Mongolia’s economy is growing with a dream speed. Year on year basis, the country’s GDP in the first half of this year grew by 17.6%. If economy continues to develop by 15% in this way, by 2015 Mongolian economy will be twice bigger compared with 2010 and will make world’s fastest economic growth record after Qatar.
Yet three risks, if unwisely managed, could turn Mongolia into one of those countries that still fails to thrive even with the fastest growing economy. The main risk is that our economy is almost fully dependent on one market. Mongolian government itself is becoming a stumbling block that stands in the way of progress. As a result of poor public management, the inflation would be the third risk. The ultimate goal of economic development, visible improvement in living conditions of every citizen depends on handling wisely the following risks.
Dependence on one market
One thing that we Mongolians should keep in mind is that we are not creating actual values that are drugging our economic development today. We are just excavating under-ground resources created by the mother-nature and selling them in just raw forms to only one market. 85% of Mongolia’s export goes to our southern neighbour, 60% of mining exports is either coal or copper. First time we started to receive more revenue from copper than from coal. Not because Southern neighbour decreased demand in copper. Simply it started to purchase less from Mongolia.
Although our export increased with China’s demand, import is increasing even faster. We import almost all products from overseas, most of them again from China. By first eight months, according to National Statistical Organization, Mongolia’s export was 2.8 billion USD, and import was 4.1 billion USD, making the foreign trade deficit into 1.4 billion USD, which is 7.8 times greater than the amount 12 months ago. Regarding significant increase of import of heavy machineries, trucks and other equipment the most purchase is related directly to Oyu Tolgoi project. Some experts forecast balance of foreign trade will be reached in 2013 when Oyu Tolgoi starts to produce copper.
What will Mongolia do if China by political or economic reason stops buying raw materials temporarily or for good?
Dependence on public governance
The Mongolian parliament and government branches, instead of navigating the economic and social growth, have themselves turned into the obstacle that puts economic progress in danger, creates doubt for national and foreign investors as it is unable to implement its thoughtless miscalculated decisions.
Mongolia’s government itself is growing faster than the economy. The overwhelming 27% increase in government spending in the past 12 months is 10% greater than economic growth. This is due to increased salaries for public officers as well as politicians struggle to keep the last campaign cash promises.
Prepared to do everything to stay in power, politicians show little concern over national long-term interests, as long as foreign investors prepaying cash before signing the deal like the investment agreement of Oyu Tolgoi for 200 million dollars. The agreement for mining coal from Tavan Tolgoi’s certain part for a number of years were negotiated with the Chinese government’s aluminium corporation for the same cash prepayment. Mongolia’s economy, even if we give away all of this year’s budget, cannot afford our politicians 2008 campaign pledge that equals to 4 billion USD now. Politicians ignore the simple code that once an international contract has been signed, it cannot be changed every month because mining investment is planned for many years ahead.
Since Mongolian politicians make decisions underway and for short-term, our State Ikh Khural members cannot do anything but push each other to change the announced decisions. Denying the decisions of their own party’s members or leaders, getting in small groups to debate against each other makes the nation’s policy unstable, withdraws and distorts Mongolia’s economic development.
Dependence on inflation
Though inflation is a result of bad public management, it became also a significant factor in destroying the benefits of economic growth. In Mongolia 17.6% of economic growth was erased by 13% of the inflation. Poor and middle income citizens, who are the first ones to get hit by increased prices as they spend most of their income on daily expenditures, do not feel change in their daily lives. Individuals with higher income feel comparatively less the inflation, as they are able to put away a certain amount into savings. In the past 12 months, bank savings rose by 76%, establishing a record of 2.7 trillion tugrogs volume. The expectation for tugrog strengthening influenced this number too.
Shortage of competition on the market causes inflation to go up. Many products, including food and manufacturing goods are more expensive in Mongolia than in well developed countries. In Mongolia, the government distributes cash, instead of investing into infrastructure.
Exit
Although a complete instruction to manage successfully these three risks are difficult to find we could identify a few essential steps. The only path to depending less solely on China is to create a unique product or service that would supply the global market and other countries. To determine the sort of product, firstly we must research, find, then invest in initial manufacturing of the process and involve many private companies so as to create a cluster.
To reduce the dependence on the government, state operations must be clear and transparent. Where there is transparency public wealth, public office position will be less abused. Every channel for becoming a “billionaire through government” should be closed off. State monitoring \preferably called public monitoring\system must be passed onto the civic society. Active and responsible citizens must be able to exercise freedom of election. Citizens themselves should be able to elect their local leaders, be it city, towns or aimag. Appointment of aimag governors and cities mayors should not be based on political affiliations but on the candidate’s merit. Competitive salaries should be presented according to their productivity.
Finally, to reduce inflation we could increase competition among private sector, remove open and hidden monopolies, involve the government as little as possible in the economy, quit land speculation that inflating apartment prices; increase productivity per hour and make productivity as the main factor in raising salaries, introduce this principle in private and public sectors, stop cash distribution promises and begin implementation of these and other essential processes.
Translated by J.Ariunaa