mongolia`s competitiveness: where are we heading? guidebook

mongolia`s competitiveness: where are we heading?

contents

Preface 4

Mongolia in World Competitiveness 7

Competitiveness Factors 8

Competitiveness Overall 11

Balance Sheet - Factor Breakdown 12

Evolution 13

Twenty Strongest Criteria 14

Forty Weakest Criteria and Simulation 15

Three Competitiveness Challenges Facing the Economy 17

Human Development

From Natural Power to Brain Power 17

We Can Do It in the Coming Two Decades 20

Labor Market

The Labor Market Paradox 22

Employers Should Blame Themselves, Not the Government 25

Energy

On the Way Towards an Energy Paradise 27

The Energy Sector has a Bright Future 31

Annex 1. Economic Assumptions for Competitiveness Factors 9

Annex 2. The Golden Rules of Competitiveness 26

Annex 3. Competitiveness - A Diversity of Thoughts 29

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mongolia`s competitiveness: where are we heading? July 2012

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where are we heading?

“You can`t manage what you don`t measure” is a well known adage. Unless you are able to measure some-

thing you do not know if it is getting better or worse. You cannot manage the improvement of a system if you do

not measure to see what is getting better and what is not. With this in mind, we have produced the Mongolia in

World Competitiveness Report for the second consecutive year in order to measure where Mongolia is ranked

compared to other countries in the world.

The inaugural report, published in 2011, enabled Mongolians to see where our country stood and what our

strengths and weaknesses were. This second report affords the opportunity to compare Mongolia to other na-

tions and to observe the results of the previous year.

At a glimpse, Mongolia’s competitiveness has improved over the last 12 months. For instance, the country’s

overall competitiveness score was 24 in 2010 and in 2011 it increased to 28. However, in terms of ranking,

Ukraine (which was ranked in 15th position last year) is now ranked above Mongolia with a score of 33, a sig-

nificant improvement of 24 points over the last year. As a result, Mongolia is now ranked in the last place in our

country selection.

Now it is time to focus on determining how Mongolia should move forward and continue to improve its na-

tional competitiveness since this country now has a better understanding of where it stands in the world. Today,

Mongolia is at a critical point; either it becomes a developed nation that efficiently allocates its natural wealth

or suffers from a ‘resource curse’ with rampant inequality and an unstable political environment. We can learn

from the tragic examples of Nigeria and Zimbabwe and, in equal measure, from the good examples of countries

like Singapore and South Korea. So, where are we heading?

It is clear that Mongolia is entering into a new economic era of growth due to the mining sector boom.

Properly defining the challenges and choosing the right development path is a collective responsibility for all

Mongolians. The Economic Policy and Competitiveness Research Center (EPCRC) has therefore defined the

five main challenges for the country’s competitiveness.

1. exchange rateAn economy must have a strong immune system. A creative and innovative private sector creates the back-

bone of such economic immunity. Despite this fact, local businesses have struggled to survive year after year

due to the unstable political environment, strong inflation, and high interest rates.

Government spending rose by 56 percent in 2011 and is budgeted to rise by a further 32 percent in 2012.

However, most of these expenditures are no different than short-sighted cash handouts and are not aimed at

long term development projects in infrastructure, education, health, or fighting red-tape. An increased amount

Otgochuluu Ch.

General Director of EPCRC

preface

5

Mongolia`s coMpetitiveness: where are we heading? July 2012

www.ecrc.mn

of money in circulation creates high demand. For instance, the trade sector experienced 43 percent increase in

2011. On the other hand, the supply side could not meet with the increased demand resulting in 17.3 percent of

inflation in March 2012. Although the bank of Mongolia took reformative action by raising the policy interest rate

to 13.25 percent, it remains another obstacle for business operators.

Income from mining sector Inflation Policy rate Long term investment Employment

what is the solution? The central bank should be a guardian of the monetary values. Unless the central bank clearly defines if

it intends to manage the internal or the external value of national currency, Mongolia may be left with nothing

while chasing two work intensive goals at the same time. Nowadays the public’s faith in the central bank has

diminished due to confusion over whether the central bank is fighting against inflation or to repair the exchange

rate, whereas in any country, the main capital of the central bank is its reputation and reliability.

2. populismOur survey results show that as the 2012 election approaches, expectations of instability in the political en-

vironment will increase. More importantly, it is said by many that the future of big projects in Mongolia depends

on which political party wins the election.

During the last parliamentary election, political parties promised citizens more than the economy could

afford. In order to realize these promises, the government is distributing handouts in the form of Erdenes

Tavantolgoi`s shares and MNT 1 million cash handouts to pensioners and disabled citizens. Such populist elec-

tion promises further fuel high inflation and have negative impact on state budgets and the overall economy.

Election promise Populist policy Apathetic thinking Economic exhaustion

what is the solution? We applaud the recent policy decisions aimed at increasing budget responsibility and banning cash-hand-

out promises. In order to increase the efficiency of the policy implementation arms of the parliament, specifically

the government and its agencies, it is important to learn from the experiences of other countries where civil

organizations are heavily involved in advisory roles. In addition an independent juridical system, a central bank,

and a national audit authority should be all developed and strengthened.

3. Brain drainHuman capital is the most valuable asset in any organization and rapidly expanding companies in Mongolia

prioritize the training of their personnel. Today, as the mining sector is booming, mining companies are attract-

ing and retaining the majority of our talented labor pool by offering significantly higher salaries. This results in

a shortage of capable labor force in other sectors, which is draining capabilities and skills across all other parts

of the economy.

While enterprises are lacking in skilled labor, Mongolia’s unemployment rate has reached a staggering 10

percent. Even though the country produces over 36,000 university graduates each year, only about 36 percent

of them get jobs. It has been found that these graduates are not skilled enough to meet many employers’ re-

quirements; a “silent war” for experienced and skilled employees has started across the labor market.

Salary level in the mining sector Labor force in other sectors Economic diversification Dutch

disease

what is the solution? It is important to reform the tertiary education system and keep on sending Mongolia’s brightest students

abroad for higher education. There is also a need for a policy which supports the development of quality edu-

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cation standards which meet employer requirements. For instance, in Chile, higher education institutes are

non-profit organizations, yet there are private-sector representatives on the governing board to provide direct

input about what skills and abilities businesses need from university graduates. This model could be adopted

in Mongolia.

4. Bureaucracy and corruptionMongolian business owners face bureaucracy and government agencies at every step of the way when

registering their entities, getting loans from banks, undertaking audits, and submitting to inspections/customs

services. They need to prepare numerous official letters and collect many signatures which become a significant

burden on time and effort. In addition, when business owners deal with government agencies, they often en-

counter many unwritten laws all the while corruption remains embedded constant part of the system. Currently,

one in four employed persons in Mongolia works in the public sector and it has been found that the younger

generation prefers to work in the “safe and easy” public sector rather than take risks in starting their own busi-

nesses.

Procedures Corruption Cost of running business Underground economy Price

what is the solution?Customs and tariff policies need to be more flexible. Red-tape should be reduced by eradicating many of

the inefficient and unnecessary paperwork that is part of the existing process. This will result in less interaction

between business and government agencies, but with a greater degree of organization when implemented prop-

erly. Greater automation and the roll-out of e-services would be helpful in creating such a framework. The time

and money that business owners save will become drivers of real economic growth and will assist an overall

increase of tax revenues of the government. We can take example on Georgia, where their recent increases in

economic growth largely result from reforms in business procedures. Courageous decisions by the government

are needed to enact these reforms and reduce the number of business procedures.

5. mining mongoliaIn 2011, a massive 89 percent of Mongolia’s exports came from the minerals sector, with 92 percent of this

exported to China. As the Oyu Tolgoi and Tavan Tolgoi projects start production, these numbers will keep on

increasing. But there are some permanent risks: What if the commodity prices fall? What if China decides to

purchase fewer minerals from us in the future?

Mining’s growth is putting stress on other sectors. At the same time, due to huge investments made into the

mining sector, the importation of mining related machines and equipment is increasing. As a result, the trade

deficit has reached USD 1.7 billion which is equal to 35 percent of the overall GDP.

Mining export Exchange rate Other sectors

what is the solution?

Creating a national wealth fund would enable mining revenues to be effectively invested in other sectors.

For example, instead of cash handouts, giving vouchers verified by this fund to energy producers, public trans-

portation companies, and end-users would support these sectors without raising inflation. Introducing new and

efficient technologies into the meat and dairy processing sectors would be a significant step, and the develop-

ment of further trade agreements by the government will also assist this process. The liberalization of strate-

gically important sectors, particularly the energy and the aviation sectors, should continue to occur gradually

while attracting foreign direct investments and creating more jobs.

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mongolia in world competitiveness

The EPCRC manages the annual publication of the Mongolia in World Competitiveness report, produced in

conjunction with Institute for Management Development (IMD) and its World Competitiveness Yearbook (WCY)

publication. The objective of the report is to analyze Mongolia`s competitiveness compared with 14 other econo-

mies selected by the EPCRC and covered by the WCY. In addition, a profile of Mongolia`s competitiveness was

created to portray the main features, strengths and weaknesses of the Mongolian economy.

