B.Lkhagvajav: If we can’t play by the universal rules, no one will play with us


 The following is an interview with President of the Mongolian National Chamber of Commerce and Industry (MNCCI) B.Lkhagvajav, about the chamber’s future goals and present economy related issues. B.Lkhagvajav, who is considered one of the leading economists in the country, is director of Urbanek LLC, and has formerly worked as an advisor to the Prime Minister of Mongolia.

You became the president of the MNCCI quite recently. How would you evaluate the chamber’s work that was carried out in 2014?

 The 19th annual meeting of the MNCCI was held on December 8 and 9, 2014. During the meeting, changes were made to the policies and rules of the MNCCI. Along with policy changes, the administrative management system of the MNCCI was changed as well. These changes reflect the first substantive change in  MNCCI policy in the last 16 years.

Previously, the administration was centered on one person. While making some changes in management, the position of president became necessary, for which I was elected. Also, the vice-chairman, the secretary, and the secretary general were newly elected to their positions.

 What led to these changes in policies?

 The MNCCI was founded on July 2, 1960. The 55th anniversary of the chamber is this year. In 1996, Mongolia approved the charter of the MNCCI. A year later, in 1997, the organization was formally established. Director Demberel was chosen to be the first director, and directed the organization for 16 years.

During Dembrel’s tenure as director, the chamber did not undergo any significant changes in policy, despite Mongolian society facing many changes throughout the last 20 years. When the chamber was first formed, the economy of Mongolia was based on a centralized economy under a communist regime, with state control over 100 percent of the economy. Today the central budget of the state is equal to 31 percent of GDP.

Now that the policies and rules of the chamber have been finalized, could you tell us about the future goals of the MNCCI? What has the chamber planned and what are its goals in the near future?

 The chamber has 25 executive officers and 75 board members. On January 22, a unified meeting will take place among all the officials, during which we will form resolutions. Later on, on January 30, board members will report on the operations of 2014 and approve the general objectives of 2015.

When I was nominated for the position of president of the MNCCI, I promised two things. The first is to have the economic transparency law approved within the first month. I think I’m close to fulfilling this promise. The law will be discussed in Parliament soon.

Secondly, at the moment, the chamber’s building is state property. This building was a gift from the People’s Republic of China but it is listed as state property. This issue is being discussed with Prime Minister Saikhanbileg.

The economic transparency law is my main goal. This law will ensure financial reform as well as capital mobility. Under these financial reforms, many limited liability companies will become joint stock companies. Furthermore, the financial reform process will lead to banking system reform. If the proposed legislation becomes law, these efforts will start this month.

The chamber’s transparency law will be enacted for six months. During this time, all citizens, enterprises, and even the state, must participate in financial reform. Also, issues such as the governance of companies and wealth distribution will be addressed. Single-person companies represent 99 percent of the companies in Mongolia, and because they submit false tax reports, these companies are not able to receive the benefits of company governance, financial mechanisms, banking systems, and capital investment. For this reason, many companies remain small or are removed from the market altogether. Addressing these market failures will be the biggest challenge of the coming six years. These challenges will be the focus of the chamber’s work.

Afterwards, the MNCCI aims to promote free trade and restore the court of arbitration. What creates favorable business conditions? It is when your properties, jobs, and services are protected by the law and the state. Businesses are built on agreements and there must be a court that protects those agreements. In the business sector, the main court that protects agreements and contracts is the court of arbitration. My next goal is associated with the court of arbitration. Just these two projects alone will require more than four years.

Free trade was established hundreds of years ago and it has its own policies, laws, and regulations. A country is able to take advantage of free trade when it is able to follow those laws, policies, and regulations. Unfortunately, on January 1, Mongolia breached these regulations and now many people complain about high taxation for exporting goods to China. If the state approves, Mongolia could export to 11 countries without export taxes.

 In your previous interviews you said that wealth creators will provide a way out of the economic recession. From your perspective, is the state getting in the way of wealth creators? Or are wealth creators not working fast enough?

 Wealth is created by the private sector, not by state officials.

