Chapter 4
“Without USAID and assistance from American companies in the energy sector, they simply would not have survived the winter of 1992–93 with an operating heating system.”
The United States Agency for International Development (USAID) launched its first program in Mongolia in November 1991, almost five years after the official opening of bilateral relations between the two countries. More than two decades later, US assistance programs continue to promote useful partnerships between the United States and Mongolia, as rapid expansion in the country’s mining sector is dramatically changing Mongolia’s economic prospects for the future.
During the period 1991 through 2011, the total USAID grant funding to Mongolia exceeded $220 million, with approximately half of this amount for economic growth. A further $31 million has been targeted on democracy and good governance. Additional funding allocations include $48 million for emergency energy assistance during the 1990s and $5 million on emergency food and disaster assistance, primarily in the 1990s. Apart from emergency relief, specific areas of USAID interest over the years have included small business development, financial sector reform, rural development, and environmental concerns.
Cash transfers have figured into the aid equation only rarely, although USAID did provide $10 million directly to Mongolia in 1991, when the country was struggling with the sudden cutting off of Soviet aid. It also provided another $10 million cash grant in 2009, following the global financial crisis. Remaining USAID grant allocations to Mongolia have largely been allocated on a project basis and have covered a number of areas, including several environmental activities.
Overall USAID funding levels to Mongolia over the past two decades have been relatively modest, averaging around $10 million annually, lower than that of other bilateral donors such as Japan and Germany during that same period and much lower than that of international financial institutions such as the World Bank, Asian Development Bank, and European Bank for Reconstruction and Development (EBRD). Focused assistance combined with good relations with key partners have assured a significant impact in some sectors.
In addition, other US departments and agencies have forged effective partnerships with Mongolian individuals and institutions over the years—starting with the US Department of Agriculture (USDA), but also including the Departments of Treasury, Energy, Interior, and Labor, the National Science Foundation (NSF), and the National Institutes of Health (NIH).
In particular, USDA programs have funded research and supported rural development, while Treasury programs provide technical advice to major Mongolian institutions such as the Ministry of Finance and Central Bank. The NSF and NIH support partnerships of Mongolians and Americans that aim to research and better understand a variety of health and environmental concerns. In December 2010, Colorado State University received a $1.5 million NSF grant to study the impact of climate change on Mongolian pastoralists.
The launch of a Millennium Challenge Corporation (MCC) program in Mongolia in September 2008 more than doubled US assistance levels to Mongolia while also introducing new approaches that have further strengthened the US-Mongolian development partnership. The MCC is itself an innovative concept, developed to support countries that have demonstrated a commitment in three essential areas—market-led economic growth, good governance, and investments in people. As one of the first countries to qualify for MCC funding worldwide, Mongolia effectively demonstrated its performance and commitment in all three areas. At this point, the MCC program in Mongolia is valued at $285 million in grant funds over five years and is scheduled to conclude in September 2013.
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In the beginning, USAID programs in Mongolia concentrated largely on short-term emergency relief, while also providing modest assistance to help build and strengthen democracy. Launched against a backdrop of economic collapse and uncertainty following the withdrawal almost overnight of Soviet assistance during the early 1990s, the intent was simply to provide the supplies and equipment needed to keep major power plants running and buy critically needed materials, equipment, and supplies.
The initial USAID effort during late 1991 and early 1992 reflected this focus and consisted of a $10 million cash transfer and $2 million in equipment and training. The next year’s program retained a similar focus, stressing the emergency response needed to shore up Mongolia’s rapidly decaying energy infrastructure. By 1998, USAID had provided nearly $50 million in supplies, equipment, and technical assistance to strengthen and sustain Mongolia’s crucially important power plants. Other early programs emphasized health and emergency food supplies, including funding to buy 30,000 metric tons of wheat.
Documents from that difficult period underscore just how far Mongolia has come in recent years. Looming disaster in the energy sector represented a special concern. Real fears were voiced in early USAID planning documents and embassy cables that Ulaanbaatar’s power system might simply collapse: “A system breakdown in winter, even for a relatively short period of time, could be disastrous, perhaps forcing the evacuation of an estimated 50 percent of the urban population and threatening the lives of thousands of individuals.”
Ambassador Lake described the situation in even more vivid terms: “The vision that hung over our heads was that in January when it’s 40 below, you face a collapse of the heating system. Roughly 40 percent of the people in Ulaanbaatar, a city of half a million, would be exposed to 40 below weather with no form of heat.”
Given this bleak assessment, it is not surprising that the lion’s share of USAID assistance during the early 1990s was emergency and short term in nature. This required improvements not only in the main power plant but also at the coal mine in nearby Baganuur that kept it running. Both the power plant and the coal mine had been constructed during the Soviet era, and the spare parts needed to maintain operations typically had to be procured from Russia. This in turn required the tiny USAID staff based in Ulaanbaatar to prepare complicated waivers, permitting the purchase of equipment made in Russia rather than in the United States. Nonetheless, every obstacle was surmounted and Ulaanbaatar’s heating system remained intact. According to Ambassador Lake, “Without USAID and assistance from American companies in the energy sector, they simply would not have survived the winter in 1992–93 with an operating [intact] heating system.”
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Even in a time of dire economic hardship, senior Mongolian officials expressed interest in building democracy and beginning a dialogue with international partners on more long-term development concerns. It was in 1990 that the Mongolian Mission to the United Nations initially approached the San Francisco-based Asia Foundation to seek assistance for the political and economic transition that was already beginning to unfold. The Asia Foundation responded positively, first with its own private funds and then, in 1991, when it received its first direct USAID grant to work in Mongolia. In that same year, it opened a resident office in Ulaanbaatar, among the first of any foreign NGO to do so.
