'Mongolia Competitiveness: Where Are We Heading?' Guidebook

MONGOLIA`S COMPETITIVENESS: WHERE ARE WE HEADING?
CONTENTS
Preface Mongolia in World Competitiveness Competitiveness Factors Competitiveness Overall Balance Sheet - Factor Breakdown
4 7 8 11 12 13 14 15 17
Evolution Twenty Strongest Criteria Forty Weakest Criteria and Simulation
Three Competitiveness Challenges Facing the Economy Human Development From Natural Power to Brain Power We Can Do It in the Coming Two Decades
17 20
Labor Market Energy On the Way Towards an Energy Paradise The Energy Sector has a Bright Future 27 31 The Labor Market Paradox Employers Should Blame Themselves, Not the Government 22 25
Annex 1. Economic Assumptions for Competitiveness Factors Annex 2. The Golden Rules of Competitiveness Annex 3. Competitiveness - A Diversity of Thoughts 9 26 29
MONGOLIA`S COMPETITIVENESS:
WHERE ARE WE HEADING? July 2012
PREFACE
Otgochuluu Ch. General Director of EPCRC
WHERE ARE WE HEADING?

You can`t manage what you don`t measure is a well known adage. Unless you are able to measure something you do not know if it is getting better or worse. You cannot manage the improvement of a system if you do not measure to see what is getting better and what is not. With this in mind, we have produced the Mongolia in World Competitiveness Report for the second consecutive year in order to measure where Mongolia is ranked compared to other countries in the world. The inaugural report, published in 2011, enabled Mongolians to see where our country stood and what our strengths and weaknesses were. This second report affords the opportunity to compare Mongolia to other nations and to observe the results of the previous year. At a glimpse, Mongolias competitiveness has improved over the last 12 months. For instance, the countrys overall competitiveness score was 24 in 2010 and in 2011 it increased to 28. However, in terms of ranking, Ukraine (which was ranked in 15th position last year) is now ranked above Mongolia with a score of 33, a significant improvement of 24 points over the last year. As a result, Mongolia is now ranked in the last place in our country selection. Now it is time to focus on determining how Mongolia should move forward and continue to improve its national competitiveness since this country now has a better understanding of where it stands in the world. Today, Mongolia is at a critical point; either it becomes a developed nation that efficiently allocates its natural wealth or suffers from a resource curse with rampant inequality and an unstable political environment. We can learn from the tragic examples of Nigeria and Zimbabwe and, in equal measure, from the good examples of countries like Singapore and South Korea. So, where are we heading? It is clear that Mongolia is entering into a new economic era of growth due to the mining sector boom. Properly defining the challenges and choosing the right development path is a collective responsibility for all Mongolians. The Economic Policy and Competitiveness Research Center (EPCRC) has therefore defined the five main challenges for the countrys competitiveness.
1. Exchange Rate
An economy must have a strong immune system. A creative and innovative private sector creates the backbone of such economic immunity. Despite this fact, local businesses have struggled to survive year after year due to the unstable political environment, strong inflation, and high interest rates. Government spending rose by 56 percent in 2011 and is budgeted to rise by a further 32 percent in 2012. However, most of these expenditures are no different than short-sighted cash handouts and are not aimed at long term development projects in infrastructure, education, health, or fighting red-tape. An increased amount
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MONGOLIA`S COmPETITIVENESS:
of money in circulation creates high demand. For instance, the trade sector experienced 43 percent increase in 2011. On the other hand, the supply side could not meet with the increased demand resulting in 17.3 percent of inflation in March 2012. Although the bank of Mongolia took reformative action by raising the policy interest rate to 13.25 percent, it remains another obstacle for business operators. Income from mining sector Inflation Policy rate Long term investment Employment
What is the Solution?

The central bank should be a guardian of the monetary values. Unless the central bank clearly defines if it intends to manage the internal or the external value of national currency, Mongolia may be left with nothing while chasing two work intensive goals at the same time. Nowadays the publics faith in the central bank has diminished due to confusion over whether the central bank is fighting against inflation or to repair the exchange rate, whereas in any country, the main capital of the central bank is its reputation and reliability.
2. Populism
Our survey results show that as the 2012 election approaches, expectations of instability in the political environment will increase. More importantly, it is said by many that the future of big projects in Mongolia depends on which political party wins the election. During the last parliamentary election, political parties promised citizens more than the economy could afford. In order to realize these promises, the government is distributing handouts in the form of Erdenes Tavantolgoi`s shares and MNT 1 million cash handouts to pensioners and disabled citizens. Such populist election promises further fuel high inflation and have negative impact on state budgets and the overall economy. Election promise Populist policy Apathetic thinking Economic exhaustion

