MONGOLIA: PROVINCIAL COMPETITIVENESS REPORT 2017 (based on the statistics of 2016) www.aimagindex.mn

Implemented by:

ECONOMIC POLICY AND COMPETITIVENESS RESEARCH CENTER

ÝÄÈÉÍ ÇÀÑÃÈÉÍ ÁÎÄËÎÃÎ, ªÐѪËÄªÕ ×ÀÄÂÀÐÛÍ ÑÓÄÀËÃÀÀÍÛ ÒªÂ ДАА 339 HHA 65.012.2 P-93

THE PROVINCIAL COMPETITIVENESS REPORT

ULAANBAATAR 2017

ECONOMIC POLICY AND COMPETITIVENESS RESEARCH CENTER

San Business Center, 9th floor, Prime Minister Amar street 29, Sukhbaatar duureg, ,

Tel: 976-11-321927 Fax: 976-11-321926

Provincial Competitiveness Report website: www.aimagindex.mn E-mail: [email protected] Website: www.ecrc.mn Facebook page: http://www.facebook.com/ecrcmn Twitter page: http://twitter.com/ursulduhchadvar

ISBN 978-99978-2-142-3

© All rights reserved. No part of this publication may be transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system. Nor may any part of this publication be included as a reference in any other work without authorization. FOREWORD

I am glad to present the latest Provincial Competitiveness Report for Mongolia. This report is the sixth annual edition published by the Economic Policy and Competitiveness Research Center (EPCRC). The economic development of Mongolia is inconceivable without rural development. In recent years, the topic of economic diversification has been increasingly discussed in Mongolia, and the possibility to diversify the economy are in Mongolia’s 21 provinces. In the process of discussing Mongolia’s economic diversification, many questions and topics have been raised, including: how can these provinces become cornerstones of the development? What sectors should provinces invest in and develop further? What are the strengths and weaknesses of each province? How can provinces cooperate and support each other in their diversification efforts? This report contains provincial profiles and detailed information regarding each of the 21 provinces as well as their competitiveness performances in recent years, as measured and assessed by the EPCRC. Sustainable development goals are increasingly being pursued and implemented by countries around the world. In Mongolia, provinces need to develop their own sustainable development strategies, based on their local challenges and particular economic situation. In doing so, they shall seek to enhance people’s livelihoods while creating job opportunities to ensure the wellbeing of future generations. For this purpose, we need rigorous research and forward- looking policies. This is the motivation behind this annual report which we hope will contribute to supporting economic development and prosperity in Mongolia. In order to better understand and strengthen the competitiveness of Mongolia’s provinces, we have been organizing annual regional competitiveness forums since 2014. During these forums, various public and private stakeholders meet and discuss the economic challenges in the region to extend their cooperation and develop sound policies. This year, the Khangai Region Competitiveness Forum 2017 with the slogan “Coherent policies for a sustainable Khangai” was held in Murun, Khuvsgul Province, on 12-13 October, 2017. I would like to express my sincere gratitude to the Asia Foundation and the GIZ Integrated Mineral Resources Initiative for their ongoing support of the EPCRC’s work. Mongolia has many resources and opportunities. However, using these opportunities to the full potential will require cooperation across provinces and a proper development framework.

TSAGAAN, Puntsag Chairman of the Board RESEARCH TEAM

Economic Policy and Competitiveness Research Center The Board Mr. Tsagaan Puntsag Mr. Boldbaatar Tserenpuntsag Ms. Lakshmi Boojoo, Director Ms. Odonchimeg Ikhbayar, Deputy Director Mr. Ganbat Chuluun, Researcher Ms. Tungalag Erdenebat, Researcher Ms. Yesunchuluu Khuderchuluu, Researcher Mr. Otgon-Erdene Khandaa, Researcher Mr. Zolbayar Enkhbaatar, Researcher FOREWORD

