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An Interview with Bill Bikales

By Rebecca Empson, on 31 October 2016

In September this year the Emerging Subjects group was lucky to host Bill Bikales as he stopped off in London from Mongolia and China en route to America.  We had a fascinating meeting with Bill and all felt that his unique long-term experience of Mongolia, as well as his reflections on the current economic situation, would be valuable to share on our blog.  In what follows, Bill kindly agreed to respond to a few questions our group posed over email.

 

Bill Bikales

Photo courtesy of Bill Bikales (2016).

 

Bill, thank you for agreeing to share your reflections here. You first came to Mongolia in 1991. Can you describe for us what you had been doing before, what drew you to Mongolia, and what you found distinctive about the country in the 1990s?

I was a grad student in Economics at Harvard, focused in my studies on the Chinese economy.  My undergraduate major in College had been Chinese studies and I had lived and worked in Hong Kong and China before returning to grad school. In 1991, Jeffrey Sachs was asked by the new Mongolian government to give them some advice on their transition, and after his first visit there Jeff arranged for a small group of his grad students to spend a few months in Ulaanbaatar.  My China background seemed relevant, which is amusing in hindsight.  I arrived in early July and stayed until just before Christmas.  1991 was a dramatic year.  I mostly worked with an organization called the Market Research Institute, under the Ministry of Trade.  They were a remarkable group of people.  It was created by future Prime Minister M. Enkhsaikhan, and was headed by future head of the Chamber of Commerce and MP S. Demberel, whose deputy was M. Bold, the CEO of XAC Bank. Staff included many others who later had very important careers.  I taught introductory economics and worked with them on other issues.  I also helped the Statistical Office do their first consumer price index, and worked with other economists in the Finance Ministry and Central Bank and elsewhere.  I fell in love with Mongolia from the start for the reasons many people do: wonderful, warm and open people, beautiful nature, extraordinary history and culture.

 

What a fascinating time to be in Mongolia. Can you describe what the ‘economic atmosphere’ was like then?

The economy was in a tailspin after the sudden end of Soviet assistance and collapse of the old system.  Most key foods, including bread, meat and vodka, were rationed, and there were long lines to get them.  Inflation was taking off.  The government had repeatedly devalued the Tugrik, and the US$ exchange rate was 40:1, but there was a very active black market with rates of 150:1, as I recall.   D. Byambasuren was Prime Minister, from the then MPRP, and a group of economic reformers from the National Progress Party (as they were then known) under Deputy Prime Minister Da. Ganbold were leading economic policy-making. There was still a great deal of uncertainty about policy, and the uncertainty was magnified when the Russian coup was attempted that summer.  Reformers were starting to implement the voucher privatization, run through the newly created Mongolian Stock Exchange.  IFIs were sending their delegations.  That was also the time of the first big economic scandal of the market economy era, when the currency traders at the State Bank International, which had just been hived off from the Central Bank, lost all the country’s foreign reserves, around US$90 million.  That took quite a bit of wind out of the sails of the strong reform faction; the Governor of Mongolbank and the head of State Bank International were both members of that group.

 

That sounds like a very dramatic and uncertain time. The dominant narrative of the 1990s is that Mongolia went through a series of externally-imposed structural adjustments and experienced ‘shock therapy’.  How would you describe them and their implementation in Mongolia at that time? What was your role in this implementation?

That narrative is internally incoherent and, simply, false.

Most importantly, it conflates the very real shock from the collapse of the old system with the impact of the policies that were implemented after it collapsed.   The Mongolian economy — and its government structures – that existed in 1989 had all been built and sustained with massive Soviet financial support.  You may recall that for the first 13 years after democracy, Mongolia had a large Soviet era debt hanging over it, which totalled roughly 10 times Mongolia’s 1990 GDP.  What was that debt?  It was the accumulated massive credits that the Soviets provided for the preceding decades – in increasing amounts through the 1980s – that financed nearly everything in Mongolia.  Budget deficits, trade deficits, infrastructure, construction, rural government offices, etc.  These credits equalled more than 30% of GDP in the years before the whole system collapsed.  30% of GDP per year!   Industry worked under the Council for Mutual Economic Assistance – better known as Comecon – trading bloc network and rules; factories got imported inputs at below world market prices and had guaranteed markets for their goods in Comecon partners like Poland, East Germany and the USSR itself.  Those credits and those markets all collapsed at once in 1990.

This shock was further exacerbated by Mongolia’s geographic and economic isolation.

When you look at the criticisms of ‘shock therapy’ in Mongolia you’ll find that none of them acknowledge this simple reality.  Comparisons with Poland or even Russia, countries that did try ‘shock therapy’, are entirely beside the point.  Mongolia was a poor, landlocked developing country whose massive aid from abroad was cut off overnight and which had no trade links with the markets that it suddenly had to sell to.   There was no way to avoid a very painful shock.  And maintaining the old system was never an option, not because the IFIs forced Mongolia to abandon it, but because it was unviable without the Soviet money.

Even the inflation that was so devastating was much more the result of shortages due to economic collapse and the bad monetary policy and artificial exchange rates of the late planned economy years than of the liberalization program.   If the government had tried to avoid inflation and depreciation by maintaining the planned era prices and rates they would have collapsed before too long anyway, and with even greater trauma.

