August 22, 2012
Development should come to both urban and rural areas. However, development is not in a hurry to come over to the rural Mongolia, which is why people are still moving to cities. Although provinces are not able to accumulate the capital needed for development, the first ever law that puts the local authorities in charge of spending the state budget on its own is going to be implemented starting from the next year.
The question is whether this law can be the necessary and sufficient condition for bringing development? How is rural development financed? What has to be done in order to bring sustainable development to both urban and rural areas? The time has come for our country to challenge our minds with a new angle of view in solving this problem now that we have the opportunity to do so.
Main source of finance for rural development
Great difficulties are faced when building urban settlements in our country because territorial boundaries of both provinces and soums are changed constantly and the centers of provinces have always been either merged or moved. Development comes to places with larger populations only.
Another discussion about expanding provinces and dividing the entire territory into five regions are still going on. Territories of the capital city or its districts are easily changed just by issuing some decree or an order. A clear example is the changing the authority over the land of Bogd mountains in between the capital city, a district or the state in accordance with one’s power and position in order to gain unlawful profits from it.
The secret behind the way they are changing the boundaries of administrative territories as they desire is that political decisions are not backed by economic relations. In the current conditions where a swift solution to the issue of land ownership is not possible, the key to strengthening economic relations and bringing development is fees related to using natural resources, income and profit taxes.
If mining royalties are not distributed throughout the country, every province is likely to dig their land and put their attention only to mining development. Canada has laws that 60 percent of mining royalties are invested to the province or territory where the mining is made and the rest goes to the other provinces and territories. Therefore, every province and territory in Canada is developing their own competitive industries. If Khuvsgul aimag was granted a certain proportion of Umnugobi’s royalties, they would not necessarily want to demolish the beautiful Burenkhaan Mountain located close to the Khuvsgul Lake to mine phosphorus. Without knowing what to develop where, when and how in the country, the management is failing to bring development.
Economic entities income tax, personal income tax, property tax and sales tax (in some countries) are spent locally for public services such as building infrastructure, ensuring security of residents and protecting safety and properties.
No tax is levied at all on small economic entities in some countries because they create jobs and supply the local residents with certain products and services that are otherwise to be brought or imported. They are only demanded to follow the related standards.
If the relations that regulate collecting and spending those taxes are not clear, dependent on individuals, not institutions, and those who paid their taxes do not witness the spending of their taxes for their community, development becomes unsustainable. A clear example is Mongolia.
In our country, which tax organization a company has to deal with depends on the volume of turnover of the company and amount of taxable income it pays for. If it is a large company, it deals with state tax organizations. A medium-sized company deals with tax organizations of a city or aimag and a small one is left for district organizations. Therefore, everything is changed every year. A small part of the collected tax remains in the organization that collected it and the rest goes into the income of the state.
Almost 98 percent of Mongolia’s tax revenue is collected from less than one thousand companies and more than 60,000 companies make up the remaining two percent. That is why, the two largest political parties promised to levy a one-percent tax on them in the last election. Most of those 1000 companies are located in Ulaanbaatar and they deal with the state tax organization (the General Department of Taxation) and taxes collected are spent all around the country based on political decisions.
On the other hand, even though these companies operate in the capital city and pay their taxes, the collected tax do not go into the bank account of the city. Therefore, it means that they are not actually paying for the public services provided by the capital city’s infrastructure. The state of roads, insufficient number of schools, heat and power outages remind us every day that Ulaanbaatar is not able to catch up with its speedy development.
One solution is to collect all taxes at local level and invest it with a ratio of 5 to 3: the state would get the first part and the last part would go to local governments (provinces and cities). This will enable us to get reduced corruption at different administration levels and create sources of capital needed for development in urban and rural areas.
Derivative source for rural development financing
As soon as cities and provinces start collecting taxes on their own and a certain fixed part of the collected tax is left for them to use, tax revenue planning becomes possible, which will allow them to plan their development financing fund and create a new source of finance. In other words, local governments can issue their own bonds with a long duration period and fixed interest rates.
This type of bond is called “municipal bond” (Munis) in many countries. Municipal bonds have a fixed purpose and a name reflecting it. Also, its interest payment, which is called coupon, is excluded from income tax. Because the government always collects taxes, the people are confident of the municipal bonds repayment. Furthermore, it allows improving local landscape and constructing new buildings for public service, which gives additional incentives for local bond purchasers.
If the right legal environment and skilled personnel needed for allowing provinces and localities use these sources of finance for raising development capital are present, all the other legal and political conditions for urban and rural development in Mongolia are already being formed.
In this way, provinces will have a great opportunity to compete with something else other than racehorses or wrestlers. The government also will not be able to change territorial boundaries of administration units as it wishes because they will face debt payment obligations.
Having as much territory as few European countries combined, every aimag of Mongolia will have the economic basis to produce exclusive local products and supply them to international market, only if they are granted the right to collect and spend taxes on their own.
Afterwards, business competitiveness of provinces have to be measured, compared and ranked. There has recently been a timely initiative from the Economic Policy and Competitiveness Research Center (ECRC) in this regard.
The experience of developed countries show that the number of people moving from the cities to the countryside gradually increases if development comes to both urban and rural areas.

Translated by B.AMAR

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Posted by on Aug 27 2012. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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