Economics Without Politics

Good morning, everyone. Today we find ourselves at what I would call a political crossroads. What affects our lives today more than almost anything else is politics — especially in its economic dimension. Most of the decisions being made in Mongolia today are not, in fact, economic decisions at all; they have become political decisions instead. That is exactly why I believe today's economic problems in Mongolia are, at bottom, political problems.

I want to compare two families for you. The first has three children. Both parents work, and together they bring home a combined salary of about 1.5 million tugrik a month. How should this family invest that income for the sake of its children? Naturally, the children are growing up, and as they grow, expenses keep rising.

How this family handles those costs depends on its income. In other words, this family has no choice but to be highly disciplined. A set portion of the income that comes in each month goes toward a mortgage payment — because, of course, they need a place to live. Second, a portion goes toward food.

There is also clothing and other expenses, of course. And with whatever remains, what does this family do? It builds up savings — even if only a modest amount. Over time, these savings need to cover the family's growing needs as the children mature. A family, in other words, always ends up saving in order to invest in its children's future.

Now let's look at a second, seemingly identical family. In this family, the father generally doesn't have steady work. They also have three children. Let's imagine that, once a year, through some kind of trading or another, this family receives a windfall of income.

Take, for example, the small-scale artisanal gold miners who have appeared across Mongolia over the last 20 years. These people go out and dig for gold by hand, and after two or three months of panning they end up with a certain amount of gold. Looking at their income over the whole year, it turns out to be roughly the same as the first family's. But look at how this family makes its decisions: while no income is coming in, they borrow; once income arrives, they spend it on food; then they wait for the next payout, running up debt in between; and when the next batch of gold comes in, they use that money to pay off what they owe from the lean period, and the cycle repeats. Now picture both of these families over a span of 30 years. The first family, after 30 years, has built up a certain level of savings, and its children are well educated. This family can keep building its savings steadily from here on, earning income both from its labor and from the interest on the savings it has deposited with a commercial bank — advancing on both fronts at once. The other family's children remain uneducated. Even after 10 years, nothing has changed.

Even after 20 years, nothing has changed. Even after 30 years, it is still the same. So what does this tell us about our own economy? The income flowing into our economy looks almost exactly like the income of that gold-panning family. Almost identical. Of course, the amount of gold mined each year is relatively stable.

The amount of copper mined is relatively stable. The amount of coal mined is relatively stable. But the truth is that prices are constantly swinging, and that is precisely what turns our income into windfall income. And windfall income — what mindset does it produce in people? It strips away the ability to plan for a stable future. Because people lose the capacity to plan their future with any stability, they end up leaning on impulsive decisions.

Impulsive decisions tend to be driven by emotion. And because that never creates the conditions for a stable future, the "gold-panning family's" life never improves, never gets better, never moves forward — while a family with a stable income, however modest, has the chance to see its life improve, advance, and follow a plan. I wanted to make that point before starting the actual presentation. So, right at the start of this talk, let's simply ask: what is a "business environment"? There are quite a few people here who run businesses. Think of it like fish living in an aquarium: their environment is the temperature and composition of the water in that tank. If we suddenly replaced all the water at once, most of the fish would die, because their environment had changed and they no longer had an environment to live in. Business works exactly the same way — it needs a consistent environment. So what do we look at within that environment? First, of course, tax policy. Second, red tape and bureaucracy, and the stability of the legal environment.

There's corruption too, of course. And on top of that, the level of interest rates. Why is the interest-rate level such a crucial factor for the business environment? For example, a company operating in China and a company operating in Mongolia borrow at different rates, and because that rate is the cost of capital for investment, a business that can survive in China cannot survive in Mongolia. Even today, one reason we still import potatoes is that, even if every other part of the business environment were comparable, once you look at interest-rate levels, we simply have no way to compete. So let's look at what interest rates look like around the world. Take, for instance, two economies that are strong enough to power through their own downturns and crises on their own strength.

In the United States — and I mean this in real terms, that is, the nominal rate minus that year's inflation — the real interest rate for 2015 was around 2 to 2.3%. In Korea, businesses are operating with loans at roughly 2%. Now let's all think about this together. Why do Korean products compete so successfully against Mongolian ones in our own market? Take a flour-based product made right here from local wheat, and place it on a store shelf next to an imported Korean flour product — the Mongolian product simply doesn't sell.

The reason the Korean product can compete with Mongolian production costs, despite being shipped from so far away, is that it is made under a very low interest-rate regime, which is what makes those businesses competitive. Behind all of it lies the fact that the interest rate is, in effect, the cost of capital for business investment — one of the most important factors in getting production going at all. Take two of our neighbors. China's rate is around 5%. Russia, even under all manner of international sanctions, had an average interest rate of 7.46% in 2015. If we look at these two higher-rate countries, that is tied to the fact that, on the economic side, their populations are shrinking, which has made investment almost costless there. So if we compare our own interest rate with that of countries producing goods for the very same markets — our rate stood at 17.4% in 2015. Let's all do a very simple calculation together: to run a business in Mongolia, you need, at a bare minimum, a real annual profit margin of around 20%. That is exactly why, even with all our patriotic preference for Mongolian-grown potatoes over Chinese ones, this cost gap makes it nearly impossible for a business to get off the ground here. So where does this 17.4% interest rate actually come from? I will say it plainly: it is a rate manufactured by politicians. Why do I say that? Because we had the opportunity to bring this rate down to 4%. In the recent past, a real annual lending rate of 4% was genuinely achievable in Mongolia. So over the next 10 years, we may well have the chance to bring it down to 4%. To lower this lending rate, we first need to trace where the underlying problem comes from.

Today, the loans extended to our businesses come from commercial banks. Commercial banks' total assets amount to 21 trillion tugrik. Of that, 11 trillion tugrik has been issued out as business loans. But there is another side to this — another "wing," so to speak. Picture a bird in flight: in a healthy economy, the banking sector and the capital market work in balance with each other, and it is that balance that keeps the interest rate at a reasonable level — a genuine, market-based rate rooted in business returns and competition. Now look at the other wing. The total market value of the companies listed on our stock exchange is 1.4 trillion tugrik — compared with the banking sector, that is roughly fifteen times smaller. Total trading in 2015 came to 546 billion tugrik, of which 510 billion tugrik was government-bond trading, according to the ministry's own figures. The actual annual turnover of money circulating in equities is only about 30 billion tugrik. We should compare that 30 billion tugrik with the 11 trillion tugrik that commercial banks issued in loans that same year. This shows exactly how lopsided one of our two "wings" has become.

So this interest-rate level comes down entirely to commercial banks, simply because there is no other money out there. Just think about it: of the 546 billion tugrik traded that year, 510 billion tugrik went into government-bond trading.

Only 30 billion tugrik went into business equities. So, looking ahead 10 years — today we already have 11 trillion tugrik in outstanding loans. Over the next 10 years, we have the opportunity to raise an additional 18 trillion tugrik through the capital market.

That is the true, present-day state of Mongolia's economy. Of course, the economy is growing. But we missed the chance to build up savings in the past. If we make use of that opportunity now, we have the potential to raise 18.6 trillion tugrik through Mongolia's capital market — that possibility exists. So we all need to answer the question: what exactly is a capital market?

A capital market is where you take a specific business project, bring it to market, and tell people: this business will generate this much profit each year. People invest, take a stake, and the business then operates using that capital. On the other side of that transaction, the very outcome we all want from the economy — more jobs — increases. And on the investor side, people earn a return by sharing in the business's profits. In our own calculations, we assumed a 5% annual return on the capital market. Why? Because there is a huge difference between a capital market and a commercial bank: a bank loan rate is built on top of the deposit rate — the loan rate is the deposit rate plus the bank's margin. So whatever the deposit rate happens to be, that gets combined with the bank's profit to produce the lending rate. On the capital-market side, by contrast, money carries no such underlying deposit-rate cost.

