The Marketization of Mongolia Via NY Transfer News Collective * All the News that Doesn't Fit source - Louis Proyect Monthly Review, March 1996 THE MARKETIZATION OF MONGOLIA by K.L. ABEYWICKRAMA (K.L Abeywickrama is a Sri Lankan journalist and writer on developmental issues.) A recent international television program focused on the problems in Mongolia: hundreds of homeless children living in the sewers of Ulaanbaatar, and the corollary tale of the benevolent Western philanthropic organization which had built a shelter to house a few dozen of these children. The story is a familiar one: life in the ex-communist states is miserable and tragic, allegedly a destructive legacy of the communist ideology that failed to deliver on its promises. The situation of Mongolia is that of an untold disaster which is worth telling. The story of this small nation of 2.4 million people living in a huge land area of 605,000 sq. miles is typical of the tragedy that has befallen many ex-communist states. The nomadic tribes of Mongolia had their triumphs in ancient times when they conquered and ruled extensive areas of Asia and Europe. Attila the Hun in the 5th century and Genghis Khan in the 13th century had the largest empires in the world in their times, more extensive than the domains of Alexander the Great or Julius Caesar. But when the Yuan dynasty of the Mongolian monarchy that ruled the Chinese Empire ended with a medley of warring chieftains by the 16th century, the country became a vassal state of China and declined into insignificance. For the next five hundred years Mongolia remained a primitive theocratic state ruled by the Head Lama, the Jetsundamma Khutuktu. China provided the provincial governors and Chinese traders controlled commerce, while 40 percent of the working population served the lamaseries as lamas or serfs working on farms. A poor and illiterate population of nomadic herders, farmers, and hunters was governed by aristocrats and monks, who owned most of the land. The imperial glories of a people who once conquered and ruled countries as far as Western Europe were only a dim memory. After the Russian revolution, defeated remnants of the White Army under Baron von Unger-Sterberg captured and ruled Mongolia until the local revolutionary forces under Sukhbaatar invited the assistance of the Soviets to gain independence and establish a socialist state in 1921. The economic, social, and cultural transformation of Mongolia under communism is a spectacular achievement, as astonishing as any of its past achievements. The socialist revolution of 1921 brought Mongolia into the modern world, and the new communist government brought Mongolia into the industrial age in three phases: 1921-39; 1940-60; 1961-1990.2 In the first phase, the state began industrialization based on the processing of livestock products and other agricultural outputs of the collective farms. Attempts to collectivize herders failed at this stage. Trade, transport, banking, and communications were nationalized. Mongolian/Soviet joint-stock companies, state corporations and state-sponsored cooperatives took over economic production. Ulaanbaatar (literally, Red City) became an industrial center. In the second phase, agricultural herds were collectivized, industry diversified into mining, timber processing, and consumer goods production. Central planning began in 1931 with the first 5-Year Plan. Soviet assistance for communications and industry increased. In the third phase, Mongolia became a part of the COMECON economic group byjoining the Council for Mutual Economic Assistance (CMEA) in 1962. The economy was linked to the economic plans of the COMECON countries, and the Soviet Union in particular, with the entirety of the foreign trade concentrated in this region and production geared to the reciprocal requirements of these countries. Soviet and East European financial and technical assistance modernized and diversified the economy with the creation of large new industrial centers in other cities like Baga Nuur, Choybalsan, Darkhan, and Erdenet. Soviet assistance averaged an equivalent of 30 percent of the GDP at times.3 Large factories for woolen products, leather goods, cashmere, cement, meat, timber, and grain processing employed hundreds of thousands of workers. For example, the shoe factory had produced 4 million pairs of footwear, while the meat factory could store a million carcasses.4 Mining became a major economic activity and copper exports constituted half the exports by value. The economy grew by an average of 6 percent per annum, but began declining to 4-5 percent towards the late 1980s with the political disarray in the USSR. By 1980, industry accounted for 35 percent of the GDP, a proportion far higher than in major industrial nations like Japan or the United States. The communist