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The Sweet Smell Of Failure: The World Bank And The Persistence Of Poverty

Paper delivered to the School of Politics and Government, Birkbeck College, University of London, London, UK, 2000

“… aid is no longer charity. It has become intrinsic to the maintenance of the international capitalist economy … (Fieldhouse 1999).”

By David South

In January 1949, US President Harry Truman set forth a challenge for the remainder of the 20th Century: the wealthy nations must aid the poorer ones to become wealthier and more democratic: in short, to become like the United States (Starke 2001: 143). The means of accomplishing this was to be international development, and its tool, foreign aid.

Decades later, this dream was being described as a nightmare. One of the most articulate proponents of the aid-is-waste thesis is Graham Hancock. His Lords of Poverty comes down unequivocally on the side of failure. Hancock argues that aid “is a waste of time and money, that its results are fundamentally bad, and that – far from being increased – it should be stopped forthwith before more damage is done (Hancock 1996: 189).”

Hancock originally wrote those words in 1989. Subsequently, a decade has past where international development organizations have attempted to prove the success of development in a wider context of the collapse of the Soviet Union, a crippling economic crisis in Asia and the former Soviet Union, and dizzying changes in information technologies. In addressing the proposition that “by the end of the 20th century, ‘development’ had failed”, it is important to clarify the underlying intentions of interntional development and whi the true actors are, and the interaction of politics and economy.

This paper will focus on one actor, the World Bank, which has seen itself as the principal international development organization for the past 55 years. I argue that the World Bank has been very successful at building a dependence on development institutions, itself in particular, but has failed at development as it has defined it: the elimination of poverty. The four main power structures underpinning the world economy described by Susan Strange – security, production, financial, and knowledge (Strange 2000: 43-119) – are each addressed by the World Bank’s programmes to varying degrees of success. It is the World Bank’s interaction with these power structures that have been a source of both stability and instability in the past 55 years.

I have chosen the World Bank because, as Hancock notes, it is

The pace-setter of Development Incorporated … the fact is that all official aid agencies, whether bilateral or multilateral, co-operate very closely with it, imitate its policies and its sectoral priorities and, to a large extent, share what might be called its ‘philosophy of development’. (Hancock 1996: 57)

I conclude that international development is now entering a new phase spurred on by the economic crisis affecting many developing nations after 1997, and not facing its destruction, in spite of rowdy protests around the world. The Asian Crisis provoked an increase in development spending, while simultaneously significantly raising awareness of international development institutions. At the beginning of the 21st century, the rise of the non-governmental organization as a key actor in development is strongly pronounced.

The fact that NGOs and private consulting companies are becoming the principal delivery mechanisms for development projects demonstrates a global lack of faith in government-run agencies and a belief in neo-liberal assertions that the private sector can do a better job.

1. Development: pernicious or persistent? 

The word development needs to be pulled apart. Its endurance as a concept comes down to its ability to mean many things to many people. It is a loaded word, which upon closer inspection, becomes befuddingly vague and as slippery as an oil-soaked eel.

Development as defined by President Truman at the start of the development period of the 20th century meant “nothing less than freeing a people from want, war, and tyranny, a definition it is hard to improve on even today (Starke 2000: 153).”

Dictionary definitions of development take in ideas of growth, progress and evolution. As Hancock noted in Lords of Poverty, “underdevelped” countries “must in some sense be stunted and backward; ‘developed countries’, by contrast, are fully grown and advanced (Hancock 1996: 41).” Hancock bristles at the moralistic notion that particular countries may need to develop; in this he would probably have clashed with Marx, as Fieldhouse notes: “much as he hated capitalism, Marx saw it as a necessary agency for creating what we now call development in India and, by inference, most parts of the Third World (Fieldhouse 1999: 44).”

A refinement of this definition is one offered by the World Bank’s president in the 1980s, Barber Conable. Development offers measures “to promote economic growth” and “combat poverty”; those are the “fundamental tasks of world development” with the World Bank being the “world’s principal development agency” (Hancock 1996: 41).

More recently, in answer to heated criticism from donor nations and powerful NGO lobbies, the World Bank has adopted a more urgent tone on poverty. “Poverty reduction is the most urgent task facing our world today. The World Bank’s mission is to reduce poverty and improve living standards through sustainable growth and investment in people (World Bank 2000).”

Assessing development according to the World Bank’s definition of development, with its focus on eliminating poverty, it is very hard to say this has been a success, as I show further on.