Dear readers, A look into an economic textbook will show, that competitiveness is defined as the ability of companies - or for that matter a country - to remain profitable in an increasingly globalized economic environment characterized by international trade and production and to assert market share at home and abroad. There are recognized and according to Paul Krugman “uncontested competitiveness indicators”: unit labor costs and effective exchange rates, each as a measure of the international cost and price comparison. This could be the core of competitiveness and its measurement. However, in economic policy debates the terms competitiveness and productivity are often interchanged. Competitiveness understood as the ability to compete commercially, is based on prices and costs and is part of the nominal side of the economy. It could be simply improved, for example, by a devaluation or by price reductions due to cost savings. It is relative and measures itself in comparison to trading partners. It is a zero-sum concept: improving the competitiveness in one country inevitably means reducing the competitiveness of its partner countries and vice versa. Continuously improving that kind of competitiveness would be for any country a difficult task at the best of times. Wage policies or changes to the prices of public goods and services are usually socio-politically hard to sell and rather sensitive, and structural reforms too often intervene with the position of interest groups. What EPCRC´s Provincial Competitiveness Report 2017 analyzes once again in a highly professional and differentiated way goes far beyond that somewhat limited understanding of competitiveness. Rather, it operationalizes competitiveness as a function of productivity. Productivity, the economic output per employee, is part of the real side of the economy and has nothing to do with prices or costs, but with output. Productivity can be measured absolutely and is not a zero-sum concept: every country can work on its own, and countries can increase their productivity together. “Improving competitiveness” thus means improving the price and cost structure in an economy; “Increase productivity” means to increase your performance. Competitiveness improves when, with a given productivity, costs go down - or productivity increases at the same cost. Competitiveness is, as the four main factors– economic performance, governance efficiency, business efficiency, infrastructure – and the 16 sub-factors with round about 180 criteria used by EPCRC indicate, a rather complex concept. But for the very same reason, it provides also many more opportunities and levers a country like Mongolia with its 21 aimags can utilize in order to improve the current situation. There is a clear need for action. Without competitiveness, there will be no sustainable economic growth and employment on sufficiently high levels. With other words, competitiveness should remain a leitmotif – an overall guideline beyond political cycles and legislative terms of governments -

Dr. Stefan Hanselmann Head of Program GIZ Integrated Mineral Resouces Initiative ECONOMIC POLICY AND COMPETITIVENESS RESEARCH CENTER

ÝÄÈÉÍ ÇÀÑÃÈÉÍ ÁÎÄËÎÃÎ, ªÐѪËÄªÕ ×ÀÄÂÀÐÛÍ ÑÓÄÀËÃÀÀÍÛ ÒªÂ

PARTNER ORGANISATIONS

The Asia Foundation

Implemented by: German Society for International Cooperation Integrated Mineral Resources Initiative

Mongolian National Chamber of Commerce and Industry, Regional Branches

STATISTICAL DATA SOURCES

National Statistical Office

Bank of Mongolia PROVINCIAL COMPETITIVENESS REPORT 2017

CONTENTS

Abbreviations...... 9 DEVELOPMENT CHALLENGES ...... 10 PRINCIPLES OF ANALYSIS AND METHODOLOGY...... 13 PROVINCIAL COMPETITIVENESS SCOREBOARD...... 19 Competitiveness factors...... 20 Overall competitiveness scoreboard 2017...... 21 Competitiveness structures...... 27 PROVINCIAL COMPETITIVENESS PROFILES ...... 31 STATISTICAL TABLES ...... 117 1. Economic Performance...... 119 2. Government Efficiency...... 131 3. Business Efficiency...... 143 4. Infrastructure...... 155 MULTI-DIMENSIONAL ENVIRONMENTAL VULNERABILITY INDICATOR ...... 177 ANNEXES ...... 187 The fundamentals of competitiveness...... 188 Data sources and notes...... 190

