Friday, August 28, 2009

The Swedish Model and Mongolia

Sweden is an exemplary model of social and economic development. Within a hundred years since 1868, when Londoners collected money for its starving children, Sweden surpassed the wealthiest country, USA, becoming a dreamland for many. The country, where one out of ten citizens is an immigrant, has a population four times larger than Mongolia’s and a land four times smaller.
A few days ago, three hundred participants from thirty three countries gathered in Stockholm for the annual meeting of Mont Pelerin Society, World’s Libertarian Economists’ Organization. At the conference themed “The Market Economy in the Welfare State,” scientists and economists held interesting discussions about the host country’s economic model. Among the participants were Nobel Prize economist Jim Buchanan, Yale University professor Richard Epstein, well known for his unique position on market and taxes; authors Mark Skousen and David Boaz, well known to Mongolian readers for their “Making of Modern Economics” and “Libertarianism: a Primer,” respectively. The mayor of Stockholm, Sten Nordin, hosted a gala dinner for the delegates in the “Golden Room” of the City Hall, where the Nobel banquet takes place on December 10 every year.
“We Swedes have three different development models,” said the famous economist Assar Lindbeck. Those are the leap in development period from 1870-1970, the period of slow growth from 1970-1990 and the reformation period from 1990 on. The first part founded Sweden’s basis for economic wonder and luxurious living standard. The middle is an unsuccessful attempt of socialism. The last phase is correcting the mistakes of the middle part.
During the first fast growing hundred years, the economy was not centralized and the government was small. It implemented a policy to create the rules of the game required for capitalist market and to keep those rules stable and transparent. The government played its “classical” role by creating public goods and services, building up functional reliable infrastructure, and supporting investment in human resources by introducing compulsory primary school system and by establishing engineering schools at all levels of education around the country.
They passed laws to support private entrepreneurship, liberalized the foreign trade and lowered the level of income and profit taxes. Soon with the increase of productivity, Sweden became the fastest, intensively developed economy of the world. As a result of the open policy, every Swede spoke fluent German by the end of century, and fluent English by the middle of the 20th century.
While almost a quarter of the population has migrated to the USA, a fifth of them came back to Sweden and started his/her own private business based on acquired knowledge and skills and started to produce goods and services for the international market.
Education and knowledge of foreign languages combined with their natural hard working culture has made Swedes contribute to humankind many well known brands and famous innovations: Alfred Nobel’s invention of dynamite, an easier and safer material to handle than gun powder, VOLVO cars and trucks, SAAB cars and planes, Eriksson mobile phones, IKEA furniture, H&M retail chain, ABBA pop group, to name only a few. Another distinct feature relevant to mention is their creation of a strong army of relatively well paid, competent, almost incorruptible and reputable public officers.
Since the late 60’s, the socialists with their promises of a paradise have increased taxes and have attempted to create a land of welfare nation with tax payers money (the second model). Slowly the country kept losing its competitiveness while the economy came to stagnation. After the 90s, the country has been trying to correct these policies by reforming the ill public sector (the third model).
Mongolian current economic and social situation closely resembles Sweden of the last century’s early period. One would assume that we better pursue the open economic policy consistently and encourage every business to orient for the global market. One would further assume that it is better to encourage investment in development of human resources capacity and make particular sectors competitive in the North-East Asian region. In short, the most relevant model for Mongolia seems to be the first one that boosted Sweden’s economic growth.
Instead, our government is following the second model which served almost as an obstacle in the prosperity of Sweden. One would once more assume, that if a country like Sweden could not create a “welfare nation” on a solid basis of the hundred year old economy, Mongolia would definitely not be able to do it, with the lack of a functional infrastructure and without a single of our companies having entered into the world market with original products and services other than mineral commodities. We cannot become a “dreamland,” even if we sold all our abundant minerals, when we have a wrong model of development.
However, there are a number of smart initiatives taking place in Sweden such as the creation of private pension funds; school voucher systems where the education of a child from a low income family at a private school is paid from public fund; connection of university labs with private companies and industries; and very well functioning internship programs that increase productivity and equality. These are only few ideas to consider and adapt to Mongolia’s development.

Friday, August 21, 2009

Key to Urbanization

Written by Jargalsaikhan.D
UB Post
Friday, August 21, 2009.