2. Failure thesis: why the World Bank is a flawed poverty-fighter

The notion that development has failed has its critics on both the left and the right. On the right, development is seen as state welfare, bailing out countries that need to get their own houses in order. On the left, development has been seen, variously as a tool of the wealthy states to control the poorer states, a means to prop up corrupt but friendly elites, environmentally destructive, and a subsidy system for multinationals. Marxists have straddled the contradictions of criticising the effects of development while also chastising the wealthy West for not doing enough for the developing nations.

Since 1990 World Bank cumulative lending has totalled US $162,789.3 million (World Bank Annual Report 2000). Since its inception, global aid has risen from US $1.8 billion a year in the 1950s, to US $6 billion in the 1960s, to US $60 billion in the 1980s, to where it currently stands at US $129.2 billion (World Development Indicators Database). The Bank disburses US $25 billion a year (World Bank). Vast amounts of money is flowing back to the West in the form of payments on debts nearly totalling US $3 trillion (Starke 2000: 153).

In fact, the World Bank through its lending wings, the International Bank for Reconstruction and Development (IBRD) and the International Development Agency (IDA), embodies an inherant contradiction: it has shown itself to be unable to decouple its mandate to recover funds from what might be the wiser strategy. As the Bank puts it, “while the country must “own” its vision and program, the Bank must “own” and be accountable to shareholders for its diagnosis and the program it supports (World Bank).”

Over the development epoch, loans were accepted by countries that have shown themselves to be incapable of repayment, leading to the debt crisis today. While this crippling debt has been accumulated, the world has come no closer to eradicating poverty.

A brief look at the figures shows the scale of the challenge. Development policies have not been able to come to grips with escalating population rates in developing nations. During the period of development, the population of the regions with the lowest rates of development have risen rapidly. As Strange notes:

World population doubled between 1950 and 1984, rising rapidly from 2.5 billion to over 4.5 billion and topping 5 billion by the end of the decade… Numbers have increased most dramatically in the three ‘developing’ regions of Latin America, South Asia and Africa … (Strange 2000: 82)

Aid on the macro scale is also unequally divided, with the 10 countries that two-thirds of the world’s poor live in receiving less than a third of overseas development aid (Raffer and Singer 1996). And when it arrives in a country very little of it gets into the hands of the poor. Some generously claim that 20 per cent of aid reaches the poor (Raffer and Singer 1996), while Hancock maintains even less wends its way to the poorest.

According to the United Nations Development Programme, more than 1.3 billion people live on just US $1 a day; and 2.8 billion live on US $2 a day – nearly half the world’s population (UNDP). This number has remained unchanged since 1990 (Starke 2000: 4). In fact, in sub-Saharan Africa, South Asia and the former communist countries, “the number living in poverty is substantially higher than the figures recorded a decade ago (Starke 2000: 4).” The most noted trend is the diffusion of poverty and its more pronounced ability to sit side-by-side with an economic boom in developing – and developed – countries, fuelled by increased investment, especially in the areas of information technology and telecommunications.

The World Bank has set the target date of 2015 to cut extreme poverty by half. It remains highly dubious as to how the World Bank has any better idea of how to do this than it did in the first 55 years of development theory and practice. Theories have been misguided in the past, as Fieldhouse reminds us:

Central to all post-1950 attitudes to Third World development was the belief that the primary need was capital investment. The defining feature of underdevelopment was thought to be lack of sufficient capital to pay the cost of overcoming the perceived ‘structural’ obstacles to development. A short shopping list of what were then believed to be the necessary measures would include the following: first, the improvement of infrastructure – communications, power and water supplies, urban facilities and hospitals; secondly, education to raise the general level of literacy and to generate skilled workers at all levels, from the highest posts in government and industry, which was believed to be the basis of western affluence and must therefore become that of the Third World. (Fieldhouse 1999: 226)

It has been a period noted by a belief that development could be accelerated, and that the conditions necessary for development were understood and all that was necessary was capital and will.

In fact international development, when it has intended to eliminate poverty, has been unable to detatch itself from what can only be called the whirlpool effect, or the core-periphery debate: a tendency for wealth and power to be dragged into the centre, like a whirlpool: to wealthier nations, wealthy elites, capital cities. While aid is ostensibly about countering this trend, it fails miserably at doing it. The continent that requires the most aid, Africa, receives the least – in the 1990s the World Bank lent Africa a total of US $1,872.8 million (World Bank). It lent Latin America and the Caribbean US $51,520.8 million (World Bank). If, as Truman said, development is about helping those suffering from want, war and famine, then Africa is being ill served.

