MONGOLIA

Interim Development Assistance Strategy

Agency for International Development

Office of the A.I.D. Representative

Ulaanbaatar

November 19, 1991

Table of Contents

INTRODUCTION

I. Executive Summary ....... .....................

II. The Mongolian Context.. . . . . ....... . . . . . . 3 A. Modern History.......... .................. 3 B. Geography and Climate.. ............ 3 C. Current Economic Status ....... .............. 4

1. The Current Crisis ....... .............. 4 2. Measuring the Economy and its Problems . . 5 3. Budgetary Implications ..... ............ 6 4. Getting the Prices Right ..... ........... 6 5. Soviet Barter Assistance.. . . . . . . . . . . 7 6. Unemployment and Industrial Production 7 7. External Trade and Exchange Rate Reform 8 8. Social Safety Net ....... ............... 8 9. The Banking Sector ....... .............. 9 10. Privatization ........ ................. 9 11. Encouragement of Private Sector Growth 10

D. Current Political Structure and Status ... ...... 10 1. Current Government ....... ............. 10 2. Central Government Structure . ........ 11 3. Government Reorganization .. .......... . 11 4. Local Government Structure . ........... 12

III. The Planning Environment .... .............. . 12 A. The Current Emergency .... .............. . 12 B. The Transition Period ....... . •. . . . . .14

1. The Crux of the Matter .. ........... . 14 2. The Public Sector .... .............. . 14 3. The Private Sector ... ............ .15 4. The Missing Link .... .............. . 15 5. An Interim Approach ... ............ 15

C. Longer Term Considerations ... ............ . 16 1. The Donor Community Approach . ........ 16 2. The Functions of Government .......... .. 16 3. Private Sector Functions .. .......... 17 4. A.Political Viewpoint ... ............ . 18

D. Developmental Imperatives .............. 19

IV. Program Objectives .................. 19 A. Selection Criteria and Process .. .......... . 19 B. Political Democracy ..... ................ . 21 C. Economic Democracy ..... ................ . 21 D. ESF and Food Aid ...... ............... . . 22

1. ESF ........ ..................... .. 22 2. P.L. 480 Food Aid .... .............. . 22

V. Elements of Strategy ........ ........ . . 23 A. Strategy Definition ... ............... . 23 B. Opeviational Strategy. . ...... . . . . .. •... 23

C. Political Democracy Interventions.. . . . . . . . 24 1. Activities of the Asia Foundation ...... . 24 2. Institutional Reform in the Informal Sector

(IRIS) Seminars ............... 24 3. National Endowment for Democracy (NED)

Assistance to Political Parties ...... . 25 4. Broad-based Democratic Education ..... 25

D. Economic Democracy Interventions .......... .. 26 1. Non-Governmental Functional Associations . 26 2. Professional Non-Governmental Associations 27

E. Private Enterprise Interventions .......... .. 28 1. A Private Bank and Investment Guarantees . 28 2. International Executive Service Corps and

Investment Fund .... .............. . 28 3. Joint Venture Promotion .. ........... . 29 4. Business Services .... .............. . 29

F. Training Services ..... ................ . 30 1. Banker Training .... ............... . 30 2. Entrepreneurs International .......... .. 30 3. Stock Exchange Training .. ........... . 30 4. Short-Term Study Tours .... ........ . 31

G. Regulatory and Quasi-Governmental Initiatives . . 31 1. Security and Exchange Commission ...... . 31 2. Agricultural Commodities Exchange ...... . 31

VI. Resource Implications ..... ................ . 32 A. Program Funding Levels .... .............. . 32 B. OAR/M Staffing Levels .... .............. . 32

APPENDICES ......... ........................ 34

Development Sector Assessments .... .............. . 34 A. Agriculture/Livestock .... .............. . 35 B. Education .......................... 36 C. Employment and Privatization .. ........... . 37 D. Energy ........ ...................... .. 40 E. Environment ...... ................... . 41 F. Health ........ ...................... .. 43 G. Mining ........ ...................... .. 45H. Telecommunications ..... ................ . 46 I. Transportation ...... .................. . 47

INTRODUCTION

In contrast with many traditional A.I.D. recipient countries,economic and social statistics for Mongolia neither capture noradequately describe many of the truly significant developmentalconditions and forces at work -- those intangibles that make thedifference between the success and failure of the process. Thesefactors were significant to the formulation of the developmentstrategy for Mongolia being proposed. One such unknown factor isthe extent to which Mongolia, having discarded Marxist/Leninisteconomics, will install the institutions needed for a capitalistmodel. Another unknown is whether the level of resourcesprovided by donors will be sufficient to enable Mongolia to serve as a development model for other socialist countries?

Among those factors less easy to measure are indomitable spirit,youthful exuberance, and aspiring middle class values. Nevertheless, these latter considerations provide significantkeys to the resolution of the development conundrum of Mongolia.

For seventy years, Mongolia was under the economic, political,and social domination of the Soviet Union. Thus,it is hard tothink of the people, or its culture, as being indomitable.Although the first country to adopt communism, it was also thefirst to reject it. The perception is strong that the values ofthe country are basically Mongolian, especially visible in thenationalistic popularity of Genghis Khan and the resurgence oflong-suppressed Buddhist traditions following the 1990 revolution.

The Soviets brought opera, the symphony orchestra, and ballet,installed comprehensive medical and educational systems, oversawthe settlement of approximately half of Mongolia's nomads (mostlyin an urban/semi-urban environment), and provided nearly $800million per year in economic subsidies during their last few years of domination, but they never overwhelmed basic Mongolianculture, or the basic geographic remoteness that sustains it. InMongolia's case, the presence of basic self-respect virtuallyeliminates the pseudo-arrogance and sycophancy that underminesdevelopmental assistance in many A.I.D. cooperating countries.

Mongolia has no inferiority complex; rather, it has an exunerancecommonly associated with youth -- a feeling of immortality thatbelies a lack of confidence based upon actual experience. It isanalogous to the new high school or college graduate approachingthe first weeks of a new job, i.e., sensing that appropriateacademic qualifications are not an adequate substitute forexperience. And, Mongolia has the educational levels to lendcredence to the analogy. Over 90% of the populations is literate and numerate to an eighth grade level.

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Mongolia is a young country demographically, as well. About 45%of all Mongolians are under 15 years of age, fully half of thepopulation is under 20, and 70% is under 35. With the inexorablerecognition that life goes on, Mongolia will gain experiencethe government has a country to run, no matter how limited itsexperience. Thus, a key to providing successful developmentalassistance may be the ability to provide decision makers with aclear indication of alternative solutions, and the consequencesand implications of potertial solutions, without enabling theMongolians to avoid taking full responsibility for the decisions made.

Despite the inexperience of Mongolia's governmental leaders andits population, the country's values are familiar ones for mostAmericans --they are strongly those of an aspiring middleclass. Following a bloody period in the !920's and the 1930'srequired to subdue Mongolian resistance to social and politicaldomination, Soviet hegemony in Mongolia, particularly in the last30 years, has been strongly benevolent. Nowhere has this been more true than economically. Mongolian nomads were hot onlyforcibly settled, they were provided with housing, jobs,factories, social services, and cultural enlightenment. And,until the 1980s, the Soviets never insisted on attaining aneconomic profit from their investment. Subsidies, and verysignificant ones (an annual average of 30% of GNP between 1950and 1990), allowed Mongolians to enjoy a standard of living farin excess of what the economic returns on domestic investment would have permitted. The cost was "merely" political andeconomic independence. The latter cost reflects the classicalcolonial pattern faced by most developing countries ot having had to trade low value raw materials for more expensive finishedproducts -- perhaps a small price to pay as long as losses were covered by the Soviet subsidy.

Consequently, urban Mongolians were able to enjoy a solid, middleclass/lower middle class, comfortable existence until the abruptcessation of Soviet and Eastern European investment and subsidy.The extent and precipitousness of this event has confused theMongolians. They have denied the death of the special Sovietrelationship, been incredulous at the lack of Soviet economicstrength and political will, and unable to comprehend theresulting economic dislocation and severe economic consequences.Mongolia's economic standard of living has declined significantly(25%-35%) in the past 18 months. Accumulated wealth, now mostlygone, absorbed the social and economic costs for only about halfof this period. For all practical purposes, the rainy day has come, the savings are gone, and it is still raining.

Mongolians are unwilling to accept this decline in their standardof living; they hold their government responsible for thisreversal of fortune. Still, drawing upon their aspiring middleclass values, they are willing to work hard to retain their

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status, despite an apparently growing lack of labor discipline.The problem is that there is not a common or sophisticatedunderstanding of the new "market" systems; they don't know how to deal with them, and they don't know what to do. The GMPR, which has the best understanding of the situation, has vacillated between timid and aggressive implementation policy, albeit often related to perceived political signals. Will Mongolians be patient with their government; how much time will they give it tc institute and implement a new economic system? Will the middle class, and importantly the want-to-be middle class, recognizewhat they have to lose, and give the government time to put new policies into place, or will they respond to spurious claims of a quick fix? Will the lower middle class or the rural populationsseize the initiative? How much progress will government have to show, and how quickly, to keep Mongolians from getting restless? How can foreign economic donor aid help? The answers to such questions are not intuitively obvious, but they will be a majordeterminant in the success of Mongolia's economic development effort.

The sector descriptions of Mongolia contained in this document were prepared by the GMPR in coordination with the UNDP. They are as accurate as any such document in a dynamic environment can be.

The developmental analysis, if it can presume to such a loftystate of examination, makes no claim to being unbiased or scientifically accurate. It leads to proposed A.I.D. strategythat is based on some eight weeks of personal, mostly random,observation. At best, the author saw only a segment of the economic and socio-cultural activities meaningful to the preparation of a strategy manuscript having such definite conclusions and long-term ramifications. Much of the supportingjustification was taken or adapted, in whole or in part, from the works and ideas of others. The original or unique elements of this document are the order of assembling the contents, and the conclusions advanced from them opinions for which the author is solely responsible.

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I. Executive Summary

After attaining final independence from China in 1921, Mongoliabecame the first country to adopt Soviet-style communism in 1924.As a critical back door of the Soviet Union, Mongolia was a majoreconomic beneficiary of the cold war. It joined CMEA in 1962,and by 1990 between 90% and 95% of Mongolia's trade was with theSoviet Union and the Eastern Bloc. By 1990, Soviet subsidies accounted for some 25% to 30% of Mongolia's GNP.

In March of 1990, popular unrest led to a change in Government,and Mongolia became the first country to give up Soviet-stylecommunism. Democratic elections were held in 1990, whichsupported this change. However, after the onset of economic problems in the Soviet Union, in 1991 the Soviets precipitouslyceased the provision of all foreign assistance to Mongolia. Thishas led to a virtually unprecedented depression.

About 1/3 the size of the United States, Mongolia has a difficultclimate -- sub-zero temperatures occur in five nonths of the year. About 80% of the land is suitable for livestock, but onlyabout 1% is used for sedentary agriculture due to disincentives.The country has a wealth of undeveloped minerals, and this mayinclude oil. The population is about 2.2 million, and it is largely homogeneous.

After almost 70 years of central control, Mongolia's economy ishighly distorted. The situation has been exacerbated by thedislocations associated with the current move to democracy and amarket economy. Per capita 1990 income is estimated at $530,with GNP at $1.166 billion.

The loss of the Soviet subsidy has resulted in a serious loss of revenues, and the resulting budgetary deficit has been financedby money creation -- some 127% during the first 5 months of 1991,211% during April and May, and 171% during the third quarter.

A price liberalization program has been negotiated with the IMF,and 18 of 35 broad categories of goods have been deregulated.Wage controls in the public sector remain in place, but 60%the prices of goods weighted in the consumer price index are

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free.

Mongolia's current account deficit is growing, exports andimports have declined significantly, unemployment is continuingto rise, and the tugrik has declined in value in the officialparallel market from 7=$1 to 120=$1 in the past 7 months.

Major government initiatives are underway to install a market economy; privatization is occurring for both large and smallstate-owned enterprises; a stock exchange has been established;the banking system has been revamped, and a variety of laws havebeen passed which create an encouraging environment for private

enterprise and foreign investment.

Major political change is also under way. A new constitution hasbeen drafted and is expected to be enacted within weeks. In mayresult in significant changes in the way government is organized,but it is not expected to materially change the direction of thecurrent political and economic liberalization.

The donors have created an emergency program to help Mongolia getthrough the current winter, and they have also met under UNDPauspices to consider the coordination of technical assistance forMongolia's longer-term development.

