Friday, November 20, 2009

Spoiled Country

A household that spends more than it earns will either borrow from someone or ask for someone’s help.

If neither works, it will start selling its own property to survive and at the end will be ruined. Some young husbands that were spoiled in childhood usually go to their parents when they cannot feed their own family. Some get used to it and even start to expect their parents’ help. They forget to decrease their expenses and increase their earnings because they believe that in times of need, they can demand support from their parents.

There are nations similar to such families. We are one of them. Every year since 1991 when our nation completed a realistic state budget for the first time, we have always had budget deficit except for in the year 2008, when copper price was at its peak. Our government spends more than its tax revenue and asks for help from abroad. Long time ago all the big countries, like rich dads, have agreed to help the poorer countries with certain amount of their GDP. The countries that have received assistance in truly needed causes and have spent them wisely have become self-sufficient and economically strong. They have come to the level of “comprehensive partnership” with their former donor countries and today cooperate with them. These are good cases.

But there are nations that have never stood up firmly because they gain assistance just to cover the unwise expenses of their governments. Foreign assistance is not required to be paid back but foreign debts are. When the time comes to repay back, these nations ask to annul or forgive their debts. In the year 2000, all donors and recipients have met and signed “Paris declaration” agreeing to increase the results of official development assistance. Our minister of finance participated as well. Since then, every year Mongolian government representatives, the Ministry of finance included, go to any one country every year to confirm the government commitment under this declaration. But there are no results. Every year, the state budget makes deficit.

Today, the government of Mongolia is already used to receiving official development assistance from foreign countries to cover its wasteful expenses so much that the parliament has created a law to support state budget deficit with foreign money. Of course, it is very easy to spend other people’s money or tax payers’ money, then foreign assistance money (these are also their countries’ tax payers’ money) when it is possible to go without any clear report on what you spend it for.

As far as foreign loan is concerned, it is usually paid in twenty to thirty years. For such a long period rich countries get richer and the careless spenders get even poorer. The latter usually has to ask for a pardon. This request is expected to start from next year in Mongolia. Then our foreign relations will be transformed into bad-loan relations.

As far as foreign aid is concerned, one is not supposed to take whatever is available. Smarter countries take foreign aid based on particular policies that support their economic competitiveness, to equip a university laboratory with state of the art technology, to train particular professionals in the world’s best universities (making sure they come back) or to invest in other foresighted projects. However it is a pity that our government implements back-looking policies to cover their past expenses and receives assistance on the things that are and can be made by Mongolian private sector. It should be very easy for aid-implementation agencies of donor countries to work with Mongolian government with our very simple approach.

We grab everything that is offered. First, the donor countries select one of their companies for a particular project. The selected companies supply the goods agreed by two governments. Then, from our side, the government selects a Mongolian company who will receive those goods and sell them on the domestic market. The government takes these proceeds and contributes to its wasteful expenses, trying to mend the hole in our budget.

As a result of such a nearsighted policy, major distortions happen in the industries, where domestic companies produce the same goods as the official development assistance’s product (wheat, flour) or Mongolian companies import the same goods (gasoline). Industries are shocked and companies without any top connections go bankrupt.

When problems and complaints start to come from businesses and the people, our government officials preach by referring to a Mongolian old saying: “never look at the teeth of a gift-horse,” attempting to throw the stone of blame to the donor country. We, Mongolian citizens see where the problem is. The problem is not in the donor countries, it is in the Mongolian government.

For the government of this spoiled nation to direct ODA policy toward decreasing wasteful spending of the budget and increasing the economic competitiveness of Mongolia.

Friday, November 13, 2009

Abandoned city

We, the citizens of Ulaanbaatar shout until we lose our voices about the horrible smoke, hell like roads, dark lighting and thousands of other problems in ger (felt houses) districts all in vain. Why is that?


There are two major reasons: first, capital city residents do not have a chance to use proceeds from the values they create for their common needs, instead the government collects all the taxes into a central pool and almost does not give it back; second, citizens of Ulaanbaatar are not able to elect their mayor, the chief for public operations, who is nominated instead by a leader of a political party.

Cities, aimags and other local provinces always look forward to anything that will be given to them from the state budget, which is too centralized and superiorly wasteful. This budget system is really obsolete and each parliament member who approves the budget knows it very well already, but the issues of Ulaanbaatar are never their priority.

Although half of the Mongolian population lives in Ulaanbaatar city, only one third of the parliament represents the city (25 out of 76 members). One would expect half of them to be from the capital city. In 2009 alone, each of our parliament members has silently (no report) spent 500 million tugrugs for their “electorate needs”, and they will be increasing that amount to 1 billion according to the draft of the state budget for 2010. It means half of the 76 billion tugrugs will not go to Ulaanbaatar city. It is a misleading Mongolian practice that the parliament is becoming another ministry of finance. Actually, it is their way of camouflaging their method of bribing low-educated, poor voters with taxpayers’ money.

In any case, almost one third of Ulaanbaatar city’s population has no representation in the parliament. It is “abandoned” by legislative power. One can see very clear this abandonment of the city when the parliamentarians discuss state budget every year. For example, when they discuss the budget for 2010, they plan to construct 400 kilometers of road in the countryside but only 8 kilometers in Ulaanbaatar city. At the outskirts of Ulaanbaatar city, there are huge ger districts many times larger than an average aimag center. There are forty to fifty pupils in one classroom of middle schools of general education. A half of the city population is getting “civilized” by carrying drinking water from somewhere, burning coal, not having a chance to shower and going to an outdoor toilet.

