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

This post was written by Liz Fox, a UCL ESRC-funded anthropology PhD candidate affiliated to the Emerging Subjects project. Liz is completing the final stage of her doctoral research in Mongolia.

 

There’s a new road in Aglag District.[1]

When the diggers suddenly appeared one evening at the end of May, the area was filled with discussion over whether the road would be paved or not. What needed no discussion, however, was why, suddenly this May someone from the government had decided that the nearly impassable central artery through this Ulaanbaatar ger district finally needed attending to. That was obvious: the June election.

The arrival of trucks of gravel and sun-blackened workers was followed shortly by a sudden rush to open and occupy abandoned shops and office spaces. Flags and banners appeared outside these doors, as did flyer-distributing pairs in colour-coordinated baseball caps. The billboards at the bus terminals became decked with the photo-shopped faces of parliamentary candidates, micro buses topped with loudspeakers whirled around the open space and up and down the dirt roads. Election fever came fast and loud to Aglag, a dramatic transformation for the normally remote and dusty district.

The candidate selection in Aglag was remarkably diverse. Residents had the choice between household names from the world of television, film, music, and art, the children of big business figures, intellectuals educated abroad and a well-established political incumbent. The fundamental choice, however, was tripartite: to re-elect the ruling Democratic Party, to return the People’s Party to power after a 4-year absence, or to take a chance on a small party or independent candidate.

For the unemployed and chronically underemployed, election rallies are a good way to pass the time. Families attended meetings by both major parties, and those held by particularly famous independent candidates. The speakers were duly listened to, the disparities between their faces on the posters and in the flesh were commented on, the local drunks who dominated the microphones when the candidates opened the floor to residents were at turns held to be funny or embarrassing, and at the end, as we walked away on the half-finished new road, the same feeling was voiced: “Yes, they speak very nicely, but will they actually do anything for us?”

What a candidate will actually deliver is a question that many Mongolians were asking as they came to a decision over who to vote for. However, I would argue that it is a question that those with socio-economic power were asking with some certainty, and those living in ger districts were asking with near total disillusionment. This assertion leads to the central working argument of this post:

The notion of voter ‘choice’ in Mongolia is complicated by three factors: 1. the disconnection of political ideology from the major political parties, 2. the forces at work that influence voting through semi- and non-legal means, and 3. a phenomenon I will call “the inverted logic of the vote-return exchange”.

 

Political Disconnection

Almost no one I speak to in Mongolia seems to think about the two major parties as distinct ideological entities: politics is just politicians. Especially among disenfranchised ger district residents, people see politicians as powerful people looking to benefit themselves and their relatives and allies. It doesn’t matter what party they are from. Joining a party is just a decision driven by personal political motives, not a demonstration of allegiance to any particular world-view.

Of course, there are people who are very passionately involved in a party here and may have always been. But, at least in Aglag District, people usually do not start in one camp or another or even know how to define one party from the other. There is no ‘package’ of related political ideals that people from one side or another cleave to with the near-religious conviction witnessed, for example, in the UK referendum and US election campaigns that were taking place at the same time. Instead, people ask the pragmatic question: what was delivered over the last four years? Who do we think will deliver more for us over the next four? In fact some families have voted for three different parties over the last three elections.

 

Locust Migration: Tricks of the Trade

Mongolians are well aware of the semi- and non-legal goings on that take place in the lead up to an election. The stream of leaked videos and audio recordings that fill the news reports and invite endless online discussion fuels the general disillusionment and disappointment in the country’s political situation. There are a number of tricky practices that are carried out in order to tip the balance of the election one way or another. One is well-known enough to have been given its own nickname: tsartsaani nvvdel, locust migration. This evocative term refers to the ‘moving’ of people from one district to another for the sole purpose of voting. Shortly before the election citizens are moved on paper and will be re-located after they give their vote. Although laws are in place that put a hold on registering a change of location in the run up to the election day, they only stop those that do move from voting in the new district’s local government election. The parliamentary election is still open to influence.

Institutions carry out wholesale address changes. On election day buses are ordered to take entire companies from one district to another, or even all the way out into the countryside and the ‘locusts’ are clearly instructed on which party to vote for. Some people brought into these schemes by their bosses say that they ‘know’ that they have a free vote in the district they have been moved into, whereas others say they ‘know’ that if they don’t vote for the candidate they’ve been instructed to, their bosses will find out someway or another and they’ll lose their job.

 

The Inverted Logic of the Vote-Return Exchange

In democratic elections, there is a logic to the relationship between pre-election promises and post-election action.  Usually, it goes like this: to win a vote you have to make the right promises about what you are going to do after you are elected. If the public gives you the vote, you return the favour by fulfilling your promises to them.  I argue that in Mongolia, things are currently working in reverse in terms of the timing and direction of ‘giving’.

Instead of exchanging promises for votes, which then are returned as political action, candidates here give things to the voters (the ‘return’) before the election. They spend vast sums of money to encourage a vote for themselves, and then once they are elected, it’s the public’s turn to give back so that the politician can recoup the loses s/he incurred during the campaign and build further power and influence.

One example of this reverse logic in action is the new road. It was promised years ago, but was only delivered just before the election. Local residents commented at length on the timing and speed of its delivery: “Look, this road could have been done in a couple weeks, years ago! They are doing it right now so that we’ll vote for them. But if we take the gift now, we’ll be the one’s who pay later; as we did for the last 4 years. The politicians made themselves richer and richer while we got poorer and poorer.”

In his speech at the opening of the 2016 Mongolian Economic Forum, President Elbegdorj also alluded to the effects of this logic when he criticised the trend of failed businesspeople going into politics. They do so, the president said, because the power they serve to gain will give them an opportunity to rebuild their own wealth. You will have to spend money to gain power, but once you do, it will be time to give back, not to those that voted for you, but your own network of relatives and allies.

 

Personal Pragmatic Voting

When politics is politicians, and voters are bussed from here to there, I would argue an intensely personal and pragmatic logic takes over. Most people in the upper socioeconomic brackets have a relative somewhere involved in politics and they are therefore both on the one hand obliged to vote for them, and on the other hand, have the most to potentially gain from supporting that relative into power. Even the rich who are disillusioned about the state of politics and complain that their own relatives seem never to be satisfied still admit that, when it comes down to it, you vote for who you have to. For the poorer ger district residents, what happens before the election may be more beneficial for them than what happens after. Due to the inverted logic, the disenfranchised serve to gain more while politicians court their votes. Once they are elected, people say they will only serve themselves.

In the end, they didn’t pave the new road in Aglag District and after only a few days of heavy rain, its surface quickly deteriorated.

But then again, one road wasn’t enough to get the Democratic Party re-elected there anyway.

 

[1] All names and locations have been changed.

Thank you to G. Gerelsuren for contributing research to the piece.