Setting prices using laws and rules, instead of letting the market regulate itself, is only beneficial to decision makers. It hurts consumers and causes even more serious consequences for the market in the long term. In a free market economy, prices for goods and services are set at the most optimal levels depending on market demand and supply, which allows for an abundance of products.
An underlying reason for the collapse of socialism was the government’s setting of prices. Although all goods were cheap, it used to be difficult to find them. You had to either have a connection who could help you purchase goods, or spend hours in a long queue where you could only rely on luck to get the product you wanted. Children born before the 1990s spent countless hours of their adolescence standing in long lines to buy meat, milk, water, and bread, instead of using that time to learn and do their homework.
Despite the transition to democracy and a free market economy almost 20 years ago, the Mongolian government is still regulating and restricting prices for staple food products, fuel, and electricity. This control on prices is the second biggest reason – behind corruption – for our economic decline.
COSTLY TALES OF PRICE STABILIZATION
Every time the government is newly assembled, the party in power immediately comes up with ideas for subsidies or softer regulations in the name of caring for and supporting the people, and they start controlling, “stabilizing”, and freezing prices. Our previous government loudly rolled out programs on mortgages and regulated prices for construction materials and fuel. In the end, the government ended up in massive debt and the central bank ran out of foreign currency reserves.
Apartment prices immediately doubled as soon as low interest mortgage loans became available. Meeting high demand from the market, construction companies kept building more expensive apartments intended for high-income families, rather than affordable apartments for low-income households. Currently, Ulaanbaatar has 40,000 empty apartments that have long locked up approximately 8 trillion MNT. Commercial banks today have no choice but to seize the apartments used as collateral for bad loans and try to sell them as foreclosed properties.
Fuel importers received 400 billion MNT in loans from the central bank. They seem to have forgotten to reduce their prices when fuel prices were at their lowest globally. However, as soon as there was a slight increase in prices in the international market, these companies started increasing their prices right away. Every government organizes a farming campaign, which sets a trend of the government providing soft loans during the harvest season and forcing flour producers to buy domestic wheat at higher prices.
The government has been controlling the prices of 25 items that are included in the consumer price index basket. The government regulates prices for bus tickets, public and private university tuition, Altan Taria 1 flour, and Atar bread, as well as household electricity, heating, and water rates. The government has tried every year to control prices for meat as well as coal for electric power.
These government programs have been disrupting market equilibrium and giving businesspeople inaccurate information. They lead to false expectations, bigger state budgets, larger government agencies, and more inefficient expenditure. The government officials who initiate these programs get wealthier, and the businesses connected to the policies are growing and becoming more profitable.
SUPPORTING MARKET COMPETITION IS ESSENTIAL
Market demand and supply can be favorable for consumers in the long term only when prices are freed up and monopolies do not exist. Natural monopolies can exist as long as they do not bar other competitors from entering the market.
Natural monopolies are acknowledged by all because they account for the total supply of particular goods and services at the lowest social cost. The Law on Fair Competition states that a company’s position in the market is considered dominant when it accounts for over one-third of the manufacturing, sales, and purchase of a certain kind of product in the market.
Under such circumstances, government organizations need to oversee whether monopolies and dominant companies are increasing their prices, taking advantage of their position in the market. This type of government organization in Mongolia is the Authority for Fair Competition and Consumer Protection (AFCCP). However, this organization was stripped off its rights to monitor the pricing activities of dominant businesses and natural monopolies on June 19, 2015, when Parliament made amendments to consumer protection laws. These changes prevented the operations of the AFCCP from being involved in the activities of any organization with a special permit, regulatory rights, or tariff subsidies. This means that when natural monopolies increase prices for electricity, heating, water, and railway transportation today, there is no one who provides oversight on the behalf of consumers. There is an inevitable need to distinguish between what a natural monopoly is and where more competition can occur. Also, government involvement needs to be reduced at all levels, and privatization has to take place.
Natural monopolies exist in the following activities of different industries: the transmission of power, telecommunications networks, the distribution and transmission of fresh water and wastewater, railroads, flight routes and airports, and radio and television broadcasting networks. Every operator in the telecommunications industry has built their own countrywide network, which has led to an abnormal system and has dramatically decreased room for mobile phone service charges to be reduced. If these monopolies are properly and efficiently managed, we could reduce living costs and improve the quality of life for most Mongolians.
If prices are set by the market and monopolies are properly managed, the private sector will receive accurate market information and be able to enhance their competitiveness. If these changes are coupled with a reduction in government corruption, Mongolian businesses could enter international markets. Mongolia will achieve flourishing development only when our goods and services are delivered globally. Many countries, such as New Zealand, Finland, and Estonia, have had such experiences. Our authorities are always traveling to these countries, but where are the benefits of these visits?
What is stopping us from just carrying out these changes and reviving our economy?
Translated by B.AMAR