The narrative also seriously misrepresents the role of the IFIs.  The IFIs did not support ‘shock therapy’ anywhere.  They are in general quite cautious.  To the extent that there was interest in a rapid and across-the-board liberalization and privatization, i.e. ‘shock therapy’, it was on the part of some of the more passionate economic reformers among the Democrats.  It was a Mongolian program, not an externally imposed one.  But there was no strong political support for such an approach.  Price and exchange rate liberalization started off more rapidly, with Resolution 20 at the beginning of 1991, but they were not sustained.  Many price controls on key goods, and a dual foreign exchange market, both classic planned economy policies, were continued for several years.  Privatization, similarly, the other key feature of ‘shock therapy’, also started off rapidly but quickly slowed down and afterwards took place quite slowly and gradually, with lots of stops and starts.  Very few of the large state-owned firms were privatized until several years later.  The largest by far, Erdenet, was kept under state ownership to this day.

‘Shock therapy’ is not the same as ‘transition to market economy’. The IFIs supported the latter, but not the former.  The IFIs are not perfect, of course.  When they make mistakes it is important to speak up.  But their main role in the 1990s was not only positive, they were downright indispensable.  They helped teach Mongolian policy-makers how market economy governments manage monetary policy and fiscal policy and deal with economic relations with the external world.  These were things Mongolian leaders had to learn very quickly.

You ask about my role in implementing IFI programs.  My work in Mongolia was not funded or overseen by any IFI.  Later I worked for the Asian Development Bank for three years, but in their Southeast Asia Department.  At times in Mongolia I sat on the Mongolian side in discussions with the IFIs, as an observer, so that I could share my thoughts later with my government counterparts.  In my work I always viewed myself as accountable first and foremost to my counterparts, not to any outside organization or government.

 

What were some of the main competing economic ideas in the 1990s? Were there, for instance, clear economic policy differences between the two main political parties?

Which two main political parties (he writes with a smile)?  What we now know as the Democratic Party was only formed for the 1996 election, when the Social Democrats and National Democrats merged. The National Democrats were themselves a coalition of various smaller parties. All of them had different ideas.  Under Byambasuren there were clear differences over privatization between Ganbold’s National Progress Party and the MPRP.  There was the famous moment when Byambasuren asked each of those groups to develop privatization proposals so the government could choose between them.  The MPRP never came up with one, while the ‘Democrats’ did.  The rest is history!  Ganbold’s group had a number of quite good economists, which gave them an advantage over the others in coming up with clear proposals quickly. Still, this was a coalition government with the MPRP the dominant partner, and there were also different ideas within the various Democratic parties.

It was only gradually over the course of the 90s that clearer differences between MPRP and Democrats emerged.

During the P. Jasrai government, from 1992-6, the MPRP had a huge majority in the Ikh Khural.  70 seats out of 76, I think?  The various Democratic groups had no influence on policy, and no coherent platform.  The Jasrai regime stabilized the economy gradually and took many steps to create the government structures of democracy and markets, but in terms of overall outlook was quite conservative.  They unified the exchange rate in 1993 – an important step.  But as of June 1996 there were still Price Commissions setting prices for bread, flour, meat, gasoline and quite a few other goods. Privatization had pretty much ground to a halt, housing was still state-owned, there were still a lot of small state-owned shops all over Ulaanbaatar, etc.  I saw the IMF programs in 1993-6 and they were heavily focused on basic macro targets – budget deficit and monetary growth, not on structural reforms such as privatization, which were included but not as core targets.  In 1994 I went with a government official to a meeting with commercial banks at which the government gave the banks a list of loans to various projects and factories and told them that they had to issue those loans.  This was not an economy that had undergone shock therapy.

After M. Enkhsaikhan became Prime Minister in 1996, following the unification of the National and Social Democrats in one party, he took a stronger economic reform approach and the policy differences between Democrats and MPRP became clearer.  He abolished the Price Commissions, quickly privatized urban housing by giving it to its residents, started to develop a new privatization program for large enterprises.  He moved strongly to deal with very serious problems with the commercial banks that had arisen due to the sort of directed lending to unprofitable enterprises that I described above.  He raised electricity prices sharply, trying to address the debilitating debt and inefficiency problems in that sector.  There were many other issues, too many to list here, that he dealt with quite rapidly.  He also oversaw the preparation of Mongolia’s new mining and foreign investment legislation.  During those four years the differences between the two parties were quite stark; more than ever before or since, I would say.

 

What myths about the 1990s do you think are important to dispel?

As already mentioned, the notion that Mongolia experienced so much hardship because of donor-imposed shock therapy is completely wrong.

This is not only a matter of history.  It is highly relevant to the challenges Mongolia faces today.  In 1990 Mongolia became independent, for real.  Mongolian decisions and choices now shape the country’s destiny more than they had for centuries before that.

Look at the last 10 years.  For a few years, Mongolia benefited from a boom in investment in mining.  Government spending soared.   Then, for a few years, as investment fell sharply due primarily to government delays in implementing signed agreements, the government avoided the consequences of that decline by launching a huge fiscal and monetary expansion, even borrowing funds at high interest rates abroad to spend on all kinds of domestic programs.

Receiving a windfall from a boom in investment does not mean you should cast off all restraints and have a big national party with big increases in salaries, transfers, capital spending, whatever.  Borrowing billions of dollars on commercial bond markets in order to live more comfortably today, without concern about how the debt will be repaid is also unsustainable and irresponsible policy-making.