7 PROVINCIAL COMPETITIVENESS REPORT 2017

Provincial Competitiveness Profiles

ARKHANGAI ...... 32 BAYAN-ULGII ………………………………………...... 36 ...... 40 ...... 44 GOBI-ALTAI ………………………………………...... 48 GOBISUMBER ………………………………………...... 52 -UUL ……………………………………...... 56 DORNOGOBI …………………………………………...... 60 DORNOD ……………………………………………...... 64 DUNDGOBI …………………………………………...... 68 ZAVKHAN ……………………………………………...... 72 ORKHON ………………………………………………...... 76 UVURKHANGAI ………………………………………...... 80 UMNUGOBI …………………………………………...... 84 SUKHBAATAR ………………………………………...... 88 SELENGE ……………………………………………...... 92 TUV …………………………………………………...... 96 UVS …………………………………………………...... 100 …………………………………………………...... 104 KHUVSGUL …………………………………………...... 108 KHENTII ………………………………………………...... 112

8 PROVINCIAL COMPETITIVENESS REPORT 2017

Abbreviations

BoM Bank of Mongolia

EPCRC Economic Policy and Competitiveness Research Center

GDP Gross Domestic Product

MNT Mongolian National Currency (Tugrug)

NSO National Statistics Office of Mongolia

SME Small and Medium Enterprises

9 PROVINCIAL COMPETITIVENESS REPORT 2017

DEVELOPMENT CHALLENGES

Most of Mongolia’s social and economic This year, the average score of provincial indicators deteriorated in 2016. Out of 21 competitiveness decreased to 66, from 70 in provinces, gross domestic product (GDP, at 2016. current prices) increased in 5 provinces, while Figure 2: Average score of competitiveness 16 provinces experienced declines.1 Orkhon (2012-2017) province’s GDP had the highest increase at 13.6 percent, whilst Umnugobi province’s GDP decreased by 0.7 percent. Figure 1: Annual change of GDP, at current prices

Orkhon Dornod Average score of competitiveness Selenge Svkhbaatar Darkhan-Uul Three out of four competitiveness factors have Umnugobi decreased compared to last year. In particular, Tuv the Government Efficiency indicators experienced Dornogobi a significant decline. This reflects a decreased Bayan-Ulgii Gobi-Altai level of trust towards the government, compared Gobisumber to last year. Uvurkhangai Graph 3: Change in the four main factors Uvs Bulgan Bayankhongor Dundgobi khentii Khuvsgul Zavkhan Business efficiency efficiency Arkhangai Economic Government Government performance Khovd Infrastructure

A poverty study done by the National Statistical If we look at regional competitiveness scores, the Office showed that poverty in Mongolia increased decline was the highest in Western provinces by 8 percent last year as the poverty headcount whereas it was the lowest in the Central region. reached 907,500 people2 meaning that 29.6 Compared to the last year, Dornod province’s percent of the population are considered poor. competitiveness score increased by 6 points, In other words, 30 people out of 100 are unable Uvurkhangai province’s score increased by to buy necessary food and non-food items. 1 point, and Gobisumber province’s score The prevalence of poverty is highest in the increased by 1 point. On the other hand, Khovd Eastern region with a poverty rate of 43.9 province’s competitiveness score decreased by percent, followed by 36 percent in the Western 13 points, Umnugobi province’s score decreased region, and 33.6 percent in the Khangai region. It by 10 points and Sukhbaatar province’s score is lowest in the Central region with a poverty rate decreased by 15 points. of 26.8 percent.

1 Mongolian Statistical Yearbook – 2016, NSO, 2017 2 “Poverty profile – 2016” NSO, 2017

10 PROVINCIAL COMPETITIVENESS REPORT 2017

Graph 4: Provinces with the most changes in government, and increase in non-performing scores loans were the main reasons behind this fall.

