Hans-Werner Sinn is a renowned German economist, former professor at University of Munich, and ex-President of the Ifo Institute for Economic Research. Sinn was named among the ten most important people who changed the world in 2011 by the British newspaper The Independent and as the economist with most political influence by The Frankfurter Allgemeine Zeitung. The following is an in depth interview with Hans-Werner Sinn about his views on the Mongolian economy.
Let’s start with what you think Mongolia should prioritize. What should we focus on the most?
Due to problems with repayment of the Chinggis Bond, Mongolia had no choice but to look to the International Monetary Fund. Even though the global interest rate had never been lower, Mongolia found itself in a debt crisis. US President Donald Trump is undertaking tax reforms and as a way to eliminate the budget deficit, the US is seeking out capital from the global market, which could be adverse for many countries.
In Mongolia’s case, in order to avoid raising capital on the global market, it has no choice
but to reform its taxation system and create a domestic source of revenue. I personally believe Mongolia needs to increase its taxes. During my previous visit to Ulaanbaatar, I talked about how the number of vehicles on the road has exceeded the capacity that the roads can handle. In order to balance the number of cars and road accessibility, it is essential to reform taxes.
It is also important for Mongolia as a nation to look at how they are using their natural resources. There is a need to focus on how to increase revenue from that sector. It sounds unfathomable that the 1.5 billion USD Chinggis Bond has caused Mongolia to tether on the brink of bankruptcy. The total value of the Oyu Tolgoi mine is 50 billion USD.
It would be beneficial for young Mongolian professionals to work and learn from experts around the world. This will help the Mongolian government retain its stake in the mine. If Mongolia was able to conduct its own exploration expeditions and find new potential mines, it could ink a favorable agreement with private investors. The contract established with Rio Tinto at the time essentially meant that this country would not receive any revenue from the mine in at least 25 years.
Rio Tinto contributed two thirds of the 10 billion USD in capital required to commence operations at the mine and to develop local infrastructure, while the government would finance the remainder. I want to discuss about why Mongolia came to pay money. Mongolia is allowing Rio Tinto to mine the 50 billion USD copper underground and is paying money on top of that.
The exploration company that found the Oyu Tolgoi mine paid a small amount of money for the license and sold it off to Rio Tinto. Even though this is not technically illegal, it is an unfortunate circumstance in the eyes of an economist. In order to address this issue, the Mongolian government must work to improve its capacity for mining exploration. For instance, establishing a mining institute, preparing engineers, and giving them practical experience will help Mongolia determine the total amount of natural resources it possesses.
Seems like it will take a long time, don’t you think?
Yes. Until then, world-class professionals can be contracted to conduct exploration efforts. Invite experts and professionals from around the world to work with young Mongolian professionals, imparting valuable information to them. This will help prevent any loss of stake in the Oyu Tolgoi mine.
As I said, Mongolia will not see any revenue from Oyu Tolgoi in the first 25 years. The government did originally own the license for the mine. A highly valuable mine was given up for a small amount of money. In order to not repeat thismistake, education reform, training of exploration professionals and people to negotiate a beneficial contract with investors is required.
I want to talk about the Mongolian education system briefly. I am from Munich, Germany. Munich, approximately the same size as Ulaanbaatar, has two universities and one military academy. There are a few other schools. Ulaanbaatar in contrast has many universities. Those universities are only preparing people to wear a tie and sit behind an office desk.
Mongolia needs people that work with their hands, professionals trained in technical institutes and that have the ability to perform high skilled tasks. The country does have professional training and manufacturing centers. These institutes need to be expanded and developed further, helping produce capable professionals. The students need to work at companies four days out of the week, accumulating practical knowledge and to also learn theoretical knowledge in class once a week. This type of dual education will be most beneficial.
Germany implements this education system. The trade balance of Germany is positive and we are one of the largest exporting countries in the world. This has a lot to do with this dual education system. The Mongolian education system is similar to that of the United States, possessing a large number of universities and colleges. However, it has already been proven that this type of education system does not have optimum results. All you need to do is look at the manufacturing sector of the United States. Possessing a large amount of land and a small amount of people, Mongolia is best suited to focus on mining, roads, and the construction sector.
