Investment and Foreign Trade Agency, Mongolian companies seeking foreign investment for projects need to improve their networking and presentation skills.  

Obstacles and Market Risks

Corruption: While Mongolians will tell you corruption has reached all levels of government, it is important to keep in mind it does not come close to the levels of corruption found in other former Communist countries. Foreign businesses do not suffer from harassment or intimidation by criminal gangs. 

Inexperience with the free market: Foreign businesses and travellers to Mongolia do experience difficulties communicating Western business concepts like consumer rights and service. It has to be said that over the past three years this has changed considerably for the better, and continues to improve as Mongolian businesses learn the importance of the axiom "the customer is always right". 

Differences between Mongolian and US standards: While Mongolia's regulations and laws are different from those in the US, it is important to keep in mind that the regulatory environment in Mongolia can be much freer in some areas. Also, many of the new laws have been drafted based on US laws and Mongolia's constitution was written upon the advice of US legal experts. 

Harsh climate: The long cold winters do present problems for some foreign businesses not used to working in cold-weather climates. This is also an area where American companies are at a specific advantage. 

Financial instability: Mongolia has had a number of serious banking crises since the early 1990s. Many private and public banks are insolvent due to bad loans. This can lead to long delays to construction projects and/or non-payment of salaries.   

Contract bidding: Only those contracts that are directly commissioned by the government will be subject to an open bidding. Private sector work is usually not subject to open bidding or design competitions. 

Downtime: Since Mongolia does no international corporate presence in the capital, any technical problems to equipment or software can involve downtime and delays as parts or repairs are sought in China. It is important to take this into consideration when establishing an operation in Mongolia. 

Advantages of Working in Mongolia

- Regulatory freedom

- Private-sector driven

- Market economy taking off

- Democratic

 Privatization of Land: Can I Own Land in Mongolia?

The dual legacies of communism and nomadism have made the issue of private ownership of land in Mongolia a thorny one. The government has passed the necessary legislation to make owning land in urban areas possible. However, inexperience with the concept of owning property and the laws that govern this make buying land risky. It is advisable to get a reliable local partner and to use the services of a law firm that knows the Mongolian situation. Long-term leases are available and might be a good option. 

Mongolian Government 

Financial commitment to date: 

The Ministry of Infrastructure Development has developed projects to encourage the production of construction materials locally. Due to financial constraints these projects have not been implemented. They include projects on cement, glass and paint production, rock processing, lime extraction and road development.

Government plans:

At this time the Mongolian government has not been able to develop a long-term strategy for the development of the construction sector. There are no specific policy incentives directly supporting real estate and housing development. The Ministry of Infrastructure is looking to the private sector to offer direction and guidance. 

Future Opportunities

The Tumen River Project: The eastern portion of Mongolia is included in a major trade zone development project initiated by the United Nations Development Programme. The Tumen River Area Development Programme (TRADP) is focusing foreign investment and infrastructure upgrading on eastern Mongolian, North-East China, the Democratic People's Republic of Korea and eastern Russia. This region has cumulatively attracted US $961 million from 1991 to 1997, with Mongolia's second biggest trading partner, China, making significant development gains.  While the Democratic People's Republic of Korea has been a thorn in the Project's side, both Mongolia and China are keen to push ahead with improving infrastructure and trade links. It is impossible to ignore the fact that China has made significant gains and that trade links with Mongolia continue to tighten. 

A feasibility study is currently underway on a railway link from Arxan, China to Choibalsan, Mongolia, and possibly on to Ulaanbaatar. As donors begin to fund these projects it would be prudent for American businesses to start building a relationship in the region to take advantage of future contracts. 

Commercial Street 2005: The City of Ulaanbaatar, Mongolia's capital and commercial centre, has drafted the blue prints for the construction of a modern commercial and business centre for the next millennium. Commercial Street 2005 will offer infrastructure and services that match global standards. The current Soviet-era infrastructure of Ulaanbaatar is an impediment to future growth and is unsuitable for Mongolia's new market economy. 