Along with other international organizations such as the Konrad Adenauer Foundation and the Open Society Institute, the Asia Foundation quickly became an important development partner. Early programs dealt with training, technical assistance, and international exposure for a country that had been isolated for decades and even centuries. Hundreds of Mongolians participated in in-country seminars and workshops, and dozens received their first opportunity to travel abroad to Western countries through tailor-made study tours designed to bring international experience to bear on Mongolia-specific issues and concerns.
Although USAID’s initial work focused heavily on the parliament and the judiciary, early democracy programs sponsored by the Asia Foundation, the International Republican Institute, and others also helped build Mongolia’s nascent civil society. Indeed, small grants provided to local organizations under various USAID-funded initiatives during the 1990s included a long list of new and emerging Mongolian NGOs, such as the Center for Citizenship Education, the Center for Human Rights and Social Studies, the Consumer Foundation, the Consumer Protection Association, the Free and Democratic Journalists Association, the Liberal Women’s Brain Pool, the Mongolian Association for the Conservation of Nature and Environment, the Mongolian Chamber of Commerce and Industry, the Political Education Academy, the Press Institute of Mongolia, the Women Lawyers’ Association, the Women Economists’ Club, the Women’s Research and Information Center, Women for Social Progress, and the Young Leaders’ Club, among many others.
While direct funding for local NGOs has become more limited in recent years, there is little doubt that USAID—along with other international donors—played an important role in building and strengthening Mongolia’s civil society at a time when even the basic idea of “civil society” was entirely new.
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Gradually, USAID-funded activity in Mongolia began to move away from a short-term emergency relief response toward a program that was better positioned to address long-term economic concerns. These efforts gained new momentum after national elections in June 1996 placed a Democratic Party (DP) government in power, one that had voiced a strong commitment to far-ranging economic reform and placed Mongolia on an irrevocable path toward a market-based economy.
Soon after the 1996 elections, three Mongolian economists associated with a USAID-funded technical advisory project were asked to serve as economic advisors to the new DP government, one of whom became a senior economic advisor. An early USAID-supported conference held at the Mongolian government’s request not long after the elections made international perspectives from Poland, Russia, Estonia, and elsewhere available to Mongolian policy makers, again with a view toward providing Mongolia with an opportunity to benefit from the experience of other former communist countries facing similar problems. Such programs helped pave the way for a period of far-reaching economic reform that put Mongolia firmly on the path toward a market-based economy.
Throughout the late 1990s and beyond, these efforts deepened the reform process in several areas, including energy, banking, tourism, trade, and privatization. Typically, USAID-funded technical advice as well as tailor-made study tours abroad involved a wide range of relevant sources, not only the United States.
For example, the ongoing USAID-funded dialogue on public administration involved a visit and presentations by a senior expert from New Zealand. Similarly, discussions on privatization drew on experience from Bulgaria, while USAID-funded energy programs included the provision of Hungarian expertise. At the same time, these programs enabled Mongolian experts to travel abroad and interact with counterparts facing similar issues, including in countries with a shared Soviet past. More recently, USAID-funded technical assistance and training has worked closely with both government officials and the private sector to address tax reform, launch a credit bureau, establish Mongolia’s Energy Regulatory Authority (ERA), introduce new approaches to mortgage financing, and improve corporate governance.
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Policy reform can be vital in shaping new approaches and introducing significant economic change. However, it also often tends to be a very “abstract” concept, hard to grasp and seemingly removed from the day-to-day realities of individuals facing harsh economic circumstances.
For Mongolians, the challenges were especially acute in the immediate aftermath of the sudden cut-off of Soviet assistance at the beginning of the 1990s, assistance that at one point had represented 30 percent or more of Mongolia’s gross domestic product (GDP). On the eve of Mongolia’s democratic era, government expenditure also accounted for 65 percent of annual GDP, while the burden of external debt owed to the Soviet Union and its allies exceeded Mongolia’s annual GDP by nearly 500 percent. The gap between what the country produced and what it consumed—largely on a subsidized basis from the Soviet Union—was both large and growing fast.
The phrase “shock therapy” is sometimes used to describe the policies that Mongolia adopted during the 1990s, featuring among other prescriptions a move toward market-based pricing as well as rapid privatization. Several critiques written during the early 2000s by Western academics who occasionally paid brief visits to Mongolia and sometimes took an optimistic and even credulous view of statistics generated during the Soviet period describe a never-ending series of economic disasters that left nothing but destruction in their wake. For example, one Norwegian academic referred to the country’s “permanent trade deficit,” as if Mongolia did not already have such deficits throughout most of the Soviet period. Similarly, he lamented the fact that a “huge share of GDP” had “permanently disappeared.” The volume providing this bleak assessment was published in 2004, just as Mongolia was about to embark on a five-year period (2004–08) in which GDP growth averaged more than 9 percent annually. Such assessments typically predicted dismal and unrelenting failure for Mongolia in the years ahead.
Although much less remarked upon in the literature, the reality is that Mongolia faced two unexpected “shocks” during the early 1990s. These shocks occurred in rapid succession and both had far-reaching impacts across Mongolia’s struggling economy. The result was a deep recession that took at least a decade to recover from.
The first, and in some respects most dramatic shock that Mongolia experienced during the post-Soviet period, started with the abrupt cut-off of virtually all Russian assistance, accompanied by the demand that previously heavily subsidized products from the Soviet Union now be paid for in hard currency. This shock had little if anything to do with policy decisions available to government officials in Ulaanbaatar. On the contrary, it was the economic implosion that followed the Soviet departure that constituted the first big shock, making current approaches untenable and causing Mongolia to seek both financial and technical assistance from abroad.
