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
(If a consensus was indeed reached at the Grand Coalition Government, let us implement the following)
The first item on our agenda is the need to undertake a comprehensive reform of the government regulation in its true sense. I wish to emphasize the word REFORM. Both the government, which endeavors to ensure sustainable growth and eliminate poverty, and the private sector which creates this growth do not need any cosmetic repair of the government regulation - all laws, resolutions, rules and procedures which distort the entire ecosystem of economic and business environment. Not only Mongolia does need a regulatory reform. Developing countries, including the post-transition economies, are undergoing reforms. International organizations, including the UNO, World Hank, ADB and others underline the importance of regulatory reform for creating the most favorable investment and business environment - the cornerstones for aspiring sustainable development and eliminating powerty. President N. Enkhbayar highlighted the scope, significance and strategies of implementation of this reform at the Second Assembly of Mongolian Entrepreneurs. Prime Minister as well emphasized the needfor eliminating bureaucratic red-tape and the importance of creating a business conducive environment.
I do hope that these ideas and recognition hi (he need of reform is shared by the Parliament of Mongolia as well. The Government’s bulldozer program in essence is the call for regulatory reform. Therefore, One may remain confident and assured that at the top Government levels, there is a will and commitment to initiate such a reform. This regulatory reform shall close the doors to corruption and bribery. It is useless to argue about whether to establish an Anticorruption agency or not without reforming the existing regulatory system. In fact, by implementing a regulatory reform we will have no need anymore for any separate independent anticorruption organization. However, is the will and commitment expressed by high level government officials, shared by mid and low level bureaucrats at ministerial, agency, city and district administration? The right answer would be negative: they do not have a will, commitment, any intention and interest. Overwhelming majority (85.3%) of the total 1745 businessmen, covered by a survey, we conducted prior to the Second Assembly of Mongolian Entrepreneurs, responded that (Annex 1, Collection of Survey Reports, Research Papers and Proposals on Improving Business Environment, 2005) bureaucracy in public service organizations is the foremost major obstacle for Mongolian businesses. This list urging of the necessity of regulatory reform can further be continued by dozens of other papers. This reform should be carried out simultaneously from upper levels to lower, and from lower to upper. However, the policies run now, the activities carried out to implement those policies are not convincing enough and the old patterns and approaches are still evident and prevalent. The experiences of countries, which undertook reforms suggest the following lessons to derive and apply in our reform efforts. These include: A Regulatory Reform Committee, comprising of representatives of the Government, private sector and civil society, are formed. Presidency, Parliament and the Government attach high specific significance to the functioning of this Committee; To simplify the existing regulatory arrangements and schemes for economic and business activities by monitoring and evaluating at national level their efficacy and invalidate the inappropriate ones, thus settling order and systematizing the disorderly government regulatory system; Having achieved the above two immediate objectives, the following fundamental principles should be embedded in the very technology of developingand implementing any government regulation:Any government regulation shall withstand three major criteria; in other words, therelevant subjects have to pass the below three tests:
-provide full and comprehensive proof that the particular object, subjectto regulation, may not fall under sole market forces; therefore a government regulation should be provided for the object;
-Finally, proofs must be presented that the government regulation is mandatory, and that this regulation shall not distort the market and will be free of and immune to bureaucracy, and that the government failure would eventually be a market failure.
In the countries which carried out regulatory reform applying different approaches the reform benefit-cost ratio is 25 to 1 !For instance in Belgium, a country much richer and much more developed than Mongolia, a survey was conducted among 2600 businessmen, and the country’s Parliament discussed the results of the survey, upon which the government undertook drastic and radical measures to simplify and reform its regulatory system. Why, then, Mongolian Parliament cannot follow the suit? We do have enough evidences, proofs and facts - 1745-respondent polls and survey results, surveys and questionnaires conducted among micro-businessmen and informal sector members, ADB report on Private Sector Assessment, WB-led investment environment studies, Ministry of Trade and Industry small and medium size enterprise survey and so on. Every and each Member of parliament is keen and concerned about their respective constituencies pushing for a greater share from annual budget, however, they all seem to neglect the reality that all of the 76 electorates are in desperate situation - with mushrooming bureaucracy and dire business environments. This should, indeed, be the first and foremost area for the MPs most serious and comprehensive discussions. This is the place where the reform should start.