We applaud the recent policy decisions aimed at increasing budget responsibility and banning cash-handout promises. In order to increase the efficiency of the policy implementation arms of the parliament, specifically the government and its agencies, it is important to learn from the experiences of other countries where civil organizations are heavily involved in advisory roles. In addition an independent juridical system, a central bank, and a national audit authority should be all developed and strengthened.
3. Brain Drain
Human capital is the most valuable asset in any organization and rapidly expanding companies in Mongolia prioritize the training of their personnel. Today, as the mining sector is booming, mining companies are attracting and retaining the majority of our talented labor pool by offering significantly higher salaries. This results in a shortage of capable labor force in other sectors, which is draining capabilities and skills across all other parts of the economy. While enterprises are lacking in skilled labor, Mongolias unemployment rate has reached a staggering 10 percent. Even though the country produces over 36,000 university graduates each year, only about 36 percent of them get jobs. It has been found that these graduates are not skilled enough to meet many employers requirements; a silent war for experienced and skilled employees has started across the labor market. Salary level in the mining sector Labor force in other sectors Economic diversification Dutch disease

It is important to reform the tertiary education system and keep on sending Mongolias brightest students abroad for higher education. There is also a need for a policy which supports the development of quality edu-
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cation standards which meet employer requirements. For instance, in Chile, higher education institutes are non-profit organizations, yet there are private-sector representatives on the governing board to provide direct input about what skills and abilities businesses need from university graduates. This model could be adopted in Mongolia.
4. Bureaucracy and Corruption

Mongolian business owners face bureaucracy and government agencies at every step of the way when registering their entities, getting loans from banks, undertaking audits, and submitting to inspections/customs services. They need to prepare numerous official letters and collect many signatures which become a significant burden on time and effort. In addition, when business owners deal with government agencies, they often encounter many unwritten laws all the while corruption remains embedded constant part of the system. Currently, one in four employed persons in Mongolia works in the public sector and it has been found that the younger generation prefers to work in the safe and easy public sector rather than take risks in starting their own businesses. Procedures Corruption Cost of running business Underground economy Price

Customs and tariff policies need to be more flexible. Red-tape should be reduced by eradicating many of the inefficient and unnecessary paperwork that is part of the existing process. This will result in less interaction between business and government agencies, but with a greater degree of organization when implemented properly. Greater automation and the roll-out of e-services would be helpful in creating such a framework. The time and money that business owners save will become drivers of real economic growth and will assist an overall increase of tax revenues of the government. We can take example on Georgia, where their recent increases in economic growth largely result from reforms in business procedures. Courageous decisions by the government are needed to enact these reforms and reduce the number of business procedures.
5. Mining Mongolia
In 2011, a massive 89 percent of Mongolias exports came from the minerals sector, with 92 percent of this exported to China. As the Oyu Tolgoi and Tavan Tolgoi projects start production, these numbers will keep on increasing. But there are some permanent risks: What if the commodity prices fall? What if China decides to purchase fewer minerals from us in the future? Minings growth is putting stress on other sectors. At the same time, due to huge investments made into the mining sector, the importation of mining related machines and equipment is increasing. As a result, the trade deficit has reached USD 1.7 billion which is equal to 35 percent of the overall GDP. Mining export Exchange rate Other sectors

Creating a national wealth fund would enable mining revenues to be effectively invested in other sectors. For example, instead of cash handouts, giving vouchers verified by this fund to energy producers, public transportation companies, and end-users would support these sectors without raising inflation. Introducing new and efficient technologies into the meat and dairy processing sectors would be a significant step, and the development of further trade agreements by the government will also assist this process. The liberalization of strategically important sectors, particularly the energy and the aviation sectors, should continue to occur gradually while attracting foreign direct investments and creating more jobs.
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MONGOLIA IN WORLD COMPETITIVENESS

The EPCRC manages the annual publication of the Mongolia in World Competitiveness report, produced in conjunction with Institute for Management Development (IMD) and its World Competitiveness Yearbook (WCY) publication. The objective of the report is to analyze Mongolia`s competitiveness compared with 14 other economies selected by the EPCRC and covered by the WCY. In addition, a profile of Mongolia`s competitiveness was created to portray the main features, strengths and weaknesses of the Mongolian economy. The overall ranking is calculated on the basis of the 248 evaluation criteria included in WCY (132 Hard and 116 Survey data) and 83 additional criteria presented for background information. By looking at the Mongolia in World Competitiveness-2011 report, Mongolia`s overall competitiveness score has improved from 24 in 2010 to 28 in 2011. However, the ranking shifted one level below the one of last year and Mongolia ranks in 15th position after Ukraine.
MONGOLIA IN WORLD COMPETITIVENESS SCOREBOARD 2011
SINGAPORE 1
QATAR 2
MALAYSIA 3
KOREA 4
CHILE 5
THAILAND 6
KAZAKHSTAN 7
MEXICO 8
RUSSIA 9
PERU 10
SLOVAK REPUBLIC 11
SLOVENIA 12
BULGARIA 13
UKRAINE 14
MONGOLIA 15
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COMPETITIVENESS FACTOR RANKINGS

