Mongolia: Agrarian crisis in the transition to a market economy

Abstract

THE RELATIVELY SHORT TIME SPAN before Mongolia resumed positive economic growth in its transition to a market economy has been attributed to a successful and rapidly implemented privatisation and market liberalisation programme. Since 1990, when the transition to a market economy began in Mongolia, a great number of economic and political reforms have indeed been undertaken. Compared with most of the former Soviet Central Asian republics, which gained independence in 1991, Mongolia advanced rapidly in the process to transform its command economy, with policies of deregulation, privatisation and market liberalisation, while simultaneously introducing political democratisation (see Spoor, 1993 and 1995). However, after the first turmoil of economic and political reforms and the dramatic changes in its external environment, by 1992 the Mongolian economy was in a serious crisis, with urgent problems such as a near shut-down of the crucial energy sector (Lee, 1993).1 Although the annual decrease in gross domestic production (GDP) slowed down in 1993 to 1.3%, over the period 1990-93 GDP contracted in total by 25.2% (see Table 1). More comprehensive policy reforms were introduced from 1993 onwards, in particular in banking and government finance, although a substantial-state dominated-'soft budget' sector still remained (which caused pressure on the government to keep on providing cheap credit).2 By 1994 the Mongolian economy's macro-stability substantially improved, with a more manageable level of 66.3% inflation, while a positive growth rate of GDP of 2.1% was reported (MRI, 1995). Was this indeed the simple consequence of a blueprint reform programme which apparently worked in Mongolia and not in other FSU countries? In order to be able to qualify this mainstream-and rather superficial-conclusion, this article will highlight three factors that throw more light on the specific circumstances and complexity of the transition in Mongolia. Firstly, the dramatic import reduction that occurred had a far-reaching impact on the economy. The Soviet aid that financed most of the turn-key projects and essential imports during the 1980s (at the level of 25-30% of GDP) was actually stopped in 1990-91 (Lee, 1993, p. 624). This import squeeze rapidly reduced (and finally removed) the large trade deficit, but induced dramatic negative multiplier effects on industry and capital-intensive-and import dependentagriculture. Secondly, while the Mongolian economy suffered from galloping inflation during the 1990-93 period, the government rather quickly reduced its budget deficit (and share of government expenditure in GDP) by severely cutting current budget expenditure and improving tax collection. However, the still sizeable deficit that is