Mongolia
Poverty Reduction Strategy Paper

The report provides the details of the assessment on Mongolia’s Poverty Reduction Strategy Paper. It describes the Economic Growth and Poverty Reduction Strategy (EGPRS), which presents main policy directions of the government with a focus on economic growth acceleration and poverty reduction efforts. It describes the transition period of Mongolia, demographic trends drawn from the household income and expenditure survey, the poverty situation, gender inequality, and poverty reduction strategy. It also reviews the promotion of economic and financial stability and provides a strategy for monitoring the policies.

Abstract

The report provides the details of the assessment on Mongolia’s Poverty Reduction Strategy Paper. It describes the Economic Growth and Poverty Reduction Strategy (EGPRS), which presents main policy directions of the government with a focus on economic growth acceleration and poverty reduction efforts. It describes the transition period of Mongolia, demographic trends drawn from the household income and expenditure survey, the poverty situation, gender inequality, and poverty reduction strategy. It also reviews the promotion of economic and financial stability and provides a strategy for monitoring the policies.

CHAPTER 1: THE TRANSITION PERIOD IN MONGOLIA

I. The Macro-Economy

1.1 The withdrawal of former Soviet Union assistance and collapse of COMECON left the Mongolian economy in an extremely difficult situation at the beginning of the 1990s. During 1990-1992, GDP decreased by more than 20 percent. The level of national savings rapidly declined, from about 35 percent of GDP in 1990 to 26 percent in 1995. Imports also decreased substantially, falling from US$924 million in 1990 to US$ 388.4 million in 1992. Inflation reached its peak of 325.5 percent in 1992, accompanied by growing unemployment. The number of the unemployed actively seeking jobs reached 54 thousand, as registered at the Labor Regulation Office. Multi-million rouble loans and assistance from the former Soviet Union abruptly ended in 1991.

1.2 To address this economic situation, the Government of Mongolia launched a series of reforms starting in 1991. These reforms included: the phased liberalization of state-controlled prices and tariffs, privatization of state owned enterprises, establishment of a two-tier banking system, liberalization of foreign trade, adoption of a floating exchange rate system, implementation of tight monetary and fiscal policies aimed at reducing inflation, adoption and enforcement of laws to encourage fair competition, and creating a favorable environment for private sector development. Since 1993, and as a result of the policies and actions undertaken by the Government, the economy began to recover.

Table 1:1:

Main economic indicators, 1990-2001

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Preliminary

Source: Statistical Yearbook, Mongol bank Bulletin

1.3 Macroeconomic stabilization which emerged during 2000-2002 has led to gradual improvement in overall economic performance and creating fundamentals for poverty reduction.

1.4 Economic growth: In the past decade GDP has fallen, but the economic situation was stabilized and the trend reversed from 1994 onward. The GDP growth rate increased to 2.3 percent in 1994 from a decline of 9.5 percent in 1992, and has remained positive since then. Importantly, the industrial sector (including the mining sector), which consistently declined at a rate of about 6 percent per annum revived, delivering 20 percent growth in 2002. The change brought up the share of this sector in GDP to 26.6 percent. In the same period, the major economic sector, agriculture, failed to realize its growth potential. The winters and springs of 1999-2002 brought extreme harsh climatic changes: droughts and excessive snowfalls led to Dzud which killed 3.5 million heads of livestock in 2000 and 4.7 million in 2001. In these years, 2.7–3.0 million female livestock miscarried. The total herd of 33.6 million heads of livestock in 1999 was reduced to 26.1 million in 2001, and 23.9 million by 2002. As a result, agricultural production fell, economic growth slowed and many thousands of herders were hit hard and left without any sources of income. This dependence on agriculture, the cornerstone of the economy, underlies the Mongolian people’s vulnerability to climatic events. Economic growth of a mere 1.0 percent in 2001, and 3.9 percent for 2002 (preliminary estimates) is a direct result of such vulnerability. Empirical evidence suggests that if there were no Dzud effects, economic growth would have reached about 8 percent per annum in recent years.

1.5 Mongolia’s economic base was fundamentally agricultural in character during the central planning period: between 1960 and 90 the economy was classified as agro-industrial. Equally in this period, all property was 100 percent owned by the state and cooperatives. Since 1990 however, restructuring and intensive privatization has led to fundamental changes in corporate structure and this along with changes in reporting, coverage and methodologies, is reflected in current summary statistics. Despite this process, whereby the economy is becoming more open, with capital and labor innovations brought by technological advance, the impact on the economy has not sufficient to lift performance; the contribution of GDP growth of these factors is estimated to be very low at only around 20 percent. This conclusion along with the estimated long term growth potential of the economy is derived from an empirical background paper prepared by the National University of Mongolia with financial support from the Japan International Cooperation Agency (see Box 1.1).

The impact of multifactor productivity on economic growth (empirical study)

The objective of this study was to assess the contribution of the main factors of production to economic growth. In contrast to previous studies of economic growth carried out for Mongolia, human capital was considered as an independent causal variable. In addition a physical capital data set was developed in accordance with international standards The main conclusions are based on an analysis of data for the period 1980-2001. The study consisted of 2 parts: analysis and empirical evaluation of secondary and collected data – and second development of policy recommendations.

From the empirical evaluation study it was concluded that a 1 percentage increase in physical capital would contribute a 0.56 percent increase in growth, whilst 1 percentage increase in labor, a 0.29 percent increase in growth, and a 1 percentage growth in human capital would result in a 0.15 increase in economic growth. Yet our analysis of factor productivity also showed that the components of average economic growth in the period (totaling 0.5 percent) were capital - 0.1 percent, labor 0.4 percent, and human capital 0.2 percent. Thus we can conclude that although the elasticity of capital is much higher, it has offered only a very small contribution to growth in recent years. Indeed, human capital has contributed twice as much to growth, as physical capital.

This contrasts somewhat with the experience of developed countries, where human capital has been found to be a very significant factor contributing to economic growth, but for Mongolia human capital appears to have an elasticity of only 0.15. One of the reasons explaining the difference this might be that the wages of highly educated and qualified staff are kept below the value of their marginal product. Potentially therefore the underestimation of educational factors may be adversely affecting the allocation of resources, which in turn would result in lower economic growth in comparison with potential.

1.6 External economic factors: Factors such as the collapse of the former eastern-bloc economic cooperation and trade system (COMECON), a narrow export base deterioration of the terms of trade and the Asian financial crisis have upset Mongolia’s external economic conditions and affected its balance of payments position. A foreign trade deficit of 32 million US dollars was recorded for 1992, this initially reversed to a large surplus balance of 102.6 million US dollars by 1994, but rebounded and from 1996 to deficits have averaged of 110 million US dollars. The abolition of customs duties in 1997 was the key causal factor underpinning the increase in imports. In 2001, the trade deficit was 169.9 million US dollars, with the current account deficit/excluding official transfers/reaching about -16.6 percent of GDP. This can be traced directly to commodity price volatility on international markets. The market price of copper, which constituted 33 percent of export revenue in 1999, was 3000 US dollars per tone in 1995, it sharply in 1999 to 1480 US$ per tone in 1999. The price recovered slightly in 2000, but again fell in 2001. These changes were accompanied by falling gold and cashmere prices on world markets. In addition, other factors such as the outbreak of food-and-mouth (FMD) disease resulted in an abrupt decrease in exports of raw agricultural materials to China, which has had a direct impact on the livelihoods of the rural population, particularly herders. Overall, a land locked location, remoteness from world infrastructure linkages, a narrow export structure, and poor international compositeness continue to impact unfavorably on Mongolia’s terms of trade.

1.7 At the same time though, the gold price has grown steadily since September 2001, and net international reserves have increased substantially over the last decade from 4.6 million US dollars in 1992 to 40 million US dollars in 1994, and 160.1 million in 2001. By the end of 2002, net international reserves reached 225 million. A commitment to open economic policies during the transition period has led to a continual increase in donor aid. The outstanding debt of the Government reached about 84 percent of GDP at the end of 2002. Official development assistance worth 2.1 billion US dollars was received in the period 1991-2002, out of which 48 percent was represented by loans. As the country started to implement the open economy policy, the government jointly with international agencies and bilateral donors has organized 9 donor meetings with the active participation of the international community.

1.8 Financial and monetary sectors: Inflation has declined gradually since 1993, it reached 66.3 percent in 1994, averaged 27 percent between 1995 and 1999, 10 percent in 2000 -and single-digit level (1.6 percent) by the end of 2002. Money supply has been increased steadily during recent years, its annual growth rate has fluctuated at around 27 percent. Bank lending rates remain approximately 35 percent p.a. This level of interest rates is not able to support production, services and economic growth. The budget has been in deficit in the past ten years, with loans from the banking system and foreign borrowings and assistance financing the fiscal gap.

1.9 Total budget revenues declined in 1998, mainly due to a sharp decline in corporate tax revenues and dividends due to a deterioration in terms of trade. This has had a harmful affect on the overall condition of the budget as the government failed to respond properly to falling revenues, and did not take serious action to improve public expenditure management. A crisis in the banking sector crisis was another factor that exacerbated the fiscal situation. Since 1996, 12 banks have gone bankrupt and the Government has been paying up to Tg 9 billion each year in interest payments for Government bonds which were issued to cover the losses of some of those banks. About 30 percent of total loans extended by commercial banks during 1996-99 were non-performing loans.

1.10 Due to the unfavorable external environment and an excessive burden on public finances, the budget deficit as a percent of GDP has continually increased, from 7.7 percent in 1996 to 12.5 percent in 1998 and 10.6 percent in 1999. Thus, the combination of the persistent falls in revenues and the excessive cost of economic restructuring have diverted already scarce resources from pro-poor programs and services. However, the budget deficit in the past two years declined, paving the way for financial stabilization. According to 2002 fiscal outturn the overall fiscal deficit was 6.0 percent of GDP with current surplus of 4.4 percent of GDP.

II. Demographic Trends drawn from the Household Income and Expenditure Survey

1.11 The Population and Housing Census of 2000 counted 2373.5 thousand people residing in Mongolia, of which 56.6 percent live in urban areas (with 32 percent of population concentrated in Ulaanbaatar city) and 43.4 percent who live in rural areas. Of the total population, 50.4 percent are women and 49.6 percent are men, and 35.8 percent of the population are children aged 0-14. The population density is 1.5 persons per square km, making Mongolia the least densely populated country in the World.

1.12 During the 1990s Mongolia’s population growth averaged 1.4 percent per annum, with the total fertility rate remaining around 2.1 children per woman. The social and economic hardships that accompanied the transition were the main reasons for the decline in population growth. However, the fertility level of poor families is higher, and the structure of poor households is very young. For instance, within poor households 45 percent of their members are under age 15, while for the non-poor the proportion is 31 percent.

1.13 A set of monographs produced by the National Statistical Office drawing on the results of 2000 Population and Housing Census show that that the livelihood of people has undergone some changes.

1.14 Firstly, for example, the growth rate of the older population has remained lower than the total population over the last 20 years. The share occupied by elderly persons within the total population has been falling continuously. However, due to the favorable population growth conditions which have existed since the 1950s, the number of older people is projected to sharply increase between 2015 and 2020. Those born in the late 1950s and 1960s will move to the older age bracket in this period. According to median variant of the population projection based on 2000 population and housing census, the number of elderly people will increase by 16.2 percent or 20.1 thousand in 2005 compared to 2000, and by 28.7 percent or 35.6 thousand by 2010. This strongly suggest a requirement for facilitating the implementing the updating of some articles of the State Law on Population, the Law on Elders and various provisions relating to discounted services and other related legal acts and programmers.