Looking at the evidence, it shows that aid follows the same pattern as private investment, seeking out success stories, rather than the poor, who by definition are society’s losers. It is an established fact that most trade flows and foreign direct investment is between the wealthy countries (Hirst and Thompson 2000: 2). The percentage of world trade captured by the developing countries has dropped from 50 per cent in the 19th century to 22 per cent (Hoogvelt 1997: 14). It is this tendency that builds into international development a peripherising effect that leaves billions on the outside of development and wealth acquisition – and draws the criticism that development has failed at its principal aim, as the World Bank puts it, to reduce poverty.

3.  Security/production

Strange has noted where power lies in the modern world. Those who can influence or determine the structures of power will wield enormous influence over economic and political relations. The World Bank is an institution that has had a profound effect on the power structures of the world economy, with positive and negative consequences.

Security is the “provision of security by some human beings for others (Strange 2000: 45).” Strange focuses on the state as the primary provider of this security in the current international political system. She also broadens this definition to include “security from slow death by starvation, and security from disease, from disablement, or from all sorts of other hazards – from bankruptcy to unemployment (Strange 2000: 47).” And she attributes most conflict to disagreements over authority.

One of the biggest challenges now facing developing states is that of authority over their affairs. It is a two-pronged challenge, from outside and from within, as much of development aid now targets NGOs and civil society.

It is arguable that the World Bank’s greatest contribution to a state is its advice on governance, legislation and anti-corruption. While the World Bank is not tasked with a specific security mandate, it does play a significant role in supporting the viability of nation states, and offers up an off-the-shelf range of authoritative institutions that nation states are advised to take up. Through Structural Adjustment Loans (SAL) and their equivalents, countries are persuaded to adopt these measures or face losing the lifeline of funds.

These policies also dovetail with global concerns for security and stability, in terms of the absence of conflict and also in terms of predictability. Other governments will feel more comfortable dealing with philosophies and institutions that ring of familiarity. But how susccessful has the World Bank been?

Evidence has shown that the SAL loans and their package of reforms were destabilizing and inherently contradictory. As Hoogvelt illuminates:

they sought to denationalize the economies themselves by imposing various forms of deregulation, liberalisation and privatisation, indeed the dismantling of the public sector … At the ideological level it made the bailiffs walk a tightrope between, on the one hand re-affirming the notions of national sovereignty and national economy, while at the same time, and on the other hand, confining development economics and any hint of Keynesian notions of national economic management to the dustbins of history. They had to uphold the state and destroy it at the same time! (Hoogvelt 1997: 167)

The results have actually jeopardised security within Africa, and according to Robert Kaplan, the chaos on that continent will wreck havoc outside Africa as well (Kaplan 1994). Security is probably the World Bank’s greatest failure in the four global power structures. Hoogvelt concludes that its legacy in Africa is particularly disturbing:

In many African countries, the imposition of the neo-liberal orthodoxy, including privatisation of the public sector, the emasculation of the state apparatus and the insistence on electoral reform, has directly contributed to the descent into anarchy and civil wars. (Hoogvelt 1997: 175)

Production as Strange states it, is “the sum of all arrangements determining what is produced, by whom and for whom, by what method and on what terms (Strange 2000: 64).” Production is a bright spot for the World Bank, in that conventional economic statistics have shown a growth in production (even after the 1997 Asian crisis), fuelled by increasing investments in telecommunications, information technologies and greater investment in public utilities (Hirst and Thompson). The World Bank has also an extensive history funding infrastructure projects critical to the functioning of a modern economy, including roads, dams, airports, and ports. There is an extensive literature on the corruption and inefficiency of many of these projects, but at a minimum infrastructure was built.

The World Bank has been “able to profoundly affect the organisation of production and trade in the periphery to the benefit of the core world capitalist system (Hoogvelt 1997: 166).”

During the World Bank’s tenure, foreign direct investment has gradually increased for these states, but because of an intensification of trade between the wealthy nations, the global distribution of GNP has,

changed little over the 1970s and 1980s, and indeed became more unequal rather than less after the 1970s. What all this shows goes against the sentiment that benefits will ‘trickle down’ to the less well-off nations and regions as investment and trade are allowed to follow strictly market signals. (Hirst and Thompson 1999: 71)

At a minimum, links have been built and could be the basis of a re-alignment of the world economic order under fairer terms. Hoogvelt notes the links are unquestionably tight:

Structural adjustment has helped to tie the physical economic resources of the African region more tightly into servicing the global system, while at the same time oiling the financial machinery by which wealth can be transported out of Africa and into the global system. (Hoogvelt 1997: 171)

4.  Financial/knowledge

Strange calls financial power the ability to “create credit”. It “implies the power to allow or to deny other people the possibility of spending today and paying back tomorrow, the power to let them excercise purchasing power and thus influence markets for production, and also the power to manage or mismanage the currency in which credit is denominated (Strange 2000: 90).”