In this milieu, this strategy recommends that the focus of A.I.D.economic assistance be concentrated on the strengthening and/orcreation of political and economic institutions/structuresrequired to build public and economic support for Mongolia'spolitical and economic reform program. Individual politicaldemocracy initiatives include support for the parliament, thefree press, the system of jurisprudence, the creation of informedpublic opinion leaders, broad-base education in democraticprinciples and the organization of responsible political parties. Economic democracy support is recommended for Non-governmentalorganizations (functional and professional), creation of aprivate bank, assistance from the IESC and FSVC for businessesand the new stock market, joint venture promotion, incentives toinitiate a business consulting industry, a variety of trainingservices, and assistance in creating a Security and ExchangeCommission and an Agricultural Commodities Exchange.

Resource requirements are directly related to estimated budgetplanning levels of $4 and $4.5 million for FYs 1992 and 1993,respectively. Staff levels required are within the 2 USDH and 5Mongolian PSC positions approved when the post was established.

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II. The Mongolian Context

A. Modern History

Mongolia regained its independence from China in the wake of theChinese revolution of 1911. After defeating Chinese and WhiteRussian invasions (with Soviet help), Mongolia secured itsindependence under Soviet protection in 1921. Following theoverthrow of its own monarchy, and an internal power struggle,within its new revolutionary government, Mongolia became thefirst country to adopt Soviet-style communism. In 1945, the USSRwas the only country with which Mongolia had diplomaticrelations. Prior to the 1950's, Soviet attention was focused onasserting control over evry aspect of Mongolian life through theimposition of collectivization and purges by a pervasive Soviet­organized secret police.

With the advent of the Sino-Soviet split, Mongolia underwent afurther massive developmental change -- as the Soviets began toprotect their back door. In 1962, Mongolia became a member ofthe Council for Mutual Economic Assistance (CMEA). Direct links were established between Soviet and Mongolian ministries. In thelate 1960's, the Soviets introduced major military forces(peaking at some 90,000 in the late 1970's) which became a highlyvisible presence, especially in rural Mongolia. By 1990, halfof the population was settled -- nomads no longer roamed at will(even granting that the settlement process had been going on foryears), satisfactory social services were in place to meet theneeds of an aspiring middle class oriented country, and between90% and 95% of all Mongolian trade was with the Soviet Union/Eastern Bloc.

Unfortunately, the underlying economic support system was almosttotally reliant upon a system of Soviet subsidies. Thus, whenthe economic problems and revolution in the Soviet Union gotserious, Mongolia lost it privileged status; a doting MotherRussia abandoned her overly protected and economically naivechild in January of 1991, cutting off economic aid and moving allcommercial trade to a hard currency basis. Soviets also beganwithdrawing their forces, a process due to be completed in the next year.

In March of 1990, popular unrest resulted in the formation of anew government and a recognition that new forms of government andeconomic systems would have to be instituted. Democraticelections in 1990 supported the concept of change, and gavelegitimacy to reformist efforts to forge a new constitution based upon western style democracy and free enterprise.

B. Geography and Climate

Mongolia is about six times the size of the United Kingdom, 3

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times the size of France, or 1/3 the size of the United States,and it has 4,450 miles of boundary. It is the largest land­locked country in the world. The terrain includes mountains,inter-mountain basins with fresh and salt water lakes, and thesteppe, which includes semi-desert areas and a portion of theGcbi Desert. Except for a mountainous region in the northwest,the climate is very arid. Earthquakes are common. Sub-zerotemperatures occur for at least five months of the year.Ulaanbaatar, the capital, has an average annual temperature of 29degrees fahrenheit, and snow has been recorded in every month ofthe year. During any given day, the temperature can change by asmuch as 30 degrees centigrade.

Approximately 80% of the land is suitable for livestock. only 1%is used for sedentary agriculture, although larger amounts couldbe developed for such use with minimal economic incentives.Almost 10% of Mongolia's territory is covered by forest,predominately in the northern mountain regions. The mountain andforest regions have wild sheep and goats, the Mongolian gazelle,red deer, and saiga antelope. The country as a whole hasadditional animals, including steppe marmot, muskrat, fox, elk,sable, and wolf which are bunted commercially for fur .nd fat.There are also game birds and excellent trout fishing. Mongoliais rich in mineral deposits, including coal, iron, tin, copper,gold, zinc, silver, tungsten, fluorspar, molybdenum, and petroleum.

The population is small, about 2.2 million, and the land issparsely settled --Mongolia may be the least densely populatedcountry in the world. Nevertheless, having pursued pro-natalistpolicies until the past year, Mongolia has a potential populationproblem. The population has tripled since independence in 1921,and agricultural production has not kept pace. Over 40% ofMongolians are under 16, 50% of the population is under 20, and70% of the people are under 35.

C. Current Economic Status

1. The Current Crisis

For much of the past 70 years, Mongolia's entire economy has beenunder the direction of central planners and collective leaders.As a consequence, the economy is highly distorted. Assets havebeen invested without being tested for economic priority, andthere has been slow growth and stagnation in production. Thesefactors have been abetted by Mongolia's geographical isolation.Mongolia is completely surrounded by the command economies ofChina and the Soviet Union, and air links to Western countries are indirect, few, and infrequent.

Today, the Mongolian economy is experiencing a decline in realincome -- perhaps unprecedented -- that rivals the decline

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experienced in Western countries during the Great Depression, or as the result of war destruction. During the 1990s over 90% ofall foreign trade was with the Soviet Union. An annual tradedeficit, estimated at about 25% of GNP, was financed almostentirely by the Soviets. As a result of deteriorating economicconditions in the Soviet Union, this relationship was terminated on January 1, 1991. Annual trade and budgetary financing fromthe USSR has ceased, trade has fallen by half, and almost allSoviet technicians have withdrawn from Mongolian factories and enterprises.

Mongolia's economic collapse is severe because of the terminationof Soviet financing, the deterioration of the terms of tradebetween the two countries, a collapse in the volume of trade, aMongolian shortage of spare parts, and other difficulties relatedto dislocations involved in moving an economy from a centrallyplanned system to a market system.

2. Measuring the Economy and its Problems

It is estimated that the decline in real income is between 40%and 50% of GDP, or U.S. $450 to $550 million -- at least 25% fromthe loss of financing, 6% from the terms of trade, and 10% to 20%from the other factors. These figures are based on conservativeestimates of the value of Soviet financing. As a proportion oftotal domestic expenditures, GDP plus net foreign financing, thedecline is on the order of 30% to 35%.

An almost total dependence on the Soviets and the CMEA forforeign trade has made it difficult to value Mongolia's economy.The inconvertibility of the ruble and the basic barter characterof Mongolia's foreign trade, denominated in rubles, has distortedthe real market value of Mongolia's imports, exports, and debt.One method of calculation to surmount this problem is to acceptthe IMF estimate that the Soviet subsidy to Mongolia in 1990 wasequivalent to $800 million, and that it constituted 30% of GNP.This method of computation would put Mongolian GNP at $2.66billion at the end of calendar year 1990, with per capita GNP atabout $1,212. The IMF, though a more sophisticated analysis, hasdetermined the per capita income figure is $530, and this is theincome figure used most commonly among the international donors.This figure puts the size of the economy at $1.166 billion.

The United Nations has chosen, arbitrarily it seems, to use a GNPper capita income figure of $100, which translates to Mongoliahaving an economy of $220 million. Much of the differencebetween this and the IMF valuation relates to the assumed rate ofexchange between the Mongolian Tugrik and the ruble. Assuming aconstant rate of exchange, application of the rate of 7 tugriksequal $1, which the Mongolians use for ruble trade, significantlydevalues Mongolia's ruble debt and Soviet financing. If the rateof 40 tugriks equal $1, the current official rate, or the

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parallel market rate of 120 tugriks equal $1, are used, theconcept of basing Mongolia's GNP on the assumed value of Sovietassistance becomes of questionable utility.

This paper will use the IMF computation. Reportedly, the IMFexamined the content of the Soviet trade packages over a severalyear period and valued them against world market prices forsimilar goods to reach its valuation. This strikes us as a verysensible approach, and one we can support.

3. Budgetary Implications

The cessation of the Soviet subsidy has contributed to a severeloss of budgetary revenues during the first half of 1991. Trade­based taxes, which previously comprised one-third of budgetrevenues, have fallen by half. Corporate income taxes andturnover tax revenues have also declined. In addition, theportion of Soviet financing which was applied to governmentinvestment expenditures has disappeared. The result is astructural budget deficit of 25% of GDP (6-7 times the U.S.budget deficit) when annualized.

In the third quarter, the fiscal deficit declined by 400 milliontugrik (about 8% of GDP), compared with the annual average of 1.1billion tugrik (25% of GDP) noted above. The decline was due toa windfall gains tax imposed after a petroleum price increase,seasonal reductions in expenditures, and budget balancingmeasures. In order to raise revenues, the GMPR introduced newdifferentiated import tariffs and export taxes for certainproducts. In the fourth quarter, the budget deficit is expectedto rise again.

This current budget deficit is currently being financed by moneycreation. During the first five months of 1991, base moneyincreased at an annual rate of 127%. During April and May itexpanded at an annual rate of 211%. In the third quarter basemoney increased at the rate of 171%, but total credit and loansto public enterprises increased only slightly. Consequently, thevalue of the Tugrik on the parallel market has depreciated byapproximately 100% over the past six months, and the economy hasbecome dollarized, i.e., some items can only be obtained withdollars, arid dollars are preferred to Tugriks because of thecontinuing depreciation of the Tugrik. The state has maintainedfixed prices for many essential commodities. Thus, the declinein goods supplied due to lower imports and production, incombination with the rapid growth of the money supply, hasresulted in severe commodity shortages.

4. Getting the Prices Right

The agricultural sector provides an excellent illustration of thecommodity pricing/shortage problem. Agriculture, direct and

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indirect, employs some 40% of the labor force and produces 25% ofnational income. Nearly 40% of Mongolia's livestock and aportion of state and collective farm assets have been transferredto private owners. However, due to the GMPR's price fixingpolicies, exacerbated by a lack of spare parts, fertilizer, andother production inputs, the availability of food in the markethas fallen dramatically in 1991. Compared with the first quarterof 1990, milk production has fallen by 32%, egg production by10%, and pork production by 14%. Meat continues to be in shortsupply, despite the fact that the numbers of livestock in thecountry are, or are near to being, at their largest level inhisto-y. This is directly related to the price of meat beingfixed at a highly subsidized price.

Before September 1, 1991, there were 35 broad categories of goodswhich had fixed prices. As agreed with the IMF, the price of 18categories of goods were liberalized on September 1. This meansthat approximately 60% of prices, calculated using weights takenfrom the consumer price index, are now free. Naturally, there isan active black market for many items with fixed state prices.Items continuing under State control include certain energycosts, rents on housing, and telephone subscriptions, but it isplanned that the established prices will reflect actual costs.The IMF negotiated price liberalization made no provision foroffsetting increase in wages, and unofficial estimates suggestthe decline in real wages due to these prices increases is about14%. Wage controls in the public sector are expected to remainin place well into 1993. There are no wage controls in theprivate sector. Price liberalization will improve the fiscalsituation, but the budget deficit will continue to be large.

5. Soviet Barter Assistance

The GMPR reached an agreement with the USSR to carry out bartertrade during tne second half of the year. This would have led toa doubling of foreign trade turnover when compared to the firsthalf of 1991. However, events in the Soviet Union have severelyjeopardized the fulfillment of this agreement. Preliminary datashows that exports and imports on a shipments basis to the end ofthe third quarter totalled $219 and $240 million respectively,and third quarter trade continued at the same pace as in thefirst half. The current account deficit on a payments basisincreased from $ ­ 22 million on July 1, to $ - 25 million on September 1.

6. Unemployment and Industrial Production

Unemployment is continuing to rise, and industrial production isfalling. Official Government statistics show that 12.6% of theurban work force is now unemployed, although it may well be muchhigher if the market is expanded to include new entrants. It isconcentrated to an extent in areas such as big construction, and

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industrial production in the first nine months of 1991 is 10.7%below the level in the same period of 1990. Under-employment isalso a major problem, with many in the manufacturing industryworking only two days a week.

Of the unemployed, 60% are women. Youth unemployment is directlyrelated to the amount of education received, with a precipitousdrop-off occurring at amounts of less than the standard 10 yearsavailable to all. Because of the on-going economic crisis, manypreviously retired on fixed incomes are again in the job market,and economic necessity has put workers into the market whopreviously had not sought employment.

Further, there is a perception that labor unions, previouslyagents of the Government, are becoming increasingly independent.Membership in unions is no longer required, and dues are nolonger automatically taken from worker's wages. In a number ofcases, new independent free trade unions have been created (theMongolia total is now about 70) in response to the perceptionthat their predecessors have not been able to protect the rightsof their members. In order to retain their mandate, it isanticipated that union leadership will become more critical ofthe GMPR's economic policy and labor unrest more common. Strikeshave had some success in getting wages raised (some railwayworkers got a 40% raise in October of 1991), and more labor unrest is likely.

