1994: Assessing the real costs of the economic contraction

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ImageToday we look at 1994.  At last the economic collapse of the early 1990s bottomed out and growth resumed.  The economic hardship of the first years of transition, however, had taken its toll.  A study on financing of education found that “Between 1990 and 1992, government expenditures and education expenditures were cut by 57.6 percent and 56.0 percent, respectively. The decline in public spending was more than three times as much as the decline in GDP. In 1993, the allocation to education was reduced to 15.2 percent of the state budget, and to 3.8 percent of GDP.”

Enrolments fell generally, but herders' children who attended boarding schools were affected more severely than other children. “Enrollment of boarders in 1992 was only half of that in 1989. In sum, those who bear the brunt of structural adjustment are rural children.”  The challenge of educating herders’ children remains to this day a part of the World Bank program in Mongolia.

Another study of vulnerable groups, carried out together with Save the Children (UK), argued that “since the social realities are now changing and the needs may be different, the advantage could be seized to change the focus and encourage a community based approach to development.” The community based approach would prove an enduring part of the partnership in Mongolia.  And among other policy recommendations of the 1994 study, this one continues to be debated today: “Methodologies for targeting the poor should be developed. The previous system attempted to provide for all and thus limited the resources available to each. However, while the government has defined vulnerable groups by category, not all of those in each group could be called vulnerable. An equitable means-testing mechanism needs to be implemented, but can only be done when the local social and administrative system is adequately understood.”  (The 2015 study of social welfare programs made a similar argument.)

While the resumption of growth gave space to refocus on the education system and on vulnerable groups, the rate of growth itself remained a paltry 2.1%, and foreign direct investment was a negligible 0.7% of GDP.  The economy was sputtering, but needed a strong resumption of economic growth.  Neglected infrastructure needed attention, and to this end the Transport Rehabilitation Project sought to arrest the deterioration of the quality and quantity of transport services in railways, urban transport, trucking and roads.  Transport infrastructure, however, can only take you part way there.

A 1994 study on Priorities in Macroeconomic Management, found a few reassuring signs of recovery: new entries in certain sectors, expanded exports, and, notably, increased trade with the neighbor to the south: “China now imports close to a third of Mongolia's exports when a decade ago trade between these two countries was negligible.”  That trend would certainly continue.

Ulaanbaatar's “Black Market” in 1994. Photo by James H. Anderson

The report also sounded some warnings: “The battle against inflation is far from over. In fact, the monetary base has been growing by over 100 percent per year in recent months due to the rapid increase in directed/subsidized credits to some Government enterprises…”  Raising concerns about the banking system, the sharp rise in real interest rates, and other factors, the report highlighted what is at stake:  “Real wages halved between 1990 and 1992, and household data suggest that they declined by a further third in 1993. According to official accounts, the proportion of the population living below the poverty line climbed from 16 percent in 1992 to 26.5 percent in April 1994.[*] About one in every four poor persons belongs to a family where not a single member is employed. … These worrying trends in poverty and unemployment place a high premium on restoring growth in Mongolia.”

Next we look at 1995, the year of the first project on poverty alleviation for vulnerable groups.
* Poverty lines were lower in 1994 than now, so the reported rates are not comparable to those estimated recently.

Prepared in collaboration with Boldbaatar Shagdar.

 (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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