FEATURE: James Anderson - Many people in Mongolia forget just how difficult it was in 1990s
ULAANBAATAR (GoGo Mongolia/ANN) - We interviewed James Anderson, World Bank's Country Manager and Resident Representative for Mongolia, on the past, present and future of economic outlook. The interview was made in the beginning of April.
MONGOLIA IS A DIFFERENT COUNTRY, BOTH IN A MOSTLY POSITIVE WAY
This is your second appointment to Mongolia. Tell us more about how you were appointed here for the second time? -I worked here from 1993 until 1997. I was working mostly on a USAID funded project and in 1996 -1997, I was doing consulting and research work for the World Bank. Then I moved to Washington and joined the World Bank as a staff member and worked for many years in Europe, Central Asia, and Vietnam.
In early 2014, I saw the job advertisement for Country Manager of Mongolia. It caught my attention, because I have a strong attachment to the country. When I first came here I did not know much about Mongolia. I was fascinated partially by the struggle that people were going through, toughness of Mongolian people at that time and also by the magnitude of the task of totally reorienting the institutional framework - Mongolia`s institutional framework – after seventy years of socialism and planned economy to an economy based on the market system. Around that time, in the early 1990s, the decision was made to make that transition. But what you need to do to get from here to there was not at all clear. It was a huge task, an incredible challenge, and I found it somewhat inspiring the way that Mongolian solved problems at that time.
I worked in 15-20 countries in Europe and Central Asia and East Asia since then. For me, Mongolia was the first country where I worked and the idea of coming back to live here was so exciting. In some ways it is familiar and in some ways, it is a different country, both in a mostly positive way.
The possibility to come back here interested me greatly and so I applied for the job and I was very happy that I was selected for that position.
-You came to Mongolia in 1993 when the country was in a difficult situation going through a political and economic transition, so you know what we`ve gone through. We had sunny days when commodities prices went up and the budget increased. How could we have increased those sunny days and made the effect more sustainable? Were there moments when you thought this is what we should have done at that moment? -Yes, I was here in the 1990s. In fact, many people in Mongolia forget just how difficult it was, and younger generations may need to ask their parents about that. I looked at some calculations and it took about 15 years for Mongolia to get back to the same level of GDP per capita that they had in 1989 because there was such a deep collapse of the economy in the early 1990s and very slow resumption of growth.
When growth resumed, it got stronger and stronger into the 2000s and this was a very positive development in people`s lives, school enrollments were increasing, etc. But when the real boom took off, the growth rates reached very high levels, then I think that’s the time you need to say that this is not going to last forever.
When you look at the past it is always very clear, in hindsight, what to do and what not to do. But in the future when Mongolia`s growth becomes very strong again, I hope that everyone remembers that you need to plan for possible shocks to the economy and not expect that the good times will continue, and, therefore, be conservative about spending and borrowing.
ALL PROJECTS ULTIMATELY LEADS TOWARDS DEVELOPMENT AND REDUCTION OF POVERTY
-Which sectors in Mongolia has World Bank supported more over the last 27 years? -Over the years, I think we have supported almost all sectors in Mongolia. The focus has changed over time. In the early years, the support was all about helping Mongolia to overcome the very sharp drop in economic activity after the end of the Soviet era. At that time the projects were focused on power plants, railways, mines, trying to keep them operational, bringing spare parts and upgrading, etc.
Years later the focus shifted more towards education. Since the mid-1990s we have been working on education through both research and projects and continue to work on education.
Starting around 2000, we also shifted towards rural development following a series of back-to-back dzuds. The focus areas have changed a bit over time, but the important thing is that whatever project is to be implemented that it would be done with a clear objective that ultimately leads towards development and reduction of poverty.
Currently, we have a couple of projects related to IT. One is called SMART Government project another one in the health sector is called E-Health and they are both just getting underway. We have a couple of education projects, and some technical assistance projects, for example working together with Ministry of Finance in the institutions of public financial management which we have continued to do for many years. We have a lot of support for different aspects of the financial sector through a trust fund supported by the Korean government working on things like financial education, capital markets development strategy, and so forth. Also, we have several projects related to governance, with support from Swiss Development Cooperation, supporting decentralization and working with civil society organizations to develop the capacity to strengthen the system of social accountability. We also have a project supporting Mongolia’s capacity to prepare large projects in an environmentally and socially responsible manner.