Since 1992, we faced three big economic recessions, not including the current recession. The state’s fiscal policy has always suppressed wealth creators’ labor, trust in private property, liberalization of prices, and the production of housing, cattle, and capital in the market.

The first stages of the current economic recession began two years ago. But the government didn’t trust its wealth creators. Instead, the government planned to inject money into the market from abroad, which today reduced the MNT’s value by 30 percent. This 30 percent devaluation has rendered the last five years’ profit of all companies in Mongolia, big and small, to zero. The state’s response represents a failure in macroeconomic policy. To mend the situation, the government must trust its wealth creators.

In 2008, the Mongolian economy was rescued by two types of amnesty laws, generating four billion USD. Another four billion USD was generated from the Oyu Tolgoi agreement. These factors contributed to the 17 percent economic growth in 2011. Internal and external investments provided an opportunity to exit the 2008 economic recession.

Last year, 10 trillion MNT was injected into the economy but despite that fact,  micro-economic entities had not yet reached a level of development necessary to take advantage of the stimulus. If these companies had reported accurate balance sheets, the monetary injection would have had a more significant impact.

Mongolia has very few macro-economists, and the few that we have don’t know much beyond theory. Policy makers should be making decisions based on the nine parameters of the macro-economy. These decisions should benefit the people.

Mongolian companies are notorious for maintaining multiple balance sheets, and as a result, are unable to properly take advantage of state stimuli. The economic transparency law will unify these balances and enable them to absorb money.

To run a business, an individual must have knowledge of the economy, law, and investment. Twenty-five years of labor has taught us the value of money. The MNCCI is an organization that protects private property.

 The state is often blamed for the condition of the economy. Why were wealth creators silent when the state enacted bad policies?

 Because we were busy. Taxation is the privilege of Parliament. Tax payers remain ignorant of the policies of the Ministry of Finance. The state retains the most favorable tax conditions for themselves. Unfortunately, they are enacting policies that force Mongolians to their knees. In 2005, VAT threshold was set at 10 million MNT, affecting companies negatively. Only after 10 years are companies beginning to understand that the VAT was preventing them from becoming wealth creators. For this reason, since 2005, I have been working to provide a favorable legal environment for businesses. According to the constitution, a citizen must be able to have property. Our tax policies and tax system must work together to ensure people can own property and protect that property.

 Last year, leaders from our neighboring countries, Russia and China, visited Mongolia. Many development projects were discussed. At the moment, Russia is facing recession and the purchasing power of the Ruble is declining. How is this affecting Mongolian businesses?

 These issues are political in nature. It has been 23 years since we entered the global economy. We are communicating with the global economy through our most valuable public commodities, which are natural resources beneath the ground, and the animals and wildlife above it.

In these 23 years, we were not able to allocate these resources through property laws and we aren’t able to protect them through the Criminal Code. Now they virtually belong to a handful of high ranking government officials. The natural resource industry is a game played by few countries in the world. We are entering the game with our gold, copper, and silver. However, Mongolia isn’t ready for the game yet. We don’t have professionals trained in international finance, we don’t have world class accountants, world class lawyers, or world class arbitration judges. We learned that if we don’t have well-trained engineers there are no advantages in owning coal. At the moment, we have poorly trained human capital and no technological resources. Even though the population of Mongolia is small, if we use the proper technology and hire the right professionals, we can rise up.

Our country has disappointed its neighbors. If we can’t play by the universal rules, no one will play with us.

To make decisions concerning the future, we must look at our history. We must learn to look back at least 200 years. Without knowing global economic history, we can’t move forward. Clause 5.6 in the Constitution states that the state must take part in the economy for the well-being of citizens and entities.

What is the single most important thing business owners are demanding from the state to get out of the economic recession?

 If financial freedom is given to businessmen, we can get through the economic recession. My goal is based on the economic transparency law and amnesty law. After the economic transparency law is passed, I encourage all businessmen to take advantage of the law immediately. If you use it correctly, all doors for investment will open; you can apply for loans, offer an IPO on the stock exchange, or look for foreign investors.


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