The World Bank’s vast lending capabilities, as shown earlier, means the Bank literally has the power to switch the lights on or off in a country’s economy. It has also been in the forefront of creating today’s “casino” economy, as Strange calls it, the 24/7 financial markets. It has served the interests of the core economies in this arrangement, as Hoogvelt elaborates:

In a world economy dominated by global financial markets, by money careening around the globe at a frenetic pace, the principal national economic objective of the core countries has to be, and indeed has become, one of maintaining the competitive strength of their currency vis-a-vis each other, fighting domestic inflation that threatens this competitive strength, and trying to catch as much as possible of the careening capital flows into the net of their domestic currency areas. (Hoogvelt 1997: 165)

As Fieldhouse reminds us, “In the later twentieth century, in fact, the World Bank and the IMF were the main proponents of free trade and other related principles in the less-developed world. They thus filled the same role as Britain had done a century earlier (Fieldhouse 1999: 20).”

After World War II, it became apparent the world financial system was not going to be able to function with a hands-off United States. The Marshall Plan in Europe established the precendent of significant loans to aid countries to economically “recover”. As these two influential World Bank economists wrote, it was partly about creating conditions amenable to investors’ interests: “Thus, basic fiscal and monetary discipline, including a properly managed exchange rate, helps establish the credibility of economic policy that gives entrepreneurs the confidence to invest (Stiglitz and Squire 2000: 386).”

And they confirm the whirlpool effect: “Entrepreneurs will not invest in countries where the policy regime is unstable – investors require a degree of certainty (Stiglitz and Squire 2000: 386).”

The World Bank since 1996 has called itself the “Knowledge Bank”, because “We live in a global knowledge economy where knowledge, learning communities, and information and communications technologies are the engines for social and economic development (World Bank).”

In many respects, the World Bank has defined development as most people understand it. As Hancock reminds us, “Consciously or unconsciously we view many critical global problems through lenses provided by the aid industry (Hancock 1996: xiv).” Knowledge and intelligence-gathering is key in an age dominated by information. As Clark notes of development organizations,

The ‘software’ of their trade – ideas, research, empowerment, and networking – are rapidly becoming more important than their ‘hardware’ – the time-bound, geographically fixed projects, such as wells and clinics. In this new age, information and influence are the dominant currencies rather than dollars and pounds. (Clark 1992: 193)

The vast volume of statistics and reporting produced by the Bank on the global economy is valuable and it is frequently used as a source even by its critics. This quite possibly is the Bank’s greatest success. The Bank’s focus on information technologies is also valuable and it is aiding developing countries around the world to gain access to the internet for example. Keohane notes that information by its very existence can generate greater cooperation between states:

Informaton, as well as power, is a significant systemic variable in world politics. International systems containing institutions that generate a great deal of high-quality information and make it available on a reasonably even basis to the major actors are likely to experience more cooperation than systems that do not contain such institutions … (Keohane 1984: 245)

Conclusion

Like a chameleon, the political and economic actors in development change their appearance according to evolving conditions. I have argued in this paper that the fundamental needs – a desire for markets, global interconnectivity and political control – ensure the World Bank’s role in international development remains principle to the day-to-day lives of developing countries. It is also a fact that development organizations such as the World Bank have amassed a wealth of knowledge and expertise that binds donor nations to them, though this is being supplanted by NGOs as they in turn create a dependency between themselves and the World Bank.

The World Bank’s greatest success has been the perpetuation of the development industry and its role vis-a-vis the global power structures. It is particularly remarkable that development aid has been so robust for such a lengthy time, and points to the key needs in the power structure that it fulfils. However, the World Bank has failed to significantly reduce poverty in the world, and since it defines development as principally poverty reduction, its form of development has failed.

Development aid in and of itself is a highly successful formula, as attested by the boom currently experienced by NGOs. The trend towards these new actors is well advanced, as The Economist noted: “NGOs have become the most important constituency for the activities of development aid agencies (The Economist 2000: January 27).”

Even more compelling, “Between 1990 and 1994, the proportion of the European Union’s relief aid channelled through NGOs rose from 47% to 67%. The Red Cross reckons that NGOs now disburse more money than the World Bank (The Economist 2000: January 27).”