The project covers 20 hectares of 1 km length in a historically vibrant part of the city. The city will pay for the engineering and infrastructure works for the complex and local businesses will pay for the construction of secondary buildings. Commercial Street 2005 is looking for foreign investment to participate in the building of a food supermarket, trade and service complex, a twin-towered international trade and service complex, a banking centre, a business centre and renovations to nearby apartment buildings. It is estimated the project will create 10,000 jobs and would cost an estimated US $100 million. 

Darkhan: With a population around 55,000, Darkhan is as-yet an untapped opportunity. Located north of  Ulaanbaatar and close to the border with Russia, Darkhan is linked by a good road and rail. Along with the mining town of Erdenet, Darkhan has a modern infrastructure. Having been trained to work in the former state industries that once dominated the city, the population is well-educated and skilled. Today, coal mining and agriculture are key to the economy. The city is potentially a good stable base for accessing the Russian market.

Getting started

Registering prior to undertaking construction work is relatively simple. The Government Agency for Construction issues three degrees of licenses. The first license is for small projects, the second is for small to medium-sized projects, and the third is for large-scale projects anywhere in Mongolia. As the project develops the company is obligated to notify and allow local building inspectors to enter the site. 

Residency Permits

All foreigners wishing to remain in Mongolia for more than 30 days must apply to the State Centre for Civil Registration and Information for a temporary residency permit or a short-term residency permit. 

Temporary Residency Permit

The applicant must present to the State Centre for Civil Registration a request issued by FIFTA. FIFTA will issue such a request to any agreed foreign investor immediately. Permits are generally issued within a couple of days and are valid for a period of time from three months to one year. A temporary residency permit can be renewed an unlimited number of times. Each renewal will re-validate the permit for a period from three months up to one year, as requested by the investor. 

Short Term Residency Permit

This non-renewable permit is issued to foreigners who plan to spend no more than 90 days in Mongolia. Applicants are required to present a written request from a Mongolian or foreign organization stating the activity in which the person will be engaged and the reason the permit is needed. In case of an exploratory visit by a potential investor, a letter from the home company will suffice. 

Entry Visas

Investors may apply for single-entry and multiple-entry visas at the Foreign Ministry's Chancellery Building in Ulaanbaatar or at Mongolian diplomatic missions in other countries. 

Single-Entry Visas

A single-entry visa is valid for three months from its date of issuance and entitles the bearer to enter and stay in Mongolia for 30 days. A letter of invitation or applicable work papers are required. This type of visa is issued at the Ulaanbaatar airport or land border-crossing point. 

Multiple-Entry Visa

A multiple-entry visa entitles the bearer to enter and exit Mongolia an unlimited number of times and is valid for a period of six months to one year. For the issuance of this type of visa, an official letter stating the reason for travel and a copy of the certificate of the organization must be submitted by the investor. 

(Source: FIFTA)

Infrastructure facts

Airports – Mongolia has 81 airports, of which 31 can be used year-round. Only eight are paved. 

Roads and highways – Mongolia has 1,531.7 km paved roads.

Railway – Mongolia has 1,750 km of rail track, mostly a north-south line reaching from Russia to China, with spur lines to the copper mining city of Erdenet and the coal mining city of Baganuur. A short line goes from the eastern city of Choibalsan to Russia. 

Registered trucks - 25,473 (1998)

Major infrastructure projects (1997-1999)

USA 

Mongolia energy sector project - US $45,500,000

World Bank

Mongolia coal project - US $35,000,000

Transport rehabilitation project - US $32,313,000 

Asian Development Bank

Telecommunications - US $24,381,000

Power station rehabilitation - US $38,277,000

Ulaanbaatar heat efficiency project - US $29,487,000

Provincial towns basic urban services project - US $7,695,000

Road development - US $22,499,000

Ulaanbaatar airport project - US $37,524,000

Japan

Road construction (1996)  - (Yen) 11,590,000

Rehabilitation of power plant IV (1995) - US $46,000,000

France 

Rehabilitation and extension of UB telephone network - (F Franc) 25,000,000

Germany

Telecommunications - (DM) 10,000,000

South Korea

Thermoelectric power plant in the Gobi desert - US $8,000,000

Upcoming major infrastructure projects

Asian Development Bank 

Improving Ulaanbaatar heat efficiency (until 2002) - US $39,785,000 

Japan

Building of rural schools - US $20,000,000

In 1998 Tg, 208 billion was invested in Mongolia, of which Tg 57.2 billion was on construction/major improvements