1.15 Analysis of total national households as well as elderly households shows that the conventional type of household, with relatives and families living together still remains the mainstay. Of the total number of elderly people, 59.7 percent or 72.4 thousand are the head of their respective households. Of men who are head of household, 4,109 are single and the same position is found with the 8,453 women. Therefore, it is important that local administrations pay increased attention to the social issues and challenges facing single elderly people.

1.16 The willingness of the older population to work and participate in community work is quite high. The census revealed that one in every 9 older persons were working. Of the total older population 12.3 percent or 15.3 thousand are economically active. As a matter of fact, the economic activity rate is high all in rural areas, both for the total population and older persons. On the whole the older population is more involved in agriculture and especially in herding. In urban areas there is a shortage of jobs for older people and moreover, establishments are not willing to employ them. The government believes it is necessary therefore, to take clear and unambiguous actions in official statements and in ensuring state population policy is enforced and implemented at establishments of all types of organizations. The objectives of these policy statements are; the facilitation of a condition whereby older people especially of those aged up to 65 years can work taking advantage of their education and experience, hence making full use of investment made earlier into human resource development; making full use of their potential and capacity, passing on the rich life experience of elders to young generations; passing on traditional customs; encouraging elders to contribute to the country’s development; and enabling them live to an active life and ensuring the accurate and proper recognition of their input and merits.

1.17 Secondly the monograph on Education produced in connection with the Population and Housing Census of 2000 witnesses that the literacy rate and educational level of the population have reached closer to the level of developed countries. This is due to greater attention paid by the Government of Mongolia towards the creation of a condition wherein children are fully enrolled in schooling and school drop-out rates are reduced. The Government took the action to establish a legal environment, which reflects well the country’s current stage of social and economic development, and to enforce the laws.

1.18 The ratio of number boys to girls is low at all of the stages of schooling in Mongolia School enrolment reduces by 9.2 points from primary level to secondary level. In numerical terms 44.7 thousand children of whom 64.0 percent are boys are out of schooling at the age of secondary level attainment. This is related to the fact that boys from herder households have had higher school drop-out rate as since livestock privatization. This tendency has moderated in the recent years but it is still in evidence. Another reason for the higher number of school drop-outs amongst boys is that poor and very poor households force boys to contribute to family incomes; their earnings enabling the purchase of essential food-stuffs for other household members.

1.19 School drop-out rates particularly among boys has deepened the imbalance in the sex ratio in educational attainment. Further down the line, this might lead to a shortage of labor supply in particular economic sectors especially those, which due to their specific conditions, require inputs by the skills traditionally provided by men.

1.20 The illiteracy rate amongst 15-19 year olds rose by 2.2 points in 2000 on the 1989 figures. In 2000 this rate is 4.2 percent meaning that 8.4 thousand 15-19 year olds are illiterate. Of this figure, 5.6 thousand are boys and 2.8 thousand are girls.

1.21 For the 20-29 age brackets, 1.8 percent of the population aged were found to be illiterate in 1989 and this indicator rose by 0.5 points in 2000. A total of 5.3 thousand people of this age group are illiterate with men representing 60.4 percent of this figure.

1.22 In relation to housing; almost half of the 54,1149 households (51 percent) enumerated during the Census reside in Gers and 49 percent in houses. When this is compared with 1989 census result the proportion of households residing in Gers is down by 9.3 percent and that of households in houses is higher by 9.3 percent. Overall, 72 percent of urban households reside in houses and 78 percent of rural households live in a Ger.

1.23 According to 1989 census 2.7 percent of the total households living in a house lived in a flat whereas this indicator rose to 3.2 percent (an increase of 0.5 point) in 2000. Also 1.3 percent of the population lives in a non-designated house and 0.3 percent in trenches, corridors, roofs and forests.

1.24 Of total Ger households 56.9 percent have no access to electricity and 69.9 percent have no telephone. In rural areas these percentages are higher; 75.2 percent lack electricity and 98.9 percent have no telephone.

1.25 On Migration the census reveals that by the beginning of 2000 74.3 percent of the total permanent residents in Mongolia were living in their birth place and 25.7 percent of the total had migrated (moved to an area other than their place of birth) with 5 percent of which being return migrants (moved to another area and later returned to the place of origin).

1.26 Of the migrants 42.6 percent had migrated during the last three years – thus exposing the reality of intense migration which has taken place since the lifting of restrictions with the advent of the transition period in Mongolia.

1.27 Within the regions migration is highest in Khangai and lowest in western regions. A third of the people who took part in the inter-regional migration within Khangai moved to Orkhon aimag, making it the most attractive destination within this region. Recent statistics explain that there are 824.7 thousand people permanently residing in UB and almost one million people, including interim residents and incoming and outgoing guests, are residing, working and studying in the city. Just in recent 5 years the population has increased by over 70.0 thousand people through migration resulting in a significant rise of unplanned social service expenditures.

1.28 As for the central region, Darkhan-Uul aimag is the most attractive end-destination point. It absorbed about one third of the total in-migrants to this region. Net migration over the last five years has resulted in a 10 percent of increase in the population of 5 years of those aged and above in the capital city. Around 60 percent and 22.5 percent of the migrants from the western region moved to Ulaanbaatar and central region respectively. Of the total population enumerated during the census 13.7 percent had migrated during the last five years, mainly from the central and western regions. And almost 40 percent of them were 15-24 year olds – with the further break-down being 20 percent for 15-19 year olds and 19.6 percent for 20-24 year olds.

1.29 It should be noted that the school enrolment of one year migrant children of 8 and 9 years is lower than their non-migrant peers. This might be associated with the fact either there is a shortage of schools in the destination place or in-migrants fail to get registered. Whereas households which moved to Ulaanbaatar city in 1999 were more likely to live in gers those who moved to the city after 1999 are more likely to reside in a house. When households moved to the capital city in 1999 and after 1999 are compared in terms of electricity the latter has poor access. Similarly, households which moved to Ulaanbaatar last year have poor access to telephone service than those migrated in 1999. Of the households moved to the capital city 4.0 percent resident in non-designated housing while of the non-migrants this percentage is less than 2.

1.30 The population’s migration has a number of causes and consequences. It affects the geographical distribution of population, on the one hand, by leading to concentration of population in Ulaanbaatar city and its outlying districts as well as in the central region and, on other hand, by sharply reducing the population levels and its distribution within other regions. Further it creates an imbalance of economic demand and supply – and presents challenges for social development.

1.31 In relation to marital status; the percentage of previously unmarried people aged 15 and above is some 8.9 percent and 11.2 percent higher for women and men respectively compared with 1979. The figures against 1989 levels are 8.3 and 7.4 points higher in the same order. This is related to the fact that young people particularly men, tend to get married later.

1.32 The proportion of divorced and separated people is also on the rise whereas that of the widowed population is declining. This can be explained by the fact that divorced men are more likely to remarry than divorced women and there the highest percentage of widowed population occurs in the 60 and above age group. In the older age groups, women are more preponderant since they live longer than men do.

1.33 The average age of marriage increased by one and half years in the census period 1979 to 1989 whilst it rose by two and half years between 1989 and 2000. However, men and women in urban areas get married one year later than their rural counterparts. From this it can be inferred that late marriage among men can be explained by many reasons like; getting prepared for family life under market economy conditions, economic preparedness, studies and other factors. In addition, the commitment, feeling of duties and life skills of the young population may well have changed.

1.34 In the context of all of the aforementioned, fertility, mortality and migration-borne changes and policy in the population arena have been incorporated in this economic growth and poverty reduction strategy paper through the line policies of health, gender, education, employment and other related areas.

1.35 Household Income and Expenditure. Changes in household incomes and expenditure in 1999-2002 are illustrated in the following by indicators such as monetary income, salary income, average salaries, monetary expenditure, savings etc. It is difficult to make comparisons between 1999-2000 household income and expenditure surveys (HIES). The 2002 HIES has used different sampling and methodology compared to the previous surveys which make difficult to make valid comparisons. The data for the 2002 HIES are preliminary. It is apparent that Household monetary income increased by 82 per cent in 2002 from 1999. However, the increase of monetary income in real terms was only a 54 percent. According to the Average Salary Survey, average salaries increased by 26 percent in 2002 from 1999 with the real increase being equal to 6 percent. Household monetary expenditure increased by 67 percent in 2002 from 1999 representing 41 percent in real terms.

1.36 Regarding Household expenditure; Indicators that better define changes in household living conditions are the household expenditure amount and expenditure structure measures. Average monthly household expenditure by expenditure item and structure as of 2000-2002 is shown in Table 1:2:. For 2000-2002, the national average share of household monetary expenditure in total expenditure has declined, to 78.9 percent. This is related to an increase in consumption of food-stuffs prepared from household farms or own businesses and provided by others (families and friends) free-of-charge.

Table 1:2:

Structure of average monthly total expenditure of household, national average, percent

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1.37 Table 1.3 shows changes in the household expenditure structure with different figures quoted for urban and rural areas. In 2000-2002, the share of monetary expenditure in total household expenditure declined in both urban and rural areas with an increase in food consumption from household farms.

Table 1:3:

Structure of average monthly total expenditure per household, by urban and rural areas, percent

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1.38 Another key indicator that reflects changes in the living standards of the population is consumption expenditure per person. A breakdown of expenditures per person for 1999 and 2002 is as set out below (Table 1:4:). The analysis divides the households that responded to the survey, into 5 equal quintiles from the smallest to largest in terms of total expenditure per person.

Table 1:4:

Monthly expenditure per person, by residence

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1.39 This underlines the fact that income distribution in Mongolia is likely becoming increasingly unequal.

1.40 Food consumption of the population. The amount of food consumption, nutritional value and ingredients of the food consumed by the population was estimated on the basis of monthly consumption of an average adult equivalent. The comparison of actual consumption and recommended consumption per month is shown in Table 1:5:. The recommended consumption is taken from the recommended amount of food and nutritional intake of the population adopted by resolution Number A/318 of the Health and Social Welfare Minister of 1997.

Table 1:5:

Monthly Adult Foodstuffs Consumption, national average, Kgs

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1.41 In all years, all food-stuffs except meat and milk have been below the recommended level. As a result of natural disasters such as drought and dzud in recent years, the consumption of milk and meat products has declined in 2002 from 1999. Although the consumption of flour, rise, eggs, potatoes and vegetables has increased in 1999-2002, these figures are still below the recommended level. Especially, consumption of potatoes, vegetables and fruits which are significantly below the recommendation.

Table 1:6:

Daily Adult Calorific Intake, national average

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1.42 Although the daily nutritional intake did not reach the recommended level in 1999-2001, in 2002 it increased because of high consumption of flour, flour products, eggs, potatoes and vegetables, all of which have a higher nutritional value. Also in 2002, protein and oils in food ingredients exceeded the recommended level.

III. The Poverty Situation in Mongolia

1.43 Definition. Poverty in Mongolia is defined using a the minimum living standards approach. According to the Law on Defining the Minimum Living Standards, the National Statistical Office determines the minimum levels differently by regions. Currently, the monetary equivalent of the poverty line ranges between Tg 19500 to 25300 per capita per month depending on the region. Households with income less than 40 percent of the minimum living standards level and who are unable to provide for their basic food needs are defined as households in ‘extreme poverty’.

