An Analysis of the Mongolian Political and Economic Transition: A Model with a Promising Future

By

Enkhtaivan Oyunbazar May, 2015

A thesis submitted in partial fulfillment of the requirements for a baccalaureate degree in (Economics) in cursu honorum

Reviewed and approved by:

Dr. Alexander Mirescu

Submitted to The Honors Program, Saint Peter’s University

March 23, 2015

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Acknowledgements

I would like to thank all of the people who have been helpful, supportive, and caring to make this work possible. I am extremely thankful to have a wonderful family, friends, and teachers who have helped me throughout life and continue to support me in any endeavor. Special thanks to the Director of the Honors Program Dr. Rachel Wifall and my advisor for this work Dr. Alexander Mirescu from the Department of Political Science.

Abstract

Mongolia is a democratic free market-oriented Asian state and it is the second largest land locked country in the world. Located between the Russian Federation and the

People’s Republic of , ’s total area of 1.6 million square kilometers encompasses an area greater than that of Britain, France, , and combined; four times the size of . Mongolia is the fifth largest country in and it is also the least densely populated country in the world; the country’s population reached only three million in 2015. Mongolia became the second communist country in the world after the

USSR when the Bolsheviks advised the young Mongolian nationalists to establish a

Marxist state. Mongolia emerged as a supplier of raw materials and for the USSR’s

Siberian industries and towns leading up to the transition. The political structure and economic development of the country were largely influenced by the .

Mikhail Gorbachev’s policies of increased openness, transparency, and restructuring of the economy in the Soviet Union eventually led to widespread reform movements in Eastern Europe, Soviet Union, and Mongolia. Mongolia held its first multiparty elections in 1990 and established a coalition government, which initiated the full-scale transformation of the entire political and economic system. A new constitution

2 allowing free elections, political parties; freedom of speech, religion, and press; the protection of private properties was necessary as the communist Mongolian People’s

Revolutionary Party suppressed these rights for seventy years. The one party rule and the centrally-planned turned into a democracy and a market oriented economy that is overcoming the difficult process of a political and economic transition, and is on its way to become an upper-middle income country.

Table of Contents

1. Historical Background...... 3

2. Political Transition...... 4 1.1 Democratic Revolution ...... 4 1.2 New Constitution ...... 10 1.3 Democratic Consolidation ...... 13

3. Economic Transition ...... 20 1.1 Period of Crisis and International Aid ...... 20 1.2 Foreign Investment and Trade ...... 28 1.3 and Price Liberalization ...... 33

4. Present State ...... 40 1.1 Model Democracy ...... 40 1.2 ...... 47 1.3 Upper Middle-Income Country...... 58

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5. Conclusion ...... 60

6. Bibliography ...... 61

Historical Background

Mongolia is a country that has a very long and rich history. The large Eurasian landmass has been the home of numerous historical nomadic tribes and empires dating back thousands of years. The was the largest empire that the people of this region built under Chinggis Khaan. A single Mongolian state was formed in the 13th century under his leadership when he established the Mongol Empire. Chinggis Khaan effectively adopted the previous empires’ political structure and military organization and used them to form the Mongol Empire.

Chinggis Khaan’s heirs expanded the Mongol Empire through conquests and at its greatest extent, the empire stretched from the Korean Peninsula to , from northern Indochina to the Middle East. The Mongol Empire didn’t last long as it disintegrated into four different empires, Chinggis Khaan’s grandson Kublai Khan founded the in China that lasted until 1368. The returned to their homeland and for the next centuries they fought among themselves for power until the rise of the Manchu Qing Dynasty. The Manchu people conquered China, deceitfully intensified the civil war in Mongolia, and turned Mongolia into a vassal state until 1911.

The Qing Dynasty collapsed as a result of internal and external pressures and the

Mongolians used this opportunity to declare independence on December 29, 1911 and 4 established a theocratic state under the Buddhist religious leader Bogd Khaan. The communists rose to power in and wanted to spread their ideology to the rest of the world. Mongolia turned into a communist state in 1921 that lasted until the democratic revolution of 1990 when a multi-party system was introduced; Mongolia adopted a new constitution in 1992 and turned into a democratic state with a free market economy.

Political Transition

1.1 Democratic Revolution

The Mongolian political and economic transition started as a result of the policy changes in the Soviet Union under the leadership of Mikhail Gorbachev. Gorbachev introduced the ideas of “” and “peresktroika”. Glasnost means increased openness and transparency; a Soviet policy permitting open discussion of political and social issues and freer dissemination of news and information. refers to the policy of economic and governmental reform instituted by Mikhail Gorbachev in the

Soviet Union during the mid-1980s.

Mongolians narrowly defined the term glasnost “il tod”, which allowed a more relaxed approach by the government to negotiations in international political and economic affairs. This increased openness and transparency led government officials and policy-makers more aware of Western practices. Glasnost started to affect many aspects of the Mongolian society. People started to openly talk about ending the communist

Mongolian People’s Revolutionary Party’s (MPRP) monopoly on power. The Mongolian people became aware of the failure of the Soviet modeled socialist system that governed the country for 70 years and started to demand political and economic reforms.

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Politically, they demanded the resignation of the Mongolian People’s

Revolutionary Party’s central committee and asked for parliamentary reforms, free elections, freedom of speech, press, religion; and wanted a transition to a democracy.

Economically, people began to discuss about private housing developments, private ownership of livestock, and the selling of basic goods such as milk and vegetables for profit. Newspaper articles criticizing the inefficiencies in the centrally planned system began to appear; complaints about breakdowns in the urban heating system, environmental pollution, and industrial mismanagement were common.

The beginning phase of glasnost didn’t allow a complete transparency from the government as the true accounts of the purges and the Stalinist repression of political and military leaders as well as intellectuals were still hidden from the public. Thousands were killed during the purges as the NKVD strategies in Mongolia called for the destruction of

Buddhism and enforcement of collectivization in late 1930’s which resulted in the annihilation of approximately 800 Buddhist monasteries and the deaths of over 30,000 monks.

The official accounts of these events have been rewritten many times, yet the

Mongolian people are still not questioning the truthfulness of these accounts. On the eve of the communist revolution, there were over 100,000 Buddhist monks in Mongolia when one-third of the males in the country became lamas. During the purges, most of them were dispersed and many of them were killed as massive graves are found in various parts of the country. Buddhism was a strong force in the Mongolian society at the time and the monks had much power, as they owned land, properties, and livestock.

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They strongly opposed the state ownership of properties and the enforcement of collectivization, which made the Soviets fear of a “counter-revolution” in Mongolia, undermining the success of the communist takeover. The NKVD instructed the

Mongolian Ministry of Internal Affairs to carry out the mass killings of the Buddhist lamas and the destruction of the monasteries. More than 500 lorry-loads of religious art treasures were forcefully taken by the Russians and brought to the Soviet Union; the fates of many famous art pieces and cultural treasures are still unknown. Although an increased transparency was visible during glasnost and the Mongolians were reclaiming their national identity and its past Buddhist culture, people were still hesitant to openly discuss about the purges.

There was still a limit in publicly questioning the effectiveness of the communist

Mongolian People’s Revolutionary Party’s policies and the wisdom of its leaders. In the beginning, glasnost and perestroika were viewed by many as steps to improve socialism, the communist party rule, and the centrally planned economic system. The Mongolian

People’s Revolutionary Party’s politburo member Bugyn Dejid was quoted in a 1987 article saying:

The process of the deepening of glasnost and democracy which had begun in

Mongolia was “only one step along the road of intensive socialist development. It

is really good when workers, herdsmen, the intelligentsia and ordinary citizens

openly criticize shortcomings in work and put forward their own businesslike

proposals. Ensuring glasnost in party and state activity is a mechanism for

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strengthening the unity of the party and people, and for struggle against

conservatism, formalism, bureaucracy, and red tape. 1

Movements that began as ways to improve the socialist system eventually turned into greater initiatives for both political and economic reforms. The Bolshevik revolution of

1921 gave the Mongolian People’s Revolutionary Party (MPRP) the control of the entire country. Soviet Bolsheviks trained the Mongolian nationalists to become communists, and taught them about Marxism and Leninism. The MPRP took its orders directly from the Kremlin and the first Mongolian constitution was drafted in 1924, giving constitutional authority to a single party rule that lasted for over seventy years.

The MPRP was founded by seven people, most of whom were later purged themselves by the Kremlin. Khorloogiin Choibalsan was the only one who was not killed as Joseph Stalin chose him to become the dictator of the socialist Mongolian People’s

Republic; Stalin wanted a submissive Mongolian leader who would follow his orders.

The General Secretary of the Central Committee of the Mongolian People’s

Revolutionary Party was the de facto leader of Mongolia. Khorloogiin Choibalsan was succeeded by a Soviet educated Marxist, Yumjaagiin Tsedenbal, who was the communist dictator of Mongolia from 1954 to 1984; he was the leader of the Mongolian People’s

Republic for over 30 years. His thirty-odd years of leadership was criticized and blamed for the country’s problems.

