The Decay

UB Post

May 28,2010

The flood of drainage that have deeply penetrated into social life of our Mongolians, inundating corridors and floors of all government buildings and decaying our whole society rapidly, is the corruption and bribe. The corruption is originated from Latin word ‘corruptus’ meaning depravity, decay and bribe.


The history of mankind proves that a number of states and civilizations have discontinued to exist in the past, by decaying and decomposing not from outside but from inside. Only those countries that managed to establish proper standards of cultural and human relations capable to prevent the corruption before it happens or stop it as it happens, achieve more success than others, developing their economy intensively and making their population wealthy and happy.

It has been 25 years since world countries are ranked according to how the citizens of that country evaluate the corruption rate in government. According to the 2009’ Corruption Perception Index Survey conducted by the Transparent International involving 180 countries of the world, our country stood at 120th place together with Kazakhstan, while our southern neighbor is ranked at 146th and our northern neighbor at much better ranking or at 76th place. Though the corruption rate in China is twice less than in Mongolia, they fight the corruption with the force twenty times stronger than ours. “International Herald Tribune” Newspaper (Page 3, May 21st, 2010, IHT) published about thousands of government officials being sentenced for the crime of corruption in China. The Vice Minister of Supervision Hao Mingjin called a press conference where he stated that 3058 public officers including several city mayors were inflicted for corruption to various sentences till life imprisonment.

These officers were found guilty of corruption and swindle for abusing their power in distributing some US$386 million that the government allocated in connection with construction projects, land development, transfer of fixed assets and evacuation of residents. The “Associated Press” Agency warned that the government distribution of cash to population in connection with the regulations of fixed capital followed by rapid development of this country might aggravate the corruption which already widely spread, in which the Agency was right. “Communist” authorities started to acknowledge that the corruption is the biggest threat to their authority.

This communist country with a single political party system fully recognizes the corruption as their biggest enemy and is taking decisive actions to fight this. In our country with multi party system, the corruption has already spread to and invaded whole society and has turned into a widely-accepted normal standard of inter-human relationships. The two political parties that alternately ruled whole government, including executive and judiciary governance, have been encouraging the corruption instead of stop and tackle it.

Anti corruption reforms have a good chance of success only when they are moved by a top leader and persistent enough to overcome bureaucratic resistance and inertia according to experts. They also have to involve civil society and be free from political manipulation.

One clear example is that though many cases of bribery and corruption linked to central and local government officials are released by the press, the linked officials have become masters in ruling out them using other press and media. Because almost every press and mass media in Mongolia, particularly newspapers, television channels, are owned by a particular political party, all news about the corruption cases are all flash in the pain. Internal democracy of political parties has been also disappearing gradually. The method to internally bribe its members, who raise a certain question about responsibility and accountability by promising high positions, has spread widely. In this way, the corruption has become the biggest enemy of Mongolians.

Translated by P.Shinebayar

POLICY AND RATE

UB Post

May 21, 2010

Last week the Central Bank of Mongolia had published in all daily newspapers own interview with itself about its new decision to launch a program so-called “banking capacity building and supporting banks with equity increase” and first of all increase its “policy rate” by one percent reaching 11 percent.


It is said that our Central Bank has decided to toughen its monetary policy, according to world practice that all central banks of the world increase their interest rate as the inflation grows. 
Though commercial banks made Wednesday their proposal of purchasing the securities worth of MNT337 billion following this news, the Central Bank sold CBS (Central Bank Securities) worth of MNT290 billion with weighted average rate of 10.21 percent. Commercial banks slowed substantially thier lending to local businesses.

The owners of commercial banks in Mongolia are very lucky guys indeed. It is very nice to operate in a country whose Central Bank policy interest rate almost doubles world’s commercial banks loan rates. It is enough just to import cheap money from foreign banks and invest in CBS. If the dollar inflation risk is managed carefully, it is safer and more reliable than issuing credits to business in Mongolia.