Source: State Statistical Bulletin

Construction trends in Mongolia show that in-country production of materials has suffered greatly. 

Building doors and window

Tg 417.8 million in 1989

Tg 2.9 million in 1998 

Bricks (million pieces)

172.8 (1989)

18.9 (1998) 

Cement (in thousand tons)

512.6 (1989)

109 (1998)

On a positive note, sales of furniture went up

Tg 34.7 million in 1989

Tg 185.2 million in 1998

US-Mongol Construct 2000: Building a New Democracy was published by USAID. It helped lay the foundations for a construction boom in the mid-2000s.
© David South Consulting 2018  
Thursday
Oct262017

Information Accelerates Crisis Recovery and Development | 1997

The United Nations Information Shop (UN Info Shop) was established by UNDP Mongolia in 1997 and was managed by the UNDP Mongolia Communications Office. Context is everything. At this time, Mongolia was still recovering from the chaotic and turbulent transition from Communism to free markets and democracy begun at the start of the 1990s, called by some "one of the biggest peacetime economic collapses ever" (Mongolia's Economic Reforms: Background, Content and Prospects, Richard Pomfret, University of Adelaide, 1994). There was a thirst for information: access to the Internet was still limited and access to mobile phones was just the preserve of the rich. As a legacy of the past, information, especially that about the outside world and the country’s true economic and social conditions, was restricted. During the years of Communism, even simple travel from one place to the next was strictly regulated. 

While today we can take it for granted that the Internet, and mobile and smart phones, deliver the world’s information in seconds, this just was not the case in the late 1990s in Mongolia. 

The UN Info Shop quickly became a crucial resource for students (many schools and universities were nearby) and it became a first stop for many wishing to access the Internet. It also substantially raised the profile of the UN in the country as the public could, for the first time, enter the UN building and discover what the UN was doing in the country. They could also visit the UNDP Mongolia Communications Office and meet its team. 

P. Dagmidmaa reads the Human Development Report Mongolia 1997 in the UN Info Shop.


An announcement in the Blue Sky Bulletin about the launch of the new journal Cooperation South.
The UNDP Mongolia Communications Office Team 1998 outside the UN Info Shop in the capital, Ulaanbaatar: David South, Bayasgalan and Bayarmaa.Many initiatives grew from the talented and dynamic UNDP Mongolia Communications Office team. Here are links to some of them: 

Ger: Mongolia's First Web Magazine 

© David South Consulting 2017

Monday
Oct022017

Wild East 17 Years Later | 2000 - 2017


Published in 2000 (ECW Press: Toronto), Wild East: Travels in the New Mongolia is 17 years old. It is also 100 years since the 1917 October Revolution in Russia that began the long experiment of the Soviet Union. Mongolia was the second country after Russia to adopt Communism

The world has changed considerably since then; and so has Mongolia. The digital revolution has rolled across the planet, the attacks of 9/11 unleashed a wave of violence and wars, and Mongolia even became the fastest-growing economy in the world a few years ago (2012). But back when this book was researched, Mongolia was just coming out of decades of isolation within the Soviet orbit under Communism, and the country experienced in the 1990s “one of the biggest peacetime economic collapses ever” (Mongolia's Economic Reforms: Background, Content and Prospects, Richard Pomfret, University of Adelaide, 1994). 

