Below are excerpts from a university paper on development in Mongolia. For readability reasons, the analysis of indicators and hypothesis testing is left out. Written by Daniël
Introduction
Worldwide it is acknowledged that there is a division between countries related to the level of development. Development is a broad and multidimensional subject (Szirmai, 2015). It can be explained from a purely economic view, but also in relation to social and political aspects in a country. This report deals with development in Mongolia, which, according the World Bank, can be seen as a lower-middle-income country, with a gross national income (GNI) per capita in US$ of 3,270 (World Bank, 2019). This East Asian country has recently, in 2010, also received aid from the state of Germany, thereby being one of the major donors (OECD, 2011). Although the percentage of aid to Mongolia is below the target, flows of money are still important for revenues and resources in developing countries.
As will become clear further in the report, development is mainly assessed as the growth of the gross domestic product (GDP) per capita. However, this is a very one-sided view on development, hence more perspectives will be dealt with. Mongolia’s booming economy is mostly a result of the mining sector, but the country still deals with income and gender inequality, and politically there are some governance issues (OECD, 2011; Osborne, Cane, Cousins, Chuluunbaatar, 2015). Various literature on development points out that improvements in poverty reduction, gender equality and governance are also essential aside from an increase in GDP per capita (Kaufman, Kraay & Mastruzzi, 2010; OECD, 2011; Szirmai, 2015).
Despite the industrialisation as a result of the mining sector, donor countries and organisations are crucial in complementing Mongolia’s sustainable development (OECD, 2011). Hopefully, all the information presented here contributes to a better understanding of a donor country can assist in improving circumstances for development. Even though there is quite some literature on development and sources on development specifically in Mongolia, links between theoretical and practical information have not often been linked for this case. Due to a variety of sources and indicators to measure development, new insights might be found. These insights provide valuable information that give direction to international cooperation to achieve worldwide a similar level of development. All in all, this paper is structured around the research question: which factors influence economic growth and how can a better understanding of these factor enhance development in Mongolia?
Theory on development
The following part synthesizes theories regarding development through various dimensions combined with concrete information in order to answer the research question of which factors influence economic growth and how can a better understanding of these factor enhance development in Mongolia. These dimensions include the growth of GDP per capita as a main indicator of development (Szirmai, 2015). Other dimensions are structural change, looking at importance of agriculture and industry in the economy. Then, shortly some aspects like poverty reduction and gender equality are described. Other social welfare indicators, like literacy and life expectancy are left out as these aspects have a positive trend in numbers, hence positively affecting development, and in-depth description will not provide astounding information (Szirmai, 2015; World Bank, 2019). Lastly, some political aspects such as patronage and accountability are described (Osborne et al., 2015; Szirmai, 2015).
To start with, development can be seen as economic growth, measured by a rise in the national income per capita. Defining it first is difficult as most sources point out various dimensions to and measurements of development rather than giving a single definition (Szirmai, 2015). Often it is seen as an increase of productive capacity due to improved living standards through the two dimensions of the (1) short-term fight against poverty and (2) long-term improvements in social or economic elements (Szirmai, 2015: 1). Consequently, this paper takes development as growth in GDP per capita, influenced by the two dimensions. Per capita means that the total income is divided by the population number. The gross national income (GNI) per capita is used for a comparison across countries, so it does not tell how much income the country actually had. Sometimes these measures are combined with the purchasing parity power (PPP), which better measures the living standard as it tells how much one can spend with a certain amount of a currency (Szirmai, 2015).
Overall, the most important part of Mongolia’s GDP is derived from the industry sector with a value added percentage to the GDP of 38.3 (World Bank, 2019). One part of the industrial sector to be highlighted in this case is mining. It is definitely important for Mongolia’s future growth, being the biggest contributor to it (Khan & Brink, 2012; Osborne et al., 2015; World Bank, 2019). In 2014 the sector was hit hard due to a fall in global commodity prices and a declining foreign direct investment (FDI), and the slow recovery was countered by government overspending and decreasing revenues from exports (MMC, 2018; Osborne et al., 2015). Nevertheless, it is expected that on the longer term the sector has positive prospects, especially since the country supposedly possesses 1.5 trillion-dollar worth of mineral resources (MMC, 2018). Expanding the sector in its current size is possible due to growing copper demands, as well as new technologies and experts’ advice from other areas in the world.
In general, the sectors of agriculture and industry play an important role in development as a structural change from the first to the second (Rodrik, 2013; Szirmai, 2015). Industrialisation is seen as important for development, enabling a shift from the agricultural sector with a low productivity to the industrial sector with more growth in combination with technological change. Of course, it is still important that the agricultural sector provides enough output, but at the point where enough food supply is present, surplus labor can go to the industrial sector (Rodrik, 2013; Szirmai, 2015). Also, industrial goods have a greater income elasticity of demand, while a higher income will not result in an increased demand for agricultural goods. Following Engel’s law, a high proportion of income spent on agricultural products would imply a lower GDP per capita.