In a capital market, if the returns are attractive to investors, investment naturally follows, and a whole new investment environment is created. Looking at this through the lens of our business organizations — in our case, family-run businesses still dominate, and publicly listed, widely held companies remain few. Yet there is a large pool of accumulated capital ready to be invested through the capital market. If that investment potential can be unlocked, there are already several hundred companies prepared to reform their internal governance and enter the capital market.

Most of these companies currently borrow from commercial banks. I want to talk today about three separate funds that could channel capital into the market. First, the Social Insurance Fund. Second, the Future Heritage Fund. Third, non-profit funds. I want to lay out here how accumulated capital could be drawn from each of these three. To begin, the Social Insurance Fund could accumulate around 7.4 trillion tugrik over the next 10 years.

The Future Heritage Fund, for its part, could accumulate around 1.11 trillion tugrik. Non-profit funds, of course, are relatively small by comparison. But because they play such a vital social role, I have included them here as well. Over the next 10 years, non-profit funds could together accumulate more than 80 billion tugrik in returns. Now, if we look at our national government's consolidated budget today, we can see the deficit clearly. In 2006–2007, mining commodity prices rose. So what happened on our side? Think of the state budget as a kind of reservoir — money flows in on one side and flows back out as spending on the other. Looking at what has come in, in recent years we have consistently run a deficit — in 2015, for example, the budget deficit came to roughly 1.1 trillion tugrik. So our budget has been running a persistent shortfall.

What this means, in practical terms, is this: the revenue Mongolia collects through taxes in a given year is far smaller than the amount of money it spends back out in that same year. So what does this say about us? It shows that, broadly speaking, we behave like people who cannot live within their means — who cannot manage to cover their own expenses out of their own resources. Now, over the past 10 years, when and how has this budget question typically come up for discussion? It tends to come up in a particular way among economists. Generally speaking, an economy moves in cycles — there is such a thing as the business cycle. So, in order to keep that cycle from hitting our economy as a direct shock, what we need to do is build up a certain level of savings.

For example, during a boom, you set aside a small amount of money into a fund. Then, when the economy slows, you find yourself short of money. So you draw that saved money back out and spend it. If you keep doing this consistently, our national budget could run along like a steady, level line, so to speak.

Now, in order to solve exactly this problem, Mongolia established a Fiscal Stability Fund, along with the legal framework needed for it. But here is what things actually look like today: on average, our national budget has been running at around 34% of GDP — that "level line" I mentioned has instead run well past the surplus revenue coming in. If we had simply kept it at 30%, as we once did — back when our economy was three or four times smaller than it is today, and the budget was equal to about 30% of domestic GDP — then, had we kept spending at that same 30% share of domestic GDP throughout, our budget's shortfall would look completely different: the large deficits you have just seen would essentially turn into surpluses. Had that happened, we would not even be talking about the government's own finances today, because our accumulated savings would be more than sufficient. Rather than borrowing money from abroad and pushing obligations forward the way we do today, that accumulated wealth would already be sitting here with us. Just look, starting from 2007 alone: the pale blue-grey line represents the actual line of domestic revenue. The green line shows what domestic budget spending would have looked like had it been held at 30%. The red line shows the actual figure, averaging around 34%. Right at the start, we were running budget expenditures equal to as much as 38% of domestic GDP.

So, from this money alone — had we held spending at 30% between 2007 and 2015 — we would, since 2007, have accumulated 4.3 trillion tugrik, more than the Chinggis Bond itself raised, and we could have used that accumulated wealth to build up the economy. Instead, what did we actually do? If you look at the growth on this chart, we simply handed the money straight out. Why? Because politicians needed to get elected. So money was handed out before elections: 100,000 tugrik was given per child, 500,000 tugrik was given to newlyweds, money was given for cashmere, money was given for wheat, on top of which student loans were handed out, and money was given for wool. We simply distributed this money instead of saving it. Had we saved it instead, between 2007 and 2015 we could have accumulated 4.3 trillion tugrik. Why did things play out this way? Because we were making decisions just like those of the gold-panning family I described earlier — because our income is not stable, it is windfall income; it rises and falls with the price of the raw materials we dig out of the ground, and when prices rise, we suddenly find ourselves rich. If you remember, we once had a windfall-profits tax that took 68% from one particular sector — a law passed specifically because a single copper company's earnings suddenly surged along with the world market price, and the state took a 68% windfall cut from it. So what became of that 68%? It simply turned into ordinary budget spending. Instead of using that money to build a genuinely powerful economy, we just handed it straight back out. As you will all remember, support was extended across so many different sectors of the economy — the number of people simply receiving handouts kept rising, and the size of those handouts kept rising too. So now, let's set aside today's actual economic realities for a moment and simply look at how income gets distributed in general. Income, broadly speaking, is distributed through two major systems. One is distribution through the factors of production. The other is the redistribution system — those are the two major channels through which income is allocated.

The factors of production consist of three things: labor, land, and capital. Through labor, income is distributed in the way we all know: you work, and you earn a wage. That is how you receive your share of the wealth and income being generated.

You receive it in proportion to your own capacity to take part. So what, really, is wealth? I understand it as something created by a particular segment of society — in truth, created by business organizations. Some of us create wealth by digging into the ground.

Yes — by mining coal, for instance, and calling that wealth creation. So, in the essential terms of the economy, how do we build wealth through labor? The wealth we generate through our labor today reflects our level of participation — how much we are genuinely contributing to the economy. Our median wage is currently around 800,000 tugrik, a figure that keeps shifting. That comes to roughly $370 a month flowing home through labor. Next comes land. Here, what happens is that people who own large amounts of property generate income through this channel — that is, income through renting it out.

In the past, land ownership was regulated by law in such a way that this particular channel of income distribution has become essentially fixed, beyond further change — very few people hold valuable capital of this kind. Then there is the income-distribution system built on capital — generating income from capital you have already accumulated. This takes two basic forms. One is investing in the shares of an operating business, where the company distributes its annual dividend to households.

The other is buying, say, part of a building and renting it out, earning income through rent. And a third is depositing your money with a commercial bank and earning interest income from it. Taken together, these are the main systems through which income is distributed across the economy. Now let's all look at our own wage levels — for instance, if we compare our median wage to the full capacity of our economy, we ought to think carefully about what level that actually represents. Second, there is this third channel — income from capital.

We don't need to say much more about land — it is no longer something that concerns many people at this point. So let's just look at income from capital. In our commercial banks, 90% of total deposits are held by only 5% of depositors. That is a deeply unequal distribution. And if income keeps failing to be distributed more evenly, there is something very important we need to discuss on top of that: whether this society can remain stable and continue to grow and develop going forward. In other words, what this means is that one segment keeps earning higher and higher income, while another segment's income never grows at all — and the gap between high earners and those whose income never grows just keeps widening. As that gap widens, a sense of resentment and hopelessness begins to take hold across society. And that is the single greatest underlying cause of long-term instability.

So what should we do? We need to narrow the income gap. One way or another, we need to bring it closer together. But we tend, for the most part, to try to close that gap simply by taxing the wealthy more heavily, and some revolutionary-minded movement takes to the streets over it. People hold rallies, marches — "let's go after the rich," and so on.

But what does that actually accomplish? That is a redistribution mechanism rooted in resentment. There is, however, a different system of redistribution — one that runs through the state. Within that state-led redistribution system, there are two major components. One is government spending.

The other side of it is raising taxes — collecting tax revenue from those who earn more and reallocating it into a form that is more broadly accessible. Behind that lie things like the free healthcare, free general education, and public infrastructure we all rely on — the reason we can, one way or another, drive on the roads for free should be understood as a form of income redistribution, because that road was built with money collected from taxpayers, which is exactly how income gets redistributed. The next system is the Social Insurance Fund — income redistributed through social insurance. So if we cannot make these systems work properly within our own economy, then the gap between rich and poor will simply keep widening going forward. There is a political catchphrase people like to use: "we will build a prosperous middle class." But how can a prosperous middle class actually be built through a one-month election campaign held once every four years? It simply cannot be done that way.

