Thirty years ago Mongolians chose the irreversible path of building a democracy and a free market economy, and enshrined this commitment in the constitution. We made this decision because history had shown that other countries were able to significantly improve the livelihood of their people within a short period of time by putting these political and economic systems in place. But today, instead of maintaining our perseverance on this path, we have been feeling confused and lost with increasing regularity.
The governing power has transitioned from the people to an oligarchy, while our economy declines and livelihoods deteriorate. Being desperate, Mongolians are continuously migrating from the countryside to urban areas. Half of our population is working in the capital city, and 6 per cent are living abroad.
The reason why we are unable to strengthen our democracy directly relates to the fact that our three branches of government – legislative, executive, and judicial – are not strong enough as institutions. The stagnating growth in these institutions comes from their ever-changing organizational structures and the appointment system that looks at connections and donations to a political party instead of talent and merit. Mongolian political parties have become used to raising their finance by trading positions and fixing tenders. Subsequently their members have also grown used to these hidden wrongdoings. As a result, our state is mired in bribery and corruption.
State ownership is expanding, and the government is setting the prices of food products, fuel, electricity, housing and construction materials. In addition, they are increasingly trading land in secret. This is driving our economy further away from free market principles. As the government grants more soft loans, provides discretionary tax reductions, and hands out cash to people, they are further damaging free competition in the market.
With increasing state and government involvement, corruption is growing and our private sector is shrinking. This is what suspends the natural growth of our economy and causes more unemployment and poverty.
Why do state-owned companies run deficits?
Mongolia has 101 state-owned companies that are currently operating. Twelve of those companies are governed by Erdenes Mongol, 5 by the Ministry of Finance, and 84 by the Government Agency for Policy Coordination on State Property. In the first half of 2016, 70 per cent of these companies ran deficits.
The deficits run by state-owned companies are made up from the public budget. In other words, the deficits are paid for by revenue collected from taxes. This means state-owned companies use taxpayers’ money to compete with the same taxpayers. However, they always keep their budgetary and financial information undisclosed. They have a vested interest to keep it secret and to not report on their financial performance. If there is a mistake made in or by a state-owned company, no one is held accountable. The director might get replaced, but it is the only thing that may happen. The executives of these companies make donations to aimags and soums, and use the public funds to prepare for elections. It was recently revealed that Ts. Nyam-Osor, who was the head of the policy regulation department in the State Property Committee, acquired 500 million tugrugs from the SME fund via his company named ‘Khos Erkhes’. After it made the news, he was removed from his position.
The state even acquired a commercial bank. State Bank, which is fully under state ownership, now has more than 500 branches across the country and has financial liabilities of 3 trillion tugrugs. This bank had 70 highly paid executives and directors. In addition, the state has its own railway and airline companies, but they all operate with losses. The total debt owed by state-owned companies stood at 3 trillion tugrugs in 2012, but the number grew more than threefold to 10.5 trillion in 2016. Within the same timeframe, the executives of state-owned companies spent 19 billion tugrugs to purchase 42 luxurious 4WD vehicles.
The government always talks about privatizing state-owned entities, but they never rush to the cause. This is because the more state-owned companies there are, the more advantageous it is for the corrupt. In 2017, Mongolia scored 64 points out of 100 in the resource governance index, while the score was only 40 in the state-owned enterprise governance index. The board of directors of the state-owned Erdenes Mongol company are completely dependent on the government. They are operating without sufficient scrutiny and are not transparent in their financial reporting. Yet, they are the company that manages a dozen of Mongolia’s strategic deposits.
Differences between a political decision and an economic decision
In a democracy, political decisions are made by the majority or by the principles of majoritarianism. But you could argue that market or economic decisions are made by the principles of proportionalism. Let’s pick a simple example to illustrate the difference and say all 76 MPs are having lunch together. They discuss how they will pay the bill and the majority agrees, making a political decision that everyone pays an equal amount. Once this decision is made, individuals don’t find a large difference between ordering an expensive steak and a bottle of wine and going for a smaller meal. No matter what they order, they will end up paying one seventy sixth of whatever the whole bill might come to.
On the other hand, if everyone agreed to pay for their own bill (making an economic decision), they will consider the value for their money before making an order. Therefore, the bill in the first scenario is likely to be greater than the second scenario.
The public budget is allocated on the same principles as the first scenario, therefore – regardless of how much revenue was generated, the expenditure always exceeds the revenue. Hence, our public budget always runs a deficit. Once there is a deficit, the government starts increasing taxes, which triggers companies to increase the prices of their goods and services. It means the burden from running a deficit eventually goes to the customers. As a result, people end up paying more for the value they receive from goods and services. When state ownership grows and the government has more power, it gives more room for corruption. Political parties understand this connection very well and take advantage by stealing from public funds. This is why the constitution restricts the government’s power over public funds, and it requires over 75 per cent of the parliament to make a constitutional amendment.
Mongolian political parties have forgotten their duty to be the bridge between the governing power and the people, and have turned into a bridge that allows individuals take advantage of public funds for their personal interests. Corruption is destroying all of our public governance institutions. In order to eradicate corruption, we need to make political party financing transparent and set up an institution that provides strong scrutiny over the financing. In addition, we need to privatize most of the deficit-running state-owned companies and allow the public to own shares. Technically the government should only focus on areas that aren’t pursued by the private sector, which includes defense and infrastructure. Some social services, including education and medical services, can be managed by the state in conjunction with the private sector.
2019.03.20
Trans. by B.Amar