Unfortunately, there seems to be little evidence that any organization working in development will be out of a job by 2015. In the meantime, the poor remain peripheral actors in a play staged for the benefit of those who are not poor. As Fieldhouse notes:

Thus aid is no longer charity. It has become intrinsic to the maintenance of the international capitalist economy, a system by which western governments directly or through multilateral agencies, mobilize debtors so that they can continue to meet their obligations to both public and private creditors. (Fieldhouse 1999: 253)

Pax Chaotica: A Re-evaluation of Post-WWII Economic and Political Order

In The Interests Of The Exploited?: The Role Of Development Pressure Groups In The UK

A Steppe Back?: Economic Liberalisation And Poverty Reduction In Mongolia

ORCID iD: https://orcid.org/0000-0001-5311-1052.

© David South Consulting 2017

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A Steppe Back?: Economic Liberalisation And Poverty Reduction In Mongolia

Paper delivered to the School of Politics and Government, Birkbeck College, University of London, London, UK, 2000

“… the neo-liberal claim that transition is most successful in situations where state organs wither away is highly problematic. The state, it seems, is required as a fundamental regulatory formation in transition (Pickles and Smith 1998: 15).”

By David South

This paper will explore the profound weaknesses of economic liberalisation as a tool of poverty reduction in the developing world. I have chosen to explore the experience of the Northeast Asian nation of Mongolia; a country sandwiched between Russia and China which has been held up as an example of how economic liberalisation policies and strong personal freedoms can help a country make the transition from a command-based Communist country to free markets and democracy (UNDP Mongolia: The Guide 1997-1999). I argue that the slate of policies that constitute economic liberalisation (or “shock therapy”) in the 1990s – privatisation, price liberalisation and a free-floating currency – are, by themselves, poor mechanisms for the alleviation of poverty; that in fact they increase poverty rates and leave a legacy of weak institutions that are either unwilling to or incabable of helping the poor. The author will also draw on firsthand evidence gained while working in the United Nations mission in Mongolia for two years.

Economic liberalisation policies have been inhibited from alleviating poverty by the cultural legacy of Mongolia’s economic development, which has de-emphasised private property and a money-based economy and placed a high emphasis on wealth being held in herds of animals and goods exchanged by barter.

Mongolia, with its relative isolation and small population of 2.4 million (Human Development Report Mongolia 2000: 55), has been seen as a self-contained petri dish by economic liberalisers hoping to incubate a robust transition to free markets and democracy that can serve as an example to other post-Communist states.

Mongolia’s journey towards neo-liberal ideas is unique. Unlike many other developing nations, Mongolia’s lively democratic movement that emerged at the end of the 1980s actively sought out these policies, and has enjoyed strong and widespread public support for them (though this has ebbed and flowed with the economic fortunes of the country). The 1996 election was fought and won by the Democratic Coalition based on these policies; the Coalition won 50 of the 76 seats in Mongolia’s parliament, and voter turnout was more than 90 per cent (Far Eastern Economic Review 1997: March 27). Thus, this is not a case of international institutions forcing upon a country policies against its wishes: the door was opened and the economic liberalisers were effectively invited in for a big bowl of fermented mare’s milk.

However, it is also a country in which economic liberalisation has failed to deliver anticipated reductions in poverty for the majority of the population, and a strong case exists that it has made things worse.

As the Human Development Report Mongolia 2000 states:

In recent years however, the predominant vision has been neo-liberal. Backed by some international donors, reformers have argued that the best thing the state can do is to largely withdraw from the economy – by rapidly privatising state enterprises, and dismantling as many regulations and controls as possible, and allowing market forces to determine the production and allocation of goods and services. (Human Development Report Mongolia 2000: 13)

Liberalisation policies in Mongolia: A potted history

With the fall of the Soviet Union at the beginning of the 1990s, Mongolia woke up to find itself without its financial benefactor for most of the 20th century, Russia, and in the grip of a severe economic decline (Rossabi 2000: 9).

But a new “big brother” was at hand. In 1991, economic liberaliser Jeffrey Sachs arrived in Mongolia (Fortune 1998: December 7). The arrival of Sachs and his ideas were to have a profound impact on the lives of Mongolians. He gathered a group of well-educated Mongolian economists to test economic liberalisation theories.