"The years 1998 and 1999 have been volatile ones for Mongolia, with revolving door governments, the assassination of a minister, emerging corruption, a banking scandal, in-fighting within the ruling Democratic Coalition, frequent paralysis within the Parliament, and disputes over the Constitution. Economically, the period was unstable and rife with controversies." Mongolia in 1998 and 1999: Past, Present, and Future at the New Millennium by Sheldon R. Severinghaus, Asian Survey, Vol. 40, No. 1, A Survey of Asia in 1999 (Jan. - Feb., 2000), pp. 130-139 (Publisher: University of California)

That collapse made for some crazy times, as Wild East shows. 

Wild East was called one of the top 10 Canadian travel books of 2000 by The Globe and Mail. 

Reviews for Wild East: Travels in the New Mongolia by Jill Lawless:

The Globe and Mail

"Engaging...a revealing and often amusing account of her journeys through a beautiful country awakening from a tumultuous era."

The Georgia Straight, Vancouver

"This readable and reportorial book is the perfect antidote to ... those tiresomely difficult, pointlessly dangerous, and essentially fake expedtions undertaken against the advice of local people who know better."

Toronto Star

"Lawless introduces us to Mongolia's tabloid press, to teenage mineworkers, sharp-eyed young hustlers, nomads whose only possessions are their livestock, Mongolian wrestlers and Mongolian horse races."

Mongolian Buryat Civilisation Bookstore

"Wryly funny and wide-spectrum account of Mongolia's tumultuous rebirthing into the 21st century. Half the population lives in Soviet apartment blocks and watches satellite TV but the other half still eek a living from the exquisite, barren hills while living in nomadic felt tents. Of course, I'd much rather be in the tents... but whatever your preference, you will definitely enjoy Ms. Lawless' writing. She was editor of an Ulaan Baator newspaper for two years, and she tells it like it is. Very highly recommended."


Copies of Wild East: Travels in the New Mongolia by Jill Lawless are still available in various editions and languages.

A promotional poster for Wild East from 2003.

Explore further Jill Lawless' work here: https://muckrack.com/jilllawless

© David South Consulting 2017

Friday
Mar102017

A Steppe Back?: Economic Liberalisation and Poverty Reduction in Mongolia

 

Paper delivered to the School of Politics and Government, Birkbeck College, University of London, London, UK, 2000

“... the neo-liberal claim that transition is most successful in situations where state organs wither away is highly problematic. The state, it seems, is required as a fundamental regulatory formation in transition (Pickles and Smith 1998: 15).”

By David South

This paper will explore the profound weaknesses of economic liberalisation as a tool of poverty reduction in the developing world. I have chosen to explore the experience of the Northeast Asian nation of Mongolia; a country sandwiched between Russia and China which has been held up as an example of how economic liberalisation policies and strong personal freedoms can help a country make the transition from a command-based Communist country to free markets and democracy (UNDP Mongolia: The Guide 1997-1999). I argue that the slate of policies that constitute economic liberalisation (or “shock therapy”) in the 1990s - privatisation, price liberalisation and a free-floating currency - are, by themselves, poor mechanisms for the alleviation of poverty; that in fact they increase poverty rates and leave a legacy of weak institutions that are either unwilling to or incabable of helping the poor. The author will also draw on firsthand evidence gained while working in the United Nations mission in Mongolia for two years. 

Economic liberalisation policies have been inhibited from alleviating poverty by the cultural legacy of Mongolia’s economic development, which has de-emphasised private property and a money-based economy and placed a high emphasis on wealth being held in herds of animals and goods exchanged by barter. 

Mongolia, with its relative isolation and small population of 2.4 million (Human Development Report Mongolia 2000: 55), has been seen as a self-contained petri dish by economic liberalisers hoping to incubate a robust transition to free markets and democracy that can serve as an example to other post-Communist states. 