This can only be achieved by actually making these redistribution mechanisms work within our own economy. Let's go back and look at the Social Insurance Fund. Its spending is shown in red, its revenue in green, and its deficit for 2015 is shown as well. So what is really happening to us today? We are living through a demographic "window," so to speak — our country has one of the highest shares of working-age population relative to total population of any country in the world. And yet, despite that, our Social Insurance Fund has fallen into deficit — running a shortfall that very year. In 2015, it ran a deficit of 373 billion tugrik. That annual deficit will grow to more than 400 billion tugrik, and it will keep growing further from there. The deeper cause behind this lies in our current demographic structure.

What is actually happening here reflects the falling birth rates that set in around the turn of the millennium. You can see the drop in birth rate clearly on the chart, and it has kept declining since. Overall, the population pyramid still looks reasonably well structured for now.

Yes — but by 2040, that pyramid will look quite different. Here is what is happening: average life expectancy, especially for women, keeps rising. Meanwhile, on the other side, the birth rate is not going to rise going forward.

At this point, it is becoming difficult to even call this shape a "pyramid" any more. Behind that lies the fact that the Social Insurance deficit I just mentioned will only keep growing. What is driving this is our demographic structure: today, for every 10 working people in Mongolia, 4 pensioners depend on them. And that is just the overall figure — the Social Insurance Fund actually comprises five separate sub-funds. Looking only at the pension sub-fund, the ratio has already fallen to roughly 2 working people for every pensioner, according to World Bank estimates. By 2020, that ratio will be 3.5 to 1; by 2030, the deficit will reach 4.2% of GDP, with the ratio falling to around 7 working people for every 10 pensioners.

By 2040, it will be 8 pensioners for every 10 workers, with a deficit equal to 5% of GDP. Right now, our national budget deficit running at around 5% of GDP is already treated as an enormous problem — and that is before accounting for the fact that the pension sub-fund within the Social Insurance Fund alone is heading toward a deficit of that same size, 5%, by 2040. Now, on the other hand, what happened to all the money we have been paying into the Social Insurance Fund over the years? Does it still exist somewhere? What do you think? After paying into social insurance for 10 years, is "my money" actually still there? It is not — because the Social Insurance Fund has effectively become just another line item within Mongolia's consolidated national budget, and whatever revenue comes in during a given year simply gets spent within that same year. So the pension contributions I built up over the past 10 years are not actually sitting anywhere in that fund. And on top of that, the deficit keeps growing.

By 2040, the deficit for that year alone will equal 5% of domestic GDP, with no accumulated reserves whatsoever to draw on. Now, here are the key initiatives. Between 2007 and 2015, we had the opportunity to accumulate 4.3 trillion tugrik, and instead we split it up and spent it. Now imagine if, by that same discipline, we kept the budget capped at 30% of domestic GDP going forward. In that case, over each of the next five years, we could channel roughly 1 trillion tugrik a year into the Social Insurance Fund alone. Do that for five years — instead of letting the budget blow past that 30% cap, redirect the difference into the Social Insurance Fund — and, on average, we could set aside around 1 trillion tugrik a year purely through that discipline. If we do that, over the first five years we would accumulate 5 trillion tugrik. Assuming a 5% annual return on that amount, by 2040 the Social Insurance Fund could grow to 14 trillion tugrik — from Social Insurance Fund savings alone.

As for how to think about that return: a 5% annual return means the fund keeps compounding forward on its own momentum. If we can make that happen, we will be able to live with real confidence in the future. We will no longer need to worry about our old age. Now let's look at the next fund — the Future Heritage Fund follows the same kind of calculation. Over the following five years, of course, the economy keeps growing, and the budget grows along with it — even holding spending at 30% of GDP, the actual budget amount still rises as the economy grows, and investment keeps growing in step with that growth. So, over the next five years, assuming the economy keeps expanding, we could set aside around 1.5 trillion tugrik a year in savings, just as we did with the Social Insurance Fund over the first five years.

Over the following five years, we would accumulate 1.5 trillion tugrik a year in the Future Heritage Fund. If we do that, by 2040 we could build up 22 trillion tugrik in the fund from natural-resource revenue alone. This does assume something, though: that a project like Tavan Tolgoi, which today is operating far below its full capacity within our economy, continues at roughly that same, reduced level. If larger projects come fully online going forward, this heritage fund could reach that same scale in an even shorter period of time.

So, as long as we simply keep the budget from exceeding 30% of domestic GDP, we can accumulate this amount of money and bring it into the capital market. Next, let's talk about a different and interesting kind of fund — non-profit funds. Now, are there people here who studied abroad? Did anyone study on a scholarship — not a government scholarship, but some other kind?

Is there anyone? Where did the scholarship come from? "I studied in Russia," someone says. Was that an endowment scholarship? Was it from a private organization?

Not a Mongolian one — a foreign one. So, for example, what is an "endowment fund"? What do you all think? How does it actually work?

In our country, what we call scholarship funding is given, for example, by the Zorig Foundation. Golomt Bank gives some too. But it's only given for that one particular year. Right — they run a selection process each year and award it to, what, 50 students?

50 or maybe 100 students receive it — just for that one year's tuition. Now, plenty of our friends have studied at excellent universities abroad. But it wasn't through government scholarships; it was through scholarships from other kinds of funds. So the natural question is: where does that money actually come from?

Right. And that is where the concept of an "endowment" comes in — something we simply do not have. Our country's own history here is still very young. In 1997, our government passed a law on this.

When that law was passed, it bundled together public-benefit organizations and another category into a single classification and left it at that. The concept of an organization "serving members of society" ended up depending heavily on the state, because the state has never handed over any real degree of self-governance to these organizations — which is exactly why they have failed to develop. Let's set that aside for today, since we are focused on economic questions, and instead talk about the other side of things: non-profit activity. What exactly counts as non-profit activity?

Take, for example, an orphanage. It gives children a place to live, hires staff to help raise and educate them, and provides them with food. Where does that money come from? It comes from asking the public for donations.

"I can raise and educate 50 children here — please give me a million tugrik." They ask for donations like that and run the orphanage on it. That is one form of non-profit activity. The scholarship funds I mentioned earlier are another.

There is similar activity in the healthcare sector. There are also funds focused on media and on psychological support. There are policy-research funds that finance organizations tasked with monitoring government activity from the outside. There are non-profit organizations focused on environmental sustainability and restoration. And there are funds that provide money to all of these kinds of organizations.

So how do these funds actually work? On one side, they raise money from the public through donations, and on the other, they use that money to finance all sorts of activity aimed at the public good. Mongolia has no law governing this specific kind of fund — we simply lump this activity together under what we call "public-benefit organizations," which is not the same thing at all. Behind that lies the fact that what we call a "public-benefit organization" functions almost exactly like a company. In economic terms, a company does business and earns a profit — profit being whatever is left after subtracting expenses from revenue. Well, the exact same process happens inside a non-profit organization: revenue exceeding expenses in a given year is, functionally, the same thing.

That surplus is, in effect, a profit for that year. But here is the difference: people do not get to split that profit among themselves. It has to be spent back toward the organization's mission. The following year, it gets spent toward that mission again. That is exactly why people choose to work at non-profit organizations.

And the members of a non-profit's board of directors are people who do not draw a salary from it. So, in order to build the kind of accumulated capital that sustains this kind of activity, societies have developed specific laws for these kinds of funds. You do not have to run the non-profit activity yourself — instead, you put money into such a fund, and that fund, through its own selection process, channels the money out to whichever non-profit activities it chooses. That entire system requires a proper legal framework, and we simply do not have that legal environment — which is exactly why we do not have this kind of fund in Mongolia.

That is exactly why Mongolian children have to ask their own parents for money in order to go to school. That is exactly why, when Mongolian children want to pursue an education, they end up looking to the government for help — or, perhaps, to some well-connected acquaintance. If we established a proper endowment-fund system in Mongolia, there are plenty of business owners out there who want to help society. There are plenty of business owners who want to give back as much as they can.

