The production of the constraints analyses posted on this website was led by the partner governments, and was used in the development of a Millennium Challenge Compact or threshold program. Although the preparation of the constraints analysis is a collaborative process, posting of the constraints analyses on this website does not constitute an endorsement by MCC of the content presented therein. 2014-001-1569-02 MONGOLIA CONSTRAINTS ANALYSIS A diagnostic study of the most binding constraints to economic growth in Mongolia August 18, 2016 Produced by National Secretariat for the Second Compact Agreement between the Government of Mongolia and the Millennium Challenge Corporation of the USA With technical assistance from the Millennium Challenge Corporation i Table of Contents Contents Table of Contents ............................................................................................................................................... i List of Figures ............................................................................................................................................... iv List of Tables ................................................................................................................................................ vi Glossary of Terms .......................................................................................................................................... viii 1. Executive Summary .................................................................................................................................. 1 Country context ............................................................................................................................................. 1 Summary of binding constraints to growth ............................................................................................... 2 1. A weak and unstable macroeconomic environment .................................................................... 2 2. Inconsistent laws and policies, resulting in an unpredictable business environment .............. 3 3. Health impacts of air pollution in Ulaanbaatar ............................................................................. 3 4. Costly access to water and sanitation in productive sectors and poor communities .............. 3 Detailed description of binding constraints .............................................................................................. 4 1. A weak and unstable macroeconomic environment .................................................................... 4 2. Inconsistent laws and policies, resulting in an unpredictable business environment .............. 6 3. Health impacts of air pollution in Ulaanbaatar ............................................................................. 8 4. Limited and costly access to water in productive sectors and poor communities ................... 9 Other constraints considered..................................................................................................................... 11 5. Education ......................................................................................................................................... 11 6. Finance .............................................................................................................................................. 11 7. Energy ............................................................................................................................................... 11 8. Transport .......................................................................................................................................... 12 9. Property Rights ................................................................................................................................ 12 2. Background .............................................................................................................................................. 13 Macroeconomic context ............................................................................................................................. 13 Productive Sector Analysis ......................................................................................................................... 17 Foreign Investment ..................................................................................................................................... 20 Foreign Trade ............................................................................................................................................... 23 Demography ................................................................................................................................................. 23 i Mongolia Constraints Analysis Table of Contents Poverty .......................................................................................................................................................... 25 3. Methodology ............................................................................................................................................ 28 Background .................................................................................................................................................. 28 The HRV Method ....................................................................................................................................... 28 The Four Tests ............................................................................................................................................ 29 Comparator Countries ................................................................................................................................ 30 4. Cost of Finance ....................................................................................................................................... 32 Background .................................................................................................................................................. 32 Analysis ......................................................................................................................................................... 35 Conclusion .................................................................................................................................................... 37 5. Quantity of Finance ................................................................................................................................ 38 Background .................................................................................................................................................. 38 Analysis ......................................................................................................................................................... 38 Conclusion .................................................................................................................................................... 41 6. Financial Intermediation ........................................................................................................................ 42 Background .................................................................................................................................................. 42 Analysis ......................................................................................................................................................... 43 Conclusion .................................................................................................................................................... 46 7. Natural capital ......................................................................................................................................... 47 Background .................................................................................................................................................. 47 Analysis ......................................................................................................................................................... 54 Conclusion .................................................................................................................................................... 57 8. Education ................................................................................................................................................. 58 Background .................................................................................................................................................. 58 Analysis ......................................................................................................................................................... 60 Conclusion .................................................................................................................................................... 64 9. Health ....................................................................................................................................................... 66 Background .................................................................................................................................................. 66 Analysis ......................................................................................................................................................... 69 Conclusion ...................................................................................................................................................