For the Government of Mongolia, the cupboard was literally bare: it had almost no hard currency and few immediate prospects of earning any. Moreover, it lacked the means and the budget to maintain the heavy subsidies of state-owned enterprises that had been a hallmark of Mongolia’s economic policy during previous decades.
For Mongolian officials at the time, the situation and the range of available choices differed from those confronting Russian policy makers following the breakup of the Soviet Union, a “closed economy,” subsidized in significant part by the largest constituent republic (Russia), even as Russia also benefitted from access to the natural resources and other products provided by the outlying republics. The emergence out of the debris of the Soviet empire of newly independent countries—Ukraine, Belarus, Moldova, Armenia, Georgia, Azerbaijan, Latvia, Lithuania, Estonia, Kazakhstan, Kyrgyzstan, Uzbekistan, Turkmenistan, and Tajikistan—was highly disruptive and quickly set in motion a complex series of new economic relationships.
However, Russia as the core “successor” state to what had once been the Soviet Union did at least inherit a manufacturing base as well as a large and potentially self-sufficient economy, one that included a fairly significant internal market numbering more than 140 million consumers, along with several actual and potential sources of foreign exchange. While facing hard choices, policy makers in a newly independent Russia could therefore contemplate several plausible alternate development strategies when setting a course forward. The new Russian economy may have faced severe economic distortions, but at least it did not depend entirely on subsidies from an external power in order to survive.
In contrast, the entire Mongolian economy had been artificially kept afloat for many years by subsidies from the Soviet Union, subsidies that were eliminated almost overnight. In addition, its population numbered considerably less than three million, representing a tiny domestic market. Perhaps not surprisingly, its workforce produced little in the way of either consumer goods or machinery and other heavy equipment. Mongolia’s infrastructure was also woefully inadequate, having less than 1,000 miles of paved road in a country the size of Western Europe.
For Mongolia, it was not a question of reallocating budgets or redirecting investment within the parameters of a large, existing, and stand-alone economy that had already achieved some measure of self-sufficiency and conceivably might have made a rational choice to “go it alone.” Rather, Mongolia at the beginning of the 1990s was an extraordinarily aid-dependent country, suddenly cut loose from all previous sources of capital and investment and with little hope of finding alternative options to replace them. As one of the most aid-dependent countries on the planet, it could no longer maintain and sustain a Soviet-style welfare state, even had its politicians and public wanted to.
Against this backdrop, Mongolia’s economic future appeared to hinge on the introduction of a new and very different market-based approach based on policy reforms that carried with them a second round of “shocks,” in this case involving market-based pricing mechanisms, large-scale privatizations, and a vastly expanded role for the private sector.
Relatively quickly, Mongolia became just as dependent on the international donor community as it had been on the Soviet Union. Indeed, for most of the 1990s and into the early 2000s, foreign assistance represented approximately 30 percent of GDP, just as it had during the 1980s when the Soviet Union had been Mongolia’s chief benefactor. Unlike the 1980s, assistance during the 1990s came from many sources and reflected a range of different perspectives, all of them broadly sympathetic to free market approaches while disagreeing on the details on how to get there.
Privately funded NGOs provided additional assistance, to some extent offering a modest “safety net” at a time when Mongolia’s own economy was rapidly imploding. For example, for most of the 1990s and into the first decade of the 2000s the annual budget of the international NGO World Vision exceeded that of USAID, with much of the World Vision budget based on child sponsorships from individual donors in Hong Kong, Japan, Singapore, South Korea, and other Asian countries. Many smaller NGOs also became involved at a time when individual Mongolians often faced extraordinarily difficult social and economic circumstances.
International donor gatherings in Ulaanbaatar, Tokyo, and elsewhere emphasized the importance of aid co-ordination. However, in reality senior Mongolian policy makers had to weigh a flood of advice, some of it conflicting, from a range of donors that included bilateral country aid programs (notably, Japan, Germany, Korea, and the United States), international financial institutions (the International Monetary Fund, the Asian Development Bank, the World Bank, and, later, the European Bank for Reconstruction and Development), various UN agencies, and a broad spectrum of NGOs.
Rather than following any straight-line trajectory or reflecting any single “pure” point of view, policy decisions varied throughout the decade and beyond, depending on election results, the views of particular politicians, and economic circumstances prevailing at the time, both globally and within Mongolia. Mongolian policy makers followed some of the advice proffered but rejected much of it, choosing a path that involved many twists and turns, as well as occasional detours and false starts. As in any democracy, different governments emphasized different themes, though all of them affirmed broad support for a policy of market-oriented economic growth that reflected a decisive rejection of the country’s Soviet past.
USAID was a part of the international donor mix throughout the 1990s and into the 2000s but by no means the only part. Attempts were made to focus USAID technical assistance in a few areas, most notably energy, the financial sector, some aspects of privatization, and, later, the tax system. In addition, USAID made a concerted effort to introduce Mongolian officials to the experience of other countries weighing similar choices, especially within the former Soviet Union and among the newly emerging nations of Central and Eastern Europe.
By the early 2000s, the proportion of Mongolia’s GDP represented by the private sector had grown from almost nothing to more than 75 percent. Leaders from across the political spectrum supported the broad outlines of this transformation, while disagreeing, sometimes strongly, on the details. While Mongolia experienced continuous economic decline throughout most of the 1990s, by the early 2000s the first signs of sustained economic growth in GDP were also finally beginning to appear.