Administrative reform, the timing of which has long ago come and which the Coalition Government has been eager to conduct, is still pending. The government would definitely gain mass support if it manages to conduct the regulatory reform before the administrative reform, of which the masses do not have sufficient understanding. However, if it exerts enough political will and commitment, these two reforms could even proceed concurrently. The masses are fed up with bureaucracy and have felt it “to their flash, therefore, they would welcome any effort reform the administrative and regulatory systems. Preparations for administrative reform shall take time. It does require time. Therefore, concurrently with running a broad public education and information campaign on the need and significance of an administrative reform, it is crucial to create a mechanism of encouraging and supporting local voluntary initiatives and opportunities of association by individuals and local self-rule organizations.
Development of a partnership mechanism to consult and advice with, listen to the voices and concerns of the private sector at all levels of implementation of economic reform policies and strategies to reduce poverty, and eventually, developing and implementing any government regulations, policies and programs, should be one of the major directions of the administrative and regulatory reforms.
The UN Private Sector and Development Commission in its report to the UN General Secretary underscored the importance of forging a private-public partnership and recommended the Governments of developing countries to embark upon effective and productive implementation. This issue has been regularly accentuated in the talks and reports by the World Bank and ADB, and these organizations are determined to further intensify their activities to support such reforms. It is not accidental I for the WB to title its World Development Report for 2005 “Enabling Investment Climate for Everyone”. The Report is built upon a series of surveys it earried out worldwide 30000 economic entities of 53 countries, 3000 micro-business and informal sector units of some 11 countries and business expenditure survey of 130 countries. These reports and surveys prove that such a favorable business environment for everyone can be built exclusively through the private-public partnership discussed above. This was also the key message Mongolian President delivered at the Business Forum. Also the Prime Minister’s call for meeting with us in the last week of every month is also an effort to support this initiative. We must ensure that this partnership mechanism is not seen just a symbolic declaration, but evolves as a practical effort present at every and each level of governance. In 2002 a Government-Private Sector Consultative Committee was established, and recently its activities have been reinvigorated with renewed structure. Similar partnership mechanisms are being established in some aimags (Annex2). Nonetheless, the perception and attitude of the Governmental organizations towards these new schemes and frameworks of cooperation, in fact, remain cold, dubious and unconvinced. At a recent meeting of the Consultative Committee, Mr. S. Batbold, Minister for Trade and Industry of Mongolia (the Co-Chairman of the Consultative Committee, representing the Government), had to spend a whole hour waiting for the other members of the committee-representatives of Ministries and Agencies. Those who did not attend the Meeting arc, perhaps, the ones who rank high by the Red Tape Perception Index, recently released by the Chamber of Commerce and Industry (Annex 3).
In its true sense, this partnership mechanism is a reform of the Mongolian governance technologies, and should be perceived akin to various meetings, discussions, consultations, seminars, or open web-pages, in vogue lately, internet chats or hotline talks. This partnership should be measured against concrete indicators and criteria of the performances of managers at each level of governance as to the actual level and scope of poverty reduction, of improvement of business environment and how effectively have partnership mechanisms have proven to be effective. For the sake of development, the policy-makers ought to introduce new governance technologies in their process of developing and implementing policies, just like the business entities introduce advanced technologies to enhance the quality and improve productivity. This is a simple, unquestionable truth that any decision proves right and effective if, and only if they were made upon close consultation with the masses, and in particular with the private sector, the very engine of economic growth. And let us just follow, obey this simple wisdom and put in place all necessary conditions. Let us modify and adapt the laws and other regulatory and implementation technologies to conform with this rule of thumb. In fact, this is the “democratic, good governance” that we have been talking a lot about lately. This is the true content of the e-governance we are aspiring.
Recently I read a law with a quite a long title - the Law to develop, Submit and Ratify Laws approved by the Parliament. According to it, the Parliament may reflect “if deemed justifiable” the words and ideas of the people in the draft laws that the MPs develop. Let us then start our work to introduce the best governance technologies by changing such “tragic” and “ridiculous” laws.
It must be one of the pivotal directions of the reform to develop the most optimal ecosystem for the private sector realistically and objectively assess the role and significance of the informal sector in the national economy, to formalize the informal sector, or create the necessary and proper legal and economic regulatory mechanisms for, as de Soto put it - "resuscitating” the “dead capital”.