On top of that, there is another major mechanism that supports non-profit activity: the tax system. This has two sides — first, the concept of corporate social responsibility, and second, tax incentives. Most countries offer some form of tax exemption to companies that donate to non-profit funds of this kind, deducting the donation from taxable income. On the other hand, engaging in activity for the public good also becomes, for companies, a new way of building their own brand while doing business — and that is exactly why capital keeps accumulating in these non-profit funds, and why the size of these funds keeps growing. Now, Parliament currently has before it a bill amending the Corporate Income Tax Law. Under this bill, businesses with annual sales revenue up to a certain threshold — some of the business owners here mentioned it, I believe up to 1.5 billion tugrik — would pay a flat 1% tax rate. But this bill has two or three flaws. First, it differentiates companies by sector: some sectors would qualify for this reduced rate, others would not — in other words, it discriminates by industry. Second, and this touches on something important, it undermines the national tax system as a unified whole. Our tax system currently has three tiers. Before, there were two — 25% and 10%. Now, they are adding yet another new bracket on top of that.

And once that happens, will the tax authority actually be able to enforce this new one-percent bracket? Frankly, I don't believe it will. Take, for example, a company with 100 million tugrik in annual sales revenue. Let's say its annual profit margin is 20%.

Given today's lending rates, let's say it is operating at a 20% margin. Under this bill, it would pay just a 1% tax on that profit. Is the tax authority really going to chase down every such company and run detailed audits to enforce that? This will genuinely undermine our own tax system. On top of that, businesses will start splitting themselves up to stay under the 1.5-billion-tugrik sales-revenue threshold. Just consider: the bill states that the income of related business entities will be combined and taxed under a single taxpayer. Suppose I co-own a company with you — you hold 55% of one company, and I fully own another. Suppose that, through the company I fully own, I effectively control the other 50% of your company as well. Your company earns 1 billion tugrik in revenue; my company earns 800 million tugrik. Then the tax office comes and says: excuse me, these two are related entities, so their combined taxable income will be assessed together — meaning they now want to tax me on 1.8 billion tugrik combined. Naturally, this other person is not going to agree to that. Why would they?

Because of me, this person now ends up paying a 10% rate instead of the 1% they could otherwise pay. So what do they tell me? "Stop owning that company through me — go hold it in your own name instead." Fine — I'll just switch it over to my own name.

And now these two entities are no longer considered related. The Tax Authority itself estimates that this would exempt somewhere between 27 and 30 billion tugrik a year from taxation. So many loopholes are being opened up here — that is the other side of it.

So what real options do we have? Without breaking our tax system, this would not even move the needle on the budget anyway — 30 billion tugrik simply is not a meaningful amount. Mongolia's national budget runs somewhere between 7 and 8 trillion tugrik, so 30 billion barely registers against that. So instead, without disrupting the tax system at all, we could simply let taxpayers decide for themselves which fund to direct that portion of their tax payment toward. They still pay their taxes in full, the same amount as always — they just get to choose which fund the money flows into, and it gets redirected there. If we do that, we could build an enormous foundation for our civil-society sector — an opportunity we will not get again. This bill, together with the annual budget law, is set to be debated in Parliament at the same time. If we get it passed, it is designed to phase in over four years, from January 1, 2017, through January 1, 2021. So, even on the most conservative estimate — say we only ever reach that 30-billion-tugrik figure per year — over these four to five years, from this opportunity alone, we could build up 120 billion tugrik for the civil-society sector.

Of course, this comes with a condition: any non-profit organization receiving this money would be required to spend at least 50% of what it raises each year toward its mission. It could hold on to the rest as savings for its mission going forward, but at least 50% has to be spent. Extrapolating that growth forward, by 2040 we could build up around 100 billion tugrik in accumulated capital, channeled through the non-profit sector.

Now, if we bring all of this accumulated capital into the capital market, we come right back to the question I raised earlier: why is our interest rate so high? If we can build a capital market equal to at least 30% of the loans issued by commercial banks — and crucially, that 30% carries none of the underlying deposit-interest cost that bank loans do — then commercial banks will have no choice but to bring their own rates down. Everything I have described here is actually quite simple to do: we just need to keep our national budget capped at 30% of GDP, and put the resulting savings to work — the first five years into the Social Insurance Fund, the next five years into the Future Heritage Fund, and alongside that, build up capital in non-profit funds. It sounds almost too easy — so why isn't it being done? It's not that people don't understand this. People understand it perfectly well. The people in political circles, the people making the decisions — they all understand it, they all know it. So there are really only two reasons this isn't happening. One is governance, and the other is the social sector. On the spending side of our national budget, the social sector accounts for an enormous share — just look at the number of people on the government payroll. About 70% of them are social-service workers: doctors, nurses, and caregivers working in healthcare on one side, and the education sector on the other.

So these two sectors alone place a massive burden on our budget. And the other issue that never gets resolved is the governance problem. If we can just solve these two issues, our economy will genuinely become "economics without politics." The people who make economic decisions will get to make them on economic grounds, and this country will become wealthy and full of capital. For this country, I have just described three funds.

The Social Insurance Fund, the Future Heritage Fund, and non-profit organizations. Each one, on its own, involves a relatively modest amount of money. But together, these three funds entering the capital market would create real monetary weight within it. Genuine monetary weight.

Why do I say that? Take our own capital market — why has it never developed? We even brought in expertise from the London Stock Exchange to help build it up — I believe we spent something like 8 billion tugrik or more on that, though I don't recall the exact figure — and a Financial Regulatory Commission was set up as well. But it still hasn't improved. Brokerage firms exist, but they haven't improved either. The reason is simple: there is no money. Annual trading turnover on our exchange is only 30 billion tugrik — it simply isn't attracting anyone's interest.

If we bring 12 trillion tugrik into the capital market, the participants operating within that market will improve their own rules and standards. Those participants will begin trading actively. More companies will enter the market. And once that happens, a whole new investment environment gets created — one capable of carrying the economy forward. Once that environment exists, it drives the whole economy forward on its own momentum, and we will see a great many businesses spring up that simply cannot survive today. Businesses operating on 10% margins will become viable. If we bring our real lending rate down to 4%, then a business earning even a 10% profit margin becomes perfectly viable in Mongolia. And that, in turn, creates jobs. And what follows from that? Competition emerges in the labor market. And it is exactly that competition that brings us back to the income-distribution mechanism I described earlier — because that is the only way wages actually rise in real terms. Why is this such a persistent problem in the labor market? I spent two years at the Institute of Labor Studies researching the labor market, from both the demand side and the supply side. There are two major problems in the labor market. One is information asymmetry: a worker has no reliable way of knowing what the realistic median wage for their work actually is. Suppose there are three welders. One works for a mining company, one does freelance welding jobs on his own, and one works for a construction company. The construction-company welder earns 800,000 tugrik; the freelance welder with his own equipment earns 2 million tugrik; and the one at the mining company earns 4 million tugrik — yet even though the construction-company welder may be more skilled than both of the others, he cannot get his wage raised, simply because that information does not exist anywhere in the market. The only labor-market information available is what gets posted in a couple of job listings when an employer wants to hire — there is no way to access real, comprehensive labor-market information, and that is exactly why people cannot get their wages increased. On the other side of this is a principal–agent problem, tied as much to ethics as to that same information gap: on one side, company management is trying to hold the wage bill down, while on the other, each worker is trying to negotiate a slightly higher wage for themselves.

So when this mix of imperfect information and conflicting incentives comes together, information about wages becomes even more closed off. Someone who has been working steadily has no real way to negotiate over their own pay, which is exactly why wages fail to rise. Broadly speaking, over the last 30 to 40 years, the International Labour Organization and highly developed countries around the world have used a whole range of tools aimed at balancing out information between labor-market participants. But one thing has become widely accepted: labor-market information will never become perfectly balanced or perfectly transparent. So, in the end, there is really only one lever available.