Commercial banks gets another luck: to increase their equity capital at the cost of taxpayers. This is another legitimate way of equity in commercial banks, that are under the control of high ranking public officials, especially of ruling political parties, without any interest. Sharing any return on policy is one thing where the two ruling political parties coalistion exercises its consensus. Money does not make differences among poltical parties.

The idea of making sure that Mongolian commercial banks maintain their required ratios in capital is a good one. Increasing equity in this way alone is like if one treats the symptom of serious chronic illness in the monetary system that provides liquidity to the economy.

We must address the causes of the illnesses. Central Bank do not talk openly and bravely that basic reason of such chronic illness is outside banks. The position of President of Central Bank is the one that must clearly express its position on such important matter to decide the destiny of the country and that must fight for this.

The major reason of Mongolians large migration abroad is because Mongolian businesses get bank loans with the world highest interest (20-25 percent). This cost of financing makes the private sector (especially those who is not connected to authorities) not priftable and the economics not competitive. The latest example is that last night 3,000 young people, stood in a queue all night long just to register for selection for works in South Korea.

Why the loan interest rate, which is the cause of all these problems, is so high?

The major reason is that saving interest rate of commercial banks is very high (16-19 percent). This is the result of price war between commercial banks not to lose the few depositors of huge saving accounts. Because of non taxes on profit from saving interest earning, lending money to commercial banks is much easier than running own busineses in here. Besides it is quite risky to operate in private sector under current circumstance where corruption spreads and flourishes by walls of of public offices.

It is even more risky if you buy shares of companies listed in Mongolian stock exchange because the companies release not correct information about their businesses and financials. Another reason is commercial banks are not able to issue loans for longer, extended period because the maximum savings term is only one year.

The condition under which there will be more depositors and more money to save in banks is that the a lot of money should be accumulated in hands of people as a result of their hardwork. A country can be stable provided that there are large segment of middle and above middle class in the society, capable of accumulating the capital and investing. It is difficult for employers to purchase equipmet in order to improve their productivity as they cannot find a cheaper financial source for the term more than ne year. Plus, companies are not willing to expand and grow because government impose more tax on them as they employ more people.

The source that inspires and creates the requirement to improve the productivity is healthy and fair competition. Unfortunately, it is replaced by machination and conspiracy, in all sectors of economy. 
It has become an accepted standard of governance that a group of few people in the name of their poitical parties swindles properties of the country and capital city in close “partnership” with their partners, relatives and tribes. 
The third reason of high tugrug interest rate is the inflation that is about to gallop. Economists say sometimes that inflation is the robbery of government. The government inceases budget expense at any time they wish to, saying it is for the sake of people. In fact cost of increase and disbursement is almost and always higher than the help it selp. Becuase the assistance is organized so that people in close contact with political parties, their friends and relatives benefit first. The same princeiple is governing almost all state owned enterprises.

The devaluation of money can be limited if, only the budget expense is less than 17 percent of GDP and its growth is less than the growth of GDP. Those in Central Bank of Mongolia, who prepared the above mentioned program, surely know that if we fail to eliminate the above factors affecting the bank policy, then the monetary policy will fail to achieve its objectives.

The Central Bank is the most politicized institution like any other institution that are supposed to be free from political influence. Even if the Central Bank authorities want to say something, those who appointed them will shut their mouth by giving a black look only once.

Should taxpayers continue to pay for prodigal expenses of irresponsible government? How long Mongolia people must serve as a guinea pig?

Translated by P.Shinebayar

IMPOTENCE CLARIFICATION

UB POST

May 14, 2010

Our Parliament members have started to make another budget clarification (amendment) for 2010. Several years had passed since Mongolia started the ill practice of clarifying the annual budget any time the Parliamentarians want to increase the expenditure. May be we have the state budget approved every month instead of calling it annual budget?