Yumjaagiin Tsedenbal was replaced by Jambyn Batmonkh in 1984 as the Soviet

Union was shifting its foreign policy and the old fashioned Marxist Yumjaagiin

Tsedenbal wasn’t cooperating. Yumjaagiin Tsedenbal was aging and his good friend and supporter Leonid Brezhnev’s policies were outdated. Jambyn Batmonkh was the last

1 Sanders, A. (1987). Mongolia: Economic realism. Far Eastern Economic Review, 138 (50), 41. 8 leader of the socialist Mongolian state and it was during his rule that the communist world started reforms and accepted Mikhail Gorbachev’s “glasnost” and “perestroika”.

The Berlin Wall soon fell and the whole communist world was shaken by the ideas of reforms; socialist states in Eastern Europe, the Soviet Union, and Mongolia all faced domestic and international pressure to reform their political and economic systems.

The Mongolian Democratic Union (MDU) was founded by young intellectuals who wanted to voice their views for reforms. It was created in December of 1989 and held its first public rally on January 21, 1990. The founders of the Mongolian Democratic

Union were aware of the restructuring of governments and economies in the Eastern Bloc countries and wanted Mongolia to be the next socialist state to implement changes. The

Mongolian Democratic Union’s (MDU) foremost aim was to end the MPRP’s monopoly on power and establish a coalition with a new MPRP leadership and allow civil societies and civil liberties to prosper. On March 4, 1990; 40,000 people demonstrated in the

Mongolian capital and demanded reforms. The protesters demanded the resignation of the MPRP’s leaders, a Soviet dependent party that ruled the country since its first constitution in 1924. The protesters warned the government that they would start hunger strikes if the leaders of the Mongolian People’s Revolutionary Party don’t submit their resignation. The Mongolian Union of Students also became active in the reform movements and petitioned to remove Stalin’s statue from the center of Ulaanbaatar.

As the protesters gained public support, political and economic reforms were imminent. The escalating reform movement had regional implications since there were other communist regimes in Asia such as China, North Korea, and Vietnam. Especially

China was extremely sensitive because of its crackdown of the student protests in

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Tiananmen Square and the five million ethnic Mongols in the Chinese autonomous region of who might start protests of their own for economic and political liberties. The large scale rallies in Mongolia were ignored by the Chinese media as the state strictly monitored the media. The development of a reform movement in Mongolia showed the world that the pressures to end communist regimes weren’t confined only to

Eastern Europe.

After continuous protests, hunger strikes, calls for reforms; the Mongolian

Democratic Union succeeded in raising widespread public awareness. A series of public rallies organized by the Mongolian Democratic Union (MDU) marked a new stage in the demand for reforms. 100,000 people protested on the main square in the capital in front of the government building demanding free elections and economic reforms. The communist government considered various options including a military intervention but eventually the leaders gave way to the pressure and Jambyn Batmonkh announced the resignation of the Central Committee of the Mongolian People’s Revolutionary Party on

March 9, 1990. Mongolia became the first country to follow the Soviet Union into socialism and it also became the first Asian communist nation to introduce reforms through a peaceful process without any violence as no lives were lost and no windows were shattered.

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Current President Ts. Elbegdorj (then opposition leader) addresses protestors during the

democratic revolution in 1989.

1.2 New Constitution

The Mongolian Democratic Union (MDU) succeeded in forcing the MPRP’s politburo to resign. The MDU’s chief spokesman Sanjaasurengiin Zorig stated that the union had official membership of over 60,000 in 1990. The MDU also succeeded in establishing a multi-party system when it formed the Mongolian Democratic Party.

Following the resignation of the communist MPRP’s politburo; the first free, multi-party elections were held on June 29, 1990 for a new parliament in which the newly created parties such as the Mongolian Democratic Party, the Social Democratic Party, and the

Mongolian National Progressive Party won seats. With a new leadership, the Mongolian

People’s Revolutionary Party still won the majority of the seats (33); the Mongolian

Democratic Party (13), the Mongolian Social Democratic Party (3), and the Mongolian

National Progressive Party (3) won seats respectively.

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After the first free elections, a new parliament was established. The new parliament was called the “State Baga Hural” and it functioned as the highest legislative body of Mongolia between 1990-1992. The new parliament members in the State Baga

Hural had the responsibility to draft and ratify the new democratic constitution.

Additionally, the State Baga Hural passed 27 new laws, revised 19 laws, and ratified 17 international treaties. The new lawmakers overwhelmingly adopted a new constitution that allows private ownership of land, guarantees and, the country’s official name was changed from Mongolian People’s Republic to State of Mongolia.

After the first free and peaceful elections, the newly elected leaders from various parties faced tough decisions to implement reforms to transition from a centrally planned economic system to a market economy. Mongolia faced bankruptcy as the decades-long

Soviet economic control, planning, and aid ended. The stagnant economy increased underdevelopment that was shown by factory breakdowns, power cuts, consumer-goods shortages, and . The relics of 70 years of waste and mismanagement were evident in all sectors of the country. With a changing political system, Mongolians reclaimed their national heritage and nationalistic sentiments that were suppressed under a Soviet-directed communist regime came back.

The new constitution declared Ulaanbaatar to be the capital and proclaimed

Mongolia to be an independent sovereign republic that ensures for its people democracy, justice, freedom, equality, and national unity. Ownership of property including land was recognized. The new constitution affirmed that Mongolia shall have a “multi-structured economy which takes into account universal trends of world economic development and

12 international conditions.”2 After a successful and bloodless revolution that started in

1989, the country was officially on the path to reform. “The first nation to go communist after Lenin’s Red Revolution in Russia and the first communist nation to go for glasnost and perestroika after Gorbachev’s innovations in the Soviet Union, Mongolia is also the first Asian country to shed communism.”3

The parliament was named “The ” which has 76 seats for which political parties contest for every four years when parliamentary elections are held.

The political party that won the majority of the sears in the parliament creates the cabinet headed by the prime minister. The prime minister is the head of the executive body, the speaker of The Great Khural is the head of the legislative body, and an independent judicial branch was established and headed by the Judicial General Council of Mongolia.

The is the symbolic head of state but also has power to command the military, veto laws, lead the National Security Council, appoint judges, and represent Mongolia internationally. First parliamentary elections after the ratification of the new constitution was held in the summer of 1992 followed by the first presidential election in 1993; Punsalmaagiin Ochirbat won the presidential election in which 92% of the eligible voters participated. Regardless of the success of the new constitution, establishing an independent judiciary in a transitioning country was the greatest challenge as the criminal-procedure law was still based on old communist ways. "Justice is difficult to implement because of our economic situation," says Jugneegiyn Amarsanaa, co-author of the Constitution and former minister of justice. "The new Constitution provides the

2 “Mongol Ulsyn Undsen Huul’,” Ardyn Erh, January 14, 1992 (six chapters, 70 articles, paragraphs numbered). 3 “Mongolia Rides into Democracy.” The Christian Science Monitor (pre-1997 Fulltext) Aug 30 1993. 13 right to have a public defender, but we never had them before, and there is no money to train and pay them."4

Many former communists were elected to the new parliament and some of them were reluctant to debate in public and inform the citizens about new laws. Radio and television needed to be independent to allow the free flow of information. Non- governmental organizations were allowed to operate freely and as of 1993, two American groups were actively promoting and the Asian Foundation opened an office in Ulaanbaatar.

The new constitution declared that no person shall be subjected to discrimination on the basis of “ethnic origin, language, race, age, sex, social origin and status, property, occupation and education”, as a protection against the state to violate human rights. The mass killings of Buddhist monks, property owners, princes, military leaders, and intellectuals in the 1930’s made it clear to the Mongolian people that such incident must never happen again.

The hard fought struggle for multiparty democracy in Mongolia was paying off as the new generation experienced the adoption of the new constitution, first free parliamentary election, first free presidential election, establishment of civil societies and non-governmental organizations. The constitution adopted on January 13, 1992 and put into effect on February 12, 1992 marked a new stage in Mongolia’s history and laid the legal framework for a political and economic transition in which the citizens cast off the

4 “Mongolia Rides into Democracy.” The Christian Science Monitor (pre-1997 Fulltext) Aug 30, 1993. 14 constraints of the former ideology and its command economy to embrace universally accepted human rights enshrined in the new fundamental law.5

1.3 Democratic Consolidation

Juan J. Linz and Alfred Stepan are professors who co-authored a book called

“Problems of a Democratic Transition and Consolidation: Southern Europe, South

America, and Post Communist Europe” published in 2009. Juan J. Linz is a Sterling

Professor Emeritus of Political Science at Yale University and Alfred Stepan is a comparative political scientist and a professor of Government at Columbia University. I came across their work in my Government and Politics of Latin America class. The book discusses how some countries in Southern Europe, South America, and Post-Communist

Europe faced challenges when transitioning into and the authors did theoretical and empirical research on the necessary arenas of a consolidated democracy.

Their research is relevant to Mongolia because the democratic transition of

Mongolia from a communist system is similar to the transitions of Post-Communist

Europe. The Eastern Bloc countries, the Soviet Union, and Mongolia experienced similar events during that time. The communist world was collapsing, the Soviet Union was disintegrating, and the people in the communist countries demanded reforms. Linz and

Stepan’s research gave definitions for completed democratic transition and consolidated democracy, and provided the five arenas that are necessary for democratic consolidation.

