Economist D.Jargalsaikhan: FILM-MAKING AND FAST FOOD INDUSTRY ARE BOOMING

While the overall economy slides into a recession only 2 business sectors are gaining momentum. These are film-making and the fast food businesses. These are countercyclical businesses. We have kept talking about the crisis, yet we have always failed to address one very important aspect - human resources, personnel capacity building, which in fact is a major resource of any economy. We are posed with a need, an urgent need to develop our human capital and use these resources efficiently in order to be internationally competitive.

How does the fluctuation of exchange rate of US dollar affect businesses?  

We may say that over the past few years we competed with the world market prices of our major mineral commodities. Prices were really high, and the copper recorded thrice higher prices than what it does today. What we earn now and what we gained from trade back then are totally different as we speak. As of today, we have lost close to 30% of the value of the Mongolian national tugrug. The foreign trade income of that period compare to the present was completely different. The Mongolbank had to intervene with huge part of its reserves to attain and maintain the current rate. The economy we have is defined as an open economy? Why? Because this is an economy where in gross output terms, what we export is less than what we import. Our economy depends on foreign trade. And the main tool what which we trade is US Dollars. Even when buying Yuan (China’s RNB) we buy with dollars. Although the bulk of our trade is done with China, to transact with our southern neighbour we still need dollars. This is why the tugrug-dollar exchange rate mirrors our economic reality. It is hard. The rate of MNT is devalued by 30% and there is no guarantee against its further depreciation. There is a possibility to maybe neutralize, slow down and in fact even stop the depreciation – this will happen when and if the prices of our exports bounce back. However, coal, copper and gold prices are not increasing to such levels.

We are living through the years darn with symptoms of Dutch diseases. What needs to be done to prevent such a situation in the future?

The symptoms of the Dutch disease in Mongolia may be compared with a state of intoxication after an excessive intake of alcohol – we are unable to do anything because are “intoxicated“ with revenues from high prices of our minerals. We had talked a lot about a potential danger of “intoxication“. The single cure to the problem rests in diversification of our foreign exchange earning, growing out of minerals to be able to produce something more. Yet that is not simply registering a company, befriending with some politicians and doing small scale domestic business. It is not easy to produce and sell at the global markets the items that are produced by others, and do better than others. This is what competitiveness is all about. What to produce, how to produce and where to market – this is what defines the competitiveness. Besides, the private sector has to be able to make rational choices. Mongolians have always sought state/government support, that there should be a state policy on this and that. The state support should be materialized in standards it sets and in its encouragement of free competition. And it should seek not to intervene to the extent possible. It just needs to motivate the businesses to abide by the set standards, that’s all.

To produce a competitive product, input and output management is to be in place. Input management deals with issues of how much material wealth, knowledge and time are invested in the production. And when we had produced something for consumption, we have to look into what makes that product competitive with the like or same products produced by others and whether it is the best one. This is was in fact referred to as “a complete value chain”. Therefore, we have to work to create a competition spirit.

I would like to give the simplest example. Since almost 1921 revolution we have been talking about the raw materials of agricultural origin. We can not export meat produced in Mongolia to Russian markets. Why? The livestock is to be free of any diseases to be slaughtered for production. However, until recently the Russians used to buy live animals, huge herds of alive animal. And since last year they have been pushing to buy alive livestock! What’s the problem – alive animals are ok, but when slaughtered are not good? Such artificial barriers need to be eradicated. Herders are competing for numbers, and do nothing, can’t do anything about producing final products, maintaining the price level at domestic market and selling its produce out to other markets such as Russia’s. On the other hand, we have 42 million heads of livestock. Let’s assume the half of the livestock is female. But how on earth 70% of the capital city’s milk needs is imported! If we ignore final products, products of animal origin, quite soon they might become even more expensive that coal.

Few people appropriated Mongolia’s underground minerals wealth under the mineral licenses. They share this wealth with bosses-officials, few families become richer and richer. The issue though is in how the money raised through minerals is used for developing Mongolia. From this perspective, the essence of the matter is not in how much we tax, it rests in what we do with the money we make. We need to look and act from different perspectives.