The overall ranking is calculated on the basis of the 248 evaluation criteria included in WCY (132 Hard and

116 Survey data) and 83 additional criteria presented for background information.

By looking at the Mongolia in World Competitiveness-2011 report, Mongolia`s overall competitiveness score

has improved from 24 in 2010 to 28 in 2011. However, the ranking shifted one level below the one of last year

and Mongolia ranks in 15th position after Ukraine.

mongolia in world competitiveness scoreBoard

2011

SINGAPORE 1

MALAYSIA 3

QATAR 2

KOREA 4

CHILE 5

THAILAND 6

KAZAKHSTAN 7

MEXICO 8

RUSSIA 9

SLOVAK REPUBLIC 11

SLOVENIA 12

BULGARIA 13

PERU 10

UKRAINE 14

MONGOLIA 15

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Macro-economic evaluation of the domestic

economy

economic performance

singapore 1

MALAYSIA 3

QATAR 2

THAILAND 4

meXico 5

CHILE 6

PERU 7

KOREA 8

RUSSIA 9

SLOVENIA 11

BULGARIA 12

SLOVAK 14

UKRAINE 13

KAZAKHSTAN 10

MONGOLIA 15

SINGAPORE 1

CHILE 3

QATAR 2

MALAYSIA 4

KAZAKHSTAN 5

KOREA 6

THAILAND 7

BULGARIA 8

PERU 9

RUSSIA 11

MONGOLIA 13

MEXICO 12

SLOVENIA 14

UKRAINE 15

SLOVAK REPUBLIC 10

Extent to which government policies are

conducive to competitiveness

government efficiencY

competitiveness factor rankings

Competitiveness Factor Rankings presents an overview of Mongolia`s performance in the four major dimen-

sions of competitiveness (See Annex 1). Mongolia ranks in 15th position for Economic Performance, 13th place

for Government Efficiency, 15th also for Business Efficiency and 15th for Infrastructure.Extent to which enterprises are performing in

an innovative, profitable and responsible manner

BUsiness efficiencY

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anneX 1. economic assUmptions for competitiveness factors

i. economic performance

1. Prosperity of a country reflects its past economic performance.

2. Competition governed by market forces improves the economic performance of a country.

3. The more competition there is in the domestic economy, the more competitive the domestic firms are

likely to be abroad.

4. A country`s success in international trade reflects competitiveness of its domestic companies (provided

Extent to which enterprises are performing in

an innovative, profitable and responsible manner

BUsiness efficiencY

Extent to which basic, technological, scientific and

human resources meet the needs of business

infrastrUctUre

SINGAPORE 1

MALAYSIA 3

QATAR 2

THAILAND 4

CHILE 5

KOREA 6

KAZAKHSTAN 7

SLOVAK REPUBLIC 8

PERU 9

RUSSIA 11

MONGOLIA 15

UKRAINE 12

BULGARIA 14

SLOVENIA 13

MEXICO 10

SINGAPORE 1

MALAYSIA 3

KOREA 2

SLOVENIA 4

QATAR 5

RUSSIA 6

CHILE 7

SLOVAK REPUBLIC 8

UKRAINE 9

THAILAND 11

BULGARIA 12

MEXICO 13

PERU 14

KAZAKHSTAN 10

MONGOLIA 15

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there are no trade barriers).

5. Openness for international economic activities increases a country`s economic performance.

6. International investment allocates economic resources more efficiently worldwide.

7. Export-led competitiveness often is associated with growth-orientation in the domestic economy.

ii. government efficiency

1. State intervention in business activities should be minimized, apart from creating competitive conditions

for enterprises.

2. Government should, however, provide macroeconomic and social conditions that are predictable and

thus minimize the external risks for economic enterprise.

3. Government should be flexible in adapting its economic policies to a changing international environ-

ment.

4. Government should provide a societal framework which promotes fairness, equality and justice while

ensuring the security of the population.

iii. Business efficiency

1. Efficiency, together with ability to adapt to changes in the competitive environment, are managerial at-

tributes crucial for enterprise competitiveness.

2. Finance facilitates value-adding activity.

3. A well-developed, internationally integrated financial sector in a country supports its international com-

petitiveness.

4. Maintaining a high standard of living requires integration with the international economy.

5. Entrepreneurship is crucial for economic activity in its start-up phase.

6. A skilled labor force increases a country`s competitiveness.

7. Productivity reflects value-added.

8. The attitude of the workforce affects the competitiveness of a country.

iv. infrastructure

1. A well-developed infrastructure including efficient business systems supports economic activity.

2. A well-developed infrastructure also includes information technology and efficient protection of the en-

vironment.

3. Competitive advantage can be built on efficient and innovative application of existing technologies.

4. Investment in basic research and innovative activity creating new knowledge is crucial for a country in

a more mature stage of economic development.

5. Long-term investment in R&D is likely to increase the competitiveness of enterprises.

6. The quality of life is part of the attractiveness of a country.

7. Adequate and accessible educational resources help develop a knowledge-driven economy.

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Four Competitiveness Factor Rankings divide into 20 sub-factors. It is possible, at a glance, to determine in

what areas of competitiveness an economy excels or has particular weaknesses and to make comparisons be-

tween the economies. These rankings provide a more detailed examination of specific competitiveness issues

and, in addition to the factor rankings, can be used, for example, to evaluate the business environment, support

international investment decisions, or assess the impact of various public policies.

Mongolia`s best sub-factor rankings are for its International Trade (7th), International Investment (8th), Pub-

lic Finance (9th), Societal Framework (9th) and Attitudes&Values (9th). The country`s weakest sub factors com-

prise: Domestic Economy, Institutional Framework, Finance and Basic/Technological/Scientific Infrastructure.

Economic Performance

14 Countries Average

Business Efficiency

Infr

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mongolia

Basic facts

Capital Ulaanbaatar

Land area (km2 ‘000) 1,564.1 (2010) -

Exchange rate (per $) 1360.56 (2010) -

Population (millions) 2.78 (2010) 13

GDP ($ billions) 6.1 (2010) 15

GDP per capita ($) 2,182 (2010) 15

Real GDP growth (%) 6.1 (2010) 8

Consumer Price Inflation (%) 10.1 (2010) 15

Unemployment rate (%) 9.9 (2010) 13

Labor force (millions) 1.15 (2010) 14

Current Account Balance (%) -15.3 (2010) 15

Direct Investment

Stocks Inward ($ billions) 2.8 (2009) 15

Flows Inward (% of GDP) 27.9 (2010) 1

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rank

competitiveness - overall

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1.3.06 Direct investment flows inward (%) 1

1.2.23 Tourism receipt (%) 4

1.3.08 Direct investment stocks inward (%) 4

1.2.22 Terms of trade index 5

1.2.21 Trade to GDP ratio 6

1.2.13 Exports of commercial services (%) 8

1.2.02 Current account balance (%) 15

1.5.01 Consumer price inflation 15

1.1.21 GDP (PPP) per capita 15

1.1.20 GDP per capita 15

1.2.24 Exchange rates 15

1.3.01 Direct investment flows abroad ($bn) 15

1.4.02 Employment (%) 15

1.2.08 Exports of goods ($bn) 15

1.3.07 Direct investment stocks inward ($bn) 15

1.2.12 Exports of commercial services ($bn) 15

strengths weaknesses

Government Efficiency Government Efficiency

Economic Performance Economic Performance

Business Efficiency Business Efficiency

2.3.07 Exchange rate stability 2

2.4.20 Redundancy costs 3

2.4.01 Tariff barriers 3

2.2.09 Consumption tax rate 4

2.4.15 Start-up days 5

2.4.21 Labor market flexibility (index) 5

2.5.03 Ageing of society (S) 6

2.5.05 Social cohesion (S) 7

2.2.11 Employer`s social security contribution rate 7

2.1.02 Government budget surplus/deficit (%) 7

2.5.04 Risk of political instability (S)15

2.3.10 Government decisions (S) 15

2.4.09 Subsidies (S) 15

2.3.04 Country credit rating 14

2.3.06 Foreign currency reserves ($bn) 14

2.4.18 Unemployment legislation (S) 14

2.4.11 Competition legislation (S) 14

2.4.08 Goverment subsidies (%) 13

2.3.03 Interest rate spread 13

2.4.02 Customs` authorities (S) 13

3.2.03 Remuneration in services professions ($)1

3.2.01 Compensation levels ($) 1

3.2.19 Attracting and retaining talents (S) 2

3.2.10 Employee training (S) 2

3.2.15 Female labor force (%) 3

3.5.04 Flexibility and adaptability (S) 7

3.4.07 Entrepreneurship (S) 7

3.5.03 National culture (S) 8

3.3.04 Investment risk 15

3.2.17 Skilled labor (S) 15

3.2.18 Finance skills (S) 15

3.1.10 Small and medium-size enterprises (S) 15

3.2.23 Competent senior managers (S) 15

3.1.11 Productivity of companies (S) 15

3.1.04 Labor productivity (PPP) 15

3.1.01 Overall productivity (PPP) 15

3.4.06 Customer satisfaction (S) 15

3.1.09 Large corporations (S) 15

Infrastructure Infrastructure

4.2.03 Fixed telephone tariffs 1

4.2.01 Investment in telecommunications (%) 2

4.2.11 Fixed broadband tariffs 2

4.2.05 Mobile telephone costs 2

4.5.01 Total public expenditure on education (%) 3

4.5.06 Higher education achievement (%) 6

4.4.08 Medical assistance 8

4.4.26 Climate change (S) 7

4.1.24 Electricity costs for industrial clients 8

4.2.07 Connectivity (S) 8

4.5.03 Pupil-teacher ratio (primary education) 15

4.4.10 Human development index 15

4.2.13 Internet bandwidth speed 15

4.2.14 Information technology skills (S) 15

4.2.10 Internet users 15

4.1.04 Access to water (S) 15

4.2.15 Qualified engineers (S) 15

4.1.16 Water transportation (S) 15

4.1.05 Access to commodities (S) 15

4.4.24 Pollution problems (S) 15

competitiveness Balance sheet

The Table below highlight the strengths and weaknesses by Competitiveness Factor and underline where

Mongolia performs best and worst in the four dimensions of competitiveness.

