Countries have traditionally measured their economic development through Gross Domestic Product (GDP). The per capita GDP of Mongolia, indicating the living standards of its citizens, was USD 6,000 in 2023, and is forecasted to be USD 6,800 in 2024, and projected to reach USD 10,000 by 2028, according to a recent statement by the Prime Minister L. Oyun-Erdene. If realized, Mongolia will move up from its current rank of 104th out of 190 countries to be among the top eighty. To accomplish this, the country must have 14 mega projects fully started by 2026. Then, how can we accurately gauge the influence of these projects on the nation’s economic trajectory?
Keynes and Say
GDP is the sum of household, business, and government final expenditure in a given year. (Y = C + I + G + (X − M): GDP (Y) is the sum of consumption (C), investment (I), government Expenditures (G) and net exports (X − M). Consumption (C + G) constitutes two-thirds of GDP, so many believe that consumption is the main driver of the economy. The higher the consumption or demand, the greater the supply (demand creates supply), and thus, Keynesian economists (following British economist J.M. Keynes (1883-1946)) support increased government spending. Left-leaning and center-left political forces endorse this view.
However, the economy is driven not only by final consumption but also by investments, savings, and total expenditures. While GDP is an important metric of citizens’ living standards, it leaves out certain factors. Most importantly, it does not include the value (and cost) of the supply chain, i.e., the stages from production to transportation, wholesale, and retail. In Mongolia, GDP is calculated using the production method, which subtracts intermediate consumption from gross output. However, gross output (GO) encompasses the value of products and services generated by businesses, large and small.
Measuring the economy using both GDP and GO would provide a more accurate picture. Since GO is larger than GDP, consumption does not represent half of the economy but rather one-quarter, meaning consumption is not the dominant driver (Figure 1).
Therefore, to fully reflect changes in economic activity, the government (NSO) should regularly release GO figures alongside GDP, and make appropriate evaluations. Some countries also use a B2B index to measure business-to-business transactions, which should be considered here as well.
By using GO, we can analyze how mega infrastructure projects impact the prices of goods and services, identify which sectors are driving innovation and competitiveness, and ultimately determine the country’s economic success. Consumption is merely a consequence, not a driver of development.
Figure 1. Mongolia’s Gross Output, GDP in yearly figures, final consumption expenditure, in billion USD (NSO)
Green:GO in market prices; Blue: GDP; Orange: final consumption expenditure
The vitality and strength of large and small businesses determine the economic status of a nation. Savings by citizens, investments by companies, capacity for innovation, and making products appealing to consumers are the foundations of success. Therefore, economic growth stems from supply-side factors (supply creates demand) as proposed by French economist J. Say (1767-1832), known as the French “Adam Smith”, over 200 years ago. His theory, known as Say’s Law of Markets, suggests that “rapid change and economic growth arise from supply”. Right-leaning and center-right political forces advocate this view.
When Per Capita GDP Reaches USD 10,000…
While presenting the 2025 budget proposal, Prime Minister L. Oyun-Erdene noted that when per capita GDP reaches USD 10,000, the country’s creditworthiness will rise by 1-2 levels, interest rates will drop by up to 30%, foreign investment will increase by 1.5 to 3 times, and infrastructure issues will be resolved. Investments in science and technology will grow, boosting productivity and diversifying the economy. Skilled human recources will return to the country, and foreign experts will begin working in Mongolia. Average wages will rise by up to 60%, household incomes will expand, poverty levels will decrease, and public sector wages will rise, improving governance efficiency. The development of education and healthcare will lead to better quality services, raising citizens’ quality of life and life expectancy.
For all this to become a reality in Mongolia, Say’s Law must be implemented. This involves improving the business environment, ensuring equity, reducing certain taxes, encouraging innovation, gradually privatizing state-owned enterprises, welcoming foreign banks through policy, fostering free competition, establishing justice, reforming the judiciary, and liberalizing prices.
Whether all of this can be achieved by 2028 depends on the government, the parliament, and the well-informed participation of citizens.