Discussions are being held to abolish the 68% WPT. They say gold companies didn’t make any profits when this tax was imposed?

When a person works and earns profits, it is unreasonable for the government just seize that profit. People work to satisfy their interests and benefits. It just can’t be so that the government would tax out all the profits if the business turns out to be profitable. The fist axiom of business is that the government’s policies must be sustainable. The second axiom: ask the question again – what did we do with that 1 billion USD that was collected through the 68%  WPT. If we failed to achieve anything with this money, if this money was spent for replacing small sedans with large jeeps, and if the only bosses-officials become richer, then what’s the point of collecting so much money? There is no need to enlarge the government. This money should be used for Mongolia by Mongolians to support the production of competitive goods for world markets.

Our major goal is not mining. We should aim at using the money from mining to accomplish concrete tasks and support peoples efforts to better their lives. The issue is not in distributing money.  We can’t give money to lazy people. The benefit transferring structure rests in the established system of Education. Let’s think of a mechanism that links education to a practical work. So if the mining investors invest in schools we could offer certain benefits or exemptions to the investors. Otherwise the government would grab profits through the taxes and squander them for its expenditures.

There is one issue that has to be clear about mining. First of all, a photo of the area should be taken before commencing the mining activities and at the end of the works the photo of the area have to be taken again and have to be compared with the previous state of the area. They both have to look the same. As mining operation starts, money will be earned. A certain percentage of these proceeds are credited in a special fund, in some countries such funds are established for 30-40 years. If environmental rehabilitation is done with this money, the post-mining area will be as fresh and fine as it was before the mining activities. This principle is to be instilled. And those who do not rehabilitate, must be punished. Their money or assets have to be confiscated. We don’t need to be scared of anything when dealing with those who violate this principle.

The government says it would cut its expenditures. But nothing notable is visible as of today. What would you advise the Government on cutting expenditures?  

It is an important issue how the budget is. The budget size is a measurement of what percentage of the total wealth produced by Mongolian people is channelled out through the government. More that half of what is produced is taken by the government, and half of that is consumed by the government and the half is spent out for social welfare and assistance measures. Economists argue about the most optimal ratio or correlation between the two, but one thing is universally accepted by the economists – expenditures must be cut. Many view that 30% is acceptable. In a conference which is held in Washington recently an analysis made on many countries’ economy was presented. A conclusion was made that the total expenditures could make up  17% of the total budget. This is basically the most effective “government participation” in the budget. That also means that we have to cut our expenditures by three times more than what it stands now. Now when the state dignitaries see their budgets shrinking, they all start talking about cutting expenditures. Have they become more clever just over a night? No, over a night they just realized that there is no other way. But they can’t. At any rate they have to cut all their comfies thrice. Do we need this many officials-bosses? Of course we don’t.  The basic role, the most important, central role of the state/government is to ensure social security, peaceful life of its citizens and set the environmental standards. The government doesn’t need to do what the government has to and can do. Government’s meddling in business suggests that they have their stakes vested in businesses.

Is deflation a reality? How is it being expressed?

Inflation is price increase and deflation is price decrease. Deflation is quite a serious matter – people stop buying and that affect the production, so production shrinks, but to a certain extent, because, for instance, people can survive without eating only for a day or so. The presence of deflation also indicates at the change in the consumption structure, meaning that some items of our consumption disappear as we stop consuming them, and some more items appear. This is an indication of a change in the production patterns and structures of the economy.

What are your thoughts on budget revision? Apparently, this is the first time the Government tries to cut its expenditures?

The government does so not because it’s such a good government, it just has no other way as to cut its money. The state always increases its budget whenever possible. “Udriin Sonin” carried an article about the Parkinson Law that a weak person always has two deputies. Either you have to leave the job, or find two deputies and show them how important their jobs are. This is the principle this government follows. The layers of the pyramid are increasing making it even bulkier, even massive.  

