The Mongolian People's Republic: Toward a Market Economy
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OCCASIONAL PAPER 79 The Mongolian People's Republic: Toward a Market Economy by Elizabeth Milne, John Leimone, Franek Rozwadowski, and Padej Sukachevin INTERNATIONAL MONETARY FUND Washington DC April 1991 ©International Monetary Fund. Not for Redistribution © 1991 International Monetary Fund Library of Congress Cataloging-in-Publication Data The Mongolian People's Republic : toward a market economy / by Elizabeth Milne . [et al.]. p. cm. — (Occasional paper / International Monetary Fund, ISSN 0251-6365 ; no. 79) "April 1991" ISBN 1-55775-207-9 : $10.00 1. Mongolia—Economic conditions. 2. Mongolia—Economic policy. 3. Mixed economy—Mongolia. I. Milne, Elizabeth. II. Series: Occa- sional paper (International Monetary Fund) ; no. 79. HC430.25.M65 1991 338.951'7—dc20 91-4710 CIP Price: US$10.00 (US$7.50 to full-time faculty members and students at universities and colleges) Please send orders to: International Monetary Fund, Publication Services 700 19th Street, N.W., Washington, D.C. 20431, U.S.A Tel: (202) 623-7430 Telefax: (202) 623-7201 ©International Monetary Fund. Not for Redistribution Contents page Preface vii Map of Mongolia viii I. Political and Economic History I Introduction 1 Political History 1 Economic History 4 Feudal Period Post-Revolutionary Period: 1921-48 Development of the Command Economy: 1948-84 Structural Change and Mounting Imbalances II. Initiation of Reform: 1985-90 9 Background 9 Economic Restructuring: The First Phase 9 IIl. Impact of Reform 1 II Overview 11 Output, Income, and Expenditure 12 Sectoral Developments and Organization Investment Employment, Wages, and Pensions 16 Prices 16 Budgetary Trends 18 Revenues Expenditures Financing Monetary Developments 21 Credit Deposits Interest Rates Balance of Payments 23 Recent Developments Structure of Current Transactions Capital Account Debt and Debt Service Exchange System 28 Convertible Currencies Nonconvertible Currencies IV. Toward a Market Economy 30 The Medium-Term Path of Reform 30 Challenges and Outlook 31 iiiiii iii i ©International Monetary Fund. Not for Redistribution CONTENTS Page Appendices I. Government and Budget Structure 33 II. Structure of the Banking System 39 III. Structure of External Transactions and Payments 41 IV. Mongolian Statistics 44 Boxes 1. A Profile of Mongolia 2 2. Energy Sources and Uses 5 3. Key Economic and Structural Reforms 7 TABLES I. Box I 1. Social Indicators 2 2. Main Economic Indicators 3 3. Summary of Selected Ouput, Employment, and Price and Wage Indicators 8 III. 4. Summary Operations of State Budget 19 5. Monetary Survey 22 6. Consolidated Balance of Payments 25 Appendix IV A1 Real NMP and Real GDP 46 A2 Implicit NMP Deflators 47 A3 NMP and GDP at Current Prices 48 A4 Composition of NMP and GDP at Current Prices 49 A5 Gross Output, Material Input, and NMP 50 A6 Income and Expenditure of Population 51 A7 Sources and Uses of NMP 52 A8 Gross Fixed Capital Investment 53 A9 Output of Major Agricultural Products 54 A10 Output of Basic Industrial Products 55 All Composition of Gross Industrial Ouput 56 A12 Coal Statistics 57 A13 Electricity Balance 58 A14 Employment by Sector 59 A15 Employment in Selected Industries 60 A16 Average Monthly Wages 61 A17 Price Indices and Volume Index of Retail Sales 61 A18 Domestic Wholesale and Foreign Contract Prices of Exports 62 A19 Retail Prices of Selected Products 63 A20 State Budget Revenues 64 A21 State Budget Expenditures 65 A22 Foreign Trade Budgetary Taxes and Subsidies 66 A23 Export Subsidy Coefficients, 1989-June 1990 67 A24 Sectoral Distribution of Gross Short-Term Credit Extended 68 A25 Sectoral Distribution of Credit 69 A26 Interest Rates 70 A27 Composition of Exports 71 A28 Composition of Imports 72 iv ©International Monetary Fund. Not for Redistribution Contents Page A29 Balance of Payments with the CMEA Area 73 A30 Balance of Payments Under Bilateral Clearing Arrangements 74 A31 Balance of Payments with Convertible Currency Area 75 A32 Export and Import Deflators and the Terms of Trade 76 A33 International Reserves 77 A34 External Debt 78 A35 Exchange Rates 79 CHARTS III. 1. Trends in Budget Aggregates 18 2. Budget Revenue and Expenditure, 1980 and 1989 20 3. Composition of State Bank Credit and Deposits 23 4. Trends in External Balance 24 5. Commodity Composition of Exports and Imports, 26 1988 Appendix I 6. Structure of Government, October 1990 34 Appendix II 7. Banking System, August 1990 39 The following symbols have been used throughout this paper: ... to indicate that data are not available; — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist; - between years or months (e.g., 1990-91 or January-June) to indicate the years or months covered, including the beginning and ending years or months; / between years (e.g., 1990/91) to indicate a crop or fiscal (financial) year. "Billion" means a thousand million. Minor discrepancies between constituent figures and totals are due to rounding. The term "country," as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis. v ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution preface This paper is based on an internal staff report prepared in connection with the application of the Mongolian People's Republic (Mongolia) for membership in the International Monetary Fund. Mongolia became a member of the IMF on February 14, 1991. The descriptions of the economic and financial systems, recent developments, and reform proposals are based on data gathered during a staff visit (which included, in addition to the authors, Kunio Saito, head of mission; Simon Nocera; Jai Keun Oh; Sarah Tenney; and Amparo Rosario, Staff Assistant) to Ulaanbaatar in August 1990 and on subsequent discussions with the Mongolian authorities held in Washington. Additional information was obtained following a technical assistance visit by the Fiscal Affairs Department held in November. Events, however, may have already overtaken some of the information in this paper, reflecting the rapid changes taking place both within Mongolia and in the global economic environment, as well as the usual time lags between preparation and publication. The authors would like to acknowledge the assistance and warm hospitality extended to them by the officials of Mongolia. They wish to express their gratitude for the contributions of Jacques Baldet and Kunio Saito. The authors would also like to record their appreciation to Noy Siackhachanh for research assistance, to David M. Cheney, Margaret A. Casey, and Elisa M. Diehl of the External Relations Department for editorial comments and advice, and to Sylvia Aida, Lan Nguyen, and Belinda Ruch for secretarial support. Any opinions expressed are those of the authors alone and do not reflect the views of the Mongolian authorities, Executive Directors of the IMF, or other IMF staff members. The authors bear sole responsibility for any factual errors. vii ©International Monetary Fund. Not for Redistribution viii ©International Monetary Fund. Not for Redistribution I Political and Economic History Introduction concludes by outlining the challenges inherent in shift- ing from a command to a market economy and the Mongolia, a country with rich and ancient traditions, planned policy response to these challenges. The ap- entered the twentieth century as a frontier province of pendices contain detailed descriptions of the structure China. Feudal rights and obligations defined the rela- of the government and banking systems and the ex- tionships between the local nobility and the Chinese change and trade systems. Emperor, as well as among the Lamaist1 temples, local nobles, and the populace. Internal political Political History and economic power were vested primarily in the temples. Economic activity was narrowly based on Archeological finds have established the Mongols as animal husbandry and rudimentary processing of animal a distinct people as early as the second millennium by-products. B.C.2 Ancient Chinese writings have frequently referred By 1924, political autonomy from China was achieved to Mongolia, although Mongolia as a political entity and the People's Republic founded, although the de- was first mentioned in the writings of the tenth and velopment of a command economy dates only from the eleventh centuries. Genghis Khan unified the Mongols late 1930s. The central role of the public sector was under a feudal state in 1206 and the Mongolian territory firmly established by 1960, and the next two decades subsequently expanded to cover most of modern-day witnessed a strengthening of ties with the U.S.S.R. China, Korea, and as far as Central Europe. By the and increasing industrial and mining activity, facilitated mid-1300s, however, the Mongol Empire had disinte- by Soviet aid (mainly in the form of loans). By the grated and was followed by a sustained period of mid-1980s, mounting internal and external imbalances, internecine strife. Under the terms of the Convention as well as nascent political and economic reforms in of Dolonnor of 1691, Mongolia ceased to exist as a the U.S.S.R., spurred the relaxation, albeit limited, of political entity and became a frontier province of China. central orders. Domestic reforms focused