Competitiveness Factor Rankings presents an overview of Mongolia`s performance in the four major dimensions of competitiveness (See Annex 1). Mongolia ranks in 15th position for Economic Performance, 13th place for Government Efficiency, 15th also for Business Efficiency and 15th for Infrastructure.
ECONOMIC PERFORMANCE
Macro-economic evaluation of the domestic economy
GOVERNMENT EFFICIENCY
Extent to which government policies are conducive to competitiveness
SINGAPORE 1
SINGAPORE 1
QATAR 2
QATAR 2
MALAYSIA 3
CHILE 3
THAILAND 4
MALAYSIA 4
MEXICO 5
KAZAKHSTAN 5
CHILE 6
KOREA 6
PERU 7
THAILAND 7
KOREA 8
BULGARIA 8
RUSSIA 9
PERU 9
KAZAKHSTAN 10
SLOVAK REPUBLIC 10
SLOVENIA 11
RUSSIA 11
BULGARIA 12
MEXICO 12
UKRAINE 13
MONGOLIA 13
SLOVAK 14
SLOVENIA 14
MONGOLIA 15
UKRAINE 15
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BUSINESS EFFICIENCY
Extent to which enterprises are performing in an innovative, profitable and responsible manner
INFRASTRUCTURE
Extent to which basic, technological, scientific and human resources meet the needs of business
singapore 1
singapore 1
qatar 2
korea 2
malaysia 3 malaysia 3
thailand 4
slovenia 4
chile 5
qatar 5
korea 6
russia 6
kazakhstan 7
chile 7
slovak republic 8
slovak republic 8
peru 9
ukraine 9
mexico 10
kazakhstan 10
russia 11
thailand 11
ukraine 12
bulgaria 12
slovenia 13
mexico 13
bulgaria 14
peru 14
mongolia 15
mongolia 15
ANNEx 1. ECONOMIC ASSuMPTIONS FOR COMPETITIVENESS FACTORS I. Economic Performance

1. Prosperity of a country reflects its past economic performance. 2. Competition governed by market forces improves the economic performance of a country. 3. The more competition there is in the domestic economy, the more competitive the domestic firms are likely to be abroad. 4. A country`s success in international trade reflects competitiveness of its domestic companies (provided
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there are no trade barriers). 5. Openness for international economic activities increases a country`s economic performance. 6. International investment allocates economic resources more efficiently worldwide. 7. Export-led competitiveness often is associated with growth-orientation in the domestic economy.
II. Government Efficiency

1. State intervention in business activities should be minimized, apart from creating competitive conditions for enterprises. 2. Government should, however, provide macroeconomic and social conditions that are predictable and thus minimize the external risks for economic enterprise. 3. Government should be flexible in adapting its economic policies to a changing international environment. 4. Government should provide a societal framework which promotes fairness, equality and justice while ensuring the security of the population.
III. Business Efficiency

1. Efficiency, together with ability to adapt to changes in the competitive environment, are managerial attributes crucial for enterprise competitiveness. 2. Finance facilitates value-adding activity. 3. A well-developed, internationally integrated financial sector in a country supports its international competitiveness. 4. Maintaining a high standard of living requires integration with the international economy. 5. Entrepreneurship is crucial for economic activity in its start-up phase. 6. A skilled labor force increases a country`s competitiveness. 7. Productivity reflects value-added. 8. The attitude of the workforce affects the competitiveness of a country.
IV. Infrastructure
1. A well-developed infrastructure including efficient business systems supports economic activity. 2. A well-developed infrastructure also includes information technology and efficient protection of the environment. 3. Competitive advantage can be built on efficient and innovative application of existing technologies. 4. Investment in basic research and innovative activity creating new knowledge is crucial for a country in a more mature stage of economic development. 5. Long-term investment in R&D is likely to increase the competitiveness of enterprises. 6. The quality of life is part of the attractiveness of a country. 7. Adequate and accessible educational resources help develop a knowledge-driven economy.
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COMPETITIVENESS - OVERALL
Economic Performance
14 Countries Average
Basic Facts
Capital Land area (km2 000) Exchange rate (per $) Population (millions) GDP ($ billions) Ulaanbaatar 1,564.1 (2010) 1360.56 (2010) 2.78 (2010) 6.1 (2010) 2,182 (2010) 6.1 (2010) 10.1 (2010) 9.9 (2010) 1.15 (2010) -15.3 (2010)
Rank
13 15 15 8 15 13 14 15
MONGOLIA
Government Efficiency
Infrastructure
GDP per capita ($) Real GDP growth (%) Consumer Price Inflation (%) Unemployment rate (%) Labor force (millions) Current Account Balance (%) Direct Investment Stocks Inward ($ billions) Flows Inward (% of GDP)
2.8 (2009) 27.9 (2010)
15 1
Business Efficiency
Four Competitiveness Factor Rankings divide into 20 sub-factors. It is possible, at a glance, to determine in what areas of competitiveness an economy excels or has particular weaknesses and to make comparisons between the economies. These rankings provide a more detailed examination of specific competitiveness issues and, in addition to the factor rankings, can be used, for example, to evaluate the business environment, support international investment decisions, or assess the impact of various public policies. Mongolia`s best sub-factor rankings are for its International Trade (7th), International Investment (8th), Public Finance (9th), Societal Framework (9th) and Attitudes&Values (9th). The country`s weakest sub factors com prise: Domestic Economy, Institutional Framework, Finance and Basic/Technological/Scientific Infrastructure.
Domestic Economy
International Investment
Employment
Prices
Business Legislation
Productivity & Efficiency
Institutional Framework
Management Practices
Attitudes and Values
International Trade
Public Finance
Fiscal Policy
Labor Market
Finance
Societal Framework
Basic Infrastructure
Scientific Infrastructure
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Technological Infrastructure
Health and Environment
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Education
COMPETITIVENESS bALANCE SHEET