Highlights: 1. Given Mongolian social and economic indicators are decreasing, an innovative and proactive approach, combining cooperation and discipline, is needed for our country to Khovd

Dornod achieve the Sustainable Development Goals. Umnugobi Sukhbaatar Gobisumber Uvurkhangai 2. At the provincial level, all challenges are similar to the previous years. Among the most pressing ones are: decreasing bank loan The increase in Dornod province’s competitiveness interest rates, supporting businesses through score is explained by several factors, including loan and tax policies and developing public economic growth, increase in income generated services. in the communication’s sector, increased level of 3. As highlighted by the Vulnerability Indicators activity from the banking sector, decrease in the graph below, many of the country’s most urgent number of non-performing loans and increase in challenges are concentrated in 9 provinces. credit availability. For example, Khuvsgul province scores the Sukhbaatar province’s competitiveness score highest in “Number of people per physician”, decreased the most. Less construction works, which implies that Khuvsgul province needs fewer business opportunities, less transparent local more physicians.

Vulnerability Indicators

11 PROVINCIAL COMPETITIVENESS REPORT 2017

12 PROVINCIAL COMPETITIVENESS REPORT 2017

PRINCIPLES OF ANALYSIS AND METHODOLOGY

13 PROVINCIAL COMPETITIVENESS REPORT 2017

The purpose and importance of the research

The purpose of Provincial Competitiveness their competitiveness edges and supplement Research is to make a comparative evaluation the existing advantages. In other words, this of the current competitiveness of 21 provinces report pursues the question of whether a certain in Mongolia and to define their competitiveness province enables local business efficiency and holistically. This study identifies the strengths and prosperous life for its residents through effective weaknesses of each province and evaluates allocation of resources and by exploiting its their potential to compete, thereby creating a advantages. database that is useful for developing a stable, Since this research is designed to compare the long-term development policy. provincial competitiveness, those that are ranked The provincial competitiveness index would give top in the list should not necessarily be the best us an opportunity to observe any improvement performers. Although they are more competitive and changes in provincial competitiveness, than the others, those provinces should promote because this study will be conducted every year their incompetency by using its resources according to the same set of methodologies. effectively and exploiting its advantages. Likewise, those ranked lower in the list should not consider Besides comparing the competitiveness of the themselves to have poor competitiveness, but provinces, this research helps to identify factors rather, they should see themselves as having that influence the provincial competitiveness lower competitiveness than the other provinces either positively or negatively and evaluate and should learn from other provinces and the competitiveness strengths and weaknesses. address the factors that are lowering their Moreover, this becomes an important source of competitiveness. ammunition to determine which province is more competitive and which is not by addressing factors For policy makers, the report on provincial that drags down the provincial competitiveness. competitiveness will be an important source of knowledge and handbook which would help The concept of provincial competitiveness is a them evaluate the current situation and level relatively new notion and aims to investigate of provincial development and to make more how efficiently a particular province is allocating effective policies to develop rural areas. Also, it its resources and potentials, thereby creating its makes for provincial administrators it possible to own competitiveness and enabling a favorable estimate the results of their implemented policies, business environment rather than merely studying to make comparisons with other provinces and its dominance. For these reasons, we ranked the learn from their experiences. Likewise, businessmen provinces by comparing a particular province can get reliable and holistic information from against others questioning, whether they could this report when making business or investment create a favorable environment for preserving decisions.

14 PROVINCIAL COMPETITIVENESS REPORT 2017

Competitiveness criteria

It is impossible to evaluate the provincial its spectrum were evaluated by 4 sub-factors competitiveness solely by means of GDP per of parameters: provincial budget, institutional capita and unemployment. Because there are framework, business legislation and societal many factors such as economic, political, social framework. There are 33 criteria in total. as well as cultural that influence prosperity of a In Business efficiency sector 34 criteria of 4 province and living standards of its citizens. sub-factors business environment, labor market, Within the framework of this research, we management practices and productivity, were adopted 4 main factors which are internationaly used in order to study the capability of provincial accepted. Some sub-factors within the main business sectors to act efficiently and with factors were replaced through another set responsibility and as an entrepreneur. of criteria that could reflect the uniqueness of Infrastructure involves 76 criteria within following provinces and create more in-depth comparisons. 4 sub-factors of criteria: basic infrastructure, Economic Performance, Governance Efficiency, technological infrastructure, education and Business Efficiency and Infrastructure are the 4 culture and health and environment. main factors which are divided into 4 sub-factors This way, the competitiveness of provinces of each. These 16 sub factors comprise of 181 was evaluated according to 181 criteria, and criteria (made some changes for this report) in this enables in depth evaluation of provincial total. competitiveness and prevents any biased In Economic Performance section, 4 sub-factors influence which may have an impact on the of criteria are: macro economy, development general assessment of provincial competitiveness. of economic sectors, standard of living and These criteria were used to create competitiveness employment. A total of 38 criteria were used. indices in each of the 21 provinces. In Government Efficiency section, provincial policies to encourage competitiveness and