era dramatically improved the quality of life of the people until 1990, achieving commendable levels of social development through state-sponsored social welfare measures.5 Education and health services were free, full employment was virtually guaranteed, lifetime pensions were granted to all employed persons, and women achieved equal opportunities in employment. Primary education was compulsory, 89 percent of the students completed the 8th grade, 50 percent graduated from the 10th grade and 16 percent of the work force achieved higher education. With a per capita GDP estimated at around US$ 840 in 1989, Mongolia achieved a literacy level of 97 percent for the population over 10 years of age. In 1990, it had 88.8 medical personnel and 119.5 hospital beds per 10,000 population. Nutritional standards, at 2,800-2,900 calories per day per capita, were adequate and compared with other middle-level countries. Infant mortality at 60.6 and maternal mortality at 1.44 per thousand births were still high but had registered substantial improvements over the years. Life expectancies at 60 years for males and 62.5 for females compared well with those in many developing countries of the time.6 Though it is now fashionable for foreign experts to describe Mongolia as a former Soviet colony, the egalitarian socialist society that was created bore no resemblance to the former Western colonies of South Asia, Africa, or Latin America with their wealthy elites and impoverished masses living in conditions of human degradation. Subsidized public housing was provided for all workers (now derided as drab Soviet-style cinder-block apartments), public transport and food were subsidized, and even political leaders and top civil servants led austere lives without private cars or luxury housing. Schools for training students in opera, ballet, drama, and circus ensured a high standard at the state subsidized opera houses, theaters, and circuses, mainly patronized by ordinary working-class families. The disintegration of the Soviet Union and the COMECON in the latter part of the 1980s forced economic and political changes in Mongolia. Between 1986 and 1990, under the guidance of aid agencies, the government made a number of tentative changes that were intended to dismantle state planning of the economy and establish market reforms to adapt the economy to the international market outside the COMECON. These were as follows: (1) increases in domestic wholesale prices. (2) increase in the administered retail prices of selected products; removal of price control on selected products. (3) increased autonomy for parastatals in investment decisions and operations; liberalization of intrastate-owned enterprise pricing. (4) introduction of soft creditfor investmentby state-owned enterprises to replace direct state subsidies. (5) rationalization of administration through reduction of ministries and state committees. (6) reduction of the armed services budget. (7)liberalization of agricultural marketing for production in excess of state orders. (8) new Law of Cooperatives to promote private sector cooperatives in production units. (9) removal of restriction on private ownership of herds. (10) removal of the monopoly of state trading corporations. (11) banking legislation to eliminate monopoly of the Mongol Bank and allow commercial banks; two commercial banks created. (12) easing of foreign exchange surrender requirements. (13) devaluation of tugrik in relation to US dollar for commercial transactions; establishment of a two-tier exchange rate. (14) preferential domestic prices for export products. (15) establishment of Customs Affairs Department and Tax Service Department. (16) encouragement to foreign investment through Foreign Investment Law. (17) introduction of foreign exchange auctions. (18)most-favored-nation agreements with countries outside Eastern Europe and the Soviet Union. But the high-growth Mongolian economy was amalgamated to the economies of the COMECON and was totally unprepared for the abrupt destruction of it, Having become dependent on high investment and raw material inflows from the Soviet Union and the COMECON, and production for guaranteed markets in the COMECON region, the Mongolian economy collapsed without these links in 1990. In the economic field, three major external shocks forced drastic changes in Mongolia. (1) Owing to its own problems, the Soviet Union terminated its financial and technical assistance program in 1991. (2) The Soviet Union could not maintain regular supplies of essential materials such as petroleum, cement, fertilizer, and machine spares. (3) The closure of the CMEA in 1991 denied Mongolia its traditional foreign markets and totally disrupted its external trade. The disenchantment with communism within the USSR and Eastern Europe and the popular belief