Mongolia now has 60% of its population vaccinated. Thus, the economy urgently needs to be recovered and brought back to normalcy. Prime Minister L. Oyun-Erdene has established a national committee on intensifying the economy during the pandemic. The committee, consisting of representatives from the public and private sectors, aims to increase exports, support import-substituting domestic production, strengthen public-private partnerships, and increase investment. A draft of the law supporting this endeavor is going to be submitted to the Parliament.
However, no law or committee can recover or develop the economy in the long run if there is no change in some of the policies and principles the government has followed until now. So, which policies and principles need to be changed?
The main goal of increasing the economy is improving the life quality of the citizens. In fact, Mongolia’s GDP per capita has not increased in the last seven years, from 4,501 dollars in 2013 to 4,127 dollars in 2020 (NSO statistics). Mongolia is a middle-income country. Only if the figure reaches 15,000 dollars will we join the club of developed countries.
Reaching this level means that the country has constantly growing savings, increasing investment, improving education, and burgeoning technologies. The government must work in this direction. The government should manage the state budget and the taxation or public funds in a well-planned and cost-effective manner and, where possible, implement non-administrative, market-based principles. Here are four things to avoid in order to reach that goal.
1. The government must not do anything the private sector can do more efficiently
All previous governments had promised not to do this but kept establishing as many state-owned enterprises and locally owned companies as possible. As a result, the Mongolian government now has its own companies, banks, and businesses in many sectors, including mining, energy, automobile, aviation, and railway. Of the 339 state-owned companies, 232 are locally owned, and 107 are state-owned. Only a handful of them make a profit, while the rest are in deficit, in debt, and subsidized by the state budget. Their total debt has reached 37 trillion tugriks, and this figure will soon exceed our GDP.
Viciously, the so-called state-owned enterprises are, in fact, party-owned, leading to political statuses being prioritized over skills and knowledge and causing a collapse of human resource policies. There are 205 thousand public servants in Mongolia and 66 thousand employees in SOEs, which collectively make up around a third of all working taxpayers. SOEs dominate the competition and create an advantage for themselves because they have taken over the private sector’s work, have cheaper financial resources, and are related to decision-makers. As a result, the main engine of development, free competition, is deteriorating.
2. The government should not control prices, rent, or wages
The more the state tries to set levels or limits on price, rents, and wages, the more likely a specific individual or group will enjoy special benefits and privileges, while the entire society pays the price. For example, mortgages may seem profitable to borrowers, but the interest rate difference is paid indirectly by all taxpayers. Because of the government’s mortgage policies housing prices have risen, benefiting construction companies.
Keeping the electricity prices too low led to the inability to raise production capacity and the looming threat of a total blackout. In addition, setting a baseline pay has made it impossible to employ part-time employees, harming many citizens, including students. When the government sets these barriers, it creates shortages, the black-market flourishes, and the quality of goods and services decays.
3. The government has to operate in its own capacity
The activities of the government must not exceed its budgets. The Mongolian state has ignored this for many years and now finds itself in a debt trap. The old debts are paid with new ones. The snowball effect of this debt phenomenon has resulted in a total debt triple the size of our GDP.
To ensure sustainable growth in the European Union, member states are required by law to keep their budget deficit lower than 3% of their GDP and the national debt no more than 60% of the GDP. The violation of this provision is punishable by a fine equivalent to 0.5% of the GDP. Mongolia’s budget deficit in 2020 amounted to 12.3% of the GDP.
4. The government needs to avoid oversupplying the market with cash
Expansionary monetary policy, when overdone, fuels the price inflation. The government’s program to revive the economy during the pandemic (pandenomics) is increasing the money supply dramatically. While business risks remain high, 3 trillion tugriks were disbursed at interest rates of 3% (typically 9%). This increased the current checking and savings account balances, while the Central bank bills still increased by almost 1.2 trillion tugriks. Originally, the government’s program aimed to reduce this figure. At the end of 2020, commercial banks made a profit of 290 billion tugriks, while by the first half of this year, they made a profit of 323 billion tugriks (BOM statistics). In 2021, the average savings interest rate is 6.1%, while the average loan interest rate remains at 14.7%.
Our economy will not develop if the government does not limit its involvement in the four areas mentioned above. Even when it develops, the fruits of that growth will be enjoyed by a small group, rather than the citizens.
2021.09.20
Trans. by Riya.T and Munkh-Erdene.D