And that lever is competition in the labor market. Only when genuine competition exists in the labor market do wages actually rise — the more in demand that welder becomes, the more his wage will rise. So the single most important thing we need to do is bring the interest rate down to a level where even lower-margin businesses can survive. If we manage that, we will create an enormous number of jobs. Mongolia is actually a country that suffers from a labor shortage — we simply fail to make use of it. Just think about it: over the next 10 years, we have the opportunity to bring an amount of money into the capital market roughly equal to the size of our entire current economy.

And if we bring that kind of money in, our labor market will recover within just a few years. Within just a few years, people will have full employment. Within just a few years, our vocational and technical training institutions will be filled with students who genuinely want to be there. Today, roughly 500,000 children graduate from general secondary school each year, and about 65% of them go on to pursue higher education.

And of the 100% who do complete higher education, only 40% actually end up working in the field they trained for. That's not acceptable. The other 60% simply spend years of their lives on something that ultimately leads nowhere.

So how do we fix this? We can only fix it by creating genuine competition in the labor market. And in order to create that competition, what do we usually look for? We look for money — someone from outside to help us, a loan from abroad. No — instead, if we use our own domestic resources and possibilities to build up savings, we can energize our own domestic capital market without needing any outside investment at all. And once we have built up that savings, we can start thinking about something else entirely: making investments abroad. That is exactly how a country builds real monetary power. And once a country builds that kind of monetary power, its credit rating improves as a direct result. Take our government bonds: when we issued the Chinggis Bond in 2012, the interest rate on that bond was 4.5%. Now it might be as high as 11% — meaning Mongolia's international credit standing has fallen by more than half. Why? Because it turns out we cannot pay back our debts. And if you ask where this debt problem originally came from, it traces almost directly back to that same government budget deficit I described earlier.

Today, because we cannot repay our debts, we are inviting in the International Monetary Fund and asking for help — and that, again, comes back to the very same budget issue. Had we kept our budget capped at 30% of GDP, our government would not need to issue bonds abroad or borrow money at all. In fact, Mongolia's international credit rating would have improved, and with a higher credit rating, investment would flow toward us far more easily — we could attract foreign investment at rates of just 2 to 3% a year. And the government would not even need to take on that financing itself; private businesses could just as easily issue their own bonds, or take in direct investment. Because monetary power of this kind only pays off once it has not already been divided up and consumed across the whole economy. Once it has been divided up and consumed, none of this makes any difference at all. We took that 4.3 trillion tugrik and split it up and consumed it within 10 years, and in just three years, how far did Mongolia's international credit rating fall? From 4.5–5% all the way up to 11% — that is how far the yield on Mongolian government bonds has climbed.

So, if we can just solve these two problems, we will have taken politics out of the economy altogether. If we do that, economic policy will become genuine, substantive policy. And if we do that, we will not need to worry about inflation. We will not need to worry about the exchange rate. We will not need to worry about economic growth.

Politicians, in particular, will not need to worry about any of it. Now, today, especially heading into the parliamentary elections, most of our political discourse is being steered toward some kind of "miracle," with everyone promising to deliver one in the next term. But at the same time, with the other hand, our future is being sold off and squandered — and we need to understand that clearly. So, as I said earlier, I see the budget deficit as the deepest underlying cause of our political economy — first is governance, and second is the social sector, where reform is needed. As for how we got here: I touched on this briefly earlier. In 1992, our new Constitution was adopted. After that, we established our state institutions, and most of them reflect what is written in the Constitution — the judiciary, the legislature, and the executive were all set out in law. After that came business organizations. Before that, we had been shifting away from a centrally planned economy toward a market-economy mechanism. So, in order to define the legal environment for business organizations and the role they play in society, we passed the Company Law, the Partnership Law, banking laws, and the Tax Code — these are, broadly speaking, the core laws regulating fundamental business relationships, and we did put those in place. After that, we passed a law on civil-society organizations — the Law on Non-Governmental Organizations, in 1997. But we never passed a law specifically for the funds that support the non-profit activity carried out by civil-society organizations. That is exactly why, even though we have 9,000 registered non-governmental organizations in Mongolia, we still do not have even a single education-scholarship fund capable of supporting, say, 5,000 children with tuition assistance — and that is tied directly to the fact that we have never passed a law for this kind of fund. There is another issue as well: we have never really reformed the Law on Political Parties. We did pass a Law on Political Parties, but it is a law that simply does not fit a modern system of governance. And this system of governance itself breaks down into four parts. The first is the issue of the so-called "unelected minister."

A great many of our problems start right here. In principle, a government cabinet is supposed to function as a collective body, in which the prime minister and the other ministers together make up something like a body of 50 people — that is the basic principle of parliamentary governance. What does that actually mean? Think of it just like any other institution: it is an organization that serves its own members. The members hold a general meeting and elect their leadership. That leadership body then sets up a working apparatus alongside itself. That body appoints someone to run day-to-day operations — call it an executive director, someone who manages that working unit. That person does the job and then reports back to the leadership on how it went. It is exactly the same idea here: we hold elections, we form a Parliament, and Parliament is supposed to set up a working body — the government — alongside itself. That, in principle, is the whole idea of a "cabinet."

So Parliament should be asking that cabinet: what will your annual budget be? What activities will you carry out? Bring us your plan, and we will approve your budget. Then go and do the job. It should not come down to who ends up in that working body being decided by "this is my relative," "I like this person," "this is the person I want working there" — there should be no such principle at play. But under our current law, every single member of the government has to be brought before Parliament individually and, in effect, "blessed" one by one.

And once someone has received that "blessing," it turns out they end up serving whoever granted it. In principle, behind that lies another issue: the electoral system. We need to look again at exactly how our electoral system affects the national budget, because Mongolia is a unitary state, not a federal one, which means we need a single, unified fiscal policy. And yet our electoral system runs on a 76-seat constituency system. So think about how a member of parliament actually gets elected. Go back and look at all the campaign materials from any election. What do they say? "We will build a school." "We will build a kindergarten." "We will pave a road." "We will build an elder-care center." "We will build this, we will build that." "We will give out child-support payments." In other words, members of parliament get elected by campaigning, in effect, against Mongolia's own unified national budget policy — against the country's consolidated fiscal policy — and they get elected out of small individual constituencies, 76 seats in total. So then what happens? When a minister comes in afterward — say the Minister of Education — a member of parliament might say: "if you build a school in my constituency, I'll support you; if you stay on good terms with me, I'll support you" — and ministers effectively get "blessed" this way. So, on the other side, the cabinet — which is supposed to be a collective body that makes decisions together and bears responsibility together — loses that collective character, because each member of parliament individually has to keep looking good to their own constituents. Members of parliament end up needing the budget to reflect whatever their own constituents are demanding. And these members of parliament were each elected from small individual districts.

They were elected from small individual constituencies. This system was tried and tested right up through the 2012 election, and what did we get from it? As you will remember, right up until 2012 we never once managed to carry out a truly national infrastructure project. We never built a single major road with a genuinely national vision. We never once managed to plan a unified national electricity grid from a proper, big-picture national perspective. We failed to develop regional infrastructure hubs. Why? Because none of that interested them — what interested them was only their own constituency's budget, not big-picture, long-term national development and investment planning. And on top of this parliamentary electoral system, we then form a government made up of these unelected ministers, who in reality do not truly answer to the prime minister's authority — because what actually happens is that each minister goes to Parliament individually and reports on their own work there.

But instead of reporting "here is what the government as a whole has accomplished," the system pushes them to report "here is what I personally delivered to your constituency" — and that is precisely what undermines Mongolia's unified national fiscal policy. It's one of the biggest problems in our system of governance. Second is the mixed proportional electoral system. Depending on the electoral system in use — if we look back, one past parliament had 26 members —

or 28, elected under a proportional system. What did those members do differently? Those elected members campaigned on national-level issues. Their promise to voters was that they would carry out the most urgently needed projects for the economy as a whole — not "we'll build a road connecting Govi-Altai province," and not "we'll build a warm shelter for livestock in some particular district." They had no such localized promises. But now we're back to a 76-seat system.