-Total lending provided from World Bank to Mongolia was $800 million. Has this amount increased recently? -That is about the total amount that has been committed. The most recent project that we had is called Export Development Project which we just launched a few weeks back. This is a $ 20 million project to support the diversification of the economy. However, that is the total amount of the project. The amount that the country actually uses over time increases as they spend the money. One of the key features of financing through an IFI like the World Bank is that you pay the interest as you use the money rather than when you decide to borrow.
-What is the average condition of the financing of $800 million? -Some of that was a grant, while most were IDA credit. IDA credits typically carry about 2 percent interest rate and are repayable over 25 years with a 5 year grace period in the beginning. These are very favorable terms that are particularly useful for projects that have long return such as energy network upgrading.
-Does the World Bank have loan limits for Mongolia? -Yes, there are limits. That comes primarily because we have limited resources and every country wants to borrow at these favorable terms. The last IDA cycle was about 100 million dollars for projects put together. The next one will be higher but we do not know the exact number. And as I mentioned, Mongolia is also eligible for IBRD financing.
-What has been the biggest project in terms of financing amount implemented in Mongolia with World Bank support? -The biggest in real terms was our very first project, which was called Economic Rehabilitation Project; this was implemented together with the Government of Japan in 1991 and it supported spare parts for power plants, railways and mines and other essential activities.
IMF PROGRAM WILL BRING CONFIDENCE AND THE STABILITY OF THE ECONOMY
-How do you see the positive effects on the economy from the IMF program? -What the IMF-led program will do is to put together, with the Government, a package of reforms which the Government really needs in order to be able to put its fiscal house in order and manage the current economic situation. What they also bring is very reasonable cost financing with low interest and very long repayment period. This brings added confidence and the stability of the economy and stability of the financial sector as well, ultimately leading to lowering of the borrowing cost for companies and helping to stimulate economic activity.
-Donor countries like Japan and South Korea will provide their assistance to Mongolia after IMF board approves the program. Is World Bank also planning to provide loans? If yes, what is the loan amount period? -Yes, we will be the part of this international coalition that is supporting Mongolia. We are preparing something called an Economic Management Support Operation. You will hear more about that in the few months and it will come after the IMF program is approved.
The details about the amounts that will come at different times during the program are still being discussed. It will be a series of budget support operations which means that there will be some discussion of important policies that are meant to be undertaken to help make the economy stronger. Together with the policies, the financing will come on the standard World Bank terms which have very low-interest rate and long repayment period.
-Economists are saying that the IMF EFF program will save our economy from crisis edge. But some economists are saying money is flowing all over the world and could have been available to Mongolia. In your opinion, were there other ways we could have followed to overcome the debt burden except for EFF? -I think it is important to remember what the IMF-led package is bringing for Mongolia. These are, first, endorsement of the policies that Mongolia needs to do anyway to reform its economy; and, second, low-cost financing. The two taken together help bring credibility to the reform package. So the key question is not just ‘Could it have been done another way?’, but ‘How much would it have cost to have done it another way?’. In fact, most of the conditions from different countries and international financial institutions that are part of this package are very good financing terms. In our case, it is about 2 percent interest rate and 25 year repayment period, and that is a package that I think would be very hard to match. What it means, ultimately, is less money spent on interest payments and more money available for important things like education and supporting social programs. Interest as a share of GDP has recently reached to about 4 percent compared to 0.8 percent only a few years ago. So the interest that has to be paid has been increasing—being able to finance the reforms that you need at a reasonable cost helps free up resources for other important things.
So the key question is not just ‘Could it have been done another way?’, but ‘How much would it have cost to have done it another way?’
-Some people say that money itself does not solve problems. The previous government borrowed many loans from foreign countries and issued bonds called Chinggis. But the situation is still the same. Getting a loan and making business is not making any positive changes to the economic situation. -The important thing to remember to ask when taking loans is: why is it needed? The Government has been running deficits for many years and it has gotten very large. When you are financing your activities by borrowing, the total stock, the amount you owe, gets higher and higher. This is what you need to keep a close eye on. As stock gets higher, the amount of repayment for servicing gets higher and, of course, it is a debt that does need to be repaid.