They explored how far any given country has gone toward completing a transition to democracy, and the definitional standard they used for their work is stated as the following:

5 J. K. Sanders, Alan. “Mongolia’s New Constitution: Blueprint for Democracy.” Asian Survey. Vol. 32, No.6 Jun., 1992, pp. 506-520 15

A democratic transition is complete when sufficient agreement has been reached

about political procedures to produce an elected government, when a government

comes to power that is the direct result of a free and popular vote, when this

government de facto has the authority to generate new policies, and when the

executive, legislative and judicial power generated by the new democracy does

not have to share power with other bodies de jure. 6

In some instances, a transition to a democracy doesn’t get completed. But the Mongolian case is different because the country successfully held its first free elections in 1990 and elected a new parliament that made the new constitution. However, even after a democratic transition is completed, there are still many conditions that must be met to consider a democracy to be consolidated.

Linz and Stepan narrowly defined democratic consolidation. According to them, it is a process that combines behavioral, attitudinal, and constitutional dimensions. “In short, with consolidation, democracy becomes routinized and deeply internalized in social, institutional, and even psychological life, as well as in calculations for achieving success.” 7 Behaviorally no major actors of a society spend significant resources to create a nondemocratic regime, attitudinally the majority of the people supports the transition, and constitutionally all aspects of the society become subjected to a specific set of laws and procedures.

The most important condition for democratic consolidation is the existence of a state. A consolidated modern democracy is impossible without the existence of a state.

6 Juan J. Linz & Alfred Stepan. Problems of Democratic Transition and Consolidation. Southern Europe, South America, and Post-Communist Europe. London: The Johns Hopkins University Press. 1996

7 Linz and Stepan, 5 16

When there is a functioning state, the five interconnected and mutually reinforcing arenas need to exist for democratic consolidation. After the democratic revolution of 1990 and the ratification of the Mongolian constitution in 1992, Mongolia was officially declared the State of Mongolia, therefore it is reasonable to discuss the five arenas of a consolidated democracy, which are: civil society, political society, rule of law, bureaucracy, and economic society.

The first arena, civil society is defined as an arena of polity where independent self-organizing groups, movements, or individuals define their purposes and attempt to advance their interests. The Mongolian Democratic Union (MDU) is an example of a civil society that acted as an opposition to the communist regime and initiated the democratic reform. The Mongolian Democratic Union’s (MDU) purpose was to force the communist leaders in the MPRP’s politburo to resign; and after the resignation the MDU demanded more changes.

The Union of Mongolian Students (UMS) is another civil society organization that participated in the democratic revolution when students were rallied to protest against the communist regime and demand reforms. The Mongolian Democratic Union and the Union of Mongolian Students are still active along with hundreds of other civil society organizations that cooperate with government institutions in policy formulation, implementation, and monitoring of public management. One example of such organizations is the Open Society Forum (OSF) that supports initiatives to provide public access to information resources about policies, laws, and regulations. Their efforts resulted in the Mongolian parliament adopting a “Public Service Broadcasting (PSB)” law in January 2005.

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The second arena is political society. Once the civil society successfully overthrows a regime, a polity has to arrange itself to contest for the legitimate and lawful right to govern. Political parties, elections, electoral rules, political leadership, interparty alliances, and legislatures are necessary for political society and the ordinary citizens are able to monitor the democratic government through them. Civil society and political society are complementary to each other in consolidating a democracy.

Some democratic leaders argue that civil society should be demobilized after successfully removing a totalitarian regime but that’s not the best practice. The

Mongolian Democratic Union (MDU) organized and led the Mongolian people against the regime and ended the MPRP’s monopoly on power but it didn’t cease to exist after achieving its primary objective. It formed a separate political entity, the Mongolian

Democratic Party, which contested in the first free elections and won seats in the parliament. The Mongolian Democratic Union (MDU) and the Mongolian Democratic

Party, now called the Democratic Party, continue to exist as separate entities that reinforce each other.

The third arena is the existence of rule of law that is embodied in the spirit of constitutionalism. Rule of law requires a clear hierarchy of laws, interpreted by an independent judicial system, and supported by a strong legal culture in civil society. 8 The

Mongolian constitution of 1992 serves as the foundation of Mongolia’s legal framework and rule of law. An independent judicial system headed by the Judicial Council of

Mongolia was established. Between 1990 and 2012, six parliaments have been

8 Linz and Stepan, 10 18 democratically elected that adopted 677 new laws, ratified 335 international treaties and conventions, made amendments to 1680 laws, and repealed 249 laws. 9

The fourth arena is a functioning bureaucracy that protects the rights of the citizens and delivers basic services to them. A bureaucracy is needed to collect taxes for police, judges, and other services. It hinders democratic consolidation if a state has a weak bureaucratic system and limited taxing capacity as the citizens’ rights may not be respected and the basic services may not be available. In many former communist countries, the party and the state had become the same, serving same purposes. The bureaucracy became weak when the party became inactive and delegitimized.

The former communist parties of some countries were legally banned after reforms. However, in the case of Mongolia, the former communist Mongolian People’s

Revolutionary Party (MPRP) wasn’t disintegrated or legally banned. The reformist leaders of the MPRP contested in the first free elections with the newly established political parties and won the election. The MPRP was able to continue to sustain the former bureaucratic system but reformed their functions. Government employees were still members of the MPRP and kept their organizations running and operated under a new set of laws.

Transitions are frequently seen as involving a pact between the regime moderates and the opposition moderates who are both able to “use” and “contain” their respective hard-liners. This was exactly the case with Mongolia. The hard-liners in the regime didn’t want to give up power and some leaders in the MPRP even suggested to use force against the protests organized by the opposition groups. On the other hand, after the resignation

9 “United System of Legal Information”. Web. 12 Jan. 2015. www.legalinfo.mn. 19 of the communist leaders of the MPRP, the hard-liners of the MDU wanted to obliterate the MPRP, dismiss its members, and bring them to court; some hardliners even suggested to execute them by a firing squad.

Fortunately, the Mongolian democratic transition process remained bloodless. The

MPRP won the majority of the seats in the first parliamentary election of 1990 and again in 1992, and led the country with a reformed leadership. They invited members from the opposition parties such as the Mongolian Democratic Party and the Socialist Democratic

Party to the cabinet. Therefore, the bureaucracy in Mongolia continued to function even after the transition; the prime minister after the first elections Dashiin Byambasuren, and the first president Punsalmaagiin Ochirbat elected in 1993, were both members of the

MPRP and served as high-level government officials under the previous regime.

The last and the fifth arena for a consolidated democracy is economic society, which concerns the overall state of the economy of a transitioning democracy.

Democracy is an interacting system in which the necessary arenas interact with and support each other. Linz and Stepan’s theoretical and empirical research brought about two observations: first, there can’t be a non-wartime consolidated democracy in a command economy and second, there has never been a consolidated democracy in a pure market economy. A consolidated democracy requires an economic society consisted of institutions and regulations that mediate between state and market.

Mongolia’s communist regime with its command economy took ownership of all properties and prices, labor, supply, and all economic activities were controlled by the state which didn’t allow other arenas such as an independent political society to emerge.

The democratic revolution and the new constitution saw the emergence of civil society

20 and political society and the next stage in the transition concerned the economy, a sound economic society needed to emerge to further reinforce the other arenas and further consolidate democracy.

Mongolia established a “state-regulated” market economy after the collapse of the centrally planned economy. The role of the state was very important during a transition because a strong state is necessary to oversee the privatization process of the state owned assets. Linz and Stepan’s book tells us that some degree of state regulation is necessary in consolidated democracies for three theoretical reasons. First, the state needs to adopt laws to regulate corporations, markets, and protection of both public and private property; second, markets aren’t perfect and when they fail, the state needs to correct them; and third, certain needs for the people such as public education, public health, and environmental protection need to be coordinated by the state. The economic transition of

Mongolia will be further discussed in detail in the next section of this paper.

Economic Transition

2.1 Period of Crisis and International Aid

The transition period’s first four years were very difficult as the economic crisis caused the real GDP per capita to fall about 25% between 1989 and 1993. The lack of fuel, spare parts, equipment, and the inadequate supply of fertilizers contributed to the decline of crop production. The obsolete machinery and the shortage of supplies also led to a significant decline in industrial production, as the factories weren’t working at full capacity.

Year 1989 1990 1991

Gross Domestic Product (% change) 4.2 -2.1 -18.0

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Agriculture (% change) 13.8 -0.8 -4.5

Industry 11.1 -1.9 -30.1

Services 5.7 3.0 -8.8

Gross Domestic Investment (% of GDP) 46.0 29.9 12.0

Gross Domestic Saving (% of GDP) 12.9 2.9 3.5

Inflation Rate (% of change in CPI) N/A N/A 130.0

Merchandise exports (US$ million) 795.8 444.8 437.0

Merchandise imports (US$ million) 1911.8 1023.6 574.3

Sources: : Asian Development Outlook 1992 (Manila); World

Bank: Mongolia: Towards a market economy (Washington, DC, Dec. 1991)

In addition to the crisis, Mongolia owed a massive debt to the Soviet Union that placed a tremendous burden on the country’s economic situation. The Soviets estimated the debt at 19 billion rubles which equaled US$ 16.4 billion. The Mongolian leaders wanted the Russians to reduce the debt and delay the payment period; they also brought up the point that Mongolia had been supplying the Soviet Union with essential raw materials for decades for low prices that a single buyer dictated. Additionally, Soviet troops stationed in Mongolia committed crimes against the Mongolian people, destroyed animals, polluted the environment, and endangered the wildlife for which there is no estimation of reparations. Eventually the Soviets agreed to reschedule the repayment but both sides weren’t able to agree on the exchange rate as the final payment was to be in

US dollars.