The Table below highlight the strengths and weaknesses by Competitiveness Factor and underline where Mongolia performs best and worst in the four dimensions of competitiveness.
STRENGTHS
1.3.06 Direct investment flows inward (%) 1.2.23 Tourism receipt (%) 1.3.08 Direct investment stocks inward (%) 1.2.22 Terms of trade index 1.2.21 Trade to GDP ratio 1.2.13 Exports of commercial services (%) 1 4 4 5 6 8
WEAKNESSES
1.2.02 Current account balance (%) 1.5.01 Consumer price inflation 1.1.21 GDP (PPP) per capita 1.1.20 GDP per capita 1.2.24 Exchange rates 1.3.01 Direct investment flows abroad ($bn) 1.4.02 Employment (%) 1.2.08 Exports of goods ($bn) 1.3.07 Direct investment stocks inward ($bn) 1.2.12 Exports of commercial services ($bn) 15 15 15 15 15 15 15 15 15 15
2.3.07 Exchange rate stability 2.4.20 Redundancy costs 2.4.01 Tariff barriers 2.2.09 Consumption tax rate 2.4.15 Start-up days 2.4.21 Labor market flexibility (index) 2.5.03 Ageing of society (S) 2.5.05 Social cohesion (S) 2.2.11 Employer`s social security contribution rate 2.1.02 Government budget surplus/deficit (%) 2 3 3 4 5 5 6 7 7 7
15 2.5.04 Risk of political instability (S) 2.3.10 Government decisions (S) 2.4.09 Subsidies (S) 2.3.04 Country credit rating 2.3.06 Foreign currency reserves ($bn) 2.4.18 Unemployment legislation (S) 2.4.11 Competition legislation (S) 2.4.08 Goverment subsidies (%) 2.3.03 Interest rate spread 2.4.02 Customs` authorities (S) 15 15 14 14 14 14 13 13 13
Business Efficiency
3.2.03 Remuneration in services professions ($) 3.2.01 Compensation levels ($) 3.2.19 Attracting and retaining talents (S) 3.2.10 Employee training (S) 3.2.15 Female labor force (%) 3.5.04 Flexibility and adaptability (S) 3.4.07 Entrepreneurship (S) 3.5.03 National culture (S) 1 1 2 2 3 7 7 8
Business Efficiency
3.3.04 Investment risk 3.2.17 Skilled labor (S) 3.2.18 Finance skills (S) 3.1.10 Small and medium-size enterprises (S) 3.2.23 Competent senior managers (S) 3.1.11 Productivity of companies (S) 3.1.04 Labor productivity (PPP) 3.1.01 Overall productivity (PPP) 3.4.06 Customer satisfaction (S) 3.1.09 Large corporations (S) 15 15 15 15 15 15 15 15 15 15
Infrastructure
4.2.03 Fixed telephone tariffs 4.2.01 Investment in telecommunications (%) 4.2.11 Fixed broadband tariffs 4.2.05 Mobile telephone costs 4.5.01 Total public expenditure on education (%) 4.5.06 Higher education achievement (%) 4.4.08 Medical assistance 4.4.26 Climate change (S) 4.1.24 Electricity costs for industrial clients 4.2.07 Connectivity (S) 1 2 2 2 3 6 8 7 8 8
Infrastructure
4.5.03 Pupil-teacher ratio (primary education) 4.4.10 Human development index 4.2.13 Internet bandwidth speed 4.2.14 Information technology skills (S) 4.2.10 Internet users 4.1.04 Access to water (S) 4.2.15 Qualified engineers (S) 4.1.16 Water transportation (S) 4.1.05 Access to commodities (S) 4.4.24 Pollution problems (S) 15 15 15 15 15 15 15 15 15 15
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COMPETITIVENESS EVOLuTION
The criteria below highlight the 25 biggest Improvements and the 25 biggest Declines in the overall performance of the economy. As they are determined by the largest percentage changes in the value of each criterion from one year to the next, it is worth reflecting on where rankings have come down and where have improved to consider lessons learned and continue moving forward in similar fashion.
IMPROVEMENTS