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declines

The criteria below highlight the 25 biggest Improvements and the 25 biggest Declines in the overall perfor-

mance of the economy. As they are determined by the largest percentage changes in the value of each criterion

from one year to the next, it is worth reflecting on where rankings have come down and where have improved

to consider ‘lessons learned’ and continue moving forward in similar fashion.

2010 2011

1.3.04 Direct investment stocks abroad (%) 0.12 3.07

1.3.03 Direct investment stocks abroad ($bn) 0.01 0.13

1.1.14 Real GDP growth -1.6 6.1

1.3.05 Direct investment flows inward ($bn) 0.44 1.69

1.1.15 Real GDP growth per capita -3.49 4.38

1.3.06 Direct investment flows inward (%) 10.38 27.88

4.2.09 Computers per capita 70 156

2.1.02 Government budget surplus/deficit (%) -5.43 -0.49

2.1.10 Tax evasion (Survey) 1.30 2.43

1.3.08 Direct investment stocks inward (%) 37.68 66.95

2.3.06 Foreign currency reserves ($bn) 1.29 2.09

1.2.08 Exports of goods ($bn) 1.90 2.90

2.4.20 Redundancy costs 9.0 4.3

1.3.07 Direct investment stocks inward ($bn) 1.95 2.82

3.2.17 Skilled labor (Survey) 1.68 2.40

4.1.17 Maintenance and development (Survey) 1.9 2.7

4.5.11 Educational system (Survey) 2.5 3.5

4.1.18 Energy infrastructure (Survey) 2.0 2.9

1.1.20 GDP per capita 1,540.2 2,181.7

2.3.11 Transparency (Survey) 1.8 2.5

2.3.09 Adaptability of government policy (Survey) 2.0 2.7

4.3.21 Intellectual property rights (Survey) 1.9 2.6

3.3.05 Banking and financial services (Survey) 3.4 4.7

2.5.01 Justice (Survey) 1.7 2.3

3.2.21 Foreign high-skilled people (Survey) 2.8 3.7

2010 2011

1.4.06 Unemployment rate 3.34 9.90

2.2.10 Employee`s social security contribution rate 4.36 9.80

4.2.22 High-tech exports (%) 7.51 0.80

1.2.02 Current account balance (%) -8.12 -15.34

4.3.17 Number of patents in force 113.9 36.6

1.5.01 Consumer price inflation 6.3 10.1

4.1.24 Electricity costs for industrial clients 0.060 0.087

4.3.19 Researchers and scientists (Survey) 3.08 2.16

1.3.14 Relocation threats of R&D facilities (Survey) 6.18 4.81

2.4.19 Immigration laws (Survey) 5.77 4.54

1.3.02 Direct investment flows abroad (%) 1.29 1.02

2.5.04 Risk of political instability (Survey) 3.18 2.59

1.2.13 Exports of commercial services (%) 9.84 8.03

4.4.26 Climate change (Survey) 5.93 4.93

3.2.10 Employee training (Survey) 8.12 6.92

4.4.10 Human development index 0.7 0.6

3.2.20 Brain drain (Survey) 3.1 2.7

3.3.17 Venture capital (Survey) 2.6 2.2

2.4.08 Government subsidies (%) 11.6 13.1

3.1.10 Small and medium-size enterprises (Survey) 3.1 2.7

4.3.18 Scientific research (Survey) 2.4 2.1

3.4.06 Customer satisfaction (Survey) 6.0 5.3

2.4.04 Public sector contracts (Survey) 6.1 5.4

4.2.20 Technological regulation (Survey) 4.3 3.8

4.3.23 Innovative capacity (Survey) 4.8 4.3

competitiveness evolUtion

improvements

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In competitiveness theory, it is important to capitalize on the strongest competitive advantages that the

country possesses. Therefore, it is important for Mongolia to identify 20 strongest criteria that is those with high-

est standardized values (STD values).

* STD Values = [(economy`s value) - (average of 14 economies)] / standard deviation

Number NameEconomy`s Value

Economy`s Rank

AverageValue

1.3.06DIRECT INVESTMENT FLOWS INWARD (%)Percentage of GDP

27.88 1 4.75

4.5.01TOTAL PUBLIC ExPENDITURE ON EDUCATIONPercentage of GDP

7.1 3 4.7

3.2.03 REMUNERATION IN SERVICES PROFESSIONS ($)Gross annual income including supplements such as bonuses, US$

- 1 -

4.2.01 INVESTMENT IN TELECOMMUNICATIONS (%)Percentage of GDP

1.58 2 0.81

2.3.07 ExCHANGE RATE STABILITYParity change from national currency to SDR, 2010/2008

0.009 2 0.100

4.2.11 FIxED BROADBAND TARIFFSMonthly fee (residential), US$

8.46 2 23.86

3.2.01 COMPENSATION LEVELS ($)Total hourly compensation for manufacturing workers (wages + supplementary benefits), US$

1.39 1 6.53

4.2.05 MOBILE TELEPHONE COSTSMobile cellular tariffs - US$ per minute local call, off-net (peak)

0.09 2 0.25

2.4.20 REDUNDANCY COSTSNumber of weeks of salary

4.3 3 12.2

4.2.03 FIxED TELEPHONE TARIFFSUS$ per 3 minutes local call (peak)

0.01 1 0.12

1.2.23 TOURISM RECEIPTS (%)International tourism receipts as a percentage of GDP

5.41 4 3.18

3.2.15 FEMALE LABOR FORCE (%)Percentage of total labor force

47.11 3 41.74

1.3.08DIRECT INVESTMENT STOCkS INWARD (%)Percentage of GDP

66.95 4 55.95

3.2.19(Survey)

ATTRACTING AND RETAINING TALENTSAttracting and retaining talents is a priority in companies

8.13 2 6.26

3.2.10(Survey)

EMPLOYEE TRAININGEmployee training is a high priority in companies

6.92 2 5.65

2.5.03(Survey)

AGEING OF SOCIETYAgeing of society is not a burden for economic development

6.08 6 4.57

2.5.05(Survey)

SOCIAL COHESIONSocial cohesion is a priority for the government

6.91 7 5.74

3.5.04(Survey)

FLExIBILITY AND ADAPTABILITYFlexibility and adaptability of people are high when faced with new challenges

6.62 7 6.28

4.2.07(Survey)

CONNECTIVITYConnectivity of people and firms (telecom, IT, etc.) is highly extensive

7.63 8 7.27

4.4.26(Survey)

CLIMATE CHANGE

Climate change is being sufficiently addressed by the government 4.93 7 4.54

20 strongest criteria

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Besides capitalizing on strengths, it is interesting to underline how the improvement of weaknesses could

impact the overall ranking of Mongolia. Forty Weakest Criteria and “What If?” Simulation identify the 40 weakest

criteria overall, by selecting those with the lowest STD values. The Simulation shows that Mongolia`s overall

ranking would increase from 15th position to 11th if its 40 weakest criteria values were replaced by the average

values of the 14 selected economies.

Competitiveness Simulations help policy makers focus on and prioritize the key competitiveness issues

facing the economy.

simulated ranking changes 15 11

Number Name Economy`sValue

Economy`sRank

AverageValue

2.4.08 GOVERNMENT SUBSIDIES (%)To private and public companies as a percentage of GDP

13.11 13 2.61

3.3.04 INVESTMENT RISkEuromoney country risk overall (scale from 0-100)

36.01 15 68.96

4.5.03 PUPIL-TEACHER RATIO (PRIMARY EDUCATION)Ratio of students to teaching staff

31.15 15 18.74

1.2.02 CURRENT ACCOUNT BALANCE (%) Percentage of GDP

-15.34 15 3.97

3.2.17(Survey)

SKILEED LABORSkilled labor is not readily available

2.40 15 5.58

1.5.01 CONSUMER PRICE INFLATIONAverage annual rate

10.1 15 3.2

4.4.10 HUMAN DEVELOPMENT INDExCombines economic - social - educational indicators / Source: Human Development Report

0.62 15 0.77

1.1.21 GDP (PPP) PER CAPITAEstimates; US$ per capita at purchasing power parity

3,589 15 24,237

2.3.04COUNTRY CREDIT RATINGRating on a scale of 0-100 assessed by the Institutional Investor Magazine 36.4 14 68.1

4.2.13 INTERNET BANDWIDTH SPEEDPer internet user (kbps)

0.78 15 24.50

3.2.18(Survey)

FINANCE SKILLS Finance skills are not readily available

2.64 15 6.10

4.2.14(Survey)

INFORMATION TECHNOLOGY SkILLSInformation technology skills are not readily available

5.07 15 7.25

1.1.20 GDP PER CAPITAUS$ per capita

2,182 15 17,641

4.4.12 ENERGY INTENSITY Commercial energy consumed for each dollar of GDP in kilojoules

31,056 14 13,044

3.1.10(Survey)

SMALL AND MEDIUM-SIZE ENTERPRISESSmall and medium-size enterprises are not efficient by international standards