Mongolia’s journey towards neo-liberal ideas is unique. Unlike many other developing nations, Mongolia’s lively democratic movement that emerged at the end of the 1980s actively sought out these policies, and has enjoyed strong and widespread public support for them (though this has ebbed and flowed with the economic fortunes of the country). The 1996 election was fought and won by the Democratic Coalition based on these policies; the Coalition won 50 of the 76 seats in Mongolia’s parliament, and voter turnout was more than 90 per cent (Far Eastern Economic Review 1997: March 27). Thus, this is not a case of international institutions forcing upon a country policies against its wishes: the door was opened and the economic liberalisers were effectively invited in for a big bowl of fermented mare’s milk. 

However, it is also a country in which economic liberalisation has failed to deliver anticipated reductions in poverty for the majority of the population, and a strong case exists that it has made things worse. 

As the Human Development Report Mongolia 2000 states: 

In recent years however, the predominant vision has been neo-liberal. Backed by some international donors, reformers have argued that the best thing the state can do is to largely withdraw from the economy - by rapidly privatising state enterprises, and dismantling as many regulations and controls as possible, and allowing market forces to determine the production and allocation of goods and services. (Human Development Report Mongolia 2000: 13)

Liberalisation policies in Mongolia: A potted history

With the fall of the Soviet Union at the beginning of the 1990s, Mongolia woke up to find itself without its financial benefactor for most of the 20th century, Russia, and in the grip of a severe economic decline (Rossabi 2000: 9). 

But a new “big brother” was at hand. In 1991, economic liberaliser Jeffrey Sachs arrived in Mongolia (Fortune 1998: December 7). The arrival of Sachs and his ideas were to have a profound impact on the lives of Mongolians. He gathered a group of well-educated Mongolian economists to test economic liberalisation theories. 

Smith and Swain neatly summerise the source of economic ideas for the transition states:

The roles played by Francis Fukuyama (1992), formerly of the US State Department, and Jeffrey Sachs (1990), as policy adviser … translated this agenda into the all too familiar programme of so-called ‘shock therapy’. Shock therapy has been based on the view that capitalism could be … imposed by fiat and that the unleashing of the power of capital will inevitably allow the institutions, regulations, habits and practices associated with the ‘normal’ functioning of a capitalist market economy to emerge (Smith and Swain 1998)

The economic liberalisation project in Mongolia can be split into two distinct phases. The first more tentative phase under the Communist government extended from 1990 to 1992 and included privatisation of some state firms, the issuing of stock-market vouchers to most of the population and a failed attempt to enter the foreign currency markets (as a result of which 80 per cent of the country’s reserves were lost). This phase coincided with a new constitution, democratic elections and significant improvements in personal freedoms. 

The economic liberalisation project encountered serious difficulties from the start, and when all aid and subsidies from the Soviet Union were removed, the economy collapsed, with inflation spiralling to 320 per cent (Human Development Report Mongolia 2000: 13). Pro-economic liberalisation factions in the Communist government lost influence and the reforms stalled from 1992 until 1996, when they were re-started with a vengeance with the election of the Democratic Coalition. The Coalition was assembled from a hitherto fragmented opposition by the Washington-based International Republican Institute and mimicked the policies of the American Republican Party, including distributing a Newt Gingrich-style “Contract with the Mongolian Voter.”

The second phase of reforms, under Democratic Coalition Prime Minister M. Enkhsaikhan, was launched with the removal of price controls on fuel and electricity, increasing prices by 50 per cent (Rossabi 2000: 11). This phase of economic liberalisation also ran into difficulties, but its most successful policy achievements have been the privatisation of public housing, the removal of trade tariffs and the reining in of inflation. 

