Country Profile: Mongolia
Introduction and History
Covering an area the size of Western Europe, and a population of only 2.5
million, Mongolia is an oddity in the international state system. Locked
between China and Russia, the state was only formally organized in the 12th
and 13th centuries under Genghis and his descendents. While the Golden
Horde continued to dominate the politics Russia and south central Asia well
into the 17th century, in their homeland the Mongols quickly returned to
their traditional nomadic existence. Forgotten by the world, Mongolia
entered the 20th century as little more than a vast indistinct area of
Mongol linguistic and cultural dominance. The nation's only definite
boundary was imposed by the Chinese, in the form of the Great Wall. While
stubbornly clinging to their distinct identity, Mongol leaders grudgingly
accepted the suzerainty of the Chinese Qing dynasty. Chinese traders
dominated the small amount of commerce, typically long-distance caravan
trade, which did occur in the region. The Mongols tended livestock, or
worked in the numerous monasteries, which employed an estimated 40% of the
adult male workforce.
With the collapse of the Qing in 1911, Mongol leaders immediately declared
formal independence from China, but this goal was not fully realized until
1921, when a constitutional monarchy was established. The same year saw
the spillover of the Russian civil war into Mongolia. The retreating White
Army of Baron von Unger-Sternberg established a regime in Mongol territory.
A combination of Bolshevik troops and Soviet-backed Mongolian Communists
succeeded in defeating the Baron's forces, and in the process established
the close Soviet-Mongol relationship which was to last until 1990. In
1924, the People's Republic of Mongolia became the world's second Communist
nation.
Over the next fifty-one years, and particularly after the Second World
War, the Mongolian People's Revolutionary Party (MPRP) systematically
established one of the most centralized economies in the Communist world.
The 1960 constitution formally disavowed private ownership, and reserved
all means of production for the state. By 1963, only 0.5% of all families
operated outside the formal planned economy. Under the plan, the economy
grew rapidly throughout the 1960's and 70's. At its height between 1970 and
1975, net material product grew at 7.6%. Throughout the 1980's, the
economy remained highly centralized. Central government revenues, which did
to count local and regional government accounts, consistently topped 50% of
GDP. In 1995, after five years of IMF-style economic reforms, the central
government still controlled 27% of GDP, compared with 17% in Russia and
only 6% in China.
In the late 1980's, as the Soviet Union was beginning to experiment with
perestroika, Mongolia also moved to implement limited economic reforms. The
scope of the central plan was scaled back, and enterprises were granted
limited autonomy in production. Rules against private ownership were
relaxed. In particular, the number of livestock that could be held
privately was increased. Cooperative enterprises were established, and the
state conceeded its monopoly on foreign trade. Moderate as these reforms
were, they appear to have set the stage for political change.
Political Reform
In December 1989 small protests began in the capital city of Ulaan Baator.
These protests generally attracted a few hundred participants, called for
specific actions (e.g., a five-day workweek) and disbanded within an hour.
As the weather changed, however, the protests gained momentum. By March a
hunger strike was underway in the city square, and troops were assembled in
the nearby sports stadium, a twenty minute march away. The few Western
journalists on hand predicted Tiananmen-style repression. Then, quite
unexpectedly, an MPRP congress, held in late March, eliminated the word
"communism" from the party constitution, inserting instead "democratic
humane socialism." The same congress reconsituted the central committee
filling it with younger, more pro-reform members.
After the apparent victory of the reform faction within the MPRP, political
liberalization proceeded rapidly. The state constitution was amended to
give opposition parties legal sanction. By August, the first parliamentary
elections were held. Ironically, while the election saw opposition parties
claim 40% of the seats in the legislative Little Hural, the MPRP remained
in firm control of the government. After winning the election, the MPRP
continued on the path of political liberalization. The 1990 government
drafted a new constitution which called for the creation of a parliamentary
democracy, formed independent executive, legislative and judicial branches,
and guaranteed the right of all citizens to own property and engage in
business activities of their choice. With this clearly pro-reform track
record, the MPRP swept the 1992 elections, winning 70 of 76 seats in the
Hural. The reformed Communists were so embarrassed by this victory that
they volunteered to give 15 seats to the opposition.
The MPRP dominated governments of the early 1990's were dedicated to more
than political reform. They were also ardent reformers of the economy.
With the collapse of the Soviet Union, the economy of Mongolia collapsed.