These are quite similar to Mongolia’s Soviet era economy, another time when Mongolians never had to address the fundamental economic policy issue; allocating scarce resources.

In the Soviet era Mongolia had equally unsustainable and illusory ‘development’, ‘growth’, ‘wealth’ – whatever you want to call it.

If Mongolia wants to be a wealthy developed country it needs to act like a wealthy developed economy.  That means setting long-term goals and working, hard, to achieve them, sacrificing short-term benefits for long-term gains.  Not just spending whatever you have today, borrowing even more, and then blaming everyone but yourself when you have nothing left and have debt problems.    Nostalgia for the past is simply another way to avoid facing the real challenges that one faces.

 

When you met with our project in September, you shared some very interesting insights about the way poverty was framed in the 1990s by Mongolian politicians.  Can you talk more about this?  Have you seen changes in the way poverty is addressed in politics? 

From 1993-5 I was working under the UNDP office in Mongolia, and the UN, along with other donors, was actively supporting the creation of a national poverty alleviation strategy and program.  It was quickly apparent that while there were a few Mongolian individuals who supported this effort, the government was not seriously interested: a lot of talk, meetings, photo-ops, but no real action.

The overall attitude then, and later, seemed to be that poor people were responsible for their own problems, and that if they needed help that was their family’s responsibility.  Resources were scarce and government had other priorities.  Those other priorities were different in different regimes, but the attitude toward poverty was quite similar.  Jasrai’s government borrowed $61 million (8% of GDP) to build the Darkhan Metallurgical Factory, at a time when resources were very scarce and despite numerous warnings from the World Bank and others that it would be unprofitable.  The Democrats were facing a collapse in copper prices (Erdenet was by far the most important enterprise in the country) and were fighting to keep the overall economy headed in the right direction, not focused on specific programs for the poor.

That started to change under Prime Minister N. Enkhbayar, who made social programs a bigger part of his platform and agenda.  But to this day there has been a consistent overwhelming preference for universal programs rather than targeted, largely because of the attitudes I’ve described.  It has been very hard to get support for programs that provide benefits only for the poor.

 

How do you think the early democratic period has come to shape the Mongolian economy and society in the present day?

I would say that by far the most important way is the Mongolian people’s strong and resilient commitment to democracy.  Everything else flows from that; the evolution of economic policy, of Mongolia’s external relations, of society in different regions of the country.

The dissolution of the negdel and the flows of population between urban and rural areas has had a key role as well.  It’s a remarkable story, with so many twists and turns.

Unhealthy attitudes about debt that developed under the Soviets, when the government borrowed year after year without any even slight concern about repayment, were further reinforced.  Borrowing from abroad continued to be a normal part of budgeting, and banks were used over and over to provide loan funds to projects and businesses that the government could not afford to support with its own resources, again with no attention to repayment capacity.  Borrowed funds were treated like any other funds, just spent on anything the borrower wanted rather than being invested in projects that were expected to pay enough of a return to allow repayment.  Of course the economic and budget situation were so dire for most of the 90s that some funds to finance daily operations of the government were appropriate.  But a pattern was created that has lasted even after those conditions changed.

A very closely related issue is ‘dependency on donors’, another way in which Soviet era mindset was carried on under democracy.  Again, donor dependency was inevitable and necessary for most of the early years of democracy.  But the danger of donor dependency are well known; undermining of national capacity to govern without support.  Mongolia had been moving out of that mindset after the mining boom took place.  But developments in recent years were a big step backward, and now Mongolia is having to turn to the outside world for help again.  I sincerely hope that government policy-makers understand how serious a reversal of progress this represents, even though they have no choice but to do this to deal with problems that they have inherited from the previous government.

 

In our project we are asking different experts how they would characterize Mongolian capitalism (see our forthcoming workshop on the 16th November at the National University)?  What do you think are three features of capitalism in the country?

Mongolian capitalism has taken off in a country with a small population, where people tend to know each other and where business (and political) competition tends to become highly personalized, which undermines confidence in fairness of outcomes and seems to make people at least as concerned with how well others are doing as they are with how well they are doing themselves.  Instead of making cooperation easier, the small size seems paradoxically to make cooperation much more difficult.  Mongolian capitalism has also been hindered by the difficulty of building effective regulatory institutions; that takes decades.  Lastly Mongolian capitalism has seemed to thrive when times are hard but go a bit off track when conditions improve.

At the same time let’s not lose touch with how much Mongolia has accomplished since those very hard times in the early 90’s!

 

Mongolia has recently gone to the IMF for help with its huge sovereign debt burden. How is this different from previous IMF negotiations? What role will international bond markets and currency swaps with China continue to play in helping to stave off further debt?

The point is not to stave off debts, right?  The point is to have access in the short term to additional low-cost debt in order to smooth the way to a more sustainable economy.  The main difference between this negotiation and previous ones, in my view, is that unlike the ESAF programs of the 1990s, and the last standby program, the need for this one has arisen primarily because of the government’s own policy mistakes, rather than external factors.  This creates a credibility problem; the government has to demonstrate that it will correct and avoid the mistakes that were made.  This same issue arises in Mongolian consideration of issuing further debt on global bond markets. Borrowing from China – whether through the Central Bank currency swap agreement or other means – carries different challenges, without upfront conditionalities but creating an even greater dependence on Chinese good will.

