Friday, February 26, 2010

We Need to Manage for the Developmental Results

Written by Scott Powers Houston
Friday, February 19, 2010.
Today I’m again sitting with D.Jargalsaikhan, a highly regarded Mongolian economist, and frequent contributor to our paper, to ask him about the recent Mongolian economic forum which was held here in Ulaan Baatar, last week.
You were so excited about this upcoming forum that you were organizing last week, that I had to come back now that it’s ended, to ask you about the results - were they as productive and promising as you had hoped?
Well it was like the recent international forum they had in Davos, Switzerland, only this was just concerning Mongolia. It was productive and encouraging in that it helps us now, keep an ear to the ground, so to speak. We now have an annual forum whereby we can see and feel the general sense of what people are really planning with the economy, both from business, and from the government. And like at Davos, we discussed eminent economic problems, and how to best address these problems. At Davos, of course, the main agenda was discussing the recent problems in Spain, and especially in Greece, and they’re trying to decide the best course of action. There’s even speculation that the Euro may one day be dissolved.
What they should do is just kick Greece out; that would immediately solve the problem with the Euro. There should be minimum accountability rules in place, and guidelines set regarding operating at a deficit, and how much the deficit can be.
Well the EU already has rules, the problem is that the Greek government did not record the debits as a “sovereign debt”, so it was not clear whether they were operating at a true deficit, or not, or by what percentage. There needs to be better accountability, and clearer guidelines on how you manage debt of any kind. That goes for here, as well.
So how do you manage the debt?
That’s what the EU is fighting over right now. It’s a very big debate. The problem in Greece was caused mainly by the borrowing of the previous government, and how it was recorded, and what the new government should do about it.
So what was the news at the forum here?
The news was that we’re also incurring a huge debt now. In Mongolia, we heard the same general news about government spending, and that was bad news to me.
It seems that they’re now borrowing too much against the future. Now that they’ve discovered this “commodity futures selling” thing, they seem to be merrily selling off Mongolia’s potentially huge future resource revenue, for big bucks today.
Yes, they are selling out the future, in more ways than that. It seems to be a warped sense of propriety over the pursuit of money today, and with the recent campaign promises of cash payouts to the public, there’s clear evidence now that the two parties are conducting these policies in coalition with each other. I saw in a Bloomberg report that the Mongolian Minister of finance has recently announced the issuance of Government Bonds, which will be Dollar-based.
Like the United States did to finance WWII? It’s fine to get more money today, and the U.S. did it out of necessity, but it’s kind of like, devil be damned about the future to do that, isn’t it?
Yes, and according to the report, the government plans to issue US$ 1.2 Billion in bonds reaching a maturity in 10 years, at a guaranteed minimum of 5%. This is alarming, because it will increase our deficit by as much as 25%, yet it’s in the IMF restrictions that the deficit should not ever exceed more than 5% of the GDP. This is the bad news I’m reading from all the discussions at the forum.
I think there’s three main things that are needed to improve the economic prospects here.
And what would they be?
Number one, the people themselves need to change. It’s not just the government that’s to blame; there’s more to “developing” a country than just throwing money at it, and bringing in new technology. You also have to develop the minds of the people to be able to live in the modern world. If you take a child and keep him in a closet until he reaches maturity, he won’t have any idea about not only academic and social things, but so many other things about modern society (including macro-economics), as well. And unfortunately, most Mongolians who have not been exposed to Western cultures, just don’t even realize how much they don’t yet understand. Also, their development in this way was retarded by being under the Soviet regime for 70 years. And more specifically, one thing they don’t yet seem to comprehend, is the value of establishing good credit. Local bank lending rates here have to remain stiflingly high to compensate for the fact that there’s so many people here who are defaulting on their loans, and it’s so difficult to determine a person’s credit worthiness here, with no established rating system in place.
Well, it’s not only bad debts that are keeping bank’s lending rates so high. It’s also because the savings rates are so high as well. People here also are still largely of the nomadic mentality of “live for today”. They’re not yet able to really think ahead too well, because as a nomadic herder, you just make decisions day to day, usually based on the weather. And that’s also why I like Hernando DeSoto’s idea of developing the Ger districts with low cost housing. That would help the mindset become more modern, faster.
Sure, I like that idea too, in theory. I also think you could oblige the settlers in that ever-growing area (with many more expected to come this Spring), by demanding that they use more environmentally friendly ways to generate heat and power. You can offer them what would be basically homesteading rights, in exchange for meeting these various basic requirements.
Then by becoming property owners, that would empower them financially, and help to broaden their thinking.
But it will take at least two generations for these social changes to come about. What do you notice of the young people during your teaching?
I’m encouraged. Even the 15 year-olds seem much more socially evolved than even the 25 year-olds that I’ve taught here in Mongolia, in the past. So there is noticeable progress, and improvement being made I think.
But there’s more than human factors that need to change for development, and understanding, there’s also economic and social conditions that need to contribute as well. So what was number two?
