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“Immune Deficiency Syndrome” of Resource Endowment and the Right Path to Development
mining1. The rich underground resource within its borders is something that was bestowed to the people of Mongolia by Mother Nature. You may call it “motherland’s treasure” or “motherland’s bounty” and etc. But in a “dry” economic term, it is called a “resource endowment”. Wealth and economic value are created by putting the endowed resources into economic circulation. Fair distribution of the wealth, created by this way, should be shaped by means of a set of socio-economic policies like the principles of market economy, inclusive economic growth policy, and the fight against poverty and corruption. The timing of wealth distribution is also important: not when the bestowed resource is lying idle, but from the point it has been put into economic circulation. Moreover, fair wealth distribution should not be designed for fulfil election promises, but for creating opportunities for economic growth and bringing real benefits to the people by proper allocation and re-allocation of economic and financial means. In short, wealth distribution should go parallel with the process of wealth creation, and not precede it.
2. The terms “equal opportunity” and “equal distribution” bear totally differing meanings. Whereas the former is one of the core principles of a new democratic and market-economy system embraced by Mongolia 19 years ago; the latter is refers to one of the core principles of the old socialist system, abandoned 19 years ago. So far, Mongolia has not put the bulk of its endowed resources into economic circulation, which means that the process of wealth creation has not yet started. We have not provided, neither in legal nor in economic sense, a mutually acceptable equal opportunity for both domestic and foreign investors who would like to put the resources into circulation. Instead of focusing on giving its citizens equal opportunity to improve their lives, we are engaging ourselves too much in talking and making laws about equal distribution of the wealth that has not been yet created. As the Mongolian proverb says, we are talking about “sharing bearskin well before killing it”. All this show how illness the Mongolian society has become: the collective hysteria over mineral riches, preaches for excessive state intervention, attempts to build authoritarian regime in the mining sector in the name of the people’s welfare, and inefficient management of economy are prevailing throughout our society.
3 However, by chance certain circles of the Mongolian society know how bad the fate of resource-endowed economies can turn if not managed wisely. They have heard or read that there are things like “Dutch disease” and “resource curse”, and what the symptoms are. On the other hand, international organizations are reminding us bitter lessons about how and why things went so wrong with certain resource-based economies. However, it seems that the society either does not want to listen, or is too busy with the wealth distribution. It can be said that in recent years constant disputes and countless campaigns have created a public hysteria over mineral riches, be it so-called “strategic deposits” or uranium. It consequently generates a wrong expectation among the general public about the development prospects of the country. The abnormal behaviour of today’s Mongolian society points out to the emergence of an unknown, totally new social disease in Mongolia. Besides of certain symptoms of “Dutch disease” and “resource curse”, it contains some other new elements. The MNCCI calls it “immune deficiency syndrome of resource endowment” for the reason that this new disease is having the following symptoms that may well weaken the immune system of national development and eventually destroy it:
·Governance mechanism itself is heavily stricken by corruption, poverty and red tape. The state systematically encourages the formation of a social mentality to put its faith in endowed mineral riches or state handouts. The state itself also committed in the same illusory possibilities.
·In reality, the “rule of party” (including the fractions or groupings inside the parties) prevails rather than the “rule of law”. Preaching equal distribution, fed on politically motivated promises, becomes a common habit for politicians.
·The society becomes obsessed with a collective search for “the shortest, the most fantastic and the unique” path to development based on resource endowment. Politicians are trying to come up with some alluring ideas and even make laws out of them.
·Although state budget revenue and expenditure are subject to the swings of the world commodity prices of minerals and raw materials, the fiscal and monetary policy is taken hostage by populist promises of the ruling party. In other words, economic criteria for sound management, allocation and re-allocation of financial resources are replaced by election promises. Likewise, the timing and prioritisation of development financings are set by political criteria or pressure, rather than by expert institutions. In such context, except the “bubble” growth indicators, the economy, de-facto, brings less and less real efficiency.
·The true meaning of “first-come, first-served” principle designed for investors is distorted by thriving, indiscriminate trade of mining licenses, although the law says the opposite. The concepts of transparency and sustainable development of mining and minerals sector failed to get introduced leading to substantial damages to natural environment and the emergence an atmosphere of mistrust and conflict between businesses and civil society. Such an atmosphere is misused by political groupings for serving their narrow self-interests. What’s more, the situation have led to various beliefs that “mining business is dirty” and that “civil movements have been sold to politicians”, damaging the image of both private sector and civil society - the two key institutions of the market economy.
·    In a newly-emerged market economy or capitalist system built on the soil of a traditional society that worships the state, government intervention gradually slips back to a socialist type, sometimes transforming the state itself into “a big entrepreneur”. Thus, the state becomes both the root causes and consequences of corruption, most evident in the mining sector.                                                                                  
·    As stated in the Constitution, endowed natural resources belong to the people, i.e. public property. This provision has been interpreted as “state property”, which means that the Parliament - the highest elected body - should give to the executive body the right to possess, use and dispose of public property and safeguard the public property in a legal sense. However, as it has been decided by the formula of STATE = GOVERNMENT – OWNER the provision has lost its both economic and legal meanings.