Poverty assessment. The Government of Mongolia has conducted several living standards surveys with the support of international agencies.

1.44 From the various surveys conducted in Mongolia since 1995 (LSMS, PLSA), poverty was found to be preponderant among five categories of people; (i) single parent-headed households with many children, (ii) households with less than 100 heads of livestock (depending on the size and structure of the household), (iii) the unemployed, (iv) the uneducated (without basic education), (v) and specific vulnerable groups (elderly, disabled, street children and orphan children).

Table 1:7:

Poverty Indicators

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Source: Living Standard Measurement Survey, 1998

1.45 The results of the 1995 Living Standards Measurement Survey (LSMS) concluded that 36 percent of the total population of Mongolia was living in poverty. The 1998 LSMS showed a poverty level of 35.6 percent, with 39.4 percent for the urban population and 32.6 percent for the rural population. This means that compared with 1995, poverty has declined in Ulaanbaatar by 1998, whilst for other urban areas it has increased. The survey also showed that poverty was particularly concentrated in aimag centers, towns and other urban settlements. Methodology utilized in these surveys limit to conduct detailed comparisons of results in terms of spatial and population groups distribution.

Sources of Information on Poverty

1. The Ministry of Labor first conducted a Poverty survey in 1995. The survey found that 13.2 percent of all households in Mongolia and 14.1 percent of the population were living in poverty.

2. In Mongolia the Household Income and Expenditure Survey has been conducted since 1966. As the number of households grew, the survey sample was expanded to include 1000-1500 respondents. The survey measures, in addition to incomes and expenditures of households, sources of income, patterns of consumption, living standards and helps define the minimum living standard. The Household Income and Expenditure Survey results are utilized as the basis for key statistical estimates, such as the poverty line, inflation and national accounts. The improvement of the survey’s the methodology and the expansion of its is therefore a key priority for the Government. Currently, the National Statistical Office, with support from the World Bank and UNDP, is working to achieve these aims, a key part of this is the revision the questionnaire to include living standards-related questions to enable the estimation of poverty profile related statistics and enable the use of the survey results as the basic data in various analyses. Starting in 2002, the National Statistical Office has been conducting an expanded Household Income and Expenditure Survey, which is not comparable directly to the household income and expenditure surveys undertaken prior. The NSO is conducting Household Income and Expenditure Survey and Living Standards Measurement Survey with a new improved methodology. The Household Income and Expenditure/Living Standards Measurement Survey has 4 components which are:

  • 1. Household income and expenditure survey/monthly/

  • 2. Living standard measurement survey/quarterly/

  • 3. Community questionnaire

  • 4. Price questionnaire

For the HIES, a sample of 11,232 households in Ulaanbaatar city and 21 aimags is surveyed each year, at the rate of 2808 households per quarter. The integrated HIES-LSMS survey will visit 3744 households a year, at the rate of 936 households of surveyed HIES households per quarter or rotation approach is being utilized.

The expanded survey undertaken under the assistance of the international agencies is an integral part of comprehensive program to reform public sector, enhance economic growth and reduce poverty. The HIES is a main source for poverty reduction monitoring, attaining the MDGs, accomplishment of the MCA requirements.

3. The first survey to measure the living standards of the population was carried out in 1995 with the assistance of the World Bank. The survey sample included 1,500 households, which represents 0.3 percent of households in Mongolia. The second Living Standards Measurement Survey conducted by the National Statistical Office with the assistance of UNDP in 1998, and its results were widely disseminated. The survey became a standing component of published official statistics. The results of these two surveys are not however, directly comparable with one another.

4. The Participatory Living Standards Measurement Survey was conducted in 2000 with the assistance of the World Bank and other donor organizations to carry out a qualitative assessment of poverty. The survey provided an opportunity for the poor to make their voices heard to the Government about their concerns, and for policymakers to listen to their assessment and opinions about their quality of life, and assessment of Government’s policies to improve their livelihoods. The objective of the survey was to enrich poverty statistics with qualitative information, and to provide information complementary to Poverty Assessment and Living Standard Measurement Surveys conducted in 1995 and 1998. The survey was the first ever survey in Mongolia to be conducted using participatory methods.

1.46 Although the level of poverty has not significantly risen during 1994-2000, the depth of poverty has increased and income inequality has worsened. The Gini coefficient increased from 0.31 percent in 1995 to 0.35 percent in 1998, demonstrating growing income inequality, particularly that of the poor. The depth index which measures the total consumption inequality of the poor population reached 10.9–11.7 percent, while the poverty severity index increased by 0.8 percentage points since 1995. According to the Participatory Living Standards Assessment, distinct population segments, the so-called “rich and poor” have emerged during 1992-1995, and more so in 1995-2000. Thus the gap between these two groups has continued to deepen. The survey also showed that a substantial proportion of urban population lies within the extremely poor category. The view that the number of middle-class households declined during 1992-1995 was supported by survey participants’ responses that the number of poor and very poor households has grown. It is clear that income shortage is a major cause of poverty in Mongolia. The overwhelming majority of the poor live in gers, with 27-30 percent of them using water from unprotected wells for daily consumption.

1.47 The poor and employment. Poverty has a direct relation with employment. Out of total poor population of working age in urban areas, 27.3–38.8 percent are unemployed, while almost 60 percent of unemployed able bodied people of working age are poor. This is demonstrated by levels and composition of total household income. A third of household income comes from wages, pensions, benefits and incentives, over 20 percent comes from agriculture and non-agricultural production, another 30 percent from household business, and 10 percent are free gifts from others. This income composition largely depends on household location. For instance, 40-60 percent of income of the urban population is composed of wages, pensions and benefits, whereas in rural areas only 7 percent of the total income comes from this category, with over 60 percent coming from household business. However, the droughts and Dzud that occurred in the past years have left over 10 thousand herder households without any livestock, and many more thousands lost most of their livestock. As a result, members of these households fell into poverty, and many moved to urban centers, swelling the number of the urban poor.

Table 1:8:

Composition of Population by working age, and by location, as at 1998

(percent)

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Source: Living Standard Measurement Survey, 1998

1.48 Although, the poor are engaged in some types of economic activity, due to low incomes they are becoming more vulnerable. In other words, these people are mainly self employed, small traders, handicraft makers, and civil servants. The majority of extreme poor are unskilled and unemployed. Moreover cultural norms and mentalities dating to the socialist times have meant many within this group’s exhibit ready-made mentalities, are welfare dependent, and lack their own initiative to escape their current conditions.

Table 1:9:

Distribution of Average Income by Consumption Groups

(percentage)

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Source of information: Living standard measurement survey, 1998

1.49 The poor and social services. The cost of education and health services has become a heavy burden on poor families and, therefore, those families have almost no access to basic health and education services. For example, household expenditure on education increased by 4 to 5 times by 1998 compared with 1995, while its share in total non-food consumption expenditure increased by 9.3 percentage points. The lower the level of expenditure per household member, the higher the weight of food expenditure in total household expenditures. For instance, 72.6 percent of households with less than Tg 8000 expenditures per person spend over 70 percent of their expenditures on food, while only 22.6 percent of households with income per capita of Tg 60.1 thousand allocate over 70 percent of their expenditures on food3.

1.50 The school enrollment rate for children of aged 8-15 years is 86.5 percent (girls 89.6 percent and boys 83.4 percent) and the drop-out rate is 2.8 percent (girls 2.4 percent and boys 3.2 percent). The drop-out rate is higher in rural areas - 3.7 percent, as opposed to urban areas - 1.4 percent. Out of the total number of children not attending school, 43.8 percent do not attend due to low living conditions and the need to work. This increase in drop out rates has become one of main reasons of chronic poverty in the country.

1.51 Wealthier households benefit more from health services than do poor households. Monthly expenditure on health services per person for different categories of expenditure groups is 9 times higher in high income households than that in very poor households. Frequency of visits by the poor to health centers has declined too. This take-up of health services by of the poor and malnutrition has led to an increase in the number of invalids, forcing more people to rely on social safety net benefits alone.

IV. Gender Equality

Gender inequalities undermine the effectiveness of development policies in fundamental ways.”

1.52 Mongolia has a good enabling environment to promote gender equality. The Constitution grants equal rights to men and women. The government has committed itself to various international conventions on rights and the equality of women, and has established the National Council for Gender Equality in 2001 to monitor and support the implementation of policy and to promote women and gender equality. Civil society organizations and movements to promote women’s rights and equality are active. Despite this positive environment, gender disparities still persist in all dimensions of poverty and specifically; access to economic opportunity, capacity to access public services, vulnerability to economic and domestic violence, and political empowerment.

1.53 Gender inequalities not only reflect disparities in the capabilities and opportunities of individual men and women, but they potentially hinder efforts to improve economic growth and reduce poverty. Government, civil society and development agencies have conducted a series of workshops and pieces of research on various aspects of gender and poverty. The key gender issues facing Mongolia identified through these workshops are:

1.54 Gender and Economic Opportunity: Due to the lack of gender sensitive approaches during the structural reform policies, it has been challenging to evaluate the negative and positive impacts these policies have had on men and women. The experience of the past decade shows that women were affected negatively and have become victims of poverty as a result of socio-economic reform policies. Women, for example, were hit hard during structural reform and privatization which took place in the early 1990s. Many women working in light industries and services were transferred to the informal sector with little preparation. Woman faced difficulties in obtaining get credit and in managing their households because they were left with no rights to own capital after privatization.

1.55 Some of the laws and regulations adopted were distinctly unfriendly to women. For instance, the Pension law that was approved in 1991 imposed conditions, which made it more likely that women would either be made redundant or encouraged to quit their jobs by stating that women with four or more children can receive state pensions early. The recently approved the Mongolian Land Law states that land will be given to the possession of household, while the Constitution stipulates this right is belong to the citizens of Mongolia. It is not clear whether and how the implementation of this law will affect men and women differently

1.56 Access to and the availability of credit and financial services, and hence the business environment are limited for women. Women work longer hours on household activities and have limited time to involve themselves in economic activities. Unpaid work never been evaluated and the contribution of the unpaid labor has never been calculated in the national accounts. Particularly in rural areas, livestock privatization and the movement from agricultural production towards household livestock herding, has resulted in and increased the level of unpaid family labor.

1.57 Opportunities for males and females in both employment and income, which are the main means of escaping poverty, are equal. Women in particular rely on the informal sector for income and employment. Discrimination against women by their age, gender, physical appearance and their childcare duties commitments needs be considered urgently.

1.58 Women have limited authority over privatized assets, registered in the name of the head of household, who is usually male. This in turn restricts women’s ability to use such assets as collateral for loans and other business opportunities. Increased reliance on livestock herding, and the reduction of childcare services, has increased women’s hours of unpaid domestic and productive work (not included in the national accounts) and limited time for women to engage in economic activities.

1.59 Gender and Access to Public Services: Mongolia’s vast territory, low population density and poor infrastructure makes it difficult for all of the population to access to public services. Educational enrollment of both boys and girls is significantly lower today than in 1990, and boys’ enrollment levels are low particularly in the higher grades. High maternal mortality rates reflect widespread problems of access and quality of health services, especially in rural areas, and this has a particularly negative effect on women. Closure of health care centers in rural areas, has lowered the quality and pushed up the cost of services, whilst also increasing the distance between providers and patients contribute to problems.