And now everyone does exactly that: building livestock shelters in district centers, building community halls, renovating cultural centers, fixing up Naadam grounds, planting trees around the district.

Building a concrete gate at the entrance to the district center. If any of you traveled around the countryside recently for the 90th-anniversary celebrations, you will have seen this: every single district built some kind of large gate at its entrance, out of iron or whatever material was available. Most of that money came straight out of the national budget.

So Mongolia's unified national fiscal policy is being undermined largely because of this electoral system, and because members of government end up going around getting "blessed" one by one. On top of that, there is a further issue: we have never really addressed the role of political parties within our system of governance at all. Today there is an odd clause buried in our Law on Political Parties. For example, the Democratic Party's National Council, or the Mongolian People's Party's National Congress, are described as the core institutions of a political party, elected by that party's general congress. But in practice, this does not happen the way the party's own charter, or the law, describes it. For the Democratic Party, the National Council is technically supposed to be elected from within the party's own general membership. As for the two major parties, generally speaking, the MPP works like this: the party chairman gets elected, and the chairman essentially draws up a list of names, brings it to the party congress, and has it ratified there. So why does internal party governance matter to the national budget at all? Because political parties, as institutions, are no longer able to identify and put forward the best possible candidates through any genuine selection process.

On top of that, we also have to talk about the internal governance problems within political parties themselves. The first issue is that there is no real internal party election process to speak of. Think, for example, about who these people actually are: they become members of parliament, they become members of government. Look at the positions of power we have today — ministers are political appointees, appointed through their political party. They go on to exert further influence over the civil service as well. So political parties are effectively what produces our politicians, which means their internal governance matters enormously. Let me use the Democratic Party as an example. In the Democratic Party, the main decision-making body is called the National Council, made up of 228 members. To get into that body, you first have to be elected from a mid-level party body.

That mid-level body — the Party Congress — has 105 members, elected from the grassroots level at the provincial and district level. To get elected to the National Council, I first have to win election from among that group of 105. So really, I only need to work with those 105 people. To win 50% of the votes among those 105, at least 50% of them need to personally know me. And beyond simply knowing me, I can also, one way or another, incentivize them to support me.

I can use money. Once I get elected this way, I become a National Council member, and from there I get to take part in the party's major decisions. From that position, on the strength of having become a National Council member, I can run for Parliament. I can become a minister. That's how it works.

So, in order to become a National Council member, I really only need to work with those 105 people. Everyone else is irrelevant. The Democratic Party has 17,000 members in total. But to become a National Council member, all I have to do is win over the 105 members from a single province or district.

So I never actually have to represent the values held by that broader party membership. Now let's look at the MPP's National Congress. There, the party chairman is elected by — well, by a body of around 400 people. Or maybe 350: the chairman puts together a list of 350 names, brings it to the party congress, they discuss it, and the congress ratifies it. The MPP itself claims to have over 200,000 members.

But what real connection is there between the views of those 200,000 members and the list of 350 names put forward by the party chairman? Honestly, we don't know. And yet these are exactly the people who go on to become the next members of parliament, the next ministers, and quite possibly the next senior civil servants. So if we want genuine internal democracy within political parties — if we truly want to build democratic governance from the ground up — we have to start with the political parties themselves. Let me share a bit of history. We call the 1911 revolution the "Revolution for Freedom." It freed Mongolia from Manchu rule and declared its independence, built on the idea that Mongolia should be recognized by the world as a sovereign, independent nation.

We call that the "Revolution for Freedom." It was, at its core, a revolution about sovereignty. Whatever else, Mongolians began, for the first time, to no longer be ruled by others — after more than 200 years, we had a state of our own once again. Then, in 1921, another revolution took place.

We call that one the "People's Revolution." The first revolution was about sovereignty; the one that followed was understood, at least in principle, as a revolution built on the idea that the people themselves would hold state power — a state founded on the will of the people, with power placed in the people's own hands. Anyone who has read the official "History of the Mongolian People's Revolutionary Party" — it has been published twice, once in the 1950s and again in 1985 — will find both editions absolutely full of language about democracy; the word "democracy" appears constantly throughout. But was there actually democracy back then? Was the kind of state we live under today the same kind of state that existed then? No, it was not. So why do we call the revolution we carried out in 1990 a "Democratic Revolution"?

Both terms share the same root — "ard," meaning "the people." One is called the "People's" revolution, the other the "Democratic" one. So what actually changed with the 1990 revolution? It meant that, in forming the state, the people would elect it directly.

The body holding state power — the State Great Khural — would have its members elected directly by the people. Not through intermediaries, but by direct election. Before that, the earlier "People's Revolution" had also built a state and adopted its own constitution, and it built its state institutions according to that constitution — but there, the right to elect was delegated through intermediaries. Back then, membership in the Politburo had essentially no connection to any direct vote from the ordinary people of that era.

That's because those people were never elected by the public at all. Politburo members were, in effect, elected from within the People's Great Khural itself — chosen internally, from among themselves. The Politburo would then put forward, say, a General Secretary, who would effectively be treated as the ruler of Mongolia. So the concept of "representative government" technically existed, but the crucial question is whether the right to elect had actually been delegated in any real way.

Now look at what we have become today: we now directly vote for and elect our own members of parliament. However much people criticize how it works, we do directly elect our own MPs. On top of that, though, the Constitutional Court, for example, ruled that directly electing candidates put forward by political parties violated a certain principle, and struck down that proportional-representation system — that mixed system has essentially been eliminated as well.

So let's go back and look at political parties themselves again — let's look, for instance, at how the Democratic Party is structured. From the very beginning, its structure is built by holding meetings at the grassroots level, electing a provincial or district party committee, and from there electing a body of 105 members. Is that right? Of those 105 people, the numbers vary by area — some districts get, say, 12, some provinces get 6, and so on.

Through that process, people get elected as National Council members. The National Council members then convene and elect the party chairman. Now let's look at all of this together: what real connection does the party chairman actually have to the party's ordinary members? Because the members delegated away their right to elect.

National Council membership — or membership in the Democratic Party's leadership — ends up having essentially no connection to the party's rank-and-file members, precisely because the members delegated their voting rights away. That's exactly why "party leadership" becomes a concept almost completely disconnected from the actual party. Looked at logically, the MPP is really no different: its Congress delegates are elected from the grassroots, the Congress in turn ratifies the chairman's list, and the chairman brings back essentially a pre-arranged list for the Congress to approve. So the question becomes: what real connection does an MPP Congress delegate have to an ordinary rank-and-file member of the Mongolian People's Party?

So what's actually happening here is that this internal breakdown within political parties is exactly what allows corruption to take root inside them. Independent factions start forming within political parties. Whether it's the Democratic Party or the MPP, it makes no difference — the same kind of factional groups form. And what do these people do? They push their siblings, relatives, acquaintances, and business partners into politics. That is exactly why this crucial part of governance has remained closed off and non-transparent all along.

Ordinary people, simply going about their own jobs, never look into or understand the internal workings of political parties. But the single biggest problem facing Mongolia's system of government today is tied directly to exactly this. Just imagine: the Democratic Party chairman needs to secure the support of the National Council members. And that support has essentially nothing to do with the ordinary party member at the grassroots level.

Under the current system, the MPP chairman needs the support of the party's Congress delegates. Beyond that, he has no real connection whatsoever to the party's grassroots members. So we need to start looking at the internal governance of political parties in an entirely new way — the same way, for instance, we look at the judiciary: is it working or not, are salaries adequate, are rulings reliably fair or not — or the way we look at the government itself. We need to look at political parties exactly the same way. A political party is, after all, a group of people bound together by a shared set of ideas, who select someone from among themselves to take state power and carry out that vision and those policies. We need to recognize that political parties are, in fact, constitutional institutions in exactly the same sense. And if the internal governance of this constitutional institution looks the way it does, then no matter how nicely we talk about governance in general, we're only telling half the story.