2.68 15 5.15

4.2.10 INTERNET USERS Number of internet users per 1000 people / Source: Computer Industry Almanac

126 15 513

4.1.04(Survey)

ACCESS TO WATERAccess to water is not adequately ensured and managed 3.12 15 7.39

4.2.15(Survey)

QUALIFIED ENGINEERS Qualified engineers are not available in the labor market

4.05 15 6.39

4.1.16(Survey)

WATER TRANSPORTATION Water transportation (harbors, canals, etc.) does not meet business requirements

1.72 15 6.23

3.2.23(Survey)

COMPETENT SENIOR MANAGERSCompetent senior managers are not readily available

2.43 15 5.20

40 weakest criteria

16


www.ecrc.mn

Number Name Economy`sValue

Economy`sRank

AverageValue

1.2.24(Survey)

ExCHANGE RATESExchange rates hinder the competitiveness of enterprises

2.99 15 5.48

3.1.11(Survey)

PRODUCTIVITY OF COMPANIES Productivity of companies is not supported by global strategies (supplies, offshoring, outsourcing)

2.89 15 5.71

4.5.04 PUPIL-TEACHER RATIO (SECONDARY EDUCATION)Ratio of students to teaching staff

20.80 13 14.40

3.1.04 LABOR PRODUCTIVITY (PPP) Estimates: GDP (PPP) per person employed per hour, US$

4.99 15 21.70

1.3.01 DIRECT INVESTMENT FLOWS ABROAD ($BN)US$ billions

0.06 15 9.76

4.1.05(Survey)

ACCESS TO COMMODITIES Access to commodities (basic resources, food, etc.) is not adequately addressed

4.40 15 7.53

3.2.12 LABOR FORCE (%)Percentage of population

41.24 14 52.12

4.4.24 POLLUTION PROBLEMSPollution problems do seriously affect your economy

2.81 15 5.10

4.4.11(Survey)

HEALTH PROBLEMS Health problems (sicknesses, AIDS, alcohol, drug abuse, etc.) do have a significant impact on companies

3.19 15 5.84

1.4.02 EMPLOYMENT (%)Percentage of population

37.18 15 49.21

3.1.01 OVERALL PRODUCTIVITY (PPP)Estimates: GDP (PPP) per person employed, US$

9,653 15 45,725

4.1.19(Survey)

FUTURE ENERGY SUPPLY Future energy supply is not adequately ensured 2.69 15 5.54

4.4.05 LIFE ExPECTANCY AT BIRTHAverage estimate

68.0 12 74.1

4.1.18(Survey)

ENERGY INFRASTRUCTURE Energy infrastructure is not adequate and efficient

2.85 15 6.12

3.3.11 STOCk MARkET CAPITALIZATION (%)Percentage of GDP

10.20 14 67.51

3.4.06(Survey)

CUSTOMER SATISFACTIONCustomer satisfaction is not emphasized in companies

5.31 15 6.90

1.4.06 UNEMPLOYMENT RATEPercentage of labor force

9.90 13 5.74

4.2.04 MOBILE TELEPHONE SUBSCRIBERSNumber of subscribers per 1000 inhabitants

842 14 1,161

4.2.12 BROADBAND SUBSCRIBERS Number of subscribers per 1000 inhabitants

13.43 15 116.43

4.2.23(Survey)

CYBER SECURITYCyber security is not being adequately addressed by corporations

2.77 15 5.36

17


www.ecrc.mn

Mongolia is now one of the fastest grow-

ing economies in the world. Indeed, in 2011 the

country experienced GDP growth of 17.3 percent.

The mining sector is however the only engine of

Mongolia`s growth and constitutes 30 percent of

GDP, 90 percent of exports, and 80 percent of

foreign direct investments (FDI). One day, Mon-

golia’s reserves of gold, copper, coal and other

minerals will be depleted. In order for the nation

to prosper in the future, alternative sources of

economic growth must be utilized.

While Mongolia is placing all of its efforts into

hUman development

from natUral power to Brain power

The “What If?” Simulations` results show how much, if at all, the country`s competitiveness would

be enhanced if policies were focused on improving the particular competitiveness issues measured

by these criteria. By looking at the 40 weakest criteria, the three main issues of human development,

labor market and energy sector can be highlighted. In other words, if we can overpass these three chal-

lenges, Mongolian competitiveness would be improved considerably. Therefore, in order to address

the importance of these issues, the EPCRC provides features and talks to officials to cover how policy

makers are focused on solving the particular problems.

three competitiveness challenges facing the economY

the mining sector with fears that commodity prices

could drop tomorrow, some resource-poor coun-

tries such as Singapore are capitalizing by means

of technical innovations. For example, high-tech

and cutting-edge products accumulate 49 percent

of Singapore`s total exports. As for Mongolia, in

2009 export of products with high-tech content

fell to 0.8 percent from 7.51 percent in 2008. In-

deed this country is exporting low-priced natural

resources and importing high-value finished prod-

ucts.

Since the end of 1980’s OECD member coun-

18


www.ecrc.mn

tries have experienced acceleration in economic

growth thanks to production and management of

knowledge in the frame of economic constraints.

In last two decades not only members of OECD ,

but also developing countries such as Malaysia,

Singapore, South Korea have successfully shifted

into the knowledge based economy.

“Competitiveness is shifting today from tan-

gibles to intangibles, from tons of goods to bytes

of information. Competitiveness is entering the

knowledge economy” pointed out Stephane

Garelli, Professor at IMD and Director of the

World Competitiveness Center.

Knowledge today is recognized as the driver

of productivity and economic prosperity. Since

other countries started investing in knowledge,

rather than in mineral wealth, Mongolia should

seek to develop intellectual resources by invest-

ing in human development.

According to the United Nations Development

Program’s Human Development Report for 2010,

korea had a human development index (HDI) of

0.88, Singapore 0.85, and Mongolia 0.62; rank-

ing Mongolia last. HDI measures the average

achievements of a country in three basic dimen-

sions of human development: length and quality

of life, level of education, and combined primary,

secondary, and tertiary gross enrolment ratio. In

the following section, the framework for effective

development of human capital shall be examined

in full.

For the past two decades the technological

revolution, specifically the advent of computers,

telecommunications, and Internet, has had a pro-

found impact on the competitiveness of nations.

Therefore, today’s infrastructure cannot only be

considered in the traditional terms of roads, trains,

and airports. Technological, scientific, health, en-

vironmental, and educational infrastructures are

becoming key assets for a nation`s development.

In order to improve human development this na-

tion must pay attention to the fore-mentioned soft

infrastructures. As of today, Mongolia ranks in

15th position for Scientific and Technological In-

frastructures.

Though science and technology are very im-

portant for national growth, health and education

are equally important areas of focus for further de-

velopment. An Executive Opinion Survey shows

that the health problems in Mongolia do have a

hUman development indeX

health and environment 4.4.10

2010

Combines economic - social - educational indicators/ Source: Human Development Report

korea

singapore

slovenia

slovak repUBlic

qatar

chile

meXico

malaYsia

BUlgaria

perU

rUssia

kazakhstan

Ukraine

thailand

mongolia

indexranking

pUpil-teacher ratio (primarY edUcation)

2008

education 4.5.03

Ratio of students to teaching staff

qatar

malaYsia

Ukraine

thailand

BUlgaria

slovak repUBlic

kazakhstan

slovenia

rUssia

perU

singapore

korea

chile

meXico

mongolia

ranking

pUpil-teacher ratio (secondarY edUcation)

education

ratio

2008Ratio of students to teaching staff

rUssia

slovenia

qatar

kazakhstan

Ukraine

BUlgaria

slovak repUBlic

malaYsia

perU

singapore

meXico

korea

mongolia

thailand

chile

ranking

4.5.04

ratio

19


www.ecrc.mn

significant impact on companies, additionally, the

average life expectancy in Singapore is 81 and in

Mongolia, only 68. It is hard to talk about human

development when a country’s citizens are not

“sound mind in and in body.”

Considering education systems is a more

complicated matter. As of 2009 Mongolia has

spent about 7.1 percent of its GDP on education.

This is a relatively high figure compared with Rus-

sia, 4.7 percent, and Singapore, 3.3 percent. Only

Malaysia and Ukraine outrank Mongolia with 7.2

percent of their GDP being spent on education. At

first sight Mongolia appears to invest quite a large

part of its capital in education, but further exami-

nation reveals the truth. If the total public expen-

diture on education is considered on per capita

level, it amounts to USD 110 , which is a very low

number compared to other countries. Qatar is in

the lead with the USD 2,389, followed by Slovenia

with USD 1,394 and Singapore with USD 1,197.

“Primary and secondary schooling are key to

the future” wrote Stephane Garelli. So it is impor-

tant to know how effective the basic education

system which should create “competitive” citizens

in the future is. By 2008, the average Mongolian

primary school teacher had about 31 students;

meanwhile in Qatar and Malaysia they had only

12 and 14, respectively. The average student to

teachers at primary schools in the 14 selected for-

eign countries was 18 and only 14 for secondary

school teachers. This data suggests that Mongo-

lian teachers are in charge of significantly more

students compared to the global standards.

To conclude, it is difficult to say that the coun-

try is developing when population is unable to live

healthily and access education, even with high

economic growth. While Mongolia is struggling to

determine how to build railroads to mining sites,

so that mining companies can transport minerals,

competitor nations are achieving their economic

units with human resources and investing in their

education.