7. External Trade and Exchange Rate Reform

To encourage foreign trade and the diversification of Mongolia'strading partners, all import and export license requirements,other quantity restrictions, and the system of foreign currencyretention requirements will be abolished over the next two years.The government has already eliminated export taxes and introduceda uniform irnpcrt tariff of 15%. It is Government policy toensure that every individual and enterprise is free to import andexport goods and services with minimal state supervision of hindrance.

In order to eliminate the need for state allocation of foreignexchange, and to encourage increased exporting and hard currencyearnings, the exchange system will be unified and the Tugrik willbe made convertible internationally. However, the implementationtiming of these foreign exchange programs have not yet been determined.

8. Social Safety Net

Recognizing that the transition to a market economy will causehardships for a large part of the population, the Government hasintroduced a program of cash supplements, channelled throughmunicipalities, for those most in need. Government will also

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carefully monitor pensions and social security benefits to ensurethat basic needs are met.

Programs will include a needs-based food stamp program. Thestamps would be tradable, and used for the purchase of food andclothing. The program would be targeted to low income familieswith benefits indexed to a basket of minimum food needs. Basedon 1989 household survey data, there are 24,000 rural familiesand 5P,800 urban families who would qualify for this incomesupplement. It is likely that the actual enrollment in theprogram would be somewhat higher as unemployment in the urbanareas increases. The budgetary cost of this program is estimatedto equal 1.7% of GDP at current prices.

9. The Banking Sector

Current legislation permits the creation of a two-tier bankingsystem. Already eight commercial banks have been formed out ofvarious elements of the state-owned Mongol Bank, but they remaintied to specific economic sectors and continue to make favorable(i.e., poor) loans to those sectors. In turn, Mongol Bank isbeing reorganized to match the structure and role of centralbanks in other market economies. Consistent with this bankingreform, Government intends to privatize each of its commercialbanks prior to the end of 1992. The new legislation allows forthe creation of private commercial banks, and sets standards,regulations, and guidelines for the operation of all banks.

The central bank has begun to introduce mechanisms to controlcredit growth, and implement standards for reserve requirements.In the near future Government plans to introduce treasury billsand bonds through open market operations. The central bank willalso introduce statistical measures and procedures in order tomonitor the growth of money and credit in the economy.

10. Privatization

The Government has embarked on an heroic program to administerthe rapid transfer of state sector assets to private owners.Already legalized are the private ownership of herds and newprivate businesses. A privatization law was passed in May whichpermits the transfer of state and cooperative assets to privateowners via the use of vouchers. (A recent poll found that some40% of respondents did not understand the voucher system.) Theintent is to transfer 100% of shops, other small assets, andassets in the agricultural sector to private owners by December31, 1991. Approximately 65% of all other state assets, exceptingmilitary assets and certain natural monopolies are to be sold, toprivate owners prior to December 31, 1992. Given the progress todate, neither objective is likely to be met. Some 130 large enterprises are required to submit privatization

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plans to the Privatization Commission before the end of 1991.Once the plans are approved, these enterprises will be convertedto joint stock companies and privatized early in early 1992.

11. Encouragement of Private Sector Growth

It is planned that every individual and enterprise be permittedto trade goods and services, and to operate businesses, withoutreceiving authorization or permission from government agencies.A simple registration procedure will be introduced to monitorgrowth, and facilitate the taxation of new enterprises. Othermeasures promoting private enterprise include: simple tax rulesfor new businesses, widespread implementation of the recentlypassed land and property rights laws, the creation of a smallbusiness assistance center, and a limited program to providetemporary interest relief on loans and credits to new smallbusinesses.

A foreign investment law has been passed by parliament. The lawpermits full profit repatriation, guarantees againstexpropriation, and limits tax rates. It is also worth notingthat many Mongolians are concerned about foreign ownership ofassets, particularly real estate. They do not wish to see theirpatrimony bought up by foreigners while the country is in temporary financial straits.

The major concern with the package of incentives is that theinterest of government in seeing it work is excessively strong.This has resulted in a rzquirement for governmental informationso pervasive that the traisaction costs of going into the formalsector are prohibitive. When viewed as a total package it tends to stifle entrepreneurship.

D. Current Political Structure and Status

1. Current Government

A new reformist Government, headed by P. Ochirbat, wasestablished in March 1990, following a period of protests andrallies. Subsequently, multi-party democratic elections for theupper house were carried out under international supervision.Six political parties participated, and the results werefinalized on July 29, 1990. The then ruling Mongolian Peoples'sRepublican Party (MPRP), once a Communist Party, under newleadership, maintained a majority in the upper house ofparliament, winning 84% of the deputies. In September, Ochirbatwas elected President for a five year term, and the upper houseelected the 53 member lower house (60% of whose members are alsoMPRP members). Members of the opposition parties were appointedto many key senior positions in the new Government, including theVice-Presidency. The main goals of the new Government wereannounced as continued development of the democratic process and

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the rapid movement of Mongolia into a market economy.

2. Central Government Structure

The organizational structure of Mongolia's Government providesfor a President, a Prime Minister, and a two-body Parliament.The upper house of Parliament, the People's Great Hural, meetsfour times in its five-year terms and consists of 430 deputieselected for the entire term. In rural aimags there are 4,000persons per Deputy in the Ikh Hural;in towns there are 10,000persons per Deputy. The lower house of Parliament, the State'sSmall Hural (or Baga Hural) is in session for 150 days each year,has 53 members, and is the principle legislating unit of theGovernment. It must be noted, however, that this current stateof affairs is under review and may be changed significantly withthe adoption of a new constitution in the very near future.

There is also a system of courts, headed by a Supreme Court,which includes city and aimag courts. The current linkagesbetween the system of courts and the Ministry of Justice bringinto serious question whether the court system is nowindependent, or an arm of the executive. However the new draftconstitution (discussed below) provides for a fully independentjudiciary.

3. Government Reorganization

On November 11, 1991, the Great (Ikh) Hural is scheduled to meetin what is anticipated to be an historic session. The two keyissues on the agenda include: approval of a new constitution,which will change the basic structures of Government, including aprobable replacement of the existing upper and lower houses with a unicameral legislature, and a close examination of the GMPR'seconomic and social policies. While the session will be intense,even to the point of generating a major shake-up in Cabinetportfolios, there does not appear to be any serious attempt toreturn to the style and systems of government that existed priorto 1990. In a simplistic sense, the session may serve as areferendum on economic reform: whether to move faster on slowerthan at present, rather than on whether to proceed or go back.

The session will also struggle over whether to divide theexecutive, as is now the case, between two positions in order todiminish the chances for abuse, or place control of governmentadministration in one position in order to target responsibilityand strengthen the implementation of policy. This split in theleadership concept is not new to the Mongolians, since such asystem did exist on occasion during the previous 70 years, whenthe leadership of the Party and the Executive were split.Neither should it be surprising that the approach might be usedunder a democratic form of governmen-; the Mongolians are new todemocracy as it is practiced in the non-Socialist world. Thus,

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they tend to implement most reforms through the processes with which they are familiar.

In any event, the donor community has little reason to worryabout the events of the Ikh Hural. The present Government islikely to undergo a shakeup, but it probably will not be forcedfrom office. Further, the elections planned for 1992, (if indeedthey take place) probably will not result in a governmentappreciably different from the compromises effected during theupcoming Ikhhural session, given the limited time for campaigningand the unsophisticated nature of Mongolia's political party process.

4. Local Government Structure

Mongolia is administratively divided into 18 aimags (provinces)and three cities, each of which has a population of more than10,000 and, thus, enjoys the rank of aimag -- Ulaanbaatar,Erdenet and Darkhan). Each aimag has a Hural and an executive,with the size of the Hural varying from one aimag to another.Each somon (district), without regard to size, will elect atleast one deputy to the aimag Hural. The executive of the aimaghas seven to nine members, consisting of the Chairman, theDeputy-Chairman and the Secretary of the Hural, as well asmembers nominated by them and approved by the local Hural.

Each aimag is divided into several somons; there are 310 somonsin Mongolia. Each somon has a 50 member Hural and an executiveof seven to nine members. Each member of the somon Hural iselected by and represents 200 persons. The structure of somonexecutive duplicates that of the aimag. Non-profit organizationssuch as schools, enterprises, and hospitals functioning at thedistrict level do not come under the purview of the somon Hural,but rather the aimag Hural and executive.

In turn, each somon is further divided into brigades. Eachbrigade contains 50-350 families. The chairman of the brigade isappointed by the somon hural and is assisted by the trade,school, and health staff, and others, working at the brigadelevel.

N.B.: The information provided above is current. However, the new draft constitution may consolidate some aimags, eliminate orcombine some somons, require legislative confirmation ofadministrative boundaries, and eliminate some Hurals.

III. The Planning Environment

A. The Current Emeraency

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As noted previously, the abrupt cessation of Soviet economicassistance in January of 1991, initiated a precipitous decline inMongolia's economy. There is common agreement that the magnitudeof the of the lost resources exceeded any opportunity the GMPRhad to mitigate their loss significantly, but there is littledoubt that the GMPR's reluctance to accept the reality of thesituation delayed government's reaction and exacerbated thedegree of the resulting economic emergency. Similarly, theGMPR's lack of executive and managerial experience impeded itsability to react to the problem after coming to terms with thefact of its existence. This was most evident in the difficulty,still evident, that the GMPR had in determining its priorities.

If the problem of getting through the upcoming Mongolian winter,a long and difficult experience in the best of times, withoutpeople dying from a combination of the effects of malnutrition,hunger, or sub-freezing temperature was well understood by theGMPR, it had little sense of how to organize and manage theresolution of the problem.

Enter the international donors, particularly the United States,the International Monetary Fund, the World Bank, the UNDP and theAsian Development Bank: they pushed the GMPR into action.Within a few months they were joined by the Japanese, theGermans, and the Koreans. The United States provided food aid inthe late Spring and early Summer, and followed this withcommodity assistance in late Fall. The former is notable becauseit involved a switch of wheat and flour with the World FoodProgram in China in order to speed the arrival of commodities.The latter is unusual because it allowed for the Soviet Union tobe an eligible sources of procurement and, indeed, the majorityof the funds are being spent there.

While the assistance amounts being provided by the IMF, the WorldBank, the Asian Development Bank, and the Japanese are eachlarger than that provided by the U.S., the funds provided to theGMPR prior to the onset of winter have come almost exclusivelyfrom the U.S.

The legitimacy of the Mongolian's emergency was confirmed whenthe Japanese hosted a joint Japanese/World Bank meeting in Tokyoto assess the magnitude of the emergency and raise $150 millionin economic assistance to see the Mongolians through the winter.Both objectives were met. As a consequence of the Tokyo meeting,Mongolia has been put on notice that continued emergency donorassistance is contingent upon further and timely enactment ofeconomic reform in keeping with efforts made to date. Further,the donors agreed to meet early in 1992, to reassess Mongolia'sreform progress and reevaluate the current state of the emergency.

The resources provided to meet the emergency have been provided

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on an unprecedented basis by many of the other donors, includingthe authority to make purchases from non-bank members and a highpercentage of retroactive financing in the case of the World Bankand the Asian Development Bank. This is consistent with therecognition that the emergency programs are intended to enableMongolia to hold on until longer-range solutions to its economicproblems can be effected. Consequently, planning for this partof the A.I.D. program of assistance fcr Mongolia assumes theprovision of non-Development Assistance appropriated funding.

B. The Transition Period

1. The Crux of the Matter

This transition period is characterized by confusion, anxiety,and poorly understood polemics. The lack of understanding ofeconomic issues is most often described as "the people don'tknow," but is quite evident that reporters of this information are equally in need of information. A major concern is that agreat amount of resources will be wasted before Mongolians getthe hang of democracy and free enterprise -- resources whosepotential productivity can ill afford to be lost.

2. The Public Sector

Mongolian institutions have undergone tremendous change duringthe past 18-24 months. And, this evolutionary process continuesin terms of both organizations and the roles they are performing.For example, the State Committee of National Planning was apowerful force in the command economy that existed prior to 1990,while the Ministry of Finance was merely the home of the accountants and their single entry bookkeeping. Today, theimportance of their roles is reversed, and neither is absolutelysure of its role and responsibilities.

The State Committee of National Planning, now renamed theMinistry of National Development, is attempting to redefine itsrole in an era when planning is passe, and its well trainedcadres are devastated to be both obsolete and without status.Can this institution develop the vision to evolve into an Officeof Management and Budget? Given the disproportionate power ofthe executive, is this even an outcome to be desired?

The Ministry of Finance, on the other hand, is almost totallylacking in experience with the range of fiscal and monetarypolicy issues usually associated with managing the exchequer. Ittoo has a staffing problem; the prestige potential is high, but alack of background and training has severely sapped theconfidence and ability of the staff to function effectively.