Smith and Swain neatly summerise the source of economic ideas for the transition states:

The roles played by Francis Fukuyama (1992), formerly of the US State Department, and Jeffrey Sachs (1990), as policy adviser … translated this agenda into the all too familiar programme of so-called ‘shock therapy’. Shock therapy has been based on the view that capitalism could be … imposed by fiat and that the unleashing of the power of capital will inevitably allow the institutions, regulations, habits and practices associated with the ‘normal’ functioning of a capitalist market economy to emerge (Smith and Swain 1998)

The economic liberalisation project in Mongolia can be split into two distinct phases. The first more tentative phase under the Communist government extended from 1990 to 1992 and included privatisation of some state firms, the issuing of stock-market vouchers to most of the population and a failed attempt to enter the foreign currency markets (as a result of which 80 per cent of the country’s reserves were lost). This phase coincided with a new constitution, democratic elections and significant improvements in personal freedoms.

The economic liberalisation project encountered serious difficulties from the start, and when all aid and subsidies from the Soviet Union were removed, the economy collapsed, with inflation spiralling to 320 per cent (Human Development Report Mongolia 2000: 13). Pro-economic liberalisation factions in the Communist government lost influence and the reforms stalled from 1992 until 1996, when they were re-started with a vengeance with the election of the Democratic Coalition. The Coalition was assembled from a hitherto fragmented opposition by the Washington-based International Republican Institute and mimicked the policies of the American Republican Party, including distributing a Newt Gingrich-style “Contract with the Mongolian Voter.”

The second phase of reforms, under Democratic Coalition Prime Minister M. Enkhsaikhan, was launched with the removal of price controls on fuel and electricity, increasing prices by 50 per cent (Rossabi 2000: 11). This phase of economic liberalisation also ran into difficulties, but its most successful policy achievements have been the privatisation of public housing, the removal of trade tariffs and the reining in of inflation.

Poverty and economic liberalisation

Prior to the introduction of economic liberalisation, there was no extreme poverty in Mongolia, though it is difficult to gauge relative poverty since this information was not gathered. Rossabi notes, however, an extensive public welfare system was spread throughout the country:

The Mongol economy required substantial subsidies from the Soviet Union. This command economy produced inefficient industries, few consumer goods, and scant increases in the size of the Mongol herds. The one-party system limited dissent and contributed to human rights abuses. On the other hand, the government provided extensive medical, educational, and welfare benefits to the young, women, the elderly, and indeed much of society. A growth in population, a longer life span, and high rate of literacy were byproducts of such state policies. (Rossabi 2000: 6)

All research data has shown an increase in poverty levels for a large portion of the population after 1990. Estimates vary wildly, but the United Nations Development Programme reports that 38.4 per cent of urban dwellers – and 32.6 per cent of rural residents – were poor in 1998 (Human Development Report Mongolia 2000: 23). School attendance is down, regional disparities have become more extreme, with the capital experiencing a boom fuelled by international aid (this totalled US $180 million in 1998 (Mongolia Update 1999: 27) and an expanding service sector. Provincial towns and smaller communities have seen local state-run businesses collapse, communications weaken, and a leaching of the population, either to the countryside to herd animals or to the capital to seek work.

To cite one graphic anecdotal example of the process, a consulant for the Asian Development Bank told a 1998 donor agencies meeting of the irony of going into former factory towns, and telling the well-educated residents to turn to small crafts and itinerant vegetable growing rather than restarting the existing factory.

Mongolia’s transition: theoretical dilemmas

As Pickles and Smith note in their work of political economy Theorising Transition: the Political Economy of Post-Communist Transformations, it is a profound mistake to ignore the distinctive evolution of each of the former Communist states. Mongolia’s attempts at transition to a market economy have been deeply marked by its cultural legacy, in spite of attempts to transcend this. While Ohmae may assert that “This movement up the ladder of development has nothing to do with culture and everything to do with the region’s ability to put the right policies, institutions, and infrastructure in place at the right time (Ohmae 1994: 21),” culture is crucial. It is simplistic to depend on a “stock set of policies to enable the supposed transition to capitalism at the end of the twentieth century to be achieved (Pickles and Smith 1998: 10).”

As Pickles and Smith add about post-Communist Eastern Europe:

Treating post-communist Eastern Europe as a whole fails to recognise the ever-present diversity of some 27 states and 270 million people. Even at the end of the nineteenth century, such political-economic diversity was central to what was unfolding in the region … The diversity of historical experiences was replicated under state socialism, and while we would not argue for some form of historical determination, the state socialist economy in part relied upon these spatial divisions of labour and forms of social organization and institutionalised practices, albeit that large-scale attempts at forced industrialisation were made to eradicate the legacies of ‘peasant societies’ and uneven capitalist development. (Pickles and Smith 1998: 12)

Historically, Mongolia had never experienced capitalism, even in its most basic and embryonic form. Prior to the 1921 revolution which made Mongolia the world’s second Communist country, the vast majority of its citizens were divided between two occupations: nomadic herding, and the herding of souls as Buddhist monks. There was a small trading community, including a tiny community of Jewish traders – a legacy of the long-gone silk route that once plied its way through the Mongol Empire. But modern, urban, industrial capitalism as was present at this time in Europe was nonexistent in Mongolia. Concepts of capitalism, market economics and private property were introduced anew after 1990.

