The Mongolian Experience

1
The Mongolian Experience

• Week 6

2
Reform Direction

• Before 1990 Mongolia had a fully state-owned
  economy and 70 years of communist one-party rule.
  
• Since 1990 Mongolian social and economic reform
  has been focused on
• an open country
• an open economic policy
• the protection of the right of private property
• privatization of social and economic sectors
• encouragement of competition aimed at building
  and developing a market economy

3
Reform Direction

• The process, speed and results of economic reform
  have been different in each of the last ten
  years, and can be divided into four stages.
• 1990-1993 Starting point Crises and supply
  shock.
• 1994-1995 Policy failures lead to stagnation.
• 1997-1998 Move to economic stabilization
• 4. 1999-2000 Limited aggregate demand

4
Crises and supply shock

• Reform started from the point where almost every
  enterprise and foreign trade had collapsed
  because of market shortages and a lack of capital
  and foreign aid.
• Although negative effects such as inflation and
  unemployment must be expected during any social
  and economic change, Mongolia faced
  hyperinflation (325 in 1992) and a supply shock
  the like of which it had never experienced in its
  history.
• Decreasing prices in 1991 and the lack of an
  effective Government policy were the main reasons
  for the negative effect of the first stage of
  economic reform.

5
Some positive steps from Government

• Starting the privatization process in animal
  husbandry meant that the supply shock did not
  affect the agricultural sector and allowed the
  further development of Mongolian livestock.
• Open economy policy, price liberalization and
  the freedom for Mongolian people to travel to
  neighbouring countries increased foreign retail
  trade, which improved supply in the market and
  slowed down the pace of inflation.

6
Policy failures and stagnation

• Although main economic measures like the
  privatization of state property, the
  restructuring of the banking sector, and price
  liberalization were taken, the absence of any
  real work ethic meant that their implementation
  was very slow.
• Result reform was faced with stagnation, which
  lasted until the mid-1990s and still has a
  negative effect today.
• No decision was made on the liberalization of
  the basic prices, which continued the crisis in
  the energy sector until the end of 1996 and
  prevented development in all sectors, especially
  small and medium sized enterprises, and continued
  the supply shortages.
• Positive point Stable price of copper
  concentrate in the world market and a good level
  of energy imports has led to an increase in
  exports, especially of copper concentrate since
  1995.

7
Move to stabilization

• Positive points
• 1. Liberalization of basic prices in 1996, and
  free import tax resolution in 1997 were important
  moves towards ending the supply shortages and
  contributed to the survival and increased
  competence of domestic enterprises.
• 2. Within two years, the chronic shortage of
  goods ended and the rate of inflation came down
  to 6 in 1998.

8
Move to stabilization

• Democratic coalition focused on economic reform
  and underestimated institutional factors and
  their importance. As they failed to resolve the
  confusion in the justice system there was no
  solid legal framework to safeguard the results of
  economic reform since 1990. So criminal
  activities, bribery, bank failures, and
  government discharge become a normal part of
  Mongolian daily life

9
Limited aggregate demand

• No growth in GDP in 1999 2000
• Possible Reasons
• Animal husbandry, which accounts for 30 of GDP,
  lost 3.4 million livestock because of disasters
  with heavy snow and deep cold in winter and dry
  summer in this period. Many herdsmen's families
  and other people saw their incomes disappear.
• The richest Mongolians, who account for most of
  the aggregate demand, no longer had anything on
  which to spend and invest their money as they had
  invested in such things as cars, homes and
  buildings from 1996-1998.

10
Privatization by voucher system

• Between 1991-1995, the most leading 470 state
  enterprises were privatized and 1.1 million
  people became shareholders of these companies.
• The result of this four years privatization
  process, enterprises were owned by a huge number
  of shareholders with equal share but no
  experience about how to deal with private
  property especially big enterprises.
• So the most enterprises were faced with
  difficulty to survive in new economic situation.
• Many shareholders lost their trust in enterprises
  that their ownership brought nothing - no
  dividends and no other benefit.

11
Mongolian Stock Exchange (MSE)

• Has played crucial role in privatization of state
  property in last ten years in Mongolia.
• Result of this privatization is the most of
  Mongolian enterprises are owned by just a few
  Mongols and still a lot of financial sources in
  people's hand.
• Current economic situation needs efficient flow
  between financial sources and economic sectors.
• MSE is willing to play classical role of any
  stock exchange, which is to develop equity and
  stock market in this country.

12
Mongolian Stock Exchange (MSE)

• Many shareholders would prefer to sell their
  shares rather than to keep their ownership.
• MSE began secondary market trading in August 1995
  with the aim of
• Centralising proerty
• Building the necessary conditions for business
  development
• Developing stock trading

13
Mongolian Stock Exchange (MSE)

• Possible solution
• Companies could offer shares with no voting
  rights, that they could keep their power in
  company management or to sell attractive shares
  to foreign investors with a good financial source
  and management experience.
• Foreign investment has been always played very
  crucial role in Mongolian economy.
• Statistics show that GDP growth is being kept
  around 3.5 when foreign investment is 48 percent
  of total investment.
• Therefore need to attract more foreign investors.

