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Mongolian Economics

Mongolian Economics

July 1, 2010 1:59 pm1 comment

So being in Mongolia has been a bit of an affirmation of Friedman economics for me, not that I had such a problem with them before but Mongolia takes the models to such an extreme that it provides a willing test subject and performs very well.

We pulled into Ulaanbaatar (UB) by train at about 6 in the morning and we got off with a bunch of Mongolians from the north (we were the only car coming from Russia, read: Westerners), who all got off with various barrels and boxes and other goods they were presumably bringing to market. UB is a giant, sprawling city that has literally grown out of nowhere since independence in 1990. The Soviets built some housing and some government buildings, but post-1990 the city has been a conglomeration of impromptu homes from immigrants from the countryside. Our guide, Ganz, met us at the train station and we right away got something to eat and then started our 5-hour drive to the south desert to spend the night in a yurt with a nomad family. Ganz explains to us that the city has doubled in population in the last 10 years, and in the next 10 will double again. More interestingly, he says that 10 years ago there was no word in Mongolia for “traffic jam”–in other words, the growth of the conglomeration has outpaced the construction of infrastructure. We leave the city and less than 10 minutes outside of it there is an open steppe…literally miles and miles of empty land with an occasional yurt and herds of sheep, goat, cows, horses, and even camels, every once in a while. The massiveness of the land compared to habitation is hard to describe. In a 5 hour drive from the biggest city in Mongolia, we passed 2 villages on the road (there’s only one paved road from the city south), and saw maybe 5 people apart from that. In a country of 3 million people, 1.5 million live in UB and the rest in a countryside stretching 600,000 square miles—thats 2 people per square mile. So you can imagine how empty most of the land is.

When we’re in the car during the 5 hour trip, I start asking Ganz about the land, how people buy land, what the role of the government/taxation is, etc. Of course I’m thinking summer home/real estate. He told me that no one owns any of the land, except in UB where you have to have permits to build. I asked him if I could build a fence anywhere I wanted on the land, and call it my own, and he said theoretically I could, but no one does that. Why not? Well, 30% of Mongolians still are nomadic herders, and move 4 times year with the seasons to herd their flocks and provide meat, dairy, skins, etc for their needs and sell to others. The economy of Mongolia in 1920 was 95% herding and 5% other (manufacturing, etc), but the Soviets, to their credit, started a centralized system of education, governance, and industrialization which led to 30% of herders today, and within 10 years probably 15% of Mongolians will be herders. To encourage the “Traditional” Mongolian lifestyle, the government subsidizes herding, essentially, by not requiring the nomads to pay taxes. As a result, a fair number of herders still exist, but they still, if they can, go to UB or another city and pitch their yurts on the outskirts looking for jobs. You can see in UB, the further outside the center you go, the higher the ratio of temporary (yurt) housing to permanent housing, as it is apparent that the city is a very new, very fast growing, conglomeration as people move in from the countryside to find jobs.

So I had a couple questions for Ganz, some of which he answered and some of which he didn’t. First, I wanted to know how much land cost in Mongolia, and his answer suggested that it didn’t cost anything, but you have to pay taxes if you have permanent claim to any land. I figured that in a place where land was a nearly unlimited resource, it essentially had no value, and no one felt that they owned any land except in places, like UB, where land was in competition. In other words, within the same country you can see the extremes of land ownership and value (the city) contrasted with the extremes of non-land ownership and value (the countryside), based on the same basic economic principle. Foreigners can go to Mongolia and pay the government $50/year per hectare to “own” land–although the government only allows “leases” for foreigners. The government thus extracts revenue on the valueless land (is this right?) through taxation. So that was interesting.