Despite the obvious challenges faced in turning around a battered economy with minimal infrastructure, bankrupt state-owned companies, huge debts, and large financing gaps, some drew encouragement from the findings of the Mongolian pollster L. Sumati and others which repeatedly and consistently suggested that, while Mongolians faced difficult economic circumstances, worried about corruption, and had become skeptical about their politicians, there was widespread consensus across society that the country had made the “right choice” when it embarked on a new, and at times difficult and demanding, economic and political path at the start of the 1990s. Indeed, routinely and over many years throughout the late 1990s and early 2000s, more than 80 percent of Mongolians affirmed the decision to embark on the path of a market economy and more than 90 percent supported the country’s decision to follow democracy.
While views on the mechanisms chosen to transform Mongolia into a market-based economy during the 1990s and into the 2000s vary, the reality is that the country is now in a very different place than it was in 1990 or even in 2000. The far-reaching impact of the rapid withdrawal of Soviet assistance followed by the quick introduction of market-led, private-sector-driven economic policies continue to reverberate. Issues of corruption, inequality, and poverty very much remain on Mongolia’s development agenda, though the tools used to measure and assess the magnitude of these issues remain notoriously unreliable. In addition, as Mongolia develops its mining resources, it is experiencing at first hand the challenges of mineral-rich economies everywhere, including the specter of “Dutch disease” and the high degree of currency appreciation and rapid inflation that usually accompanies it. At the same time, Mongolians have welcomed many of the changes that have taken place since 1990, most especially in their ability to travel, acquire property, make personal choices about how to live their lives, benefit from the fruits of their own labor, and attain access to consumer goods unheard of two decades ago.
Looking ahead, international experience from mining-based economies in other parts of the world offers a number of sobering “lessons learned.” Among other things, this international experience typically emphasizes the corrosive effects of corruption; the importance of good governance; the need to invest in education; the imperative to improve infrastructure; the utility of avoiding a one-dimensional, “mining only” economy; and the importance of effectively addressing environmental concerns. Already, Mongolian officials have visited some of the more successful mineral-based economies, including Botswana, Chile, and Norway. They have also looked into some of the experience available in the United States, including that offered by the Alaska Fund. While drawing on that experience and looking for ways to apply it in Mongolia, the central challenge remains as daunting as ever—effective implementation.
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My own introduction to the formidable list of development challenges facing Mongolia came in August 2001 when I arrived in Ulaanbaatar to take up my new three-year assignment as USAID mission director, assuming responsibility for a $10 million annual program budget and a five-person office with one American (myself), three Mongolian professional staff, and a driver.
The Mongolian GDP for that year (2001) was estimated at approximately $1.1 billion, the state budget at just over $430 million. Foreign aid, estimated to be in the $250–$300 million range annually for much of the 1990s and early 2000s, represented approximately 30 percent of GDP, just as it had during the Soviet era. Direct foreign investment was around $43 million, a trivial amount.
These figures stand in stark contrast to 2012, little more than a decade later, when Mongolia’s GDP was estimated to have reached $10 billion; the state budget stood at $4 billion; and foreign aid, while remaining on the order of $300 million annually, now represented less than 4 percent of GDP. Direct foreign investment had increased exponentially and by now easily exceeded $1 billion.
Other contrasts are just as startling. For example, in the early 2000s, a UNDP report described Mongolia as one of the five “most aid dependent” countries in the world and saw little hope that the situation would improve anytime soon. Yet by the early 2010s, Mongolia was routinely ranked in international publications as one of the world’s fastest-growing economies, in turn leading to rapid growth in both per capita GDP and per capita income. As a result, the relative importance of foreign aid to Mongolia has vastly diminished. While donor assistance still has a role to play in Mongolia, it is much less important in the broader scheme of things than was the case one or two decades earlier.
In recent years, rapid economic growth in Mongolia has been accompanied by increasing concerns about corruption, both actual and perceived. For example, in the early 2000s Mongolia ranked in the “bottom 50 percent” in the annual corruption rankings produced by Transparency International—half the countries included in the tables were “better” than Mongolia in this ranking, but half were also “worse.” Unfortunately, as noted earlier, Mongolia’s position in the Transparency International tables slipped markedly through 2011, when it dropped to 120 out of the 182 countries surveyed. While the Transparency International survey for 2012 indicated a modest if welcome improvement (Mongolia moved to 94 out of the 174 countries surveyed for that year), Mongolia still has much work to do in addressing a number of persistent corruption concerns.
At the same time, most leading social indicators in Mongolia have improved—in some cases, significantly—since the early 1990s. Accurate figures over an extended period of time are not always reliable. As reported by the World Bank, the life expectancy for a Mongolian at birth in 1990 was estimated at just over 60 years––nearly 58 for men and just over 63 for women (some sources put them at somewhat higher levels). By 2010, the comparable figures had climbed to nearly 68 years (64 for men, 72 for women).
Among other things, these figures reflect significant improvements in Mongolia’s maternal, child, and infant mortality rates during the post-Soviet era, led partly by improvements in vaccination coverage that are now approaching 100 percent. Noncommunicable diseases are now the leading cause of death in Mongolia, reflecting a health profile that is more like a West European nation rather than a traditional “developing” country. While overall government spending for the health sector has declined as a proportion of total public spending, economic growth means that the total amount available for both public and private health spending is much greater than ever before.
These same trends are apparent in education. For example, in 1990 the World Bank reported that Mongolia devoted 17.62 percent of its annual government expenditures to education, a proportion that fell to 14.61 percent in 2009. At the same time, considerably more resources than ever before are available for education, largely because of increased tax collection and rapid economic growth. Improvements have also been registered in the pupil-teacher ratio for both primary and secondary school. Overall, the number of primary students in Mongolia increased from 165,400 in 1990 to 273,966 in 2010. The number of Mongolians enrolled in college or university also increased dramatically during the same period.