Similar problems are being experienced throughout government,although the problem may be most serious in service and technical

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units. The requirement to provide services, rather than dictatebehavior, is mind-bending, as is the need for managers to acceptpersonal accountability and responsibility for decision-making.From all indications, however, the Mongolians are demonstrating acommendable degree of flexibility in adapting to the change. Theproblems are of ignorance, inexperience, and perception that nomistakes can be tolerated, not an unwillingness to get involved or work hard.

3. The Private Sector

Nowhere is this adaptability more evident than in the privatesector. Entrepreneurial behavior is still viewed pejoratively bymany Mongolians in a sociological sense, even while there is wideintellectual acceptance that such behavior must be encouraged.For example, the governmental agency that once represented the managers of state-owned enterprises at International LaborOrganization meetings has now resurfaced as an association of theowners of these same enterprises after privatization, as well asnew firms looking for leadership and guidance in how to functionand compete in private markets. Without a government subsidy,such organizations must scramble to justify their existence.

4. The Missing Link

One of the sought after commodities in Mongolia is advice: moreoften wanted in an academic, rather than in an operational,sense. The danger is that such advice will be adapted to fitthought processes left over from an outmoded system of values andapproaches to problem resolution. New ideas have a tendency tobe veneered onto old structures, but out of the absence of analternative, rather than of knowledgeable intent. Mongoliansneed opportunities to learn about the new systems to which theyare being exposed, and these opportunities need to be grounded inpractical realities to aid in the demystification of the newconcepts. Mongolians have a long history of pragmatism, and theyseem to practice this approach to issue resolution well in thecompany of those with who they share common problems. The linkbetween the old systems and the new must be able to accommodateold thought processes, replace the variables in these processeswith new data, and then introduce new concepts while minimizingthe stress of alienating Mongolians from their roots.

5. An Interim Approach

Traditional economic development solutions are time consuming,both to initiate and to implement. In the case of Mongolia, thelevel of expectation is so high that a reliance on conventionalwisdom is unacceptably risky. With time being the criticalconstraint, it would appear to be sound policy for Mongolia tomove forward with economic reform quickly, while using everyopportunity to encourage the education of its citizenry in the

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concepts of political and economic democracy through formal andinformal associations of shared common interests. Despite theircrucial importance, these are needs for which the foreign donorcommunity has developed little capability or capacity to handle.

C. Longer Term Considerations

1. The Donor Community Approach

With the assistance of the United Nations Development Programme,the GMPR carried out its first economic development coordinationmeeting with the donor community in October of 1991. Focussed ontechnical assistance, it provided an opportunity for the fullspectrum of donors, including some from the old Soviet Bloc, tobecome acquainted and exchange ideas. It clearly demonstratedthat the Mongolians have neither a set strategy nor a clearconception of their aevelopment priorities. However, it didallow the various donors to indicate the types of developmentactivities in which they were interested in the absence offurther Mongolian direction.

For the most part, Mongolian solicitations of support consistedof a menu of those activities of long-standing involvement and/orfascination, or those for which prior sources of funding had beenlost. It may be indicative of the strong motivation of manydonors to work in Mongolia, perhaps combined with a the shortageof viable alternatives and a sense of need for rapid involvement,that collaborative interest was shown in many of these proposals.

Annual renewal of the donor coordination meeting are likely to bemore analytical and substantive. Experience will contribute to abetter understanding of institutional and operational problems.However, differences in the timing and style of donor programmingwill continue to cast an ethereal effect on the deliberations.

To put backbone in the donor coordination process, the residentdonor representatives need to meet regularly to review currentevents and establish a clear and direct comunication channelwith the GMPR on issues of significant policy and operationalconsequence. Plans to do this are already underway.

2. The Functions of Government

Mongolians see only faintly and indistinctly the differencebetween the governmental role of regulation in the publicinterest and governmental direct involvement in operations andproduction. Given their experience, this is understandable. Thedistinction is becoming even more difficult to deal with asMongolians perceive their standard of living decreasing, anddecreasing abruptly, even as private enterprise and marketeconomics are introduced. It is a classic case of confusing thecause and effect of simultaneously occurring phenomena.

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--

Within living memory, Government has always been directive andoperational. Despite the change in programmatic philosophy,their has been no general acceptance that Government should beless directive. Many, both in and out of Government, believethat a strong leader, democratically elected, of course, isrequired to preserve Mongolia's independence from enormous andgzeedy neighbors. Similarly, with a growing feeling among manyMongolians that private enterprise -- at least at the largeenterprise level -- is not the answer, the hand of those favoringa strong and deeply involved government is strengthened. Thisenvironment may make the task of entrepreneurs more difficult.

3. Private Sector Functions

By and large, the concepts and philosophy of entrepreneurship -­as represented by outsiders coming into the local village -- areviewed in pejorative terms. This may have more to due with theirexperience with Chinese traders, with whom the Mongolians havebeen feuding for centuries, than the tenets of Marxism/Leninismwhich are still fresh in the minds of most. Combine this with 70 years of economic isolation; an almost complete lack of modernbusiness skills, including accounting, marketing, and management;and a serious economic depression, and the situation seems dire.

On the plus side, entrepreneurship has been a way of life forrural mongolians. They have long been accustomed to takingresponsibility and making decisions related to their personalwelfare, far from the immediate clutches of government. Despitehow little they may respect the purveyors of trade goods, theyneed them and have existed with them in an easy truce for a longtime. Further, the brighter lights of small towns and villageshave attracted many rural Mongolians. In the past, this has beendue to the opportunity to receive government jobs or services.Increasing, they are taking advantage of an opportunity tosustain themselves through participation in cottage industry andsmall business endeavors. In rural Mongolia strong government isviewed favorably because it has provided education, health,veterinary, and other social services at almost no cost, whileapplying most of its strength to the supervision of city folk who, obviously, need it.

Private enterprise, thus, is wedged between a rock and a hardplace. Privatization provides one means for escaping the crunch.However, except for commercial activities such as tea shops,barber shops, small grocery stores, etc., the majority of theentities to be privatized are beyond the financial reach of entrepreneurs. These large firms will become stock companieswith professional managers -- at least alleged professionals.The acknowledged lack of actual professionals will make it veryhard for newly privatized firms to meet stockholder expectations,as will the fact that it was never anticipated that these firmswould have to earn a profit in a competitive market.

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The major remaining opportunity for entrepreneurs is through theestablishment of small businesses. The government has recognizedthis as well, and the crucial importance it has attached to suchestablishments is both good and bad. It is good because laws arebeing enacted to provide incentives for the creation of smallbusinesses. However, most of these laws extract a price in termsof regulation and restriction that makes their existence moot.To those Mongolians wishing to make their fortune in business,the idea of a weak government engaged mostly in international activities has some appeal.

The Cooperatives vis a viz the Collectives, however, provide anexception to the rule. The cooperative movement is actually asupport organization of family-owned, or very small, businesses.The movement is growing rapidly and has a great potential formaking a big impact -- particularly in the rural areas.

This is a difficult environment within which to program donorassistance. Indeed, the provision of assistance throughgovernment-associated initiatives gives every indication of beingcounter-productive, while the private sector contains very few institutions with which to work.

4. A Political Viewpoint

The GMPR has made a public commitment to effect a democraticpolitical process and to carry out economic reform through marketinechanisms. However, the Government is not monolithic in itscomposition, nor is the MPRP, the dominant political party of thegovernment. Thus, the leadership of the current administration must tread a thin line between the need to implement soundeconomic policy and the political reality of needing to mitigatethe negative effects of economic reform if it wishes to stay in office.

If government leaders believe that voters will vote their pocketbooks, then it is facing a very serious problem. In terms ofpurchasing power, city folk are experiencing depression. Countryfolk, however, are not doing badly -- they even have reason tolook favorably on the administration that gave them ownership oftheir livestock. In fact, this situation creates the politicalanomaly wherein the administration is obsessed with implementingeconomic changes that will ultimately prove to be most beneficial to Mongolia's urban population, is opposed in the execution ofthese reforms by this benefiting group, and is supported in doingso by the group that will benefit less.

Despite this rather bizarre situation, the pundits agree that thereform process is likely to go on with little diminution of speedunder almost any administration capable of being elected. Foreconomic planners this is comforting -- if indeed it is true.

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D. Developmental Imperatives

Donor motivation and morale are much higher than intuition mightsuggest. This is generally attributed to a perception, even anexpectation, that Mongolia will achieve economic growth at a morerapid rate than most developing countries. The factors behindthis view include the country's excellent educational base, thehigh level of aspirations and standards to which many Mongoliansare accustomed, and the demonstrated willingness to strive fordesired objectives. Mongolians have middle class aspirations andobjectives that are very attractive to donors.

However, is has been made abundantly clear to the Mongolians thatassistance from most of the donor community is contingent upon(1) a continuation of economic reform in a timely manner, and (2)any governmental change being implemented through the ballot boxand democratic means, rather than demonstrations by a vociferous minority in Sukhbaatar Square.

IV. Program Objectives

A. Selection Criteria and Process

Established Asia Bureau policy requires the Office of the A.I.D.Representative in Mongolia (OAR/M) to concentrate its resources on two defined developmental objectives against which the successof applications of resources can be measured. Further, these objectives must be central to the development process. In the case of Mongolia, the choices of political and economic democracyare almost obvious. They have been publicly announced as two ofthe most important concerns of the Government, and they are vitalfor restructuring of Mongolia after 70 years of Communist rule.

The elemental nature of existing Mongolian institutions that cansupport political and economic democracy make it relatively easyto measure the progress made toward the achievement of theseobjectives, but the basic lack of understanding by the Mongoliansof the principles involved is analogous to the attempt to carryout programs of assistance in almost any A.I.D.-assisted country.Thus, while the unusually high educational level of Mongoliansmay enable the development process to occur more quickly, the process itself may vary very little.

Several other factors played a decisive role in the choice ofobjectives. Based upon the brief Sector Assessments provided inSection VII below, Mongolia's Health, Agriculture, and Education systems are, comparatively, in good shape. Worsening economicconditions will take their toll on these sectors through budgetoutlay reductions, but much of this will be recovered from thelarge number of donors lining up to provide assistance to them.It is regrettable that much of the investment in these areas willbe wasted because of the poor policy environment for valuing the

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feasibility priority of various activities, but donor assistancewill provide interim relief and take some of the pressure off thegovernment while more basic economic policy issues are addressed.

The Agriculture Sector is worthy of special mention. Admittedly,in the short- and medium-term, Agriculture will be the largestemployer and provide the greatest share of GDP. It may also bethe most heavily subsidized sector of the economy. Neither is itlikely that this situation will change, given the eagerness ofdonors to work in the area and the critical nature of ruralpolitical support to almost any government administration.A.I.D. assistance to the sector, however, will be limited tothose occasions when there is a mutuality of interest withprivatization and related business concerns, including supportfor the Cooperatives Movement (small business).

Concern about environmental issues is increasingly becoming aconcern of many Mongolians. A "Green" political party exists,but major parties have adopted their agenda. The GMPR hascreated a Cabinet-level organization to address the problem, andthe new draft constitution makes environment a governmentalconcern. At this point, however, Mongolians are more inclined towant more pollution if it means jobs and export products togenerate foreign exchange. Public sensitivity to the problemneeds to be raised considerably. Were a grass roots movement,perhaps supported by a non-governmental and non-profitorganization, to gain an identity in the subject area, A.I.D.financial assistance might prove to be an excellent investment.At this point, however, there are simply higher priority uses foravailable funds --places where the return on investment is perceived to be greater.

Finally, the minerals sector is likely be the most importantsector for Mongolia's long-term economic development. Mongoliais believed to be rich in minerals and oil, although the latteris not yet a proven resource. However, the Mongolians areproceeding with the exploitation of their mineral wealth withgreat deliberation. They have heard horror stories of how othernations have been victimized by large multi-national firms, aswell as had some experience of their own. Recognizing, that thedevelopment of a minerals industry is a relative slow process,the Mongolians are attempting to get a handle on policy and anidea of their natural inventory before delving too heavily intooperations. This is an area of great promise for A.I.D. help,but not until the GMPR is a little more certain of itsintentions. For this reason, it might be argued that the U.S.should get involved in helping before policy is set -- before itis too late to affect the situation. Were funds not aconstraint, or the economy not in disarray and in need ofbolstering in the shorter-range, this might have been selected as an "objective" sector.

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B. Political Democracy

The objective of democratic assistance program is to strengtheninstitutions and structures that are required to sustain orimplement the democratic transition currently occurring inMongolia. The objective will be met through technical assistance, training, and commodities.