We do not have any ready-made recipes or international experiences or prescriptions. However, we should see it as a natural phenomenon, process in a developing country, including countries with transition and post- ||mis11ion economies. Precisely therefore, the above
mentioned UN report emphasized the issue, calling for “unleashing entrepreneurship” from tight bonds and provide opportunities to develop their entrepreneurship. It highlighted the importance of a state policy to develop the markets for the pyramid bottom layers. Hundreds of hundreds of Mongols are working hard to improve their lives and do away with poverty. Yet, it is not secret that many others “abuse” poverty, and under the pretext of poverty, expect others give or do something for them. Although a multitude of programs and projects are being implemented to reduce poverty, create jobs and promote entrepreneurship, most of them have not been effective and productive? Then what are the reasons for inefficiency, inability of these efforts to substantially and visibly contribute to poverty reduction? Apart of the obvious reasons such as poor coordination and weak management of the activities of these projects, one of the serious causes is the lack of any link between poverty reduction efforts and business support activities - there is no policy framework or concepts that link poverty reduction strategies with business promotion initiatives; no any clear set ofactions to undertake to address poverty from the perspectives of the private sector, which comprises of formal and informal segments. The activities and operations of “C iei Initiative”, “Credit Mongol” and other non-banking and other non-banking financial institutions prove that success is a factor of entrepreneurship and empowerment.
Put in simple words, this can be identified with sharing entrepreneurial wit, experiences and best skills of a herder Dorj with a herd of thousand heads of livestock with a poor livestock breeder Dondog. In a wider context, we are talking about finding the best ways to direct the private-sector generated initiatives and efforts toward the fight against poverty.
The 2-E approach for ensuring economic growth and reducing poverty, developed by the Mongolian National Chamber of Commerce and Industry (Annex 4), in essence builds upon this very clear and simple principle. To understand this principle, one doesn’t need any magic abilities. The only thing required is adopting humane political and economic policies wiling to improve peoples lives and support their efforts to build better lives.
Although there are no official survey data on the number of employeds in the informal sector, unofficial statistics mum-si that there are over 400 thousand people working in informal sector. There are also records stating that the informal sector produces 17-20, even 30% of GDP. The “real-life” statistics however prove that there are far more people engaged in informal sector, and it yields larger the cited share of the GDP. Only in the trade sector in 2003 10138 economic entities and 31.1 thousand various license and patent holders, employing altogether
62 thousand people made sales of 1.3 trillion tgs, of which 43.6% was produced by the informal sector and 52.6% (335.3 billion tgs) of the total production accounts for the informal sector. Of these 31.1 thousand micro-businesses 22.3 thousand or 71.7% ran small shops, kiosks and counters. According to the Mongolian National Chamber of Commerce 2004 survey among micro-businessmen, 428 out of 584 responded that they were doing business with their own money, 73.8% responded that they made up to 200 thousand tgs monthly income, and 68.4% responded that this income was not enough to support their lives.
Also, most of the respondents indicated at shortage of available job spaces and therefore rented their business spaces, and that the rent fees were increasing rapidly especially in Ulaanbaatar. Of the respondents 74.7% pay up to 70 thousand tgs, apart of the rentals, for various fees; 46.3% used own funds to start the business and 32.7%o used bank loans and credits to start up, however, this ratio is different for urban and rural areas (Annex 5).
“Liberty and democracy Institute” run by Ernando de Soto, gaining popularity among Mongols lately, is planning to implement projects and launch some surveys in Mongolia. I saw a quite thick volume on the Prime Minister’s desk. Some works to formalize informal economy, improve and enhance the rule of law and convert“dead” capital into viable asets, are likely to take place. Recently Mr.Gankhuyag, Su .Batbold and B.Batbayar and some other state officials have drafted and submitted quite a comprehensive general comprehensive code to develop small and medium size enterprises containing a full array of strategies to promote SME development through government policies and establishment of new institutions to develop and improve the financial environment for SMEs along with a set of definition of small and medium size business. Also the MNCCI has developed and introduced to the Millennium Challenge Account National Council a comprehensive document containing the strategies for development of financial institutions necessary for SMEs, the technical and economic feasibility study of the projects needed to implement in Mongolia in the area of economic and technical assistance (Annex6) .Yet, the political environment to embrace all these initiatives and efforts, the will and commitment to further advance them are of instrumental importance. And it was not accidental for Jeffrey Sacks, now the advisor to Secretary Generel of the UN, who used to advise us in early 90s, to mention in his book advise us in early 90s, to mention in his book “The end of Poverty” that a commitment to a policy, one is abiding by, was essential at both national and global levels. Obviously, poverty doesn’t hit us within a night. A person is not born poor, and clearly, being born to a poor family doesn’t mean that he or she would remain poor for his or her entire life. Therefore, poverty
should be seen and treated like a disease a person could develop. Three-tier policy measures could be identified to address poverty - 1) prevention, 2) diagnosis and treatment, and 3) post-illness rehabilitative measures, as with any health disorder or illness. Indeed, some efforts in this area are already being observed. Some private sector entities, especially, the largest corporations and companies, upon recognizing their social responsibility, have launched movements and campaigns to combat poverty. Spirt Bal Buram LLC initiated a campaign “Vision” in this course, and NIC-Petrovisparented an initiative called “Together Against Poverty”. Some companies are working to create new jobs in poor outskirt districts or in provinces. At this very juncture the Government needs to create certain incentives to encourage and expand such economic and social initiatives. The private sector and the informal sector should operate in an environment with correct market signals and just game rules so that they are able to perceive the poverty triangle not as a problem, but as a market opportunity. For this, the government is expected to build such an environment, a policy framework within which these private agents are motivated to elicit innovative, entrepreneurial and pro- development thrust. In today’s world, 4 billion people earn less than 2USD a day and 2 billion people earn less than 1 USD a day the very people filling the bottom the pyramid.