2010 1.3.04 Direct investment stocks abroad (%) 1.3.03 Direct investment stocks abroad ($bn) 1.1.14 Real GDP growth 1.3.05 Direct investment flows inward ($bn) 1.1.15 Real GDP growth per capita 1.3.06 Direct investment flows inward (%) 4.2.09 Computers per capita 2.1.02 Government budget surplus/deficit (%) 2.1.10 Tax evasion (Survey) 1.3.08 Direct investment stocks inward (%) 2.3.06 Foreign currency reserves ($bn) 1.2.08 Exports of goods ($bn) 2.4.20 Redundancy costs 1.3.07 Direct investment stocks inward ($bn) 3.2.17 Skilled labor (Survey) 4.1.17 Maintenance and development (Survey) 4.5.11 Educational system (Survey) 4.1.18 Energy infrastructure (Survey) 1.1.20 GDP per capita 2.3.11 Transparency (Survey) 2.3.09 Adaptability of government policy (Survey) 4.3.21 Intellectual property rights (Survey) 3.3.05 Banking and financial services (Survey) 2.5.01 Justice (Survey) 3.2.21 Foreign high-skilled people (Survey) 0.12 0.01 -1.6 0.44 -3.49 10.38 70 -5.43 1.30 37.68 1.29 1.90 9.0 1.95 1.68 1.9 2.5 2.0 2011 3.07 0.13 6.1 1.69 4.38 27.88 156 -0.49 4.3.19 Researchers and scientists (Survey) 2.43 66.95 2.4.19 Immigration laws (Survey) 2.09 1.3.02 Direct investment flows abroad (%) 2.90 2.5.04 Risk of political instability (Survey) 4.3 2.82 2.40 2.7 3.5 2.9 3.2.20 Brain drain (Survey) 3.3.17 Venture capital (Survey)
1,540.2 2,181.7
DECLINES
2010 1.4.06 Unemployment rate 2.2.10 Employee`s social security contribution rate 4.2.22 High-tech exports (%) 1.2.02 Current account balance (%) 4.3.17 Number of patents in force 1.5.01 Consumer price inflation 4.1.24 Electricity costs for industrial clients 3.34 4.36 7.51 -8.12 113.9 6.3 0.060 3.08 6.18 5.77 1.29 3.18 9.84 5.93 8.12 0.7 3.1 2.6 11.6 3.1 2.4 6.0 6.1 4.3 4.8 2011 9.90 9.80 0.80 -15.34 36.6 10.1 0.087 2.16 4.81 4.54 1.02 2.59 8.03 4.93 6.92 0.6 2.7 2.2 13.1 2.7 2.1 5.3 5.4 3.8 4.3
1.3.14 Relocation threats of R&D facilities (Survey)
1.2.13 Exports of commercial services (%) 4.4.26 Climate change (Survey) 3.2.10 Employee training (Survey) 4.4.10 Human development index
2.4.08 Government subsidies (%) 1.8 2.0 1.9 3.4 1.7 2.8 2.5 2.7 2.6 4.7 2.3 3.7 4.2.20 Technological regulation (Survey) 4.3.23 Innovative capacity (Survey) 3.1.10 Small and medium-size enterprises (Survey) 4.3.18 Scientific research (Survey) 3.4.06 Customer satisfaction (Survey) 2.4.04 Public sector contracts (Survey)
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20 STRONGEST CRITERIA
In competitiveness theory, it is important to capitalize on the strongest competitive advantages that the country possesses. Therefore, it is important for Mongolia to identify 20 strongest criteria that is those with highest standardized values (STD values). * STD Values = [(economy`s value) - (average of 14 economies)] / standard deviation
Number
1.3.06 4.5.01
Name
direct investment flows inward (%) Percentage of GDP Total public expenditure on education Percentage of GDP remuneration in services professions ($) Gross annual income including supplements such as bonuses, US$ investment in telecommunications (%) Percentage of GDP exchange rate stability Parity change from national currency to SDR, 2010/2008 fixed broadband tariffs Monthly fee (residential), US$ compensation levels ($) Total hourly compensation for manufacturing workers (wages + supplementary benefits), US$ mobile telephone costs Mobile cellular tariffs - US$ per minute local call, off-net (peak) redundancy costs Number of weeks of salary fixed telephone tariffs US$ per 3 minutes local call (peak) tourism receipts (%) International tourism receipts as a percentage of GDP female labor force (%) Percentage of total labor force direct investment stocks inward (%) Percentage of GDP attracting