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The Council for Mutual Economic Assistance countries ended the preferential pricing and payments arrangements with Mongolia and the economic crisis in the Soviet

Union sharply reduced Mongolian import capabilities. The Soviet Union became incapable of paying for the purchases from Mongolia and in 1990 alone, almost 90% of the Soviet imports from Mongolia had not been paid for. A Soviet-Mongolian joint mine which exported large quantities of and molybdenum and contributed greatly to the

Mongolian GDP faced the risk of closure because of the unreliable deliveries of spare parts and equipment.

The official currency of Mongolia, the togrog, was devalued by 82.5% against the

US dollar in 1991, 1 US dollar went from equaling 7 togrogs to 40 togrogs. Currency devaluation was necessary to find the togrog’s real value in the market, which was essential for foreign trade. Three devaluations were put in place for the togrog against the dollar in 1991. The government’s goal was to make the currency fully convertible and economists wanted it to be floated which would determine its real value and help the country integrate into the international economy. Banking reforms by the government made the central bank independent of the government and other independent banks were established to make non-guaranteed loans to state enterprises.

The centrally planned economy of Mongolia had been based on unrealistic plans for a long time and the workers and the herdsmen wanted reforms. Economic planning was introduced in 1948 via a Soviet based Five-Year Plan system, but it didn’t have much of an impact for growth and development. The techniques used in agriculture were outdated, the in the cities was run-down, and there was a general lack of expertise to market Mongolian products for exports and to attract foreign investment to

23 the country. The existing transportation routes weren’t sufficient enough to support export trade and tourism. The air and rail links to the Soviet Union, also known as the

Trans-Siberian routes were irregular and bureaucratically run. The relationship with the southern neighbor China hadn’t developed to the point where travel facilities between

Ulaanbaatar and Beijing could meet demand.

The heavily subsidized Mongolian factories produced basic goods and exported mostly to other communist countries in , The Council for Mutual Economic

Assistance, an organization created and led by the Soviet Union in response to the formation of the Organization for European Economic Co-Operation in Western Europe.

The Comecon was consisted of Eastern Bloc and other communist countries in the world; members included countries such as Soviet Union, Bulgaria, Czechoslovakia, Hungary,

Poland, Romania, East Germany, Mongolia, , and Vietnam. Mongolia’s trading partners were mostly member countries of the Comecon and only 4% of foreign trade was with countries outside of the organization. The Mongolian economy was lagging behind compared to the other Comecon countries. Even the Soviet party secretary and a member of the politburo of the communist party, Vladimir Dolgikh, visited Ulaanbaatar to discuss the Soviet-Mongolian economic cooperation and its efficiency with the

Mongolian People’s Revolutionary Party’s (MPRP) General Secretary Jambyn

Batmonkh.

The beginning phase of perestroika called for economic policies to improve

Mongolia’s balance of trade along with fuller and more efficient use of the enterprises built by the Soviet Union and other Comecon countries. Raising the quality of Mongolian products to international standards and the more rational use of capital investment were

24 necessary steps. Warehouses and factories stockpiled machinery and equipment ahead of the requirements because the inefficient system delayed the deliveries of imported equipment, and some suppliers even dispatched incomplete sets of machinery and equipment.

Mongolia imported most of its industrial and agricultural machinery from the

Soviet Union and these imports were valued at 1 billion US dollars in 1986. These imports of industrial and agricultural machinery and equipment accounted for 36% of all

Mongolian imports from the Soviet Union and 80% of Mongolia’s foreign trade was with the northern neighbor. Other major imports during this time were oil and petrol imports valued at 284 million US dollars, consumer goods and foodstuffs imports valued at 118 million US dollars.

The extraction and the processing of were important for the Mongolian economy as the country had large reserves of natural resources. Joint enterprises with the

Soviet Union and other Comecon countries were needed to increase the efficient extraction of minerals. Mongolia had joint enterprises established with the Soviet Union,

Bulgaria, and Czechoslovakia. East Germany built a carpet factory as an aid project in

1971 which used the Mongolian wool and exported most of its products to the Soviet

Union. Mongolia cooperated the most with Japan from the capitalist world as the

Japanese government donated equipment to build a cashmere factory as part of war reparations which made cashmere scarves and sweaters, and exported most of its products to Japan.

Exports of non-ferrous metals such as copper and molybdenum accounted for

45% of Mongolia’s total exports, while non-foodstuffs raw materials such as wool and

25 products of their processing accounted for 25% of total exports. Mongolia had 22.6 million herds consisting of , , cows, horses, and camels, and the livestock related products accounted for 15% of exports. The command economy system proved to be inefficient even in regards to livestock management. The government had unrealistic expectations to grow the number of herds, the actual 22.6 million was far below the expected 25 million in 1987. There was little incentive for the herdsmen to work hard and grow the livestock population because the livestock was owned collectively by government established “production associations”, thus considered public.

Tourism and the manufacturing sectors had much room to improve as the infrastructure and the capital investment weren’t developed yet. The manufacturing sector was in its infancy as the Soviet trained Mongolian engineers made spare parts for vehicles and lorry trailers; the productivity of this sector was still very low. The Soviet

Union was essential in keeping the mines, factories, power plants, and the heating systems functioning as Mongolia heavily depended on imports of Soviet technology as well as experts. Mongolia’s economic dependence on the Soviet Union made it difficult for policymakers to support domestic industries and make reforms to increase productivity and efficiency.

Mongolian People’s Revolutionary Party’s (MPRP) General Secretary Jambyn

Batmonkh’s leadership was consistent with Mikhail Gorbachev’s perestroika and he called for restructuring of economic management, intensive development, and greater efficiency. The economic restructuring initiatives started on a modest scale in 1986 in emulation of Soviet initiatives. Jambyn Batmonkh was a trained economist and he was aware of the need for diversification of production in the economy and foreign trade. The

26

Comecon countries reduced their level of investment and Mongolia needed to open up its economy and produce marketable goods for Western markets and Japan to avoid the decline in foreign trade.

Despite the wealth of natural resources, Mongolia was considered to be one of the poorest countries in the world. The reformers wanted to change the legacy of inefficiencies, slow growth, and stagnation; and implement structural changes to reverse the ineffective policies of the previous communist governments. The seven decades of socialist mismanagement nearly bankrupted Mongolia as the country’s annual per-capita

GNP of around 100 US dollars was among the lowest in the world. Fuel and food were being rationed in 1991 and a widespread starvation was imminent during the winter if foreign aid didn’t arrive. The US, Japan, and other Western countries sent food aid worth millions of dollars to prevent starvation as the food distribution system nearly collapsed despite the country’s large numbers of livestock. The government started rationing meat in the capital on May 16, 1991; Mongolia appealed for emergency aid from other countries as a result of severe shortages of meat and medicines. The GDP fell by 25-30% in 1991 with the industrial output falling by 50% and the nearing 200%. With the subsidies being cut and price liberalization due in 1992, many of the newly privatized enterprises were expected to go bankrupt.

The energy dependency on the Soviet Union put pressure on the economy when the Soviets cut their oil and petrol supplies by half. With delays and inefficiencies in the transportation system; spare parts, equipment, and machinery for factories and power plants weren’t delivered on time, only 30% of the spares for the biggest power plant in

Ulaanbaatar was delivered in 1991. The production was falling due to the lack of

27 imported explosives and fuel oil, sometimes the capital Ulaanbaatar had enough coal reserves for only few days. The power plants generated heat to the city apartments and people faced the risk of living in unheated homes when the temperature dropped to -30

(°C) during the winter. Grocery stores were depleted of their inventories and on some days, there was no bread, rice, butter, or meat in the stores. Selling of goods in the black market soared and people paid higher prices to purchase basic goods. Sometimes the only commodity left in grocery stores was salt and people weren’t able to make purchases even if they had money.

The transitioning economic system of Mongolia was struggling in the beginning to establish the market forces. It needed help from international organizations and foreign countries to overcome the challenges. Politically, the MPRP won the parliamentary elections of 1992 and was in power until the parliamentary elections of 1996, when the

Democratic Alliance consisted of opposition parties such as the Mongolian Democratic

Party and the Social Democratic Party won the election, winning 50 out of 76 seats in the parliament. It was the first time the MPRP was out of power in Mongolian politics since

1924.

The period between 1992 and 2000 was period of economic crisis and political instability as the unemployment grew, increased, and the market forces were being laid. The MPRP’s rule from 1992 to 1996 was heavily criticized by the opposition parties because of the slow process of privatization. With an agenda to speed up the process and further privatize state owned enterprises, the Democratic Alliance won the elections of 1996 and was in power until 2000. However, the Democratic Alliance faced strong opposition from the MPRP and disunity within the alliance as a result of being a

28 coalition of multiple parties. The struggle for power within the alliance and the MPRP’s strong opposition led to the creation of four different governments led by four different prime ministers from 1996 to 2000. The social costs of the economic transition were high and the lack of broad based political support, the inexperienced leaders of the Democratic

Alliance, and the disunity within the parliament worsened the situation; 35% of the population lived below the poverty line in 1999.