It would be great if the Parliament will meet everyday without any break to celebrate Naadam Festival and the Tsagaan Sar Holiday. The MPs will have something important to be busy with. This time they have a good reason to increase the expenditure of the budget because the original budget was made based on estimation of world market price for copper at $5800 per a ton.
This time, our MPs cannot sleep in order to divide the windfall income because copper price jumped up to $7000 recently. They know well that it is not so easy to distribute such windfall ‘fairly’. There are only few clarifications on which OK buttons are pressed easily without any rejection. For instance, it is OK to add some MNT2.4 billion to foreign trip costs for our MPs and ministers. It is a matter of great honor for MPs to get some more money for their related constituency by fighting tooth and nail. On the contrary, if the copper price drops down, none of our MPs would never ever say a single word about trimming their budget expenses or making such clarifications, they even stand firmly for their position to spend what is planned in the budget expenditure.

This clarification to the budget that is made by our Mongolian lawmakers every time the copper price goes up is clarification to completely different things for Mongolian civic society. This is the clarification of how the management capacity of Mongolian state and government has deteriorated. The budget clarification of this time clarifies how seriously Mongolia is infected with the Dutch disease, how weak is our public governance management capacity and emergency needed for intensive care for the Mongolian economy.

Mongolia is vibrated nationwide when the price of only one mineral commodity vibrates at international market, which shows how seriously Mongolia was infected with the Dutch Disease. When the copper price jumps, blood pressure of MPs and minister get high in the fight to share windfall, but when the copper price declines they pretend as if they are not aware of the decline. This deteriorates normal function of the government and demonstrates how absolutely our socio-economic life relies on copper price at international market.

It has been almost three decades since civilized countries created a special mechanism that regulates their budget money when the market price fluctuates. They save the windfall earned due to increase of major export price at world market instead of hurrying up to waste it right and left, and releases it to spend when the price goes down in order to keep the country’s budget financing stable. For instance, Chile raises funds for its Stability fund in such a way. They place the Fund abroad in order to control inflation and, using the interest, finance economic reform, productivity increase and research initiatives.

As a result, Chile managed to liberalize its economy, explore new economic branches not dependant on mining and develop the country by means of cluster. Another clarification we, the citizens, clarified is the malfunction of the government after legislative and executive governments are mixed and it became a standard that parliament members become cabinet ministers. There is no subject to bear responsibility when the government shows their superiority every time the copper price jumps, when its speed exceeds economic growth and when their expense is bubbling, which made it possible to increase their expenses through the clarification to state budget any time they wish to. The management of Mongolian government is based on external factors not on firm principles, which led to the loss of foresight and prudence of governance and further the loss of long-term policy for social and economic development. The government has become incapable to fulfill their dreams and can see nothing beyond election.

The third clarification we, the citizens discovered is that there is a real threat that short-sighted actions of few irresponsible persons playing a game of political party might bring the budget deficit of Mongolia to unmanageable level and bring the country into bankruptcy, if we will not strengthen our governance management. There is a standard that normal function is provided well if we manage to keep the budget deficit below 5 percent of GDP. EU requirement is 3 percent. In case of Greece, because their budget deficit reached 14 percent, this country is on the verge of bankruptcy and all Europe is doing their best to rescue them. As Europeans has a single currency unit, they have no choice but uniting their efforts. What about us, Mongolians. We pledged to keep it below 5 percent to IMF in order to get large amount of money and recently the Finance minister said the deficit is 6.4 percent. Thus, it is not so difficult to understand that their so-called ‘clarifications’ are indeed the clarification of unaccountability. The only way to control the budget deficit is to approve a budget stability law as soon as possible.

The law is already ready and waits for approval only. If it cannot be passed before the end of this spring parliament session, it would have to wait until next parliament forms. The reason is our MPs cannot reject their golden chance to spend state budget funds for winning next elections.

At the end, if they are not able to make clarifications to budget, then they will have nothing to do basically.

Esteemed MPs do not pass that damned law. May the Unaccountability Prosper! Long Live Budget Clarification!