Standard advice to consumers in America is to borrow for things that you are still going to have when you repay it. If it is something you are going to be using for decades like your house, then you can borrow for long terms with repayment over decades.
But for current consumption and for ordinary living expenses - the recommendation for consumers is not to borrow at all. You need to be sure that your income is sufficient to pay for those expenses and for any borrowing we have to be able to plan in the future to be able to pay back.
These are basic principles of financing that for the most part can also be applied to countries and governments - they need to look at the current budget, the amount of revenue and the expenses and try to balance that in a way that they are not borrowing when they do not need to.
MONGOLIA IS RIGHT AT THE BORDER BETWEEN LOWER MIDDLE INCOME AND UPPER MIDDLE-INCOME COUNTRY
-How is Mongolia classified according to World Bank (as a low or middle income developing country)? -Our classification system is something that was designed many years ago to have thresholds which only move according to global inflation. Mongolia is actually right at the border between lower middle-income and upper middle-income country. Mongolia is currently classified as a lower middle-income country. A little over a year ago, it was an upper middle-income country for one year because it was very close to the border. Because of changes in the exchange rate, it can move around that threshold.
-What does the classification mean and how does it affect Mongolia? -We do not use it in any kind of mechanical way for our lending decisions, although some donors and particular trust fund programs might use it in a mechanical way.
We do use the main number which makes that determination, GNI per capita, as part of our determination of eligibility for different types of programs and lending rates. For example, the IDA allocations are influenced by GNI per capita. Mongolia is now at the point where it could access international credit markets and it has done so. However, because it is a commodity dependent country, and one whose economy is subject to fluctuations in international prices for those commodities, Mongolia is still considered eligible for IDA funds even though it is right around the border between upper and lower-middle-income countries.
-Mongolia`s share in IBRD, a member of WBG, has been increased recently and Mongolia`s voting share is now 0.06%. How has IBRD cooperated with Mongolia before? What is the total amount of financing provided? -IBRD is the International Bank for Reconstruction and Development that is the original body of the World Bank Group. We implement projects together with IDA which is another part of the World Bank Group which lends at the most favorable terms for low-income countries, or lower middle-income countries. In some ways, everything we have done since 1991 has been cooperation with IBRD because IBRD is administering the projects on behalf of IDA.
All of Mongolia’s borrowings from the World Bank since 1991 have so far been on IDA terms. But Mongolia is now also eligible for IBRD terms which are the lending that is usually used for countries that graduate from IDA and become credit-worthy on their own. So, if you think of larger, wealthier, middle-income countries that still work with the World Bank, they usually borrow directly from IBRD. At the moment the terms are very favorable because global interest rates are very low. This is something Mongolia is eligible for but has not yet used.
-The World Bank Group members IFC and MIGA provided $2.2 billion loan guarantee to Oyu Tolgoi. Has Oyu Tolgoi ever used this guarantee? -IFC provided loans including loans on their own behalf and syndicated loans on behalf of other members totaling $1.2 billion, not exactly a guarantee. MIGA provided $1 billion guarantees. MIGA is the arm of the World Bank Group that provides certain types of insurance, called political risk insurance, to help encourage companies to invest in places all over the world. The size of both the IFC and MIGA support is very large for both organizations and it really reflects the confidence that World Bank Group has in Mongolia`s future prospects.
WORLD BANK SOON TO IMPLEMENT SECOND ENERGY SECTOR PROJECT
-You said that lately, projects have shifted more to IT development, connecting rural areas to high-speed Internet. Could you please elaborate on this? -Our program evolves as the economy evolves. Those initial projects were really put together in order to help the economy keep moving in a very difficult time. By the late 1990s until 2000, the needs were changing. In 1997 at the time I left, mobile phones were just beginning to be used in Mongolia. To me, as an American, it sounded like a great luxury. But the fact is that the infrastructure for the telephone system was not widely developed made Mongolia a good market for mobile phone companies because people often did not have landlines. Into the early 2000s, in urban areas, it expanded very well. But the rural areas had still very weak penetration of telephone services. In 2005, only about one percent of people in the countryside had access to modern telephone services. The World Bank’s Information and Communication Infrastructure Development Project set up a type of PPP model to demonstrate that there was a market in rural areas for modern telephone and ICT services. By 2013, all soum centers had modern phone or Internet services.
