Free Economy: Competition Is Its Lifeblood

Chimeddorj Munkhjargal — Bachelor's degree in Business Administration from the School of Economics, National University of Mongolia, in 2007; a Master's degree in 2011; a Master's in Public Policy from the School of Government, Oxford University, in 2018. He has more than ten years of experience researching regional development policy, procurement, and labor economics. Competition, the free economy — thank you. Good evening, everyone. Can you hear me? I wanted to tell you about a friend of mine — a hardworking, diligent, industrious friend.

My friend set up a small bakery, and his business went bankrupt. But here is how my friend explains that bankruptcy: he says it went bankrupt because of the SME Support Fund. Interesting, isn't it — my friend never even applied to the Fund for Supporting Small and Medium Enterprises, because he knew that even if he applied, he wouldn't be approved. Let me give another example, about a different friend. A few years back he set up a construction company that does almost every kind of construction and installation work, but has never once managed to win a tender. Yet he was never able to earn more than what it took to cover his workers' wages, and after struggling along like that, he eventually shut the company down.

In principle, he could have entered tenders and competed. But he never got the chance to enter a single tender. Recently, I ran into two acquaintances of mine — two older brothers — at the Moscow airport. It turned out they had crossed the border at Zamyn-Üüd and flown on to Moscow on a domestic Russian flight. Why?

Because, they said, I'm patriotic, you know — but I can't afford a MIAT ticket, my money just doesn't stretch that far. You might be thinking that these people, my friends, my acquaintances, must be failures of some kind. But these people are not failing. It's simply that in our lives today, it has become impossible to make a living through honest work.

People no longer have the chance to build their own lives with their own hands. That's why my friends are struggling: one had his bakery go bankrupt, and the other, unable to win tenders, kept doing subcontracted work for companies that had won them, until he eventually shut his company down. The real reason I want to talk about all this is to ask: what is a free economy, and what is its lifeblood? We don't compete today — I want to talk about whether there is a free economy in our lives at all. We call the 1992 Constitution a democratic constitution, don't we? And we say that the events of 1990 amounted to a democratic revolution. But what, really, is a revolution?

In our lives, all sorts of things simply keep changing, every single day. Everything keeps evolving and changing — technology changes, people grow up, people grow old, people move to the city, change professions, keep learning — everything just keeps changing. We call all of this change "evolution." A revolution, on the other hand, is when a very deep, qualitative change, following a certain pattern, takes place within a short period of time. In other words, when the ongoing evolution we're living through shifts abruptly and something entirely new comes into being, that is what we call a revolution.

That is why we call the democratization of 1990 and 1992 a democratic revolution, and why we call the Constitution adopted in 1992 a democratic constitution. And we say that at the heart of this constitution's lifeblood lie two great qualitative changes. The first was a change in the political system — a very powerful, abrupt change. We moved from a socialist political system to a democratic political system that upholds human rights. That was one part of the revolution; the other part was that we shifted from a centrally planned economy to a market economic system.

Putting these two together, we are essentially saying that the 1992 Constitution was written anew, as a democratic constitution. Everyone, I want to focus on this second part. What is a free economy — let's line up, on a single spectrum, all the political ideologies we know of today. All the way at one end, the far left, is the state that decides everything — the slogan of that era being something like "for the collective, one for all and all for one" — a harmonious, communal society that existed only in our imagination, a social order none of us ever actually lived under, which we call communism. At the far-right extreme, opposite the state that decides everything, there is also a view holding that the state is not needed at all — the view that we can live without a state.

We all call this anarchism, right? So where, in fact, were we before 1990? We were somewhere just this side of that far-left end. Our society was called a socialist society. What is a socialist society? At that time, the state owned more than 95% of all the wealth on the territory of what is now Mongolia, and the state controlled how it was used — there was no private property. So what did we used to say back then?

We used to say we were building communism. My father, my mother, my grandmother, my grandfather — all of them believed we were building communism. What did "building communism" mean? In fact, socialism itself was not understood as a self-standing social order; everyone believed it was merely a stage on the way to communism. And what did people say about that? The clearest example that comes to my mind now is this: right now, we said, we receive according to what we produce. In the future, we said, we will build a society where people receive according to their needs.

Communism. But then, in 1990, after the events on the square, the entire Politburo resigned, and when the 1992 Constitution was adopted, we swung abruptly from that far-left extreme toward the right. Why do I say we swung to the right? Because the Constitution guaranteed property rights. What is a property right? When I speak of property rights, I don't just mean having property — I also mean giving people the chance to build their own lives with their own hands. Property rights are not limited to saying, "the car in my garage is mine," or "the house I live in is mine."