The critical issue now is not whether Mongolia will borrow more funds, but from where.  The IMF would have tougher upfront conditionalities, but their program would be designed to restore and deepen an economic policy framework that is consistent with healthy long-term growth.  China might offer funds with milder or no upfront conditionalities, but aimed at increasing Mongolia’s dependence on China, rather than improving Mongolia’s policy-making.  Does Mongolia want to be another Cambodia – now, possibly, the Philippines as well – a country whose perennially weak economy makes them unable to resist Chinese offers of assistance?

 

How do you think Mongolia could create a better business environment?

First thing would be to show that signed commitments made under one government are accepted as commitments by later governments as well.  The back and forth about OT, especially, but about TT and some others have seriously undermined Mongolia’s reputation. There should not be a perception that every time there is an election everything goes back to square one.

 

You recently published an article in the WSJ calling attention to Mongolia’s looming debt crisis.  What moved you to write this piece?  Was there a response to it in Mongolia?

Given the urgency of the issues, and the election of a new government with a strong parliamentary majority, it seemed a good moment to lay out some thoughts about the issues.  The most important point on my mind was that the current debt problem is almost entirely a self-inflicted problem, due to bad policy-making.  It’s gotten some attention, but of course the new Parliament and Government have some very good economists who knew this already.

 

14 Responses to “An Interview with Bill Bikales”

  • 1
    Shock therapy wrote on 3 November 2016:

    Shock therapy implemented in Mongolia in early 90s was a crime against Mongolian people. Few kids from Harvard with no experience and shallow educational background showed the way how Mongolia would transition to an marke t economy. Mongolia was in reality a playground or live-experimental zone for liberal-brainwashed American kids looking for adventures. Shock therapy was imposed on Mongolians and it destroyed not only the economy but the society itself. The hardships Mongolians have experienced and have been going through now are exactly the result of economic policies that was forcibly adopted in early 90s.

  • 2
    Fake democracy and collapse as a country wrote on 3 November 2016:

    Much of Bill Bikales’s talk are outright LIE. Before so called Democracy and market transition of 90, Mongolia was relatively well-off, economically independent country. Mongolia has never been so dependent on Soviet Union or Comeco as you mention. But Mongolia is now totally dependent on international financial organizations, China and trans-national companies. It’s clear that he is one of the men who played major role in laying ground for hardships Mongolians went through in early 90s and the current economic and political disaster the country is facing. The disastrous situation the country is in now is exactly the result of economic policies and the political institutions imposed on Mongolia by IFI through the hands of so called democrats such as Ganbold, Enhsaihan, etc. current oligarchs who have massed enormous personal wealth large portion of which are in safe haven abroad, off-shore accounts. In fact, Mongolia is, as a country, on the verge of COLLAPSE. Mr. Bikales this is the fruits of hands-on work you have done in Mongolia and we understand the reason that you are trying to defend-by any means possible–the policies you helped implement in 90s.

  • 3
    Lauren Bonilla wrote on 4 November 2016:

    We are having some problems with the comment feature, so I (Lauren Bonilla) am posting this on behalf of Bill Bikales:

    Thank you for your comments. I know that these are very difficult and often emotional questions. In order to avoid making this too personal a discussion, I’d like to refer readers to a 2000 paper by Dr. Hiroshi Ueno, a long-time close observer of Mongolia’s economy and society, and not at all a supporter of any sort of radical ‘shock therapy’ reform. Here are the link to the paper itself, and two excerpts.

    “Assessing Transition Policies” http://hiroshi-ueno.eco.coocan.jp/MongoliaE-Transition2-2000Mar22.pdf

    Excerpt #1(page 2): “Second, Mongolia had been heavily dependent on the assistance from the Soviet Union, the assistance having been about 30% of GDP throughout 1980s. Most of the assistance was loans, creating a huge debt to the Soviet Union amounting to about 10 billion transferable ruble (TR) at the end of 1989 or about US$16 billion at the official exchange rate of US$1.6 per TR in 1989. Third, Mongolia had been deeply entrenched in the Council for Mutual Economic Assistance (CMEA, formerly called COMECON) system, and had been assigned the role of a primary commodity provider to the Soviet Union and CMEA countries. Its exports were mainly mineral resources represented by copper concentrate and livestock products such as meat, wool, fur and leather; its imports were mainly energy, machinery and spare parts. In 1989, 91% of the export went to CMEA countries including the Soviet Union and 7% went to the Soviet; 94% of the import came from CMEA countries including the Soviet Union and 83% came from the Soviet Union4 . Fourth, Mongolia was also heavily assisted by the Soviet Union in terms of engineers and managers. It is said that about 100 to 200 thousand Russians were in Mongolia before the collapse of the Soviet Union5 . Though most of them were military related personnel, there also were a substantial number of manages and engineers taking leadership and command in factories and government offices. Most of them left Mongolia along with the collapse of the Soviet Union. This departure created a vacuum of management and engineering in many areas particularly constraining the operation of mining and manufacturing industries and utility industries.”

