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The gap between the poor and the rich

By D.Jargalsaikhan

No. 304

It is said that Mongolia has developed most rapidly for the last 20 years. It was not a long ago that a statesman from Myanmar exclaimed, “Your country is a developed country, not a developing one,” having seen the skyscrapers, wide and narrow roads, fancy cars, and uniquely named restaurants and hotels.
However, the high economic growth has not reached the majority of our population, which leaves a small number of people having too much income and the majority being battered by the price increases in consumer goods and weakening currency rates. It keeps highlighting the difference between the rich and the poor. The small group of people who have high income are controlling most of the wealth in Mongolia today.
As our mining-dependent economy repeatedly goes into crisis, the low-income majority are seeing more unemployment, leaving more people wanting to work abroad. An essential factor that defines the difference between the wealthy and the poor is access to infrastructure, which includes electricity, roads, fresh water, and sewage systems. In countries such as India and the Philippines, where one half of the population are poor, the difference between the luxury districts of the rich and the muddy slums of the poor can be easily seen. In Mongolia, although half of our population is living in the capital and tens of thousands of apartment blocks are being built, the number of people who reside in the ger district is not going down. In terms of access to fresh water and improved sanitation facilities, Mongolia is behind North Korea.
A democratic society provides everyone with an opportunity to work hard. However, if people keep working hard but are not able to improve their livelihood, they start losing faith in government and seek opportunities to express their discontent about the differences in income. On the other hand, only a small number of families seize ruling power while monopolies establish themselves in the economy. The Philippines, where the participation and involvement of ordinary people is weak, has been ruled by 17 families only. As instability emerges in the country, these families have decided to spend public funds on strengthening the military. As a result, the rich build walls around their homes and hire small armies to protect their families from getting kidnapped. Do we have to let the same situation take over in Mongolia?

INFRASTRUCTURE IS THE SOLUTION

GDP per capita is not the only indicator that shows the difference between developed countries and developing ones. Access to infrastructure, including roads, electricity, fresh water, and sewage systems, is an important indicator. The nations that provide good access to infrastructure talk about the quality of education and medical services, whereas the countries who have not ensured good access to infrastructure talk about access. In order for Mongolia to make infrastructure accessible, a lot of capital will be required.
The investment that has gone into Ulaanbaatar in recent years has definitely been necessary and timely. If the roads and junctions had not been widened, traffic in the capital would be at a standstill. Going forward, we need to provide half of the population of the capital with heat and fresh water, and to give every household an opportunity to buy an apartment that fits their purchasing power. The project to re-plan the ger district and build apartments in ger district areas close to downtown has basically stopped.
The reason why the project is on hold is funding. In the last three years, the supply side of many housing projects was funded by the Chinggis and Development Bank bonds, while the demand side was handled by printing currency and providing eight percent mortgage loans. However, this arrangement is neither stable nor sustainable, because the cost of government bonds is too high to spend on infrastructure.
The economic growth of Mongolia has decreased five times compared to the 17 percent it reached four years ago. Nevertheless, the construction of infrastructure should not stop. Where the required funding comes from has become a headache for the government.

INFRASTRUCTURE IS NOT FUNDED BY BONDS

Building infrastructure is the most important condition conducive to improving economic productivity. Infrastructure requires a great deal of initial investment, but it makes the economy grow after it starts being used.
The financial markets of most developing countries are based on commercial banks and lack insurance and pension funds because they are not developed. Also, there are only a few investors and most of the population does not have bank accounts. The interest rates offered by non-bank financial institutions are very high, and there are no joint funds. In addition, there is only a small number of daring investors. These factors make it difficult to find funding for infrastructure in developing countries.
Infrastructure can generally be funded in four ways. The first funding mechanism is funding by tax income from the government. The second is funding through state-owned banks using people’s long-term savings. The third is funding by investors using insurance and pension funds. The fourth is to attract foreign investment.
Mongolia has been using the first funding mechanism to fund infrastructure in Mongolia, but it has not been enough due to a small tax-paying population, small economy, and huge territory. Also, the operating expenditure of the government is more than 800 billion MNT a year (400 million USD at currency rates today), which is clearly lower than the need.
The State Bank of Mongolia is basically a commercial bank that inherited previously established banks that went bankrupt. Also, a postal savings system has not developed in Mongolia.
Some countries that have small populations and lack a banking sector have been using a postal savings system where people can deposit money at low interest rates. In Mongolia, Khan Bank has a branch in every soum, however, it is a commercial bank and is not able to use long-term, low interest rate loans to make infrastructure investments. That is why Development Bank of Mongolia was established, to attempt issuing government-guaranteed bonds and fund infrastructure.
Mongolia’s health and social care fund belongs to the government. These funds always run deficits, thus they are not capable of investing in infrastructure. However, if we manage to set up private insurance and pension funds, there is an opportunity for long-term investment.
Mongolia has only one choice: to attract investment from international development banks rather than foreign private investment. It would be better for Mongolia to raise funds for infrastructure from the World Bank, Asian Development Bank, and the European Bank of Reconstruction and Development. The investment from these institutions brings not only money but also highly detailed estimations, engineering blueprints, and performance monitoring.

These development banks all have AAA ratings, which means that they assess risk very carefully to meet their standards. When these banks provide loans, they study whether a country can repay them or not, and gives recommendations on what needs change and how it should be made. The Asian Infrastructure Bank, which is expected to be formed next month, opens up a new opportunity for Mongolia. If we acquire a 30-year loan with an interest rate of less than one percent to be repaid seven years later, it would be far more profitable than funding from bonds, the interest rates of which have almost reached almost 10 percent today.
Infrastructure mirrors the development of country and is key to removing the gap between the rich and the poor.

Trans. by B.AMAR

Short URL: http://ubpost.mongolnews.mn/?p=16285

Posted by on Sep 20 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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