Aid from donor countries and international organizations was essential to help the transitioning economy hampered by political instability. Total aid to Mongolia from donors between 1991 and 1998 amounted to $1.5 billion of which $714.7 million was in loans and $813.9 million was in the form of grants. A group of donor countries and multilateral institutions such as the Asian Development Bank, , International

Monetary Fund, Japan, Russia, and Germany pledged over $1 billion of loans to

Mongolia as of 1997, Japan was the largest donor Mongolia during this time. Mongolia’s

GDP reached $1.039 billion in 1998 and to sustain the growth, an aid package of $320 million was promised after the seventh Mongolia Assistance Group Meeting in 1999.

Mongolia was to use the aid package to strengthen the financial sector, further privatize state-owned assets, and introduce legal framework for foreign investment and financial institutions. $737 million was needed in aid from 1999 to 2002 to improve the energy, transportation, and social sectors; the country was gradually moving away from emergency aid and investing more in long-term projects as the economy showed signs of progress.

2.2 Foreign Investment and Trade

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After the first free elections, the newly elected president Punsalmaagiin Ochirbat believed that Mongolia had the potential to match the economic growth of the other

Asian countries such as , Taiwan, , and Singapore – these countries experienced tremendous growth and became to be called the Asian Tigers. The

Prime Minister Dashiin Byambasuren took a more realistic approach and believed that it would take more than a decade for Mongolia to catch up with the economic growth of these countries. Despite the fact that the debt owed to the Soviet Union brought challenges, D. Byambasuren wanted Mongolia to draw Western investment and international aid to develop the natural resources, and establish a “state-regulated market economy”.

The newly appointed Mongolian government reached out to countries such as

Japan and South Korea to increase the level of foreign trade and find substitution for the decreasing partnership with the Soviet Union. Joint enterprises with the Soviet Union were handed over to Mongolia and the Soviet workers and instructors totaling around

40,000; Soviet troops totaling around 100,000 were repatriated. Mongolia’s GNP was expected to drop by 6% in 1991 as a result of the loss of Soviet inputs; factories were running out of supplies, projects were halted, and the industrial output fell dramatically.

Japan’s interest to invest in Mongolia grew as the Japanese-built Gobi factory produced 310,000 cashmere sweaters and 25,000 camel wool blankets and coats annually mostly for the Japanese market. Japanese firms including Mitsubishi agreed to a build a steel scrap-reduction works that will have an annual output of 100,000 tonnes, 50% of which will be exported to Japan and other markets. Infrastructure was little developed

30 and there was virtually no links with countries outside of the Comecon. Transportation and reliable infrastructure were necessary to develop trade with Japan as Mongolia depended on either Soviet or Chinese rail routes to the Pacific ports.

The Japanese were interested in the Mongolian raw materials. Toshiki Kaifu was the first Japanese prime minister to pay a state visit to Mongolia and the Japanese minister of foreign affairs promised to stress the importance of economic aid to Mongolia at the G7 summit. The Mongolian president Punsalmaagiin Ochirbat asked for 200-300 million US dollars to help Mongolia move towards democratization and the transformation to a free-market economic system. Japan was the largest donor of aid to

Mongolia and supported the reforms because the Japanese believed that the success of democratization and of the transformation to a free-market economy in Mongolia would contribute to peace and stability in the East Asian region. Japan organized a conference of donors during the summer of 1991 in order to bring more foreign assistance, a total of

155 million US dollars of aid was given in 1991. Despite the struggles to modernize, economic crisis, low income levels, and primitive lifestyles, the adult literacy of

Mongolia was close to 100%.

With supplies from the Soviet Union being unreliable and cut in half in quantities, the solution was to find new trading partners and suppliers. Re-establishing a friendly relationship with China was important; the two countries had become hostile to each other following the Sino-Soviet split in the early 1960’s, a geopolitical standoff in which

Mongolia sided with the Soviet Union. In 1991, China accounted for 15% of Mongolia’s trade, up from nearly zero a few years ago. But the lack of cargo facilities and the different rail gauges presented problems to further increase trade with the southern

31 neighbor. Since Mongolia neighbored only two countries, the Soviet Union and China, it was most logical to increase trade with China to counterbalance the dependency on the

Soviets.

The remaining 60,000 of the Soviet troops stationed in Mongolia were getting pulled out in 1987 which led to the normalization of Sino-Soviet and also Sino-

Mongolian relations. Mongolia with a newly instituted multi-party system and a transition to market economy needed cooperation with China. The Chinese president

Yang Shangkun visited Mongolia in 1991 and met with the Mongolian president to discuss Sino-Mongolian economic, political, and cultural ties. The summit between the two countries’ leaders was considered a success as China allowed Mongolia to ship goods through its territory and access the port city Tianjin’s facilities. With access to the

Pacific Ocean, Mongolia was able to further promote economic ties with Japan, the

United States, and Europe. China also promised economic assistance, long-term interest free loans, and signed agreements to avoid double taxation, prevent tax evasion, and protect investments.

A delegation from South Korea visited Mongolia and signed agreements for economic cooperation, and they agreed to build a hypodermic syringe factory in the capital, Ulaanbaatar. The first democratically elected president of Mongolia

Punsalmaagiin Ochirbat visited South Korea and offered to help mediate the dispute between socialist state of North Korea and the Western style democratic state of South

Korea. He also expressed his interest to import South Korean technology. A business management and services training center was established in Ulaanbaatar with help from the British. Trade representations were opened in Bangkok, Seoul, Hong Kong, and

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Singapore. A new foreign investment law was passed to attract investors and gave priority to increase export potential, manufacture finished goods, develop the infrastructure, and expand tourism.

In 1999, the prime minister, Janlavyn Narantsatsralt said that GDP growth rate was planned to reach 6.0% in 2002, it was -18% in 1991 and 3.5% in 1998. With reforms of the banking sector, the private sector was expected to contribute a larger share in the

GDP replacing the aid from donors. The estimates of GDP growth of 6-7% by 2002 were possible with the banking sector reform and more foreign investment in key areas such as infrastructure; 60% of the GDP was generated by the private sector in 1999, only eight years after the transition to market economy began in 1991. More foreign investment was needed in areas such as extraction of and non-ferrous metals, crude oil, tourism, manufacturing, construction, trade, communications, and services. As of 1999, 58 countries had invested a total of $240.5 million in 1,087 companies; the most active investors were from China, Japan, Russia, South Korea, , Italy, Canada, and the .

The opposition party MPRP was against the fast pace of privatization of the

Democratic Alliance governments fearing that foreign companies would take control of strategic sectors such as energy, national airline, and communications. They intensified the internal disunity within the Democratic Alliance and the third DA government under

Janlavyn Narantsatsralt was replaced in 1999 by a fourth government since 1996 led by prime minister Rinchinnyamyn Amarjargal, the last DA government until the elections of

2000. Rinchinnyamyn Amarjargal continued the economic reforms and initiated the privatization of larger state owned enterprises. The Democratic Alliance was collapsing

33 as a result of weak leadership, with a succession of four governments; and the polls were favoring the Mongolian People’s Revolutionary Party (MPRP) to win the 2000 elections.

In the July 2000 parliamentary elections, the MPRP won 72 out of 76 seats in the parliament and the party’s chairman became the next prime minister.

The imports from Russia was gradually replaced with imports from China, although Mongolia still imports products from Russia. The trade turn-over between Mongolia and China reached a historic $314.1 million in 2001 and increased to

$341.8 million in 2002. Most of Mongolia’s exports go to China, 41.7 percent of total exports went to China in 2003 while 29.5% of Mongolia’s total trade was with China.

20.2% of total imports to Mongolia came from China in the same year. Hundreds of

Chinese owned businesses operate in Mongolia, mostly in trade and services, textile, industry, food and agriculture.

2.3 Privatization and Price Liberalization

The economists believed that Mongolians needed to tighten their belts and reduce spending during the reforms when the foundations of a free market system were being laid. All aspects of the economy needed comprehensive reforms including macroeconomic balance, low inflation, freeing of prices and trade. People’s attitude towards property needed to change as the government encouraged private ownership of properties. All properties were owned by the government during the communist regime and people didn’t care for the properties since they were public; vandalism and theft were common. Privatization of state property was an important step for the transition to market economy and the new legislature unanimously voted in favor of privatization.

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Mongolia needed to open up its resources to foreign investors and to domestic market forces. The Mongolian 1.6 million square kilometers of land is rich with resources

– livestock produce, leather goods, and non-ferrous metals such as copper. The first free elections gave the Mongolians more political freedom as they had multiple parties to vote for, but the former communist party was still able to win the majority of the votes. The former communist party leadership was radically changed and they supported privatization and embarked upon a three-year program. The government decided to free prices on non-essential commodities while doubling the state subsidies for essential items such as meat, , soap, petrol, and public utilities. These essential items were put on ration and people stood at long lines at grocery markets to get their shares of rationed goods. Subsidies to failing state enterprises were cut and at the same time salaries, bank savings, and pensions were doubled. Producers were able to fix their own prices when price reforms were implemented, but retail sales plummeted as a result.

A poll was conducted by the government and 90% of the citizens voted in favor of privatization as the government promised to include all of the people in the process which meant that people would be able to own private properties, a right that wasn’t possible under the previous regime. Institutional and legal frameworks were to be established quickly since Mongolia joined the reform movement later than the Eastern

Bloc countries. The privatization law was passed in May of 1991, allowing state assets to be privatized through a voucher system that entitled all citizens born before May 31,

1991, to acquire property and shares. Economic advisers from international organizations were called to consult on the transition process. Competition in the economy was almost non-existent and the state monopoly over the economy needed to be abolished. Both

35 immediate and long-term benefits were expected as a result of the reforms. In the long run, improved infrastructure was necessary for the agricultural sector and the natural resources sector needed strategic development plans to encourage foreign investors.