Some critics have argued that Mongolia’s decision to embark on a market-led economic path has resulted in a downsized government, with a diminished role for the public sector. In reality, tax revenues in Mongolia have increased tremendously over the last two decades, and the country now has far more financial resources available for health, education, and other social sectors than at any time in its history. Moreover, government budgets are much larger than 10 or 20 years ago, both for the various line ministries working out of Ulaanbaatar and among the many local governments based in the provinces. Indeed, Mongolia’s total national budget increased nearly ten times in nominal terms between 2001 and 2012.
Looking ahead, there is little doubt that good governance remains a fundamental challenge for Mongolia. More than any other issue, the country’s performance here will likely determine the extent to which ordinary Mongolians benefit from the “mining boom” or are left behind because of it. Good governance will also go a long way toward determining the level of social stability in Mongolia as well as the strength and durability of its democracy. The cautionary experiences of mineral-rich countries elsewhere provide grounds for pause, especially as concerns about income inequality and corruption mount. Mongolia will face extreme challenges in the years ahead, and the jury is still out as to whether or not it will ultimately succeed.
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The nature of the development partnership between the United States and Mongolia has changed over the years, even as the Mongolian economy has changed. While involved to some extent in policy dialogue during the late 1990s and early 2000s, when Mongolia continued its shift from a command-based to a market-based economy, USAID supported a series of “hands-on” initiatives intended to demonstrate in more concrete ways the “nuts-and-bolts” aspects of business development.
During the late 1990s, for example, USAID emerged as one of the original international donors to design a truly rural-based initiative. Similarly, in the early 2000s USAID became among the first to promote business-related activities in Mongolia’s rapidly growing ger districts. The urban-based program was known as the Ger Initiative and implemented by CHF, formerly called the Cooperative Housing Foundation. Both rural and urban programs involved USAID directly in promoting credit and business services to low-income Mongolians, whether in the countryside or the crowded, rapidly growing ger districts surrounding Mongolia’s three largest cities, Ulaanbaatar, Darkhan, and Erdenet.
As one of the first donor initiatives aimed at rural Mongolia, the Gobi Initiative had an immediate impact, assisting herder groups and promoting entrepreneurship in both aimag capitals and soum centers, first in the southern Gobi region and then in many other parts of Mongolia. In addition, the Gobi Initiative pioneered a wide variety of media products focused specifically on rural Mongolia, including the magazine Rural Business News and the radio serial Herder from the Future. At the same time, it made a conscious effort to expand the quality of information transmitted to the countryside, in part through initiatives such as MarketWatch and WeatherWatch, eventually reaching audiences estimated at more than half a million.
Looking back, the legacy of both the Gobi and Ger Initiatives lives on in the many hundreds, even thousands, of businesses that have been founded or assisted across Mongolia. Working with a variety of local partners, the Ger Initiative alone helped form more than 180 business associations, create more than 1,200 new businesses, and generate more than $50 million in sales. In addition, it led to the establishment of the well-known local consultancy group, Development Solutions, an organization that continues to promote small business development across Mongolia.
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In retrospect, USAID work on both policy and practical “hands-on” project development came together in a most dramatic fashion in the early 2000s in the all-important banking sector. Indeed, the impact there has been far-reaching, among other things resulting in the founding of XacBank, the revitalization of Khaan Bank, and the privatization of the Trade and Development Bank. Today, all three banks rank among the top four in Mongolia. Both XacBank and Khaan Bank have now been privately owned and operated for many years—but it is highly unlikely that either bank would even exist without significant prior USAID involvement at a time when both were weak and struggling institutions.
The story of Khaan Bank—previously known as the Agricultural Bank of Mongolia—represents an especially notable success. As a government-owned entity, the Agricultural Bank had a long and undistinguished history of failure, having been bankrupted twice despite receiving large infusions of donor assistance as well as government funds paid for by Mongolia’s taxpayers. Typically, the bank was at its weakest following elections, having engaged in a globally familiar pattern of “directed lending” focused more on winning votes than on achieving any kind of sustainable development.
For government policy makers struggling to keep it afloat, the Agricultural Bank increasingly seemed like the proverbial “problem child” or, perhaps more accurately, “the problem from hell.” By the late 1990s, it had been so badly mismanaged and made so many problematic loans that one international consultant hired by a leading international financial institution could see no way forward. Asserting in his final report that the Agricultural Bank was “irreparably damaged,” he added that no amount of remedial intervention could possibly save it, and the only realistic remaining course of action was to “shut it down.”
Despite this dire prognosis, USAID did something that few donor agencies would ever dare to do—it assumed a lead role on the governing board and direct, “hands-on” responsibility for the entire range of operations of an essentially bankrupt bank. This decision was made at the Mongolian government’s request in August 2000, a request driven primarily by the government’s reliance on the Agricultural Bank to deliver both credit and salaries to teachers, doctors, nurses, and other government workers in the countryside.
During the innovative 30-month restructuring and remedial program that followed, the small USAID-funded management team headed by Peter Morrow, an experienced banker from Arizona, entirely “rebranded” the Agricultural Bank, relaunching it as Khaan Bank, a name that resonated strongly with Mongolia’s impressive history going back to the days of Genghis Khan. As part of the rebranding, the management team—consisting largely, though not exclusively, of Mongolians—also introduced a new logo, new computer technology, new loan products, and in many cases new staff selected on the basis of merit rather than political connections.
Within six months, Khaan Bank had been returned to profitability. Some of the measures that made this possible seem obvious only in retrospect. “Before we took over, pensioners would go to their local branch to wait for payments in cash,” recalls Morrow. “The government typically ran weeks or months behind on payments and rarely had enough money to pay everyone. So pensioners would jostle, sometimes even fight, for a favorite spot in line to make sure they got paid.”