Foreign governments need to stop pandering to the government here. Stop giving them so many free hand-outs. Most of the overseas development assistance is just being rendered on the Mongolian government’s own terms. They’re not even accepting loans at 1% because they’re spoiled and they say, “we never are asked to pay interest”, or they reject money which comes with a requirement that the European government offering the loan must monitor the funds themselves by sending one of their own people here to monitor it. It’s rejected because they just want to use the money to buy personal things, and then the foreign governments just pander to these unreasonable demands, and they allow the Mongolian government to monitor the funds, themselves, with no accountability. This has to stop. There has to come a time when someone bigger than the Parliament members themselves have to make ultimatums for them to comply with. “Play ball, or else no more help”. Because the Parliament members are never going to voluntarily relinquish their absolute power over business, by themselves. No one would voluntarily, or unconditionally just do that. Someone bigger than them needs to force them. The problem was established with the formation of the government in the first place, which allowed for Parliament members to also own private enterprises. No other democracy allows this, because of the obvious conflict of interest problems.
Well I agree that there should be a requirement of accountability for these overseas assistance loans. But we can not have a coup d’etat.
The damage is done, and now we must make change through the economic process with the Parliamentary elections in 2012. And as far as stopping the assistance, there were times when we certainly needed it, (like 1991-1994, and again in 2001), and we appreciated it, because without it, we may have collapsed. But these funds need to be independently managed. We need to manage for the best developmental results.
So who best to manage?
It depends, and the management’s success needs to be measured by the outcome only, and not by any other means.
And what I’ve also seen here, is that you have young, intelligent, ambitious Mongolians who have means, still being stopped in their tracks, with their projects, by the government. I have a friend who’s a young businessman, and this is all he wants to be. But now he says, “unfortunately, to really achieve what I want to do, I must become a politician”.
That’s the problem. It’s a double-edged sword. Politicians retain the ultimate power to decide on any business, without transparency. To move your business agenda forward, you must become a politician. That’s what happens when public property is sold under the table. Business and politics (well they’re always going to be connected in some way), but nonetheless, they need to be clearly separated. So what was the third thing?
Well the third thing is something that happily, already exists here. It’s something that Mongolians as a people have always possessed as part of their inherrant culture even since the times of Chinggis Khaan. It’s something other countries who suffered the fate of being stripped of their resources without the people ever being benefited, like (in history) Bolivia, Venezuela, Saudi Arabia and Iraq, didn’t have. And it’s the one thing that I think might ultimately save Mongolia, and possibly, eventually, secure a better future for all of it’s people.
And what is that?
Freedom of speech. Mongolian people have always respected different ideas from abroad, and have always exercised a lot of religious tolerance. In fact, I’ve noticed, especially in writing for the UB Post and City Night magazine, that we all actually have more freedom of speech here in Mongolia, than I even have within my own embassy, which threw me out simply for making the same suggestions I just made here, earlier.
I agree that this is a great strength of the Mongolian people. And we need to encourage and develop this more. We were surpressed during the Soviet times and we weren’t able to express ourselves freely, or grow as a culture. Now that we’re free, we can eventually reach solutions by dialog. But we can not force things. We can not create something on unhappiness. The choice, in the end, must come from free will and be borne out of a free society. We have to let it take its course.
So back to the forum, what else came from it?
Well we learned that with future forums we could do better. Unfortunately we could not accommodate all of the interesting opinion makers in our society. For one, we should not hold it again in the government house. By having it held there, only a certain limited list of people were allowed to enter. Secondly, we learned that we should prepare more in advance for the next forum, rather than just putting it together quickly, like we did with this one.
So with it being in the government house, even though it was “closed door” as you had said, do you think that there was still some pontificating, and political posturing on the part of the speakers, and not really people speaking from their heart.
Yes, and unfortunately, we also don’t really have effective leadership in this country, either. It’s hard to accomplish any real progress this way, but at least we were still able to get a true feel for what the upcoming economic climate will be, and that was the good news coming from the forum. We now can make a reliable assumption of what will happen in the future, or over the next year, and we can now develop an effective strategy, knowing essentially what we can expect to happen. And people can still learn more about all of these happenings by visiting our website.
So you mention “leadership”. Are you disappointed with the new President?
(Chuckles) Well, I know him very well, and he’s a good man at heart, but I don’t think he really carries much clout or influence over his peers – not even within his own party. And he’s not establishing strong ideas by leading with his own example.
But I see he seems to be proactive about trying to bring the real process of democracy to the people, to the common man, who I think at this time, most Mongolians fell ostracized by the process. I don’t think they fully understand yet, how much of a difference they themselves can make.
This time in history has needed him. And then one day, maybe we’ll actually see more progress if we eventually enter a time of real difficulty. But right now, despite the current world economic environment, this is not really a time of great difficulty.
Hopefully we can still make significant progress without that time ever coming.
I hope so, too.
Thank you for talking with me today.
It was my pleasure.

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