Tracking Mongolia’s development

Sometimes insights come from unexpected sources.  Ever since returning to Mongolia some months ago I have, naturally, been observing how things have changed since I last lived here in 1990s.  Many of the changes are immediately recognizable and even foreigners arriving for the first time could guess that the high-rise buildings and cafes are new. But it was a chance conversation with a fellow foreigner that drove home just how dramatic those changes have been.

Mongolia’s black market in 1994
Photo: James H. Anderson

When I moved to Mongolia in 1993, the first Mongolian word every foreigner learned was baikhgui.  Not there; don’t have any; absent.  With this simple utilitarian word, one could concisely express the verbal equivalent of a shake of the head.

“Do you have any bread?”
“Baikhgui.”
“Rice?”
“Baikhgui.”
“What happened to the water/electricity/heat?”
“Baikhgui.”

Store shelves were empty and inflation was skyrocketing.  Savers saw their savings evaporate, and those with money had little to spend it on.  Those lucky enough to have dollars could find some goods at one of a couple “dollar shops”, receiving sticks of chewing gum as change.

In the early 1990s, Mongolia’s transition was about recovering from collapse and building the basic institutions of democracy and capitalism.  GDP had fallen more than 20 percent as the former socialist trading arrangements collapsed and Soviet aid was withdrawn.  The old tools of administrative control were still being applied—the basic institutions of markets had yet to be developed and officials, trained in Marxist-Leninist economics, had a basic lack of trust that the “chaos of the market” would not make things even worse.

So what was the unexpected source of the insight? Arriving in Mongolia a few months ago I was surprised that a fellow foreigner was unfamiliar with the word baikhgui.  Now, not everyone is linguistically strong (and I am worse than most) but for a foreigner in the early 1990s baikhgui was a word one could not avoid learning if one tried.

While the early 1990s taught foreigners the word baikhgui, by now the operative word has become baigaa; an equally utilitarian word, the verbal equivalent of a nod: We have it; yes, indeed; present.  The store shelves had filled long ago—nature abhors a vacuum and suitcase traders filled it—but in the intervening years the numbers of shelves and stores, and the selection of goods available, had grown tremendously.  Between 1993 and 2014, Mongolia’s average income per person tripled.

Store shelves full of fruit in Mongolia today
Photo: James H. Anderson

Signs of change are also apparent in headlines.  A stringer for the wire services in the 1990s used to say that the only way he could get stories published was to have either Chinggis Khan or the ratio of animals to people in the first paragraph.  Indeed, even some academic authors shamelessly followed this dictum. (Ahem.)  Now, however, the foreign press is all about the mines.  When will the new deal for OT’s second phase be signed? What are the forecasts for copper/coal/gold prices?

One thing that hasn’t changed is that Mongolia still likes to do things in a big way.  One of the more radical reformers in the transition from plans to markets, with an early mass privatization program in the 1990s, Mongolia embraced the mining economy with vigor when vast mineral resources were discovered.

Mongolia was not the first country to experience a natural resources boom, and there were lessons aplenty from other countries about how to manage the boom-bust cycles, how to “save for a rainy day” and, hopefully, avoid the resource curse.  But the magnitude of the adjustment that Mongolia had to manage is mind boggling. When I lived in Mongolia in the 1990s, foreign direct investment (FDI) averaged 1-2 percent of GDP.  Even as late as 2009, FDI was less than 15 percent of GDP.  By 2011, as investment in OT and other mines was in full swing, FDI had soared to 53.6 percent of GDP.  By 2011 the economy was growing at 17 percent, and the notion of a boom-bust cycle was entertained only by pessimists; and, as it turns out, realists.  And while the first case of “Dutch Disease” afflicted a relatively prosperous country, a country with strong market institutions, Mongolia was neither.  For a young democracy with young institutions, with the suffering of the depression of the 1990s still within memory, and with a citizenry eager for better days, the idea of countercyclical policies, of saving for a “rainy day”, found little support.

Despite the lessons from other countries on how to mitigate the resource curse, despite the great strides that had been made in revising legislation to do so, the exuberance for the boom part of the cycle was too much to resist.Spending went off budget to avoid spending rules, and new procurement rules were circumvented to build infrastructure more quickly. The international capital markets only validated the exuberance, lending Mongolia 20 percent of its GDP at rates comparable to those given to Italy.

Then the bust part of the cycle kicked in.  As quickly it ascended to the heavens, FDI fell back down to Earth as OT moved from development to operations and policy changes led some foreign investors to lose confidence—FDI as a share of GDP stood at 7.2% at the end of 2014.  Commodity prices fell (and look to continue falling), growth has slowed, and the repayments of foreign borrowings loom only two years away. Now that there is a downpour, the “rainy day” fund is in deficit.

There are no easy solutions to the current economic challenges. Months ago the Government acknowledged the difficulties and began to lay out a plan for righting the economy: bringing much of the off-budget spending on-budget, for example, and passing a package of measures to further shore up the economy. Such actions are commendable, but given the magnitude of the challenge, full implementation and deeper restructuring will be needed—and will require broad political support.

In these difficult times, I hope that Mongolians (and foreigners) will take a moment to remember back whenbaikhgui was the operative word in the Mongolian lexicon.  While times are tough, the Mongolian spirit is tougher. Baigaa is the word now, and this applies as much to ideas for reform as it does for spare tires and goods on store shelves.

This article originally appeared on The World Bank’s East Asia & Pacific on the rise Blog. Publication does not imply endorsement of views by the World Economic Forum.

To keep up with Forum:Agenda subscribe to our weekly newsletter.

Author: James Anderson (Jim) is currently the World Bank’s Country Manager for Mongolia, a country familiar to him from his time there in the mid-1990s.

Image: Vehicles drive during sunrise in the Taiga area along the M54 highway Krasnoyarsk – Mongolia.  REUTERS/Ilya Naymushin.