    Excerpt #2 (Page 7-8): “As indicated in Table A-1 in Annex, a very quick transition to a market economy was initiated by the government of Mongolia in 1990. It was initiated 8 by the government alone, and there was no supporting program by IMF nor by the World Bank in 1990. The government announced to construct a market–oriented economy. The government adopted a new three-year development plan “Memorandum on Economic Reform and Medium-Term Policies” in September 1991. This had a quantitative framework for 1991-1994 with special emphasis on the first two years (Table A-2 in Annex). Though the Memorandum was produced by the government, it was a joint product of the government and IMF. IMF started its mission to Mongolia in August 1990, one year before the announcement of Memorandum and held many talks with the government. IMF also supported the Memorandum by approving its first stand-by arrangement in October 1991. It must be noted, however, that its ownership was truly in the hand of the government as one of IMF officials recalled that at that time the government was more enthusiastic about the transition than the IMF mission wanting to undertake all radical reforms. Furthermore, IMF’s support in 1991 was a standard stand-by agreement mainly aiming at arresting the widening external and domestic balance, and the conditionalities based on the first ESAF arrangement of IMF came much later in 1993. Also the World Bank’s first adjustment credit “Banking and Enterprise Sector Adjustment Credit” came much more later in 1997. All these suggest that transition and adjustment policies in early 1990s were not imposed by the international organizations but adopted by the government itself. Hence, a typical criticism to international organizations that they impose transition policies on borrowers does not hold at least in the case of Mongolia’s transition.”

    One note from me. Dr. Ueno’s point that the first IMF program was a stand-by agreement, and that the first ESAF (Enhanced Structural Adjustment Facility) program wasn’t agreed until 1993, may not be clear to all readers. The first wave of assistance, from 1990-1993 (and longer for many donors) was really a quick move by many IFIs and other donors to respond to the looming humanitarian crisis in Mongolia following the withdrawal of Soviet support. It was only in 1993, after the crisis had largely been overcome that, structural adjustment type programs were arranged. Even then the World Bank and Asian Development Bank did not arrange their own adjustment-type programs for several more years. The key point is that at the time when the most radical economic reforms were being attempted or considered by the Mongolian government, from 1990-1991, the IFIs were not pushing any such agenda at all.

  • 4
    Andrei Marin wrote on 4 November 2016:

    According to Rossabi (2005) IMF and ADB had missions of economists in the country since 1990 and 1991 studying economic prospects and arguing for rapid economic reforms centred on rapid privatization of state assets, reduction of state expenditures etc. (the standard arguments of the ‘shock therapy’ doctrine). Mongolia qualified for loans and grants from the IMF, ADB, and WB since 1991- it’s quite reasonable to think there was pressure for implementing the shock therapy even if formally it was not worked out in a conditionality agreement. Whether the shock therapy started before or after 1993 or if Jeffrey Sachs, IFIs or western political actors had direct or indirect involvement is beyond the point here. To me it is pretty obvious that it was a rather damaging shock the effects of which are still being felt today. To say the current crisis is a self-inflicted one is a rather ahistorical and narrow story. To put it nicely.

  • 5
    Bill Bikales wrote on 4 November 2016:

    Thanks. The IMF, World Bank, ADB et al never supported anything that can be described as ‘shock therapy’ in Mongolia or elsewhere. It is not in their institutional genes. Did they advocate reduction in state expenditures? Certainly — how could they not, given the economic collapse that had occurred? How could expenditures not have been reduced? Rapid privatization? Absolutely not, never — check the record. And 1993 vs 1990 is a critically important distinction. The 1993 ESAF was an agreement with the conservative Jasrai MPRP government. Its conditionalities bore no resemblance to ‘shock therapy’. The only time the Mongolian government tried anything close to ‘shock therapy’, and then only briefly, was under Byambasuren, and at that time the IFI programs had very minimal conditionalities, because they were aimed at overcoming the crisis caused by the sudden end of Soviet support.

    Getting the history right is important for understanding the current situation and preparing for the future.

  • 6
    Bill Bikales wrote on 4 November 2016:

    Andrei, I am not denying in any way that Mongolia suffered a huge shock in 1990-2, and that its effects are still being felt. The shock was the collapse of a system under which Mongolia received 30% of GDP per year as a gift, plus all the benefits of CMEA trade, plus thousands of resident advisors/managers/engineers, plus a lot more. That disappeared almost overnight. Mongolia’s choices for dealing with this shock were few, and their governments tried different approaches at different times, sometimes more cautious, sometimes more ambitious. Much of what was done early on during the transition was unplanned response by different parties, government and non-, to the chaos that followed the Soviet withdrawal. It is a myth that Mongolia underwent donor-imposed shock therapy and that this was the cause of the problems. Those who take that myth as truth remind me of Trump supporters in the US right now, full of passion and making wild emotional assertions that can’t be supported by evidence.

    As to my statement that the current crisis was self-inflicted, this is not at all ahistorical. Mongolia did not have to borrow $2+ billion dollars at commercial interest rates in the last four years. It did not have to let the budget deficit explode to 20% of GDP in the first half of this year. It could have take advantage of the boom years of 15% growth just a few years ago by preparing for the downturn that was inevitable. Now Mongolia has to finance its large budget deficit and at the same time start repaying those commercial loans. That’s the current self-inflicted crisis.

    This is why I said that “shock therapy” is not the same as “transition to the market economy”. Macroeconomic policy can be tighter or looser. There is lots of room for debate, within certain basic boundaries. In the last few years Mongolia crossed those boundaries by a very large margin.