Would it be correct to say that you do not support allowing foreign mining exploration companies to conduct exploration expeditions in Mongolia?
Yes, that’s correct. At the moment, Mongolia has no choice but to contract highly skilled
foreign professionals. But when Mongolia allows the whole company to conduct the exploration activities, they tend to lose their ownership of the mines. Mongolian companies should contract foreign professionals to conduct exploration and help retain ownership within the country.
It is possible then to attract investors and sign a contract. However, Mongolia must be unwavering on certain clauses in a potential mining agreement with an investor. When establishing a long-term contract, the two sides must agree to the general agreements and obligations. A clause must be added that in the event of any extenuating circumstances, the two sides will amend the agreement accordingly. I think it is important to note that the attorney contracted to draw up the contract plays a very important role.
My wife and I were both involved in the privatization efforts in East Germany. Based on my experience then, I wrote the book “Jumpstart”. The experiences I noted in my book were implemented during the privatization of the Bolivian mining sector. Bolivia had made it constitutionally illegal to sell ownership of its mines. In this circumstance, we gave advice on how to involve private businesses and investors in the privatization efforts.
The solution was to establish a joint company. In order to make use of the experience and technical capability of private companies, the government established a joint company. The government reached an agreement on what the machinery, technical equipment, and know-how of the company was worth and established a joint company accordingly. I came to Mongolia in order to share this.
Mongolia issued a 1.5 billion USD bond and also enrolled in the extended fund facility program with IMF. What are your views on the program?
This is not a solution, only a sign of more hardships to come. If a person with a low-income receives a loan from one person and uses a loan from another person to pay it off, where will that get them? Country-wise, it will cause the country to be directly influenced by someone else. Norway does not waste its reserves and invests in the global stock market. This helps maintain a relatively low interest rate. Venezuela, on the other hand, has caused artificial inflation due to uncontrolled spending from its oil revenue. The country is on the brink of bankruptcy due to its reliance on oil and decreasing oil prices on the global market.
If Mongolia spends its mining revenue on products such as vehicles or televisions, it is not beneficial. Investors see that there is an economic bubble that has formed in Mongolia that is about to burst, and therefore, they believe it will not be profitable to do business. It would not be outlandish to say that debt is poison. Increasing debt causes a bleak future. It might be time for Mongolia to tighten its belt and increase taxes in order to overcome this hardship. If Mongolia is able to overcome its current crisis, a great and prosperous future is waiting.
How do you see the potential of tourism in Mongolia?
I have heard that many tourists from German speaking countries such as Germany and Switzerland come to Mongolia. Germans wish to see and marvel at the ancient culture and beautiful nature of Mongolia. “The Story of the Weeping Camel” being shown in Germany moved a lot of people emotionally. Mongolia has the opportunity to attract tourists from all over the world. The development of rural infrastructure is key in developing the tourism sector.
Improving the services of rural hotels is also important. Many people come to see the history of the great empire that once was. Not only during Naadam, but year-round, organizing interesting sights will be helpful.
The government must be actively involved in tourism to attract investment and support the sector policy wise. The cooperation between the national government and local governments will help Mongolia see results. Germany is one of the countries with a very developed tourism sector.
There are many companies that send our citizens to many different countries. It is possible
to work together with them. Of course, they will have their requirements and standards. Using those avenues, it is possible to develop the tourism sector much further. Since tour operator companies have a vested interest in operating long-term, it will help establish a sustainable source of income for Mongolia.
What must be done to support domestic manufacturing?
Mongolia would be hard-pressed to establish say a vehicle factory and compete globally. But, Mongolia has the chance to initially supply all of its domestic demand. You can build your own buildings and roads. Of course, you do need experts that have experience in this matter.
On a related note, the Chinese market is large but we must not forget that the European Union’s market is even larger. Of course, China will always be an important economic partner for Mongolia but it is also important to diversify.