that marketization and multi-party political democracy would create a Hollywood paradise, aggravated by a collapsing economy, led to political demonstrations in Ulaanbaatar. It led to multi-party elections in June 1992 and the victory of the Mongolian Peoples Revolutionary Party and the defeat of the Communist Party. The IMF and the World Bank, the Asian Development Bank and bilateral Western aid agencies, and numerous Western NGOs then came into Mongolia in force to help dismantle all aspects of socialism and create an open market economy. At any given moment around 50-100 foreign specialists would be working in Mongolia on social, economic, and political changes. The willing students of capitalism in the Mongolian government rushed through the following changes within a brief five years. (1) Removal of export-import controls/duties and price controls, opening the market to international market forces on the basis that these would improve market signals, promote competition, and establish exports to hard currency markets. (2) Closure of all large collectivized and cooperative farms and distribution of their assets to small farmers and herdsmen. (3) Closure of the state trading corporations. (4) Privatization of all small-scale commercial establishments and most of the large-scale industries. (5) Removal of subsidies and most guaranteed social services. A key reform was the liberalization of the tugrik to float with the US dollar. The tugrik had settled at 400 tugrik to 1 U.S. dollar in 1994 (from 6-7 tugrik to the U.S. dollar some years earlier). Major pieces of legislation which introduced the market economy in this period were: Law on Business Entities of Mongolia, Banking Law of the MPR, Foreign Investment Law of Mongolia, MPR Privatization Law, Law Prohibiting Unfair Competition, and the Bankruptcy Law. Privatization commenced with the issue of T. 3,000 worth of pink vouchers and T. 7,000 worth of blue vouchers to every citizen. Since there were no capitalists in Mongolia, these vouchers enabled the purchase of shares in businesses. Pink coupons were transferable, and were used to buy shares in small businesses. Blue vouchers were not transferable, and bought shares in large businesses. Pink vouchers enabled new business persons to accumulate vouchers to buy up shops, trucks or cars, and small work places. Blue vouchers, which are not transferable, could not transfer ownership of the large businesses, despite the under-valuation of assets of the enterprises by the enterprise managers. These enterprises ended up with thousands of shareholders, sometimes as many as 40,000 or more, each shareholder having a maximum of 5 to 7 shares. The former chief executives got themselves elected as the General-Directors (Chief Executives), and the Representative Governing Boards (equivalent of Boards of Directors) were packed with important local personalities. By the end of 1993, 764 large enterprises and 2,440 small enterprises were privatized. Collective farms were divided into small units and livestock was distributed to herdsmen. The public housing sector is still mainly in state or local government hands but will be privatized soon. Of the large privatized companies, the government still has shares in 165. The consequent economic and social effects were disastrous, with the economy registering a decline of around 50 percent from 1990 to date. Production in the large-scale industries has dropped from 90-95 percent capacity utilization to 30-35 percent and is still declining. Almost all major industries are technically bankrupt, workers are being paid in devalued tugriks carrying about 5 percent of the former value, pensions have become valueless, and the entire social safety network is being dismantled. Concomitantly, the social indicators have also declined: unemployment and infant and maternal mortality have risen, school attendance has declined, and malnutrition, vagrancy, and crime have increased. Foreign advisers attribute the continuing decline to the force of external economic shocks, the weaknesses of the existing means of production, and the isolation of the economy from the international market. They say that due to the lack of an adequate macro-economic environment for private business and foreign investment, the full benefits of the initial reforms cannot be achieved. They ignore the shuttered factories and government stores (they say they were too big for Mongolia anyway) and point to the entrepreneurial spirit in the numerous street kiosks and the large flea markets. They point to the new millionaires riding Mercedes Benz cars. What they do not say is more relevant. Western management gurus are fond of equating business competition in open markets to warfare and use military terms to describe strategies designed to destroy competitors and gain new