Any city or settled area develops from a power that supports the energy of residents who aspire to live a better life, and not from a power that limits and diminishes their internal will. Despite all hopes, in Mongolia, the communist method of attempting to solve community problems without the community itself is getting stronger instead of outdated. In last year’s election of capital city’s legislative body, all representatives actively competed with each other promising the nation to perform all sorts of miracles if only they get elected. More than a year has passed since this extravagant overture and people are still waiting for the action.
City and district management is still under the trap of negotiations set up by political parties. Top management positions at these levels are given out as reward for political engagement. As a result of a so called coalition, the number of deputy seats keeps increasing and the decision making process keeps slowing down while operation costs keep inflating.
If a supporting company of one party takes over one public property, then a supporter of the other party is entitled to take over another property. Both sides, together or one by one, go for state owned company’s chief executive seat or property to milk money and share it with a related political party. Take a glance, for example, at the way how all state or city owned companies were run for the last 19 years. As a result, there is no single problem for which the city of Ulaanbaatar is responsible.
Small rain floods the city because the dams have disappeared. People live in dark streets full of waste, without drinking water but at least with expired food and get poisoned with heavily polluted air. In short, we are getting less and less secured. Ulaanbaatar is not getting urbanized, but “ruralized,” read “medievalized,” and reminds one of the shaky dining ger standing at the major off-road connections.
City rulers of all times never formulated, let alone strictly followed, a workable, long term development plan and policy. They pretended to manage while the citizens were pretending to be managed. From election to election we replace some of them, but it is like replacing one feudal with another one. No progress.
Yet, a housing project that replaces ger districts could be a major driving force to enforce urbanization. The construction of housing for 170,000 families would be a historic jump in economic, social and cultural developments in Mongolia. This initiative of exchanging land for apartments for every ger district resident was proposed by the Mongolian Civic Union to Ulaanbaatar citizens and city officials. Nothing is done in this regard except for the fact that the former mayor successfully used the motto “Exchange Your Land for a 3-room Apartment” as a slogan for his campaign and got elected in the Parliament last year. It is not clear how many of his voters got their land replaced with 3-rooms.
The residents in ger districts could create cooperatives and make a plan for construction of houses, schools and other common services in cooperation with the city and district officials.
This cooperative could become a public company where those residents and other participants owning shares would not only get his current land replaced with apartments with certain number of rooms, at a certain location by the preliminary rules, but also share profits from the sale of remaining apartments. In this project, many will have not only an apartment but also a job.
This initiative could get a wide range of support from architects, engineers and other professionals. Since all participants have a share in the public construction companies, the cost will be minimized may be to the third per square meter. Thus estimated bribe level for land title and construction related permissions will also be reduced.
The most efficient method in dealing with huge differences in price between land owners and the city is to invite owners to become shareholders of the project.
The rest is a question of technicalities. The decision making power of citizens to improve their living condition should be in their hand. The city officials should support that power instead of limiting it.

Mongolians for fair taxes, wise spending.

Friday, August 14, 2009

Destiny of construction industry

Written by D.Jargalsaikhan
Friday, August 14, 2009.
UB Post

The construction industry is laying unconscious in the emergency department. With mad high prices at the peak its whole body is shivering, in spite of all efforts, nothing has changed for almost a year. If this patient dies, all who invested almost one trillion tug into 470 unfinished buildings, as well as 7800 hopeful prepaid homeowners, and 78000 employees will be lost. The industry people ask the government to inject money and think that everything will be OK as before. Is this the right way?
One must have the right diagnoses before attempting to save the life of a patient and to cure from the disease properly. If the diagnosis is wrong, no treatment can help.

The basic reason behind the disappearing productivity, declining competitiveness are distortions made by industry players, under pressure by the three powers: supplying, regulating and buying. These distortions are a direct consequence of ignorant, premature actions of the industry. Distortions in material, human and financial resources have heated the soaring prices. The majority of products were being imported because the domestic material supply could not match the demand growth. The businesses of a large economy after catching a glimpse of this absolute profitable demand stored the construction materials with longer and cheaper credit and sold them when they wanted. The continuing import of labor caused a loss of long-term policy in nourishment of national labor and their skill development. As for financial resources, the feverish demand for housing caused a mortgage loan with as high as 20 percent per annum, i.e. a borrower was paying for 2 apartments for the duration of 5 years. This gave a false expectation to investors. Banks supplied short-term high interests and enormous amount of loans to apartment builders and buyers at the same time.

The special characteristic of the construction industry, the issue of human safety, is the reason why it is heavily regulated. The professional monitoring department, who is supposed to regulate this, became a barricade rather than a stepping-stone. In international practice, the architectural company who designed the building is also responsible for the safety of the building from the beginning until the end of the project. But our controllers come only after the construction is completed just to grant or not grant the permission for operation, depending on the size of the bribe. In any case, the residents have already moved in and settled down. This is just one of many cases showing that it does not matter who is responsible for what.
The construction company acquires the land, constructs the building and makes sales to customers while it should be responsible only for building. As a result, they become their own clients. As the Mongolian saying goes: “The bull rests until the axe is raised.” That is why even the president Elbegdorj recently warned the people about possible collapse of a building in Ulaanbaatar. While they do everything, none is of high quality. There is no specialization. If everybody did what they, are best at doing, insurance service would develop and would place a double control over the operation risk. The government must make sure that the safety requirements are met, but should not perform the safety check by itself.