A Hungary educated reformer Naidansurengiin Zoljargal became the first chairman of the in Ulaanbaatar. The government also created the State Commission for Privatization, an organization headed by Yo Gerelchuluun who had the responsibility of overseeing the transfer of Mongolia’s 2,200 state owned properties and fixed assets out of the total 2,600 into private ownership. The first phase of the three-year privatization program transferred most of the state owned enterprises to the private sector; small enterprises such as shops, restaurants, and hotels were auctioned.

Both Mongolian citizens and foreign investors were able to participate in the auction and invest in service-oriented businesses. The same opportunities to buy stock and property were given to foreign investors and the foreign investment law provided tax exemptions for the first three years of operations for foreign owned enterprises. Most investors were interested in Mongolia but many of them wanted to wait for the economy to stabilize. A total of 57% of the state-owned fixed assets were to be privatized and the government decided to keep strategically important sectors such as transport, telecommunications, and some enterprises under state control.

The second phase of the program allowed the government to issue vouchers to citizens and a limited amount to foreigners, a process which transferred the ownership of state-owned companies to the people. The Mongolian Stock Exchange opened in

September, 1991 where people traded their state issued vouchers. A total of 27 billion togrogs’ worth of coupon were issued and each Mongolian citizen at the time received

36 coupons worth of 10,000 togrogs. People started buying shares in the newly privatized companies and the state collected 200 togrogs from each coupon to help the workers who were laid off from the former state-owned entities; thousands lost their jobs as the privatized firms laid off workers to improve efficiency.

The opening of the Mongolian Stock Exchange marked the start of the second phase of the privatization process. The privatized state-owned companies traded their shares and the people who were given vouchers from the government worth of 10,000 togrogs each were able to acquire shares in companies. Foreigners were also able to participate but the foreign investment law limited the foreign ownership to 49% of any

Mongolian company. The chairman of the Mongolian Stock Exchange Naidansurengiin

Zoljargal estimated the stock exchange’s daily trading volume to reach 50 million togrogs when more people start participating in the new system and increase liquidity in the market. The stock exchange’s success was important for the government reform plans followed by a new company-tax law and the creation of a corporate earnings tax.

Nearly 10% of the workforce from the privatized companies lost their jobs, adding to the

100,000 unemployed people or 14% of the total work force at the time. The struggle to shift to a market-driven system caused revenue to fall, exports and imports to drop as the trade deficit and unemployment grew and the inflation rate hit 100%. Laid off workers

37 weren’t happy with the pace of the privatization process and organized hunger strikes.

The reformist government also feared that the resistance could encourage hardliners and former communists to slow down or even turn back some of the structural changes especially since there was an attempted coup organized by Soviet hardliners in in August of 1991 and both the President Punsalmaagiin Ochirbat and Prime Minister

Dashiin Byambasuren belonged to the Mongolian People’s Revolutionary Party.

Although the Mongolian People’s Revolutionary Party (MPRP) won the first free election, Prime Minister Dashiin Byambasuren appointed ministers from the opposition parties and created a coalition government. This government had the responsibility to save the economy that was on the verge of collapse. The leaders in the new government wanted to consolidate the political revolution of 1990 with an economic revolution: the privatization program, price liberalization, foreign investment, and the development of key sectors were all essential. The coalition government was consisted of former communists and reformers. Forceful reformers included economists such as the First

Deputy Prime Minister Davaadorjiin Ganbold and other young policymakers. They carefully observed the fast-track reforms in Eastern Europe when Western economists such as Jeffery Sachs were advising the reformist governments in the Eastern Bloc countries during their transitions.

About 95% of the livestock and all trade and services had been transferred to private ownership by 1995. Strategically important sectors such as essential mines, telecommunications, large-scale transport, and public utilities were still under government control. Entrepreneurs who were able to acquire majority of the shares in profit-generating state assets turned the enterprises to limited companies, and as a result,

38 more cosmopolitan and urban capitalist Mongolians were in a better position to benefit from the privatization. The Ulaanbaatar Hotel is an example of such profit-generating enterprises; after the transfer to private ownership, the hotel located in the heart of the capital, had an occupancy rate throughout the year comparable to that of any five-star hotel in the world.

The opposition parties formed an alliance and won the parliamentary elections of

1996 and pushed the Mongolian People’s Revolutionary Party out of power. The New

Democratic Alliance Government under Prime Minister Mendsaikhany Enkhsaikhan initiated a program to privatize 60% of the remaining state assets. The program was designed to bring foreign investment and technology into key sectors of the economy to improve productivity and efficiency. The prime minister also saw this as an opportunity to generate revenue for the budget. They considered offering state assets such as the

Soviet-Mongolian joint Copper Plant at , the Gobi Cashmere Company, and

MIAT Mongolian Airlines.

The reforms in the financial sector, budgetary reforms, and price reforms further solidified Mongolia’s transition to market economy. Mongolia signed most favored nation agreements with Japan, the U.S., South Korea, and the , enabling the country to export to these countries at preferential rates. The government enacted a new tax law that abolished most custom duties by July 1, 1997 to attract more foreign investment. At a 1998 conference held in Ulaanbaatar on investment possibilities, the prime minister announced:

The government of Mongolia is strongly committed to the improvement of the

overall investment environment. The Government has undertaken decisive steps

39

towards the liberalization of trade and tariffs. We are simplifying and streamlining

bureaucratic rules and procedures that impose major impediments for foreign

investors. We will continue to work in this direction until foreign investors would

feel comfortable to work and live in Mongolia 10

The development of the private sector, increased foreign investment, and financial aid from donors helped the Mongolian economy to stabilize. The Democratic Alliance ruled the country from 1996 to 2000 and started the banking sector reforms. The MPRP led by

Nambaryn Enkhbayar won the elections of June, 2000 and he became the prime minister when the MPRP won 72 out of the 76 seats in the parliament. The Democratic Coalition’s leaders’ lack of experience in governing gave a land-slide victory to the Mongolian

People’s Revolutionary Party (MPRP).

By the end of 1997, 804 companies from 38 countries had invested in Mongolia.

Joint ventures were created with new partners from Japan, South Korea, the U.S., Hong

Kong, and , in addition to China and Russia. It was an encouraging development for a country endowed with abundant natural resources. Foreign assistance still played a large role in the Mongolian economy comprising nearly one-third of the GDP in 2000.

Prime minister Nambaryn Enkhbayar inherited an economy that fell from 3.25%

GDP growth in 1999 to 1% in 2000 as a result of two harsh winters that affected the agricultural sector by significantly reducing the livestock population. Nambaryn

Enkhbayar wanted to continue the privatization process by proposing to privatize the state owned Trade Development Bank as well as the Gobi Cashmere Company. He started the privatization of land and realized the need to improve the infrastructure. The

10 Comments delivered to Conference on Investment Opportunities in Agro-industry and Tourism, sponsored by GOM and the World Bank, Ulaanbaatar June 1998.

40 construction of a new 2,000 km road network called the ‘Millennium Road’ commenced under his government.

The banking sector reforms of 1995 and 1996 included the passage of new laws to implement comprehensive standards, currency exchange licensing, reserve requirements, as well as audit and financial reporting standards. This process continued under

Nambaryn Enkhbayar as the sector experienced growth and the number of commercial banks increased and expanded to rural areas.

The government privatized the two state owned banks: the Trade and

Development Bank and the Agricultural . Further reforms included increased supervision, central bank autonomy, corporate governance, and the development of interbank markets. The next step was the broader financial sector reform.

Securities and capital markets, a pension system and the insurance sectors were still at their infancy. The improvement in the banking sector was necessary as banks serve as financial intermediaries to further develop the private sector and diversify the economy.

Present State

3.1 Model Democracy

The period from 2000 to 2015 was very important for Mongolia as the country started to experience the direct effects of the milestone reforms of the 1990’s. Politically, the new democracy continued to hold free elections in which the two major political parties, the Mongolian People’s Revolutionary Party (MPRP) and the Democratic Party, competed for power. In 2000, five political parties including the Mongolian National

Democratic Party, the Socialist Democratic Party, and the Mongolian National

41

Progressive Party, that emerged after the Democratic Revolution of 1990, merged together to form the Democratic Party of Mongolia.

After the elections of 2004 and 2008, neither party had a clear majority and the two major parties formed coalition governments. Prior to the elections of 2012, the former communist, Mongolian People’s Revolutionary Party, dropped the word

“Revolutionary” from its official name and became the “Mongolian People’s Party”.

Some members including the former party chairman, prime minister, speaker of the parliament, and president, Nambaryn Enkhbayar formed a new party and kept the old name the “Mongolian People’s Revolutionary Party” which currently has the third most seats in the parliament after the Democratic Party and the Mongolian People’s Party. In the last parliamentary elections held in 2012, out of the 76 seats, the Democratic Party won 31, the Mongolian People’s Party won 25, the Mongolian People’s Revolutionary

Party won 11, the Civil Will-Green Party won 2 seats respectively.

