The price for AI-92 gasoline has risen by 600 tugriks to 2050 tugriks in July. Increased transportation cost led to a price increase in all common goods and services. The price of gasoline kept growing for five consecutive years since it was 1530 tugriks. In Mongolia, uniquely, the price never decreases once it rises. People express anger, sometimes protest, and demand a price reduction or wage increase before simply adapting to the situation. Most people believe that the state sets the price just like in Soviet times.
The state accordingly makes promises not to increase prices, especially before elections. The government tries many “price stabilization” methods that include reducing the excise tax on fuel or removing customs duties, stacking meat into state reserves, and providing soft loans for wheat and goat meat producers. Regardless, prices for all those commodities rise. Keeping electricity prices too low prevents investment funds from accumulating; thus, minor accidents at existing plants could lead to power outages and complete darkness at any given time.
The free market is the only system that has created the greatest material wealth in human history. The foundation of the free market is free prices. Even though nobody can control free prices, some politicians promise otherwise. When the government sets the price, only certain groups benefit from it, and the people bear the cost. When the rising prices and shortages of goods and services wreak havoc, politicians deflect the blame using fancy words and countless excuses.
Everyone should learn what a price is, who sets it, why inflation happens, and what its roots really are. The truth is better told than hidden.
Price
Prices for goods and services are set by the buyer’s (demand) and seller’s (supply) expectations (subjective). The higher the price goes, sellers increase, and buyers decrease, and the other way around, which is an inevitable phenomenon. Those expectations and values are realized by the free market. The more one tries to set prices in a different way from the market, the more supply and demand distort, and the goods and services either disappear or a certain group pockets the profits excessively. Since price itself is market information, different players access varying information, making wrong business decisions.
An example would be our gasoline market. Being a lucrative business, it has 100 companies importing and 30 distributing gasoline. The media has extensively revealed how deeply government officials are involved in this business, be it explicitly or in secret. We all know by name the many members of parliament coming from the gasoline business. The reason why the fuel business is profitable is that the government demands prices not to increase and regulates it by taxes. Hence, sales are guaranteed.
If prices were freed and competition was the controlling factor, the prices would initially rise before eventually falling. The minister responsible for the matter considers it right to let the market set the price of fuels. Since all of Mongolia’s gasoline comes from one producer (Angarsk, Russia) with the same initial price, the importer can only stand out by reducing their transport cost. The ones who manage to do it will survive, and the others would merge and join forces, or go bankrupt. The prices will stabilize.
The consumers would have to understand the unchangeable factors, when and how the prices fluctuate to plan their consumption correctly and use vehicles depending on their capacities. Those who cannot afford private cars will demand better public transportation services and elect politicians wisely.
A talk has reappeared about Rosneft joining the sector. The whole situation would reemerge, but even worse. Kyrgyzstan’s case proved to have limited the citizens’ political rights. Moreover, as a supplier of more than 25%, the law does not allow them to participate in retail.
Constructing domestic oil refineries on time and building a crude oil pipeline as soon as possible is necessary. At the same time, oil exploration is needed to increase reserves. In addition to lowering prices, domestic fuel production secures consistent supply. Now that Russia has announced a halt on fuel export, Mongolia is asking China to supply it at a higher price.
Price increase or inflation
Prices are skyrocketing. Apartment prices have risen sharply due to the declining stock of construction rebar. I have previously mentioned how prices for goods and services have jumped up from the fuel price increase. Price increase or inflation exhausts people’s wealth. Inflation is a sign of a crisis in the system, similar to fever in the human body.
This time around, politicians are linking the recent inflation to the sudden rise of demand after decreased expenditure and saving behaviors, logistics clog in China and Mongolia, minimized availability of oil in Russia, and the domestic upward trends of price. Although true, these explanations are highly superficial. The core cause of inflation lies in state governance and failures in economic policies. That is why inflation is referred to as “invisible taxes.”
The fundamental error in our economic policy is that instead of taking full advantage of the market, the state is overly involved in all sectors in a politicized and uncontrolled way. As a result, increased government interference has hampered free competition by creating players who are directly and indirectly supported by the taxpayers’ money and never go bankrupt.
Favorable access is constantly granted to oligarch companies linked to the government in the name of price stabilization. Those companies and banks, in turn, are financing political parties and politicians to strengthen their positions and expand their businesses. In addition, the oligarchs have “privatized” the judiciary, using it as a tool to intimidate and threaten their opponents. Citizens are no longer surprised by the millions of dollars, billions of tugriks, and surveillance devices coming out of the homes of generals and prosecutors.
Using government positions for one’s personal gains is common, making Mongolia high on corruption rankings. Our prime minister, L. Oyun-Erdene, who rose to power talking about corruption and the private purchase of Erdenet’s 49% shares using public funds, has become quiet as a mouse as soon as taking office. The reason might be the establishment of the status quo from the power equilibrium between oligarch groups within the MPP.
Despite their political monopoly and ability to make and implement any law since 2016, the MPP still falls short in limiting the deeply rooted corruption. Failing to run the IAAC (Independent Authority Against Corruption), the government has established a working group to hunt down “mice and squirrels instead of lions and tigers,” not to mention their motto of “building a new societal culture against corruption” within only two years.
In Mongolia, corruption is even divided into categories, and corrupt groups hold each other hostage. The MPP factions are competing for big projects as oligarch groups have now diversified their businesses and extended their reach to Ulaanbaatar’s land and mountain foothills, mining licenses, banking and financial powers, and the construction business.
Corruption is the fundamental cause of inflation and is strangling Mongolia’s economy, impeding development, and impoverishing Mongolians, pushing them to flee the country. As for the Prime Minister, changing the status quo within the MPP will likely lead to a government turnover, while leaving it as it will lead to a dramatic turnover of the country.
2021.08.12
Trans. by Riya.T and Munkh-Erdene.D