Economic Efficiency Government Efficiency Business Efficiency Infrastructure • Economy • Provincial Budget • Business Environ- • Basic Infrastructure • Development of • Institutional Frame- ment • Technological Economic Sectors work • Labor Market Pro- Infrastructure • Standard of Living • Business Legislation ductivity • Education and • Employment • Societal Frame- • Finance Culture work • Management Prac- • Health and Envi- tices ronment

15 PROVINCIAL COMPETITIVENESS REPORT 2017

Data and information source

The Provincial Competitiveness Index uses Executive Opinion Survey two types of data for the computation of The Executive Opinion Survey was sent to competitiveness. These are: executives in top and middle management in all • Hard data (statistical data) of the provinces covered by the report. The survey questions are designed to accurately reflect their • Executive opinion survey perspectives on the business environment and Of all the 181 criteria to measure competitiveness, competitiveness of the province. 102 or 3/5 rely on hard data whereas 79 or We believe the survey results would provide us 2/5 rely on executive opinion survey. Of the with good insights as the survey respondents hard data, 29 criteria or 25% are informative are experienced and knowledgeable local criteria intended to give general information but professionals working in the field. not used in computing the competitiveness. In order to be statistically representative, we Hard data measures competitiveness over a selected a sample size randomly from each of specific period of time (for the past one year the 21 provinces proportional to GDP of the e.g.) and indicates how the competitiveness in provinces. Moreover, to avoid from non sampling each criteria is performed (for example, in terms errors, we expanded the survey size and surveyed of GDP). On the other hand, executive opinion a total of 1050 executives which is equal to 50 survey is used for measuring qualitative data executives on average for each province. that could not be easily measured. Moreover, opinion surveys are used to verify hard data The survey contained 79 closed questions and results, clarify and reflect, how the public and 1 open question. The respondents assessed businessmen evaluate the current situation. the competitiveness issues by evaluating the Therefore, compared to hard data the survey questions on a scale of 1 to 10. Scales of 1-5 responses reflect perceptions of competitiveness indicate negative perception on the question, through business executives’ perception who whereas those of 6-4 indicate positive perception. are dealing with local business situations. Their The average value for each economy is then responses are more recent and closer to reality calculated according to which the rankings are since there is no time lag, which is often a problem determined. with hard data that show a “picture of the past”.

16 PROVINCIAL COMPETITIVENESS REPORT 2017

Methodology of computation of provincial competitiveness index (pci)