and retaining talents Attracting and retaining talents is a priority in companies employee training Employee training is a high priority in companies ageing of society Ageing of society is not a burden for economic development social cohesion Social cohesion is a priority for the government flexibility and adaptability Flexibility and adaptability of people are high when faced with new challenges connectivity Connectivity of people and firms (telecom, IT, etc.) is highly extensive climate change Climate change is being sufficiently addressed by the government
Economy`s Value 27.88 7.1
Economy`s Rank 1 3
Average Value 4.75 4.7
3.2.03
4.2.01
1.58
0.81
2.3.07
0.009
0.100
4.2.11
8.46
23.86
3.2.01
1.39
6.53
4.2.05
0.09
0.25
2.4.20
4.3
12.2
4.2.03
0.01
0.12
1.2.23
5.41
3.18
3.2.15
47.11
41.74
1.3.08 3.2.19
(Survey)
66.95
55.95
8.13 6.92 6.08
2 2 6
6.26 5.65 4.57
3.2.10
(Survey)
2.5.03
(Survey)
2.5.05
(Survey)
6.91
5.74
3.5.04
(Survey)
6.62
6.28
4.2.07
(Survey)
7.63
7.27
4.4.26
(Survey)
4.93
4.54
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40 WEAKEST CRITERIA
Besides capitalizing on strengths, it is interesting to underline how the improvement of weaknesses could impact the overall ranking of Mongolia. Forty Weakest Criteria and What If? Simulation identify the 40 weakest criteria overall, by selecting those with the lowest STD values. The Simulation shows that Mongolia`s overall ranking would increase from 15th position to 11th if its 40 weakest criteria values were replaced by the average values of the 14 selected economies. Competitiveness Simulations help policy makers focus on and prioritize the key competitiveness issues facing the economy. Simulated Ranking Changes
Number
2.4.08 3.3.04
15
Economy`s Value Economy`s Rank
11
Average Value
Name
government subsidies (%) To private and public companies as a percentage of GDP Investment risk Euromoney country risk overall (scale from 0-100) pupil-teacher ratio (primary education) Ratio of students to teaching staff current account balance (%) Percentage of GDP skileed labor Skilled labor is not readily available consumer price inflation Average annual rate human development index Combines economic - social - educational indicators / Source: Human Development Report gdp (ppp) per capita Estimates; US$ per capita at purchasing power parity country credit rating Rating on a scale of 0-100 assessed by the Institutional Investor Magazine internet bandwidth speed Per internet user (kbps) finance skills Finance skills are not readily available information technology skills Information technology skills are not readily available gdp per capita US$ per capita energy intensity Commercial energy consumed for each dollar of GDP in kilojoules small and medium-size enterprises Small and medium-size enterprises are not efficient by international standards internet users Number of internet users per 1000 people / Source: Computer Industry Almanac access to water Access to water is not adequately ensured and managed qualified engineers Qualified engineers are not available in the labor market water transportation Water transportation (harbors, canals, etc.) does not meet business requirements competent senior managers Competent senior managers are not readily available
13.11 36.01 31.15 -15.34 2.40 10.1 0.62 3,589 36.4 0.78 2.64 5.07 2,182 31,056 2.68 126 3.12 4.05 1.72 2.43
13 15 15 15 15 15 15 15 14 15 15 15 15 14 15 15 15 15 15 15
2.61 68.96 18.74 3.97 5.58 3.2 0.77 24,237 68.1 24.50 6.10 7.25 17,641 13,044 5.15 513 7.39 6.39 6.23 5.20
4.5.03 1.2.02 3.2.17