Translated by P.Shinebayar

Augusto Pinochet

UB POST

May 7,2010

In 1960’s socialist idea spread dynamically in South America, and left forces started to take power in almost all countries. In Chile, S. Alende won the election in his fourth attempt and nationalized land, industries, mines, shops and all entities and expelled foreign companies from the country in just a few years. These actions were followed by economic instability and shortage of food and consumer goods, resulting economic bankruptcy. In 1973 there was a military coup d’état and the President was shot in the Government house and all those of socialist idea were arrested and chased and hanged.

Military leader Augusto Pinochet appointed a number of young ministers, graduates of the Chicago school of economics (US) who had studied market economy theory and returned all confiscated property to their owners back and reestablished market economy relations and invested huge amount of capital to infrastructure development and managed to stimulate economy.

Economic restructuring, which Augusto Pinochet brought during his twenty six years of military rule at the expense of thousands lives of his countrymen, has been in introduced in Mongolia in peaceful way. If we Mongolians study the reforms he made, understand and adapt into our conditions, then we can achieve higher results in our socio-economic development, but not at the expenses of human lives and freedom, as this dictator has done.

It is worth to point out two major works of the Pinochet government, which played an exceptional important role in the present achievements of Chile. This is the introduction of innovation based economy and the amendment of the Constitution, ensuring fair, stable government and continuity in character of power. As for the first work is concerned, new government of Chile has concluded in 1974 an agreement on the compensation of US$87 million to ITT (International Telephone and Telegraph) of the USA. It was agreed that if the compensation money would be invested in Chile, especially in “scientific and technology research and development, and their integration into the economy” then the government of Chile would match the fund into all projects.

Thus how the first public private partnership (PPP), a nonprofit development fund was created, laying foundation for the present magnificent achievements, diverting mining revenue toward the socio-economic development through the diversification of economy. This was base for industrialization and defining socio-economic development guideline and developing innovation based economy.

The board of the “Foundation Chile” is composed of government and private sector representatives and it operates like a private company. Many private companies have become its donors. BHP, the major investor of the largest copper producing country has contributed to the fund recently US$20 million and has been collaborating to create competitiveness in the country’s economy.

Today, the Stability fund Chile has been allocated in off-shore and economic reform researches are been funded by the interests of the fund.

The next tangible work was the Constitution, formulated by Pinochet in 1980. This Constitution, formulated by the dictator is still in force today, ensuring stability of government, preserving continuity of governments’ accomplishments and enriching with new contents from the new one. So far five governments have served the country after Pinochet.

The Chileans have just copied their Civil law from French one. The legislative power (Congress) is vested on two Chambers. Senate or the upper chamber consists of 38 members, elected for 8 years and partial election in every four years. Chamber of Representatives or lower chamber consists of 120 members, elected at every four year. President is the head of Executive power.

At this time, when Mongolian society is actively engaged in discussion, regarding the productivity-based economy development principle and an efficient governance structure, it is useful to study the above said two works and creatively reflect in our future activities.

Sanhattan

UB Post

April 30,2010

Santiago of Chile is a city of 470 years history, stretching out the western skirt of majestic Andes range. New part of the old city is called Manhattan in Santiago or in brief Sanhattan, since it resembles Manhattan of New York for its unique architecture of glass skyscrapers, looming up as if competing with the high peaks of mountains.

Sanhattan is a modern district of trees and greeneries, planted with full of thought for the best of man and also the world famous brand luxurious stores, deluxe hotels are located here. It is also leading Latin America dynamic financial center for its per capita income ($15000).

We flew via Korea, the USA and Brazil for two nights, travelling to the other end of needle, pinning through globe and arrived in a city of 6 million populations and with fresh air and we from Ulaanbaatar city could here breathe deeply.

Sanhattan is a symbol of effective and efficient economic policy of Chile managing wisely its mining income and improving the living standard of its population significantly and basis for further development and progress and prosperity of Chile.

Columbia University professor Jeffry Sachs said once that any country has to pass through three major transitions becoming a rich from being a very poor. There are four different economic phases of structures: pre-commercialization, commercialization, industrialization and knowledge based economy.

The country has to develop its development policy and strategy, suitable for its own condition to move to the next phase.