The last thing that needs discussing is external oversight. Who actually oversees the government's decisions, its activities, the way it carries out its work? For example, here is how we tend to think about it: the National Audit Office provides oversight. We assume the National Audit Office is what keeps an eye on government activity. The National Audit Office actually carries out three kinds of audits.

One is compliance auditing, one is performance auditing, and one is financial auditing — those three. But this is still, itself, part of the state apparatus. It is still just one more branch of government. We need independent institutions that look at things from the outside and can objectively judge what is working and what is not. And we can only build that kind of institution once we have the same non-profit funding mechanisms in place that I described earlier.

Only then will we have a genuinely strong, independent media. Only then will we have genuinely independent policy-research institutions. One advantage politicians have — or, depending on how you look at it, one of the things that is turning our economy into a political economy — is a naturally "positive" outlook. They tend to frame everything in a positive light. For some good leaders, that positive vision is exactly what pulls society forward into its next stage of development. But for others, that same positive rhetoric does not actually move society forward at all.

On the other hand, what these people often lack is the ability to make comparative judgments. For example, imagine a decision is made to give every university student 70,000 tugrik. That decision gets framed as: "here, we're funding this for you."

But no one asks whether, instead of giving each student 70,000 tugrik, there might be a better way to use that same amount of money to strengthen the education sector as a whole. Our society lacks the institutional capacity to carry out that kind of comparative analysis. Politicians almost never do this kind of comparison themselves. Why? Because they are building their own political brand — "I gave students 70,000 tugrik, and look at the benefit that brought to education" — and they simply move forward with that story. Yet there could be dozens of other, far more effective ways to spend that same amount of money in support of education. We simply lack the policy-research institutions capable of doing this kind of comparative analysis.

That is missing in our society. So, if we can solve these four issues, Mongolia's national budget will become relatively healthy, at least on that side of things. Next is the social sector, where some deeply rooted problems face us. First is education. Why is it that our children, sitting in public schools and receiving a free education, cannot compete effectively?

Why is education free in the first place? For instance, why can't we simply pay the true cost of privately run education? Could this sector be privatized and run that way instead? Of course, at the level of basic constitutional principle, general education must remain free. Every citizen of Mongolia should be entitled to a free general education.

But that does not mean the state itself has to run the entire education sector directly. Where private families can afford to pay their children's tuition, that should happen through private schools, with private investment flowing into that space. Where does the state actually need to step in? Only where families genuinely cannot afford their children's education — that is where free education needs to be provided. But look at what actually happens with us: just look at how much of our national budget flows into the education sector.

And how much flows into healthcare. What does the government actually do? It builds the school building, builds the dormitory, does the renovations, pays for the heating, pays the electricity bill, employs the teachers, designs the curriculum, prints it, distributes it, sells it — the government is involved in every single part of the process. Now take healthcare: at least pharmaceutical imports are handled somewhat by the private sector.

But diagnosis, treatment, disease prevention, and basic medical services all still rest entirely on the government's shoulders. Just looking at healthcare alone: at least $50 million leaves the country every year for this reason, because Mongolians who need this level of care, when they fall ill and there is nowhere here to treat them properly, travel to China. They travel to Korea. Wherever they go, they are seeking healthcare abroad. And that money simply leaves Mongolia.

Why? Because we do not offer a comparable service domestically. And that kind of service will never emerge from a sector run entirely by the state — it can't, because on the other side, there is no competition among private clinics either. Just look at the cost per person of the service being delivered.

We end up spending far more, through the government, than we would under real competition for a comparable level of care — while pushing the rest of the cost out through the state on the other side. In healthcare, this shows up in construction contracts, in medical-supply contracts, and in medical-equipment procurement contracts.

And through that procurement process, corruption and red tape take hold. That is exactly why we pay into the Social Insurance Fund and then still end up waiting two hours in line at a hospital, only to be told to come back tomorrow because the results need to be sent elsewhere, or because a different piece of equipment is needed for a different kind of scan — that is what we should actually be hearing instead. So, in this sector, first, we need to give private clinics the opportunity to invest and run their own operations — though let's be clear, this is still a business, and the state needs to treat healthcare providers as businesses on the other side of that relationship. There is also another concept here: the public-private partnership. In Mongolia, there is a concept called "concession," enshrined in law — a concession law that works something like this: you build a road with your own money, and once you finish building it, the state checks the quality and buys the road back from you, paying you for it over time. That is one form of concession. And in the social sector, this kind of concession model has been used very successfully in many countries, on many large-scale projects. Let me try to explain it simply.

What does "concession" actually mean? Behind the concept of a public-private partnership, there are really three components to implementing any project or program. First is what is called "design." What does design mean? For a building, it means deciding what shape the building should take.

whether it's even needed, and if it is, where the rooms should go and what purpose it should serve — that is what design covers. In the education sector, for example, this would be the curriculum and teaching materials — all the design elements. The next component is operations. Operations means, in education, actually teaching the classes.

In healthcare, it means actually delivering care — the services being provided, the operations themselves. The third component is financing: who is actually going to pay for it? By answering the question of which of these three components should sit with government and which should sit with a private company, we can fundamentally transform the education and healthcare sectors.

And that creates room to move to the next stage of development. Let's just think this through together. Take, hypothetically, District Four — say it's a middle-income area of Ulaanbaatar, with residential buildings and schools.

Let's say 15,000 children attend school there, all in general secondary education. Of those 15,000 children, suppose 2,000 attend private school, and the remaining 13,000 attend public school.

So what's the actual problem here? There are 70 children crammed into a single classroom, so the demand arises to build another school. And the government builds one — even though the money it takes to build one government-run school could build two private schools for the same cost, and even though building it through government just adds one more school without actually improving the quality of education. We end up building schools purely to satisfy the requirement that children attend general education, without ever really improving educational quality. So what if, instead, we use a public-private-partnership model: first, we acquire the land. We look at the location and identify a suitable site — say, one where children won't have to cross busy roads to get to school — and the government acquires that land first.

Then we hold an open, competitive tender: "Build a school on this land with your own money, and provide 10 years of education, charging no more than 400,000 tugrik in annual tuition per student — any takers?" Let's imagine putting that offer out. Probably no one takes it, because building a school is itself a fairly expensive undertaking.

So the next approach would be: what if the government builds the school itself, and then holds a tender asking, "Will you run this school with your own curriculum and your own teaching staff, charging no more than 200,000 tugrik per student?" That, we might actually find takers for. And if even that doesn't work, we try yet another approach: the government builds the school and also provides the curriculum.

We say: "the current cost per student is 100,000 tugrik a year — we'll cover that. But you run the school under our curriculum, hire your own teachers, and charge no more than 200,000 tugrik total per student." Would a management team take that on? Yes, they would. That is a public-private partnership. If we can do that, we no longer need to keep pouring government money into this sector. In other words, what I'm saying is this: take, for instance, families living in a more affluent district —

out of the 15,000 children living in that district, 60% of them could end up attending what is technically a private school under this kind of arrangement, receiving private-sector management within a public framework. That would create competition, and that competition would improve the quality of education. So we could shift children into privately run education without spending any additional money from the budget. Just look at private schools today.

There's a private school in Zaisan charging around $200,000 a year in tuition. Looking at more typical private-school tuition, the going rate tends to be at least 1.5 million tugrik a year. If we could bring that tuition cost down to 500,000 tugrik by arranging with a private operator — providing them land on the condition that it is used exclusively for the school, and that per-student tuition doesn't exceed 500,000 tugrik — under that kind of agreement, we could build a great many schools using private capital. And that, in turn, would ease the burden on our national budget.