Though the mining sector`s hyper growth is

inevitable for Mongolia in a short term, if Mongolia

does not invest part of its mining revenues in de-

velopment of human capital, all evidence of such

growth may eventually disappear.

do have a significant impact on companies

do not have a significant impact on companies

health proBlems

2011


Health problems (sicknesses, AIDS, alcohol, drug abuse, etc.)

singapore

malaYsia

slovak repUBlic

chile

thailand

korea

qatar

slovenia

BUlgaria

meXico

Ukraine

perU

kazakhstan

rUssia

mongolia

ranking

life eXpectancY at Birth

2008


Average estimate

singapore

korea

slovenia

chile

meXico

perU

qatar

slovak repUBlic

BUlgaria

malaYsia

thailand

mongolia

rUssia

Ukraine

kazakhstan

ranking age

high-tech eXports (%)

2009

technological infrastructure 4.2.22

Percentage of manufactured exports

singapore

malaYsia

korea

kazakhstan

thailand

meXico

rUssia

BUlgaria

slovenia

slovac repUBlic

chile

Ukraine

perU

mongolia

qatar

%ranking

do not have a significant impact on companies

20


www.ecrc.mn

The EPCRC talks to B.Ganbat, Director of Depart-

ment of Innovation Policy of the National Development

and Innovation Committee (NDIC).

-what should we do in order to shift to a knowl-

edge based economy?

-I think it starts with interpreting correctly what a

knowledge based economy is. It can be defined as

creating national wealth by producing goods and ser-

vices based on new knowledge and technologies.

Questions like: “Does Mongolia has the poten-

tial to shift into a knowledge based economy? What

should be done firsthand in order to achieve this?” are

open to us today. For instance, if no new economically

valuable knowledge is found by science, shifting to a

knowledge based economy cannot be done. However,

new knowledge and technologies are mostly being im-

ported to Mongolia directly via foreign investments.

Moreover, in today`s time where the mining sector is

prevailing it may even threaten the national security in

the long run. Therefore, Mongolia must also become

a country which develops not only mining enrichment

but also agriculture and high technology sectors. In

order to do that, we need to develop and follow a

model suitable for the specific features of Mongolia

and come up with the right strategy to implement the

model in practice. Then develop an educational policy

that supports all of the above.

Science and educational sectors are considered to

be the knowledge sector of the country. Since wheth-

er a country can develop depends on the knowledge

sector, educational and scientific institutions need to

be reliable knowledge sources. Unfortunately, our

educational and scientific sectors have had very little

innovation in this regard. Even though Mongolia has

many people who have attained a tertiary education,

what we need today is not merely quantity, but also

quality. Specifically, we need to pay attention to pre-

paring engineering, technology, and natural sciences

professionals. Today, almost 90 percent of all higher

education institution graduates are humanities and

social science majors.

-since the adoption of the law on science and

technology in 2006, the state budget allocation

to this sector has been increasing. has this trend

been fruitful?

-Since 2007, investment the science sector

has been continuously growing and this year it has

reached MNT 20 billion, but it is still not enough. Even

though the Law on Science and Technology specifi-

cally states that the state budget allocation for sci-

ence and technology sector must be 1.5 percent of

the country`s GDP, this is merely a statement and has

not been verified in real life. For instance, the MNT 20

billion allocated for 2012 is a mere 0.17 percent. If the

allocated budget is lower than 0.2 percent, it is usually

considered by scientists that the science and technol-

ogy sectors of the country are no more than a symbol.

The number has to be at least 0.6 percent in order to

anticipate first stage results, and if it reaches 1 per-

cent, then results suitable for the country’s economic

condition can be expected. Countries which have de-

veloped knowledge based economy have raised this

number to 4 percent.

In order to understand the results of our tech-

nological sectors, we need to pay attention to some

specific aspects of knowledge sector. Usually, tech-

nological research starts with funding being granted

and ends with a prototype being developed. The pat-

we can do it in the coming two decades

21


www.ecrc.mn

ent is obtained and a final report is provided to who-

ever paid for the research. Academic research, on the

other hand, is evaluated based on whether the study

is published in a high-impact professional journal and

the number of quotation of the article. In Mongolia,

the number of patents granted per year range from

120-160 and most of them are registered at the Intel-

lectual Property Office of Mongolia; there is no pat-

ent registered at the international level for commercial

purposes. New products used through license agree-

ment in an economically beneficial manner are almost

nonexistent. As for academic research, very little has

been published in acclaimed professional journals

most of it is research in Mongolian studies, religion,

history, language, culture, paleontology, archeology,

and the like. Based on this, one can easily conclude

that the science and technology sectors` contribution

to the country`s development is unsatisfactory.

-what is the reason behind it?

-First of all, one of the primary reasons for the

not so fruitful outcome of our science and technology

organizations is that the scientists and researchers`

salaries are very low. Secondly, laboratories and their

working conditions are unsatisfactory. Thirdly, the

methods of operation and cooperation of our scien-

tific institutions with other sectors within society are

backwards.

Moreover, all science and technology sector ac-

tivities are funded solely by the state budget. On the

other hand, in the U.S. and other industrialized coun-

tries, 70 percent or more of these kinds of research

are financed by the private sector. The reason why

the private sector of Mongolia does not approach sci-

entific research institutions is that the two sectors do

not have a history of cooperation or a trust in each

other. Additionally, scientific institutions` research

only goes as far as the laboratory level, not bridging

the gap between laboratory and practical utilization.

In this regard, a lot needs to be accomplished; more

investments and new forms of cooperation with indus-

tries have to emerge.

-will the situation get better as the government

has approved the law on innovation?

-For a long time, Mongolia has been lacking the

legal environment to support the development of new

kinds of production processes and industries based

on creating and utilizing economically beneficial

knowledge. In order to create exactly that kind of en-

vironment, we have worked on drafting the Law on In-

novation for 2 years and the Parliament has approved

this law on May 22nd 2012. By approving this law, the

above-mentioned investment issues, or lack thereof,

can be solved by establishing venture capital and in-

novation funds to create investment mechanisms that

promote innovation. Furthermore, the legal environ-

ment for developing the infrastructure of innovation

shall be created so that science parks, incubators,

and technology transfer centers shall be able to oper-

ate.

-You mentioned that the salary of scientists

and researchers is low and their working condi-

tions are poor. what needs to be done in order

to encourage them to improve their effectiveness

and to develop economically beneficial intellec-

tual property?

-This law states that unless the funding agree-

ment specifies otherwise, results of research devel-

oped with state funding, such as technology and prod-

uct patents, is owned by the researcher so that he/she

can use it in practice and production. By doing so, the

researcher has the opportunity to establish a start-up

company and sell his product in the market and take

the profit for himself. This in turn would encourage re-

searchers to do more studies. The U.S. Bayh-Dole Act

of 1980 started the second academic revolution. Many

researchers and scientists published their works and

used them in the market. It was an academic boom.

So, the Bayh-Dole Mongolia is about to emerge.

-many doubt that mongolians will be able to

sell computer chips produced at home in the inter-

national market. can mongolia really develop high

technology?

-I am 100 percent confident in that possibility. If

Mongolia wants to survive in the 21st century world as

a competitive nation, there is no other way but to do it.

Capital and labor intensive industries are not suitable

for a scarcely populated country like Mongolia. De-

veloping only those sectors is a bit on the backwards

side. For instance, by only developing the mining sec-

tor, we cannot compete with other countries. Coun-

tries such as Israel, Singapore, Norway, South Korea

and Finland are some of the countries which showed

that developing knowledge based industries can pro-

vide a country with sufficient benefits to sustain its na-

tional security, increase its level of competitiveness,

and globalize in 20 short years. I believe we can also

do the same in the coming two decades.

22


www.ecrc.mn

laBor market

the laBor market paradoX

emploYment (%)

employment 1.4.02

2010Percentage of population

ranking %

qatar

singapore

thailand

perU

kazakhstan

rUssia

korea

slovenia

Ukraine

slovak repUBlic

chile

meXico

BUlgaria

malaYsia

mongolia

UnemploYment rate

employment 1.4.06

2010Percentage of labor force

%

qatar

thailand

singapore

malaYsia

perU

korea

meXico

kazakhstan

slovenia

rUssia

chile

Ukraine

mongolia

BUlgaria

slovak repUBlic

ranking

The World Bank reports that Mongolia’s for-

eign direct investment reached USD 5.3 billion

in 2011 (almost 62 percent of GDP). Such an

amount has never been seen before by Mongo-

lians, with 85 percent of it going solely into the

mining sector. As world mining giants like Rio

Tinto, Vale, and Peabody Energy are operating

in this country, Mongolia ought to obtain not just

financial investments but also skills and knowl-

edge from these long-standing companies. In

other words, foreign investments should also be

used to ensure the transfer of skills to the local

workforce. However, the situation is reversed;

foreign mining companies are taking the best

workers out of other sectors’ human capital. This

in turn is causing shortages of capable labor

within domestic companies and as a result their

competitiveness is decreasing.

The Executive Opinion Survey included in

the Competitiveness report shows that Mongolia

is already facing a human resources shortage.

