Is the smart government an extractive club?

We celebrated our national holiday, Naadam, for an exceptionally lengthy time this year. This is the first time ever that a law was passed to extend the public holiday from three days to five days. Also, the 90th anniversary celebrations of more than 120 soums took place this year, causing a massive Naadam wave to move from the capital city to the countryside. Mongolian National Broadcaster reported that our government officials, including cabinet ministers, spent 10 days, “working in the countryside and actively checking up on the progress of their respective sectors they are responsible for.”
It is doubtful whether our declining economy can survive these huge Naadam celebrations. Our economic growth, which was 17.5 percent three years ago, has now been reduced to 7.5 percent. The inflation rate, which was not supposed to exceed one-digit numbers as promised by the government, reached 14.7 percent in the first half of the year, while the current account deficit has grown as big as one-third of our GDP. Furthermore, foreign investment declined by 65 percent in the first five months of 2014. Also, due to the 3.8 trillion MNT injected into the economy by the government’s price stabilization program, tugrug rates have fallen by 27 percent. As a result, one U.S. dollar is exchanged for 1,840 tugrugs today. The turgrug decline increased import prices, which caused many companies to squeeze their operations. It led to a significant reduction in tax revenue and government income. As a consequence, road and other construction projects financed by the governmenthave been suspended. Our foreign exchange reserves were cut in half within a year, falling to 1.6 billion USD by the end of May.
Although it has been 60 days since the government announced their 100-day action plan to revive the economy, there has been no change in our economy except for the enactment of foreign investment, petroleum, the “glass account”, and mineral laws, as well as the signing of the concession agreement for CHP-5 power plant (combined heat and power plant-5). Despite some decreases in sales, real-estate prices are not going down but are still heated while the banks that are allocated with one-third of the housing mortgages are facing risk. Also, as the amount of bad loans increases, there is a threat that the economy could entirely go into decline.


Mongolian politicians today are rushing to make the point that foreign investment will increase and there will be double-digit economic growth as soon as a stable legal environment is created. They are saying that good laws will get rid of corruption and restore the faith of other countries in Mongolia. As if in response, Moody’s, the credit rating agency, downgraded Mongolia’s sovereign rating from B1 to B2, and presented a Naadam gift that set a more negative trend.
Mongolia’s current economic decline is mainly caused not only by legal instability, but also the failure of our government to implement and enforce existing laws. If the authorities do not benefit from implementing and enforcing a law, they simply make changes to the law or pass new laws such as the tax amnesty law. Mongolia’s economic decline traces back to our politics, not the economy. Unless we determine the cause of Mongolia’s current unfavorable market conditions and fix it, the situation will stay the same regardless of what laws are passed. Due to repeated changes, both external and internal investors do not have faith that the government will not do it again. Our recent history shows that large investors want to establish a stability agreement before commencing a big project in a country with an unstable legal environment, like Mongolia.
Daron Acemoglu, an MIT professor, and James Robinson, a Harvard professor, studied the experiences of Zimbabwe, Sierra Leone, Colombia, and other countries that have gone bankrupt due to artificial causes that helped the authorities of those countries get rich while ordinary people became poorer. When they asked the question “Why do nations fail?”, they came up with a very crucial conclusion. Their answer to the question was that the reason why a nation fails is that their government becomes an extractive institution (not inclusive) that is used as a tool by a few elitists to protect their interests, acquire wealth, and maintain their political power for a longer amount of time.


Although our government and its structure have not become such extractive institutions today, it can be said that they are well on their way to getting there. A trend has been set for the last ten years that political party leaders have come to have monopoly power in their political parties. Instead of demonstrating leadership in society through their ideology, political parties appear to be turning into a tool for power for the few and their followers to acquire more wealth, and to control others using money.
The main condition that allows for such a situation is the ongoing non-disclosure of political party funding for campaign financing as well as operating costs. Financial reports, including revenue and expenditure, are not even disclosed to political party members, let alone the public. This secrecy becomes the underlying cause that dramatically increases corruption in public governance as soon as a political party acquires ruling power.
We, the citizens of Mongolia, have the right to know who is financing political parties, how they get refunded through the public budget, and have laws passed in their favor. Behind the scenes of legal instability, there is a huge battle going on for the protection of different interests, as well as a status quo of the redistribution of wealth and leverages against each other. It can be seen from how mining licenses and land permits are issued, withdrawn, and reissued.
Being cautious of doing business, Mongolians are increasingly becoming more interested in working for the government. The number of businesses associated with the government is going up while people now realize that such businesses never go bankrupt, despite how much debt they have or how much deficit they run. There is a Mongolian saying, “You will not go hungry if you follow the livestock.” It is now said that one will not go hungry if one follows a political party. It has been a long time since they started laying off almost the entire staff of the previous government after every election, as the winning party replaces everyone – including janitors – with people who are associated with their political party. As the staff turnover continues, there is less opportunity for people to gain experience and improve their skills. As a result, the capability of our executive branch is diminishing. Even though our political parties are aware of this situation, they are choosing to ignore it while attempting to make every government institution serve the interests of their political party leaders.
In order to prevent our government from becoming an institution that only serves a minority, we must have political parties produce their financial reports truthfully. It is the foremost objective of the citizens of a democratic Mongolia. To achieve this objective, the General Election Committee must be replaced by a Commission of Voters and be managed by trusted citizens with no political party affiliation, and have political parties produce their financial reports regularly.

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Posted by on Jul 27 2014. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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