Poverty and economic liberalisation

Prior to the introduction of economic liberalisation, there was no extreme poverty in Mongolia, though it is difficult to gauge relative poverty since this information was not gathered. Rossabi notes, however, an extensive public welfare system was spread throughout the country: 

The Mongol economy required substantial subsidies from the Soviet Union. This command economy produced inefficient industries, few consumer goods, and scant increases in the size of the Mongol herds. The one-party system limited dissent and contributed to human rights abuses. On the other hand, the government provided extensive medical, educational, and welfare benefits to the young, women, the elderly, and indeed much of society. A growth in population, a longer life span, and high rate of literacy were byproducts of such state policies. (Rossabi 2000: 6)

All research data has shown an increase in poverty levels for a large portion of the population after 1990. Estimates vary wildly, but the United Nations Development Programme reports that 38.4 per cent of urban dwellers - and 32.6 per cent of rural residents - were poor in 1998 (Human Development Report Mongolia 2000: 23). School attendance is down, regional disparities have become more extreme, with the capital experiencing a boom fuelled by international aid (this totalled US $180 million in 1998 (Mongolia Update 1999: 27) and an expanding service sector. Provincial towns and smaller communities have seen local state-run businesses collapse, communications weaken, and a leaching of the population, either to the countryside to herd animals or to the capital to seek work. 

To cite one graphic anecdotal example of the process, a consulant for the Asian Development Bank told a 1998 donor agencies meeting of the irony of going into former factory towns, and telling the well-educated residents to turn to small crafts and itinerant vegetable growing rather than restarting the existing factory. 

Mongolia’s transition: theoretical dilemmas

As Pickles and Smith note in their work of political economy Theorising Transition: the Political Economy of Post-Communist Transformations, it is a profound mistake to ignore the distinctive evolution of each of the former Communist states. Mongolia’s attempts at transition to a market economy have been deeply marked by its cultural legacy, in spite of attempts to transcend this. While Ohmae may assert that “This movement up the ladder of development has nothing to do with culture and everything to do with the region’s ability to put the right policies, institutions, and infrastructure in place at the right time (Ohmae 1994: 21),” culture is crucial. It is simplistic to depend on a “stock set of policies to enable the supposed transition to capitalism at the end of the twentieth century to be achieved (Pickles and Smith 1998: 10).”

As Pickles and Smith add about post-Communist Eastern Europe: 

Treating post-communist Eastern Europe as a whole fails to recognise the ever-present diversity of some 27 states and 270 million people. Even at the end of the nineteenth century, such political-economic diversity was central to what was unfolding in the region … The diversity of historical experiences was replicated under state socialism, and while we would not argue for some form of historical determination, the state socialist economy in part relied upon these spatial divisions of labour and forms of social organization and institutionalised practices, albeit that large-scale attempts at forced industrialisation were made to eradicate the legacies of ‘peasant societies’ and uneven capitalist development. (Pickles and Smith 1998: 12)

Historically, Mongolia had never experienced capitalism, even in its most basic and embryonic form. Prior to the 1921 revolution which made Mongolia the world’s second Communist country, the vast majority of its citizens were divided between two occupations: nomadic herding, and the herding of souls as Buddhist monks. There was a small trading community, including a tiny community of Jewish traders - a legacy of the long-gone silk route that once plied its way through the Mongol Empire. But modern, urban, industrial capitalism as was present at this time in Europe was nonexistent in Mongolia. Concepts of capitalism, market economics and private property were introduced anew after 1990. 

Urbanisation, modernisation and industrialisation were wholly communist concepts in Mongolia prior to 1990. The traditional nomadic way of life measures wealth in terms of the size of the herd and places a high value on the ability to roam unencumbered by private property divisions and the ability to trade animals for other goods (though these needs are simple since a nomadic herder can only carry around a limited quantity of possessions). 

Economic liberalisation policies have, ironically, only exacerbated this trend, driving more of the economy into barter relations and actually pushing a portion of the population out of urban areas and into subsistance herding in order to survive (Partnership for Progress 1998: 2-3). 

Mongolia also offers some anomalies to theories of economic and democratic liberalisation. Lewis contends that democracy gives a nation a distinct economic advantage. “Average wealth, the degree of industrialisation and urbanisation and level of education are perceived to be much higher for countries which are democratic, education being of particular importance in this respect (Lewis: 1997).”

Yet as Fortune magazine noted, “No other Asian country enjoys more political freedom today than Mongolia. And no other Asian country has shown greater commitment to open markets. But Mongolia has received little reward for its efforts (Fortune 1998: December 7).”