The legislative system that will emerge from the constitutionaldebate is one such critical institution. The agent of governmentresponsible for enacting legislation must be able to participateon at least an equal basis with the administration in theresearch, drafting, and public policy debate concerninglegislation, or the democratic process for selecting thelegislators may be a pyrrhic victory. Similarly, the judicialsystem must be given the capability to perform as an autonomousagent no longer under executive control. If it is simply theagent of the administration, as now seems to be the case, thanthe democratic process has been thwarted.

Outside government, the key institutions of democracy include thefree press and media, professional and other non-governmentalassociations, and political parties. These groupings all need tobe active and independent if democracy is to be reallyrepresentative.

Finally, Mongolia needs to establish a broad public base ofsupport for the concepts of democracy through the reeducation ofits populace concerning their democratic rights, privileges andresponsibilities. In the absence of a political culturesupportive of democracy, the very foundations of Mongolia's newdemocratic principles are at risk.

C. Economic Democracy

Economic democracy is the right to carry out business activitiesin a free market to the extent of an individual's ability andimagination, or until such activities begin to interfere with thepublic as a whole. These rights are protected by government, butthey are guided internally within the market by associations ofprofessional and operational interest groups. These privategroups are critical to the preservation and growth of the privatesector; they set standards of ethical behavior, represent membersin the public debate on public policy, are a critical source ofinformation and guidance to their members. Where an individual may have little power or influence, the association can be astrong protector of economic democracy.

Unfortunately, Mongolia has few such associations, and many thatit has are government-supported, or the successors of entitiesthat were once the recipient of government subsidies. In almostall cases, existing associations are all struggling to meet the

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needs of members for information and help on how to participatein the free market. Assistance to these associations, and to some that need to be created, may be the quickest way to have animpact on the design and structure of Mongolian markets. And,this is a priority for both government and the donors because theimportance of Mongolia's economic problems is recognized to be atthe heart of its development problem.

D. ESF and Food Aid

This document provides a context and strategy for programmingdevelopment assistance funds. However, consideration has alsobeen given to the likely continued provision of Economic SupportFunds (ESF) and food aid under P.L. 480. While an effort will bemade to program these resources collaboratively with the overallstrategy, it is recognized that their size and the specialjustification for their availability may make this difficult.

1. ESF

Previous ESF was provided on an emergency basis -- to help in theinternational effort to provide raw materials, supplies, and spare parts required to get Mongolia through the winter of1991/2. Flexibility and speed characterized the design of theCash Grant that met this need. With the changes that have takenplace in the Mongolian economy and the introduction of majorprograms instituted by the IMF and other donors, this emergencysituation should not reoccur. With the need for alligatorfighting abating, greater attention can be given to clearing the swamp.

Several attractive projects suitable for ESF funding havesurfaced. Ulaanbaatar has a sewage treatment plant that is notworking up to it capability due to a lack of spare parts andstructural deficiencies. A former Soviet airport not too farfrom Ulaanbaatar and on the main rail line is a potential sitefor an air cargo terminal. Assistance with the capitalization of a private bank provides another potential investment opportunityfor ESF resources.

Two primary factors should govern the use of ESF: it should befocussed on a specific, limited, development objective; and itmust be designed with resources external to, but within the overall guidance of, OAR/M.

2. P.L. 480 Food Aid

Emergency wheat and flour has already been provided, and arequest is now extant for further food assistance. The responseto this latter request is directly related to the lack of realknowledge the Mongolians have about their own food situation. Isthe problem a failure to produce enough food, or the lack of

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adequate storage and/or distribution facilities? Are fixedprices and rationing mechanisms contributing to the food problem?These and a series of related questions have been raised with theMongolians, and answers are being prepared. After the visit of aFood Assessment Team, which will review Mongolia's system forcollecting food data and analyze the nature of the food problem,it should be possible to develop a more structured approach for resolving it.

As in the case of ESF, the design of any food aid activities willrequire outside assistance working within the general purview of OAR/M.

V. Elements of Strategy

A. Strateay Definition

A strategy description should identify the beginning and endingpoints, discuss the obstacles in between, and develop a plan fordealing with the obstacles that considers cost, other neededinputs, the time available to do the job, and uncontrolledvariables. In this document thc defined starting point is thedescription of conditions in Mongolia provided above. The endpoint is the existence of a number of closely related andefficiently operating Mongolian institutions capable of assuringthat the processes of political and economic democracy will growand flourish.

Individual elements of the strategy are grouped contextually onthe basis of the overall objective they support, e.g., politicaldemocracy interventions and economic democracy initiatives.However, the economic initiatives are disaggregated further intoseveral functional concerns, e.g., private sector, training, and regulatory interventions.

B. Operational Strategy

In addition to selecting the right program strategy, there is aneed to select an appropriate organizational management oroperational strategy. OAR/M is anticipated to be composed of oneU.S. direct hire and three Mongolian nationals over the next 6-9months. Further, there is a need to get the program underwaywithout delay. The acceptable methods for dealing with theseconstraints are limited: a resource-consuming emergency designprogram can be mounted, or use can be made of approved existingprograms, with project managers in place, and a proven record ofimplementation success. OAR/M has selected the latter method.Assuredly, it is not an accident that the program strategy fitsthe operational capabilities of the Private Enterprise Bureau.

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C. Political Democracy Interventions

1. Activities of the Asia Foundation

Discussions are alre-dy underway between the Asia Foundation (TAF) and the Mongolians concerning activities to strengthen keyinstitutions and structures that will contribute to the growth of political democracy. Although there will be flexibility in TAF's program to enable it to take advantage of the current transition of the Mongolian political scene, including the pending new constitution, the program is expected to include the following.

The Legislature: For the past 70 years, the Administration has dominated Mongolia's Government. The legislative branch has been, largely, a rubber stamp for the initiatives of the Administration. To finally give it strength and voice, TAF wishes to help create a functioning committee structure, a legislative drafting capability, a legislative research capability, and other structural units that will give the institution an ability to engage in public policy dialogue as an equal partner with the Administration.

The System of Jurisprudence: Like the legislature, the system of jurisprudence in Mongolia has been captive to the Administration. The courts, particularly in the areas of civil and busines law,have simply been an extension of the bureaucracy -- another element in the comprehensive domination by government of all aspects of life. The new draft constitution reorganizes the judiciary and makes it independent. TAF wants to work with the judges and the Ministry of justice to develop the new system.The product will be a reform .­,f the court system to place the focus on interpretation of the constitution and legislation,justice based upon the law, and a capability within the Ministryof Justice to draft legislation that limits the requirement for,and the span of, legal interpretation by the court system.

The Free Press: Over 70 publications purport to report events occurring in Mongolia. They vary widely in both journalisticstyle and practice, but all report the views of particularorganizations, parties, or government departments. Mongoliansneed a press that provides "all the news that's fit to print"with candor and honesty. TAF can assist in creating such a pressfrom a neutral perspective through training and technical assistance, and through helping to create a professional pressassociation, as discussed below under Non-Governmental Professional Associations.

2. Institutional Reform in the Informal Sector (IRIS) Seminars

The IRIS Center of the University of Maryland is under contract to produce 5 seminars on major Mongolian public policy issues of

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over a 9 month period. Each seminar will enable 7-8 prominentMongolian leaders representing the spectrum of public opinion totake part in a detailed review and analysis of a subject in whichthey are active. Each Mongolian attendee will make a formal presentation of his/her viewpoint, and each seminar will beaddressed by international experts from both the private andpublic sectors. Rather than seek to reach consensus, theseminars will make participants sensitive to the points of view of others, pave the way for rational compromise, and help theattenders become more informed and articulate public opinionleaders.

3. National Endowment for Democracy (NED) Assistance to Political Parties

Within the past year or two, many new political parties and movements have appeared in Mongolia. With little sense oforganization, platform, financing, or fixed membership, few havebecome effective political participants. Consequently, the Mongolian People's Revolutionary Party (once a Communist Party),the best organized political grouping in the country, has hadlittle difficulty in continuing its dominance of the politicalarea. The opportunity for representative democracy to work inMongolia will be improved if there is a competitive process amongpolitical parties having an equal opportunity, in an organizational sense, to present their views.

To help produce such a situation, the National RepublicanInstitute of NED, or some similarly capable non-profit vendor,should provide assistance to all Mongolian political partiesaccepting the principle of governmental change through democratic processes. Training would be offered in the processes ofcreating, running, and financing a political party. Skills provided would include how to recruit and maintain membership,how to select and replace leadership, how to generate financing,etc. No funding would be included for commodity support,although the vendor could provide such support from private resources as long as it was provided with equity.

4. Broad-based Democratic Education

Elites in all sectors and representing all political persuasions seem united on the need to have more information about the newdemocratic and market economy systems that Mongolia has decided to adopt. They see the need both for themselves and for the general public (which is less convinced of the necessity of some changes). All the specific programs mentioned above will helpfulfil these needs. However, there is also a need to rapidlyimprove the understanding of, and thus the commitment to, the newinstitutions and the cultural values and modes of thought that support them.

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Mongolia has a highly educated and literate population and an effective educational system; many Mongolians have a commitment to learning and a remarkable belief in the efficacy of education in overcoming personal and national problems. Working from this basis, it should be possible to make a substantial and rapidimpact on Mongolia's ignorance of democratic concepts at a relatively low cost.

The democratic education program should have two major thrusts. The first would be to improve the understanding of English, both general and technical. Expanded knowledge of English would serve many Mongolian and U.S. objectives. From the democratic perspective, it would play a major role in integrating Mongoliainto the democratic community of nations and the democratic world culture to which the country wishes to adhere, and it would greatly simplify the communication of democratic concepts and ways of thinking at all social levels.

Much of what needs to be learned, the Mongolians can and will learn themselves, if they are provided with the tools. Secondly,the Mongolian educational system is developing new curricula at all levels to replace the former Marxist-Leninist curricula in social studies and humanities, including national and world history. This requires the rapid creation of new materials and the training and retraining of thousands of teachers. Educational leaders are fully aware of the size of the task and their lack of information on what the content of the material should be. They would like help in the development and teachingof the new ideas, and A.I.D. can contribute to the effort.

In developing a program to meet both these needs, the emphasiswill be on the training of teachers and the development of curriculum materials, including computer aided instruction. It is anticipated and expected that both the Peace Corps and USIS will coordinate and participate in this effort.

D. Economic Democracy Interventions

1. Non-Governmental Functional Associations

Associations are a proven instrument through which individuals and individual firms can effectively participate in the dialogue on public policy. Such institutions can be very effective in promoting economic democracy through their ability to articulate the needs of special interest groups, provide an alternative viewpoint on (and input to) the choice of government policy, set industrial standards of integrity and business practice, and establish relevant programs of information and training for members.

To help establish such associations in Mongolia, A.I.D. will

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20

provide long-term (9-12 months) to improve the organization andmanagement of at least three embryonic Mongolian organizationsthat are: financed by their membership, rather than government;concerned with representing their membership in the publicdialogue on Mongolia's economic policy; and desirous of providingservices required for the effective and efficient operation ofmember firms. One association will be concerned with commerce,one with manufacturing and export, and one with small business.These activities will incluae commodity support needed for theeffective utilization of technical assistance resources, as well as short-term consultant and training services.

Services could be provided through Buy-Ins to PRE's PrivateEnterprise Development and Support and GEMINI projects, amongother available central projects. All three activities should befully funded in FY 1992, based upon separate scopes of work prepared by OAR/M.

2. Professional Non-Governmental Associations

The justification for professional non-governmental associationsis similar to that given for functional associations. Further,in order to become an attractive venue for external investmentand joint venture partners, as well as perform effectively ininternational markets, significant improvements must be made inthe caliber of professional services available in Mongolia.

Assistance would consist of the provision of short-term technicalassistance to rehabilitate and energize the existing MongolianBar Association; to create professional associations for auditorsand accountants (similar to the American Institute of CertifiedPublic Accountants), bankers, and stock brokers; and to helprevitalize the media through the Mongolian Press Association.

Services would be based upon separate PIO/Ts prepared by OAR/M,and be provided by Buy-Ins to such projects as PRE's PrivateEnterprise Development Support and Financial Sector DevelopmentProjects, and Asia's Democracy Project.

3. Economic Advisory Services

An A.I.D. grant to the United Nations Development Programme hasbeen used to provide Mongolia with macroeconomic advisoryservices from Sachs and Company. The GMPR would like to have theservices continued for an additional 6 months. It is likely thatthe assistance team would be supplemented by one person, anadviser (to the Inter-Ministerial Economic Coordination Committeechaired by the first Deputy Prime Minister) to a total of 5. Theactivity will include provision for short-term, in-countrytraining. It is proposed that the grant be negotiated byASIA/DR/PD, based upon a project scope of work prepared by theUNDP, and attached to a PIO/T prepared by OAR/M.