markets. Large sophisticated armies easily defeat small ill-equipped armies. But foreign aid specialists from the industrialized countries advising developing countries recommend that the weak and ill-equipped go forth and battle the giants on a level plain in open competition. The results were predictable. The huge Mongolian industries are unable to sell their products against more sophisticated foreign imports coming from China; local producers sell raw material to Chinese traders in exchange for manufactured products, denying raw materials to local factories.7 Aid consultants, who use up most of the aid monies to ex-communist countries, recommend more privatization, more competition, and more open markets. But the finances for modernizing plant and retraining management are not forthcoming. Mongolia receives economic assistance from the ADB and the IMF for some infrastructure development. The Ulaanbaatar airport is being renovated and the Ulaanbaatar Thermal Power Plant 3 is to be completed with foreign contractors and loans. The Medium-Term Program (1993-1996) of Economic Restructuring is being implemented with IMF guidance. At the Aid Donor Meetings in Tokyo, the G7 countries have pledged various aid packages to support the countrys economic reform programs. Bilateral aid programs focus on womens issues, preserving bio-diversity, environmental protection, overhaul of the legal system, building stock markets, etc. Funds are not available for investment in developing the moribund industrial sector, because the logic of free enterprise theory is applied to recommend that these should come from private investors. In a country where capital accumulation was only made by the state, which has now been impoverished by the new economic order, this is a condemnation of industry to extinction. Local robber barons of the new capitalist era are still too poor to take on large industries. A very few foreign investors have entered Mongolia from Hong Kong, mainly for garment manufacture. But international investors have generally ignored Mongolia. The dismantling of large-scale agricultural cooperatives and state farms has also led to the contraction of agriculture. By breaking up farms into small units owned by former cooperative members or workers, farming has been denied the capital resources, machinery, and technical services that existed earlier. Farmers are reverting back to subsistence agriculture. Food shortages have occurred and will become more frequent as subsidized imported grain replaces locally grown wheat. Though stabilization was slated to be in sight by 1994, both agriculture and industry declined even in 1993. Livestock declined by 2 percent, industrial production by about 13 percent. The Consumer Price Index was 109 percent in 1993, down from 154 in 1992. Real average household incomes fell 28.2 percent. The trade deficit has been controlled and inflation is declining due to a tight money policy. But there is no light at the end of the tunnel. Beggars and the homeless are now on the streets in freezing winters that reach minus 40 degrees. Though restaurant waiters and hotel staff may proudly decline service tips, and rural herding families in their ghers (traditional dome-shaped tents) still offer free meals to passing travellers, pickpockets now haunt buses, prostitutes line the karaoke bars, and some children live in sewers. And the Western NGOs, churches, and charities have joined the armies of aid-workers to perform their good deeds in Mongolia. NOTES 1. Robert Worden and Adrea Matles Savada, "Mongolia, A Country Study," (Washington, D.C.: Federal Research Division, 1989). 2. "Mongolia, A Centrally Planned Economy in Transition," Asian Developmental Bank (Hong Kong: Oxford University Press, 1992). 3. ShahidYusuf and Shahidjavad Burki, "Developing Mongolia," World Bank Discussion Paper (Washington, D.C.: The World Bank, 1992). 4. K.L. Abeywickrama. "Preparation oflndustrial Enterprises for Privatization and Restructuring in Mongolia," UNIDO, 1994. 5. IBRD/Worlcl Bank, "Mongolia, Tosvard a Market Economy," Washington, D.C., 1992. 6. Mongolia, Ministry of Trade & Industry, Market Research Institute of Mongolia, "Economic Update, Mongolia, 1993," Ulaanbaatar, 1994. 7. Mongolia, Ministry of Trade & Industry, Market Research Institute of Mongolia, "Foreign Trade Statistical Survey of Mongolia," Ulaanbaatar, 1994. 8. Mongolia, Ministry of Trade and Industry. Market Research Institute of Mongolia, Ulaanbaatar, 1994. ================================================================= NY Transfer News Collective * A Service of Blythe Systems Since 1985 - Information for the Rest of Us 339 Lafayette St., New York, NY 10012 http://www.blythe.org e-mail: nyt@blythe.org ================================================================= nytlab-06.06.99-12:01:17-31348