Mongolia’s economy has been declining almost consecutively for 20 years. Despite the unique names they select for themselves, the governments we have had so far have failed to reduce currency depreciation, unemployment, and poverty.
Although Mongolians attempted to accumulate money and wealth, our real income has not seen any increase because savings rate in commercial banks is always caught up by inflation rate. On top of that, tugrug rate fell twice as much as the inflation rate in 2014 and has recently been so weakened that the tugrug rate against USD reached 2,000.
The authorities tell us that the lack of circulation in economy derives from shooing the foreign investment away and the falling prices of coal, copper, and gold. Even though this argument is valid for Mongolia’s economy, which is dependent solely on mining, we are not talking about what is truly causing the economic decline. The primary cause is the government’s deep-seated habit of controlling prices, which is the elephant in the room that we have been ignoring.
Who sets prices in Mongolia?
In any country, price of consumer goods and change in prices reflect reliability of its economy. People conceal their wealth if they live in a country where the risk of losing your property or getting robbed is high. But, one should be able to increase his wealth only when he puts it into circulation, which would result in mutually beneficial commercial interactions. Therefore, we can see whether this system is corrupt or not by looking at how prices are being set and by whom.
Prices that are set by supply and demand in a fair way that is exempt from any external control are used as market indicators by investors, consumers, and others to make commercial decisions. These indicators, only when they are accurate, show you where surpluses and shortages are in the market.
The government has been setting prices of many consumer products in Mongolia. Under the name of caring the people and supporting businesses, the government has been setting and restricting prices. In the end, such measures benefit the decision makers the most and allow them to steal from public funds.
Mongolia is seeing a growing number of populists who have a hidden agenda to serve their individual interests by controlling prices of consumer products, but claim that they will protect the people from the rich. It can be seen from the example of Mongolia’s agriculture sector.
Who wins? Crop farmers, flour makers, or consumers?
Mongolian crop farmers have broken a 20-year record by gathering a harvest of 489,000 tonnes in 2014. Nevertheless, crop farmers today are opposing wheat imports from Russia.
On the other hand, flour makers are stressing the need to buy from abroad because the gluten content of Mongolia’s wheat is below 28 percent. Crop farmers were provided with a subsidy of 100,000 MNT per one tonne of wheat in the past whereas it has been reduced to 70,000 MNT this year due to the economic decline. They started providing the subsidies in February this year. It means that 1.4 billion MNT is given for harvesting 20,000 tonnes. But, the flour makers paid the same amount (1.4 billion MNT) to the government for customs taxes and VAT when importing 20,000 tonnes of wheat. The subsidies come from the public budget as spending whereas the taxes are added to the budget as revenue. So, which one is more profitable? The government cannot ruin an industry by supporting another.
As soon as the harvest is over, flour makers go to the crop farmers and buy their wheat that has most gluten content. When a new year comes and the gluten-low wheat is not purchased, the crop farmers, flour makers, and the government have an argument every year over whether it is needed to import wheat or not. The government decisions keep getting stuck amidst lobbying, which results in a shortage of flour. Consequently, the flour makers are forced to get low quality wheat. It is said that there are three ways to produce flour using wheat of such low quality. One way is to import better quality wheat from abroad and mix it before working the mill. Another way is to mix the flour with that coming from Russia to increase the quality. The third way is to bring chemicals from China to ‘fix’ the gluten and color of the wheat, after which the flour is delivered to consumers directly.
If the value chain of flour is thoroughly examined, it can be seen that all deficits are made up by money coming from taxpayers and consumers rather than crop farmers and flour makers. In return, the taxpayers and consumers get flour with mixed chemical that could harm your health.
Who gains from it?
False prices allow corruption to grow. When that happens, there is a need to control prices at a larger extent. Every market player who has been receiving any kind of subsidies demands that it continues. As a result, every one of them has political decisions favoring them.
As a consequence, the prices become more deviated. As prices get false, the authorities who set prices have stronger interest to conceal it more and distort information. Such distortion benefits the authorities and their conspiring associates only.
If prices are freed to be set accurately by supply and demand, it will allow economy development including creation of more jobs. In order to overcome the economic decline, Mongolia needs a free price system exempt from any obscurity.
2015.03.25