The role of the state

Broad, Cavanagh and Bello see a strong argument for clear state direction in underdeveloped economies in the beginning stages, before allowing market mechanisms to dominate:

The South Korean economy’s resumption of growth after a brief period of stagnation at the onset of the 1980s and Eastern Europe’s slowdown after rapid growth in the 1960s confirm a more complex truth than the purveyed by free-market ideologues. Communist economies may propel societies through the first stages of development, but further growth into a more sophisticated economy necessitates a greater role for market mechanisms. (Broad/Bello/Cavanagh 2000: 392)

Strong state direction in economic development has been abandoned in Mongolia (it remains to be seen whether the re-election of the former Communist party in the summer of 2000 will alter this), and it can be argued that the over-dependence on market mechanisms has been premature. 

In fact, “the neo-liberal claim that transition is most successful in situations where state organs wither away is highly problematic. The state, it seems, is required as a fundamental regulatory formation in transition (Pickles and Smith 1998: 15).”

The absence of this regulation in Mongolia means that where once economic transactions were transparent, they have now gone underground. The example of cashmere exports (one of the country’s major foreign-currency earners) is particularly interesting. In 1998 the Mongolian government, faced with ever-dwindling tax revenues, introduced a tax on cashmere exports, ostensibly to protect the domestic cashmere-manufacturing industry. Whatever the true intention, the result was catastrophic for government revenues. Recorded exports fell by more than 98 per cent, to US $306,000 in 1998 from US $16 million in 1997 (Far Eastern Economic Review: 1999). The trade went underground and a handful of customs officials could not make a dent in a border as vast as Mongolia’s. It is a graphic example of how weak the central government had become, unable to raise revenues when necessary.

Economic liberalisation also tends to pull economic activity into the capital, as has been witnessed across the transition states. Centrifugal forces leave great swathes of poverty in rural areas and drain marginal urban centres of their skilled workers (Pickles and Smith 1998: 17). Mongolia is no exception to this pattern (Rossabi 2000: 10). 

Forces outside the market

After investigating the role of economic liberalisers in non-communist developing nations, Robert Bates found that market-oriented economists routinely overlook the role politics and political power play in wealth distribution: 

One reason that market-oriented economists tend to deny the centrality of politics to the development process is that they tend to discount problems of distribution. Those who adhere to the efficiency-and-growth position counter that if development produces a maldistribution of income, those who are losers in the short run could become winners in the longer run … From this viewpoint, governments are not just irrelevant to the development process, the actually impede it. (Bates 1988: 239-240)

There is scant contemporary research into the role of clan or family elites in modern Mongolia, but Rossabi, a Mongolia historian, believes they wield significant influence to this day, and have glided from communism to capitalism with ease (Rossabi 2000: 12). He asks, “Has there been sufficient turnover in the political elite, or does it represent the same consitutency as in the past? Has it expanded sufficiently to make itself more broadly representative of the Mongol population, including the herders and the countryside in general?”

In search of a purpose

Mongolia today is undergoing a basic economic dilemma familiar to Ricardo. It is at once transforming political and economic relations while also exploring what advantages it has to offer to the world markets, that old chestnut of absolute and comparative advantage. To date, its absolute advantage has been to be the source of raw materials, the two key foreign currency earners being copper and cashmere wool (Human Development Report Mongolia 2000: 30).

Its large herds of animals (some 34 million) are under-utilised as foreign-currency earners, and for the most part provide food for domestic consumption. One of the main reasons for this has been the rudimentary livestock techniques that exclude these vast meat and dairy resources from foreign markets (while the herds are raised without any use of chemicals, there is no quality control - a service once provided by the state before 1990). The distortions to the economy caused by these policies are highlighted in the Gross Domestic Product (GDP). In 1985, agriculture accounted for 14.3 per cent of GDP, and industry was 31.8 per cent. By 1998, agriculture (now mostly nomadic herding) accounted for 32.8 per cent of GDP and industry shrank to 24.1 per cent (Human Development Report Mongolia 2000: 56). The economy had contracted and was more focused on meeting basic domestic food needs.