To remedy the problem, Khaan Bank introduced a direct deposit system, allowing pensioners to simply access their savings accounts rather than having to wait in line to collect a cash payment. At the same time, Khaan Bank extended a loan to the Pension Authority in Ulaanbaatar to ensure that the government could always cover its pension obligations on time. As a result of this creative effort, nearly half of Mongolian pensioners opened accounts at Khaan Bank.
Bank restructuring programs are often associated with ruthless staff reductions and a wholesale closing of branch offices deemed unproductive. However, under USAID stewardship the number of Khaan Bank branch offices actually increased from 269 to more than 350, and the number of bank staff doubled from 800 to more than 1,600. At the same time, the bank extended more than 400,000 loans and provided financial services to more than 500,000 households. In addition, staff salaries increased and training opportunities expanded dramatically. By 2012, the number of Khaan Bank branches had crossed the 500 mark, and the number of employees exceeded 5,000, virtually all of them Mongolian.
The success of Khaan Bank during those years had other positive consequences. For example, Khaan Bank pioneered new approaches to corporate arts support and philanthropy, as it set about acquiring one of the country’s best private collections of contemporary Mongolian art. Perhaps most important of all, Khaan Bank was transformed in a short time from being a net drain on government resources to becoming one of the largest taxpayers in Mongolia.
As the once-bankrupt bank became solvent, the dramatic turnaround was featured in several international publications, including the Far Eastern Economic Review and Asian Wall Street Journal. The success of Khaan Bank provided me a convenient excuse, as USAID country director, to visit every one of Mongolia’s 21 provinces. These visits provided useful opportunities to meet with not only bank managers but also local officials and clients from across the country. In cases where small district towns did not have a bank, officials and local entrepreneurs invariably pleaded that a branch of Khaan Bank be opened as soon as possible in order to stimulate more economic activity.
What was noticeable even then was that loans from Khaan Bank were already beginning to make an important difference, among other things making possible the wave of new purchases—solar panels, satellite dishes, portable televisions, and motorcycles—quickly being adapted for countryside use. Between 2002 and 2009, the number of herder families who owned solar panels increased from 15 percent to 75 percent. Years later, whenever I see the familiar green and white Khaan Bank signs in some of the most isolated and remote settlements in Mongolia, I recall those difficult early days when the very future of Khaan Bank hung in the balance and the consensus among many donors was to simply “shut it down.”
Purchased by a Mongolian-Japanese consortium for $6.85 million in March 2003, Khaan Bank has emerged in recent years as a unique and perhaps unprecedented “success story” for Mongolia, winning numerous international banking awards along the way. Moreover, the new owners immediately hired the USAID-funded management team, using their own funds to ensure the bank’s continued success rather than having to rely on Government of Mongolia subsidies or US taxpayer support.
During the two and a half years that USAID managed Khaan Bank, it allocated approximately $3 million to fund the management team headed by Pete Morrow and mobilized by its American consultant, DAI. Already the largest bank in Mongolia in terms of number of branches, by 2007 Khaan Bank also ranked as the largest in terms of assets, loans, deposits, and earnings. By 2011, Khaan Bank was worth as much as $100 million and had paid more than $40 million in taxes. Viewed from a broader perspective, the Khaan Bank story provides a tangible example of US-Mongolian cooperation in pursuit of sustainable development in Mongolia.
USAID’s contribution to the establishment of XacBank is equally inspiring and has had a similarly dramatic impact on Mongolia’s initially modest but now rapidly growing financial landscape. Established only in 2002, XacBank was formed following the merger of two donor-funded nonbank micro finance institutions, one supported by USAID and the other funded by the UN Development Program (UNDP). Early on, the new bank proved successful, attracting additional investment and gaining notable experience in how to design, implement, and sustain effective micro credit programs in a large, sparsely populated country.
Much of the credit for XacBank’s early success goes to Stephen Vance, at that time country director for Mercy Corps in Mongolia and one of the main architects of the USAID-funded (and later USDA-supported) Gobi Initiative. Tragically, several years later Vance was killed in Peshawar, having assumed responsibility for a USAID-funded rural development program in Pakistan’s tribal areas bordering Afghanistan.
Despite its modest beginning, XacBank has grown rapidly and in 2012 was regarded as one of the largest, best managed, and most successful private banks in Mongolia. It still maintains a commitment to micro finance while pioneering a range of other financial products, including mortgages and leasing. Having subsequently received additional support and investment from Triados, the European Bank for Reconstruction and Development (EBRD), the International Finance Corporation (IFC), and other international financial institutions, it has played an important part in strengthening Mongolia’s banking and financial sector.
Mongolia still faces big challenges in banking and across the financial sector. However, at a micro level, Khaan Bank and XacBank represent success stories of the highest order. Both institutions also pioneered the use of Internet banking and ATM machines in Mongolia. Despite the vast distances that would seem to make banking in Mongolia risky, if not unprofitable, proportionately more Mongolians now maintain deposit accounts than is the case in any number of other countries spread across Asia, including Russia, India, China, Vietnam, Indonesia, and Kazakhstan.
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While entailing fewer financial resources, USAID programs concerning governance and democracy have helped further strengthen the US-Mongolian development partnership. For example, during the early 2000s, the USAID-funded judicial reform project implemented by the National Center for State Courts (NCSC) trained hundreds of judges and helped computerize almost every courtroom in the country. Reflecting high-level US interest in judicial reform, the NCSC program in Mongolia was officially launched by US Supreme Court Justice Sandra Day O’Connor during a visit she made in September 2000 to speak in Ulaanbaatar at a conference on legal issues.