14
What is the current FDI situation?

• In the last 10 years, there have been 1,400 joint
  ventures and wholly foreign owned companies from
  61 countries with a total investment of 331
  million US registered in Mongolia.
• According to the origins of investment the
  largest investors are
• Peoples Republic of China
• Russian Federation
• Germany
• Japan
• USA
• South Korea

15
Mongolian Entrepreneurs views on business
development in Mongolia

• (J Odjargal Businessman of the Year 2000)
• The scope and potentiality of the business,
  conducted by one person is always limited
• The key issue of success in business is a right
  selection of co-workers, particularly managers.
• In addition the traditional selection criteria
  such as education, work experience and
  humanitarian, it seems hard to identify their
  business mind development and talent and
  cleverness.

16
Mongolian Entrepreneurs views on business
development in Mongolia

• In addition to the contract-based salary,
  employees are paid an encouragement bonus upon
  achieving higher result
• The willingness towards better life is the key
  driving force of the people to work efficiently.
• If one correctly identifies, organises and
  directs them, Mongolians have a high capability
  and potential.
• The internal atmosphere of the team is very
  important for the productivity of the company
• The pursuit of team goals and to have team
  responsibility for both achievements and
  mistakes, from one side creates an efficient
  business-like and from the other side a mutually
  cooperative team atmosphere.

17
Mongolian Entrepreneurs views on business
development in Mongolia

• I have critical view on the phenomena observed in
  Mongolia that many of them employ their own
  relatives regardless their knowledge and skills
  essential for the positions, and offer them more
  power, and consequently this situation leads into
  loss of a business-like atmosphere in the team

18
Information management the driving force of
business

• Success and failure in a business are dependent
  on
• how information is obtained
• how it is managed and
• how efficiently it is used in the business

19
Knowledge based economies

• The powerful tool of the knowledge-based economy
  is information technology.
• The government of Korea has introduced its
  program to computerize each household of the
  country
• Costa Rica is implementing "one computer to one
  pupil" program for the elementary and secondary
  schools.
• Ireland, the country has a population closer to
  Mongolia's, has invested a considerable amount
  into Information Technology field preparing most
  of its students on hardware and software
  development, and such of situation resulted in
  attracting many trans-national corporations in
  computer technology into the country

20
Knowledge based economies

• India has become major exporter of programmers/
  software engineers-developers.
• China and Malaysia have established special zones
  to develop information technology, where a
  favourable legal environment has been
  established.
• As a result these countries have become advanced
  technology producers

21
Tax Problems

• According to the "Law on Foreign Investment,"
  information technology and software development
  companies with foreign investment enjoy tax
  holiday in first 5 years.
• However, such a rule does not apply for the
  national companies that invested in the same
  field.
• If such situation continues further, Mongolian
  companies may locate their assets, that can be
  invested in priority sector of Mongolia, in China
  or other countries, whilst only foreign companies
  will dominate in the priority sector of our
  country

22
Tax Problems

• ie, there is no equal opportunity for Mongolian
  companies, working in their home country to
  compete with foreign companies.
• The reason is not a situation of being lack of
  assets or knowledge, but it is just the law of
  Mongolia

23
Cultural anecdotes

• There is international time and then there is
  Mongolian time
• Mongolian time means that a planned event will
  happen at sometime in the future but not at a
  specific time.
• What happens when you make an appointment for a
  business meeting?
• That's when Mongolian time comes into play. There
  will be a meeting but not at the time originally
  discussed. It doesn't take much to throw off the
  schedule.
• It is most odd that in a country that is
  valiantly trying to establish itself as a viable
  commercial partner in world economics, that it's
  business players are not attuned to the finer art
  of planning, scheduling, and following through -
  three essential ingredient of time management and
  business management

24
Mongolian Time?

• An example of the retail stores which jeopardize
  the fundamental goal of maximizing sales.
• Many store fronts fail to post hours or days of
  operation. Others close at times to convenience
  the staff and not the customer. One busy store
  north of the State Department store, provides a
  lunch break to it's staff between 2 and 3 p.m.
  This apparently to enable the 1p.m. to 2 p.m.
  lunchtime crowd to shop during their break.
• However, what this store gains in sales from one
  group they lose from the angry crowd outside
  their store wondering what their hours are and
  why the staff don't come back from whatever their
  lunch is. 12 minutes past three is a peculiar
  time to reopen the store. This procedure may have
  been suitable when it was only locals who shopped
  at these venues, but now with the high influx of
  tourists, and some residents having more spending
  money, a good business practice would be to
  periodically review business procedure.

25
So where are the management skills coming from?

• Management skills are being developed through the
  Mongolian Universities, but I wonder how many of
  the entrepreneurs - of which there appears to be
  no shortage based on all the new businesses
  springing up all over the city, will ever have
  opportunity to receive more than training by
  trial and error

26
The Growth of the Informal Sector

• 30-35 of economic activity and/or employment
  resides in the informal sector.
• The crisis of the early and mid-1990s, during
  which large pools of labour were released from
  formal employment. Rural to urban migration.
  The "market's" reallocation of resources toward
  areas neglected under the old system services
  such as distribution and transportation. The
  institutional environments faced by the formal
  and informal sectors hindering growth of the
  formal sector, facilitating entry for the
  informal sector.