Urbanisation, modernisation and industrialisation were wholly communist concepts in Mongolia prior to 1990. The traditional nomadic way of life measures wealth in terms of the size of the herd and places a high value on the ability to roam unencumbered by private property divisions and the ability to trade animals for other goods (though these needs are simple since a nomadic herder can only carry around a limited quantity of possessions).

Economic liberalisation policies have, ironically, only exacerbated this trend, driving more of the economy into barter relations and actually pushing a portion of the population out of urban areas and into subsistance herding in order to survive (Partnership for Progress 1998: 2-3).

Mongolia also offers some anomalies to theories of economic and democratic liberalisation. Lewis contends that democracy gives a nation a distinct economic advantage. “Average wealth, the degree of industrialisation and urbanisation and level of education are perceived to be much higher for countries which are democratic, education being of particular importance in this respect (Lewis: 1997).”

Yet as Fortune magazine noted, “No other Asian country enjoys more political freedom today than Mongolia. And no other Asian country has shown greater commitment to open markets. But Mongolia has received little reward for its efforts (Fortune 1998: December 7).”

The role of the state

Broad, Cavanagh and Bello see a strong argument for clear state direction in underdeveloped economies in the beginning stages, before allowing market mechanisms to dominate:

The South Korean economy’s resumption of growth after a brief period of stagnation at the onset of the 1980s and Eastern Europe’s slowdown after rapid growth in the 1960s confirm a more complex truth than the purveyed by free-market ideologues. Communist economies may propel societies through the first stages of development, but further growth into a more sophisticated economy necessitates a greater role for market mechanisms. (Broad/Bello/Cavanagh 2000: 392)

Strong state direction in economic development has been abandoned in Mongolia (it remains to be seen whether the re-election of the former Communist party in the summer of 2000 will alter this), and it can be argued that the over-dependence on market mechanisms has been premature.

In fact, “the neo-liberal claim that transition is most successful in situations where state organs wither away is highly problematic. The state, it seems, is required as a fundamental regulatory formation in transition (Pickles and Smith 1998: 15).”

The absence of this regulation in Mongolia means that where once economic transactions were transparent, they have now gone underground. The example of cashmere exports (one of the country’s major foreign-currency earners) is particularly interesting. In 1998 the Mongolian government, faced with ever-dwindling tax revenues, introduced a tax on cashmere exports, ostensibly to protect the domestic cashmere-manufacturing industry. Whatever the true intention, the result was catastrophic for government revenues. Recorded exports fell by more than 98 per cent, to US $306,000 in 1998 from US $16 million in 1997 (Far Eastern Economic Review: 1999). The trade went underground and a handful of customs officials could not make a dent in a border as vast as Mongolia’s. It is a graphic example of how weak the central government had become, unable to raise revenues when necessary.

Economic liberalisation also tends to pull economic activity into the capital, as has been witnessed across the transition states. Centrifugal forces leave great swathes of poverty in rural areas and drain marginal urban centres of their skilled workers (Pickles and Smith 1998: 17). Mongolia is no exception to this pattern (Rossabi 2000: 10).

Forces outside the market

After investigating the role economic liberalisers in non-communist developing nations, Robert Bates found that market-oriented economists routinely overlook the role politics and political power plays in wealth distribution:

One reason that market-oriented economists tend to deny the centrality of politics to the development process is that they tend to discount problems of distribution. Those who adhere to the efficiency-and-growth position counter that if development produces a maldistribution of income, those who are losers in the short run could become winners in the longer run … From this viewpoint, governments are not just irrelevant to the development process, the actually impede it. (Bates 1988: 239-240)

There is scant contemporary research into the role of clan or family elites in modern Mongolia, but Rossabi, a Mongolia historian, believes they wield significant influence to this day, and have glided from communism to capitalism with ease (Rossabi 2000: 12). He asks, “Has there been sufficient turnover in the political elite, or does it represent the same consitutency as in the past? Has it expanded sufficiently to make itself more broadly representative of the Mongol population, including the herders and the countryside in general?”