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E. Private Enterprise Interventions

1. A Private Bank and Investment Guarantees

New banking legislation permits the operation of private banks,including international banks, under standards regulated by theCentral Bank. The same legislation permitted government entitiesin specific sectoral areas to create financial units, calledprivate banks. There are 7 or 8 of these, but they remain tiedto specific economic sectors and continue to operate on the basisof governmental whim. Even after planned privatization, it is not likely that these institutions will have the confidence offoreign investors and joint venture partners. Mongolia needs aprivately organized and operated bank to attract foreign funds, abank that is motivated by profits obtained by attractingcustomers with the provision of sound and efficient services,that can be relied upon to make loans on the basis of assessed risk, that can provide unbiased financial advice, and can berelied upon to protect the funds of investors and produce themfor customers upon request. The existence of such a private bankwould also enable Mongolia to participate in the full range of PRE's Investment Guarantee Programs.

Influential Mongolians are aware of the need for, and thebenefits to be derived from, a private bank. Activities arealready underway to attract local investors. To assist in thecreation of a private bank, short-term technical assistance willbe needed to help the Mongolians organize their venture. Theywill also need help in identifying a joint venture partner, onewhose size and business interests are compatible to those ofMongolia. The investment of such a partner would consist mainlyof management and training inputs, rather than capital. Also ofvalue would be the partner's correspondent banking relationships.

Assistance for this activity will be sought through PRE'sFinancial Sector Development Project and Investment GuaranteeProgram, based upon a scope of work prepared by OAR/M.

2. International Executive Service Corps and Investment Fund

Mongolia has embarked on a sweeping privatization program, with separate strategies for divesting large-scale and small-scaleenterprises. Organization and management problems are a seriousproblem, particularly for the larger firms. New firms are likelyto have little experience, and the old ones need help in adaptingto the new requirements for operating in a market economy. TheIESC provides an excellent means for helping the Mongolians deal with the problem.

A.I.D. (OAR/M) would provide international transportation costsfor the Volunteer Executives (Vas). Local support costs would beborne by the firm being assisted. The administration of the

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program would be lodged in on of the Non-Governmental FunctionalAssociations cited above, and it would be responsible for theselection of participants in the program through democratic means. In addition, to help avoid the problem of Vas having maderecommendations tbat firms cannot afford to implement, it isproposed that a 4'oreign exchange revolving loan fund be created,to be matched by a government giant of an equivalent amount inlocal currency. If recommended by a VE, the participating firmcould obtain an appropriate loan from the fund, but no more than a set amount, perhaps $10,000 in combined dollar and local currency financing. The fund would be administered by a privatebank under the direction of the Association cited previously,which would be responsible for confirming the recommendation therecommendation of the VE and negotiating the terms of repaymentto the revolving fund. However, oversight and final loanapproval would be provided by a steering committee composed ofthe resident representatives of the various economic assistancedonors to Mongolia, chaired by the UNDP Resident Representative.

3. Joint Venture Promotion

There are numerous Mongolian firms that have the capability ofproducing fairly sophisticated products. Unfortunately, they are not the products needed and marketable in international markets.To attack this problem, it is proposed that the services of theIESC be employed through PRE's Trade and Investment ServicesProject to survey Mongolia's industrial capability and capacityand use the network of VEs to locate joint venture partners whomight be able to convert Mongolian firms into solid, profit­making, exporters.

4. Business Services

Potential investors and joint venture partners are dissuaded frominvesting in Mongolia because of the lack of basic businessservices. Organization and management, accounting and auditing,training, and infrastructure support services are either notavailable locally, or they are operate at an inadequate level ofsophistication. There are, however, a variety of institutions inthe formal training field, mostly now supported by government,that are interested in becoming 'for profit' businesses, or inestablishing affiliated, but separately financed consultingfirms. The intent would be to change providers of academic courses into client-oriented services firms.

A.I.D. can help to bring this about by providing financing fortraining and commodities, and by providing technical assistance.Repayment for financing would be made in the form of scholarshipsfor participants selected by the small business associationmentioned previously, and by the provision of pro bono services,particularly organization and management services for newly

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privatized with whom they would hope to establish a long-termconsultant relationship. A special effort would be made to havethe A.I.D. assistance attractive to investment by joint venture partners.

Services can be provided through a program of coordinated Buy-Insto PRE'S Private Enterprise Development Support, Trade andInvestment Services, and Investment Guarantee Projects.

F. Training Services

1. Banker Training

Beyond the requirements for a private bank and a professionalbankers association mentioned earlier, Mongolia has a generalneed for banker training. For the most part, internationalbanking operations in Mongolia had been the province of theSoviets prior to 1990. Consequently, existing banking practiceand technology is primitive, at best.

Similarly, banking regulations and techniques rather hastily putin place over the past year are in dire need of reconsiderationand revision. A.I.D. can help to solve this problem by providinglonger-term resident technical assistance (9-12 months), short­term technical assistance, and short-term training. There wouldbe a need for this assistance to tie in, or link up with theprivate bank and professional banker's association initiatives mentioned previously.

Assistance would be obtained through a Buy-In to the FinancialServices Voluntary Corps and Financial Services DevelopmentProjects.

2. Entrepreneurs International (EI)

EI provides a type of hands-on, practical, technical assistancethat is ideal for Mongolians. It takes advantage of their highlevel of education and the rapid rate of growth anticipated inthe small business sector and newly privatized industrial sector.Given the rapid rate at which Mongolians are learning English, aprogram of 6 participants for an average of 3 months could be sustained.

Candidates would be sought from the functional and professionalassociations cited previously. After the receipt of proposals,OAR/M would prepare nominations and send them to the Office ofInternational training, along with other required documentation.

3. Stock Exchange Training

Mongolia has established a private Stock Exchange, and a programof broker training has been carried out. However, the resulting

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product is less than sophisticated. As operations get under way,there will be a need for continued short-term training. Thistraining should also be linked in the proposal for setting up aprofessional stockbrokers mentioned.

The preferred method of meeting this training need would bethrough a Buy-In to PRE's Financial Sector Volunteer Corps orFinancial Sector Development projects.

4. Short-Term Study Tours

The general level of Mongolian experience with the institutionsand practices of a market economy is very low. Thus, in a numberof cases in has been considered useful to provide short-termstudy tours for senior-level opinion leaders. Programs in the areas of management and small business operations are alreadyscheduled. Continued use of this technique will provide a way tofurther experience for Mongolians in areas having significancefor Mongolia's economic development.

G. ReQulatory and Quasi-Governmental Initiatives

1. Security and Exchange Commission

In general, OAR/M will avoid activities involving the publicsector. An exception is proposed in the case of assisting in thecreation of an institution analogous to the Security and ExchangeCommission in the United States. The logic for this exception topolicy is that a private stock market has been created and thereis a need to assure that it is regulated in the public interest.This activity does not assist Government involvement in theproduction of a service provided better in the private sector.Further, given the present lack of a professional association for stockbrokers, there is an exigent need.

2. Agricultural Commodities Exchange (ACE)

Mongolia's ACE was announced in August of 1991, but it has justbegun to operate. Intended to be private, eventually, it willperform a market clearing function between Mongolia's ruralproducers and its urban and industrial consumers. The importanceof the market is emphasized by the extent to which Mongolia isreliant upon its agriculture sector for employment and productive output.

The ACE has benefitted from the training activities that havetaken place in support of the Mongolian Stock Exchange. In this sense it is somewhat better positioned to become a going concern.However, a great deal of technical assistance and short-termtraining will be required. Such training can be provided throughPRE's Financial Sector Development and Financial Sector VoluntaryCorps projects.

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VI. Resource Implications

A. Proaram Fundinq Levels

OAR/M proposes that its FY 1992 and 1993 budgets, provisionallyestablished at $4 million and $4.5 million, respectively, beprogrammed for the activities described above, as follows.

PROJECTED FY 1992 AND 1993 PROGRAM BUDGETS

($000)

Activity FY 1992 FY 1993

Asia Foundation Activities 400IRIS Seminars 400Assistance to Political Parties 250Broad-based Political Education 200 200Non-Governmental Associations 650 400IESC and Investment Tund 500 300Join Venture Promotion 300 200Business Services 800 500Banker Training 400 200Entrepreneurs International 200 200Stock Exchange Training 200 100Short-Term Training Tours 100 100Security and Exchange Commission 200Agriculture Commodities Exchange

700 200 800

Total 4000 4500

B. OAR/M Staffing Levels

The post was established at a staffing level of 2 USDH and 5 PSCMongolian local positions. Until June of 1992, OAR/M will beable to get along with 1 USDH and 3 PSC Mongolian locals: theA.I.D. Representative, a Senior Program Assistant/Translator, aSecretary, and a Driver/Messenger. In the summer of 1992,however, it is anticipated that the remaining 3 persons will beneeded: a Project Manager/Design Officer, and a Junior ProgramAssistant/Translator, and a full-time Participant TrainingOfficer.

OAR/M's ability to carry out the relatively ambitious programdescribed above is strictly related to the method of programimplementation, i.e., through Buy-Ins to established PRE andother central bureau projects. These projects are long and wellestablished, with proven track records and skilled projectmanagers. As such, they bolster the size of the staff actuallyworking on the Mongolian program to a level many times greaterthan the resident employees. Obviously, given the sometimesoverwhelming support costs and problems associated with residence

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in Ulaanbaatar, this is an efficient and effective method ofoperation. Further, it will continue to work well as long as the program is operated and managed this way.

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APPENDICES

Development Sector Assessments

The following Sector Assessments are extracts of materialoriginally prepared by the Mongolian Government officials fordistribution at the October 1991 meeting of donors providingeconomic assistance to Mongolia, an event sponsored by the UnitedNations Development Programme. They are written from a Mongolianperspective, and their content was not independently verified.They are certainly not presented as representative of theposition, policy, or opinion of the Government of the United States.

What they do present, however, is a sense of what the Governmentof the People's Republic of Mongolia feels to be the status andproblems of Mongolia in each of the sector areas. They areincluded as an appendix to the A.I.D. draft program strategybecause they help to illustrate the environment in which theA.I.D. strategy is expected to be implemented

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A. AQriculture/Livestock

1. Current Situation

The agricultural sector employs 40% of the labor force and produces 25% of national income, making it the most importantsector in the economy. Within agriculture, 70% of net productderives from livestock production, with the remainder coming from land cultivation.

The government began a privatization program in this sector in1985. Nearly 40% of livestock and a small proportion ofcollective and state farm assets have already been transferred toprivate owners. The privatization of the remaining state farmsand collectives is expected to be completed over the next two years.

The economic crisis has been strongly felt in the agriculturalsector. Due to inflexible pricing policies, a lack of spareparts, a lack of fertilizers and other inputs, a shortage offoreign exchange, and a sharp drop in demand due to high pricesin non-price controlled items, the production and imports of mostfood products have fallen substantially in 1991. In particular,when compared to the first quarter of 1990, milk production has fallen by 32%, egg production has fallen by 10%, and porkproduction fell by 14%. It is estimated that $33 million worthof spare parts and diesel fuel are needed immediately to keep thenation's 11,000 tractors and 2,500 combines operating.

Inadequate fodder production, a traditional problem, resulted inheavy livestock losses last winter and a substantial dependenceon imported fodder -- a commodity no longer available throughbarter with the Soviets. Other problems include overgrazing,limited veterinary services, and a shortage of veterinarymedicines.

2. Policies and Priorities

Many of the structural problems and production declines in theagricultural sector stem from poor pricing policies and a lack ofincentives. The government hopes that this sector can becomeboth an important source of growth and a source of hard currencyearnings during the next several years. To achieve this, the government has embarked on a rapid privatization and priceliberalization program. The government will free the farm-gateprices of all agricultural products once this year's state orders are fulfilled. The prices of fertilizers, pesticides, gasoline,and other inputs have also been raised significantly, or liberalized.

The privatization program and price liberalization will have far

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I'1

reaching effects upon the rural economy. It is likely that therelative price of agricultural products will increasesubstantially, and at the same time input costs will increase.The impact of these changes on production techniques, herd sizes,herd composition, and pesticide and fertilizer use is difficultto predict. Further, the existing state-run marketing anddistribution system will be abolished. These functions will betransferred to the private sector. This transfer and adjustmentprocess must be carefully monitored to ensure that a smoothadjustment takes place. Government policies which promote thedevelopment of the private sector may play an important role inchanging production levels. For example, there is a strong needto promote private sector development of slaughter houses toaccompany the five large state slaughterhouses which currentlyexist.

In the short-term, the main priority of the government is toencourage a rapid and smooth transition of the agriculturalsector to a market environment. There are several areas wheretechnical assistance is particularly important, including: aSectoral Study of the entire agriculture structure; FarmManagement, to assist state and collective farms; QualityControl, to regulate exports of meat, wool, leather, andcashmere; Legal Reform, to avoid "common property" problems andformulate policy on land tenure, leasing, taxation, etc.;Veterinary Medicine and Pest Control; Fodder Production; andSlaughterhouse Decentralization.