  • 7
    Andrei Marin wrote on 6 November 2016:

    Bill, these are quite complex issues about which you obviously have privileged insight. Still, you would forgive a layman- rather dispassionate I hasten to add, for fear of being stamped a Trumpette- for not taking your statements as the only valid reading of history. One of the reasons for this is the possibility that your account is biased in light of you being a Harvard economist trained (correct?) by Jeffery Sachs, the well known high priest of the ‘shock therapy’- much as he rejects the term and all the evils blamed on it. The other reason is the empirical evidence that is recorded, and which I for one read as evidence for the existence of a second shock, additional and largely simultaneous to the one you point out. This second shock was the set of drastic measures implemented in the first couple of years after Resolution 20 was passed in January 1991. These measures included some that are invariably included in the definition of the ‘shock therapy’: liberalization of prices and trade, abolition of subsidies, and the privatization of the state assets. These were done in Mongolia at a speed and with such a stubbornness that they boggle the mind: in the first 14 months (until March 1992) it seems most price controls had been removed. Before the end of 1991, the Privatisation Commission announced that 75% of the state farms had been privatized (97% by the end of 1995), as well as 50% of enterprises. The subsidies for all sorts of services essential in the countryside were also removed hastily We know today that these abrupt changes had devastating effects on the Mongolian society and not least some of its most marginalized and poor members. Surely some Mongolian politicians were over-zealous in pushing this reform agenda, and sometimes there is evidence of IFIs being more reserved about the expected results. Still, it seems they never opposed this agenda and it’s reasonable to think they even encouraged it. For instance, although the “Memorandum on economic reform and medium-term policies” development plan of the government was officially the work of the government, it was ‘a joint product of the government and the IMF’ (Ueno 2000, p.14). In fact Ueno, which you quote as a keen observer of that period, more than hints that the adoption of the Memorandum in September 1991 was a precondition for the IMF to approve its stand-by arrangement one month later. (ibid.). In my reading of the history at that time, therefore, there is quite strong evidence that IFIs were not removed from the political process, not by a long stretch. Whether or not there was another way, including the debate between shock vs. gradualism, it seems was never resolved in academic circles. We pretty much don’t know, it seems (to me as a lay reader with limited understanding of macroeconomics), what made gradualism work for some but not others. I for one, am curious of what Mongolia would look like if it’d chosen that path early on.

  • 8
    Transition was disaster brought upon by Sachs and his creq wrote on 7 November 2016:

    Within a year of privatization from 1992-1993, Mongolia’s industrial sector was brought down in entirety, industrial production fell 90%. A well known western economist described this process in Mongolia as “privatization wiped out the industry overnight.” Most of the privatized factory equipments, machineries were shipped to China for reprocessing for steel and iron. The claim that Mongolia was receiving annually 30% aid (GDP) is absolutely not TRUE!!!!!!! This is the number that Sachs’s crew invented to justify their sin and unfortunately, this false data/number have been referenced in some academic works as second source. Mongolia has received aid from the Soviets and its block, but the country was pretty much on its own. The entire aid/loan that Mongolia received from the Soviets through 70 years of satellite amounted to $11.4 million dollars (ruble converted to USD) 98% of which Russia has annulled or forgave in 2005. By 1989-1990, before transition started, Mongolia was pretty much economically independent, industrialized country where 35% of GDP was coming from industrial sector which mostly composed of manufacturing, production as opposed to extraction of mining raw materials of today.

  • 9
    Transition was disaster brought upon by Sachs and his creq wrote on 7 November 2016:

    Wow, IFI was not involved in Radical Reforms that took the country to the ground kkkkk —-The key point is that at the time when the most radical economic reforms were being attempted or considered by the Mongolian government, from 1990-1991, the IFIs were not pushing any such agenda at all.——quite shallow claim. Kontrad Adenaur, ADB, IMF, WB aren’t they IFI? And Jeffrey Sachs, sinner, didn’t he work for IFI at that time!! All other academic work and papers written on Monglia’s transition verify that indeed Mongolia’s transition was handled by IFI that steered the process for years directly and indirectly. For Mongolia’s transition, read the works of others such as PAUL COLLINS, FREDERICK NIXSON, ROSSABI and many others inluding Byambasuren, who was PM who handled privatization process. In fact, Byambasuren mentioned in his memoir how he, as PM, was blackmailed by IFI with conditionalities to receive financial aid.

  • 10
    Lauren Bonilla wrote on 8 November 2016:

    Thanks all for a enlivened discussion on this topic. Currently 10 researchers associated with the Emerging Subjects projects from UCL, the National University of Mongolia, and the Mongolian University of Science and Technology are traveling near the mega-mining areas of Tavan Tolgoi and Oyu Tolgoi in Omnogobi province. Something that we have been struck by is the diversity of narratives and lived experiences of development and economic interventions in this region. This has prompted some of us to reflect on the debates taking place on this particular blog post. We have discussed how there is never a single story, but always different and contradictory versions and visions about something, shaped crucially by where one sits in the story.

  • 11
    Bill Bikales wrote on 8 November 2016:

    Thanks, Lauren. I hope you don’t mind my taking one last chance to reply to some questions that have been raised!

