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, 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 16^th 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.

 

This is the second in a series of posts about Mongolia’s 2016 parliamentary elections that were held on June 29th.

 

Ulaanbaatar is dusty, bleak and windy. Waiting for the bus, I am forced to seek momentary refuge in a KFC doorway when, out of nowhere, the sky turns an ominous brownish yellow. High-speed wind torpedoes through the city and lashes across my body filling my nose and mouth with dust. I haven’t learnt the art of always wearing a scarf around my neck to protect against such moments. The climate is unpredictable and so is the political atmosphere. Like political life itself the storm appears to come out of nowhere.

It’s early May 2016 and there is still some ice on the Tuul river. Snow can be seen on the mountains to the South. Workmen are starting to put down new pavements and are planting trees along the roadsides. The news reports that the police are undergoing crash courses in English. Everything must be in place for ASEM (the 11^th Asia-Europe Meeting).  In contrast, deserted construction projects lie in wait for new investment. Small shops are getting rid of stock before they close down, with sales offering up to 30-40% off. Rumours spread that a measles epidemic has erupted and infant moralities are spiralling out of control across the city. No doubt the government will hide all of this from its foreign visitors when they arrive later in the summer.

 

With the so-called ‘economic crisis’ two things have become apparent. Where the rich are stuck with unfinished property and dormant mining licences they cannot act on, the poor have lots of cheap goods, now mostly broken and used for something else, but which they bought on credit and have to pay off. Everyone talks about debt and its vast accumulation. It is certain that the Democratic Party will not be re-elected, but who will take their place? Will it be a coalition? Will any of the Independent candidates be elected? What of the new and emerging parties – why do they seem to implode through internal factions?

 

In the afternoon of the 4^th May, I receive an SMS message from a friend that a Mercedes-Benz has just driven past a bus stop in the centre of town and thrown hundreds of thousands of tögrög out of the window at people waiting for the bus. Could this be a political move related to the elections? Is it just the tip of the iceberg of many more such events? If so, who is the man in the car? Through what connections has he got hold of such large amounts of cash? By the end of the day, and on (apparent) police investigation, it is confirmed that this was simply the action of a man who had been arguing with his wife. The speculations die out and the event is soon forgotten.

 

On the 11^th April, a prominent politician and businessman’s offices are raided at the Bayangol Hotel, presumed, in part, due to the on-going ‘railway scandal’ where miles and miles of purchased tracks have been left to rust on the steppe. A large group of people, including the national judo team and various politicians come out to support him at the location. Special forces police officers can be seen seizing boxes and taking them away live on TV, but he’s never arrested himself. ‘We’re just really living in a society where the law is no longer the law’, his daughter laments. Speculations about internal factions aside, in this gesture of power we are invited to be reminded that the state holds ultimate power.

 

After the event, rumours circulate about future arrests and a list that has been drawn up with the names of those who might be targeted next. People in the countryside speculate that money laundering by big bosses has triggered flows of cash to purchase antlers from the forests. At night, people have been seen trying to sell their government-allocated shares to eager Chinese buyers (shares which the government later agreed to buy back), and during the day the atmosphere is intermittently hijacked by the stopping of traffic to allow blacked out cars with sirens to dart past with ASEM-related visitors as they speed through the city. The façade of buildings along the main roads are being painted. Motorway shoulders are being raised to hide unsightly slums.

The political atmosphere is characterised by a sense of fits and starts. Things suddenly emerge as if from nowhere. They are followed by a period of intense speculation and a search for connections and comprehension. Then, just as quickly, they seem to dissipate into the background again and things return to some sense of normalcy.

 

As the weather warms, the Tuul river begins to thaw. In the mornings men and women, sometimes with children in tow, come to gather plastic bottles along its banks, carrying them home in plastic woven bags on their backs. Every now and then these people travel back by bus from Zaisan sitting awkwardly with their enormous luggage slipping across the floor into the elites who live here. As it gets warmer, I walk across the river and up into the mountains beyond. A small trickle of water appears, but instead of this leading to a large torrent, a few days later the water disappears completely. People speculate that the government has syphoned off part of the river to provide water for the new ASEM buildings being built for the foreign visitors, providing further evidence, they lament, that they can’t ‘carrying the state’ correctly. Two days later, however, the river begins to flow again when the ice thaws further up in the mountains, and just as suddenly the speculations disappear.

 

Recalling these events hints at the way in which politics is currently discussed in Mongolia. That is as rumour about the motives of politicians and businessmen, rather than an actual discussion about policy. The drying up of the Tuul river and the rumours which surrounded it, as well as the lack of interest when the actual reason was revealed, is just one such case. In the lead up to the Parliamentary elections this year, people were constantly searching for meaning – connections and explanations – in actions they found difficult to read and understand. In fact this searching for meaning and speculation is what politics is in Mongolia. It is the speculation of connections and motivations beyond the visible and tangible. To understand politics – or to think politics – is to understand the underside of things, beyond the way things appear to the ordinary eye, to uncover the workings of a kind of magic or religion.

‘Nothing can be understood’, one friend recounted, ‘if the networks underneath are not known and understood’. He elaborated further, ‘if you don’t understand the motivations of individuals then politics in Mongolia is impossible to understand’. Searching for the motivations behind actions that seem strange is –sometimes – the only way people are able to process the wayward atmosphere that seems to characterise so much of political life in Mongolia. Speculation and circulation of rumours, of factions, motivations, alliances and actions of individuals dominates political talk. And while the new younger politicians are seen as potentially hopeful (they have not, as yet, the trail of speculated exchange of favours attached to them), they are all locked within the dominant parties and have little room to make a mark. It is as if, tightly held within alliances of debt and obligation, there is no room for new political visions to emerge. Everything is understood and explained as driven by personal business gains that bind people to each other and constrains as well as determines their actions.

 

In this atmosphere politics, as we might imagine it, appears a kind of empty shell. People feel they are living in an economic system (capitalism) rather than a political one (democracy now appears jaded and opaque). And because the economic system persists, regardless of who is in charge, politics itself appears defunct, a point that makes attaching the term ‘crisis’ to the word ‘economic’ a kind of political parody (cf. Roitman 2014, and Rebekah Plueckhahn on the political atmosphere of stalling and suspension after the elections). In this light, we might ask what work the term ‘crisis’ does in narratives about the economy in Mongolia? From one perspective it appears to be a political move to try to contain the moment in a specific temporal framework – a fallacy, of course, when it is now realised as the norm. Here, the ordinary is the speculation and incoherence of political life, there is no progress of access, or threat to another. The economic crisis is not an exception to the ordinary. There is, in many ways, a sense of a ‘crisis ordinary’, of […] ‘a process embedded in the ordinary that unfolds in stories about navigating what is overwhelming’ (Berlant 2011:10). In attending to these stories as they unfold, maybe politics is not such an empty shell after all. In these ways of navigating – sometimes overwhelming relations of debt, both monetary and social, and the complex entangled relations of obligation and favour that flow in their wake – life is always intensely political. It is just being played out in a different sphere from that which any election promises would have us believe.

 

All photos © Rebecca Empson.