The private sector has expressed that not only

are capable workers with IT and finance skills

not readily available but also the process of find-

ing and hiring qualified engineers and competent

senior managers is difficult to accomplish. The

non-stop advertisements for hiring employees

in television channels, newspapers, and radio

programs reveal that a high demand for labor is

23


www.ecrc.mn

finance skills2011

labor market - availability of skills 3.2.18

Finance skills

chile

malaYsia

singapore

rUssia

kazakhstan

thailand

qatar

slovak repUBlic

meXico

korea

slovenia

Ukraine

perU

BUlgaria

mongolia

ranking

are not readily available are readily available

information technologY skills2011


Information technology skills

singapore

malaYsia

slovak repUBlic

rUssia

qatar

chile

korea

BUlgaria

slovenia

Ukraine

kazakhstan

meXico

thailand

perU

mongolia

ranking

are not readily available are readily available

higher edUcation achievement (%)

2008

education 4.5.06

Percentage of population that has attained at least tertiary education for persons 25-34

singapore

korea

kazakhstan

perU

chile

mongolia

slovenia

BUlgaria

rUssia

qatar

malaYsia

meXico

slovak repUBlic

thailand

Ukraine

ranking %

present. Demand aside, the supply side of this

issue can also shed some light onto this problem.

Mongolia stands 6th among our 15 compa-

rable countries in terms of the number of people

between the ages 25-34 who have a higher ed-

ucation degree. While only 25 percent of young

adults in Russia have attained tertiary education,

that number reaches 32.7 percent in Mongolia.

It’s surprising to see that there is a good supply of

human resources but the private sector is still fac-

ing skill and labor shortages. Employers explain

this trend by the fact that higher education institu-

tions do not create the capable workers that are

needed. Thus, every year over twenty thousand

college graduates enter the unemployed stratum.

As of 2011, among the 35,847 college gradu-

ates of that year, only 12,975 found jobs and the

remaining 64 percent were left behind. As new

graduates have inadequate skills for effective ad-

aptation into the labor market, a “silent war” for

experienced and skilled employees has started.

Even though private colleges are criticized

for producing “the unemployed with diplomas” by

being socially irresponsible business in the edu-

cational sector, they are not the main reason be-

hind the problem. As of today, 101 colleges and

universities are educating 172,798 students, but

most of them (104,101) are attending the 15 state

universities. If the state budget allocation to edu-

cation is increasing every year, why is the quality

of the “products” of universities not improving?

“Only 6.8 percent of our university funding

comes from the state and the remaining comes

from the students’ tuition, but 70 percent of it goes

out to teachers as salary. So there’s no room for

improving the study environment or the facilities”

says S. Tumur-Ochir, Director of the National

University of Mongolia at the 2011 Mongolia Eco-

nomic Forum. It’s time to study whether the pur-

pose of the state funding is being met and to take

a good look at the structure of higher education to

preference quality over quantity when it comes to

educating. There is a need to adopt the practice

of having business sector representatives on the

governing boards of higher education institutions

in order to provide direct input about what skills

and abilities businesses need from university

graduates. Chile has successfully implemented

such a policy.

are readily available

24


www.ecrc.mn

skilled laBor2011


Skilled labor

malaYsia

singapore

thailand

slovak repUBlic

rUssia

meXico

qatar

kazakhstan

slovenia

chile

Ukraine

korea

perU

BUlgaria

mongolia

ranking

is not readily available is readily available

laBor force (%)2010


Percentage of population

qatar

singapore

thailand

perU

rUssia

kazakhstan

slovenia

korea

slovak repUBlic

Ukraine

chile

BUlgaria

meXico

mongolia

malaYsia

ranking%

qUalified engineers2011


Qualified engineers

chile

singapore

malaYsia

slovak repUBlic

qatar

thailand

meXico

korea

perU

rUssia

slovenia

kazakhstan

Ukraine

BUlgaria

mongolia

ranking

are not available in the labor market

are available in the labor market

On the other hand, as the economy grows

the shortage of skilled workers is becoming the

most difficult issue. While 70 percent of college

students are studying in universities and only 30

percent of them are attending vocational educa-

tion and trainings, when it comes to finding a job,

there is a clear need for the opposite. Thus, peo-

ple with college degrees are reluctant to work in

construction or as miners yet they do not have the

qualifications to work in the fields of their interest.

As of today, even though the Law on Voca-

tional Education and Training was approved in

2010 and the system of supplying skilled labor to

employers has been created, it has been difficult

to keep up with the market demand. Oyu Tolgoi,

Tavan Tolgoi, as well as other huge mining proj-

ects and big infrastructure projects such as the

government implemented New Development pro-

gram, need even more skilled workers. However,

according to the World Bank report, skilled work-

ers compose only 20 percent of the workforce of

the country and most of them are already drawn

into the mining sector.

Due to the shortages of skilled workers, it

is essential for construction and mining compa-

nies to obtain workers from abroad. According

to kh.Ganbaatar, Vice President at Mongolian

Employers` Federation, in 2011 or in Employ-

ment Support year, the private sector created

over 72 thousand new jobs for Mongolians and

60 thousand for foreigners. And this year over 50

thousand Chinese workers are expected to “be

imported” while the number of unemployed reg-

istered with the Labor & Social Welfare Service

increased by 51.6 percent to 58,400, according to

the NSO (National Statistical Office).

While businesses are failing to find enough

skilled laborers and capable personnel and

have no other option than to import workers

from abroad, Mongolia’s unemployment rate has

reached almost 10 percent. Human capital is the

most valuable asset in any organization and the

development of a country depends on the citi-

zens’ employment and related capabilities. Thus

the labor market must receive special attention.

25


www.ecrc.mn

The EPCRC talks to kh.Ganbaatar, Vice Presi-

dent at Mongolian Employers` Federation (MonEF)

and Vice-Chairman of National Employment Commit-

tee.

-what were the achievements of employment

support Year?

-The labor market in Mongolia is just becoming

formed. It seems that over past 20 years we have

been busy changing policy in the fields of politics and

economics and have not have time to pay attention

to the more important human development consid-

erations and labor markets. But recently the govern-

ment has created a new legal environment for creat-

ing new jobs and supporting employment. Legal and

policy reform could be inferred from the 2010 Law on

Vocational Education and Training and the 2011 Law

on Employment Promotion. Renovation of the legal

environment regarding employment and labor was the

most important achievement of the 2011 Employment

Support Year, more than just creating new jobs. In

general, as a result of 2011, 73,000 Mongolians were

able to secure long-term jobs. Additionally, 2012 was

announced as the Year of Supporting Citizen`s Par-

ticipation and Family Development, which also aims

at reducing poverty and unemployment by invent-

ing new structures of financing such as low interest

rate loans for small and medium enterprises, changes

that are the contributors to job creation. Generally

due to the economic growth, the employment rate will

increase and MonEF reach data shows that by 2016

there will be about 160,000 new jobs created.

-mining and construction sectors are growing

at a furious pace, prompting employers to com-

plain that the deficit of skilled workers is becom-

ing the most difficult issue...

-As the above mentioned Law on Vocational Edu-

cation and Training’s framework suggests, the gov-

ernment is collaborating with Millennium Challenge

Account, Asian Development Bank, and other donors.

Roles and responsibilities of educational organiza-

tions and employers are now clear; cooperation with

each other is absolutely needed. Employers have full

rights to cooperate with vocational education orga-

nizations and observe the education process, give

hands-on opportunities to the students, and examine

their post-graduation abilities. Within this framework

was established the public and private sector partner-

ship, the National Advisory Board for Vocational Edu-

cation and Training, in addition to other regional and

local boards.

The government aims at ensuring that skilled la-

borers possess the relevant training to meet the de-

mand of employers and though they will be spending

money from the national budget, donors will have to

help as well. Therefore, employers should put 0.5-1.5

percent of their wage-fund into the Vocational Educa-

tion and Training Fund in order to prepare their em-

ployees with the skill sets they need. If an employer

does not do so, it is a shame. For instance, Oyu Tolgoi

is investing about MNT 30 billion in training and edu-

cation as well as upgrading two educational centers to

prepare the 3000 workers they need. I just want to say

that employers, like Oyu Tolgoi, must pay attention on

education in order to get their desired workers.

-only 36 percent of 36,000 graduated students

in 2011 were able to find jobs. on the other hand,

employers cannot find component staffs as they

need and often criticize that colleges and univer-

emploYers shoUld Blame themselves, not the government

26


www.ecrc.mn

sities are pursuing quantity over quality. what

do you think about the increase in public expen-

ditures on higher education, which has not given

significant improvement in the skills of students?

-The private sector is always for increasing pub-

lic expenditure on education. However those invest-

ments should be spent towards a demand driven edu-

cational system. As of today, most Mongolians do not

understand that people should choose their career

according to the market demand. That could be one

reason of the low employment rate among graduates.

On the other hand, universities enlist as many stu-

dents as possible in order to make a profit. If we look

at the educational system as a pyramid, the bottom

part of the pyramid must consist of a large quantity

of skilled workers and as you go higher the number

of higher educated professionals such as economists,

lawyers, and doctors should decrease. As of today,

this pyramid`s top is pointed downwards in Mongolia.

Therefore, we made a proposal to the Ministry of

Education, Culture and Science about inventing new

recipient rules based up on labor market demand. For

example, we need to do a study on how many accoun-

tants or construction engineers will be needed tomor-

row, and then we should train them. The Minister gave

a positive reaction on that and promised to review the

new law on Higher Education. Moreover, there is a

need to revamp higher education curriculum in order

to ensure that students possess the relevant skills to

meet the demand of employers and align our educa-

tion with international standards.

-human resources have become a constant

challenge for domestic companies as the high sal-

aries of mining companies have lured away many

of their competent staffs. what should we do in

order to prevent “brain drain” caused by mining?