As a result of industrialization, there is a distinction between a traditional-rural sector and a more modern-urban sector. This creates a dual economy in which most accumulation of human capital, innovation and productivity growth occurs in the industrial sector (Rodrik, 2013). Even though higher developing countries eventually experience a shift to the services sector, the industrial sector still has a high productivity and an increasing scale of production (Szirmai, 2015). Moreover, technologies used in services are often the outcome of technological advancement in the industrial sector. Since Mongolia’s development mainly relies on mining and overall industry, a focus is on the shift from agriculture to industry (Osborne et al., 2015). In essence, the first hypothesis is: (h1) a higher importance of the industrial sector compared to the agricultural sector leads to economic growth. The first part of the hypothesis can be measured by comparing in the value added percentage to the GDP for both sectors in a ratio to weigh off the importance of them both.
To be specific, mining is important for Mongolia’s economic development as it leads to employment opportunities, infrastructure development and the government legally regulating the sector (Osborne et al., 2015). Nevertheless, the booming mining sector faces the threat of the Dutch disease (Khan & Brink, 2012; Szirmai, 2015). This implies that mining is mainly functioning due to receiving foreign money and being a huge sector resulting in the suffering of other economic sectors, but that there is also too much dependency on it (Szirmai, 2015). To prevent a possible collapse of this major sector, economists from the World Bank cooperated with the Mongolian government in making a law regarding government savings and controlled spending and borrowing (Khan & Brink, 2012). In either case, mining is an essential part of Mongolia’s structural change and can be measured through the adjusted savings of natural resource depletion in percentage of GNI. Hence the second hypothesis: (h2) the depletion of natural resources contributes to economic growth.
To continue, mining also leads to one hand increasing income inequality and on the other hand decreasing poverty in Mongolia (Osborne et al., 2015; Theunissen, 2014). The latter becomes clear when one looks at the percentage of a population that daily has a certain amount of money to spend in relation to relative price levels between countries. As for income inequality, each segment of a population should have the same amount of income, but generally this is not the case (Szirmai, 2015). Income equality leads to a more inclusive growth, making all groups in society benefit from development. Furthermore, both in case of Mongolia and generally in developing countries, inequality exists between the rural and urban areas. Usually the latter areas have a more modern, industrial sector with a higher productivity and technological advancement (Szirmai, 2015). Therefore, it is important that a distinction is kept in mind. All in all, the third hypothesis states: (h3) poverty and inequality, particularly rural-urban, have an influence on development. To measure, the Gini coefficient shows income inequality through to what extent each part of the population has an equal part of the overall income (World Bank, 2019). As this does not take into account the rural-urban difference, the difference in rural and urban poverty headcount ratio at national poverty lines can be used.
Despite the rural-urban inequality, Mongolia seems to be doing well in terms of gender equality, which is both a goal in itself and essential for economic growth (Dijkstra, 2019; Osborne et al., 2015). Women’s equality and gender empowerment is promoted by national laws and there is a quota of 20% for parliamentary positions to be held by women. In reality, there is a lack of economic empowerment, due to the level of education not being translated into higher salaries or positions (Osborne et al., 2015). A major concern on top of that is sexual harassment, which is often not recognized as a crime. Generally, if there is gender equality in education and the labor market, this leads to more economic growth. The main drivers are an improvement of skills, better performance of the labor market and a higher average income (Dijkstra, 2019). It also leads to a more varied input in policy choices and hence better political decisions. All things considered, the fourth hypothesis is: (h4) gender equality is important to achieve development. As indicator the CPIA gender equality rating can be used, which shows equality of men and women in education, health, the economy and protection under law (World Bank, 2019).
In addition, development has a political side as well. Historically, Mongolia transitioned from a communist state to a democratic one, but the impact of this is not essential for assessing development in the recent fifteen years (Osborne et al., 2015). Nevertheless, political aspects should be taken into account. Two main governance constraints for development in Mongolia are patronage and weak accountability plus transparency related to corruption. The reason of weak accountability and transparency is linked to the relationship between the national, sub-national governments and citizens. The sub-national governments have actually little power and derive their resources from the national government, weakening accountability towards citizens (Osborne et al., 2015). There is little authority over budgetary issues and citizens participation is limited. Regarding patronage, even though democratic principles and values are officially present in Mongolian institutions, they are not always present in the decision-making. Positions are given and decisions are made based on political affiliation and kinship ties.
On the whole, many developing countries suffer from issues of corruption, weak accountability and low transparency. The first concept is often to defined as the use of public power to some extent for private gains (Kaufman et al., 2014: 4). Usually, corruption makes people invest in rent-seeking activities for their own benefit. Moreover, it negatively affects investments and decreases tax revenues that could be used for development (Szirmai, 2015). It does not mean corruption makes growth impossible, but often it is an obstacle. This is mostly the case when there is no transparency which shows how decisions are being made and resources are used. Therefore, the presence of transparency diminishes the negative effects of corruption. Especially when executives in the public sector can be held accountable, corruption can be countered to ensure the use of resources and power for economic growth (Szirmai, 2015).