1.60 Gender and Vulnerability: High incidence of domestic violence threatens women’s physical and emotional security. According to a study conducted in Ulaanbaatar, one third of women in Mongolia have experienced some form of domestic violence, and more than one-tenth have been beaten by their partners.

1.61 Since women’s higher levels of unemployment and high reliance on the informal sector for employment and their livelihoods mean that many women fall outside of the state social protection and benefit system. Female-headed households are especially prone to poverty. For instance, 24.6 percent of very poor households and 18.3 percent of the total poor households are female-headed households, although female-headed households make up only around 12-13 percent of the total.

Table 1:9:

The number of poor households, by head of household’s gender and income group

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Source: UNDP/NSO 1999

1.62 As poverty deepens, the number of female-headed households in poverty is growing because these households tend to have more children and are lower income-earners. In addition, divorces affect women more economically and physiologically, thus increasing their insecurity. Female-headed poor households are more concentrated in aimag centers and soums due to limited opportunities for them in the countryside to engage in business or to commute to urban centers for work. In addition they have poor access to the social safety net system.

1.63 Based on assessment of various data and reports, the Government has changed its approach to prioritizing equal rights for women in order to provide them with more opportunities. The new concept is based on securing gender equality, formulating and implementing new economic and social policies and programs. Many of the participants of the Regional Seminar on “From I-PRSP to F-PRSP” organized in February-March 2002, have mentioned that “Education is important to reduce poverty. People need to be taught the living/survival skills from a young age. Men are seldom given the opportunity to participate in various training programs”.

Table 1:10:

The number of poor households, by head of household and location, as at 1998

(percentages)

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Source: Living Standard Measurement Survey, 1998

1.64 National Program on Gender Equality: One of important tasks of the Government of Mongolia is to provide an appropriate environment for gender equality in the fields of politics, economics and civil society, culture-and within the home to develop and implement appropriate gender sensitive policies in order to improve livelihoods and the quality of people’s lives and promote human development. Studies and research indicate that gender equality exists in Mongolia to some extent. Therefore, the Government of Mongolia approved the National Program for Gender Equality in December 2002 in order to regulate these issues; making appropriate changes in the division of labor by lessening gender inequality in unemployment, effecting poverty reduction and equity in educational provision; counterbalancing gender inequality in politics, decision-making positions and in property relationships; and to formulate policies to decrease family violence in compliance with national economic and social policies. The National Program on Gender Equality sets goals and outlines activities for improving gender equality in:

Family welfare and development: to strengthen families and values, to ensure an equal burden is assumed by parents in child-rearing and domestic work; to address domestic violence through legislation and awareness rising; to balance rights and decision-making regarding household property, providing training and resources for poor families.

Economic relations: promote gender-sensitive macroeconomic policies and statistical monitoring and data collection to improve access to employment, health and social insurance, and ensure equality in domestic finances.

Rural development: improve rural education enrollment, particularly of boys, increase participation in regional development, reduce child and maternal mortality, provide equal opportunities for employment and small business activities

Empowerment and decision-making: develop enabling an environment for a greater level of women’s representation in government decision-making both for elected and career positions.

Strengthening the national mechanism for achieving national gender equality objectives: establishment of national secretariat, gender based research, mainstreaming gender perspective into policies, programs, and budgeting, and improving monitoring/evaluation of gender-related goals and programs.

Implementing the National Program on Gender Equality will require support for strengthening the national secretariat and the overall mechanisms established for securing gender equality.

V. Insecurity

1.65 Participants in the Participatory Living Standards Assessment made clear interrelationship between poverty and insecurity. In addition to the economic insecurity the PLSA demonstrated the prevalence of other forms of insecurity: social, safety, environmental and physical.

1.66 Economic insecurity is expressed mainly in terms of unemployment and remoteness from the market. As a result, many households rely on pensions and benefits as their only reliable source of cash income. Investment involving communities and based on participatory initiatives, would mitigate the risks associated with agricultural production and will prevent the decline of the agricultural economy. Work insecurity and a lack of job vacancies has exacerbated poverty.

Table 11.

Employment Rate, at as 1998

(percent)*

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Share of employed population of working age in the total working age population

Source: Living Standard Measurement Survey, 1998

1.67 Environmental insecurity has a damaging effect of livestock husbandry. The effects of natural disasters, droughts, ‘Dzud’, forest fires and parasitic infestations have been made worse by a growing over-concentration on grazing pressure, as the numbers of herders and livestock increased while pastoral mobility has declined since 1990s. These primary environmental problems affect population living standards and cause poverty. Environmental insecurity particularly affects new herders, as well as the supply of raw materials to national industry and the export of raw materials. Unemployment and poverty are rising in rural areas. For instance, the total number of livestock has been continually increasing during 1994-1999. But the Dzud that occurred in the past years killed many animals, reducing the size of the herd to around 24 million animals by the end of 2002, which represents 29 percent less than in 1999 and 20 percent less than in 2000. At market prices, the value of the lost livestock is over Tg 270 billion. For Mongolia with its harsh climate, and the economic dominance of nomadic pastoralist population, the livelihood of the population is extremely vulnerable to environmental insecurity. Participants in the Regional Seminar on “From I-PRSP to F-PRSP” organized in February–March 2002, had intensive discussions about environmental and climatic difficulties and the lack of Government support to protect them.

1.68 Social insecurity leads to a weakening of traditional kinship relationships. Kinship has been weakening throughout the 1990s, while semi-commercial forms of intra-household transfers are increasing. The most vulnerable of all are those excluded from kinship and other social safety nets. In addition, as enterprises have closed leaving many people without a job, thus causing disruption and the lessening of friendship relations.

1.69 Many households are also prone to physical insecurities, particularly among the poorer groups. Unemployment and economic insecurity has led to widespread social malaise, alcohol abuse, a rising crime level, domestic violence and marital breakdowns. These insecurities create various shocks for households and lead them into stresses and poverty. For instance, 156 out of 10,000 adults over 18 have become victims of one or other form of violent crimes in 2001 (Statistical yearbook, 2001).

1.70 Economic crisis, social inequality, and breaking down of values and other negative trends in the society have created another type of vulnerable: street children. Street children live in the conditions lacking basic human needs in extreme poverty and begging. This unacceptable phenomenon is in contradiction with the basic rights of children and had a negative impact for the social progress and a matter of discussion of the international community moving beyond the national borders. The main reason for becoming “street” are as follows:

~ Absence of normal conditions of life at home

~ Subject of types of violence

~ Lack of love and care by parents

~ Having serious illness, health and physical development concerns

~ Malnutrition and physical weakness

~ Breaking ties with school or never attended school

~ Having difficult behavior

To address the issue of street children the city municipality has launched a comprehensive program aimed to return street children to their family environment and create a special environment for those who are lacking any care providers, including:

~ Adjust the status of special schools and pay attention to capacity and qualification building of teachers and social workers who work with children without adult supervision and have aggressive behavior as well as increase salaries of teachers and social workers.

~ Review the accountability system of parents who leave their children without supervision and introduce amendments to relevant laws.

~ Elaborate and undertake an appropriate policy for street youth who became adult and reached 18 being street children for a number of years since 1990.

VI. Major Reasons for Poverty and Insecurity

1.71 The major reasons why a third of Mongolia’s population is poor are determined as follows:

  • The economy started to the transition without a clear articulated direction through a holistic approach. The shocks of the transition to a market economy have caused many industrial and service enterprises to close down, leading to lay-offs in excess of a thousand employees,

  • Macroeconomic instability was deteriorated, especially in terms of increases of prices for domestic and imported goods, external shocks, banking crisis and slowing down of economic activities leading to income losses.

  • Many thousands were given livestock during livestock privatization. However, a lack of experience in livestock herding and a lack of preparedness to climatic hardships made many of them lose their livestock, stripping them of their income sources,

  • Many children who left their school during the initial transition years were left uneducated and without opportunities to work,

  • Government transfers and social safety benefits to the people, which were large before 1990, were reduced substantially,

  • Finally, the real incomes of the whole population have declined substantially.

1.72 These findings were also confirmed by the Participatory Living Standard Assessment Survey and participants in the Regional seminar on “From I-PRSP to F-PRSP”, 2002.

Forms of Insecurity and Vulnerability

The good life is to build your own life on his/her own way, make a decision independently him/herself on his/her own life, allow his/her children be educated and be healthy” as determined by a group of women from Bayanzurkh soum of Khuvsgul aimag

Another group of women from Khukhmorit sum of Govi-Altai aimag said that “We will be having a good life if we have good work, are healthy, have sufficient food and clothes, and be on the same path with the society”.

Groups of men and women from Tuv aimag expressed their feelings and thoughts as follows: “A bad life means illiteracy of children and youth, suffering from illnesses, having a shortage in physical and mental needs and being uncertain on their future”.

One poor lady from Sevrei sum of Unmugovi aimag said that “I’m heavily indebted and have lost control over the amount of the debt,- its like the number of stars in the sky”.

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Source: Participatory Living Standards Assessment, 2000

VII. Government Efforts to Reduce Poverty

1.73 The National Poverty Alleviation Program. The Government of Mongolia, jointly with United Nations affiliated agencies, other international financial institutions and donor countries formulated and approved the National Poverty Alleviation Program (NPAP) in June 1994. The program was implemented until 2000. The main objectives of this multi-sectoral program, are based on principles of decentralization and public participation, were to reverse the declining trend of living standards and halt the human capital deprivation of the Mongolian population. Within the NPAP more than 13 thousand small scale projects have been undertaken in remote soums, horoos and bags to create temporary jobs in rural areas, to support pre-school and basic education, to improve basic medical services for the rural population, to provide technical training for adult disabled people by involving them in income generating activities, to provide education to disabled children through raising the incomes of vulnerable groups and the development of social infrastructure. The impetus for these projects came from the communities themselves, which is what made these projects distinctive.

1.74 Other programs and projects. Parallel to the National Poverty Alleviation Program the Government of Mongolia with the assistance of international banks, financial institutions, development organizations and donor countries has implemented a number of projects in health, education, infrastructure, and environmental sectors that directly and indirectly affect the living standards of the population. For example, 26 percent of foreign loans and assistance received during 1991-2001, amounting to 287 million US dollars, were spent on the social sector.

1.75 Employment. Approval of the Law on the Facilitation of Employment made an important contribution to the development of national industries and the reduction of unemployment. The Law clearly set out mechanisms to accomplish the Government’s policy to support employment and financing mechanisms for a series of related actions. For example, the law requires that no less than 0.3 percent of annual budget revenues be allocated to the Employment Support Fund. According to this requirement, Tg 200 million was allocated to the Employment support fund from the central government budget in last two years. In addition, Tg 441.2 million was generated in the form of fees from expatriate workers in Mongolia in the second half of 2001. Out of the total revenue of Tg 641.2 of the Fund, Tg 400 million was allocated to 30 employment offices in aimags and capital city districts, enabling them to organize vocational training and to support employers, making important contributions to the effort to reduce unemployment. A total of 4.6 thousand citizens were trained in the first half of 2001, of which 41 percent were people with incomes under the minimum living standard level. Consistent with the policy of public works, 260 unemployed people, military servants and 240 convicts are engaged in construction works on the Millennium Road project.

1.76 Income generating activities: The National Program for Household Livelihood Support, financed by the IDA, was approved in 2001 and is being implemented as a follow-up to the National Poverty Alleviation Program. The main objectives of this program are to remove the poor households from poverty, and to prevent the non-poor low-income households from falling into poverty through mobilizing the economic and social resources necessary to support human and development capabilities. Implementation of the first stage of projects under this program started in the second half of 2002.