We used 153 of the 181 criteria in computing 3. Calculating the competitiveness index and the competitiveness index (28 criteria for overall ranking background information were not included in Each of the four main factors of competitiveness computation). The following steps were used in is divided into the four sub-factors. The computing the PCI: standardized value means of each of the 16 1. Calculating standardized value sub-factors for each province are obtained by computing weighted mean of the standardized The essential building block for the rankings is the values. Each sub-factor, independently of the standardized value for each individual criterion. number of variables it contains, is assigned an Computing the standardized value is important equal weight of the overall ranking (16 * 6.25% mainly because it enables to convert data with = 100%). Thus, the weight of the sub-factors will different scale unit obtained from statistics and be consistent and the results would be more survey to the same comparable measurement. reliable. It also blocks any diverted impact on Standardized values are computed for each other factors in cases of errors and omissions criterion and each of the 21 provinces according in statistics. to the following formula. The competitiveness index of 16 sub-factors of each province which based on mean xi-μ STD(x)= standardized value are calculated using the σ following formula. Where: ii – value of the criterion of the province i x STD(x)-STD (x) μ – mean of x value I= min STDmax (x)-STDmin (x) σ – standard deviation of x value Where: All criteria were reviewed to determine the I – competitiveness index shape of the distribution before calculating the standardized value. In case of not normally STD(x) – standardized value of the criteria distributed data, the standardized value was STD_min (x) – minimum value of the standardized calculated from normalized data by taking the value of the criteria logarithm. STD_max (x) – maximum value of the standardized In most cases, a high value is considered to value of the criteria be good and the province with the highest standardized value is ranked first, while the one The competitiveness index of the four main with the lowest as the last. However, with some factors is calculated based on the mean of the criteria the inverse may be true, where the lowest sub-factors index, the overall competitiveness value is the most competitive, for example, poverty index is calculated based on the mean of the rate and maternal mortality rate. In such cases, four main factors` index. standardized value is multiplied by (-1). Based on the four main factor`s index and 2. Criteria ranking overall index, we then rank the provinces, the one that has a maximum value of index calculated as Provinces are ranked based on the mean of 100 scores, other provinces’ scores are calculated the standardized values of the 153 ranked according to their values. criteria. The higher standardized value indicates more competitive provinces and the provinces The overall scoreboard shows the province`s are ranked from the most competitive to the least context of competitiveness compared to the competitive. other provinces. Those provinces ranked top should not be directly considered as the most competitive. Although it is right to consider that those provinces are more competitive than other provinces.

17 PROVINCIAL COMPETITIVENESS REPORT 2017

How to use the provincial competitiveness report?

Provincial competitiveness scoreboard is divided 2. Provincial Competitiveness Profiles (pages 31- into the following sections: 115) 1. Provincial Competitiveness Scoreboard (pages This section provides a summary of the overall 21-30) competitiveness, competitiveness structure, sub- factor rankings and challenges facing each The provincial competitiveness scoreboard province`s development. presents the overall rankings for the 21 provinces. The provinces are ranked from the Moreover, 10 strengths and 10 weaknesses most competitive to the least competitive. by four competitiveness factors (Economic Performance, Government Efficiency, Business Competitiveness Factor Rankings Efficiency and Infrastructure) are highlighted. It is In addition to the overall competitiveness important to determine competitiveness strengths scoreboard, provinces are ranked according to and weaknesses as they play a vital role in the each of the four main factors: Economic Efficiency, current provincial economic situation and future Government Efficiency, Business Efficiency and development perspectives. By properly examining Infrastructure. its competitiveness strengths and advantages, the Competitiveness Sub-Factor Rankings province can identify its comparative advantages. In addition to identifying strengths, addressing its Provinces are ranked according to all 16 sub- weaknesses would help improve that province`s factors (4 from each factor). The sub-factor competitiveness. rankings provide more detailed and in-depth examination on each of the competitiveness In addition to comparing competitiveness of factor rankings. different provinces, this report also provides 25 improvements and 25 decreases in comparisons Competitiveness Structures of last and this year’s indicators for each of the This section compares the values of the four provinces. competitiveness factors for each of the 21 3. Statistical Tables (pages 117-175) provinces. Charts help identify in which factors a province may have a particular strength or a This section presents the complete criteria weakness. list, broken down by competitiveness factor. It is possible to find rankings and information about each of the 150 ranked criteria affecting competitiveness.

18 PROVINCIAL COMPETITIVENESS SCOREBOARD PROVINCIAL COMPETITIVENESS REPORT 2017

Competitiveness factors

Economic Performance

Economy Economic sectors Standard of living Employment

Government Efficiency

Provincial budget Institutional framework Business legislation Societal framework

Business Efficiency

Business environment Labour market and productivity Finance

COMPETITIVENESS FACTORS Management practices

Infrastructure

Basic infrastructure Technological infrastructure Education and culture Health and environment

20