We spent the afternoon and night with the nomad family, who spoke no English but Ganz translated. One of them asked at what age in the US do we learn how to ride horses, which I found amusing–horses, to Mongolians, are like cars in the US, it’s a right of passage to be a good rider. The kids in the countryside start riding at age 5. The business of this nomad family was herding, like all other nomads, although, as Ganz explained, they are more successful than most. They have an above-average number of animals (2 or 3 hundred) and sell surplus meat, dairy and wool, making money to buy provisions, more animals, and a cool satelite TV hookup in their yurt which gets 18 channels. They have 3 children, 2 of whom talked to us about wanting to move to the city when they finish school and get a job in UB…their parents support them. The only reasons the parents haven’t done it is because they have no skill set outside of herding that they could sell in a labor market, like many of the unskilled laborers who go to UB every year to find jobs. This family also supplements their income from hosting tourists like us. So for herders, they have an above-average income. What I found interesting was that their “lifestyle”–which you could really call a job–existed, as Ganz said, for them and for their own. They did not have ambitions toward stable production, or a desire to make five times as much money staying in one place, settling down and doing a western ranching model. I asked Ganz why, and didn’t get a straightforward answer, but my guess is that with the government subsidizing nomadic herding, there’s no reason for people to do anything to cover expenses aside from their basic needs. The greater needs of the economy aren’t being met.

Which brings me to my ultimate surprise: In this country of 5 million animals for 3 million people, 70% of meat is imported! That tells you that Mongolia isn’t producing at the capacity it should, and it has ultimately to do with the unwillingness of people with a herding skillset to setlle down in a production-oriented industry like ranching. Why is this? Ganz told me that some farmers, in particular, have started to adopt western crop models and have been increasing their yields and their wealth–clearly the stationary farming model is more productive. Why haven’t herders realized the stationary herding (ranching) model? Certainly, if I told my ranching friend in Montana that he could move his ranch to Mongolia for one tenth of the price, hire ten times as many herders and quadruple his profits, he would jump at that opportunity. Why hasn’t a clever nomad decided to undertake such a ranching model? And spare me the romance of the noble nomad, loving the culture of the herd and embracing glorious Mongolian culture. Clearly most herders or their children, when given a choice, choose to move to UB and get a job.

I haven’t figured out the answer yet, but Ganz speculated that eventually there will be ranches and the herding model will stabilize. It helped, he said, that two years ago there was a giant animal blight and 20% of animals in Mongolia died–he said it was a tragedy, but ultimately proved that nomadic herding is unsustainable and helped to move people to establish sustainable careers. Ganz is a bit right wing, and has his own tourism business with 8 employees and makes, by his estimation, a middle class wage. His parents were nomads, but he went to the city after school and learned English, eventually becoming a tour guide. He’s quite the Reaganite as well, which is humorous. His Uncle makes and sells ornate jewelry and is pretty good at it.

When we came back to UB, we discovered the raw growth of the city–how traffic laws aren’t enforced because no one understands them, how the biggest building in UB is still empty because they built it crooked and couldn’t install an elevator, how everything is either Soviet-era ugly or under construction, but there’s a beauty to the city in its spontaneity.

Ganz estimates that by 2020, only 5% of Mongolians will be nomadic herders, a complete reversal from 100 years ago. This, I believe, is the ultimate affirmation of the idea that efficiency in the economy will be reached despite the attempt to subsidize a different economy, because people ultimately adapt and move toward different industries. I guess the biggest mystery to me, right now, is why these “unskilled” nomads don’t adapt herding to a sedentary model, where they can still herd but can make five times as much money doing so. Perhaps, when the romance of moving to the big city subsides, many former herders will take their education and go back to the countryside, creating a new “traditional” ranching economy that is more efficient and will ultimately bring more wealth to themselves and the economy.

These are not coherent thoughts but just my rants and musings. Anyway, what do you think?

1 Comment

  • Is the nomadic model really less efficient? Ranching in the Southwest especially used to be quite nomadic; the main change has come from the fact that cattle feed has gotten much, much cheaper relative to the cost of land. If you keep a bunch of herd animals in the same place they cannot subsist on the output of that plot of land, even with modern irrigation and fertilizer. The way ranchers make it work is generally by buying cattle feed and giving it to the animals. Even grass fed cattle are fed by intensively irrigating the land in order to maximize yield.

    If you’re a rancher in Mongolia, where the land is free, I don’t know that there’s much benefit to keeping your cattle in one place. Doing so means either investing in irrigation, which is very expensive, especially in a country where it sounds like there is very little industry and infrastructure, or feeding your animals purchased animal feed, which is likewise probably more expensive in absolute terms than is feed in the US. Not to mention that being nomadic protects from the adverse effects of localized droughts or floods.

    Herds move around in the wild, and most herding people everywhere in the world have moved with their herds. They haven’t done this because of the romance of the lifestyle or ignorance of settled farming techniques, they’ve done so because it made sense to do so given the costs of land, labor and feed.