1.77 Poverty assessments showed that female-headed households are more likely to be affected by poverty and vulnerability. Parallel with sub-projects to increase the incomes of women within the National Poverty Alleviation Program, the Government developed and integrated the National Program on Advancement of Women, which is modified and replaced by the National program on gender equality adopted in December, 2002. The former program has included ambitious objectives to reduce poverty among women, but its implementation was not successful due to improper implementation mechanisms and financial difficulties (source: Program assessment report).

1.78 Small and medium size enterprise support projects in agriculture, implemented by the Government of Germany were quite successful among many projects and programs implemented to support employment and income generation in rural areas.

1.79 In addition to special programs and projects, the Government of Mongolia implemented a series of increases in the wages of civil servants, other wages and pensions who are considered to be in the low-income group. In 2001-2002 pensions were increased by 41 percent on average, while the salaries of civil servants were increased by 23 percent.

VIII. Achievements and Lessons

1.80 Achievements. Although the rate of increase in poverty has slowed and its spread has been limited as a result of policy actions, poverty remains one of the critical problems facing Mongolia of today. The NPAP implementation has recorded the following achievements:

  • Projects aimed at income generation activities and the creation of temporary jobs within public works, have secured increases of incomes of over 30 percent of poor households. Most of the participants have acquired skills and business knowledge, - and became more self confident and have escaped from poverty.

  • In order to ensure the sustainable livelihoods of poor herder households over 2,200 herder households were given 107 thousand heads of livestock on a contract basis. In addition to the livestock re-stocking project, some herder households have diversified their activities by involving them in crop farming and support their livelihoods.

  • Female participants have benefited more from income generation projects. For example, 65 percent of participants in income generating projects were female. At the same time female participants benefited from activities aimed to acquire skills on project development and management implemented by non-governmental organizations, rural health improvement projects, especially the maternal home restoration project.

  • Community/public works projects have had a positive effect not only on creation of temporary employment, but have also had a long-term positive impact on the development of local economies. Bridges, roads, dams and irrigation canals have provided sustainable and long-term benefits to rural population. Also, projects for the supply of safe drinking water, public bath facilities, heating systems and waste removal have contributed to fostering a healthier and cheerful community life.

  • Projects on strengthening basic and preschool education and rural health improvement have been implemented all over the country, with the effect of increasing school and kindergarten enrollment, reducing school dropouts and levels of infant mortality.

1.81 In addition to specific projects aimed at alleviating poverty, policy measures have been undertaken to maintain and enhance macroeconomic stability during the recent period. Macroeconomic stability enables the building of sustainable livelihoods of the population, in particular for those of the poor. Stabilization of inflation and currency rates, increases in foreign and domestic investment, restoration of national industries, strengthening of the public sector including fiscal management, improvement of the level and coordination of foreign loans and assistance helps improve the access and quality of social service delivery with a pro-poor focus. The objectives of raising living standards and reducing poverty amongst the population, especially in the rural areas, by improving infrastructure and fostering technological and scientific advances leading to increase of productivity are stated as one priorities of the Government’s program.

1.82 As a result of economic restructuring, the share of the private sector increased and it now accounts for over 70 percent of total GDP. The Mongolian economy has become more open, all citizens of Mongolia have the right and the opportunity to set their own personal goals for their lives and a favorable environment for the growth of private initiatives has been established.

1.83 Participants in the seminar organized in March in Bayankhongor aimag noted that “Now we learned what is poverty, what causes poverty and the ways to eliminate poverty”. And that “Poverty is affected not only by national economic and social development, but also by the passive and submissive nature of the poor; we ourselves are not well organized.”

1.84 Lessons. We have learned that programs and projects for poverty reduction and social welfare enhancement should be implemented in combination with a broad range of policies for sustainable economic growth, intensification of structural reforms, improvement of banking and financial services, as well as enhancement of social safety nets. It means that a poverty alleviation program, no matter how sound in its concepts and principles, may not eradicate poverty unless it is harmonized with and supported by broad-based social and economic projects and programs, policies oriented toward enhancing human capabilities, increasing employment, and enhancing economic growth.

1.85 The key objective of EGSPRS is the formulation, implementation and monitoring of poverty reduction and supporting the sustainable livelihoods of the population, the improvement in the targeting of social safety nets, - and the narrowing of the income gap between the rich and the poor and between urban and rural development. In addition poverty reduction efforts should be pro-poor oriented, and strategies should utilize efficient mechanisms to distribute the benefits of the growth to the poor.

1.86 Mongolia’s extremely narrow structure of exports is very elastic to commodity price changes, leading to the economic vulnerabilities to externalities. The current level of economic growth is remains well below our requirements.

1.87 The banking system, which plays an important role in the economy, remains fragile. Competition is weak, resulting in persistently high interest rates and limiting access to domestic lending for the private sector. In addition the profitability of privatized enterprises is low, as human capacity and private sector management skills are not fully developed.

1.88 Components of good governance, such as transparency of government regulation, public policy management, monitoring, as well as participation of civil society are inadequate, leading to poor basic services in education and health, and in both poor quality and weak access to social safety nets.

1.89 In addition, past experience shows that besides targeting of programs to the poor, it is necessary to prevent vulnerable groups from slipping into poverty, within the overall poverty reduction framework. Thus the poverty reduction efforts should be directed not only to poor, but to people in danger of falling into poverty.

CHAPTER 2: ECONOMIC GROWTH SUPPORT AND POVERTY REDUCTION STRATEGY

I. Government Development Goals and Policy Priorities

2.1 The Government has analyzed the economic situation since Mongolia adopted the market economy and defined its medium term economic and social development policies. Carrying-out restructuring as well as reforms undertaken within the social and political sphere have became an essential resource for ensuring economic growth. The prevalence of the private sector in the economy is another major source for ensuring enhanced economic growth. The Government has set itself the goal of reducing poverty through higher economic growth, which will be based on active private sector participation and an export oriented trade policy. Regional and sustainable development concepts will be incorporated in the general economic growth strategy.

2.2 In addition to the Government’s pursuit of economic growth by using all possible and appropriate internal resources, it is also directing its strength to creating a sustainable livelihood, for all of the population and to reduce poverty through protecting nature and the environment based on the accomplishments of human civilization and improving social welfare. A stable macroeconomic situation, investment and the building of human capital factors will play a significant role in ensuring growth.

2.3 The Government of Mongolia will renovate techniques and technology, upgrade the processing of raw materials, rehabilitate the industrial processing sector, ensure sustainable development conditions, recover and develop the agricultural sector, increase investment in education and health sectors, ensure human development through supporting both foreign and local investment in all sectors and establishing favorable conditions for investment.

2.4 Besides reducing poverty within the country through ensuring higher economic growth, the policy on ensuring human development implemented in education, health and social welfare sectors will itself contribute and consolidate the economy’s growth potential. Moreover, the development of more efficient mechanisms of budget and financial management as well as reforms in the public sector will be another important ingredient in securing economic growth.

2.5 The following are the priorities defined in short term within the framework of Mongolian development goals:

  • to deepen the reforms for ensuring macroeconomic stability, and to intensify the restructuring process;

  • to improve the health of the banking and financial sectors;

  • to recover and develop national industry, to ensure economic growth through supporting export oriented industry;

  • to support the regional as well as rural development, to intensively develop infrastructure;

  • to create an equitable environment for ensuring human development, to improve all levels of education, its quality, health service provision and its accessibility;

  • to reduce unemployment and poverty, to generally improve the living standards of population;

  • to ensure sustainable development and ecological balance, to mainstream nature conservation and environmental policies as priorities within regional socio-economic development;

  • to speed up the land reforms;

  • to reduce the air, water and soil pollution in large cities and settlements; to improve the living environment of the people through the reprocessing of waste;

  • to improve governance to ensure human security;

  • To create a fair, moral and democratic society that protects concepts of democracy, basic human rights and the freedom of each citizen;

  • To mainstream gender dimensions in poverty interventions to promote gender equality.

2.6 At the beginning of the century the world has set itself global objectives to live without hunger and poverty in the next century. The Government of Mongolia has accepted the development goals set by the international community, and has committed itself to implementing them in the context of our country. With assistance of international agencies such as UNDP, ADB the Government has adopted and incorporated the MDGs in various policy documents.

2.7 The Government of Mongolia is working along its objectives of enhancing economic growth, poverty reduction and meeting specific development goals. In this framework, the Government of Mongolia is supporting the Millennium development goals, and has set its own Millennium Development Goals for achievement by 2015. The Government will endeavor to meet goals such as; the reduction in the number of people in extreme poverty by 25 percent by year 2005, and by 50 percent by year 2015, to provide universal primary education to all people and to reduce infant and child mortality by 50 percent by year 2005 with mainstreaming gender issues in poverty reducing efforts.

2.8 The Millennium Development goals have been incorporated in the EGSPRS, particularly in those sections dealing with health, education, employment, and other overall macro economic goals. These feature in the policy matrixes as well as monitoring section. Institutionally the government agencies jointly with civil society will undertake continuous monitoring of the process of achieving these goals, determined through annual plans and special reports during MDG implementation.

II. Extending Participation

2.9 In preparation of EGSPRS preparation the participatory approach is being utilized effectively, including all stakeholders. The government working group was a main coordinating body for the preparation of the strategy. Based on I-PRSP JSA and recommendations from the Mongolian cabinet and parliament, other donors the technical working group started an intensive and iterative process, including defining policy priorities by sectors, consultations, comments, coordinating with related domestic and donor funded projects. During the process of preparation the government has organized the donor consultation on energy, ICT, health, social welfare sectors and rural and UB city development laying a base for the sectoral policies. In addition the reforms in governance, including gender issues and legislative environment was discussed intensively under the UNDP support. At the final stage of the process the MOFE organized a round table discussion with Cabinet and Parliament members on policy priorities included in the EGSPRS and time table for implementation and monitoring. Besides government coordinated activities in order to support the PRSP process, the international community, in particular the World bank has organized several seminars workshops on economic growth, trade and poverty issues, pro-poor policies, public sector reforms among all stakeholders. UNICEF has initiated a monitoring approach with extensive focus on rural household’s social sector services assess and quality which is intended to carry out in the further as one of main tools for monitoring of EPSPRS targets.

2.10 Extensive participation of non-government organizations was ensured, such as in conducting of research on specific issues and sectors, active participation in regional and consultative meetings, in sub-working groups as well as in the National Coordinating Committee. There are over 2500 non-governmental organizations currently in Mongolia. Compared to 1996, the number of NGOs increased 4.2 times. This was not only a qualitative growth. NGOs have matured financially, institutionally and in human capabilities. Most importantly, they became an active and responsible part of the development process. In the PRSP process, a working group comprising of representatives of 12 NGOs represented the civil society stakeholder and took an active part in the consultation process at all levels.