-There should be a Mongolian national salary

policy and within this framework three stakeholders,

the government, trade union and employers, should

discuss and agree on each sector`s standard salary.

No matter where the personnel work: public, private,

or a company with foreign capital; there must not be a

big salary gap. For example, if an electric engineer in

foreign-owned company gets a salary of MNT 1.5 mil-

lion, in order to keep engineers at state owned CHP 4

they should give a competitive salary. Of course there

should not be a too strong regulation and bonuses

should be able to vary.

i

Create a stable and predictable legislative and

administrative environment.

ii

Ensure speed, transparency and accountability

in the administration, as well as the ease of doing

business.

iii

Invest continually in developing and maintain-

ing infrastructure both economic (road, air, tele-

com, etc.) and social (health, education, pension,

etc.).

iv

Strengthen the middle class: a key source of

prosperity and long-term stability.

v

Develop privately-owned medium-sized enter-

prises: a key element of diversity in an economy.

vi

Maintain a balanced relationship between

wage levels, productivity and taxation.

vii

Develop a local market by promoting private

savings and domestic investments.

viii

Balance aggressiveness on international mar-

kets with attractiveness for added-value activities.

iX

Counterweight the advantages of globalization

with the imperatives of proximity to preserve social

cohesion and value systems.

X

Always return the tangible signs of success-

ful competitiveness to the people by providing a

higher level of prosperity for all.

anneX 2. the golden rUles of competitiveness

Source: IMD

27


www.ecrc.mn

energY

on the waY towards an energY paradise

Many believe that Mongolia`s vast coal deposits

and large untapped wind, solar, and water energy

resources will transform the country into an “Energy

Paradise.” However, the research paper titled “Base-

line Paper for Low Carbon FDI into the Electricity

Sector of Mongolia” conducted by EPCRC and co-

organized with Mongolia Economic Forum`s sub-

session “Coal or Wind?” shows that more needs to

be done in order to a achieve such high expecta-

tions.

Mongolia is now experiencing rapid economic

growth, which has resulted in a dramatic increase

in energy consumption. The economy is expected to

grow even faster as Oyu Tolgoi and Tavan Tolgoi

become operational and ambitious projects such as

The New Development Program (including 100,000

Household Housing) starts. However, extensive min-

ing production and large scale reconstruction will not

happen without meeting the resulting energy needs.

As of today, the country’s peak in energy de-

mands have been met thanks to imports from Rus-

sia, as well as China provinding power to a number

of mining companies operating in Gobi region. How-

ever, the imports have been problematic due to the

fact that Mongolia’s neighbors are not able to give

guaranteed supplies at reasonable prices.

For example the power plant at Oyu Tolgoi

is scheduled to be built by 2017, until then power

must be imported from China to conduct the proj-

ect. However, Ivanhoe Mines announced that if talks

of importing energy fall through, the company may

have to build a temporary power plant which would

undoubtedly delay commercial production. Though

China eventually agreed to supply, this example

demonstrates how Mongolia is becoming more de-

pendent on energy imports, especially for mining.

Mongolian energy consumption is estimated to

increase approximately by 1500-3000 MW by 2015-

2030, in comparison to the current 857 MW total ca-

pacity of country`s thermal power plants. Moreover

due to age, deterioration, and unreliability of the

equipment, the actual available power capacity may

be significantly lower.

The Executive Opinion Survey shows that busi-

ness owners do not believe that future energy supply

is adequately ensured and are afraid of potential en-

ergy shortages. According to the Mongolia in World

Competitiveness Report, Mongolia ranks at the 15th

position out of the 15 comparable countries in terms

of energy infrastructure and future energy supply.

It is clear that the country needs to increase en-

ergy supply by creating new capacity. Therefore,

a long-awaited CHP-5 is to be built on site of CHP

3 in Ulaanbaatar. The construction of first section,

which will have 450 MW electricity and 587 MW

thermal capacity, is expected to be completed by

28


www.ecrc.mn

energY intensitY2007


Commercial energy consumed for each dollar of GDP in kilojoules

singapore

perU

slovenia

chile

korea

meXico

slovak repUBlic

qatar

thailand

BUlgaria

malaYsia

rUssia

kazakhstan

mongolia

Ukraine

ranking kilojoules

fUtUre energY sUpplY

Basic infrastructure 4.1.19

2011Future energy supply

is not adequately ensured is adequately ensured

singapore

malaYsia

slovak repUBlic

thailand

kazakhstan

korea

slovenia

perU

qatar

rUssia

BUlgaria

chile

meXico

Ukraine

mongolia

ranking

energY infrastrUctUre

Basic infrastructure 4.1.18

2011Energy infrastructure

is not adequate and efficient is adequate and efficient

singapore

qatar

malaYsia

slovak repUBlic

korea

thailand

slovenia

chile

kazakhstan

perU

meXico

rUssia

BUlgaria

Ukraine

mongolia

ranking

2015. Moreover, in order to meet this growing de-

mand and start exporting energy, Mongolia needs

to build power plants at Tavan Tolgoi, Shivee Ovoo,

Baganuur, Aduunchuluun, Khotgor, Boorooljuut and

Chandgana coal deposits. However, there might be

an even bigger problem than energy supply.

According to the World Health Organization

(WHO), Ulaanbaatar ranks as the most polluted cap-

ital in the world. If the WHO considers particulates

over 20 micrograms per cubic meter to be danger-

ous, in Ulaanbaatar that level is 14 times higher than

the limit and reached 279 micrograms. The green-

house gas produced by each person is alarming be-

cause of the aging and deteriorating coal-fired power

plants, which dispense a huge level of emissions.

Therefore, if this country wants to slow down air pol-

lution, Mongolia needs to start considering cleaning

up the energy sector.

In 2005, Mongolia’s parliament approved the Na-

tional Renewable Energy Program, which aims at in-

creasing the country’s renewable energy share from

20 to 25 percent by 2020. And in 2007, a Law on

Renewable Energy was adopted. As a result, large

scale private sector activities have been initiated like

the development of the Mongolia`s first wind energy

park. Newcom Group is working to put into operation

a wind farm in Tuv aimag`s Salkhit Mountain with

a capacity of 50 MW, which would supply almost

5 percent of the country’s electricity when it starts

operating in November of 2012. If Newcom Group

successfully completes its wind power plant, it shall

lead to many other projects for renewable energy.

However, experts warn that there might be more bar-

riers than opportunities for private investors. Lack of

infrastructure and uncertainty in the regulations re-

main major problems.

For example, Newcom Group has purchased

31 huge turbines from General Electric. As each

wind turbine weighs 240 tons and its basement

weighs 1000 tons, transporting them is a big prob-

lem. “Transporting huge equipments by dirt road is

extremely difficult, as the road from Zamiin Uud to

Choir is not completed yet” says B.Byambasaikhan,

CEO of Newcom Group. D.Samdan, senior engineer

and an expert at MCS International said that it took

two years to transport equipment for the Ukhaa khu-

dag thermal power plant.

In order to improve renewable energy sector and

introduce advanced coal technologies, foreign direct

investments are vital for Mongolia. However, the

is adequately ensured

is not adequate and efficient is adequate and efficient

29


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pollUtion proBlems


2011

Pollution problems

singapore

malaYsia

chile

slovak repUBlic

slovenia

qatar

thailand

rUssia

korea

Ukraine

BUlgaria

kazakhstan

meXico

perU

mongolia

ranking

do seriously affect the economy

do not seriously affect the economy

anneX 2. competitiveness - a diversitY of thoUghts

Scholars and institutions have been very prolific in proposing their own definition of competitiveness.

This diversity is an indicator of the popularity of the subject but also of its multifaced nature.

definitions of competitiveness

A field of economic knowledge, which analyzes the facts and poli-

cies that shape the ability of a nation to create and maintain an envi-

ronment that sustains more value creation for its enterprises and more

prosperity for its people.

The set of institutions, policies and factors that determine the level

of productivity of a country.

Competitiveness is relative and not absolute. It depends on share-

holder and customer values, financial strength which determines the

ability to act and react within the competitive environment and the po-

tential of people and technology in implementing the necessary strate-

gic changes. Competitiveness can only be sustained if an appropriate

balance is maintained between these factors which can be conflicting

nature.

A firm is competitive if it can produce products and services of

superior quality and lower costs than its domestic and international

competitors. Competitiveness is synonymous with a firm`s long-run

profit performance and its ability to compensate its employees and

provide superior returns to its owners.

source

IMD`s World Competitiveness

Yearbook, 2003.

World Economic Forum, Global

Competitiveness Report, 2004-

2005.

Feurer, R. and K.Chaharbaghi,

“Defining Competitiveness:

A Holistic Approach,” Manage-

ment Decision, 1994, Vol.32,

pg.58.

Report of the Select Committee

of the House of Lords on Over-

seas Trade, 1985

state monopoly, strong regulation, and fixed prices

scare investors. As a result, the country`s energy

sector with its power plants dating back to Soviet

times, is lagging behind global development.

As the EPCRC`s research findings suggest,

there is an urgent need to transform energy tariffs

into market principles. A more liberalized market

scheme would help prevent the high risks of oper-

ational failure of the state controlled power plants

and would create a more attractive environment for

investors. “It is vital for Mongolia to liberalize the en-

ergy sector,” said D.Zorigt, the Minister of Mineral

Resources and Energy at the Mongolia Economic

Forum. “As a result, more reliable and modern tech-

nologies would be introduced to the sector and en-

ergy supply would be ensured.”

do not seriously affect the economy

30


www.ecrc.mn

The immediate and future ability of, and opportunities for, entre-

preneurs to design goods worldwide whose price and non-price quali-

ties form a more attractive package than those of foreign and domestic

competitors.

