As a result of a series of studies done on development of countries around the world, it has been established that the development of a nation depends more on political and economic institutions rather than factors such as geographical location, weather, history, culture, tradition, religion, or education.
Professor Daron Acemoglu from the Massachusetts Institute of Technology in the USA and James Robinson from Harvard University based their book “Why Nations Fail” on these development studies. The book won many awards, and millions of copies were published. It has also been translated into Mongolian.
Professor James Robinson recently visited Mongolia and gave lectures, where I had the opportunity to moderate. They defined “institution” as a set of rules that determine individual behavior in economic and political setting. In terms of scale, political and economic institutions are divided into two groups: inclusive, which serves the public, and extractive, which serves a minority.
INCLUSIVE AND EXTRACTIVE INSTITUTIONS
Let us have a look at the example of two Koreas. Korea was divided 60 years ago.As a consequence of which, South Korea selected the path of capitalism, whereas North Korea chose to follow socialism. Currently, South Korea has a GDP forty times higher and GDP per capita 20 times larger than North Korea’s.
A satellite image from NASA showed that North Korea had only one city – Pyongyang – shining bright in the night sky while almost all cities in South Korea were lit up. The same contrast can be observed between the economy, freedom, and livelihood of the two countries.
Professors Acemoglu and Robinson explained this difference with the type of institutions they have – inclusive and extractive.
Inclusive political institutions allow political power to be distributed across the society, diversity to prosper, civil society to provide supervision on public governance, and local authorities to have decisionmaking power. In contrast, extractive political institutions centralize power among a handful of people, not allowing the people to exercise scrutiny on the government, and have local communities that are not able to decide for themselves.
Inclusive economic institutions ensure that property relations are well regulated, rule of law is deeply seated in the governance, business principles apply to everyone equally, and economic policy prioritizes the common good. In this setting, investment is focused on industries that are significant to economic development, such as education and health. When economic institutions serve the interests of a few people, the property rights are unclear, and unlawful governance dominates.
Their vague business regulations are not made for the public, and give advantage only to the powerful elite. It does not allow people to choose what they want to do while the government is incapable of working for the common good.
Despite walking on the same path as North Korea for 70 years, Mongolia adopted the same way forward as South Korea in 1990. Today our people are striving to make our political and economic institutions inclusive. However, this aspiration of ours has repeatedly faced significant challenges.
Mongolian political institutions today have become very good at pretending to serve the public. In reality, they have been serving specific groups, namely political parties and their senior leadership. The latest example is the fact that authorities changed the election laws a month before the elections so that the new law gives them advantages.
Then the government issued the state-owned Erdenes Tavan Tolgoi’s shares on behalf of the company, bought non-existing shares with non-existing money using loans, and is distributing cash to people ahead of the elections. When political institutions serve a minority, economic institutions are less likely to serve the public.
Therefore, Mongolia’s private sector has seen fair competition diminishing, and has become increasingly interested in obtaining soft loans from the government or getting a piece of the pie from the bond money. When economic institutions serve the public, there is an increased desire to do business, and it – in turn – creates more opportunities.
When property rights are protected, people have more interest in investing, and place their capital efficiently. It encourages new players to come into the market, and allows companies to raise funding.
Furthermore, when the free market economy is in full motion, the return on education increases, and economic inclusion improves. Unfortunately, this process has clearly slowed down in Mongolia as government involvement in economy expands. Our external and internal debts are rapidly increasing.
Under these conditions, only a specific group is seeing their businesses flourish while the room for fair competition shrinks and the imminent economic crises comes knocking on the front door repeatedly. When a country has inclusive economic and political institutions, economic competition rises, and new technology and initiatives are brought in. It – as coined by Australian economist Schumpeter – is referred to as “creative destruction” because the arrival of new technology can essentially bring down an entire industry if the older methods cannot keep up or adapt. It results in redistribution of resources.
The few handfuls that hold a monopoly never wants such drastic change to take place, which halts the economic growth. Under these circumstances, talent, creativity, and new ideas are not valued. When institutions serve specific groups, it allows only one group of people to take advantage over others. In contrast, a fully effective democracy that encourages diversity has no choice but to follow the rule of law. Mongolia still lacks inclusive political and economic institutions that serve everyone equally.
Trans. by B.Amar