2.11 In order to broaden participation of the local governments and civil society in the process of development of the poverty reduction strategy, the first nation wide consultation in the form of series of regional seminars was organized in the first quarter of 2002 with assistance of the World Bank and the International Fund for Agricultural Development. During these seminars, participants assessed poverty and discussed possible ways to reduce poverty. Participants concluded that in addition to a reduction in living standards of Mongolians, there is growing income inequality. Although the Government with the assistance of international donors is providing quite a substantial support and assistance, results are unsatisfactory. The participants also proposed that in developing and implementing the poverty reduction strategy, the definition of poverty should be clarified, the poor should trained in life skills, and basic social services and the system of assistance for the poor, their targeting mechanisms should be improved. They also underlined that financial support should be provided based on resources and specifics of particular regions, through local cooperatives and other similar institutions and to those able to do business and to repay loans. Poverty will be effectively reduced if the poor are cared by more able people. They also underscored that job creation, development of small and medium enterprises, extension of infrastructure to connect rural areas with the market, expansion of financial services and effective environmental and disaster management should be key priorities of the Government. NGOs were an essential component of whole exercise: they were involved in preparation and organization of the regional seminars and took a substantive part in them. It is worth noting that one third of participants in each seminar were representatives of civil society. On the other hand, working groups participated in series of GDLN regional seminars organized by the World Bank Institute with subsequent internal discussions. During the PRSP consultative process, meetings discussed the Road map which is in essence an action plan for implementation of the strategy. Thus, local and national level teams made a good start for further in-depth involvement in the implementation phase of the EGPRS, in particular in contracting out some governmental functions as well as monitoring of this implementation.

2.12 Series of consultative and business meetings as well as other events were organized on the national level. These consultations involved members of Parliament and the Cabinet, other high-ranking government officials on national and local levels, representatives of donor organizations, the private sector and non-government organizations, citizens, the poor and vulnerable in particular. Some of these participants including ministers, members of PRSP working group discussed their experience of the process on video and telephone conferences organized by the World Bank by sharing their views on specific issues, learnt experiences of other countries. Representatives of civil society presented their experience of PRSP process to the World Bank President stressing the wide presentation and consultations on specific as well as general issues on poverty and economic growth in Mongolia. Also, Mongolian representatives participated in international conferences and seminars on national poverty reduction strategies where they shared the process of the development of the PRSP in Mongolia and learnt from the experiences in other countries, which found its reflection in the Mongolian PRSP. All this greatly enhanced the quality of the PRSP.

2.13 The Poverty Research Group under the UNDP Poverty Research and Employment Facilitation project is continuing to operate as a unit to assist in addressing research and data gaps identified in the I-PRSP and its JSA through poverty research activities and developing recommendations for specific policy areas. The research in area of review of initial privatization policies, their impact on poor, of prevention of middle income groups from falling into vulnerability, of weather effects on environment and ways to approach sustainability of herders income have been sub-contracted to selected teams.

2.14 The specific project proposals, including Institutionalization of the participatory process, Improve pre-school education for the rural children, Improving participation of stakeholders and basic information, Support herders coalition have been screened by the National steering committee and main donors and proposed to PRSP Trust Fund.

III. Sustainable Development and Pro-Poor Growth

2.15 The Mongolian government’s priorities are to accelerate economic growth and reduce poverty. Special focus is given to the involvement of poor people in development process through helping to improve their health and educational level, upgrade their skills, and most importantly the creation of a favorable environment for business development. Therefore one of the milestones of poverty reduction is acceleration of economic growth.

2.16 Pro-poor economic growth: Economic growth is the pre-requisite for poverty reduction, along with the narrowing of income inequality and, subsequently, ensuring sustainable development for the population. Mongolia’s average GDP growth of 3.3 percent during 1995-1999, and around 2 percent in the past 3 years is not sufficient to reduce poverty. Therefore, the central objective of the EGSPRS is to reduce poverty by increasing an economic growth to 5-6 percent per annum in the medium term. Sustainable high economic growth creates opportunities for the people to study, work and develop. However, the government and civil society should focus on efficient mechanism for channeling the benefits of higher growth to the poor. The Government will place emphasize on encouraging citizens’ initiatives and creating a favorable economic and social environment in order to expand civil society participation in development.

2.17 In the medium term the Government will implement policies aimed at accelerating private sector-led economic growth through the stabilization of macro economy, low inflation, development of free market competition, and appropriate monetary, credit and tax policies, thus raising the living standards of the population.

2.18 Economic growth will be enhanced by coordinating macroeconomic policies with policy priorities in the sectors and economic and social sector restructuring. Based on results of LSMS, the incidence of poverty was uneven in 1998. The depth of poverty was highest in aimag centers. Since then, natural disasters in the past three years greatly affected the livelihoods of herders. Therefore, the government policy priorities should be re-oriented towards those population groups most affected by natural disasters through expanding financial and banking services in rural areas, developing small and middle-size enterprises, stabilization and expansion of agricultural activities. Joint efforts aimed to accelerate economic growth and reduce poverty by the government alongside civil society and the private sector will be expanded.

2.19 Pro-poor allocation of resources. A further central goal of the EGSPRS in the medium term will be redistribution of the benefits of growth to the population equally, with a distinctly pro-poor focus. However, this distribution will not be done in a passive manner, but through implementing specific projects and programs aimed at increasing employment among the poor and the near-poor to take their own initiatives to improve their situation. As well, the Government will undertake economic restructuring consistent with building economic capacity, including public sector reforms, improving public expenditure management and the rationalization of social safety nets.

2.20 Ensuring comprehensiveness of the poverty reduction strategy. In addition to incorporating the main objectives of the economic growth acceleration and poverty reduction into long-term development policy documents, policies will be encompassed in national medium-term development programs and the medium term budget framework, as well as the annual Economic and Social Development Guidelines and budget proposals, thus ensuring consistency and comprehensiveness of implementation of the strategy with enhanced accountability and transparency.

2.21 To achieve this objective macroeconomic management and coordination is essential. Therefore it is important to develop a system of “outputs envelopes”, which is consistent with new public sector management and finance environment and priorities of the macroeconomic and sectoral policies.

2.22 The long term vision of Mongolia’s development is premised on a consensus of all stakeholders, including the government, civil society and the private sector. The business plan for the medium term of entities is becoming an efficient mechanism to link this long term development vision with sectoral priorities - feed back loops regarding financial resource issues is provided by a much improved medium term budget framework. This sequence of activities and their linking will provide a base for the formulation and implementation of pro-poor policies. The main objectives of the medium term plan will be included in the EGSPRS, and its implementation and monitoring will be done through annual Socio-Economic Guidelines.

IV. Acceleration of Economic Growth

2.23 Within the framework set by the strategy, the Government is giving priority to acceleration of economic growth, ensuring macroeconomic stabilization, further opening of markets and the creation of a favorable environment for business. We believe that the core objective of the economic growth and poverty reduction strategy is long-term macroeconomic stability. Macroeconomic stability is the cornerstone of economic growth enhancement and the increase in incomes of the population. The main engine of economic growth is private sector development, which is primarily based on privatization of state owned assets, improving business environment, enhancing business management, attraction of foreign investment and with overall enhancement of the macroeconomic stability.

2.24 Further, the Government will continue to support through policy measures, an open economy - and at the same time it will pursue a policy of accelerating the economic growth by attracting foreign investment and investing in efficient way. The Government will take measures to decrease the number of different kinds of trade permissions required, and simplify the overall procedure in order to support exports, industries and services in rural areas. It will pursue a policy of developing small and medium size enterprises, renovation of outdated technology, improving processing standards of raw materials and, therefore, boosting both production and the quality of the final product and increasing the number of small credit services. In relation to acceleration of economic growth, a favorable environment for service sector growth, particularly, development of the tourism sector, will be established.

2.25 The Poverty Reduction and Growth Facility Program, agreed between the Government of Mongolia and the IMF, is directed to ensure fiscal sustainability, to support private sector investment, to stabilize the macroeconomic situation and, hence, distribute the resources created as a result of economic growth for human development and poverty reduction. By implementing the PRGF, it is forecasted a solid basis for further economic development will be established and the economic growth is expected to be 5.5–7 percent in 2005-2008. Moreover, it is projected that the current account deficit of the balance of payment will be reduced to 6.7 percent of GDP in 2004 and, further, policy measures will be pursued to sustain it at the level of 6.5 percent.

2.26 Mongolia, with her vast territory and pristine nature, endowed with natural, in particular mineral resources, its advantageous geo-political position and the associated multi-faceted international relations, relatively well-developed human resources and urbanization, has many advantages for development. However, Mongolia’s economy is extremely vulnerable to climatic changes and the impact of external ‘exogenous’ shocks. The narrow base of the economy, the small size of the population, the distance from the sea and the other attendant problems of small economies also negatively affect national development. The main outcomes of this vulnerability are the sharp declines in prices of main export commodities and ‘shocks’ to the agricultural sector visited on the country in the past 2-3 years. Therefore, the implementation of any actions and mechanisms to accelerate economic growth in the medium term is only possible on the basis of careful study of these factors.

2.27 Overview of Mongolia’s economic growth in last 10 years. During the transition period after 1990 when Mongolia began its transformation into a market economy, investments halted leading to an economic downturn; 1992 saw the largest decline a 9.5 per cent decrease in GDP from the previous year. This decline continued until 1993 when the economic downturn reversed.

Figure 2.1:
Figure 2.1:

Real Economic Growth, 1989-2002

Citation: IMF Staff Country Reports 2003, 277; 10.5089/9781451826814.002.A001

2.28 The economic growth trend in last 10 years can be split into 3 periods; 1993–1995, 1996-1999 and 2000-2002.

Table 2:1:

Economic Growth, percent

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2.29 Real terms economic growth was 1.1 per cent in 2000 and 1.0 per cent in 2001; and for 2002 it is expected to be at around 3.9 per cent. During the last 10 years, the growth rates of different sectors have not been stable due to structural changes in the economy, external economic conditions and climatic influences. In 1993-1999, growth in the primary sector of livestock husbandry was the main source of economic growth, yet the corresponding figures for industry, construction, transportation and communication remained unstable. In particular, growth of the industrial sector which declined by 6.4 per cent in 1993 recorded growth of 14.8 per cent in 1995. However, the sector experienced another decline of 3.6 per cent in 1996; yet in 1997-1999 it revived. The industrial sector, especially processing started its revival from 2000. Livestock husbandry which saw extensive growth between 1993-1999 comprising 36.8 per cent of GDP, declined by 16.6 percent in average due to unfavorable natural conditions. This resulted in an overall average economic growth rate of 2.0 per cent in between 2000 and 2002, in particular the processing sector delivered growth of 31.8 per cent in 2001, unprecedented since 1990. In 2002, its high growth continued at 22.1 per cent. In order to compile the requirements of Chinese external trade operations the technical standards MNS 4724:2001, MNS 3683:2001 have enforced for certain types of row materials, namely skins, wool.

2.30 The capital city UB is becoming one of chief contributors to economic growth. Almost 36 percent of Mongolia’s GDP is produced in the capital; in 2001 the capital’s GDP increased by 20 percent reaching MNT 426.9-bil. In GDP, industry, construction, hotel, dining hall, and financial services are delivering a more rapid growth. The share of the private sector on the capital’s GDP has been increasing in recent years and hit on 71.2 percent. With the growth in production, in 2002 budget revenue increased by MNT 5.5-bil from previous year comprising 13.5 percent of the central budget.

2.31 Medium term government policy directions to enhance economic growth: Within the objective of attaining high economic growth in 2004-2007, the processing industry based on domestic raw materials, mining and extraction, tourism, IT, and infrastructure are considered to be main sources.