Many developing countries get stuck for many years at pre-commercialization or at pre- industrialization or at pre-knowledge based phase. Main reason is the extremely difficult transition activities and the complexity of finding right form.

To carry out the initial transition, there should be dynamic urban and rural labor distribution, and exchange of production between urban and rural population. Economy shall enter its commercialization phase when all the rural population participates in this exchange process. Many of the African countries are stuck up in this phase because they could not accomplish this particular transition.

As for Mongolia, it has successfully completed its initial transition and engaged in the preparatory period for its next transition from commercialization to industrialization phase.

But as for Chile, it has completed this phase about twenty years ahead Mongolia and today engaged in the process of transition from industrialization to knowledge based economy.

Chile has brought an end to its dependency on minerals through Stability fund and diversified its economy and managed to strengthen its capacity. Today Chile has developed world level industries of fishing, winery, fruits, vegetables, wood and paper and is laying foundation for knowledge based economy.

It is a great opportunity and viable university knowledge to learn from Chilean experience, which has successfully gone through the path, turning mining income as its foundation of rapid development, which is a challenge for Mongolians.

It is possible for us, Mongolians to go through this transition relatively short span of time if we could wisely utilize the existing opportunity of globalization and information technology achievements.

At that time, Ulaanbaatar will have its own Manhattan and would increase per capita income up to the level of Chile or by three times.

Santiago city.

Role of the Government

UB Post

2010.04.23

Over the past fifty years, there have been no significant principal changes in our central government methods and strategies to rule the country.

Instead there are increasing number of politicians who speak there were many changes. Almost every person who got positions in central government make them autocrats, treat the citizens as their bondservants and still do all things in dictatorial way. Though they passed laws and orders to moderate property relations, which is a fundamental to society, and develop economy by the law of market economy, central government still cannot get rid of its old socialist approaches in regulating other social relations.

Experts from the Harvard University have found that the understanding that the government plays the most important role in determining and developing national advantages is baseless at all. The government’s decision that it has the duty of a helper and supporter for each economic sector, hinders firms in their efforts to develop their competitiveness on a long-term basis, causing the loss of possibility of continuous economic improvement. For instance, in our country, in order to keep major consumer goods prices stable (meat, petroleum etc) certain type of goods are stored for an extended period and are released to market at cheaper prices in times of shortage in supply.

Actual cost of such “aid” (storage cost, loss, seller’s choice, transport cost) is often higher than the sold price. Indeed this is a wrong political action for income transfer attempting to support a part of the community with the money of other part of the community. Beside material losses, this kind of “aid” dampens the firms’ desire and enthusiasm for competition, sometimes brings ties of some businesses and politicians too closer and encourages corruption, which causes big damage to society. Aids only support and assist the increase of demand for aid itself. Experts claim that the most important role of the government in developing the economic competitiveness is to be a presser and challenger.

In order to define and develop its competitive advantage, the government needs not only focus on improving and strengthening the business environment but also needs to support business competitiveness in all aspects. The only unalterable principle for the government is to establish standards of human safety and environmental impact precisely and ensure their firm observation and compliance. For instance in Spain, there are is precisely established high standard for construction of building facilities and all competent agencies obey to these standards strictly. In order to comply with such high standards and make a good profit, building companies introduce the best technologies and can be creative and initiative to be competitive, thanks to which this country is very popular in Europe because it has the most quality and beautiful buildings in terms of cold and sound proof walls and window sets, as well as planning and architectural designs.

Another function of the government to improve the competitiveness of business sector is to give the right signal at the right time. For example, in 70s when Japan-made products were considered as low quality and cheap ones, the Japanese government had tightened up all quality-related national standards and initiated popular Deming Prize, which was an important signal for companies in planning their businesses. Because it was the matter of honor for companies to receive this prize, which is believed to be the guarantee of excellence in quality, after nearly ten years the name Japan meant “quality” and soon almost every company started to export their products abroad.

