Artificial prices are the primary cause of decline

Mongolia’s economy has been in decline for almost 20 consecutive years. Despite the unique names they select for themselves, the governments we have had so far have failed to reduce currency depreciation, unemployment, and poverty.

Although Mongolians attempt to accumulate money and wealth, our real income has not seen any increase because the savings rates at commercial banks are always caught up with the inflation rate. On top of that, the rate of the tugrug fell twice as much as the inflation rate in 2014, and was recently so weak that its rate against the USD reached 2,000 MNT.

The authorities tell us that the lack of circulation in the economy derives from shooing foreign investment away and from the falling prices of coal, copper, and gold. Even though this argument is valid for Mongolia’s economy, which is dependent solely on mining, we are not talking about what is truly causing the economic decline. The primary cause is the government’s deep-seated habit of controlling prices, the elephant in the room that we have been ignoring.

Who sets prices in Mongolia?

 In any country, the price of consumer goods and changes in prices reflect the reliability of an economy. People conceal their wealth if they live in a country where the risk of losing property or being robbed is high. But one should be able to increase their wealth only when it is put into economic circulation, which results in mutually beneficial commercial interactions. We can see whether this system is corrupt or not by looking at how prices are being set and by whom.

Prices that are set by supply and demand, in a fair way that is exempt from any external control, are used as market indicators by investors, consumers, and others to make commercial decisions. These indicators, only when accurate, show you where surpluses and shortages are in the market.

The government has been setting the prices of many consumer products in Mongolia. Under the name of caring for the people and supporting businesses, the government has been setting and restricting prices. In the end, such measures benefit the decision makers the most and allow them to steal from public funds.

Mongolia is seeing a growing number of populists who have a hidden agenda serving their individual interests by controlling the prices of consumer products, but they claim that they are protecting the people from the rich. An example can be seen in Mongolia’s agriculture sector.

Who wins? Crop farmers, flour producers, or consumers?

Mongolian crop farmers broke a 20-year old record by gathering a harvest of 489,000 tons in 2014. Nevertheless, we are still importing wheat from Russia, driving crop farmers to protest.

On the other hand, flour producers stress the need to buy wheat from abroad because the gluten content of Mongolia’s wheat is below 28 percent. Crop farmers were provided with a subsidy of 100,000 MNT per one ton of wheat in the past, which was reduced to 70,000 MNT this year due to economic decline. They started distributing the subsidies in February this year, and 1.4 billion MNT has been given for the harvesting of 20,000 tons of wheat. But flour producers paid the same amount (1.4 billion MNT) to the government for customs taxes and VAT when importing 20,000 tons of wheat. The subsidies come from the public budget, whereas the taxes are added to the budget as revenue. So, which one is more profitable? The government cannot ruin one industry by supporting another.

As soon as the harvest is over, flour producers go to the crop farmers and buy their wheat with the highest gluten content. When a new year comes along and the low-gluten wheat is not purchased, the crop farmers, flour producers, and the government have an argument every year over whether it is necessary to import wheat or not. The government’s decisions get stuck amidst lobbying, which results in a shortage of flour. Consequently, the flour producers are forced to get low quality wheat.

It is said that there are three ways to produce flour using wheat of such low quality. One way is to import better quality wheat from abroad and mix it before working the mill. Another way is to mix the flour with that coming from Russia to increase the gluten content. The third way is to bring chemicals from China to “fix” the gluten content and the color of the wheat, after which the flour is delivered to consumers directly.

If the value chain of flour is thoroughly examined, it can be seen that all deficits are made up by money coming from taxpayers and consumers rather than crop farmers and flour producers. In return, the taxpayers and consumers get flour mixed with unhealthy chemicals.

Who gains from artificial pricing?

 Artificial prices allow corruption to grow. When that happens, there is a need to control prices to an even larger extent. Every market player who has received any kind of subsidy demands that the support continues. As a result, every one of them makes political decisions favoring their interests.

As a consequence, the prices become more deviated. As prices get further from real market value, the authorities who set prices have a stronger interest in concealing their manipulation and begin to distort information. Such distortion benefits the authorities and their conspiring associates only.

If prices are free to be set accurately by supply and demand, it will allow economic development that will include the creation of more jobs. In order to overcome its economic decline, Mongolia needs a free price system exempt from any obfuscation.


Trans. by B.AMAR

Short URL: http://ubpost.mongolnews.mn/?p=13951

Posted by on Mar 30 2015. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.

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