After decades of economic growth, GDP was shrinking and inflation was out
of control. The national currency, the tugrik, was collapsing, falling from
a 1990 rate of 3.4/$ to 693.51/$ in 1996. External trade evaporated. The
collapse also cut the nation off from easy Soviet loans, which had
customarily accounted for 30% of GDP. This drastic loss of revenue very
early drove the Mongols to seek the aid of the International Monetary Fund,
the Asian Development Bank, and other official aid agencies. One of the
first responses to the dire condition of the economy was to slate most
state-owned enterprises for privatization. Systematized privatization began
in early 1991, only a year after the initial collapse of the economy and
well before any clear property rights laws were established.
In 1996, the political winds changed again. The Democratic Alliance, a
coalition of pro-democracy parties, won 50 of the Hural's 76 seats. The
new government promptly proceeded to increase the pace of reforms. Since
elected, the new government has moved to privatize all government assets,
including the huge Erdent Copper mine and the Gobi Trading Co. (an exporter
of fine cashmire). These two companies are perhaps the only two profit
generating state-owned enterprises, with Erdent alone accounting for almost
half of export earnings. The democrats also abolished all distinctions
between domestic and foreign companies. Even more radically (but
completely in line with neoliberal economic theory) Mongolia abolished all
tariff duties, except for small charges on automobiles, cigarettes and
alcoholic beverages. Mongolia has thus become "the most pro-business
government in Asia." At the same time, official unemployment has reached
28% of the urban workforce, schools and hospitals have been closed, and 37%
of all households live below the $8US/month official poverty rate.
Structure of the Economy
The current structure of the Mongolian economy demonstrates both the legacy
of 65 years of Soviet-style industrialization, and almost a decade of
IMF-style economic reform. In the 1930's, the Mongolian economy was
almost entirely agricultural, focusing primarily on animal products drawn
from the traditional sheep and camel herds. In 1940, livestock-based
agriculture accounted for over 60% of net material product (NEP), while
industry composed only 8%. Under Soviet guidance, Mongolia began to
increase the output of the industrial sector while simultaneously
restructuring agriculture away from livestock and towards grain production.
By 1990, industry accounted for 36% of NEP, while agriculture had declined
to only 19%.
Trade also developed as an important component of the Mongolian economy in
the Communist period. Growing from 8% of NMP in 1940, trade accounted for
over 29% in 1990. While this figure would tend to indicate a national
economy fairly integrated into the larger world, Mongol trade was almost
exclusively directed to the USSR and other COMECON nations. In 1980's,
well over 90% of trade was with these countries. Furthermore, trade was
chronically lopsided. Mongolia maintained constant trade deficits, as well
as current account deficits, which were largely financed through
concessional loans and grants from the Soviet Union.
With the collapse of the Soviet Union, Mongolia lost the prime market for
its exports. Trade as a percentage of GDP had fallen to 15% in 1997.
Worldwide exports fell by 37% from 1990-1997, while exports to Russia
declined 92% in the same period. Similarly, worldwide imports declined by
52%, with Russian imports falling by 78%.
The structure of trade is also chronically against Mongolia. Despite
decades of industrialization, the quality of its manufactures falls far
below world standards. Consequently, the country remains an exporter of raw
materials, such as minerals and livestock products. These products have
traditionally been extremely sensitive to market conditions, with prices
swinging rapidly. Tumbling world prices for copper and cashmere, Mongolia's
two prime exports, have significantly reduced export earnings.
Simultaneously, Mongolian imports consist of heavy equipment, and the fuel
oil to power the machines and heat urban homes. Stable prices for these
goods can cause rapid balance of payments difficulties, further straining
the financial sector.
Structure of the Banking Sector
The first national bank of Mongolia was established in 1924 as a joint
venture between the governments of Mongolia and the Soviet Union. By 1954
all Soviet shares in the bank had been transferred to Mongol control, and
the State Bank of the Mongolian People's Republic was formed. The Bank was
charged with all central and commercial banking functions. The Bank
functioned as State Treasury, holding all currency reserves and
non-monetary gold assets. Control of the Bank was vested in the Council of
Ministers, a select group formed out of the People's Great Hural.
Since it functioned within a highly centralized planned economy, the Bank
did not serve any independent function. All credit issues were decided
within the Council of Ministers, and formalized in the state budget.
Enterprises were required to submit projections of their expected credit
needs. All credit was extended on the basis of these negotiated
projections, without collateral. Most importantly, households were
completely excluded from the credit system.