Over the past fifteen years, Mongolia has transformed into a model democracy with a thriving market economy. Mongolia is committed to the democratic values and much progress has been made in regards to economic liberty, transparency, regular elections, rule-of-law, human rights, freedom of association and freedom of speech.

Mongolia held free elections since 1990 - seven parliamentary elections in 1990, 1992,

1996, 2000, 2004, 2008, and 2012, and six presidential elections in 1993, 1997, 2001,

2005, 2009, and 2013. According to international observers, the parliamentary and presidential were far more liberal and democratic compared to other former socialist states transitioning towards an open market democracy.

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43

Source: “POLITBAROMETER #11(44), June 2012”. Web. 12 Jan. 2015. www.santmaral.mn

While most post-communist states demonstrate features of both democratic and non-democratic regimes, Mongolia has been regarded by international organizations as a model democracy that has peacefully transitioned into a new political and economic system; Mongolia is a success story in terms of its implementation of democratization and . However, despite its relative success, Mongolia still faces the challenges of eradicating poverty, establishing equality and social justice for the people; these challenges fit into the broader project of democracy.

Like other new democracies, Mongolia faces the problems of poverty, corruption, economic distortion, inequality and there have been minor instances of human rights violations. Presently, the most pressing challenge for Mongolia is to fight poverty and achieve equitable distribution of its wealth valued at trillions of US dollars. By utilizing this wealth, a larger middle class with higher income levels needs to emerge to further solidify Mongolia’s democratic establishment. It is essential to eradicate poverty

44 for a healthy democracy and Mongolia needs to manage its mineral wealth in a transparent and inclusive way that will benefit the entire population.

Having only two neighbors, Russia and China, Mongolia has a foreign policy approach to establish and sustain good relations with other countries by virtue of its

“”. The United States, European Union, Japan, South Korea,

Australia, India, , Canada, and other Central Asian countries are considered third neighbors and engage with Mongolia in political, economic, and military matters.

Mongolia intends to counterbalance the influence from Russia and China through its third neighbor policy. It is important for Mongolia to protect its national security by establishing bilateral relations with its third neighbors to avoid too much dependency on its powerful neighbors.

Mongolia plays an active role in many international institutions. In 2003, it hosted the Fifth International Conference of New or Restored Democracies. Over 500 people from 100 different countries attended the conference to have a dialogue on democracy, good governance, and civil society. The conference adopted a declaration called the

“Ulaanbaatar Declaration” which identified six important features that democratic countries must have: “1. Just and responsible, 2. Inclusive and participatory, 3. Promoting and protecting the rights and freedoms of all their members, 4. Open and transparent, 5.

Functioning under agreed rules of law and accountability, regardless of the challenges faced, 6. Demonstrating solidarity towards others”. 11

Mongolia considers the as an important multinational organization given its legitimacy, professionalism, equality, and global reach, and actively participates

11 YİĞİT, Süreyya. "Mongolia's Path To Economic Prosperity And Political Liberalisation." Middle Eastern Analysis / Ortadogu Analiz 5.57 (2013): 80-92 45 in its missions. Since 2002, Mongolia has contributed to UN peacekeeping missions in

Chad, , , the Ivory Coast, Kosovo, Liberia, , Sudan, the

Western Sahara, and . 12 Mongolia also chaired the Community of

Democracies, an intergovernmental forum of democracies formed in 2000. Additionally, an observer status in the Shanghai Cooperation Organization (SCO) has been secured.

Relations between Mongolia and the United States has significantly improved since the United States opened its first embassy in Ulaanbaatar in June, 1988.

Engagement with the United States both bilaterally and through international institutions such as the IMF and World Bank helps Mongolia to overcome its geopolitical isolation; and the United States has showed much support for Mongolia’s political and economic transition. Since 2003, the Mongolian military and the US Department of Defense organized the Khaan Quest military training exercise which marked its 10 year anniversary in 2013 and has grown to include military personnel from Mongolia, the US,

Germany, France, Japan, South Korea, Singapore, India, and Canada, and an observer states has been given to Russia and China.

In 2003, Mongolia dispatched an infantry company and engineering platoon, totaling 170 soldiers to as support for the US-led Operation Iraqi Freedom. In the same year, a team of Mongolian military instructors and maintenance specialists were sent to aid the US and NATO-led International Security Assistance Forces in

Afghanistan. These operations led Mongolia to engage directly with the US military as a partner and shape the region’s security environment through the joint US-Mongolian

Khaan Quest military exercises.

12 Reeves, Jeffrey. "Mongolia's Evolving Security Strategy: Omni-Enmeshment And Balance Of Influence." Pacific Review 25.5 (2012): 589-612 46

George W. Bush was the first sitting US President to visit Mongolia. He came to

Mongolia in Novermber, 2005 to applaud Mongolia’s efforts as an ally in Iraq and

Afghanistan in the ‘war on terror’ and reassured the US support for Mongolia’s democratic development. In the same year, the US Speaker of the House of

Representatives Dennis Hastert and the Secretary of Defense Donald Rumsfeld visited

Mongolia. Rumsfeld congratulated Mongolians for their free political and economic system, he praised the Mongolian army in Afghanistan and Iraq, and the contribution

Mongolia had made to "the liberation of 50 million people". He warmly acknowledged

Mongolia's friendship towards the United States.13

Many high level government officials from the United States have visited and applauded Mongolia for being a good example of a socialist state transitioning towards democracy. When congratulating Mongolia’s president for his re- election, US President commented:

“Through its impressive democratic achievements and its progress on economic

liberalization, Mongolia serves as a significant example of positive reform and

transformation for peoples around the world”.14

Hillary Clinton made two visits to Mongolia, in 1995 as the First Lady of the United

States and again in 2012 as Secretary of State. had written that “Mongolia has shown an example of how democracy can prevail in places, where democracy seemed

13 MONGOLIA/US: Mongolia has Ally Beyond its Region. Oxford: Oxford Analytica Ltd, 2005. 14 “Statement by President on the Presidential Election in Mongolia | The White House,” accessed August 16, 2013, http://www.whitehouse.gov/the-press-office/2013/06/27/statement-president- presidential-election-mongolia. 47 impossible. I say to democracy doubters to come to Mongolia”. 15 After the 2013 presidential election in Mongolia, her successor as U.S. Secretary of State, John Kerry reiterated that “the people of Mongolia recently participated in yet another free and fair presidential election, evidence of Mongolia’s strong commitment to its democratic process…..Mongolia is playing an active and important role in promoting peace and stability around the world”. 16 Economic development, democratization, high levels of literacy and higher education, high levels of GDP, equal distribution of income, an accountable state, civil societal organizations, durable and effective institutions are needed for a successful transition and despite the fact that Mongolia lacks some of the features mentioned above, it continues to be considered by many in the international community as the beacon of light for democracy and economic liberalism.17

3.2 Economic Growth

The economic crisis of the early 1990’s was very difficult on the Mongolian society. However, the fragile economy began to show signs of improvement in the late

1990’s and early 2000’s. The privatized livestock population in the countryside was growing as the herdsmen paid more attention to the herds once they owned them. The private sector was growing with the privatization of state-owned enterprises, and the government was able to collect taxes for its budget from the private sector. The market forces in the transitioning economy began to come together with privatization and price liberalization.

15 “U.S. Secretary of State Hillary Clinton Makes a One-day Visit to Mongolia : InfoMongolia.com : News and Information About Mongolia, Lessons,” accessed August 16, 2013, http://www.infomongolia.com/ ct/ci/450. 16 “Speeches, Op-Eds & Other Important Documents | Embassy of the United States Ulaanbaatar, Mongolia,” accessed August 16, 2013, http://mongolia.usembassy.gov/remarks_070913.html. 17 YİĞİT, Süreyya, p. 91 48

Source: Asian Development Bank, Asian Development Outlook 1997-1998, p.56

The economic growth of Mongolia was evidenced by the continued GDP growth from 1994 to 2008. There was negative GDP growth rate of -1.3% in 2009 as a result of the global economic . The average real GDP growth rate during the recovery period, from 1995 to 2001 was 2.54%. The economy shrunk by an average of -4.99% during the period of economic crisis during the early years of the transition from 1990 to

1994. The economy continued to shrink until 1994 when there was a slight increase in real GDP growth.

The pro-foreign investment approach of the government led to the adoption of liberal tax reforms and friendly investment laws. This policy approach combined with the rising commodity prices and the increasing Chinese demand for commodities such as gold, copper, and coal made Mongolia an attractive destination for investors and mining companies. The Mongolian economy began recovering from 1994 to 1998, and started showing positive results. The aid dependent economy was gradually becoming self- reliant as the private sector grew and the government established a revenue stream through taxes from the private sector.

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50

An American investor named Robert Friedland found a mine with a large deposit of copper and gold in the Mongolian . The mine is called Oyu Tolgoi,

Turquoise Hills in English, and it ranks among the largest mines in the world. Robert

Friedland’s Vancouver based company, Ivanhoe Mines Ltd, raised more than $31 million for the mine’s exploration work in early 2000’s and the mine was expected to generate more than $1 billion in investment and become the biggest private enterprise when

Mongolia’s GDP was only around $1 billion in 2002.

A mining boom was happening in Mongolia as Friedland advertised the country’s mineral wealth to global investors and dozens of mining companies came to Mongolia and sought exploration licenses. Although the economy had recovered from the period of crisis, it still depended on assistance from international organizations and donor countries and a heavy loss of livestock occurred as a result of harsh winters in 1999 and 2000.