    Andrei, thanks again for the further thoughtful comments. Quickly on your first question; no, I never actually studied with Jeff Sachs. My focus in my studies and work prior to Harvard was China’s economic reforms. China was, of course, the classic case of a gradual approach to reform.
    Again, on a smnaller point – relevant to the comments by the anonymous poster who commented after you – the narrative that I am rejecting here is that the IFIs *imposed* shock therapy (“ST”) on Mongolia, by conditioning their assistance to Mongolia on rapid and radical liberalization. There really is no evidence that they did. Ueno makes an even stronger point; that the IMF actually opposed ST and advised against it. But again, the first loans were issued under a severe crisis and if the Government was determined to try such an approach the IMF could hardly have refused to provide balance of payments and budget support in response. The IMF, ADB, World Bank and other missions that were visiting then were trying to understand the Mongolian economy, assess the magnitude of the crisis, and identify some urgent priorities for assistance. There were so many urgent problems — imagine! Just maintaining the production and distribution of heat during the winter received a tremendous amount of attention. Importing fuel and other key imports. Paying salaries, other critical expenses. Those were their main concerns. Sure, this was the start of establishing new economic management institutions and approaches. But donors did not insist that on a very rapid approach.

    To the extent that there was ‘ST’ — and it was only a limited extent, because the pace of change slowed very rapidly very soon after the reforms started and for the whole Jasrai era was very gradual — it was a Mongolian agenda, set by Mongolians.

    As to privatization, during the first two years, many small enterprises, mostly in services, were privatized. They had few valuable assets and were sold for vouchers. There was on cash privatization program in place until several years later, and it was only then that enterprises of real value — Talkh Chikher, APU, Makhimpex, Trade and Development Bank, NIC, the Ikh Delguur, the UB Hotel, Sharyn Gol, etc were privatized. This was not shock therapy by any definition. It took years. The dissolution of the negdel happened rapidly, as you noted. But this wasn’t privatization in the usual sense; this was the collapse of an entire system of collective rural governance, heavily subsidized by the state, in which the herds and other assets were simply divided up among the members. I would be very interested — delighted — to do a new study of that process. I think ou and I would both be surprised by the findings.

    Finally, as I’ve suggested, it is impossible to distinguish as easily as you suggest between the external shock caused by the end of Soviet support, and the domestic shock caused by policy choices. There were no easy choices.

    Anyway, thanks everyone, especially Lauren and Rebecca.

  • 12
    Mongolia’s FAILURE as a country rooted in the “shock therapy” policy implemented by Sachs and his crew and supported by IFI wrote on 8 November 2016:

    It reminds the saying “thieves never admit that they are thieves, of course, unless they are brought to justice.” Here are some references to theme of discussion here. 🙂

    Keith Griffin, UN economist: statistics can only hint at the trauma inflicted on Mongolia by the economic “shock therapy” that started in 1990… with the strong encouragement of the West, Mongolia decided to follow the example of Russia and adopt a strategy of “shock therapy”

    THE TRANSITION TO A MARKET ECONOMY: MONGOLIA 1990-19981 Frederick I Nixson and Bernard Walters School of Economic Studies University of Manchester ….. Some Problems in the Transition to a Market Economy Since the implementation of ‘shock therapy’ economic reforms in 1990 and the collapse of the Soviet Union in 1991, the Mongolian economy has undergone a painful transition. Gross Domestic Product (GDP) at market prices declined for four consecutive years (1990 – 1993 inclusive) with a cumulative loss of 20 per cent of national income.

    Some Problems in the Transition to a Market Economy Since the implementation of ‘shock therapy’ economic reforms in 1990 and the collapse of the Soviet Union in 1991, the Mongolian economy has undergone a painful transition. Gross Domestic Product (GDP) at market prices declined for four consecutive years (1990 – 1993 inclusive) with a cumulative loss of 20 per cent of national income.

    Neoliberal “SHOCK THERAPY” policy during the Mongolian Economic Transition. Enkhbayar Shagdar, Associate Senior Researcher, ERINA.
    Mongolia reels from `shock therapy’ | The Independent

    Modern Mongolia: From Khans to Commissars to Capitalists
    By Morris Rossabi … Jeffrey Sachs, the Harvard University Architect of “Shock Therapy” for the communist economies, visited Mongolia in March 1991 …. Some western economists, Frederick Nixson cautioned against shock therapies … Shock therapy prevailed …

    Mongolia’s FAILURE as a country rooted in the “shock therapy” policy implemented by Sachs and his crew and supported by IFI

  • 13
    Bill Bikales wrote on 11 November 2016:

    Thanks again to everyone. My point in the interview was not to revive the old debate about shock therapy vs gradualism. It was always a bit too academic and removed from real world policy choices, even then. In 2016 it is obsolete and arid.

