Privatization in Mongolia By Dulguun Batbold

Outline ‡

Country background

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Privatization in Mongolia

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Share distribution model

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Auction model

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Overall effects

Country Background: Overview ‡

Population: 3 million (less than 2/3 of MN)

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Land: 604,000 sq miles (7 times larger than MN)

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Nomadic heritage

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Political system: Parliamentary democracy

Country Background: Planned Economy ‡

1924-1990 „ „ „

1921 revolution Communist/socialist regime Close ties to the former Soviet Union

Country Background: Planned Economy ‡

Government controls the economy: „

Where you work

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What you study

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How much you get paid

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How much you pay, etc.

Country Background: Planned Economy ‡

Government owns practically everything „

Factories

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Movie theaters

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Department stores

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Apartment buildings

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Universities

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Livestock, etc

Country Background: Transition ‡

1990-Present „ „

Break-up of Soviet Union Parliamentary democracy

Country Background: Transition Goals ‡

Soviet Union collapse linked to its failed command economy

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Necessity to shift to a market economy: „

Promote private enterprise and entrepreneurship => Privatize gov’t assets

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Establish market incentives => Price liberalization

Privatization: Questions ‡

How best to implement privatization? „ „

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How to transfer assets to private hands: sell or give away? Is it better to do it at once or gradually over time?

No definitive answers from economic theory „ „

Helps to look at experience of different countries We will study experience of Mongolia

Privatization: Objectives ‡

Privatization program should aim to: „

Create environment for efficient market mechanism

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Promote economic growth and raise standard of living

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Be mindful of equity (fairness)

Privatization: Two Models ‡

Mongolia experimented with two different methods to dispose of public property: 1.

Give away: share distribution model (1990-1996)

2.

Sell: auction model (1997-2000)

Share Distribution Model: Overview ‡

Each citizen received free of charge 3 red and 1 blue vouchers

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Tradable red vouchers could be used to buy shares in small enterprises

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Non-tradable blue vouchers to bid for ownership share in large enterprises

Share Distribution Model: Rationale ‡

Low level of domestic financial savings

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Principle of fairness

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Lack of a well developed market

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Absence of adequate methods for valuing assets

Share Distribution Model: Effects ‡

Highly equitable ex-ante distribution of wealth „

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High dispersion of ownership „ „ „

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Equal opportunity to benefit from privatization

Lack of unity among shareholders No effective control over management Some enterprises had 20,000 small shareholders (<1%) spread all over the country

No improvement in efficiency „ „ „

Same managers No outside investors to modernize operations Lost economies of scale (loss of COMECON markets)

Share Distribution Model: Effects ‡

No increase in competition „

Central planning legacy – one major producer in each industry ‡ ‡ ‡

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One meat factory (Makh-Impex) One major bakery and flour mill (Altan Taria) One brewery and distillery (APU), etc.

Small domestic market ‡ ‡

Low population Small economy

Share Distribution Model: Effects ‡

Increased inequality (poverty rate 1/3 in 1995) „ „

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Insufficient education and knowledge (only 60% of red and 90% of blue vouchers used) Profit motive of new owners - downsizing of workforce and dismantlement of old social safety nets

Contributed to high inflation (325% in 1993) „ „

Issuing shares for free was equivalent to expansionary monetary policy Profit motive of new owners – price increases

Share Distribution Model: Summary ‡

Pros

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Cons

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Fair ex ante distribution of wealth

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Lack of managerial control

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Fast pace of privatization?

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Did not lead to increased competition

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Increased poverty and inequality

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Inflation

Auction Model: Overview ‡

Learned mistakes from the first period (19901996)

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A functioning stock market existed by then in the country

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Cash privatization – sale of government assets through auctions, tenders, flotations etc.

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Aimed to create ‘real’ owners with controlling stakes in companies

Auction Model: Positive Effects ‡

Clear control of the privatized enterprises helped increase their productivity „ „

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All three companies mentioned earlier have turned around from losses to profits after privatization Change from shortages and rations to full shelves

Increased competition „

All three monopolies mentioned earlier now have wellrun, wholly private competitors

Auction Model: Negative Effects ‡

Increased scope for corruption „ „ „ „ „

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Incomplete and weak regulatory environment No financial reporting and weak auditing Nontransparent auction procedures Leveraged buyouts through illicit government-controlled loans Mining licenses

Highly uneven distribution of income

Long-run Effects of Privatization ‡

Private entrepreneurship thriving

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Public participation in the economy significantly decreased Before After Private

Public Public

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Private

Robust economic growth (Real GDP growth) 15 10 5 0 -5 -10 -15

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Market economy at work

Market economy at work

Market economy at work

Privatization at work

Lessons learned? ‡

Privatization is not a panacea: „ „ „ „

Not sufficient to guarantee a well functioning market system Tradeoff between equity and efficiency Takes long time to yield results Effects are often unpredictable

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Beneficial in the long run?

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Going forward: „ „

Involve impartial third parties such as IMF and World Bank to increase transparency Attract foreign investment and know-how

Questions?

References ‡

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Foster, Darin. 1998. Mongolia Country Profile. Political Economy Seminar Presentations, University of Texas, Austin. Accessed on August 18, 2008. http://web.austin.utexas.edu/chenry/cboone/archives98/polecpapers/0022.html Jermakowicz, Wáadysáaw, and Piotr Kozarzewski. 1997. Privatization in Mongolia. Paper prepared for the project “Support for Economic Transition in FSU Countries” No. 103, Center of Social and Economic Research, Warsaw. Korsun, Georges, and Peter Murrell. 1995. Politics and Economics of Mongolia's Privatization Program. Asian Survey 35(5): 472-486. Nixson, Frederick, and Bernard Walters. 2006. Privatization, Income Distribution and Poverty: The Mongolian Experience. World Development 34(9): 1557-1559. World Bank. 1997. The Consequences of Large-Scale Privatization in Mongolia. Accessed on July 25, 2008. http://www.worldbank.org/html/dec/Publications/Abstracts97/08t rans/trans5.html

Comparisons ‡

Goyo vs Gobi

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SBB vs APU