Economic growth and economic development are different terminologies. Growth does not necessarily imply development, but development implies growth. British economist Paul Collier in his book “The Bottom Billion” demonstrated that growth is critical for development and proved that poverty cannot be lowered if the economy does not develop.
Even though the Mongolian economy has been growing since the 1990s, development only started in 2010 and was brought solely by the mining sector. However, the two global economic crises showed that Mongolia’s economic development is unsustainable and unsecured as it depends on the mining sector alone. Despite the fact that the mining sector constitutes 80 percent of total export, compared to its total investment, a relatively small number of people, namely 58000, work in this sector.
Individually, small-medium enterprises (“SME”) have a minor impact on the economy but collectively make the largest contributions to economy and make up the largest number of workforces. SMEs are regarded as the backbone of the economy. Thus, the development of any country is reflected in the type of products or services that are supplied, the types of machinery or technologies that are used by SME, and the efficiency of SMEs. What does SME look like in Mongolia?
Current outlook of SMEs
According to the study (D. Gan-Ochir et al., 2018) conducted by the Bank of Mongolia, there are 80,000 business entities registered with the government and 60,000 of them are classified as SMEs. SMEs are only responsible for 17 percent of the GDP, and 2.3 percent of total export but employ 900,000 people, which is 43 percent of the total workforce in Mongolia. Furthermore, Mongolian SMEs are unable to export their products or services. Profits and opportunities of SMEs to expand their businesses depend greatly on currency rates as they purchase machinery or certain raw materials in foreign currencies and sell their goods in the domestic currency.
In Mongolia, it is a tricky business to conduct a study on SME as the numerical data on business entities, especially SMEs, is not comprehensive or merely unclear. The Asian Development Bank study (Asia SME Finance Monitor 2014, p.102) revealed that 98.2 percent of total business enterprises, 97,762, had less than 50 employees in 2013. Moreover, 90.6 percent of registered enterprises are micro-enterprises that have less than 10 employees. Half of the registered Mongolian enterprises do not carry out business activities and shut down.
After 30 years, the current reality does not meet our expectations, although the development of SME has been widely discussed since the 1990s. At the beginning, the government attempted to support SME through foreign loans, domestic loans, and donations. The first law on governmental support to SME was approved only in 2007. Since then attempts were made to amend the Law on SME, but the Parliament has not approved any.
The law on SME stipulates that an SME is an enterprise with an annual turnover of less than 1,5 billion tugriks and with less than 200 employees. In fact, the definitions vary in the following sectors:
- In the industrial sector, if an enterprise has less than 20 employees and the annual turnover is below 250 million tugriks, it is classified as an SME.
- In service, if an enterprise has less than 50 employees and the annual turnover is below 1 billion tugriks, it is classified as an SME. Which enterprises of which sector are classified as SMEs, and their customs or tax deductions, are determined in beneficial ways for legislators. Due to this uncertain classification, statistical data on SMEs cannot be generated.
The study by the Bank of Mongolia determined that two of the biggest challenges which SMEs are facing nowadays are funding and capabilities of human resources. The government has implemented gazillions of policies, spent billions of tugriks under the so-called aim to develop an SME, but recently the public discovered to whom the money was allocated. Fifty-five out of 76 members of the Parliament granted the SME Development Fund loans with a 3 percent interest rate to directly owned or indirectly related enterprises. Still, we were not able to hold them accountable and, within a year, the case is fading into oblivion. In the last 10 years, discounted loans amounting to 835 billion tugriks were granted to 7536 recipients through the fund, but no one would be shocked if most loans were granted to government officials.
Under the administration of such government, once more no one would be surprised by the fact that opportunities for workforce training are rare for SMEs. In addition, the education of particularly technical skills of our workforce is not meeting the business needs and standards. The labor productivity of a country increases when business and research are closely integrated.
Changing the outlook
In order to change our reflection in the mirror, we have no choice but to change our appearances. Supporting SMEs by developing hard and soft infrastructures is necessary for SMEs more than loans. Hard infrastructures such as roads, telecommunication, electricity play a crucial role. Also, soft infrastructures can be improved, for instance, by measuring the transaction cost. If a transaction is slow and cost is high, or even if it fails, the circulation of money will cease. For instance, on average 2,4 million tugriks are required for an SME’s loan guarantee, and SMEs bear cost of 521,000 tugriks to receive discounted loans from the government and others (ERI research. 2017). Additionally, the time spent (gifts, bribes, and et cetera) in connection with contacting government bodies can be added to the cost. If the economic bodies of the state can develop as an institution, the cost of business transaction dramatically lowers.
If we look at the history of other countries SMEs take part in the product supply chain, diversify, and expand. To illustrate, several thousand SMEs were able to stand on their feet owing to big corporations in Korea and Japan. The dozens of firms that supply parts to the car manufacturer Toyota were established, they grew and expanded around it, and it certainly has led to the creation of an independent city, Toyota.
On the contrary, in Mongolia, big corporations push smaller firms out of business. Small firms go bankrupt as they cannot compete with big corporations that own banks, agriculture, manufacture, grocery, TV, and newspaper businesses, and sell prepared foods or vehicles too. There are enterprises that have given opportunities to others, sold subsidiaries to their employees in order to fully focus on their core businesses. In Mongolia, a monopoly is being established in the liquor and cashmere sectors. Both big corporations and banks must stop entering every business and it is the perfect time to start focusing on one sector so they could expand and enter the global market. Thereby, SMEs will have opportunities to expand and consequently employment will increase which could lead to poverty reduction.
Fortunately, due to the fourth industrial revolution new opportunities begun opening up for SMEs. It is also the best time to manufacture customized products instead of manufacturing in large scales. 3D printing technology has been implemented. As a result of the industrial revolution redistribution of manufacturing and supply is occurring. It is providing opportunities for SME to learn quickly and smarter, and to enter the global market. The government of Mongolia is facing a need to create this type of soft infrastructure. In the first few years, tax deductions or exemption can be offered to SMEs that are starting new businesses. It is essential to support and protect domestic production of goods that are imported but can be produced domestically through tax and other measures.
SMEs receive their financing from commercial banks. They mostly request for financing amounting to 10-50 million tugriks with a term of 1-5 years. The Bank of Mongolia could follow the examples of some particular countries and take measures to cut the reserve ratio requirements for SME financing so the commercial banks could cut their loan interest rates respectively.
The country develops as soon as SMEs develop and expand.
2019.09.25
Trans. by Riya.T and Ariunzaya.M