2.32 In the processing sector development livestock raw materials processing production, promoting export-oriented production of this type will be supported through SME’s promotion and their efficient allocation and development in line with regional development principles. This includes cashmere products, meat, skins and hides, fur, flour productions, extraction of oil, and development of facilities to process the raw oil into petroleum products. In this regard, conditions to increase the extraction of oil will be provided.

2.33 For the mining sector, in order to utilize minerals and raw materials of Mongolia in the most effective and proper manner, measures will be taken to attract foreign and domestic investors into the mining sector and building favorable conditions for business operations. The government will encourage intensification of exploration, research and analysis works to open and utilize new deposits of minerals; and increases the extraction of gold, copper, coal, oil, zinc and other minerals. The production of final products with a high metal composition is a priority.

2.34 Within the framework of IT sector development, priority is given to IT sectors through expansion of internet services, establishment of a unified e-information network, thereby improve software and conditions for quality training of personnel, design and sale of software, development and export of e-information processing services.

2.35 Within tourism development priorities, the number of foreign tourists is to be increased significantly by establishing an environment for development of tourism in Mongolia, especially increasing the number of international flights and ensuring comfortable travel conditions. Hotel service quality will be raised to meet international standards. The comfort ability in tourist camps and entertainment activities will be ensured. There is a need to upgrade marketing efforts of Mongolia’s tourism market. 2003 has been announced as to the year of visiting Mongolia - many important measures will be taken.

2.36 Regarding regions and infrastructure; a legal environment for regional development is to be established; priority is given to development of SME’s in the countryside - for this purpose infrastructure such as transportation, communication, road, and energy will be developed to improve the business environment. Gradually shift to regional economic planning to narrow the development gap between cities and countryside. This will enable active participation of rural areas in market relations and establishment of favorable conditions for market and business development in the countryside.

2.37 In regard to livestock husbandry and land cultivation sectors, set the start for developing intensified livestock husbandry, improve the pasture management and water supply, assist in building up of security stock of feeds. Protection systems for livestock against natural and weather disasters, assistance in technical and technological innovations in land cultivation are needed to be enhanced, in particular introduction of new environmentally friendly technology in soil processing, support land cultivation, establishment of an appropriate weather system with extensive preventive measures, and livestock insurance system.

2.38 Medium term economic growth trends: Consistent with the above priorities of the government economic policy and activities, the economic growth rate for 2003-2007 has been estimated in three scenarios.

2.39 In 2003, the real growth of GDP is projected to be 5.2 per cent, in the mid-term or 2004-2007 6 percent, as a high scenario.

2.40 In this scenario for livestock husbandry and crop sectors are projected based on assumptions to have very favorable weather conditions resulting in their revival and thereby providing a growth to processing, food production, and weaving sectors. Projections to attain 6 per cent economic growth in 2004-2007 assumed that the agricultural sector would grow by on average 4.2 per cent, mining and extraction sector by 8 per cent, processing industry by 7.9 –8.0 per cent - the main foundation for the economic growth. Hotel and restaurant services - 7.0 per cent growth.

Table 2:2:

High Scenario with Economic Growth of 6.0 Percent.

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- expected actual

- projections

2.41 In this case for the medium term period external economic conditions are assumed to be extremely favorable. In addition, for mining and extraction sectors, some deposits, exploitation of which were planned to start, were considered as being exploited.

Table 2:3:

Main Assumptions on Newly Exploited Deposits

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2.42 The second or base scenario is a GDP growth of 5.5 per cent in the mid term. In this scenario, the growth of agriculture, mining, extraction and processing sectors were taken slightly below the ones used in the 1st scenario.

In the 1st scenario (high) the following growth rates were projected:

  • -

  • - Crop industry - 4

  • - Livestock husbandry - 4.3.

  • - Agriculture as a whole - 4.2

  • - Mining, extraction - 8

  • - Processing - 8.0

  • -

In the 2nd scenario (base):

  • - Crop industry - 4

  • - Livestock husbandry - 3.8

  • - Agriculture as a whole - 3.8

  • - Mining, extraction - 6.0–6.6

  • - Processing - 7.3–7.9

Table 2:4:

Base Scenario with Economic Growth of 5.5 Percent

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- expected actual

- projections

2.43 The 2nd scenario is a scenario, which is more realistic by providing relatively less growth to mining and processing sectors. In this scenario the livestock has a normal loss and crop production and land cultivation a decent harvest. Regarding the external condition, it is the same as in 2000-2002.

2.44 Investment needs for the mid term are estimated as follows consistent with the economic growth trend.

Table 2:5:

Investment at Current Prices, MNT billion

(based on GDP estimated by expenditure approach)

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2.45 In the mid term Mongolia needs investment that equals to 24 per cent of GDP, almost 60 per cent of which is projected to be financed from foreign sources. The government will meet its investment requirements by utilizing budget investments, donor country loans and aid, mainly in education, health, infrastructure sectors and promoting regional development, and attracting direct foreign investment into mining, processing, hotel, trading businesses.

2.46 The 3rd scenario is the lower - case scenario with unfavorable situations for main economic sectors such as livestock husbandry and land cultivation. In this scenario the economic growth in the mid term is projected to be at 3.0–3.7 per cent. The risk exposure is continued in the agriculture - decline projected for up to 5 years in livestock husbandry and 4 years in crop industry. The main difference of this scenario from the 2nd one is the processing sector in addition to livestock husbandry. In connection with the continued decline in the livestock husbandry, the processing industry is projected to grow by around 4.8 per cent assuming that main sub-sectors of the processing industry - food and weaving - will not deliver a decent growth. Furthermore, external condition is considered to be unfavorable, including continues commodity price volatility, declining world demand, political instability, outbreak human and animal diseases.

2.47 The above three scenarios provide for a conclusion that the economic growth in the mid term will be fluctuated at around 3-6 percent subject to external and internal circumstances.

Table 2:6:

Summary of GDP Indicators, 2001-2007

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2.48 The 2nd scenario is considered to be the most consistent with the reality - no priority is given to any sector, risk in the agricultural sector is taken into account, growth of livestock husbandry is 1.7 points below the average growth recorded in 1996-1999 (normal loss without risk exposures).

2.49 The following table shows the composition of the mid-term economy by sectors under the 2nd scenario:

Table 2:7:

Economic Structure by Major Sector

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Source: MOFE

2.50 According to the 2nd scenario the economic structure will not be changed much. Due to growth in mining and processing sectors percentage of industry in GDP will increase by 1.5 points with a decrease of agriculture share by 1.4 percentage points.

CHAPTER 3: PROMOTION OF ECONOMIC AND FINANCIAL SUSTAINABILITY

3.1 At the first half of 1990, when Mongolia has made her first steps toward market economy relations, her macroeconomic situation was unstable, the economy was in recession that continued for a certain period of time. There was a gradual tendency toward macroeconomic stabilization in 1995-1999. However, not only the economic and financial crisis in South East Asia and overall economic slowdown in the world, but also the unstable internal political situation and unappropriate policy measures have affected Mongolian economy negatively.

I. Budget and Finances

3.2 In the early 1990’s, the budget revenue constituted about 60 percent of GDP, but as a result of the economic crisis in Asia it dropped to 23.4–33.6 percent in 1995-1999. This was also affected by the following changes in the tax policy and legal environment in Mongolia. Measures taken in 1997-1999 within the taxation reform:

  • Four-rate (15, 25, 35, and 40) corporate income taxation was changed into two-rate (15 and 40).

  • Five-rate (2, 15, 27, and 40) personal income taxation was changed into three-rate (10, 20, and 40).

  • All import taxes were annulled except the import tax rate of 15 per cent on alcohol beverages.

  • Import tax rate on flour and vegetables of 15 per cent was linked to seasonal pattern.

3.3 The taxation reform started in 2001 changing VAT rate to 15 per cent and increasing excise tax on alcoholic beverages and tobacco products by 50 percent with the aim of increasing budget income. The tax law on nullification of import duties was abolished imposing flat import duties on all imports. In addition, as a result of the Government’s policy to improve the tax collection, revenue as of GDP has increased to 36 per cent in 2001-2003. By the mid of the last decade the economy started to experience the positive growth rates, averaging at 3.3 percent. Since the transition the economic performance has been slowed down, and signs of recovery emerged by the mid of the last decade only. However, due to external shocks, including commodity price fluctuations, East Asian and Russian crisis, the world overall economic slowdown and natural disasters overall economic growth was quite concervative at around 2 percent, downwarded mainly by livestock sector performance. Despite a low economic growth, last three years were period of extensive measures aimed to improve the public finances. Compare to overall deficit of over 10 percent by the end of the previous decade, fiscal deficit was reduced from 7.7 to 6 percent of GDP in 2000-2002. This strong performance was a result of sequenced policy measures aimed at enhancement of tax administration and expenditure management with strong focus on reduction of dependence of budget on banking sector, elimination of domestic and external arrears, enhancing efficiency of intergovernmental fiscal relations. During 2000-2002 the government reduced domestic arrears twice and reached - 32.4 billion togrog.

3.4 A number of measures have been taken achieving notable results with a view to raise the tax collection process by expanding the tax base as stated in the Government’s Action Plan, improve the tax imposition and control over the tax payments, rationalizing the tax debt workout management through strengthening the legal regulatory framework and to increase the real income of low-income citizen.

3.5 It is expected that the real annual income of citizen will increase by 1.2 billion MNT each year due to the decision to postpone the starting date for the tax imposition on the dividends, interest income received by permanent residents in Mongolia in order to promote personal savings, to January 1st, 2005.

3.6 As the next stage of reform the government has undertaken a series of decisive measures to enhance budget planning, execution and monitoring, enhance transparency of fiscal operations by transferring from yearly planning to medium term, linking policy priorities with budget resources, improving comprehensiveness of budget, rationalization of the system of norms, introduction of the Treasury Single Account (TSA) system, improving reporting system. In overall, in the medium term, fiscal and tax policies shall be directed to macroeconomic stabilization, including financial sustainability, improvement of the fiscal balance, expansion of access to and improvement in the quality of social services, increased pro-poor orientation of public expenditures. These reform measures were grounded in the Public Sector Finance and Management Law (PSMFL), which was passed by the Parliament in June 2002. The Parliament has discussed and adopted the next year’s budget in a new manner not applied formerly consistent with the content of newly adopted laws.

  • Budget financing and product payments are not dedicated for financing the budget institution, its staff and utility expenses, and will be provided in accordance with the performance results of their duties, tasks and subscriptions from the government.

  • Budget expenditures and financing were distributed by expenditure items as well as by budget disposers or budgets were approved in bulk for each minister in charge of certain sectors.

  • Next year’s budget financing will be made based on contracts on product supply and results.

  • During the years, budget financing can be changed subject to operational result reports from budget institutions.

  • Sectors located in the countryside but carry out nation-wide activities will be financed from the central budget under a contract not from the local budget.

3.7 A tender selection process was initiated which led to the selection of 3 educational institutions to provide training to the civil servants at all levels on the new system for budget management. These institutions will conduct comprehensive on-site training and consultancy regarding the new system for budget management and involve about 8 thousand managers, general managers, and financial officers of 22 aimags and all the districts of the capital city for the period from May to July 2003.

3.8 These training events conducted at the local level will create the human resources capacity needed for preparing the 2004 budget proposal in accordance with the requirements set forth in the PSFML.