In our country it is an opposite. Some public organizations rates the companies according to the amount of tax the companies paid (originally the taxation is supposed to be the matter of government) and if exclude “prize certificates” the price of which is paid by the competing companies, there is no specific government policy in Mongolia in this sphere. It is even strange that such prize do not separate the vodka, tobacco and petroleum selling companies that are anyway obliged to pay excise tax depending on peculiarities of their businesses.

Principal objective of the companies is not to pay taxes but to be competitive in their respective fields, expand scope of their business, strengthen their position in market being different by their productivity and make a high profit. Main duty of the government in economy is to create a domestic demand by which every business will continuously endeavor and be constantly creative and initiative in order to increase their productivity and profitability.

The government has a duty not to support and assist business activities but to press and challenge them.

Translated by P.Shinebayar

New Strategy

UB Post

April 16, 2010

Time has come to look back to past two decades when we pulled our economy by free market system and stood up with the help of international donors though there were times of failure and conclude ups and downs in reality. We need to summarize what we have been focused our national policy and energy on and what results we have achieved and seriously discuss what we have to do and what should be our priority to outline strategy for next two decades.


On the other hand, as Mongolia is more shining on the world mineral map and as it neighbors with the world’s biggest consumers, the sharks of mining industry are keeping close eye on Mongolia, some of them have already set up here. As we intend to extract and use our natural resources which is not recoverable, we, the Mongolians, have to not only address current problems but also we are obliged to create a resource that our next generations can make use of. We need a new strategy of state policy directed towards ensuring efficient and fruitful development our economy and society based on mineral resources we are in possession of.

We have to recognize that new circumstances require a new way of thinking. In the past, Mongolian government had focused on issues of macroeconomics in order to maintain economic stability. The policy of macroeconomics or of a “bigger picture” includes four major objectives: increase total output of production; increase employment; keep the goods and service prices stable; and balance foreign trades. The goverments of Mongolia, one after another have been doing it with mixed results, mainly under the pressure of its main lender the International Monetary Fund, but it gained some experience.

Mongolian government like other developing economies did not consider that a good marcoeconomic policy without an efficient microeconomic policy can not result in a success. Macroeconomic stability is a necessary condition for economic development, main purpose of which is improving living standards of its citizens, but is not a sufficient condition. Because the government failed to carry out its economic policy in integrated and systematic ways, only living standards of macro-decision makers and their allies have improved significantly. It is evident by the recent public announcement about the huge personal income increases of our parliament members and top political officials. As a result of wrong economic policy, social crisis has worsened and most of population got poor.

The President once stated during 2009 election that we have government officials much richer than citizens. The above-mentioned sufficient condition for economic policy is created through microeconomic policy or a policy that is to do with particulare industrial sector.

Though the government adopted certain industrial development policies in the past, there is no principal results yet. No sustainable development is reached in any of the sectors. Instead, the competition was replaced by conspiracy in every field, the government is involved in, the „close ties” between business and government was developed till the next election, because of which corruption has flourished and government officials are becoming richer and richer.

In the past two decades, Mongolian economy is politicized into real fever, and every one wants to be a member of a political party, like at the old time of socialism.
Originally, supporting the macroconomic stability by means of efficient microeconomic policy means creating a free competition in all business sectors. Under the circumstance of free competition, people have to race their minds and skills and supply demanded goods and service at reasonably cheaper prices, in order to improve their livelihood. 
The competition is created through the policy of productivity. Business clusters in a certain region, counry and locations increase productivity of that industry, where firms to supply for domestic demand first, then expand their business to foreign markets.

The July 1, 2008 event has shown that how fast the poor citizens can stand up and create instability in society, if we do not understand and implenment the needed microeconomic policy in order to address the poverty. The latest reminder for that are hunger strike protesters at the Sukhbaatar Square and events happening in Kyrgyzstan. 
Another urgent need to discuss the policy of productivity seriously is a business cluster emerging in the southern region of Mongolia already. If this cluster is supported by an efficient microeconomic policy, our underground resource can turn into aboveground resource and if not, only an empty hole will be left behind. 
Thus, the time has come to renew our economic strategy and policy.

Translated by T.Shinebayar