USAID programs in Mongolia included several initiatives dealing with the environment. For example, during the late 1990s and continuing into the early 2000s, USAID funded a co-operative arrangement with the US Department of Interior, leading to study tours of American national parks and the placement of former National Park Service staff from Alaska in Hovsgol National Park for several years. This initiative also supplied communication equipment to park staff and helped build a new information center at Hovsgol.
Starting in the mid-2000s, USAID environmental funding was targeted on the eastern part of the country, including support for the Wildlife Conservation Society’s work with local communities to help preserve habitat and protect the gazelle. Wildlife Conservation Society research focuses on surveys, animal genetics, foot and mouth disease, and wildlife management and conservation. Given that gazelle migrations know no boundaries, efforts have also been made to engage with international NGOs, as well as local governments in neighboring Russia and China, to help ensure the survival of one of the greatest wildlife spectacles in the world—the movement of tens and even hundreds of thousands of gazelle each year across Mongolia’s Eastern Steppes.
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While USAID in recent years has emphasized sustainable development, from time to time USAID’s Office of US Foreign Disaster Assistance (OFDA) has joined with other international donors to respond to dire and even unprecedented emergencies. The first such USAID disaster assistance was offered long before the formal January 1987 opening of diplomatic relations between the United States and Mongolia.
During the mid-1960s, some two decades earlier, the United States offered emergency assistance through the Mongolian Red Cross in the aftermath of flooding on the Tuul River that killed dozens and caused enormous amounts of damage to property. Though not publicly acknowledged at the time, very probably this offer of emergency relief represents the first official effort on the part of the United States to provide humanitarian assistance to Mongolia.
In subsequent years, the United States has on several occasions provided emergency assistance to Mongolia through USAID/OFDA, most notably during and after harsh winter dzuds in 2000–01 (nearly $730,000) and again in 2010 (approximately $300,000). At other times, USAID worked with Mongolia’s National Emergency Management Agency (NEMA) and other local institutions on disaster preparedness and risk reduction, including programs to improve medical facility preparedness and the capacity to deal with disasters and to increase knowledge of earthquake risks among schoolteachers and students. Between 1993 and 2011, USAID/OFDA provided nearly $1.4 million to Mongolia to help in these and other efforts.
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In January 2004, the United States established a new development assistance mechanism, the Millennium Challenge Corporation (MCC). From the outset the MCC provided grant funding aimed at addressing economic growth through poverty reduction, with an explicit focus on countries demonstrating a sustained commitment to good governance, economic freedom, and investments in people. MCC also placed a strong emphasis on diligent cost-benefit analyses, measurable goals, and effective monitoring and evaluation.
Based on these MCC criteria, Mongolia was among the first countries eligible for an MCC Compact program. During 2005–07, it initiated a process of large-scale public consultations across the country, preparing the ground for a consolidated set of funding proposals. On October 22, 2007, President Bush and President Enkhbayar signed the MCC Compact with Mongolia in the White House in Washington, D.C.—the first MCC Compact personally signed by a US president.
In keeping with MCC guidelines, the five-year, $285 million Compact between Mongolia and the United States aimed at reducing poverty and promoting sustainable economic growth. The new program, which more than doubled the amount of US grant assistance allocated to Mongolia, reflected a new approach to development partnership, one that placed the Government of Mongolia at the very center of the planning as well as the implementation process. The MCC Compact came into force in September 2008, formally launching a five-year time frame for project implementation, scheduled to end in September 2013.
MCC program implementation is the responsibility of the Millennium Challenge Account–Mongolia (MCA), a stand-alone entity based in Ulaanbaatar and specifically established by the MCC Compact. The MCA is headed by a senior Mongolian, who is responsible for a staff numbering well over 100, almost all of them Mongolian. Specific MCA programs have a number of priorities, including infrastructure ($86 million), health ($39 million), property rights ($27 million), vocational education ($47 million), and energy and environment ($47 million), all areas deemed high priority by the Mongolian government. The fact that MCC funds are not “tied” in any way also means that the technical assistance, training, and other support the MCA provides has come from many sources, including not only the United States but also Germany, Finland, Denmark, South Korea, China, and elsewhere. When accusations of corruption or misuse of funds have arisen from time to time, they have been investigated and, where appropriate, dealt with.
One of the most enduring MCA legacies is likely to be the 176.4 kilometer road through the Gobi region that connects Choir with Sainshand on the southern route to China. When officially opened in late 2013, the Choir-Sainshand highway will complete the last missing link of paved, all-weather road connecting Europe with East Asia via Mongolia.
In fact, the Choir-Sainshand road project was a “second-choice” initiative, the initial plan having been to use MCC resources designated for infrastructure to invest in railways jointly owned by Russia and Mongolia. However, it proved impossible to carry out required audits and undertake other needed preliminary work, and funds were therefore reallocated to build a road through the Gobi desert. Because the proposed MCC-funded railway initiative later had to be abandoned, some in the media ascribed geopolitical machinations to the decision, suggesting that the project failed because Russia was opposed to it. Whatever the truth of that claim, the Choir-Sainshand road proposal quickly emerged as a viable alternative that also made an important contribution toward strengthening Mongolia’s limited transportation infrastructure.
Health-related MCA-sponsored programs in Mongolia have emphasized noncommunicable diseases. This focus is directly linked to Mongolia’s current health and mortality profile, which indicates that too many Mongolians die far too early from more traditional “Western” diseases such as cancer, diabetes, heart ailments, and road accidents.
