Mongolia needs to increase domestic savings and circulate it into the economy through domestic investment if it hopes to have sustainable economic growth, according to Naoyuki Yoshino, Think20 Japan 2019 chair and dean of the Asian Development Bank Institute in Japan.
The UB Post has interviewed Yoshino, a highly reputable Japanese economist and academic, to delve into Mongolia's potential and opportunities in green energy, infrastructure investment, policy for small and medium-sized enterprises (SME), governance, sustainable development goals, trade and investment, and digital technology, which are all topics that will be highlighted at the Think20 Summit, set to take place in Tokyo on May 26 and 27.
“Incentive mechanism is very important. Mongolia should look at what its advantages and strengths are. For example, cashmere and other products. Then, utilize your strength and sell your products all over the world. The education system is also very important. IT can help reduce education disparity in the country. Advancing IT will allow people in any place to receive the highest possible education. Mongolia should receive the advantage of internet society,” Yoshino advised.
Mongolia is a very large country in terms of territory and infrastructure is a crucial topic. Infrastructure is critical for helping farmers bring their products to larger communities and cities so that they can sell more products.
In most developing countries, infrastructure projects are financed by the government but some countries are engaging in public-private partnership (PPP). However, this mechanism is failing in many places, including Mongolia.
“The reason why PPP is not doing well in so many countries is linked to the rate of return from infrastructure that comes from user charges. For example, water supply. People are paying water price. Revenues only come from water price. The same applies to electricity. People want to have a lower price for water and electricity but private investors want a higher rate of return. There’s a contradiction. This is the biggest problem of PPP,” Yoshino explained.
Regarding this, Yoshino suggests building a centralized infrastructure system so that businesses can be built along it and provide revenue to the state through tax.
“Infrastructure can create a big impact on the region. Big businesses will start to pay tax (if a centralized infrastructure system is established). This infrastructure will create a big economic spiral effect to the region, meaning that the government can receive higher property, corporate and income taxes. The government will benefit a lot. However, infrastructure investor can only receive the price of water or electricity. They cannot receive from this economic impact. However, the economic impact is created through this infrastructure,” he said.
“Economic development will increase tax revenues. All of this money goes to the government, while the infrastructure company received only the small price of water/electricity. The tax revenue will continue to rise if it’s a good infrastructure. I’m proposing to return, let’s say, 50 percent of the tax revenue to the infrastructure investors, which will increase the rate of return and make banks want to invest in water and electricity infrastructure.”
Yoshino explained that his proposal is a win-win deal for the government, private investors and consumer as the government will continue to receive 50 percent of the tax revenue, private investors will earn more money and accumulate funds to improve operations, and consumers will continue to pay a low price for the use of water and electricity. He added that this doesn’t apply to just water and electricity and that it can be applied to other types of infrastructure such as IT, road and railway.
Enhancing infrastructure will boost productivity, efficiency, quality, and yield, according to the economist. He advised Mongolia to start improving its infrastructure from Ulaanbaatar, especially its electricity and water supply, and railway services.
“Infrastructure is important for connecting production to the market, and then, to consumers,” Yoshino added.
Regarding investment, Yoshino stated that the Mongolian government needs to create a good investment environment in order to attract foreign investors.
“Mongolia needs lots of economic development, especially in terms of SME. Lack of financing and credit guarantee is provided by the government,” Yoshino shared.
“Banks are reluctant to lend money to SME because they are very small, risky and sometimes, they go into bankruptcy. The government started to provide credit guarantee to SME, which means that if a SME can’t return the money, the government will provide assistance to the banks. It look like a good system. However, many SME in Mongolia go bankrupt. In Mongolia, this credit guarantee system is in deficit. Huge deficits are being created. So, it is very important to restructure this system.”
To make SME loans smoother, Yoshino proposed adjusting the credit guarantee rate depending on the capacity and operations of banks.
“Currently, Mongolia is providing the same credit guarantee rate whatever the bank is. I’d like to propose that if a bank has a very large default ratio to SME, their credit guarantee should be lowered. If the bank is providing many loans to SME and the default losses of SME are very small, then this bank should have higher credit guarantee ratio.”
The ADBI dean sees a wide range of opportunities that can be created in Mongolia through IT.
“I think digital technology will bring a lot of benefits to Mongolia. To make this possible, there needs to be IT infrastructure – internet and mobile phones. Even in remote areas, many Mongolians own mobile phones. I think there are many things that can be done in Mongolia using IT technology,” Yoshino said.
He then linked this topic with education, suggesting that advanced technology enables teachers to provide online classes and lectures, making education more accessible to people of all ages living in.
“Education is very important as skill development is very much needed in Mongolia. The best teacher in Mongolia can give lecture through video – maybe 15 lecture per semester. Everyone will be able to watch it using the internet, which will provide better education. In many different subjects, the government and ministries can help create these videos so that students can watch it anytime,” the economist stated.
As for implementation, Yoshino recommended financing IT projects through bank loans and suggested using his earlier idea for increasing the rate of return for investors. He reminded that the ministry should periodically receive feedback from students receiving online lectures and based on it, provide supplementary classes.
Developing digital technology will open opportunities for people, especially women, to work from home.
Yoshino says, “Mongolia is very large, cities are scattered, and its population density is small. Digital technology is the best way to connect people from various regions. Mongolia should utilize these digital technologies,” the economist said. “Mongolia can advertise its products through the internet. People in Japan who want to buy good products from Mongolia will not need to go all the way to Mongolia to get them. You can sell your products all over the world, increasing your export revenue.”
Among other countries in Central Asia, Mongolia used to be under the communist government, which increased state-owned enterprises (SOE). While the private sector strives for higher profit, the public sector does not and this prevents SOE from earning higher revenue through productivity.
One way to boost revenues and productivity of SOE is, as suggested by Yoshino, to establish a bonus system based on performance that will give incentives to high achieving employees.
“This gives incentives for employees to work hard, make profits, and reduce costs,” Yoshino says.
This will not only benefit the company but also the public, which will receive services. In other words, employees who work well will receive a high wage, companies will get better revenue and improve their productivity, and the customer will receive better quality service or product.
GREEN ENERGY AND ENVIRONMENT
Globally, countries are switching to green energy, which is renewable, cost-efficient, friendly to the environment, and reduces global warming.
Mongolia is heavily reliant on coal. It is inevitable in the development stage but Mongolia can utilize green energy such as solar power and hydroelectricity in other areas.
Yoshino sees opportunities for Mongolia to develop solar, wind and hydropower systems, which can reduce its reliance on coal.
“By setting up a solar power panel, Mongolia can produce much more energy. Nowadays, small-size solar panels can generate an immense amount of energy. People who live in remote regions can set up a few solar power panels and will no longer need to burn coal,” Yoshino says.
To promote the use of green energy over coal, Yoshino proposes to tax carbon dioxide emission not only in Mongolia but throughout the world. He says satellite photographs can help measure the amount of emission released in specific areas.
Like other countries, Mongolia is required to enhance public financial education to prevent people from buying risky stocks.
“The ministry of education, bankers, financial institution and the central bank should get together to create a good financial education program, starting from primary and secondary schools. Otherwise, people will lose their money by investing in stock markets. In Japan, we’ve been doing this since five years ago. We have created a program for primary school students,” Yoshino said.
Simple things can make a huge difference, according to the Japanese economist. He says that primary school students should be given allowances by their parents on a monthly basis, teach them to keep a booking of their spending, make sure they keep track of interest rates if they borrow or lend money to others. When children become older and go to secondary school, they should be taught about other financial instruments and products such as bank deposits, insurance and pension, Yoshino advised.