During the recent flood, many expensive cars were destroyed in the basement of a newly constructed apartment complex of Zaisan area. Consider who is responsible for the damage?
It is almost physically impossible to get permission for land title, for connection with the infrastructure and for operation. There are thousands permissions at hundreds of levels. Direct and indirect bribes to the national, city and local bureaucrats raise the cost of apartments by almost 1/3. Many construction companies are at fault here; land speculating companies are twice at fault.
The construction companies hunt for the most profitable customers instead of supplying products for particular market segment depending on purchasing power. Nobody has yet constructed buildings for lower income households in growing ger districts of Ulaanbaatar. Newly constructed apartments were occupied by families or their children who have been living in apartments anyway. Thus, the felt town is growing with the speed of light. Banks are not helping this process by favoring short-term profit and pushing up the price. They are even sidetracking by offering 2 percent per month mortgage loan. They daydream that they can still keep selling houses to poor people with the price set by the most powerful purchasing customers. In the end, the customers pay the huge bank interests and bribes for bureaucrats given by land speculators. This has now reached its limit.
The construction industry is shivering from high fever under the stretch of soaring costs in supply and regulation from the top and plummeting purchasing power of customers from the bottom. This tension will remain until the decrease of stretching forces. Otherwise, it will snap and everything will restart anew. The point is to decrease these restrains and not to keep injecting more money drops.

It will take time to see the disappearance of land and permission bribes, the decrease of bank interests and the purchase of apartments by ger districts people with their salaries. The question is, “can this patient survive until that day?” You reap what you sow. Unfortunately, we always expect a different type harvest from our seeds.

Friday, August 7, 2009

The Source of Wealth

Written by D.Jargalsaikhan
Friday, August 07, 2009.
UB Post

A man was planning his time and money to climb to the peak of a mountain. After lifelong preparation and effort, he finally reached the top. When he looked around he found out that it was the wrong mountain. The reason was that he used the wrong tools to measure his direction and progress throughout his mission. If careless in our plans for the future, Mongolia may end up like this man.
Every nation needs to use the right instrument to measure its success in creating and distributing wealth. One way of measuring this progress, which is employed in Mongolia today as it was in the socialist past, is through economic inputs – for example, investments through financial, natural and human resources. This method is also used for managerial performance evaluation. The rationale is that society will be richer as consumption increases.
This one-sided approach creates illusions and plants wrong beliefs and false expectations in society. In economics, countries with abundant natural resources or huge population are called ‘nations with comparative advantages’, but not all such nations are rich.
In our “wonderful rich homeland with ocean-like resources” as is sung in a popular Mongolian song, half of us is living on the verge of starvation. The good news is that Mongolia is not the only poor country in the world: there are plenty in Africa and Latin America today. The bad news is that most of these countries stay poor because the educated population leaves while the rest are kept under some dictator’s pressure for years until the other desperate tribe plots a coup-d’├ętat just to put its own dictator in power. Then the same scenario starts all over again. This chain of ruling takes centuries because wealth is measured by inputs. There is no measurement by results, outputs and outcomes. Governments in these countries never report on how they spend their resources. Those who challenge them are arrested for attempting to uncover state secrets.
Another way of measuring a nation’s wealth is by comparing inputs with outputs and outcomes. This formula counts the values created by each tugrik invested, each ton of minerals processed or each hour of labor applied. Whenever this ratio – called ‘productivity’ – is used, operations are more effective, the economy is healthier, there is less waste, and society is more conscious.
Productivity is a measurement that does not stem from a government resolution or someone’s orders. It comes as a necessity of a particular environment, whether it is the environment of competitiveness or competition. Only competition presses a country, an industry or a firm to increase its own productivity. Those who can increase it win, and those who cannot, lose.
Competition creates productivity, and productivity creates a nation’s wealth. Looking at Mongolia closely, one finds conspiracy instead of competition, which produces redistribution instead of production. Furthermore, only conspirators, distributors and their gangs get incredibly rich while the majority gets poorer.
In a competitive environment, information comes to all players at the same time. These players have equal access to supplier companies, the services of related institutions are of higher quality, the location has sufficient infrastructure, and skilled labor is shared. Nations that provide such environments in one or more industries become countries with competitive advantages.
After studying some 80 countries and regions over the last 20 years, Harvard University researchers concluded that countries that base their policies, laws and institutions on productivity grow much faster than those who do not. Take Singapore or Finland for instance as suitable archetypes for Mongolia.
In order to increase our nation’s wealth, we first need to create healthy competition in the economy. It should be our top economic policy priority. The government must not be a player itself. Instead, it should draw clear rules and make each player follow them.
The government should transfer every function to the private sector and undertake only those tasks that cannot be performed by private enterprise such as national security, protection of properties and human rights.
True competition creates productivity, makes all of us efficient, and also increases state wealth. If we use the right tools to point us to the right direction, there is still a chance for us of climbing to the top of the right mountain.