Micro-business and micro-finance are the two sides of coin. Promoting micro-business and micro-financeshould not be a target of just a single-year instead, supporting micro-business and micro-finance should constitute one of the key areas of continuous and persistent reform.
There is much work to be done to develop the legal and regulatory definitions for micro-business, to improve the environment for micro-businesses with clear settings and terms of rent, taxation, social safety nets and labor relations. The results of a survey conducted among micro-businessmen, given as an annex to this article, the speeches delivered by businessmen at the Assembly of Businessmen, illustrating the true situation, are much more informative, “live”, telling and helpful than the renowned economics manuals, and it is worth for our politicians to carve out some time from their schedules to read them. The policies and activities addressing poverty should be measured by relative indicators which evince the ability to meet such conditions as whether the number of people falling into poverty is greater than the number of people graduating form poverty, whether the number of new entrants into the micro-business is greater than the number of people who quit micro-business, whether the number of people moving to informal sector is greater than the number of those moving from formal to informal arena, whether the number of people who graduate from poverty and enter informal sector is greater than the number of people working in the informal sector but eventually falling into poverty. (Annex 7).
In a situation when the micro-financial organizations arc represented cither by non-banking financial institutions or credit and savings cooperatives, it isnecessary to improve the legal and regulatory environment and create incentives to promote active competition in the financial sector. WhileImplementing these policies and improving the legal and regulatoryenvironment, we should rely not only on pure Governmentalregulation, but also on quazi-regulations. We should be aware of the distorting consequences of our traditional attitudes to deliberately invite for government regulations when we see something going wrong at this or that field and to give the right answer to regulations to be “prudential or not prudential”.
This approach should be abided by when establishing a Financial Regulatory Committee. Also the Central Bank’s authority supervise non-banking financial institutions should be delegated onto a non-governmental organization and on the basis of establishing rating of banking and financial organizations and creating a realistic credit information and database, the priority directions for the government’s policy to support and encourage financial institutions.
Ensuring intensive development of the private sector, settingjust rules for promoting fair competition, encouraging entrepreneurship and cultivating good corporate governance should constitute one of the core directions of the reform. At the prime order, Mongolia s Private Sector Development Strategy Paper should be developed by the Government and organizations representing the private sector, with the support of international organizations.
I mentioned earlier that the Asian Development Bank developed Mongolia’s private sector assessment paper. The World Bank as well has carried out pertinent research, surveys and analyses. Enough has been done also by Mongolian governmental and non-governmental organizations. In other words, the current state of affairs in our private sector, encountered difficulties and challenging issues, and the trends and directions for future development of the sector have already been addressed and determined. Some developing countries include the Private Sector Development Strategies as a part of their national development strategies and vision, and integrate into their Plan of Actions. If the private sector is the driving force of the national economic growth, and if it is one of the creators of a nation’s development and prosperity with weighty and tangible contributions to effectively addressing many social pressures, it is not much difficult to understand and realize the significance of the Strategy Paper. Moreover, the President of Mongolia has underscored the value of the Strategy Paper and declared his intention to take the issue under his auspices, all the pertinent forces must act promptly, talk with international organizations and start working on the paper
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