In search of a purpose

Mongolia today is undergoing a basic economic dilemma familiar to Ricardo. It is at once transforming political and economic relations while also exploring what advantages it has to offer to the world markets, that old chestnut of absolute and comparative advantage. To date, its absolute advantage has been to be the source of raw materials, the two key foreign currency earners being copper and cashmere wool (Human Development Report Mongolia 2000: 30).

Its large herds of animals (some 34 million) are under-utilised as foreign-currency earners, and for the most part provide food for domestic consumption. One of the main reasons for this has been the rudimentary livestock techniques that exclude these vast meat and dairy resources from foreign markets (while the herds are raised without any use of chemicals, there is no quality control – a service once provided by the state before 1990). The distortions to the economy caused by these policies are highlighted in the Gross Domestic Product (GDP). In 1985, agriculture accounted for 14.3 per cent of GDP, and industry was 31.8 per cent. By 1998, agriculture (now mostly nomadic herding) accounted for 32.8 per cent of GDP and industry shrank to 24.1 per cent (Human Development Report Mongolia 2000: 56). The economy had contracted and was more focused on meeting basic domestic food needs.

Mongolia has a number of strengths it can draw on, however, with its impressive steps at building democracy and personal freedom chief among them. Lewis categorises former communist states into two groups, with group two taking an undemocratic route. Mongolia would rank in group one, since these countries have: “relatively rapidly established a reasonably viable constitutional order and multiparty system, having held free elections, seen unequivocal changes of government and generally established civil liberties (Lewis: 1997).”

The economic model used by the Democratic Coalition was the United States; Mongolia’s new leaders, dismissed other Asian nations – with their stoic, thrifty populations taking direction from the state – as poor examples for Mongolia. Like the US, Mongolia’s nomadic heritage values freedom and individual effort over the state, assert government advisers such as Tserenpuntsag Batbold, an economic adviser to the Mongolian prime minister’s office.

Batbold is sanguine about finding a purpose for the country’s economy: “I’m always thinking about this, but I can’t give you an answer. This is exactly why we have to create a nondistortive economic environment, one which will show us the true comparative advantages of this nation (Asian Wall Street Journal 1997: May 27).”

Yet the process has been a difficult one. At a June 1998 international investors’ conference in Ulaanbaatar, the World Bank variously called Mongolia the “gateway to Russia”, the “gateway to China”, and the “gateway to Central Asia” (UB Post: 1998), giving the impression that both the global institutions and the Mongolian government would try anything in a desperate search for a purpose for the country’s economy. In fact, efforts in the 1990s to attract foreign direct investment (FDI) have not been fruitful. In 1999, FDI stood at US $70 million; it was US $200 million for all of the 1990s (Human Development Report Mongolia 2000). The belief that foreign private companies would pay for the country’s infrastructure improvements has run up against a wall: most foreign companies find it hard to see the benefits in investing in a country that only has a market of 2.4 million people and very high start-up costs.

By 1998, even Sachs was striking a pessimistic note. He told Fortune magazine he disagreed with the pace of reforms and insisted infrastructure improvements – more roads, improved livestock breeding, investment in information technology – were the only things that would improve the country’s economy (Fortune 1998: December 7).

Conclusion

Political power in Mongolia has switched from the hegemonic control of the Communist Party (and its overlords in Moscow) to be dispersed amongst a plethora of actors, including international aid organizations. Economic liberalisation has destroyed the state’s ability to guarantee a minimum standard of living. However, it has also expanded the number of small businesses in the country, and the GNP generated from the private sector has grown from 10 per cent of the total in 1990 to 64 per cent in 1999 (Human Development Report Mongolia 2000: 31). In spite of this, poverty rates remain stubbornly high, undermining assertions that free markets alone will generate wealth for the disadvantaged.

Unfortunately, Mongolia has significantly misdiagnosed the origins of prosperity in its current role model, the United States. Economic liberalisation policies cling to simplistic notions of the evolution of capitalist markets in the US, ignoring the complex relationship between state-funded or regulated infrastructure development and economic growth. Post-communist countries have been ill-advised on what policies will actually reduce poverty rates. These societies do not fit into conventional ideas of underdevelopment; on the whole their populations are highly literate and skilled. While products produced by these countries may not be able to compete head-on with more technologically sophisticated equivalents in Western markets, there is little evidence that wholesale destruction of these industries will spurn economic growth and reduce poverty.

Pax Chaotica: A Re-evaluation of Post-WWII Economic and Political Order

In The Interests Of The Exploited?: The Role Of Development Pressure Groups In The UK

The Sweet Smell Of Failure: The World Bank And The Persistence Of Poverty

ORCID iD: https://orcid.org/0000-0001-5311-1052.

© David South Consulting 2017