Related to transparency, accountability and corruption is the issue of patronage. It refers to personal rule and the use of power and/or wealth in the benefit of a group of adherents (Szirmai, 2015). This issue impacts government effectiveness in delivering public services of high quality independent of various pressures (Kaufman et al., 2010). Not only does patronage negatively affect the quality of public administration, it also counters governance being rule-based. As a result, it is difficult to set out pathways to development (Osborne et al., 2015). All these political issues can be combined to the concept of good governance, implying the presence of proper access to and exercise of authority (Szirmai, 2015). Good governance on itself creates a stable environment for investments and businesses. All in all, the last hypothesis can be derived: (h5) good governance has an effect on economic growth. To test this, all six Worldwide Governance Indicators (WGIs) are used: government effectiveness, rule of law, voice and accountability, regulatory quality, political stability, and control of corruption (World Bank, 2019).
Development recommendations & conclusions
This final part of the report is meant as an advice or policy recommendations for a development strategy in Mongolia, and the role of foreign aid. It is clear that Mongolia’s economy benefits from the mining sector, but that measures are needed to sustain this sector, and actions need to be taken to decrease inequalities and improve the political system (Khan & Brink, 2012; Osborne et al., 2015). Regarding income inequality, there are actually welfare programs in place, and the OECD already published a report on how to improve foreign aid based on the principles of the Paris Declaration (OECD, 2011; Onishi, 2015). Information on both the programs and aid report will be incorporated in the recommendations below regarding various factors that contribute to or hinder economic growth.
Firstly, the Paris Declaration set some principles that should be taken into account regarding aid. These principles include country ownership, making policies less donor-centric; alignment with national development strategies and national systems, while improving predictability; harmonization, so common arrangements among donors or partner countries; and mutual accountability so both Mongolia and other donor countries can be held accountable by the public (OECD, 2011; Szirmai, 2015). These measures improve development, especially in relation to poverty reduction. Regarding predictability, for instance donor country Germany has contributed more aid money than calculated. Improved calculations will help the Mongolian government to better estimate development results. In addition, more focus should be on giving budget support instead of other program-based approaches that are less in line with government priorities and counter Mongolia’s governmental authority (OECD, 2011). Furthermore, more attempts could be made to set up coordinated donor missions.
Secondly, Mongolia itself is spending a relatively high amount of its GDP (2.78%) on social welfare programs, compared to other countries in East Asia and the Pacific (Onishi, 2015). For example, there are cash transfers like the Child Money Program. Every month cash transfers go to children under 19, which is meant as redistribution of the wealth created by the mining industry. Overall, the programs provide 34% of the benefits to the poorest 20% of the population (Onishi, 2015). Even though this will have a positive effect on decreasing poverty, the government of Mongolia should also pay attention to the difference in rural and urban poverty (Theunissen, 2014). Donor countries could make effort to coordinate aid programs with Mongolian officials and explicate the need of paying attention to rural-urban income inequality. Another inequality to explicate is gender inequality. Despite national laws it is utterly necessary to ensure that in practice women are not discriminated in the labor market and harassed, as stressed in the fifth Sustainable Development Goals (UN, n.d.).
Thirdly, based on theoretical understanding and the regression analysis, some points can be made regarding structural change and political circumstances. Although the booming mining sector is expected to contribute to economic growth in the future, there should be more thought on decreasing dependence on this sector solely (Khan & Brink, 2012). The laws which came into existence in cooperation with the World Bank’s economists to regulate a properly maintained mining sector should be observed by donor countries. At the same time, donor countries should also observe political factors that hinder growth. Even though the analysis has not provided fully solid confirmation on the estimated relationship between good governance and economic growth, both general theories and practical information on Mongolia’s political circumstances stress importance of good governance (Kaufman et al., 2010; Osborne et al., 2015; Szirmai, 2015). Especially ensuring decisions being rule-based will decrease corruption, plus increase transparency and accountability despite patronage. When providing aid, donor countries should implicitly take care of money flows and decision-making in welfare programs. That way, alignment is still in place, without pushing for political improvements and decreasing aid support with the risk of it having no effect on political issues (OECD, 2011).
To conclude, improvements in aid can be reached by living up to the Paris Declaration and Mongolia itself continuing its social welfare programs, preferably with an extra focus on rural-urban inequality (OECD, 2011; Onishi, 2015). By opposing income and gender inequality, inclusive growth is more likely to take place. Furthermore, a sustained and responsible structural change will help Mongolia’s future growth, on the condition that good governance will increasingly prevail (Osborne et al., 2015; Szirmai, 2015). Hopefully, donor countries will take these recommendations in consideration in dealing with aid flows to improve development in Mongolia.
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