Not all economic growth can be turned into productive development.
In 2011, the economy of Mongolia expanded 27.8 percent by the prices of 2005 and 17.3 percent by the prices of 2011. According to the National Statistical Office of Mongolia, budgetary revenue increased by 34 percent, social care spending by 28 percent, budgetary spending by 80 percent, and bank loans by 76 percent. However, unemployment went up by 50 percent, inflation by 10.2 percent, and 40 percent of the population is still poor.
What is the underlying reason the economic expansion is not bringing development? What is wrong with the economy of Mongolia and what needs to be changed?
Basically, development of a country means bringing better living standards for people by shifting towards a production based economy from an agricultural, resource based economy by introducing new knowledge and technology. Economic development has to be sustainable, equitable, and inclusive.
In order to develop our economy, we need to see what we can change in the near future and what we cannot. Our economy, which is based on its natural resource, is completely dependent on international market commodity prices of coal, copper, and gold. Even though Mongolian territory is vast, the size of our domestic market is too small.
The Mongolian market is isolated from areas that have high income and sophisticated markets, but we border with two large economies in Russia and China. Mongolia has a harsh, continental climate. These are the basic conditions of our economy, which are not going to change in the near future.
Other basic conditions of Mongolian society that are not likely to change fast in the near future include two fifth of the population who are under poverty line, strong presence of historical tradition, great differences in education between urban and rural areas, a trend towards urbanization, and a relatively young democracy.
Development is more important than economic growth for low-income countries and it has to be sustainable. In order to reach sustainable development, a development policy aimed at continuously improving people’s living standard has to be formulated and its implementation has to be measured by the indicators of public health, governance, political freedom, personal security, job guarantees, and local development.
Equitable economic development depends on whether people are benefitting from economic growth equally or not. It is not a equitable development if 10 percent of the population gets all the advantages from the mining growth and 90 percent of people do not feel the growth and most likely become poorer and poorer.
Economic development has to include every single person and our economy has to develop in a way in which that has access to the benefits of development.
When talking about macroeconomic indicators such as inflation, unemployment, and economic growth, a market-based approach has to be used in order to create appropriate conditions, both internal and external, for holding prices steady.
Furthermore, it is important to develop and consolidate institutions of governance. In order to do that, “the rules of the game” have to be clear and trustworthy, works of formulating and implementing functions need to be separated and accountability mechanisms have to be established, and an accessible database that keeps documents and digital information must be created.
In microeconomics, when talking about how family economies and firms make their decisions and interact with each other, policies need to be directed at encouraging both regulation and competition while attracting foreign investment. Also, the fact that price reflects opportunity costs has to be taken into consideration.
The positive side of attracting foreign investments is having new financial and human resources, using them in the mid-term and long-term, creating new knowledge and necessity, improving economic discipline and having new political and business partners.
The negative side of attracting foreign investment could be drastic changes in exchange rates, dependency on foreign technology, education and funds, foreign companies controlling the majority of exports and discrimination against local people.
In order to minimize these disadvantages, market interventions have to be made to keep exchange rates stable, include calculations of possible resource price fluctuations when calculating the public budget, make other resources transparent along with some necessary information, and regulate social relations in a legal framework.
The ugly side of attracting foreign investment is that it encourages corruption and reduces benefits from natural resource.
This can be regulated by setting stable and clear rules (rules regarding taxes, the environment, and hiring employees), creating few government agencies, preferably only one, that handles everything regarding those rules and making every interaction transparent.
By now, the Government, people and private sector should realize that Mongolia can only develop by attracting foreign investment and it will not be that easy. Our rapid economic growth will bring development if we manage to make our government transparent and accountable.
Translated by B.AMAR