In August 1990, the first round of banking reforms was put into effect. The
new system established a two-tiered banking structure, a central bank
(Mongol Bank) and a set of commercial banks. The first two commercial banks
were the Bank for Investment and Technological Innovation, and the State
Bank of Mongolia (International). Throughout 1991, six more commercial
banks were given operating licenses. Each of these banks seems to have
taken, or been given, a particular portfolio of accounts from the old State
Bank, for example, the Agricultural Bank and the Industrial Bank.
Unfortunately, the creation of the two-tiered system solved none of the
problems plaguing the Mongolian banking system. First, when the new banks
were created, non-performing loans were not forgiven. As state assets were
sold-off, the newly private companies were not forced to assume the debt of
the state companies they were replacing. Instead, the banks kept the debt
on their books. This means that each bank was essentially insolvent from
the moment it was formed. Secondly, the banks, even if nominally
separated, continued to be owned and operated by the government. Even as
rapid privatization of the economy began in 1991-92, Mongolian banks
continued to direct loans on the order of the government, without reference
to profitability or collateral. By 1998, conservative estimates showed
that 45% of all loans in the Mongolian banking system were non-performing.
Even as bad loans piled-up, the banking system continued to expand. In
1992, the government issued the first license for a private bank. Other
private commercial banks have been formed, but the exact number is
uncertain. Operating with endemic corruption, private banks have little
better track record than state banks. A 10% kickback seems to have been the
standard rate for a loan in both private and public banks. In 1995 the
first public banking scandal was reported in the press. Government
prosecutors brought charges against a private businesswoman and five bank
managers. The government claimed bribes of over $1 million in cars and
jewelry had been distributed in order to secure $3 million in loans. Of
the five banks involved, two were privately held. Surprisingly, none of the
bankers denied that the transactions had taken place. Instead they claimed
that cars were gifts "for the bank" and that the jewelry was "given as a
Mongolian New Year present."
By 1995, both public and private commercial banks began to fail. The
Autoroad Bank was the first bank to be declared insolvent. In July 1996,
Mongolia's first private commercial bank collapsed. By the end of 1996, two
large public banks also failed. In total, the losses in 1996 accounted for
close to 50% all banking assets. By the end of the year, only three large
commercial banks, all state owned, remained in the sector.
Most recently, the Reconstruction Bank collapsed in May 1998. The failure
of the Reconstruction Bank is particularly disturbing because it was
theoretically under the close, direct supervision from the government. The
Reconstruction Bank was created in 1996 from the remains of the People's
Bank, which had recently been declared insolvent. In February 1998 the
government began to doubt the solvency of the new bank, and ordered a halt
on all new loans. In direct defiance of this order, the bank continued to
extend credit. Of the 7 billion turgriks (approximately $9 million) in bad
loans on the bank's books, 4 billion were issued after the government
ordered moratorium.
The Reconstruction Bank's failure highlights another aspect of Mongolia's
banking troubles. The government publicly stated that it was unwilling to
absorb the bank's debts, and invited other banks to submit takeover bids.
When the privately held Golomt Bank emerged as the highest bidder,
allegations of foul play immediately arose. The Minister of Finance who
was charged with overseeing Reconstruction Bank's moratorium had become a
director of Golomt Bank. The bank owner' brother has a seat in the Hural,
and all the men involved are members of the Prime Minister's Democratic
Union Party. These connections have lead the MPRP to allege that the
Finance Minister deliberately allowed Reconstruction Bank to be run into
the ground in order to allow for it to be merged with Golomt, which would
be instantly transformed into Mongolia's largest (but still debt ridden)
bank . The unspoken assumption is that the government will not directly
absorb the inherited debt, but will follow past behavior and issue interest
bearing government bonds to the bank to cover the debt. This has been
standard practice for all Mongolian bank failures.
The decrepit conditions of Mongolia's banks have driven money out of the
financial sector. As of 1995, M2 money supply accounted for only 26% of
GDP. Families have tended to hold money within the households. Preferably
assets are held in any currency except tugriks. A gray economy has
developed, wherein families extended loans along kinship lines. Small
business owners in particular are forced to rely on these avenues for
credit.
