1992: On the magnitude of Mongolia’s challenges and the speed of reforms

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Continuing with our reflections on the 25 year partnership between Mongolia and the World Bank, today we look at 1992.  The political and economic changes envisioned by early reformers became lasting institutions with the adoption of a new Constitution and elections to the new State Great Khural later that year.  The reforms were well underway, but the economic difficulties deepened with GDP falling a further 9.3% during the year.  Mongolia faced the challenge of reforming its institutions and dealing with a very sharp economic decline at the same time.  The World Bank, for its part, sought to help keep things running and to contribute ideas on the way forward.

Implementation proceeded on the projects approved the year before, delivering spare parts, needed supplies, equipment, technical assistance, and yet more spare parts.  The challenges of “transition countries” were still new and little understood, so World Bank staff focused their analytical skills on the nature of the problems being faced, and the approaches that could be considered.  Just how fundamental the questions were can be seen in one paper’s stated objectives:  to describe the main characteristics of the Mongolian economy; to delineate the reforms being introduced for the purposes of adjustment and structural change and to define the nature of assistance that the Mongolian government might need to overcome the economic crisis and promote long-term development. Fundamental, indeed.

A recurring theme of the assessments around that time was the relative speed with which Mongolia was undertaking its reforms.  In the discussion paper cited above, “Developing Mongolia”, the authors wrote “for a country wholly bereft of any capitalist traditions or experience with free markets, Mongolia has shown unusual alacrity in grasping the nettle of reforms. The economy is subject to constraints physical, institutional and managerial few other socialist countries are having to contend with.”

Denizer and Gelb, 1992.  “Mongolia--Privatization and System
Transformation in an Isolated Economy”, World Bank Policy
Research Working Paper 1063.

The Council for Mutual Economic Assistance (CMEA) had disbanded the year before and the breakdown of trading and aid relations was taking its toll on Mongolia.  The impact was put in perspective in a 1992 research paper called “Mongolia - Privatization and System Transformation in an Isolated Economy”. Mongolia’s “geography and economic orientation made disengagement from the Soviet economy and integration into the global market economy very difficult. Some simple comparisons with Bulgaria, the most CMEA dependent country in Eastern Europe, are illustrative. The terms of trade loss to Bulgaria from the end of the CMEA was estimated at 12% of GDP, while Mongolia's loss of Soviet aid alone was 30% of GDP. Thirty percent of Bulgaria's exports were for convertible currency, and these represented 15% of GDP. Mongolia's convertible currency exports were barely 1% of GDP.”

The same report focused on Mongolia’s voucher privatization scheme and the interplay between the speed of contraction in resource availability (due to the loss of aid and breakdown of trading arrangements), and the momentum of movement toward a market economy. The authors argued that after the rapid formulation and implementation of major reforms there was a marked slowdown, when reform timetables were revised and a more gradualist approach adopted. Nevertheless, by 1992 the voucher privatization scheme was underway.  The first chart, as far as I can tell, in any World Bank report on Mongolia focused on the sales of shares for vouchers.

Tomorrow we look at 1993 and Mongolia’s nascent private sector as seen at the time.

*Prepared in collaboration with Tina Puntsag and Boloroo Bayasgalan.

 (Please follow our 25 years in 25 days journey here and on twitter with the hashtag #WBG_Mongolia25th)


Jim Anderson

Lead Governance Specialist, World Bank

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