Let's look at healthcare the same way. What is our healthcare system, really? On one side, the government builds the building, hires the doctors, and funds it all — it pays the doctors' salaries. And then we go and stand in line for two hours at the hospital with our social-insurance card, and after waiting until the afternoon, the doctor tells us to come back tomorrow for another appointment. Meanwhile, that very same doctor, working at a private clinic, can give you a full examination in a single visit for 200,000 tugrik. So why should the money we pay into social health insurance keep flowing into this kind of sector? If instead we structured the Social Health Insurance Fund so that reimbursement is based purely on the service actually delivered, regardless of whether the provider is public or private, we would no longer need to keep building more hospital buildings. Today, if you look at our public hospitals: back when the Democratic Party led the coalition government, there was a major reform underway alongside the banking-sector reform — a social-sector reform that included privatizing some of the larger district hospitals in the capital. That effort stalled. Only one hospital ended up being privatized — I believe it was the Bayanzurkh district hospital, run by a company whose name I can't quite place right now — right around the time commodity prices spiked. Because of that, the Bayanzurkh district hospital today isn't even recognized as a typical district hospital, because it's a private hospital that earns its revenue by billing the Social Insurance Fund based on the services it actually provides. So, even without a fully separate, independent fund, we already have one working example. If we spin the Social Health Insurance Fund off as its own independent entity, we would genuinely be able to receive care — public or private, it wouldn't matter — get properly diagnosed, and access services on that basis. Now, let's look at how the health-insurance sector works in other countries in relation to pension insurance — what's the connection between health insurance and pension insurance? In some countries, it works like this: if you don't drink, don't smoke, don't take unnecessary risks, and take care of your health, the amount you receive in retirement increases as a result — the two are directly linked. The single biggest problem in healthcare isn't diagnosis and treatment — the biggest problem is prevention. Once a country develops a genuine social health-insurance system, you stop seeing things like this: why do we have these three-story buildings tucked between residential blocks, called "family clinics," with a couple of staff in white coats sitting inside, that most of us know nothing about and have no real connection to? Maybe the occasional elderly person goes there, or a child goes in for a vaccination — but otherwise we have no real connection to it, even though so many of these buildings have been built.

Along with that, so many of these family-clinic buildings have been built, and so many people have been hired to staff them, at enormous cost — yet in countries where the health-insurance fund is genuinely independent, the staff at that same family clinic function essentially as insurance case-workers, actively working out how to reduce the healthcare costs of the people registered with them. That's why they'll tell you: come in this year for this particular screening, because catching it early saves a great deal of money down the road. There are smoking-cessation programs you can be enrolled in, alcohol-cessation programs too. Sometimes they'll check your weight and say your trend looks a bit concerning, let's adjust your diet — that's exactly the kind of thing an insurance case-worker does there. So what do we actually have instead? We have the government pouring money into building a great many hospitals and a great many schools, and in return, what we actually get is: wait two hours, get told nothing can be done today, come back tomorrow — that is the level of healthcare service we receive. This is exactly the kind of reform the social sector needs — it is essential. In general, we need to finally begin the reform that has been left untouched for 20 years. If we can do that, within 10 years we will have a country we can genuinely trust in. Do you remember the very first slide I showed at the start of this talk — comparing average lending rates in the US, Korea, our two neighbors, Japan, and the UK?

If we bring our real lending rate down to 4%, we can achieve genuine growth. What that actually means is that we would come close to China's own lending rate. It would mean being able to manufacture goods at costs comparable to China's. Think about what that means for the real economy. We would be able to sell our meat to China.

We would be able to sell our milk. We might be able to sell healthy vegetables to China. We could sell to Russia as well. That is what real investment leads to.

On one hand, I am talking about the possibility of bringing our real lending rate down to a globally competitive level. But beyond that, Mongolia's real economic potential is not limited to this alone. We have enormous natural wealth. But once we build this kind of savings-based economy, over the following 10 years we will actually be in a position to invest abroad. What options do we have domestically? A large accumulation of idle capital at home can, in itself, eventually become a source of instability —

a source of crisis, in a sense, within the economy. That is exactly why it makes sense to invest part of that capital in other countries. We could, for instance, buy into Wall Street. We could buy into Hong Kong's stock market. We could buy into London's capital markets. We could invest in high-return businesses across the global economy — earning dividends from Facebook, earning dividends from Google. That is exactly how resource-rich countries manage their wealth. We often hold up Norway as an example of a country that does this extremely well — Norwegian companies can invest domestically, take in foreign investment, and issue bonds abroad without any difficulty, because they can raise capital at very low cost with full confidence behind it. Now let's look at our own stage of development. People here like to talk about building a "knowledge economy." But honestly, that's just talk. A knowledge economy isn't something you build in five or ten years. First, we need to become a savings-based economy.

We need to build up our savings. We need to support our domestic companies. That, in turn, drives further economic growth. That creates more jobs. And more jobs mean more competition in the labor market.

That means people's incomes rise. And once we've built this kind of savings-fueled domestic economy, we can start investing our surplus abroad. Maybe after that stage we move into the next stage of development, where we're able to manufacture products that are genuinely competitive on world markets — because by then, our business conditions will be roughly on par with everyone else's, and on top of that we'll have accumulated savings, and our international credit rating will have improved. So, genuinely, over these first 10 years, all we really need to do is build this savings-based economy. And for that, all we need is fiscal reform and social-sector reform.

We don't need to go looking for money abroad at all. If we simply improve our own budget discipline, improve our own governance, and carry out social-sector reform, we can build a savings-based economy by 2025. After that, we set our goals for the following decade. At that point, we'll be manufacturing export-oriented products. We'll be competing with China on some kind of manufactured good.

We'll be competing with Russia on some product. We'll be competing with Korea and countries across Southeast Asia with some kind of product — that's the stage where we could genuinely lay the foundations of the economy. And after that, perhaps we reach the knowledge economy — biotechnology, nanotechnology, information technology, high-value, knowledge-based products. That's the long-term vision. But right now, suddenly jumping straight to a knowledge economy and imagining Mongolia competing head-to-head with a company like Apple, producing high-end products for world markets — that's simply not realistic.

So, to lay the groundwork for that future, we need to accomplish this over the next 10 years. If we cannot build up savings, forget about everything else. Because right now, Mongolia's credit rating is what it is: when the government wants to issue a bond, and the best rate it can get is 11%, no business can grow on that foundation. A company borrowing at a 17% annual interest rate can only survive if it earns more than 20% profit a year.

Every other business simply won't survive. So if we're talking about the next stage of our development, the very first thing we need is fiscal reform. And to carry out fiscal reform, we first need to reform healthcare, education, and the social sector generally. We need to spin the Social Insurance Fund off as its own independent entity. The other crucial issue is fixing our governance.

But to be able to do that, we have to start with the internal governance of political parties. First, we are not going to reform political parties from the outside. What we probably can do is demand that political parties make their own internal governance transparent. We should be looking at political parties exactly the way we look at government institutions. Is it transparent, or is it not?

We need to know who gets elected, and how. If we can do that, we will have accomplished the very first real reform of our governance. Now, I may have only touched on this briefly here, as it relates to political parties, but really this comes down to four major laws: the internal governance of political parties, the Law on Political Parties, the Election Law, and the Civil Service Law. How these four laws get reformed will determine exactly how political parties themselves ultimately change.

Now, I myself am a member of the Democratic Party. 2016 may well turn out to be the year the Democratic Party begins its own internal reform. Perhaps it happens again in 2017. Perhaps again in 2018. Perhaps again in 2020. Reform is never a process that simply comes to an end.

But there is one thing we need to understand clearly: the internal affairs of a political party are not just about who becomes its leader, or what decisions get made inside one particular party. This is about Mongolian society's actual economic policy today. Right now, what we have is not a genuine political economy — it is an economy hijacked by politics, one that has drifted far from the fundamental principles and theories of economics. Because every decision ends up being driven by politics, genuine economics plays only a very small role in it — a very small role indeed. There is almost no decision-making grounded in real economic principles; it is political decisions all the way down, and the deepest underlying cause of that lies with our political parties. Thank you. [applause]