B. Education

1. Current Situation

Approximately 26% of Mongolians attend some form of school duringthe year. This has led to a literacy rate of over 90%, and 19%of the labor force has completed secondary school, while 16% hashad some higher education. The first 10 years of education,i.e., through the end of high school, is provided free. Since1989, several private schools have been established, and theyreceive some State funding.

Almost 25% of the State budget in 1990 was spent on education.One reason for the size of this figure is that it includes roomand board expenses for many children of nomadic families who needto attend boarding school. In spite of the share of Stateresources, the school system suffer from numerous shortcomings:

o a shortage of classroom and laboratory equipment (valuedat $12 per student and with an average use of 25 student per piece of classroom equipment);

o only one lecturer out of 38 is involved in some research activity;

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o two-thirds of the library books are completely out of date;

o Mongolian universities rank far lower than those inWestern countries in terms of supply of teachers, economic cost efficiency, and quality of graduate education; and

o most schools have no photocopying, audio, or video facilities.

These shortcomings have resulted in a low quality of education, and have limited human resource development.

2. Policies and Priorities

Government has embarked on a sweeping program of educationalreform, including an open-door policy in the field ofprofessional education, the integration of higher education intothe rest of the world, the creation of an environment which encourages academic freedom, and the setting up of independentresearch and training institutes in accordance with the LimaInternational Declaration. Moreover, economic efficiency in theprovision of education will be stressed, as will the requirementthat specialists within the system both teach academically andcontribute to the needs of industry through research. Several steps have been taken in this regard.

A new Education Law was adopted on June 27, 1991. Accordingly,the State will provide free general education, while requiringtuition to be paid for professional degrees. It also extends theareas where cooperative and private schools may be set up.Another step was the establishment of a national committee made up of members of the Baga Hural and other institutions to adviseparliament on university issues and on the teaching of science -­as a liaison between the universities and the Academy ofSciences. A third step is for each university to draw up a planfor its own modernization.

Important areas for development include: School Modernizationthrough improvements in equipment and faculty training;Institutional and Structural Reform to cut costs while improvingthe quality of education; Curriculum Development and ForeignLanguage Training; Teacher Training; and Rural Education, toraise the share of eligible children in kindergarten to 50% and in preparatory school to 90%.

C. Employment and Privatization

1. Current Situation

The ongoing transition from a centrally planned to a market economy raises major and complex problems related to maintaining

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employment levels; improving economic output; the management andproductivity of small and large enterprises; skill developmentand training; industrial relations; labor protection; and socialsecurity. Owing to the very rapid nature of the economictransition, the Government must tackle this broad range of issueswith considerable urgency to avoid economic collapse and ensurethe sustainability of the transition. In many, if not most,instances, this involves not simply institution-building, butcompletely reorienting the way institutions and people function.Some of the key problems are as follows.

o Unemployment levels have increased phenomenally. The economy simply does not generate enough jobs to absorb thegrowing number of new entrants to the labor force. Theliberalization process has only aggravated the problem,including the current emphasis on retrenchment andrationalization of the use of labor. Moreover, people who were used to being provided with employment by the state are now being asked to look for jobs outside Government.

o The privatization process will raise problems for bothlarge and small enterprises related to financial andmanagerial practices, management and entrepreneurshiptraining, support and credit systems for entrepreneurs,labor/management relations, and general attitudes.

o The economic transition will create new demands for skilldevelopment and vocational training, and it will becomeincreasingly important to match skills closely with theneeds of the emerging labor market. Current skilldevelopment programs are severely outdated in terms ofcontent, level of skills, and equipment and technology.

o New questions are being raised concerning industrial relations, employment services, occupational safety andhealth, and the provision of social security, particularlyas they relate to a market economy.

2. Policies and Priorities

In its privatization program, the Government has identified thesmall enterprise sector as being of particular importance becauseof its potential for growth and employment generation. Without arapidly expanding small enterprise sector, it seems inevitablethat unemployment will reach unacceptable levels as a result ofretrenchmenL from public enterprises, bankruptcies, and economicrecession. This has led to several government initiatives,including the establishment of a Coordinating Council onDevelopment of Small Enterprises, Trade and Services under thechairmanship of the Vice-Minister of Labor and the establishmentwithin the Ministry of Labor (MOL) of a Center for SmallEnterprise Promotion. High priority is also given to the

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'/

development of cooperatives as a source of economic growth andemployment. A cooperative development plan is being prepared,and steps are being taken to provide more support for thedevelopment of cooperatives.

In the large public enterprises targeted for privatization, theprogram will not, by itself, bring about the requiredimprovements in financial and managerial performance. Thepresent situation is likely to deteriorate further once themarket reforms start taking hold, unless strong remedial actionis taken. The State Commission for Privatization is overseeingand directing the privatization process. It is planning toestablish an enterprise performance improvement cell, staffed byhighly experienced facilitators, to provide assistance toenterprise managers during the economic transition.

The MOL is facing a wide range of new issues related toemployment and labor administration. The rapid growth inunemployment has highlighted the need for the MOL to strengthenits employment service role. The economic transition has led tothe emergence of an entirely new relationship between tradeunions, employers, and the MOL. It is of vital importance to thefunctioning of the economy that the MOL should strengthen theselinks and assume a strong and active role in industrialrelations. In the area of safety and health, as well asinspection, previously responsibilities of the trade unions, theMOL will need to take on a new role.

The entire range of social security programs will need to beexamined and revised. At present, social security is fundedpartly from employers' contributions, while the remainder comesfrom the State. In early 1991, Government established the StateSocial Security Department under the MOL to take responsibilityfor all social security matters. Preparatory work is now underway for the restructuring and reorganization of the differentsocial security programs.

The technical education and vocational training system requiresin-depth review and a complete reorientation. This is related tochanges in the education system. This will require coordinationbetween the roles of the Ministries of Education and Labor toassure that skill development programs meet the needs of theemerging labor market and the economy.

Priority areas for technical assistance include: smallenterprise development; cooperative development; enterpriseperformance improvement; labor administration; social securityreorganization and restructuring; and skills development.

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D. Energy

1. Current Situation

Roughly half the population inhabiting the central economicregion, which includes the four largest cities, Ulaanbaatar,Darkhan, Erdenet, and Choibalsan, are served by a power grid fedby six coal-fired stations and connected to a Soviet network. Inpast years, peak load requirements have been met by importingSoviet power, but this has been available only intermittentlysince January of 1991.

There have been frequent power outages in the Central EnergySystem this year. This is a result of breakdowns due to plantobsolescence and the difficulty encountered in obtaining spareparts from the Soviet Union due to a lack of foreign exchange,which the U.S. $10 million grant has helped assuage, although theimpact of the problem cannot be overemphasized. The Erdenetcopper mining enterprise reports that such outages were largelyresponsible for a loss of about $12 million worth of output in the first of 1991.

2. Policies and Priorities

The major considerations in the energy sector focus on tariff­setting, energy production efficiency, and energy use efficiency.Current electricity tariffs for both households and industry areset at 0.5 tugriks/kwh. This is well below any measure of cost,particularly if equipment procurement and replacement cost aredenominated in hard currency. Tariffs for industrial andcommercial use need to be raised rapidly to long-run marginalcost, and peak-loan pricing techniques should be applied, amongother efficiency-enhancing allocative techniques. In regard toresidential consumers, it is believed to be socially unacceptableto impose full-cost tariffs immediately. However, a gradualincrease in real residential rates is planned.

Examples of inefficiency in energy production include low grossefficiency of co-generation of electricity and heat (below 60%),high own-use of power stations (18%), and high transmission anddistribution losses (13%). These indicators point to a need forthe introduction of modern technology and an improvement inoperations and maintenance procedures and techniques. An energyaudit and conservation study will be conducted in 1992.

Vndustry accounts for 90% of total power consumption in thecentral grid. Obsolete equipment in many plants, coupled withinadequate pricing of electricity -- common characteristics ofex-centrally planned economies -- have led to inefficient use ofpower by industry. The faster this situation is corrected byconservation measures and full-cost pricing, the longer Mongolia

40

can delay incurring the cost of new generation investment.

It will be extremely difficult to predict growth in energy demand over the next decade. The rise in domestic energy prices, incombination with the current economic decline, is likely to leadto slow or, perhaps, negative growth in energy demand over the next several years. The requirements for new generating capacitymust be carefully studied on a regional basis.

Investment projects currently under consideration include: smallcoal-fired plants to replace diesel generators in three westernaimag centers; expansion of the plant in Choibalsan; expansion ofsteam-heat production and distribution facilities in Ulaanbaatarand Darkhan; the dismantling of Ulaanbaatar station No. 3 forupgrading and/or replacement; renovation of the thermal plants inDarkhan and Dornod; automation of the distribution network in thecentral energy system; and building a high capacity power station in Baganuur.

E. Environment

1. Current Situation

In spite of recent efforts, the current situation still reflectsthe effects of seven decades of central planning under which environmental issues were largely ignored.

There are approximately 3,800 rivers, 3,500 lakes and 7,000springs in Mongolia. However, deforestation and usage forhydropower and irrigation over the last 30 years had contributed to an 18% decrease in water resources by 1989. Water levels inrivers such as the Selengge and Tuul have fallen to 59% ofearlier levels. The five biggest rivers are also experiencingserious pollution problems. Originating from factories, powerstations, and state farm waste, the main pollutants arephosphorous, nitrate/nitrite, ammonical-nitrogen, and excessivehardness. Other problems may also exist that are not detected bythe outdated monitoring equipment currently in use.

Forest resources are 1276 million cubic meters and cover 10% ofthe country, mostly in mountainous areas. The forest plays acritical role in the protection of the soil cover and water resources. However, there has been serious forest depletion,often in critical watershed areas. Over the last 15 years, 1,065forest fires have occurred, affecting 2.748 million hectares. Bythe end of 1990, an area of 225,000 hectares had lost the abilityto support forest growth. Afforestation efforts to date have not been very successful.

Mongolia has 140 species of mammals, 415 species of birds, 8species of amphibians, 20 species of reptiles, and 15,000 speciesof insects. Those endangered include 23 mammal species, 19 bird

41

species, 6 amphibian species, and 86 types of plants. TheMongolian Hunti-ng Fund protects 51 mammal and 126 bird species.Przewalski horses were extinct in Mongolia, but they have beenreintroduced. They continue to have trouble with theirbiological ability to maintain herd size. The wildlifemanagement organization permits 3 million animals to be huntedannually, generating revenues of 40 million tugriks in 1990.However, climatic irregularities and disease cause large numbersof additional losses. Two species of fish are also consideredendangered, and 30 are protected.

Major air pollution sources include ger stoves in urban areas,small coal heaters, diesel- and coal-fired power stations,factories, and vehicles. Coal-fired power and heating stationshave no filtering of exhaust smoke. Since 1977, an air pollutionmonitoring system has been operative in 17 cities samplingcritical pollutants three times daily.

Mongolia generated 40,000 cubic meters of solid waste annually.Fifty percent of this comes from Ulaanbaatar and is carried tothree disposal sites 10 km. away. None of it is treated,separated, or properly incinerated. These wastes include siltfrom sewage treatment, oil products, toxic industrial chemicals,radioactive material from hospitals, and conventional garbage.Rural waste is left uncovered and exposed near settlements andis, at best, incompletely burned. This adds to soil, water andair pollution. Instituting modern waste management must clearlybe given a high priority.

2. Policies and Priorities

Mongolians are noted for their adherence to a clean environment.These principles are embodied in the December 1990 Governmentresolution delineating the role and responsibilities of the StateCommittee for Environment Control (SCEC). The assistance of theinternational community has been sought through membership insuch environmental organizations as the UNCED, Man and Biosphere,and ESCAP.

Though the SCEC has normally been allocated an annual budget of30 million tugriks for environmental monitoring and 24 millionTugriks for research, the current budgetary crisis makescontinued support at these levels uncertain. Government isdetermined to promote a clean environment, but investments inthis sector cannot be a priority in the short-term.

Short- and medium-term objectives include: the introduction ofeffective environmental monitoring methods; the creation of anenvironmental data bank; and assistance with managing the 13preserves, some jointly established with the Soviets and theChinese, which cover 3.5% of Mongolia. These include 4 types ofnational nature area, preserves, national parks, historical

42

sites, and reservations.

Medium- and long-term objectives include continued ESCAP designstrategy assistance for a comprehensive, integrated environmental policy, including: fines and sanctions for pollution; a land usepolicy and law; recycling of waste and purification of industrial and household water sewage; a redoubling of afforestation efforts; a reduction in the use of chemical pesticides, strict environmental controls on mining activities; various incentives for the purchase of cleaner household stoves; and research on how to stem the growth of the desert and drought.

