The Vision 2050, the long-term policy document, will soon be discussed at the parliamentary spring session. The economics section of this document contains several interesting ideas and goals. Over the next 30 years, the economy is estimated to grow six times, reaching $78 billion, and GDP per capita is estimated to increase four times, reaching $15 thousand. This would bring us on an equal footing with countries such as Chile, Poland, and Croatia.
It states that after 30 years “There will be dramatic structural changes in our economy due to the development of manufacturing and other new industries, and conditions will be set for the economy to become really diversified. A shift from consumer economy to production economy will take place, eradicating the vulnerability of Mongolia’s economy to foreign markets and the structure of the economy will be characterized by the following main sectors.”
Fig.1: The projected results of developing the leading sectors of the economy
This document defines the projected outcomes but does not specify ways to achieve those. It is unclear whether this economic structure ought to be developed by the state or the private sector; whether it will play by the rules of free market which is the engine of development, or not.
Lesson not learned
We have been talking about restructuring the Mongolian economy for almost 20 years. A country like ours, where half of the economy and export are almost entirely depending on minerals and raw materials, faces numerous obstacles and challenges. Economic growth and decline affect the political and social life strongly, but the government has failed to take a lesson from these experiences.
Fig.2: Mining and other sectors; proportions in export Source: The economic research institute (ERI)
Due to economic growth, the amount of export products has increased, but the weight per unit has not. Countries with an economic structure like that of ours have been described as rent economy1, prone to Dutch illness, or got caught in a resource trap. Some of these countries can become middle-income economies using their natural resources, but many have no choice but to diversify their economies. Moreover, in resource-rich countries, the struggle for rent weakens the political and economic institutions and, as a result, they are caught in a resource-trap. (“The Bottom Billion” by Paul Collier).
In Mongolia, public institutions are weak, funding of political parties is secret, the government is unstable, and hence, corruption does not decrease and the judiciary power cannot become independent. Thus, Mongolia’s competitiveness remains weak, only with minerals such as coal, copper, and cashmere products on the global market, failing to diversify its economy.
Fig.3: Export in 2019, by groups of goods
Source: National Statistics Committee
Non-mineral products accounted for only 16% of Mongolian exports in 2019. The main reason of this low percentage is that the government was unable to implement its own decisions. The government had introduced “Exporting Manufacturer’s Support Program” in 1998 and an agency called “National Council” was supposed to be created, but was not implemented. Then, in 2013, the Export Support Program” was released, only to fail. Since 2018, we now have the “Mongolian Export” program.
Since we do not analyze the reasons for previous policy failures, do not evaluate neither the process nor the results, do not consider accountability, and our politicians only speak in future tense, our policy of economic diversification solely remained on paper. The most important fact is that the practice of doing private business in the name of the state is strengthened, while a political clientelist system was formed and even got legal protection. The Mongolian state did not learn and is not learning.
Is there any example of a country that has succeeded in diversifying its economy by using smart policies and implementing them continuously and has gotten out of its dependency on mining?
Located in South America on the coast of the Atlantic Ocean with a population of 19 million people, Chile has been working for many years to change its resource-dependent economic structure and create a globally competitive export sector.
Today, half of the Chilean total export is copper, the rest consists of nuts, fruits, wine, beer, fish, wood and wood-based products. In providing these products to the world market and making them competitive, public-private partnerships, bi- and trilateral agreements initiated by the government and export promoting government policies and institutions have played a crucial role.
Today, Chilean fish products account for 8% of the global fish consumption. Although American and Japanese companies entered this sector in the 1970s, they were not as successful. These companies were acquired by Salmones Antartica which, initiated by the Chile Fund (the Public-Private Partnership), learned from the Norwegian experience, introduced its technology and increased its production. It has also implemented joint projects with the Japanese government and attracted foreign investment. Initially, there were only 4 companies in the Chilean fishing industry, however within 10 years, the number has grown to 200, creating a whole cluster. Salmones Antartica made the first major investment in localization of salmon, sharing their technology with the private sector and making them competitive.
This is how a world-class fruit business was organized as well. In the past, only apples and grapes were produced, but today Chile produces about twenty types of fruits and has become the largest fruit exporter in Latin America.
Following the footsteps of the fruit industry, the wine industry, which solely had focused on the domestic market, has made progress. As business expanded and foreign companies entered, they brought along new technologies and investments. Today, Chile is the fourth largest exporter of wine in the world.
The success lies within successful R&D (research and development) from the very beginning, through the Chile Fund jointly ventured by the government and private sector, and consistent implementation of business plans. The biggest challenge at first was the lack of qualified human resource. So, over 80 students went to California and studied agriculture. The program was funded by the US Ford Foundation with a budget that today would be equal to $200 million. Initially, the concept of human resource development was developed in cooperation with the USA, and private sector’s charity organizations such as Ford and Rockefeller have invested in Chilean universities and research centers with technical and human resource support.
Chilean universities and institutes have been involved in the development, research and quality control of products to meet the needs of foreign consumers. But when it comes to export, the state-run Export Agency (ProChile) offers special support and assistance to the private sector. In particular, the agency was financing half of the marketing costs of promoting the Chilean wine internationally. Organizations such as ProChile and Corfo, which play a part in import substitution and create competitive export products, played a key role in Chile’s success. With the development of the Chilean economy -by the expansion of new sectors- the country is now a big player in the world market.
30 years away
Whether it is possible to raise the Mongolian standard of living fourfold in 30 years depends on how transparent and corrupt the government is. All other terms are given in our country. We are to choose the right sector for diversifying our economy; to conduct government-private joint research and development of strategies; to raise necessary investments; to train our human resource domestically and abroad. The company should start as a joint venture between state and private companies, but after the transfer of its experience to the private sector, it should be a stock company.
And to convert all existing state-owned companies into stock companies, the state participation shall not exceed 35%, while using the company’s growth to sell 10% of its stock and create a program that will use the revenue to research the development of the industry. A state should only be a judge and regulator but must refrain from being a player itself. It’s time to stop regulating the prices and give market players the opportunity to compete fairly and plan properly in the long run.
If we don’t act, the Vision 2050 will always remain a vision, out of reach.
1The ‘rent-seeking’, which arises from various licenses and regulations. For resource-rich countries this represents a common challenge. Rent-seekers are those who seek to use their authority to reap higher benefits with minimum effort. Simply put, these groups seek to perpetuate their benefit solely through their authority.
2020.03.05
Trans. by Riya.T and Sungerel.U