3.9 As set forth in the law on management and financing of budget institutions, a new principle of financing is applied on all levels of the budget – contract on product supply and result agreement. As of the end of 2002, over 14.0 thousand economic entities operated in the capital and composed budget revenue of the capital; MNT 51.1-bil were mobilized to the capital budget and MNT 53.7-bil were spent on and financed operating cost of approx irately 500 entities in the field of education, health, culture, media, urban services and social order ending up with a budget deficit of MNT 73.9-million. Up to 2001 the capital city has had an independent budget capable to generate revenue to fund expenditures, however, in recent years the Ministry of Finance and Economy while developing a draft budget makes constant adjustments to the capital city budget so that deteriorating the independent status of the capital city budget.

3.10 Under this law, budget institutions on all levels and general disposers of aimag and UB city budget will prepare quarterly and annual reports on product supply including which services, on which quality level, and how were performed using budget funds.

3.11 Mongolia is just starting the implementation of this new principle, thus we set out implementation targets as follows:

  • At primary stage: fully comprehend the law concept, correctly define products, measure supplied products in proper criteria, learn to prepare reports correctly and in a timely manner.

  • Secondly: Fully mobilize opportunities to deliver services at a possible low cost and highest quality, decrease the cost of products and services.

  • The Ministry of Finance and Economy has developed several procedures and Government decrees related to the enforcement of the law management and financing of budget institutions and is preparing their enforcement, namely:

  • Definition and approval of output types as set forth in the law on central budget;

  • Criteria for enforcement and outputs monitoring specified in the concerned contracts;

  • Regulations concerning establishment of Government contingency fund and its allocation;

  • Defining and authorization to the organization on disposal of budget saving generated during the fiscal year.

3.12 The PSMFL aims to strenghthen governance within the public sector, improve public sector performance, and clarify the roles, processes, and regulations governing the public sector performance. In accordance to the PSMFL the amendments were introduced into the concerned laws and legal regulations. The recent session of the Parliament ammended 78 laws, including the fundamental changes into the Consolidated Budget Law. According to the new system a series of and forms and regulations were adopted, namely Output contract, delegation of authorities, reports on outputs with concerned intsrutions, determinind of types and cost of outputs of public entity, business plan with comprehesive portfolio. All these regulations lay foundations for the deepening of public sector reforms aimed at improving public sector service delivery, its transparency and accountability.

3.13 If the major external shocks would not occur the fundamentals of macroeconomic stabilization will be maintained. Especially fiscal and public restructuring policy measures undertaken are conducive to the macroeconomic stability. The government has defined the following objectives with respect to the tax revenues for the purpose of ensuring the macroeconomic equilibrium for 2004-2006:

  • To appropriately define the level of interdependence between economic growth and budget revenue; to intensify the tax imposition, collection and control within the legal framework; to further consolidate the progress of the last few years in terms of ensuring ongoing flow of budget financing;

  • To relate the budget revenues and tax relations to the Civil Service Reform activities as well as the measures to be taken in the mid-term regarding the government’s social policies and the need to ensure budget balance and stability;

  • To implement measures to reduce the tax burden on the economy and the population to the reasonable level without following the tax policy consistent with the state budget revenue increase.

3.14 The percentage of budget revenues in GDP expected to be 37.4 percent in 2004, dropping to 36.3 percent in 2005-2006. In this connection, the following measures will be taken within the mid-term budget framework in the next three years with respect to taxation:

3.15 The tax burden on the economy was 29.2 percent according to the 2002 actual and the policy will be pursued in the next three years to maintain it at this level. The income from social insurance fee payments will be calculated in relation to the personal real and cash income growth and the activities to improve the level of employment. Thus in 2004-2006 it is expected that the personal revenues will increase by 15 billion MNT or by 27 percent compared to 2003. A system will be devised by which an excise tax is to be increase on cigarettes and it is expected that as a result the tax revenues will increase by about 3 billion MNT from 2004. It is expected that the revenues from land fees and payments will increase to a certain extent with the beginning of land privatization. The policy towards reduction of the higher rate of the corporate taxes will be reviewed and introduced since 2005 only if the accompanied by offsetting current expenditures cuts. This will as an initial step towards unification of the corporate tax level.

3.16 The restructuring in the social sector will be undertaken in accordance to the Main guidelines on restructuring and privatization of social sector adopted by the Parliament. The list of social entities to be restructured in the medium term is approved by the Cabinet.

3.17 Fiscal sustainability: The fiscal sustainability is a key for the macroeconomic stability. Years of 1997-99 were a period of lower revenue accumulation due to poor tax policy, business collapse, external shocks, and Asian financial crisis. In addition the public expenditure management was poor, in particular in area of expenditure control and wage policy. In overall the budget performance was poor with large fiscal deficit and instability. The general structure of the Mongolia’s budget for 1993-2003 was as follows:

Table 9.

Macro fiscal performance, 1993-2003

(as a percentage of GDP)

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plan

3.18 Mongolia has attained a remarkable success in reducing the budget deficit in last 10 years. In 1994 the budget deficit constituted 19.8 per cent of GDP; however we managed to reduce it in succeeding years down to 6.0 per cent in 2002. Although the current expenditure of the budget was increasing in terms of amount and percentage in the total expenditure, direct subsidies to state-owned enterprises had been reduced 3 times in 1995-2000.

Figure 3.1:
Figure 3.1:

Fiscal Trends

Citation: IMF Staff Country Reports 2003, 277; 10.5089/9781451826814.002.A001

3.19 Since 2001 the government started fundamental changes in area of public expenditure management with aim to enhance tranparency, accountability and improving service delivery. As an outcome of implemented policy actions on fiscal sustainability from 2001-2002, the fiscal macroeconomic indicators were improved, current budget was with positive number and expenditure financing supervision was upgraded.

3.20 As a result of efficient measures and actions undertaken by the Government on ensuring the fiscal sustainability, improving tax collection process and implementing rational tax policy, the fiscal sustainability has been improved from the second half of the 2000, access and quality of public services has been improved. The newly established Government (August 2000) undertook a series of decisive measures to improve the tax collection, repayment of domestic and foreign arrears, enhancement of fiscal discipline. As the first step the government repaid lending to the Mongolbank worth 12 billion togrogs. Further, as result of the above measures the arrears in wage bill of 8.2 billion togrog was retired and inter-agency arrears were reduced substantially. By the end of 2002, 16 aimags out of 21 have nullified their arrears. The Public Sector Financing and Management Law was adopted by the Parliament in June 2002 and enforced from 1st of January of 2003 in order to speed up fiscal reforms. 2003 budgeting was drafted according to the Public Sector Financial Management Law and start from 1 January 2003 the budget is enforced. The VAT has been increased by two points reaching 15.0 percent and enforced, and excise tax on alcoholic beverages and tobacco products has been increased by 50 percent as well as customs tax by two points reaching 7.0 percent (The customs tax is being enforced within one year).

3.21 The intergovernmental transfer system was modified based on new equalization model: of 80 percent of excise VAT and 50 percent of special excise tax centralization and a reallocation based on various criteria. Key indicators of last 5 years of the capital’s budget and finance show that tax collections from corporate and individual income taxes have been increasing from year to year, but with the amendment into the Taxation law effective 2001 most part of VAT, effective 2002 corporate income and excise taxes, and effective 2003 individual income tax collections are mobilized to the central budget changing the budget structure of the capital and leaving its with a less budget base. Under the law on administration and financing of budget institutions, General portfolio manager of the capital or the Mayor shall bear the following duties and mobilize funds required for performance of his/her duties from local sources:

  • 1. Enhance infrastructure of local property, do road maintenance

  • 2. Ensure the smooth running of water supply purifying facility

  • 3. Take environmental protection measures and do furnishment, expansion and reform

  • 4. Build flood barriers, fight against soil wear

  • 5. Ensure the public sanitation, remove and destroy trash

  • 6. Protect from fire

  • 7. Destroy damage-causing animals

  • 8. Fight against animal decease and deceases transferred from animals to humans, take preventative measures

However, education, culture, health, labor, social welfare, social security delivery and prevention measures are being supplied to the Government on a contractual basis under a new structure. Under the structure, the capital budget revenue is comprised of revenues with limited source that are imposed on one specific object such as immovable property tax, vehicle tax, stamp duty, land payments, rent for utilization of water, forest and minerals. This reflects the requisite to take actions towards identifying additional sources of revenues and expanding the tax base.

3.22 As a result of the measures aimed to maintain macroeconomic stabilization the macro fiscal indicators for 2001-2002 have improved substantially. The following Table describes the financing gap filling for the period of 1997-2003.

Table 3:1:

The ‘Financing Gap’ as a Percentage of GDP

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Plan

3.23 As indicated in the Table 20, the fiscal deficit for 1997-1999 was primarily financed from the external resources, namely financial loans. Domestic resources, such as loans the banking sector, especially from Mongol bank were also utilized. Due to over reliance on the domestic sources for financing the fiscal deficit, the “crowding out effect” took place. However, the Government’s initiative to reduce the government credit from the banking sector and to finance the monthly and quarterly deficit through issuing short-term bonds have successfully implemented in 200-2002. The fiscal deficit for 2002 was financed, basically from the external project loans, extended to the Government of Mongolia on a concessional basis.

3.24 Based on EGSPRS and preliminary consultations with IMF, key indicators of the budget in its mid-term projection for 2004-2006 are projected to be on the following levels provided Mongolia’s GDP growth reaches 5.3 percent in 2004 and 5.5 percent in 2005-2006:

Table 3:2.

Fiscal Projections Outline as a percentage of GDP

(Base Case)

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Expected Outturn

MTBF

3.25 In the mid-term, total budget expenditures and net lending to GDP ratio will be reduced steadily. For instance, by 2002 total expenditures constituted 44.8 per cent of GDP, which is targeted to drop to 43.3 per cent in 2004, and 41.8 in 2005. This will be attained through the following measures by the Government:

  • Restructure some self-sufficient units of education, health and culture sectors into self-financed institutions, transform them into state owned entities, or contract out some services, and privatize;

  • Carry out the civil service structural reform in phases, downsize the Government expenditures;

  • Reduce subsidies to state-owned entities;

  • Optimize the ODA utilization, in particular improve targeting an efficiency of loans extended from donor countries and international financial institutions, as one of key factors of economic growth through amendment the existing legislation on foreign investment and loans, and maintain debt level of Mongolia at manageable ratios.

3.26 The surplus of the current budget was 4.4 percent in 2002, and this will be kept above 4.7–5.4 percent in 2004-2006 for potential funding of domestic investment. The overall budget deficit will not exceed 5.9 percent of GDP in 2004 and 5.5–4.5 percent in 2005-2006.

3.27 Resource allocation. The credible public sector policy flow from a consensus of policy priorities with budget and official development assistance allocation. Therefore the Government Action Plan considers being a primary policy document which identifies the main directions of policy for the medium which were transferred into the sectoral strategies, projects and programs. The current fiscal reform aims to strengthen the linkage between policy-making with budget allocation, in particular with focus on pro-poor measures.

Table 3:3:

Budget Allocations to the Social Sector

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3.28 Since 2000 the Government has focused its attention on the education sector, thus providing to one child of poor and herder families with free university education and dormitory fees, improving the educational environment, the budget allocation for this sector has been increased during last three years. The education and health sector financing is planned based on the expenditure norms per student or service person, and the financing of schools with many students is done sufficiently. These norms have been in force since 1998 and depending on the price changes, they have being increased annually. Despite, there are some cases when the allocated normative expenditure is not sufficient and lack of in remote schools with a small number of students and in soums hospitals with a small population. It is a common situation when children of wealth