Scores for Prior Years:

Following decades of communism, Mongolia abandoned its Soviet-model economy in the late 1980s after Moscow ended subsidies that accounted for a third of GDP.

Mongolia opted instead to construct one of the region’s most open economies, abolishing capital controls and most import duties and swiftly privatizing state-con-trolled assets. Despite these strides, however, Mongolia’s economy still suffers from several structural weaknesses. Its underdeveloped infrastructure discourages invest-ment.

Tax collection is horribly inefficient, resulting in persistent budget deficits. More important, the banking system is in disarray; in 1999, the total number of banks fell from 18 to 12, with bad loans accounting for 40 percent of total assets. As a result of all these problems, Mongolia suffers from high rates of poverty and unemployment.

In July 2000, dissatisfied with the governing democratic coalition, the people overwhelmingly voted the ex-communists back into power, giving them 72 of 76 seats in the unicameral parliament— virtually guaranteeing that anything the party agrees upon will pass.

The Mongolian People’s Revolutionary Party has vowed to slow the pace of privatization programs that it deems inimical to the economy; unfortunately, this includes the much needed deregulation of the bank-ing sector.

Government expenditures and revenue from state-owned enterprises are decreasing. As a result, Mongolia’s overall score is 0.15 point better this year.

TRADE POLICY

Score: 1– Stable (very low level of protectionism)

Mongolia abolished virtually all forms of tariffs and taxes on imports in April 1997. The average tariff rate is less than 1 percent. The government has streamlined the customs bureau, making it much more efficient, and no longer maintains any significant non-tariff barriers.

FISCAL BURDEN OF GOVERNMENT

Score— Income and Corporate Taxation: 4– Stable (high tax rates)
Score— Government Expenditures: 3– Better (moderate level of government expenditure)
Final Score: 3.5– Better (high cost of government)

Mongolia has a top income tax rate of 40 percent and a top corporate tax rate of 40 percent. (Information on the marginal tax rate faced by the average taxpayer is not available; therefore, Mongolia’s income and corporate taxation score is based solely on the top income and corporate tax rates.) In 1998, government expenditures equaled 23 percent of GDP, down from 34.2 percent in 1996. As a result, Mongolia’s fiscal burden of government score is 1 point better this year.

GOVERNMENT INTERVENTION IN THE ECONOMY

Score: 2.5– Better (moderate level)

Government consumes 17.5 percent of GDP. In 1998, Mongolia received 5.6 percent of its total revenues from state-owned enterprises and from government ownership of property, down from 8.5 percent in 1996. As a result, Mongolia’s government intervention score is 0.5 point better this year.

MONETARY POLICY

Score: 4– Stable (high level of inflation)

From 1993 to 1999, Mongolia’s weighted average annual rate of inflation was 13.1 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT

Score: 3– Stable (moderate barriers)

Mongolian legislation provides for the protection of private property and foreign investments from government expropriation. New laws also provide equal treatment for Mongolian-owned and foreign-owned companies, and restrictions on currencies
and profits have been removed. However, there is do-mestic resistance to foreign investment in privatized industries. Although no industry is formally restricted, the government maintains a list of industries— including liquor, securities, animal skins, pharmaceuticals, and chemicals— in which foreign investment is discouraged. Foreigners may not own land, but they may lease it. In January 2000, the government established a foreign investment agency with the goal of streamlining the foreign investment process.

BANKING AND FINANCE

Score: 3– Stable (moderate level of restrictions)

Mongolia’s financial sector is underdeveloped, with the over-whelming majority of transactions taking place on a cash or cash-equivalent basis. The government continues to dominate the banking sector; although it has identified the need for reform and has drawn up a plan to privatize three commercial banks, with plans to invite foreign bidders, the parliament thus far has blocked all such efforts. “ In 1998,” according to the Economist Intelligence Unit, “ the controversial merger of the state-owned Renovation Bank and the private Golomt Bank brought down the government, and was later reversed.” In January 2000, the central bank forced two state-owned banks into liquidation— the first time this had occurred— and insti-tuted tougher capital requirements for all banks. The number of banks in the country has fallen from 18 to 12, and more mergers are likely.

WAGES AND PRICES

Score: 3– Stable (moderate level of intervention)

The government controls the prices of electricity and fuel products. The Economist Intelligence Unit reports that the government rationed fuel because of the disruption of supply from Russia last year. The government also influences the price of electricity and energy services by negotiating the price with suppliers. Mongolia maintains a minimum wage.

PROPERTY RIGHTS

Score: 3– Stable (moderate level of protection)

Expropriation of existing private property is unlikely, and the government has instituted new laws to protect property owners. However, the enforcement of laws protecting private property is inefficient. According to the U.S. Department of Commerce, “ While there is no reason to believe that the judiciary is unduly influenced either by the government or by any individual or entity in Mongolia, it is important to note that there is a countrywide lack of expertise in Western business practices that certainly extends to judges. In addition, many of the recent laws in Mongolia have not been thoroughly tested.”

REGULATION

Score: 4– Stable (high level)

The vast number of regulations that have been passed over the past several years imposes a sizeable burden on business. Combined with the continuing restructuring of the government itself, it presents what the U.S. Department of State terms “ a bureaucratic maze.” The Department of State also identifies “ petty corruption” as a problem, and the Economist Intelligence Unit reports that the government has established a parliamentary working group to address the corruption problem.

BLACK MARKET

Score: 3– Stable (moderate level of activity)

Mongolia’s government buys many goods through its complex procurement program, and this distorts the prices of food commodities. The result is a black market for these and other government regulated goods. Smuggling also poses a problem for example, in the transfer of Russian medicine over the border.

2001. Index of Economic Freedom.

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