    While I respect Lauren and Rebecca’s point that different people perceive reality differently, I wanted this discussion to be rooted in facts, and I cited many to support the following key points:
    1. Mongolia did not go through ‘shock therapy’ as it is normally defined. Privatization was slow in Mongolia, not rapid. Price liberalization started dramatically, but in 1996 there were still Price Commissions determining the prices of key household goods such as meat, flour, bread, gasoline, etc. Until 1993 there was no unified exchange rate. I mentioned an anecdote; in 1994 I went with an official from the National Development Board, the successor to the Planning Commission, to a meeting with the commercial bank association, for which the government had prepared a list of businesses and projects that the government wanted to support but lacked budget funds for, and which the banks were then ordered to lend to in amounts specified by the government. Most of those loans ultimately went bad. None of these facts are consistent with shock therapy. And from 1992-1996 economic policy under the Jasrai government was quite conservative.
    2. Yes, during the Byambasuren regime there were some Mongolian policy makers who advocated a sweeping and rapid ‘big bang’ reform push. A few parts of their agenda were realized, like Resolution 20, the voucher privatization of small enterprises, the first move toward a market-determined exchange rate for the Togrog. But these were first steps only and they were not followed through. This is where Rebecca and Lauren’s point about impressions is most relevant. Many people, in Mongolia and outside Mongolia, reacted strongly to those first steps and to the announced intentions of the reformers and received the impression that Mongolia was going through a more rapid reform process than was actually the case. And they then associated all the trauma that ensued with the reforms, and not with the huge external blow that the country had endured. One commenter cited Keith Griffin’s criticisms of shock therapy. I met with Keith when he first came to Mongolia in 1994, and I commented on the draft papers that he and his team were presenting. The glaring problem in their work, as I pointed out to him, was that he came to Mongolia determined to make a case for a Chinese-style gradual reform process in contrast to a ‘shock therapy’ approach, but there was no need to make such a case in Mongolia in 1994 because the government was no longer even remotely interested in rapid reforms. He went ahead and wrote his book, anyway, and it had no impact whatsoever in Mongolia because it was addressing issues and problems that no longer existed.
    3. The critics of ‘shock therapy’ never – and that includes the commenters here – acknowledged the massive shock that the Mongolian economy suffered when Soviet support and Comecon trading were ended, and how much this constrained the options that policy makers had. The comparison with China’s choice of gradual reforms made no sense at all; China had not suffered a shock like that and under a Communist Party ruled system could move as slowly as it wished. China had been almost autarkic under Mao; it had its own sources of food, fuel, steel, etc. Mongolia’s economy was very open, but only in one direction, using a ‘soft currency’ that no longer existed and through doors that had been slammed shut. Mongolia had a slew of factories that had been producing goods that they could no longer sell, with inputs that they could no longer obtain. While living and working in Mongolia I saw, and was occasionally in small ways involved in, scores of donor-funded projects aimed at helping these enterprises become successful under the new market circumstances. Those projects cost a lot of money and almost never succeeded. The challenges were too enormous.
    4. The role of foreign advisors in promoting ‘shock therapy’ in Mongolia has been exaggerated beyond recognition. The IFIs never supported radical reform, rapid privatization, etc. Some observers claim so, casually, but offer no evidence. Rossabi is mentioned as one source, but look at the list of people that he interviewed for his book and you’ll see that he talked to no one who was involved in those early reform discussions, neither Mongolians nor foreigners. He, like Keith Griffin, dove in with preconceived notions about what had happened and would not accept any evidence that was not consistent with his preconceptions. The IFIs issued scores of reports that talked in anodyne terms about the need to move to a private sector led market economy, but they were consistently cautious and reluctant to intervene in discussions about the pace of those reforms, at least until macroeconomic stabilization had been restored in the mid-90s. I cited Hiroshi Ueno’s piece in which he mentioned discussions with a senior IMF official who indicated that the IMF had urged the Government to go slower on reform. As to the role of Jeffrey Sachs ‘and his crew’, myself included, Jeff Sachs visited once, in Spring 1991. At that time Resolution 20 had already been issued. The privatization scheme had already been drafted. When I and my colleagues arrived in July 1991 the exchange rate had already been devalued to 40:1 and on our first day in Mongolia we were shown the new privatization vouchers, which had just been printed and were going to be distributed soon. We taught economics, did some technical tasks and engaged in discussions with some people in the government, but it is clearly wrong to think that we were the prime movers, or even movers of secondary importance, in reforms that had largely taken place or been prepared well before we even got there. We then left in December, 1991. Some left earlier than that. I returned in July 1993, and worked with the Jasrai government. It is always appealing to blame problems on foreigners. But it is unfair to the foreigners, and it is even more unfair to Mongolians, to not acknowledge that in fact there was an economic debate among Mongolian leaders and economists following the collapse of Communism, that some of the ideas of more radical reformers were implemented, while many ideas of the much more cautious thinkers were implemented as well. This was a Mongolian debate in which all parties could draw on the writings and experience of the sources that they believed in. And donors were hardly united in promoting one particular set of free market based ideas. I’ve already mentioned all the projects aimed at supporting enterprises. There was a great diversity of views among donors.

    Of course mistakes were made in those years. I tend to agree with some observers who believe that in rural areas the government erred in not investing more in public goods to make herding more viable, and that the belief that herders could just return to traditional way of life was mistaken. There were other mistakes, some resulting from too much caution – such as the bankrupting of virtually the entire commercial banking system in the early 90s by makingit an arm of the government instead of training banks to lend to borrowers who could repay their loans. Others from too much faith in the ability of market forces to quickly produce economic health and stability. One comment mentioned Frederick Nixon’s work. While Nixon also fell into the trap of applying the ‘shock therapy’ label where it was in fact not accurate, his analysis of the challenges Mongolia faced then was often quite correct. How to develop a long-term vision and strategy, and incorporate crisis management into such a vision, was an extremely difficult problem as he pointed out. I am not defending or criticizing all that was done. I only want readers to appreciate just how traumatic a shock the country had suffered, how difficult the choices were, and how brave and well meaning all Mongolia’s leaders were as they attempted to place Mongolia on a healthy development path.

    Thank you again.

  • 14
    Marissa J. Smith wrote on 11 November 2016:

    I would draw attention to the role of de-legitimizing the Soviet-Mongolian relationship in Bikales’ points. This, like ongoing Russian-Mongolian relations, was fundamentally different in terms of what is aid, what is debt, what one side is “teaching” the other, from what is the case in bilateral relations between Mongolia and NATO countries (and their financial institutions, political parties, think tanks, and individual economists).

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