These issues are not burning issues for our Mayor because he is not elected by the citizens, but only nominated by the leaders of political parties. In fact, they have never set a goal to improve the living conditions of city residents. They, themselves, know it very well. That is why when election of parliament members comes, they go to the countryside. They have been wandering around all the cities of the world advertising themselves as the mayor of Ulaanbaatar, but suddenly become a deputy from a local province in countryside.

Such mayors and their teams with a completely different agenda come to the city office every time and instead of improving living conditions of the residents they mismanage public property, create their own hotels and palaces inside existing parks and have almost finished selling “under the table” all free lands that could be connected with the existing infrastructure.

They have brought city planning to the highest possible level of chaos. They have shown how the city must not be managed and how the city can be the most polluted city in the world and the largest enemy of lungs of their citizens. We “thank” them deeply for that.

Next steps

Quarterly, when tax reporting time comes, the largest enterprises in Ulaanbaatar city go to the state tax department, the medium ones go to the city and the smaller ones go to the districts. Your company size can be determined by whom you are addressed or at which level you have your own “network” of influence to get the smallest possible size of tax payable.

In every civilized city and municipality in modern world, the local authority collects business taxes, personal income taxes and property taxes on their territory, accumulating and spending them for common needs of the residents. That is the only way to stop migration of their citizens and develop communities.

In some countries, if the sales tax is 7%, its 2-3% goes to government budget and 4-5% goes straight to local budget. The country and the city compete by leveling the percentage designated to them. Further, the taxes that they collect become only a guarantee for the long term bond that the city may issue for social and economic large and long term projects’ financing.

It is time for our government and politicians to discontinue regarding Ulaanbaatar as a province in the country. For the citizens, Ulaanbaatar is not a province, even though it might be to the parliament members. Those of us born in Ulaanbaatar would like to lead a city life.

It is evident that political parties will participate in the state parliamentary election at the national level. It is also evident that at the local level the citizens vote for Mayoral position out of the residents. The election of provincial governance by its local citizens is a model observed throughout the world.

Our city will prosper when its mayor is elected directly by the residents and not by a ruling party of the country. Only then will the mayor take responsibility before its electorate and will be called back by referendum if his work is unsatisfactory.

A substantial part of tax revenues should go back to those who had paid them in the form of meeting their collective needs and for community development. The Mayor of Ulaanbaatar must be elected by its citizens themselves.

Friday, November 6, 2009

Mongolia and Chile

Mongolia and Chile are similar in many ways. Minerals, including copper play an important role in both economies. If the state owned company, Codelko makes a central contribution to Chile’s economy, Erdenet, the two states-owned joint venture does the same for Mongolia. Yet Chile’s copper is an established business, which having one third of the world’s copper reserve, creates 1/3 of world production. Chile has a population five times larger and two times smaller the territory compared to Mongolia. It skirts half of the Pacific coast line of South America. Mongolia’s Oyutolgoi is considered the world’s largest unexploited copper mine.

There are many differences between the two countries as well. Beaches and forests are some of the major geographical differences. Yet, at this time of information and technological revolution, one would assume that there would be fewer differences in terms of individual capacity and governance. In Chile, the government was changed many times but the economy kept growing and at the present moment the country has entered the club of developed nations. The way that they achieved this result is very simple: Chile has been saving a certain part of its revenues coming from the increasing price of copper and when the prices went down, putting it back into the economy in order to keep the economic growth dynamic.

In Mongolia, when copper prices rise, the size of our government increases immediately along with its expenses, festivals, holidays and entertainment. Remember the fable where the grasshopper, freezing in winter’s cold, comes to the ant’s house and asks for food and heat: The ant, after having worked hard during the summer to collect and dry wheat, and now enjoying his rest in the winter asked: “Why have you not treasured your food and prepared a house for winter when the time was warm?” The grasshopper replied: “I was busy singing and entertaining myself.” To this the ant said: “If you could sing the whole summer, surely you could dance through the winter as well.” Sounds similar to the story of our government, doesn’t it? When money comes in from the higher price, their first task is to spend. Plus, it is both parties, ruling in coalition that compete with each other in their promise to people to give cash one more than the other. Then in difficult times, our government asks for foreign aids and even charges the foreign investor with cash before they can produce anything.

The state budget is a tool for economic development in Chile. But in Mongolia, it is a tool for implementing political promises and funding election campaigns of participating political parties.

Actually, our government including parliament members, government representatives and working groups, has made so many study tours to Chile, that by this time they could implement any program. Furthermore, the Chilean ministers of finance, other officials and advisers have visited Mongolia several times. There should be many costs related to these trips but the question is, “where are the results?”

We did establish a “Stabilization fund.” But have we not seen the initiatives created by Chileans to spend a part of their revenues for the diversification of the economy, for less dependence on market prices of one commodity and for increase of economic competitiveness? In Chile, they have developed salmon farms, superior wines and have diversified their export. The whole preparation was made under a careful plan. It could have been our major mission of our study of Chile, but nothing has been brought back to Mongolia. It is indeed a time for fewer visits and more work. It is also a time to develop and strengthen our private sector as Chile has done.