National competitiveness refers to a country`s ability to create,

produce, distribute and/or service products in international trade while

earning rising returns on its resources.

Competitiveness includes both efficiency (reaching goals at the

lowest possible cost) and effectiveness (having the right goals). It is

this choice of industrial goals which is crucial. Competitiveness in-

cludes both the ends and the means towards those ends.

Competitiveness implies elements of productivity, efficiency and

profitability. But it is not an end in itself or a target. It is a powerful

means to achieve rising living standards and increasing social wel-

fare - a tool for achieving targets. Globally, by increasing productivity

and efficiency in the context of international specialization, competi-

tiveness provides the basis for raising peoples` earnings in a non-

inflationary way.

Competitiveness should be seen as a basic means to raise the

standard of living, provide jobs to the unemployed and eradicate pov-

erty.

Competitiveness is the degree to which a nation can, under free

trade and fair market conditions, produce goods and services which

meet the test of international markets, while simultaneously maintain-

ing and expanding the real incomes of its citizens.

Industrial competitiveness is the ability of a company or industry to

meet challenges posed by foreign competitors.

The ability to produce goods and services that meet the test of in-

ternational markets while citizens earn a standard of living that is both

rising and sustainable over the long-run.

Supporting the ability of companies, industries regions, nations

or supra-national regions to generate, while being and remaining ex-

posed to international competition, relatively high factor income and

factor employment levels.

Competitive advantage at firm level is the ability to consistently

and profitably deliver products and services which customers are will-

ing to purchase in preference to those of competitors.

European Management Produce

and Market, 1991

Scott, B. R. and Lodge, G. C.,

US Competitiveness in the World

Economy, 1985, pg.3.

Buckley, P. J. et al, “Measures of

International Competitiveness: A

Critical Survey,” Journal of Mar-

keting Management, 1988.

Competitiveness Advisory

Group, (Ciampi Group). “Enhanc-

ing European Competitiveness”.

First Report to the President of

the Commission, the Prime Min-

isters and the Heads of State,

June 1995.

Competitiveness Advisory Group,

“Enhancing European Competi-

tiveness”. Second Report to the

President of the Commission,

December 1995.

OECD, Technology and the

Economy: The Key Relation-

ships, 1992, pg.237.

US Department of Energy.

The First Report to the President

and Congress, 1992.

OECD, Industrial Competitive-

ness: Benchmarking Business

Environments in the Global

Economy, 1996

Department of Enterprise, Trade

and Employment, Uk.

Source: US National Competitiveness Council

31


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the energY sector has a Bright fUtUre

EPCRC talks to T.Tserenpurev, Chairman of

Energy Regulatory Committee.

-what changes are expected after the

amendments and updates of the law on en-

ergy?

-Due to social development and market con-

ditions, some legal changes were required in

the energy sector. Therefore, on December 10th

2011, the parliament amended the Law on En-

ergy, originally introduced in 2001. Within this

framework, policy and institutional changes hap-

pened; among them was the transformation of the

Energy Regulatory Agency into the Energy Regu-

latory Committee. I can also tell you specifically

about changes in tariff and regulations that came

from our organization.

Because energy tariffs in Mongolia are lower

than the global average, the power plants can not

carry out technological overhauls, and as a result,

they can not reduce their expenses and are falling

into debt Therefore, it is necessary to gradually

increase tariffs in order to create attractive condi-

tions for investors.

Energy tariffs used to be fixed by the ex-

pense-based methodology. Now, thanks to the

new amendment, it will be fixed based upon the

idea that investors will be able to justify their in-

vestments. This move may potentially make the

sector more financially viable.

Consequently, according to the Parliament

resolution #72 passed in December 2010, energy

tariffs are increasing step-by-step to match mar-

ket demands and by 2014 the sector will operate

without incurring losses.

-the executive opinion survey shows that

business owners don`t believe in future en-

ergy supply. will we face an energy shortage?

-Even if some people say that Mongolia will

face energy shortage, we are still fulfilling our

main obligations of supplying consumers with re-

liable supply of electricity and heating. Of course

the energy consumption has increased due to the

country`s development, especially during the last

3-4 years. But we have a precise plan to meet this

growing demand.

For example, the CHP 5 tender is now at its

final stage and by 2015 when the construction of

its first section will be completed, we will produce

450 MW of electricity and about 600 Gcal of heat.

Currently CHP 4`s capacity have expanded by

40 MW and we are talking about installing an ad-

ditional 100 MW capacity. By 2013 the thermal

power plant in Darkhan will also be expanded by

30 MW.

Moreover, the Energy Resource program suc-

cessfully put into operation a 18 MW power plant

in Ukhaa Hudag. We also built new blocks of 3

MW at the Dalanzadgad power plant. As for the

east area, the plan to expand Dornod`s Choibal-

san power plant by 100 MW was announced. And

in order to connect consumers of Zavkhan and

Gobi-Altai aimags with reliable sources of energy,

a 60 MW power plant will be built near Mogoin

Gol coal deposit.

32


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-mongolian energy consumption is esti-

mated to increase approximately by 1500-3000

mw by 2015-2030. how will this demand be

met?

-In 2010 we made an announcement to the

government and the National Security Council

about increasing energy demand and its sup-

ply. Due to large scale projects, such as 100,000

Household Housing program in Ulaanbaatar, 310

MW of power and 700-800 Gcal of heat will be

needed. Due to the planned metallurgical com-

plex in Erdenet and Darkhan and the industrial

park at Sainhsand, 1,000 MW of capacity will be

needed in central area according to the WorleyP-

arsons. CHP 5 will supply central area. Moreover,

the government granted a license for a new 600

MW thermal power plant in Chandgana Tal coal

deposit, which will be operational by 2015. In Tuv

aimag`s Bayan soum`s Buuruljuut we will also

build a 600 MW power plant. And we granted a

new 300 MW license in Tsaidam.

The 600 MW power plant at Tavan Tolgoi and

the 400 MW at Oyu Tolgoi will fully supply the ar-

eas demand even with Tsagaan Suvarga. Since

the western area has no ambitious demands, the

24 MW power plant at Khushuut coal deposit and

the 36 MW power plant that will be built in Khotgor

are enough.

-oyu tolgoi announced that the problems

encountered while dealing with china would

delay commercial production projects. even if

the problem is now resolved, doesn`t it show

that mongolia became more dependent on en-

ergy imports?

-Currently we import electricity from Russia in

order to cover the peak load and regulate the grid

frequency. In 2011 200 million kW/h of electricity

were imported, and that amount is expected to

grow this year. Concerning Oyu Tolgoi, accord-

ing to its investment agreement, the project will

import the power from China until its own power

plant is finished by 2016.

Talks of importing electricity from China have

reached an agreement. The construction of a 220

kV line at the southern border is completed and

the connection in Inner Mongolia will be built by

July 2012. Therefore, there will not be any power

supply problem at Oyu Tolgoi. It is estimated that

Oyu Tolgoi`s power demand will be 100 MW at

first stage, and will reach 310 MW in peak of pro-

duction.

-how do you see prospects of private sec-

tor involvement into the energy sector?

-As the country develops, Mongolian compa-

nies become more capable. The Law on Conces-

sions adopted in February 2010 created a favor-

able legal environment to increase private sector

participation, especially, in regard to domestic

and foreign investors. For example, it is within

this framework that the Mogoin Gol power sta-

tion project is being implemented. Also CHP 5`s

construction and Dornod power plant`s expansion

will happen within the framework of the Law on

Concessions. Generally, private sector role in the

energy sector is likely to expand further.

-as much of the machinery and equip-

ment in electricity sector dates back to soviet

times, power plants are a considerable cause

of Ulaanbaatar`s air pollution. what is the

government`s strategy to support the low car-

bon new capacities?

-I think we are in the transition period as the

energy sector is entering a new stage. The CHPs

which were constructed in 1960-80`s do have

served their purpose. Therefore, it is time to in-

troduce new modern technologies. There is more

than one way available to drastically improve ef-

ficiency and reduce harmful emissions. For ex-

ample, CHP 5 will be reducing its pollutants by

97-99 percent.

There are already power plants which are

more efficient and economical, which consume

less water, with fewer personnel and have high-

er capacity. For example, in Korea, China, and

Japan only 200 people work at a thermal power

plant with a capacity of 600-1,200 MW, which is

similar to our CHP 4 where 1,400 people work. In

other words, with the benefits of new techniques

and technologies they are able to save on work-

ers’ salary. Therefore, the private sector will be

very active in terms of introducing modern tech-

nologies.

As for renewable energy, hydro power plants

Durguun 12 MW and Taishir 11 MW are being put

into operation and supplying its customers with

power. Newcom Group`s Salkhit power park will

be operational by November of 2012. In addition,

there are a number of great projects such as two

50 MW wind parks at Sainshand and Choir. We

aim at increasing the renewable energy share to

20-25 percent by 2020, as stated by the National

Renewable Energy Program.

mongolia`s competitiveness: where are we heading? guidebook

Documents

competitiveness challenges

competitiveness factors

countrys competitiveness

mongolias competitiveness

world competitiveness

national competitiveness

t measure

energy sector