Property rights mean giving people the chance to build their own lives with their own hands. Now let's all look back at our society today. Are we truly living in a free economy? Does every single member of this society have the chance, if they try hard and work hard, to build their own life with their own hands? Unfortunately, the answer is no. Unfortunately, it is not.

If there's anyone here who works in labor markets, or who knows about securities, there is a concept called a "derivative" security, isn't there? Well, in mathematics there is exactly the same concept, which in Mongolian we call уламжлал — the "derivative." In English, these two concepts — the financial one and the mathematical one — are, in fact, the very same word. So why, in Mongolian, do we call one of them "derivative" and the other "уламжлал"? What, really, does it mean for something to be new?

Perhaps something "new" is really just something that carries within it the core traits of an old thing that already existed at some point, isn't that so? Let's take this idea and bring it back to the economic content we were just discussing, back to the content of the democratic constitutional foundation we were just discussing. We call the abrupt change of 1992 a revolution, don't we? But as we live in this society today, aren't we simply carrying forward, having inherited, something that already existed before 1992? And isn't that, perhaps, a competition-free economy? If that is so — if our society today is simply something carried over, something inherited — if we are preserving and carrying forward the core content of the pre-1990 society, then we probably shouldn't be calling it a revolution.

If we are going to call it a revolution, then we ought to be carrying forward the qualitative change it represented, shouldn't we? Let's all go back to the example of my friends. Here is what actually happened: my friend ran a small bakery — to get it running, he took out a bank loan at 30% interest and started his bread business. And he kept it going. Meanwhile, what happened to the bakery right next door? It took a loan from the SME Support Fund at 3% interest, and with that 3% loan, it cut its bread prices by 10%.

If my friend had lowered his bread price by even 5%, he wouldn't have been able to cover the interest on his bank loan. And if he hadn't lowered it, his business would have failed just the same, unable to compete — either way, it was going to go bankrupt. So what is my friend doing today? He is working as a baker in the bread business of a boss's child who got a loan from the SME Fund through connections. Let's move to the other example. Why couldn't my friend win any tenders?

Because here is what the state required: my friend's chief engineer had to be a certified consulting engineer. When we asked how to turn a chief engineer into a consulting engineer, the answer was that he had to attend a training course. And where was that training held? It turned out the state organized it. So how often was it held? It turned out the training was held only once a year, admitting just thirty people. That's why my friend had no right to enter tenders. He kept doing subcontracted work for companies that had won tenders, never earning more than it took to cover a few workers' wages, and after struggling along like that, he shut the business down.

Let me bring back those two older brothers I ran into at the Moscow airport. For whatever reason, our state keeps propping up its state-owned enterprises. The losses at MIAT, Mongolia's national air carrier, are measured in the billions. And yet we keep covering MIAT's losses with taxpayers' money. That's why people end up flying with Air China, or with Russian or Korean airlines instead, carriers that are competing for passenger service. So here, once again, is an interesting question: did the Constitution adopted in 1992 authorize taking money out of our pockets as taxes in order to give one business an advantage over its competitors?

Did it authorize blocking our competitive environment with some license or special permit? Did it authorize using our own tax money to fund a loss-making state-owned company? We cannot talk about a free economy without answering these questions. A free economy means the fruits of competition — only when the chance to compete exists can we build our own lives with our own hands. When there is no competition, where does that leave us?

Because there is no competition today, businesses have stopped competing with each other and started competing for state power instead. Why do we go after state power? Because to outdo the bakery next door, what I need is a connection who can get me a loan from the SME Fund — that's why we go after state power. Why are we competing for state power? Because to get the special permit that lets me enter tenders, instead of competing with the construction company next door, I go to the state authorities to secure that piece of paper for my company alone — that's why we keep competing for state power. Nobody cares how much a state-owned company loses; people go there chasing corruption. In 1776, a scholar named Adam Smith clearly laid out the founding principle of modern economics. He described it as the "invisible hand."

Because competition is capable of resolving, on its own, every problem we face in our social life, this book remains, even today, one of the most important books humanity loves to read. To create, in the society we live in, the chance for every single member of that society to build a good life for themselves with their own hands, there is really only one thing we need to do. What is that one thing — what must we do? It comes down to those who hold power in the name of the state. Thank you.