·    All these have led to an increasingly dominant role of state in minerals sector and given an appetite for setting up more state-owned companies, curbing the role of private sector, in some cases even taking over their property rights. Financial “innovations” like “share from motherland’s treasure”, “motherland’s bounty” or a corporation named “Rich Mongolia” (whose shares, as they say, would be in possession of each citizen, and  would pay dividends and achieve sensational triumph on the world stock market), can only be thought out in Mongolia. Indeed, the “innovations” like these and attempts to make laws to apply them are also evident symptoms of the social “immune deficiency” disease, which contains in itself a threat to weaken and damage the immune system of the country’s development in the long-run and make it impossible to set proper development concepts and strategies based on experiences of other countries and general trends of the world economy. So, because of the above symptoms, the “wish list” like “the GDP per capita will reach US$5,000, US$10,000 even US$15,000” becomes the backbone of official development plans and strategies.
4. Mongolia is a resource-endowed, land-locked, scarcely-populated developing country with small and vulnerable economy like many others in the world. We have nothing different. May be, it could stand out in the crowd of developing nations by its wide and deep ocean of corruption. We are not at all a model country, neither in political nor in economic sense. Empirical evidence and research have already shown that despite two decades on the path of democracy (which is relatively good achievement if we compare with some authoritarian regimes) the country has arrived at a superficial democracy, where democracy and its values have failed to penetrate deep enough into the hearts and minds of the people. Needless to say, the society itself already acknowledges this fact. So, considering that we are talking, dreaming and planning for economic growth and development in this context, we should not to drift away from reality. There is no need to think out a totally new and unique way to “sensational growth or development”, which does not exist and has never ever existed. What we see is not a sunrise but a mere mirage.
5. Regarding the economic development policy, there is an evident lack of good timing and competency to identify hotspots of the crisis and take rapid and comprehensive action. Today, the most pressing challenge for us is how to weather the economic crisis. During his recent visit to Mongolia, the World Bank Managing Director has given some ideas and recommendations on how to turn the crisis into opportunities. However it is not an exaggeration to say that Mongolia produces a plenty of master plans and long-term strategy papers, but as if leaves the implementation of short term policy issues to the donor countries and international organizations. (Here the “Atar-III” (Virgin Land) nationwide agricultural campaign aimed at improving agricultural production could be exclusion). Due to the lack of liquidity, the real sector has already regressed back to barter trade, and by now has almost exhausted all of its resources. The lending crisis in the construction sector has deepened to the extent of posing high risk of bringing the banks to the collapse. Last March, the Central Bank was making pompous statements that it had succeeded in breaking the pace of economic decline thanks to its policy of subjecting as it has named “the anyway-hopeless private sector” to a free-fall and instead focusing on inflation targeting and tight-money policy to stabilize exchange rates, while exactly because of these well-acclaimed policies the banks and businesses were on the verge of collapse in desperate need of a “life injection”. However, the truth is life injection should be given when the patient is still alive, not after its death.
6. It should be noted that there would be devastating consequences, if the Parliament and Government would fail to diagnose the problems lying at the connecting points of vertical and horizontal transaction lines of economic sector and sub-sectors, and subject the private sector to a free-fall as the Central Bank did before. In remainder of 2009, the debt crisis in construction sector must be solved. Construction companies and associations have prepared concrete proposals for saving the sector and done almost everything it takes to get them heard and implemented, but unfortunately with no result. We should not forget that this sector is in fact one of the main indicators of economic boom or crisis, and that its recovery brings revival to many other sectors and sub-sectors through the connecting points of vertical and horizontal lines of business transactions. Therefore, right now, it is not time to talk about mortgage, bond and certain laws, etc. because we cannot afford losing time.
The Government needs to make bold financial and policy interventions. First of all, it should register and classify all unfinished construction projects, and give priority to those fitting into a category of “affordable housing” that matches purchasing power of citizens. It should also provide state guarantees for those who can secure foreign loans, and facilitate barter trade of construction materials by issuing financial and non-financial guarantees. Of course, this is not an exhaustive list of things that could be done on the part of the Government to save the troubled construction sector. The questions like how to sell the finished constructions and products and who will own them are the next phase issues. To save this important sector the Prime Minister personally should take charge of coordinating all the relevant activities of banks, tax, customs, railway and judicial authorities by establishing the working groups urgently. The financial intervention or support for SME, which could have been started a bit earlier, the “Atar-III” campaign for promoting agricultural production can serve as examples of government policy and financial intervention. The same should be urgently done in construction sector during times of crisis.
7. If we want to secure our position and reputation in the business world, we have to fulfil our obligations. However, it happens sometimes that unforeseen event or circumstance beyond the control of the parties prevents one or both parties from fulfilling their obligations under the contract.