Privatization and the Mongolian Stock Market
Mongolia maintains a small stock market, but the function of the market is
not to raise new capital. The stock market was born with the first wave of
privatization in the early 1990's. Under the "small privatization" all
citizens, including women and children were issued 10,000 tugriks worth of
pink and blue vouchers. The pink vouchers could be used to buy shares in
the first round of privatizations, which included restaurants, hotels and
shops. Rural residents and nomads could use the vouchers to purchase
livestock or farm equipment. These vouchers could be exchanged or sold.
The blue coupons were intended for use in the "big privatization," that is,
for large corporations and factories. These coupons could not be
exchanged, and were designed to insure that every Mongol continued to own a
part of the means of production.
As the government decided to privatize large corporations, they were
listed on the stock exchange and blue coupons could be used to purchase
shares. Predictably, this system resulted in thousands of shareholders,
each with a tiny fraction of the whole corporation. Since there was no way
for investors to examine the true value of the companies being offered, the
privatization was really little more than a gamble. Many Mongolian's found
themselves holding completely worthless shares. For this reason, the rural
pastoralists who traded their shares directly for livestock seem to have
come away generally better than city-dwellers.
While a brief market in pink coupons flourished, typically selling for
one-tenth face value, the stock exchange has yet to develop a secondary
market. It is still primarily used by the government as a vehicle to
privatize state assets. Since current plans call for a complete
privatization of the economy by 2000, the brokers are likely to stay in
business, but corporations in search of capital will have to look
elsewhere.
Conclusion
The transformation from a command to a market economy in Mongolia occurred
faster than in any other post-Soviet economy. The program was overseen by a
democratically elected government and overseen by the IMF and other
international aid organizations. Yet, even with these advantages, the
Mongolian economy remains in a shambles. Since 1990, GDP has declined by
over 50%. Official unemployment was 28% in 1997.
Banking reform has been the most ignored aspect of the economic program.
Under current conditions, banks are largely state owned, but seem to easily
resist the short term wished of the government. Banks continue to extend
loans on the basis of friendship and bribes, while completely ignoring the
needs of either legitimate commercial or consumer needs. By 1998, even the
Finance Minister was forced to admit that banks should have been the first,
not last, priority of economic reforms.
A larger question remains unanswered. Why has the international aid
community allowed banking reform to lag so far behind other aspects of the
economy? The IMF, the Asian Development Bank and the International
Development Agency have been heavily involved in Mongolian reforms from the
very beginning, yet they consistently ignored bank reform. One theory holds
that banking occupies a unique place in any economy, and that banking
reform, especially banking collapse, is universally feared and delayed.
The contagion effects are simply too great.
Another theory is more intriguing in the Mongolian case. First, the
banking sector is very small. Even the collapse of the Reconstruction Bank
resulted in only $9million in bad loans. Secondly, Mongolia is an example
of a democratically elected Asian government that has cooperated
extensively with the aid organizations. Combining these two facts together
it becomes quite evident that the low level of total aid, even if it is
never paid back, may be justified by Mongolia's usefulness as an example to
other reforming states. Here is a country which is taking bitter medicine,
and suffering temporarily, but has the full backing of the international
community. Russia and the other post-Soviet economies can be shown how
easily aid money will flow if they will stop resisting IMF proposals. As an
Asian democracy, Mongolia provides an opportunity to counter the "Asian
values" debate. China, in particular, has felt the pressure of a
democratic neighbor on its boarders. Stirrings for democracy in China have
recently been coming from the Inner Mongolian province, which contains 4.5
million Mongols, twice as many as the Mongolian state.
It remains to be seen how useful Mongolia's example will be in the long
term. Both China and Russia may feel some international pressure, but they
also see that Mongolia's economy is a wreck. China has even tried to turn
the example against the IMF, arguing that political reform and economic
reform should have been separated. Mongolia's banks will eventually have
to change, but it remains to be seen whether the transformation will be
sudden or slow. For now, the international community can only wait and
watch, and hope that its investment in democracy pays off.
Bibliography:
Books, Journals and Web Sites:
Abeywickrama, K.L. "The Marketization of Mongolia." Monthly Review. V47,
n10. March 1996. pp. 25-34.
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Factsheet: Mongolia. U.S. Department of State Dispatch. August 30, 1993.
v4, n35. Pp.603-607.
Foreign Trade. Mongolian Chamber of Commerce and Industry.
http://www.magicnet.mn/mcci/ftrade.htm
Griffin, Keith,ed. Poverty and the Transition to a Market Economy in
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Asian Approach. New York: Oxford University Press, 1995.
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