Economic reform and development: ”what to do and how” delivered by Sambuu Demberel, Chairman & CEO of the Mongolian National Chamber of Commerce and Industry.2005

The answer to this question is simple and obvious – the government.

Then, why is the government holding it up? The hurdle starts with the government’s interfering into an affair where it is not needed, and its failure to attend affairs where it is needed. Put in different words, the government’s governance modes are outdated and obsolete. In official discourse I would put it even more descriptively - there is too much government regulation, which in addition to being excessive, is wrong and biased too. The classic example of the government’s misperception of its genuine mission is its obtuse attempt to regulate the prices of some of the items in the consumer basket such as meat or benzene, which have direct or indirect effect on people’s lives. Instead, it could sit down with meat exporters or fuel importers, listen to what they have to say and seek for a more effective regulation together if needs arise. Another extreme of the Government’s ignorant behavior is to simply leave the issue pointing at the Energy Regulatory Council to take the full authority and responsibility to regulate energy prices. Constant reference to economics textbooks phrase “the law of market demand and market supply” also indicates at a distortion of government’s regulation.

The two extremes of the government regulation are clearly traced down when reviewing the past 15-year history of Mongolia’s reforms. The first extreme refers to actions and inactions of early and mid 90s based on the ever- spread market notion that “an invisible hand” would regulate the market. It was not possible, I admit, to avoid this extreme to implement a reform package aiming at monetizing a non-monetized economy, capitalize a non­capitalized market and build the reform cornerstones - 4L + P - price liberalization, foreign trade and exchange rates liberalization, financial liberalization and implementing privatization. The very spirit is the politics, the society and the time urgently required these reforms. This was also advised by the consultants of international organizations, including the IMF, which is still seen by many as a “monster”. The reaction of a non-capitalized and non-monetized economy to such an experiment was indeed somewhat weird and bizarre in the eyes of a researcher.

The famous Resolution 20, made over a night, followed by several hundred percent nominal devaluation of exchange rates carried a strong message of naive and romantic politicians with very shallow knowledge in economics, who cared more of the political rather than economic content of reforms that once we overcome the hard years “of transition” and tighten our belts for some time, we would reach a safe “green valley” called "market economy”. A hesitant and diffident society, erratic behavior and acts of economic agents hit by reform shocks - these were the true images of the reality in those years.

Back in early 90s, the conception of building a better, new society was fed on a textbook verse “under market economic conditions…,other things being equal, cetirus paribus”, unfortunately, the reality turned out to be totally different from what we expected it to be.

I recall my translating some pieces of works written on privatization, writing and publishing an article titled “What is privatization?” trying to render myself and others some systematic and orderly knowledge on the objectives, forms and methods of privatization. However, the aim of the privatization process in early 90s was more of political nature rather than of economic character compromising the efficiency and productivity gains of privatization. Thus for the sake of gaining time, abstaining from orderly gradualism, the government had chosen to apply a shock therapy method. J. Komai, known as the “Father of Transition” for his surveys and research on reform processes in socialist economies, confessed in one of his writings in 2002 that the speed was not the most important factor of successful reforms. Yet, a huge political, economic and social sacrifice had to be made to start a reform in a society where resistance, opposition, hesitation, mistrust and in confidence on one hand, and optimism, aspiration, commitment, at times extremism on the other, are all mixed up. The other extreme I referred to above was a gradual yield to a view that the market was not able to solve all the problems and that the Government did indeed need to participate, and if necessary, actively get involved in economic activities. This period lasted since mid 90s. New catch-phrases such as “the government is the worst manager”, or calls for greater trust to market and need for drastic, radical reforms came into vogue among politicians. Although radical reformists took power, they remained mostly declaration makers at the top of the governance pyramid whereas the mid and lower level professional bureaucrats at regulatory and implementing agencies, preserving their old inertia reversed the flow. It is worth to note that the regulatory and implementing agencies had undergone only some organizational changes but with the old governance technologies in place. The government then presented a pleasant surprise for our two neighbors, which was an experiment tested nowhere else in the world — it set zero import tax rates and requested the two neighbors to reciprocate the move. Ridiculously, the neighbors almost ignored the act, one citing the same dare economic conditions of a developing country as Mongolia and the (>l her one replying that it already accorded Mongolia twice as less imports duties as it charged other developing countries. Although this measure did create some short­term positive effects on domestic market, it badly hit the nascent domestic industries, striving to learn the ABSs of market economy. The theoretical basis for making the decision to annul import duties was a naive belief that certain signals would be conveyed to the market that would automatically promote import competition, increase exports and diversification of the economic activities into import-substituting industries.

Ministries turned into, so-called, “Policy Ministries” and slat led producing huge piles of laws and policy papers. Although the major reforms were designed to stimulate the market, the actual implementation of these reforms deterred and limited the free flow of transactions on the market. Thus, the government, violating the market “rules of the game”, developed its own rules. Since this very moment, the government grew too self-reliant, self-c omplacent and self-assured. Such a behavior nurtured it hazardous tendency for the governments to start their  office with first of all setting its own structure and size.

To do so, the governments had to conceive self- vindicating and most convincing arguments that only the Government would be smart and visionary enough to regulate and rectify the market economy, yet the government was not mature enough to conscientiously sense the very essence of its behavior. Judging from political point of view, no any association is observed - no matter whether the government is built of democrats, or communists, or liberal conservatives, of rightists or leftists - anyone who forms the government was not immune from this worship of exceeding government regulation. The tragedy of this phenomenon was the fact that despite the government’s efforts to curb expenditures by reducing the number of ministries from 20 to 4 or 5 and delegating some of their functions to newly established agencies, it did never come across the government’s mind that not the high costs, but the government-produced law, regulations, procedures and rules were discouraging Mongolia’s economic growth and tying the hands of the private sector.

Although the economic doctrine abided by the two major political powers appear to be different on paper, in reality they both excessively relied upon and distorted state/ government regulation. And this is the situation where we find ourselves now. Therefore, I increasingly started emphasizing not the appearance of governance, but the governance technologies. This favorite phrase of mine is particularly relevant to the politicians who argue about which government interfered to which extent into the economy, market. Then, does the government ever realize that it too heavily prices into the market affairs? I would say, it does realize it, but not to the fullest extent and not much convincedly. It is an undeniable truth that over the past short history we did manage to open up our economy to the outer world inviting in the most liberal and market-oriented regimes, for which we were accorded high appraisal on the part of the international community. At times we even like to refer to ourselves as a model country. Yet at the same time, it is also an irrefutable I net that within this relatively liberal system, overtly or covertly, intentionally or accidentally we did create too much of government regulation which limited economic freedom, hindered private sector development and discouraged entrepreneurship. All d emulations were to gradually shift to “negative list” from the “positive list”, however, most of the laws, i evolutions, decrees and procedures were based on positive list and accounted to several hundred, turning into the key technology of government regulation. “On one hand”, the government has reduced the number of special permits from 600 to 100, but its “other hand” continues to produce papers, declaring new government regulations. Thus, I define Mongolia’s current economic regime as “a market economy distorted by excessive government regulation”