For most of the entrepreneurs who turn to the MNCCI for help and advice, especially those from construction sector, business activities have stalled because of the suspension of bank credits. As from the beginning of 2009, there has been a sharp rise of foreign exchange rates, those, who have outstanding USD loans, incurred significant losses because of unfavourable currency rates. Consequently, loan repayment slows down, interest payment and loan default penalties accumulate. In such cases, the MNCCI issues a so-called “Hardship Certificates” to certify that fulfilment of liabilities was prevented by unforeseen circumstance beyond the control of the parties. With the emergence of “hardship” circumstances the party gets exempted from liabilities. In other words, as an arbitrary institution the MNCCI provides a legal proof for waiver from default payments and penalties. There are cases where standard and bank contracts prohibit the inclusion of such clauses which violates the right of parties to freely negotiate the terms of their mutual contact.
8.  Inflation pressure will most probably increase in the coming months. The judgment of economic actors tells the same. But one important thing should be pointed out here. Although in Mongolia, historically inflation has been triggered mostly by the same cost-push factors, lately we were given “two eyes” for the analysis and diagnosis of inflation and economic trend: the “clear” eye of the real sector who knows the situation from its bitter experience; and the “blurred” eye of the Central Bank who makes its diagnosis above from the sky through questionable econometric models and formulas. The price of consumer goods still continues to rise, giving us a good reason to question the much-acclaimed inflation targeting policy of the Central Bank. Under such circumstances, we are compelled to give a piece of advice to the Prime Minister and Minister for Finance: Do the opposite what the Central Bank prescribes.
9. Other economic sectors and sub-sectors are also in dire straits, be it foreign trade or export manufacturing. Hence, the MNCCI calls the Government to start immediately a series of open discussions with major companies from each sector about how to turn the crisis into opportunity. It is not time to sit idle hoping that the anti-crisis program of the Government, the ongoing joint programs with the International Monetary Fund will yield its results. In fact, it is time to tackle the crisis by listening to the views and thoughts of the real sector, making corrections into the policies by including their proposals and views. We do hope that the Government would accept this suggestion.
10. The happy and easy-going days of Naadam Festival are gone. Now, it is time back to work. Just recently, the statistics of the first half of the year has been issued. The World Bank has expressed its views and issued its recommendations on Mongolia. The UN Secretary General Ban Ki-moon has paid a visit and shared his views and advice. In sum, all these pointed out the need for timely policy actions and brought forward the following questions: - What must we do exactly to bring the economy into the state of revival by the end of 2009? What kind of economic and ecological challenges will the year 2010 bring for Mongolia? To what extent will deepen the threat of desertification and shortage of drinking water by 2011, not to mention 2015, 2020 and 2030?
In addition to economic concerns, there is a strong need to make our development concepts and policies “green”. The environmental issues are gaining more and more importance nowadays both at national and international level. It is not mere coincidence that more than 20 parliamentarians have set up a “green group”. Last March, the UN Environment Program issued a strategy paper “Green Economy Initiatives”. The recent flood damage in Ulaanbaatar has exposed many problems of the city management and taught us a bitter lesson. Moreover, the failure story of Taishir Hydro Power Station Project has left us just a huge, useless monument. These examples have taught us that environmental concern is vital. Our ancestors, wisdom-keepers and lamas rightly predicted the future state of the nature on our soil being good messengers of the decree of heaven.
The Chamber of Commerce and Industry has made a proposal to the President, Parliament, Government and political parties to make the environmental policy as an “eternal priority” of the development concept of Mongolia. It has been over and over again talking and writing about the new concept terms like “3 Clean”, “Organic Mongolia” and etc. These are not mere rhetorical alliterations or trendy expressions, but the terms of green development of Mongolia.
11. Throughout 2007 and 2008, the MNCCI have been constantly raising the issue of economic revitalization plan. As a desperate measure it has even formulated and presented “Economic Revival Plan against the Economic Crisis” to the Parliament and the Government. It was, indeed, a comprehensive document which contained the unified view of the Mongolian business community and important lessons drawn from crisis management experience of other countries. Unfortunately, the recommendations were not implemented, and the attempt to implement them was flawed in terms of timing, prioritisation and sequence of policy actions. The absence of the culture of regular and efficient dialogue with a private sector was the main reason.
We do not exclude that Mongolia still has a potential of having by the end of 2009 and first half of 2010 a moderate inflation (not necessarily a single-digit), revived real sector and a competitive environment for its banking sector. Yet, the potential can be realized only if the Parliament and Government improves its anti-crisis policy management; ensures effective harmonization of fiscal and monetary policies; and makes the Central Bank start focusing on targeting growth instead of inflation and instructs it to stop its empty and “out of this world” talks.
Today, we have to make a significant choice: either to have an inflation rate of 10 to 12 or even 15 percent with a revived real sector like a busy ants’ nest, or to have a one-digit inflation of 9 or even 6-7 percent (which contains an in-built inflation pressure that can easily worsen the rate to 20 or 30 percent) with a sluggish real sector and thoroughly exhausted banking sector bottle-fed by the Central Bank. Needless to say, today’s right choice is tomorrow’s right path.