-You mentioned in another interview that the World Bank will be supporting solar power plants. What projects are being implemented/discussed in this respect? -We have a project which we think will be approved in the next few months called the Second Energy Sector Project. As you can guess from the name, we had an energy project in the past which supported upgrading of distribution networks. The Second Energy Project will also focus on upgrading distribution networks of two of regional distribution companies. In addition to that there will also be a component to support a solar power plant in the Western aimags and this will be supported by a grant from Scaling up Renewable Energy Program. This will be financed both by the World Bank and ADB. The project will be implemented by the Government.
The World Bank also supported the Government`s 100,000 solar gers program in the past which was a perfect solution for people out in countryside who move around and cannot access electricity in other ways. It has been a model also for other countries.
STRONG REGULATION PLAYS VERY IMPORTANT ROLE IN ADDRESSING POLLUTION
-Air pollution is a critical issue at everyone`s attention. World Bank has a project on air pollution. However, people are demanding more action as the pollution keeps increasing. What mistakes have made in the past in your opinion to worsen the problem? -I think first we should think about what was done right. I would say that the one things Mongolia did right were that some years ago they looked into their situation scientifically and in detail. We supported the government in analyzing and understanding the main sources of the air pollution as well as the health impacts. Then the government worked towards putting together a strategy to try to reduce the pollutants. Mongolia`s air pollution is mostly a wintertime phenomenon and it is heavily influenced by weather patterns. The main source of the worst pollutant, which is PM 2.5, is the incomplete combustion of the fuel. So the World Bank and other donors including MCC, JICA, and others supported a program trying to introduce stoves which more completely combusted the fuel.
As the stoves were introduced in years past, the average level of pollution actually was reducing. But at the same time, the city was growing extremely rapidly and it continues to grow rapidly. As the stoves programs ran their course, fewer were distributed and many were resold and were used somewhere else outside of the city. At the same time, the city was expanding rapidly. All of these factors came together this year to make for a very difficult winter.
But so far it has been optional whether or not to use a low polluting stove or a high polluting stove. When you address something like pollution, there is a very important role for strong regulation. In the US, we also used to have terrible pollution in the cities in 1960-1970s. A combination of many different measures, including strong regulation over the emissions from cars, helped to reduce the air pollution. In Ulaanbaatar, the same needs to be done: There needs to be more control over the high polluting stoves.
I should mention also that the low polluting stoves have gotten much better over time. Researchers are still working and experimenting with ways to design the stoves so they produce even less pollution.
Whenever possible solutions are being discussed to address the air pollution problem, they should be very carefully evaluated scientifically and economically to be sure that they are solutions that actually produce results.
-The city officials decided to prohibit the migration to Ulaanbaatar city from rural areas. What is your opinion on that? -Many other countries in East Asia have such prohibitions. What we often find, however, is that this just leads to corruption because people move anyway, but they need to get their children into school and do other things and need to get permissions. The freedom of movement, which is a fundamental right, is something that I think is very important and should not be infringed. This does not mean that you can just come in and set up anywhere and in an uncontrolled way. But I think that allowing people to move and take opportunities to improve their lives is something that should continue to be allowed.
I WOULD NOT SAY THAT WORLD BANK IS SOLELY A FINANCIAL ORGANIZATION
-What are the main sources of World Bank revenue? -For IBRD, the World Bank issues its own bonds so it borrows on international capital markets and then lends it out to countries so that countries are able to borrow at a rate less than they would if they would go to be international capital market themselves. This is because of the World Bank’s high credit rating of AAA.
For IDA, because it has such favorable terms with very low-interest rates and long repayment periods, it needs to be replenished every three years. This replenishment comes from member countries that are donors to IDA. The biggest donors are the UK, USA, and Japan. Every three years those countries and others make their own contributions so that the amount of money that IDA can use to lend at these very favorable terms to countries like Mongolia is still available for others.
-Is World Bank influenced by the ideology of donor countries when it makes decisions? Or is the World Bank only a financial organization? -We are a non-political organization which means we are created to support economic development in our member countries. I would not say that the World Bank is solely a financial organization as our main mission is to fight poverty and boost shared prosperity which means, basically, focusing on people at a lower end of the income spectrum to help support their lives. Over time we have broadened our mandate and now we support decentralization, social accountability, and different aspects of governance. But we are not political and do not choose sides and favor parties.