Health is the first priority, followed by maintenance of economic livelihood, and management of the environment for economic well­being.

F. Health

1. Current Status

Demoqraphy. Mongolia has a population of just over 2 million ofwhich 46% are below 16 years of age. Eighty-six percent of adult women work, but there are creche and kindergarten facilities forless than 16% and 25%, respectively, of children under 8 yearsold. The previous national policy of encouraging populationgrowth and the very limited availability of contraception haveled to the development of a cycle of multiple births with little control over birth spacing. The result has been high levels of maternal morbidity and mortality.

Nutrition. Mongolia's extreme continental climate results in large seasonal fluctuations in food supply. Problems exist withthe supply of vegetables and fresh milk, particularly in rural areas. With the exception of some wild berries, practically nofruit is available. Meat supply has been sufficient, and should increase further with the switch to a market economy. However,the large role of meat in the traditional diet leads to a veryhigh level of saturated fat consumption, in part as a (inefficient) source of energy during the long winters. Foodsavailable for young children are extremely limited. Widespread use of traditional, nutritionally inadequate, infant foods andthe high rate of unattended children due to employment amongwomen have contributed to child malnutrition. Low birth-weightis a problem for 3.4% of newborn infants.

Health-care Delivery. There is a well established health-care infrastructure with 27 doctors, 120 hospital beds, and 85 health workers per 10,000 people. Care is provided at four levels. First, at the brigade level there are 1,300 nurse-practitionerswith an average of 4 beds. Second, there are 31 physician postsat the somon level with 8 beds, on average. Third, there are 30inter-somon hospitals with 57 beds and 15 physicians, on average.

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Fourth, there are three general hospitals with an average of 300beds and 50 physicians at the level of the aimag and the three principal cities. In addition, Ulaanbaatar has a number of specialty hospitals, including one for infectious diseases.

The emphasis still appears to be on curative rather than preventive care. Preventive work is done by a series of sanitaryand epidemiological stations and sub-stations and gynecologicaland pediatric outposts, each on the order of two per aimag.Maternal and pediatric care is one of the better-developed sub­sectors, with good antenatal coverage and 98% of deliveries taking place in health centers. Immunization coverage is high among infants, exceeding 18% for each antigen.

Finally, in Ulaanbaatar there is an institute of traditional medicine, a drug and byproduct control company, and MONMINX, a company which prior to the current liberalizations had theexclusive rights to import drugs and medical equipment directly.

Morbidity/Mortality. Infant mortality at 64.9 per thousand is midway between high and middle mortality countries. Acuterespiratory infections and diarrhoeal diseases account for 75% of this, and 60% of morbidity. Slowness of urgent care response is also a factor. Maternal mortality is high at 144 per 100 thousand live births, and reflects a high crude birth rate and the lack of proper child spacing.

The viral hepatitis infection rate is quite high (69 per 10,000),since vaccines are available only for some strains. Moreover,80% of hepatitis carriers will contract liver cancer, the incidence of which has gone up four-fold recently. The liver cancer rate is 25 times higher than in the West. Menincocol meningitis and tuberculosis rates are also high due to the dryclimate.

2. Policies and Priorities

Among the many challenges Mongolia faces in its attempt to improve health care are: the logistics of providing care to ageographically dispersed population (1.34 persons per km2); the inadequate state of communications and transportation; and a complete dependence on imports.

Nevertheless, there are favorable factors, such -7: a high level of awareness at senior government levels; a high rate of female literacy, which facilitates the delivery of health information;the strong capabilities of the Social and Economic Council within the Ministry of Health; and a well established system of health infrastructure.

The major short-term need is medicines, exacerbated by supplyproblems and a lack of hard currency. Longer-term needs include:

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a plan for the development of the sector; training programs toprovide management skills to health care professionals;additional ambulances and communications equipment; privatesector initiatives in health care delivery; and the localmanufacture of drugs and biological products.

G. Mining

1. Current Situation

There has been only limited development of Mongolia's mineral resources. State geological surveys and other studies suggestthat this sector is an important source of future hard currencyearnings for Mongolia. Potential resources include: copper,fluorspar, gold, silver, coal, uranium, nickel, and others.

Mongolia's coal reserves are estimated at 100 billion tons,making her one of the world's 20 largest coal deposit nations.The 16 currently active coal mines have an annual capacity of 8million tons. some 80% of production is consumed in the centraleconomic region. Coal output grew 10% per annum during the1980s, but is currently declining due to obsolescence ofequipment, lack of spare parts, and inadequate maintenance of themines, particularly with regard to safety conditions. TheMinistry of Energy estimates that 1991 coal deliveries to urbancenters will fall 200,000 tons short of demand, most of whichoriginates in the power grid.

2. Priorities and Policy Issues

There is a need for a sector study to examine issues in thissector, and to help determine priorities. General assistance inthe development of mining policies and regulations is also required.

The rapid exploitation of mineral resources is a key priority ofthe government. This will require both an increased exploitationof existing mines, e.g., Erdenet copper mine, and the developmentof new mines. The integration of these projects with thedevelopment of transportation facilities must be considered.

Fuller utilization of existing coal mines and the development of new sites will be necessary in the coming years, both to meeddomestic demand and to take advantage of possible exportopportunities.

The law on Economic Units passed on July 1, 1991, allows up to49% of state equity in infrastructure, including mines, to beleased or sold to private interests -- both foreign and domestic.However, given the condition of the existing coal mines, it isnot realistic to expect private interests to assume such a rolevery soon. This does not exclude the possibility of introducing

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foreign management under contact arrangements.

The Center of Mongolian Coal and Chemical Technology has beendirected to lead the development of a petroleum-coal conversion program. Current dependence on oil imports from the SovietUnion, its high cost in foreign exchange, and Mongolia's largecoal deposits make this a potential avenue for exploration.

Another concern is the need to produce "active" coal for use inpower plant smokestack scrubbers and sulphur coal for use incleaning power station water effluent. Pollution control andreclamation activities require further examination, as well.

H. Telecommunications

1. Current Situation

Mongolia's telecommunications system requires substantialoverhaul and expansion to enable it to meet demand and play a proper role in the transformation to a market economy. Much ofthe equipment is outmoded; circuits are congested; directdistance dialing, domestic telex, data transmission, and valueadded services are non-existent; and the waiting list for locallines is almost as large as the number of connections. In thelast 10 years, telephone density has increased at an average rateof less than 2% per annum. In the next few years, non­availability of spare parts for Soviet-made equipment may disruptportions of the existing network.

An order has been placed for a 27 ,000-line combined local,national transit, and international exchange from the Frenchsupplier Alcatel at a cost of $9.8 million. A down payment wasmade of $1.3 in 1990, with the remainder being financed by theFrench bank Paribas over 5 years at 12% interest.

An earth station near Ulaanbaatar for Asiasat I, installed by NECof Japan at a cost of $2.4 million, was inaugurated on July 17,1991. Sumitomo has agreed to a one-year payment delay without interest.

Negotiations have been concluded with Japan to grant-finance a1,000-line national transit exchange combined with a 100-lineinternational exchange, connected to Intelsat via an earthstation scheduled to begin operation in 1993. The estimated costis $7 million. There are potential incompatibilities between theFrench and Japanese systems which require a consultant on signalling/switching.

Given the long distances between population centers in Mongolia,satellite transmission is by far the most economical technologyfor inter-urban communication. This requires expansion of theexisting Asiasat earth station and the installation of DAMA

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(voice) and VSAT (data) stations. Negotiation are underway withDaewoo of Korea to install digital exchanges with 20,000 lines atan estimated cost of $8.7 million as a first step.

The total foreign exchange cost of contracts recently signed, orexpected to be signed through 1991, is about $30 million. Ofthis amount, 77%, or $23.2 million is expected to be financed ongrant or export credit terms.

Additional urgent requirements include service for four aimagsnot yet connected to Ulaanbaatar by medium-capacity microwavelines. This requires construction of 1,200 km. of 8 MB lines,estimated to cost $12 million.

2. Policies and Priorities

Two general areas are under consideration for reform. These arethe design of a better institutional and regulatory structure forthe sector, and the setting of more appropriate (economic) tariff schedules.

International evaluations have recommended that responsibility betransferred into an autonomous, commercially-oriented enterprise.They also propose the establishment of an independent regulatoryauthority, and separation of the postal and broadcasting servicesfrom the telecommunications enterprise.

Domestic tariffs are well below any measure of cost, particularlywhen equipment procurement and replacement cost in had currencyis taken into account. Considering the burden on budgets ofexisting residential subscribers, the Government feels that aone-step increase to full-cost tariffs would be sociallyunacceptable. Nevertheless, it recognizes that prices must risein stages to more closely reflect the actual cost of service.

I. Transportation

1. Current Situation

Ulaanbaatar is currently served by three international airlines;MIAT, Aeroflot, and Air China. Three flights operate each weekbetween Moscow and Ulaanbaatar. There are now four flights eachweek between Ulaanbaatar and Beijing: two by MIAT and two by AirChina. MIAT carried 49,000 internation&l passengers in 1990.Its fleet consists of one Tuoplev-154 leased from Aeroflot and 1250-seat Antonov-24s, of which four are out of service due to lack of spare parts.

For domestic service, MIAT uses 45 Antonov-2s, in addition to theAntonov-24s mentioned above. Due to Mongolia's large area andundeveloped road network, domestic air transportation has beenheavily subsidized. In 1990, 774,000 domestic passengers,

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5­

representing approximately 75% of inter-city travelers, were carried by MIAT.

The Mongolian railway system is operated by a Soviet-Mongolian joint-stock company known as the Ulaanbaatar Railway (MNR). Each partner government holds 50% of the equity. In 1990 the railway carried 14.5 million tons of cargo and 2.5 million passengers over a network totalling about 1,800 km. Coal, mainly for power plants, accounted for 47% of the cargo. The railway is also the means of transport for nearly all of Mongolia's exports.

The railway is also a major route for trade between the Soviet Union and China. Until 1990, Mongolia obtained a significant amount of revenue from this transit trade, which totalled nearly2.5 million tons in 1986. In 1990, transit carriage still accounted for 21% of the railway's freight turnover. In 1991, only 100,000 tons of transit cargo is anticipated. Overall transit cargo turnover during January-May, 1991, was 30% below the corresponding period of 1990.

Mongolia's road system is relatively undeveloped. Over a territory of 1.6 million km.2 , or four times the size of Japan, there are 42,000 km. of roads, of which 1,300 km. are paved and 3,000 km. are gravel-surfaced. Road transport accounts for approximately 70% of freight tonnage. A state research institution has estimated that the poor condition of the roads raises transport costs by 500 million (pre-devaluation) tugriks per annum (roughly $100 million), composed of vehicle wear and tear, extra fuel consumption, and delay of shipments.

Mongolia's road fleet consists of 40,000 vehicles, of which 11,000 are in private hands. Ten percent of busses are idle for lack of spare parts. Most of the truck fleet operates with gasoline rather than more efficient diesel engines. About 66% of the trucks, which are predominantly of 5-ton capacity, are at least 6 years old; 50% have recorded 500,000 km. or more. The trucks consume on average 37 liters of fuel per 100 km., equivalent to 6.5 miles to the U.S. gallon. It is estimated that a modernized diesel fleet with a more diversified load mix, including substitution of buses for many of the trucks carrying long distance passenger traffic, could save 35% of current fuel costs.

2. Policies and Priorities

The Government recognizes that the current arrangement in which MIAT is responsible for air transport, safety, navigation, and airport management is anomalous and wishes to study institutional reforms. In addition, renovation is required at Ulaanbaatar airport to build an aircraft maintenance hangar, improve a variety of navigation equipment and systems, introduce modern ground-handling and support equipment, and improve the passenger

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service facilities. In addition, MIAT wishes to purchase further aircraft in order to expand its international operations, raise tariffs to economic cost levels, and meet burgeoning demand for an increases in domestic service.

Railways improvements are planned in four areas: institutional reform, modernization of equipment to increase efficiency,expansion of export service capacity, and provision of new equipment to lessen reliance on the Soviet Union. In addition the tariff structure requires revision to economic cost levels.

In the transportation sub-sector, Government attaches priority to four major links totalling 480 kms.: Erdenet-Darkhan (180 km.),Ulaanbaatar-Baganuur (90 km.), Urhangay-Kharkhorum (80 km.), and Kharkhorum-Tsetserig (130 km.). In addition, there is a need for a master plan to forecast rehabilitation and expansion needs upto the year 2010, to privatize some 80% of publicly owned road transport and vehicle repair facilities, and to increase user tariffs and fees -- including the cost of fuel.

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