Mongolia has a number of strengths it can draw on, however, with its impressive steps at building democracy and personal freedom chief among them. Lewis categorises former communist states into two groups, with group two taking an undemocratic route. Mongolia would rank in group one, since these countries have: “relatively rapidly established a reasonably viable constitutional order and multiparty system, having held free elections, seen unequivocal changes of government and generally established civil liberties (Lewis: 1997).”

The economic model used by the Democratic Coalition was the United States; Mongolia’s new leaders, dismissed other Asian nations - with their stoic, thrifty populations taking direction from the state - as poor examples for Mongolia. Like the US, Mongolia’s nomadic heritage values freedom and individual effort over the state, assert government advisers such as Tserenpuntsag Batbold, an economic adviser to the Mongolian prime minister’s office. 

Batbold is sanguine about finding a purpose for the country’s economy: “I’m always thinking about this, but I can’t give you an answer. This is exactly why we have to create a nondistortive economic environment, one which will show us the true comparative advantages of this nation (Asian Wall Street Journal 1997: May 27).”

Yet the process has been a difficult one. At a June 1998 international investors’ conference in Ulaanbaatar, the World Bank variously called Mongolia the “gateway to Russia”, the “gateway to China”, and the “gateway to Central Asia” (UB Post: 1998), giving the impression that both the global institutions and the Mongolian government would try anything in a desperate search for a purpose for the country’s economy. In fact, efforts in the 1990s to attract foreign direct investment (FDI) have not been fruitful. In 1999, FDI stood at US $70 million; it was US $200 million for all of the 1990s (Human Development Report Mongolia 2000). The belief that foreign private companies would pay for the country’s infrastructure improvements has run up against a wall: most foreign companies find it hard to see the benefits in investing in a country that only has a market of 2.4 million people and very high start-up costs. 

By 1998, even Sachs was striking a pessimistic note. He told Fortune magazine he disagreed with the pace of reforms and insisted infrastructure improvements - more roads, improved livestock breeding, investment in information technology - were the only things that would improve the country’s economy (Fortune 1998: December 7).  

Conclusion

Political power in Mongolia has switched from the hegemonic control of the Communist Party (and its overlords in Moscow) to be dispersed amongst a plethora of actors, including international aid organizations. Economic liberalisation has destroyed the state’s ability to guarantee a minimum standard of living. However, it has also expanded the number of small businesses in the country, and the GNP generated from the private sector has grown from 10 per cent of the total in 1990 to 64 per cent in 1999 (Human Development Report Mongolia 2000: 31). In spite of this, poverty rates remain stubbornly high, undermining assertions that free markets alone will generate wealth for the disadvantaged. 

Unfortunately, Mongolia has significantly misdiagnosed the origins of prosperity in its current role model, the United States. Economic liberalisation policies cling to simplistic notions of the evolution of capitalist markets in the US, ignoring the complex relationship between state-funded or regulated infrastructure development and economic growth. Post-communist countries have been ill-advised on what policies will actually reduce poverty rates. These societies do not fit into conventional ideas of underdevelopment; on the whole their populations are highly literate and skilled. While products produced by these countries may not be able to compete head-on with more technologically sophisticated equivalents in Western markets, there is little evidence that wholesale destruction of these industries will spurn economic growth and reduce poverty. 

Wednesday
Jul222015

In their own words: Selected writings by journalists on Mongolia, 1997-1999 | 6 January 2010

 

Launched in 1999 towards the end of my two-year assignment in Mongolia, this book is a unique resource for a developing country: a one-stop compilation of journalism chronicling the ups and downs of life in a country where the political and economic system has been turned on its head. You can download an edited selection of the book from Google Books here: In their own words: Selected writings by journalists on Mongolia, 1997-1999

Now also available at the University of Toronto: https://search.library.utoronto.ca/details?3403065