The MCA program includes a strong public health and educational outreach component that extends to all 21 of Mongolia’s provinces and involves dozens of health-related NGOs, both local and national. It also provides vehicles, health equipment, and other material to government health centers across Mongolia. Finally, it is improving public health education in Mongolia, in part through a partnership that has been developed between the Mongolian University for Health Sciences in Ulaanbaatar and George Washington University in Washington, D.C.
Property rights form the foundation for any market-based economy. Under a related initiative, the MCA is working with the Government of Mongolia to improve the efficiency and effectiveness of the state urban property registry process. Ultimately, as many as 75,000 households in Ulaanbaatar and eight regional urban centers, including Erdenet and Darkhan, should benefit as they are given the opportunity to register their properties in various ger districts and assume legal ownership. Already, the project has upgraded the geospatial infrastructure needed for accurate land mapping, in part by providing global positioning systems equipment to the various regional land offices.
In addition, the MCA is working to introduce a new system of leasing pasture land in rural areas immediately adjacent to Ulaanbaatar, Darkhan, Erdenet, Kharkhorin, and Choibalsan. In each case, these areas, which provide meat, milk, and other important agricultural products for Mongolia’s urban population, face immense and growing pressure as urban Mongolia continues to expand into the countryside. Herders in these areas will also benefit from new wells, fodder, seed, fences, and winter shelter as part of a broader effort to improve livestock management and reduce the degradation of Mongolia’s vulnerable pasturelands.
As Mongolia’s economy expands dramatically during the coming years, there will be opportunities for many young Mongolians to find employment—but only if they have the right technical skills in place to meet expected demand. The mining and construction sectors in particular will create many thousands of new jobs that can and should be filled by Mongolians.
Based on MCA programs, the Great Hural passed new legislation that promotes reforms in the structure and content of vocational education and training in Mongolia. Measures are also underway to strengthen existing vocational training institutions, provide additional equipment, improve classroom space, and strengthen ties between private firms and public vocational training institutions. As with health programs, the vocational program initiative is national in scope and should benefit every part of the country.
Finally, the MCA directly addressed environmental concerns that rank among the most serious issues facing Ulaanbaatar. Vehicles, dust, industrial pollution, and smoke from the ger districts—all contribute to an untenable air pollution situation, especially in winter months when a thick, black pall of smoke often envelops Mongolia’s capital city. As a result, Ulaanbaatar now bears the dubious distinction of being the second most polluted city in the world.
The MCA response embraced a series of activities aimed at introducing new energy-efficient heating products, including cooking stoves and new insulation products to mitigate pollution and improve air quality. The MCA program focused entirely on the ger districts of Ulaanbaatar, home to approximately 180,000 households and some 500,000 people. By 2012, well over one-third of these households had purchased new and more efficient MCA stoves, lowering pollution while also lowering fuel costs by as much as 30 percent. Beyond the nearly 70,000 fuel-efficient stoves distributed in the single winter season of 2011–12, a further 18,000 ger insulation sets had been distributed, contributing to a reduction in both pollution and fuel costs. In addition, pilot MCA projects have demonstrated the positive effects of more fuel-efficient housing as well as more efficient boilers.
Another component of the MCA energy effort involved development of Mongolia’s first commercial wind farm at Salkhit (“Windy Mountain”) near Ulaanbaatar. The wind farm, featuring GE turbines, is designed to reach a capacity of 50 megawatts, providing an important new source of energy for Ulaanbaatar while also demonstrating the viability of wind power in Mongolia. It is exactly the kind of investment that USAID hoped for when it funded Mongolia’s first “wind atlas” a decade earlier, based on the expectation that wind, solar, and other forms of renewable power do indeed have a positive future in Mongolia.
As the MCC program enters its final phase of implementation in Mongolia, there are high hopes that all these projects—selected, designed, shaped, and implemented under Mongolian supervision and often involving Mongolian contractors or subcontractors—will make a major contribution toward strengthening economic growth, reducing poverty, and improving the quality of life in Mongolia. At the same time, continued concerns over corruption could undermine Mongolia’s efforts to effect a second compact, to begin in fall 2013 or beyond.
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Finally, other parts of the United States government, such as the US Department of Agriculture (USDA) and the Department of the Treasury, have made notable contributions toward strengthening the US-Mongolian development partnership. Historically, the USDA program in Mongolia has largely consisted of American wheat and other agricultural commodities that are donated to Mongolia. Proceeds from the sale of these commodities are in turn allocated for a variety of development purposes.
Since the 1990s, “monetized” programs from USDA valued at more than $80 million have been helpful in funding a wide range of activities, including rural road construction, research on yak production, and small business development. At one point, monetized proceeds from US wheat sales in Mongolia were used to help establish Mongolia’s first Internet site—magic.net. USDA funds have also been used to support the ongoing work of various American NGOs based in Mongolia, including both CHF and Mercy Corps.
In 2009, the launch of an active US Department of the Treasury program marked the start of yet another chapter in US-Mongolian development relations, this one organized within the context of the global financial crisis of 2007–08. As a first response, USAID provided a $10 million cash transfer in 2009 to the Government of Mongolia as part of a much larger international effort that included several other donors to meet immediate foreign exchange shortfalls.
At the same time, the Department of the Treasury used additional USAID funds to provide both long-term and short-term technical advisors, first to the Mongolian Central Bank and then to its Ministry of Finance. The intent from the beginning was to strengthen Mongolia’s fragile and highly stressed financial sector, in part by applying “lessons learned” and “best practices” from other countries that had successfully weathered similar crises in the past. Finally, in spring 2010, USAID provided initial funding to enable the Treasury Department to launch a technical assistance project at the General Directorate of Tax (GDT), aimed at improving capacity in the audit of specialized industries, including Mongolia’s growing mining sector.