Friday, July 4, 2014

Mongolian capitalism: cultural battles

By James Watkins

Economics student, Harvard University

A decade and a half of free market economics has transformed Mongolia. The country has undergone two transformations: an economic transformation from a planned, communist economy to the free market, and a socio-cultural transformation of urbanization from its distinct rural, nomadic culture. But these transitions have not been smooth, nor are either of them complete.

According to S.Dorjsuren, Ph.D., Professor of Economics and Finance at the Mongolian University of Science and Technology, Ulaanbaatar’s urban, consumerist culture and its adopted style of Western capitalism, “is not fundamentally natural to Mongolian people. To survive, people have to adjust to this economy.”

Having talked to a variety of figures with direct experience of Mongolian business and international economics to make sense of this transition, three fundamental cultural battlegrounds are evident where Mongolia is still trying to adjust to its new capitalist identity.

1) Mongolian individuals vs. the state

Capitalism works well when people define themselves through an ideology of individualism; an ideology which is suppressed in communist societies. A transition to a successful capitalist society, therefore, is not simply about setting up free markets, but a change must also occur in the consciousness of individuals. Mongolia went through the former in the 1990s; progress on the latter is more complicated.In Professor S.Dorjsuren’s words, “The market economy was changed in one day—the prices of goods were liberated. But after that, people panicked, they did not understand the meaning of a market economy.”

A source working with the Ministry of Finance asserts that Mongolians do indeed “have a very strong individualist streak that predates the socialist days.” For Professor S.Dorjsuren, this can be traced to Mongolian nomadic culture. “Nomads decide everything by themselves, so there is no rule in how we should live. We are our own bosses. Unlimited freedom is what nomadic culture is.”

There are therefore two very contrasting cultural influences for Mongolians. Individualism and a lack of recognition of authorityare pervasive manifestations of nomadic culture, however the country’s socialist history has instilled a sense of the opposite: reliance upon the state and a level of consciousness that transcends the individual.

These divergent cultural foundations result in a society whose fundamental beliefs and economic relationships appearconfused and incoherent. Sant Maral polling of social attitudes show that Mongolians have little trust in the effectiveness of the government, and that people even mistrust the government’s intentions, and yet they demand that the government be ever more involved in their lives. A substantial proportion of those surveyed believed that the state should control key sectors of the economy, and one in three people believed that their future wellbeing should depend more on the state’s actions than on their own.

Indeed, the source at the Ministry of Finance identifies “a lack of trust” in the government as one of the unique characteristics of the Mongolian economy, however also mentions that, contradictorily, “people [still] expect the government to play a big role. … [This] is a huge hangover from the socialist days.” The relationship between the individual and the state, then, which is so clearly defined in developed capitalist societies, remains confused and complicated in Mongolia.

2) Mongolian society vs. the capitalist climate of business

Another distinct quality of business in Mongolia is the social baggage that is taken into the boardroom. When asked about what makes Mongolian economics unique, H.Amartuvshin, the Managing Director of TenGer Financial Group LLC, a Mongolian who has worked in finance throughout Europe, the U.S., and Asia, immediately mentions, “[business] is more by handshake, or relationship-driven: people trust some people, mistrust others.”

The source at the Ministry of Finance also emphasizes, “informal kinds of agreements… Western concepts of the sanctity of contracts are a lot less followed here.”

Both the Ministry of Finance source and H.Amartuvshin describea subjective, un-transparent style of management that typifies Mongolian business,withdominant business practices, whereby the whims of individuals (perhaps one individual) dictate decision-making processes, rather than defined rules or established practices.

The Mongolian business culture is “more bureaucratic, more hierarchical, more ‘one man, show-man’, rather than a team of professional managers… Everything is in the hands of one or two people,” says H.Amartuvshin.According to the source at the Ministry of Finance, everything “takes place behind closed doors, … [Mongolian business leaders] are really reluctant to open up.” Whereas Western decision-makers would be “all lawyered up, [have] investment bankers that are advising them, networks of experts… [in Mongolia it’s] a couple of officials striking a deal across the table.”

This is perhaps an example of the clash between the social, informal nature of Mongolian people with the formal, individualistic, objective ethic of Western capitalism. The clash of cultures makes it difficult for foreign companies to do business in Mongolia; H.Amartuvshin suggests that this is one of the fundamental causes of the current economic malaise that has seen foreign capital flee the country.

3) Mongolian economic realities vs. the Western model

When asked if any other country typifies the style of economy that Mongolia is heading towards, Professor S.Dorjsuren answers “America” without hesitation. However, there remain vast differences between the fundamentals of the two economies that, if unaddressed, prevent Mongolia from experiencing the full benefits of American-style capitalism in the immediate future.

The source at the Ministry of Finance argues that for younger generation of Mongolians, whichhas no memory of the socialist days,“there’s an appreciation for what makes Western economies work, although I’m not sure it’s always an appreciation of the right things.” Like Mongolia, the United States started out with a great resource base, but it was accompanied by“the commitment for individuals to work hard and save. … Here, the consumerist side has emerged,” beforethe savings culture that built the American economy. Spending is a cultural phenomenon within Ulaanbaatar: “when the government was doing the cash handouts from the Human Development Fund, … the money that went to the people in the countryside was all invested,” in the city, however, that money was spent.

Low savings also leads to a weak financial sector, and insufficient investment, a diagnosis of the Mongolian economy oft cited by foreign investors. “The stock exchange is basic, … there is no retail buying [of government bonds], there are even no institutional investors like mutual funds or insurance companies that are based on retail clients … so there’s a long way to go before that kind of economy is going to be close to what you see in the West.”

Professor S.Dorjsuren also notes the importance of low savings and investment rates in Mongolia, which means growth has torely upon less sustainable practices. However, he identifies this as a symptom of a more underlying problem: “people have very little money to save due to an uneven distribution of income.” This comes from a culture of low pay in Mongolian industry. “Why are salaries low? It is because of the legacy of the socialist regime. … Of Mongolian GDP, from 100 MNT of income, 25 MNT goes to the salary of workers and 75 MNT goes to capitalists’ profit. Other countries are the reverse of this figure.”

Although these exact figures have not been verified, global estimates of the share of labor in income by French economist Thomas Picketty do indeed suggest that only around 25 to 30 percent of Mongolian income goes towards remunerating labor (with the rest going towards remunerating capital in the form of profit), whereas in developed economies, that figure has remained around 70 percent for centuries. The labor share of income in Mongolia is among the lowest in the world, comparable to countries such as Cameroon, Niger, Tanzania, and Yemen, meanwhile countries economically similar to Mongolia and other post-Soviet states all fare much better.

The Mongolian example: Nomadic capitalism?

The new Mongolian capitalist identity being forged in Ulaanbaatar is a work in progress. There are many quirks, many inconsistencies, and many weaknesses that are the result of the difficult transition towards a Western style of capitalism. Will the end product retain a distinctly Mongolian feel? Will the informal, social-based business style and the nomadic philosophy of rejecting authority survive the cultural transformation ongoing in Ulaanbaatar?

Both Professor S.Dorjsuren and H.Amartuvshin suggest that the openness of Mongolian society, and the ability of Mongolians to adapt and to “learn fast” may well allow the culture of the Mongolian economy to assimilate to its Western model. But, as the source at the Ministry of Finance puts it, “I think the jury’s out.”

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