(Survey)
1.5.01 4.4.10 1.1.21 2.3.04 4.2.13 3.2.18

(Survey)
4.2.14
(Survey)
1.1.20 4.4.12 3.1.10

(Survey)
4.2.10 4.1.04
(Survey)
4.2.15
(Survey)
4.1.16
(Survey)
3.2.23
(Survey)
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Number
1.2.24
(Survey)
Name
exchange rates Exchange rates hinder the competitiveness of enterprises productivity of companies Productivity of companies is not supported by global strategies (supplies, offshoring, outsourcing) pupil-teacher ratio (secondary education) Ratio of students to teaching staff labor productivity (PPP) Estimates: GDP (PPP) per person employed per hour, US$ Direct investment flows abroad ($bn) US$ billions access to commodities Access to commodities (basic resources, food, etc.) is not adequately addressed Labor force (%) Percentage of population pollution problems Pollution problems do seriously affect your economy health problems Health problems (sicknesses, AIDS, alcohol, drug abuse, etc.) do have a significant impact on companies employment (%) Percentage of population overall productivity (PPP) Estimates: GDP (PPP) per person employed, US$ future energy supply Future energy supply is not adequately ensured life expectancy at birth Average estimate energy infrastructure Energy infrastructure is not adequate and efficient stock market capitalization (%) Percentage of GDP customer satisfaction Customer satisfaction is not emphasized in companies unemployment rate Percentage of labor force mobile telephone subscribers Number of subscribers per 1000 inhabitants broadband subscribers Number of subscribers per 1000 inhabitants cyber security Cyber security is not being adequately addressed by corporations
Economy`s Value
Economy`s Rank
Average Value
2.99 2.89 20.80 4.99 0.06 4.40 41.24 2.81 3.19 37.18 9,653 2.69 68.0 2.85 10.20 5.31 9.90 842 13.43 2.77
15 15 13 15 15 15 14 15 15 15 15 15 12 15 14 15 13 14 15 15
5.48 5.71 14.40 21.70 9.76 7.53 52.12 5.10 5.84 49.21 45,725 5.54 74.1 6.12 67.51 6.90 5.74 1,161 116.43 5.36
3.1.11
(Survey)
4.5.04 3.1.04 1.3.01 4.1.05

(Survey)
3.2.12 4.4.24 4.4.11

(Survey)
1.4.02 3.1.01 4.1.19

(Survey)
4.4.05 4.1.18
(Survey)
3.3.11 3.4.06
(Survey)
1.4.06 4.2.04 4.2.12 4.2.23

(Survey)
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THREE COMPETITIVENESS CHALLENGES FACING THE ECONOMy
The What If? Simulations` results show how much, if at all, the country`s competitiveness would be enhanced if policies were focused on improving the particular competitiveness issues measured by these criteria. By looking at the 40 weakest criteria, the three main issues of human development, labor market and energy sector can be highlighted. In other words, if we can overpass these three challenges, Mongolian competitiveness would be improved considerably. Therefore, in order to address the importance of these issues, the EPCRC provides features and talks to officials to cover how policy makers are focused on solving the particular problems.
HuMAN DEVELOPMENT
FROM NATuRAL POWER TO bRAIN POWER

Mongolia is now one of the fastest growing economies in the world. Indeed, in 2011 the country experienced GDP growth of 17.3 percent. The mining sector is however the only engine of Mongolia`s growth and constitutes 30 percent of GDP, 90 percent of exports, and 80 percent of foreign direct investments (FDI). One day, Mongolias reserves of gold, copper, coal and other minerals will be depleted. In order for the nation to prosper in the future, alternative sources of economic growth must be utilized. While Mongolia is placing all of its efforts into the mining sector with fears that commodity prices could drop tomorrow, some resource-poor countries such as Singapore are capitalizing by means of technical innovations. For example, high-tech and cutting-edge products accumulate 49 percent of Singapore`s total exports. As for Mongolia, in 2009 export of products with high-tech content fell to 0.8 percent from 7.51 percent in 2008. Indeed this country is exporting low-priced natural resources and importing high-value finished products. Since the end of 1980s OECD member coun-
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tries have experienced acceleration in economic growth thanks to production and management of knowledge in the frame of economic constraints. In last two decades not only members of OECD , but also developing countries such as Malaysia, Singapore, South Korea have successfully shifted into the knowledge based economy. Competitiveness is shifting today from tangibles to intangibles, from tons of goods to bytes of information. Competitiveness is entering the knowledge economy pointed out Stephane Garelli, Professor at IMD and Director of the World Competitiveness Center. Knowledge today is recognized as the driver of productivity and economic prosperity. Since other countries started investing in knowledge, rather than in mineral wealth, Mongolia should seek to develop intellectual resources by investing in human development. According to the United Nations Development Programs Human Development Report for 2010, Korea had a human development index (HDI) of 0.88, Singapore 0.85, and Mongolia 0.62; ranking Mongolia last. HDI measures the average achievements of a country in three basic dimensions of human development: length and quality of life, level of education, and combined primary, secondary, and tertiary gross enrolment ratio. In the following section, the framework for effective development of human capital shall be examined in full. For the past two decades the technological revolution, specifically the advent of computers, telecommunications, and Internet, has had a profound impact on the competitiveness of nations. Therefore, todays infrastructure cannot only be considered in the traditional terms of roads, trains, and airports. Technological, scientific, health, environmental, and educational infrastructures are becoming key assets for a nation`s development. In order to improve human development this nation must pay attention to the fore-mentioned soft infrastructures. As of today, Mongolia ranks in 15th position for Scientific and Technological Infrastructures. Though science and technology are very important for national growth, health and education are equally important areas of focus for further development. An Executive Opinion Survey shows that the health problems in Mongolia do have a
Education
4.5.03
PuPIL-TEACHER RATIO (PRIMARy EDuCATION)