But generally, do you think this time the budget revision is more progressive?

The issue is not in being better or worse. It’s just their job, their duty. They have no choices. No talk about the promised money. That race of promising money is out of spectrum at all. The time for fables and bed-time fairy tales is over. Now the baby is awake and he is hungry. The situation has totally changed. As President Obama said, special measures are taken in special times. Hardest decisions are made at hard times. Security, safety and environment are of concern for making that tough decision. Standards pertaining to these 3 should never be changed. What this means is that we were floating in deep waters. Now the level of waters subsides and we are to reach the bottom. But we just can’t hit the bottom. But bottom is being felt here and there – electricity is problematic, infrastructure has stopped. We have no time to loose. Think of tomorrow – how to we end the crisis and what to do after the crisis. We have to act in such a way that a crisis won’t hit us again.

Do you think we can avoid the mistakes after we win the crisis? What to do to be able not to repeat the past mistakes?

That’s exactly what we have to work for. Yes, we can make mistakes, but those mistakes can’t be repeated. We have felt one thing very clearly – first, expenditures must be modest, second – the government must be small and lean, and third, one needs to work to live a better life. The environment where this person can achieve the highest productivity must be in place. I don’t think many Mongolian young people lack energy and will. Just let them work, let them be creative, and don’t impede, restrain their creativity and productivity. To support them, don’t give them cash, money. Give them information, knowledge, education, develop their skills. We have to work visualizing in mind the life we enjoy in 5-year-time from today.

How to keep jobs during the crisis?

There are state monopolies such as the Railroads and Erdenet etc. Such enterprises should place their prime attention on bringing in new technologies. These monopolies need to be dismantled. The private sector makes its own decision about how many people to lay off and how many people to hire. And the main factor here is competition. In competitive places, there are not many people to layoff, because they abide by a principle to produce more with few people, and they have no redundancies to cut. The people who work in the private sector already invest a lot through sincere efforts, strong will and education. Laying off such an employee is harder than selling off machinery or equipment. Therefore, we need to instill the value of valuing personnel, human resources and human capacities. Yet, today these are people who are god rid of first of all, and so easily. Why? Because we have a distorted salary and remuneration system. International organizations and foreign companies pick the most capable Mongolians for their offices.

International organizations do not pay taxes, therefore they can afford to pay high salaries. Foreign companies contract capable Mongolians for many years with high salaries and attractive benefits atop of the salaries. And importantly, when hiring Mongolians, they provide for their health insurance. Therefore, many people join these organizations. At the same time, we have to realize that we have already started competing with foreigners in Mongolia. The distortion rests in excess taxation and the tax revenues are spend for sumptuous needs of the government. In fact the people have to be receiving what they are paid. And the government says that taxes are cut. But in reality, close to 30-40 per cent of what we earn is paid to the government through taxes. 40 per cent! In the past, it was almost half, 50%. Still, 40% is too heavy a burden. There is one serious matter which we can’t ignore. Where are they? This is an issue.  The goal is not in preserving jobs. It’s preserving people. We have to accentuate this.
This is an issue about people, the humans.

Then, if it really comes to laying off, the problem is in those laid off or what?

Of all 4 major assets in the world, the most expensive one is the human capital. If we manage to make this capital work, the returns are several times more than those of other assets.
When we talk and write about the present, we have to be thinking of the future. Einstein once said that a new issue necessitates a new approach, a new solution, a new mentality. This is exactly a time of a new issue to be resolved with a new mindset. With a new way of thinking, we have to visualize our future – not our personal, but the country’s future, the country’s future interests and benefits. This is a matter equally important for everyone – for citizens, for companies, for the government. To draw an analogue, let’s say Mongolia is a boat in an ocean. If the boat has a hole on flooring, everyone would be drowned. This is not the time to look for who is guilty. We have to brainstorm to, first, start the boat, and second keep it moving, advancing, navigating.