Developing the mining sector was important to further support the private sector, increase exports, and bring foreign investment.

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People began to think that Mongolia could become the next Chile or Peru, overcoming the economic hardships by utilizing its resources. The development of the mining sector led to increased employment, better infrastructure, transportation links, energy sources, and more urban settlements in the sparse populated land. The GDP grew by 3.7% in 2002 when the processing sector grew by 23.3% and the mining sector by

24.3% respectively. In 2002, it was estimated that mining will account for 21% of the

GDP in 2004 and 31% by 2010.

The economy continued to grow after 2002 when more large public enterprises were privatized, oil prices fell, and the number of tourists coming to Mongolia increased.

The banking sector improved tremendously with support from the World Bank and the

IMF, domestic savings also increased as people became more confident in banks. The money supply increased, and in 2003 the Central Bank of Mongolia had enough foreign

52 reserves to afford 17 weeks of imports. Public and private investments boosted the construction sector; high rise buildings, apartments, and offices started to emerge. Older buildings from the socialist period were refurbished and more roads were built. The inflation rate began to drop as prices of oil, food, clothing, housing, and electricity stabilized and the market forces of supply and demand determined prices.

The economic growth driven mainly by the mining sector was supplemented by tourism as income generated by tourism rose by 14.4% in 2004. On top of that, Russia canceled 98% of Mongolia’s debt owed to the former Soviet Union and the prime minister Nambaryn Enkhbayar negotiated to pay only US$150 million out of the total debt valued at $12.5 billion. The large debt was considered a significant burden on the economy and the financial risk of investing in Mongolia was substantially reduced as a result of the agreement. It was a very important milestone for Mongolia because the settlement of the debt was considered to have provided Mongolia with economic independence. In 2004, the European Union became the sixth biggest trading partner for

Mongolia; a total of 90 EU companies had invested in Mongolia. The economy grew by a stunning 10.7% in 2004, followed by 7.3% in 2005, 8.6% in 2006, 9.9% in 2007, and

8.9% in 2008.

53

Mongolia: Economic Structure. New York: The Economist Intelligence Unit N.A.,

Incorporated, 2008.

The overall government objective for the economy was to boost investment in the mining industry, develop the infrastructure, and relieve poverty as the transition to market economy created income disparities. The introduction of the mortgage system to secure loans on land and property was another major reform as people became capable of buying assets through mortgage financing. With an improved legal environment and better rates of tax collection, the budget started producing surpluses which meant decreased dependency on aid programs. The economy continued to grow from 2008 to 2012 with the increased spending construction and the rise in foreign direct investment, 2009 was an

54 exception when the economy shrunk by -1.3% because of the global economic recession.

In 2008, Moody’s upgraded Mongolia’s long term debt ratings from B+ to BB- and forecasted the economic growth to be in double digits.

Mongolia: Economic Structure. New York: The Economist Intelligence Unit N.A.,

Incorporated, 2013. ProQuest. Web. 12 Mar. 2015.

On August 25, 2009 the parliament amended several laws to pave the way for the signing of the Oyu Tolgoi agreement with the Canadian based mining company Ivanhoe

Mines. Oyu Tolgoi is one of the largest undeveloped mines in the world with an estimated deposit containing 81 million pounds of copper and 46 million ounces of gold, an increase in the deposit is possible as the mine isn’t fully explored. Once reaching full production, the mine is expected to yield 450,000 tonnes of copper and 3.3 million

55 ounces of gold per year for a period of 70-100 years. With commodity prices of 2009, prior to the signing of the investment agreement, Oyu Tolgoi was estimated to generate

$6 billion of annual revenues for Mongolia once reaching full production when the GDP stood at only $5.2 billion.

Mongolia was predicted to become one of the fastest growing economies in the world. Rio Tinto is a renowned British-Australian mining company and it became the largest shareholder of Ivanhoe Mines. On October 6, 2009 the Mongolian government and Ivanhoe Mines signed an investment agreement for Oyu Tolgoi and established a company called Turquoise Hill Resources, the Mongolian government agreed to own

34% of the joint company and Ivanhoe Mines agreed to own 66% with the backing of Rio

Tinto.

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Mongolia’s world-class deposits of copper, coal, iron ore, and uranium; and its business friendly legal environment, commitment to democracy, and free-market principles make it an attractive destination for investors. The government plans to improve the Mongolian Stock Exchange and offer initial public offerings for large state- owned companies for further growth. The decision makers believe that the is key to economic development and provide easier financing for business projects. A

Mongolian mining company called the Mongolian Mining Corporation producing thermal and metallurgical coal offered an IPO on the Hong Kong Stock Exchange and raised $650 million through an issue that valued the company at over $3 billion. These investments may seem smaller in scale to the level of investments in large economies, but in the case of Mongolia, they are the driving force for the fast-paced economic growth.

Another large mine is Tavan Tolgoi and it has the largest deposit of metallurgical coal in the world with 6.4 billion tonnes of reserves. Tavan Tolgoi is fully owned by the

Mongolian government and the government plans to issue some shares of the company to

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Mongolian citizens and sell 30% of the shares to investors through an initial public offering at an international stock exchange. The government plans to build new rail lines to China to transport minerals from Tavan Tolgoi and eventually export to the Japanese and South Korean markets, the rail lines will be upgraded with heavy-load tracks which would double the current capacity.

In 2010, the economy recovered from the recession of 2009 and a GDP growth of

6.4% was recorded. 2011 was a historic year as the Mongolian economy witnessed an astonishing growth of 17.3%. China’s demand for coal and copper increased and

Mongolia’s exports expanded by 73.4% to $3.5 billion in 2011; the total trade stood at

$8.3 billion, an increase of 95% compared to the previous year. The growing Chinese industrial sector combined with the rise in commodity prices contributed to this growth.

Total imports was valued at $4.8 billion when it rose by 114% year on year basis when

58 the mining companies imported large quantities of machinery and transport equipment.

High levels of foreign direct investment and increased government spending supported imports of capital goods and the economy was expected to grow in double digits for the future.

Mongolia: Economic Structure. New York: The Economist Intelligence Unit N.A.,

Incorporated, 2015. ProQuest. Web. 12 Mar. 2015.

1.3 Upper Middle-Income Country

Mongolia’s economic growth rates of over 17% in 2011 and around 12% in each of 2012 and 2013 were the envy of the world. Annual GDP per person of less than $2,000 doubled to $4,000 in a matter of few years. Mongolia is estimated to have over $3 trillion of mineral wealth, each of the 3 million Mongolian citizens can claim to about $1 million of this wealth. The GDP growth in 2014 was estimated to be 9.8% despite the falling

59 prices of commodities in the global markets. The economy is expected to expand for the next decade and the double digit GDP growth rates will bring more income.

The table above projects the economic growth until 2020 based on macroeconomic research conducted by a research institute named Eurasia Capital which focuses on Central Asia. The substantial mineral wealth of Mongolia will bring the necessary investment to improve the infrastructure, support other sectors of the economy, and provide the Mongolian people with better living standards.

Mining, agriculture, and tourism are the three main sectors of the economy and

Mongolia plans to use the income provided by the mining industry to diversify the economy. Much investment is planned to be spent on education, health care, infrastructure, and the poor. Mongolia moved from the group of low-income economies to the group of lower-middle income economies as classified by the World Bank. Based

60 on the economic growth forecast and macroeconomic research, Mongolia will move to the group of upper-middle-income economies during the next decade.

“Country and Lending Groups”. Web. 12 Jan. 2015. http://data.worldbank.org

The two tables above were provided by the World Bank. The first table shows the list of current lower-middle-income economies including Mongolia with a GNI per capita range of $1,046-$4,125 while the second table shows the list of upper-middle-income economies with a GNI per capita range of $4,126-$12,745. Mongolia’s GNI is estimated to reach $10,000 by 2020 and the country has a bright economic future supported by its vibrant democracy and the significant mineral wealth.

Conclusion

Mongolia has been transitioning from a one-party ruled socialist country with a centrally planned economy to a multi-party democracy with a free market economy.

Mongolia followed a Soviet style political and economic model for over 70 years until

1990 when the country was forced to reform as a result of both internal and external

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pressures. Mikhail Gorbachev’s reforms in the Soviet Union allowed the whole Eastern

Bloc and Mongolia to introduce their own reforms. Mongolia held its first multi-party

free elections in 1990 and adopted a new constitution in 1992 to become a democratic

state with a new economic model based on social democratic values.

The political and economic developments in Mongolia have been considered a

success by Western countries such as the United States and international organizations

such as the United Nations and the World Bank. The Mongolian constitution guarantees

human rights and the existence of various freedoms including free elections and freedom

of press, religion, and speech makes Mongolia a model democracy. The vast Mongolian

land with a plethora of mineral resources has provided Mongolia with high levels of

income and the economic future looks promising as the country will move to the upper-

middle-income group of countries.

However, some challenges still remain despite the relative success of the political

and economic reforms. The new democratic state faces the challenges of income

inequality, corruption, environmental degradation, and pollution. The mining sector is

bringing much wealth but depending only on mineral wealth can’t be the solution. People

are careful of resource nationalism and Dutch disease that could damage the economy.

Mongolia needs to diversify its economy to compete with other developing countries.

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