Ratio of students to teaching staff
Ranking QATAR MALAySIA uKRAINE THAILAND buLGARIA SLOVAK REPubLIC KAZAKHSTAN SLOVENIA RuSSIA PERu SINGAPORE KOREA CHILE MExICO MONGOLIA
2008
ratio
Education
4.5.04
PuPIL-TEACHER RATIO (SECONDARy EDuCATION)
2008
Ratio of students to teaching staff
Ranking
RuSSIA SLOVENIA QATAR KAZAKHSTAN uKRAINE buLGARIA SLOVAK REPubLIC MALAySIA PERu SINGAPORE MExICO KOREA MONGOLIA THAILAND CHILE
ratio
4.4.10
HuMAN DEVELOPMENT INDEx
2010
Combines economic - social - educational indicators/ Source: Human Development Report
Ranking index
KOREA SINGAPORE SLOVENIA SLOVAK REPubLIC QATAR CHILE MExICO MALAySIA buLGARIA PERu RuSSIA KAZAKHSTAN uKRAINE THAILAND MONGOLIA
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significant impact on companies, additionally, the average life expectancy in Singapore is 81 and in Mongolia, only 68. It is hard to talk about human development when a countrys citizens are not sound mind in and in body. Considering education systems is a more complicated matter. As of 2009 Mongolia has spent about 7.1 percent of its GDP on education. This is a relatively high figure compared with Russia, 4.7 percent, and Singapore, 3.3 percent. Only Malaysia and Ukraine outrank Mongolia with 7.2 percent of their GDP being spent on education. At first sight Mongolia appears to invest quite a large part of its capital in education, but further examination reveals the truth. If the total public expenditure on education is considered on per capita level, it amounts to USD 110 , which is a very low number compared to other countries. Qatar is in the lead with the USD 2,389, followed by Slovenia with USD 1,394 and Singapore with USD 1,197. Primary and secondary schooling are key to the future wrote Stephane Garelli. So it is important to know how effective the basic education system which should create competitive citizens in the future is. By 2008, the average Mongolian primary school teacher had about 31 students; meanwhile in Qatar and Malaysia they had only 12 and 14, respectively. The average student to teachers at primary schools in the 14 selected foreign countries was 18 and only 14 for secondary school teachers. This data suggests that Mongolian teachers are in charge of significantly more students compared to the global standards. To conclude, it is difficult to say that the country is developing when population is unable to live healthily and access education, even with high economic growth. While Mongolia is struggling to determine how to build railroads to mining sites, so that mining companies can transport minerals, competitor nations are achieving their economic units with human resources and investing in their education. Though the mining sector`s hyper growth is inevitable for Mongolia in a short term, if Mongolia does not invest part of its mining revenues in development of human capital, all evidence of such growth may eventually disappear.
4.2.22
HIGH-TECH EXPORTS (%)
2009
Percentage of manufactured exports
Ranking SINGAPORE MALAYSIA KOREA KAZAKHSTAN THAILAND MEXICO RUSSIA BULGARIA SLOVENIA SLOVAC REPUBLIC CHILE UKRAINE PERU MONGOLIA QATAR %
4.4.11
HEALTH PROBLEMS
2011
Health problems (sicknesses, AIDS, alcohol, drug abuse, etc.) do have a significant impact on companies
Ranking SINGAPORE MALAYSIA SLOVAK REPUBLIC CHILE THAILAND KOREA QATAR SLOVENIA BULGARIA MEXICO UKRAINE PERU KAZAKHSTAN RUSSIA MONGOLIA
do not have a significant impact on companies
4.4.05
LIFE EXPECTANCY AT BIRTH
2008
Average estimate
Ranking SINGAPORE KOREA SLOVENIA CHILE MEXICO PERU QATAR SLOVAK REPUBLIC BULGARIA MALAYSIA THAILAND MONGOLIA RUSSIA UKRAINE KAZAKHSTAN
age
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WE CAN DO IT IN THE COMING TWO DECADES

many people who have attained a tertiary education, what we need today is not merely quantity, but also quality. Specifically, we need to pay attention to preparing engineering, technology, and natural sciences professionals. Today, almost 90 percent of all higher education institution graduates are humanities and social science majors. -Since the adoption of the Law on Science and Technology in 2006, the state budget allocation to this sector has been increasing. Has this trend been fruitful? -Since 2007, investment the science sector has been continuously growing and this year it has reached MNT 20 billion, but it is still not enough. Even though the Law on Science and Technology specifically states that the state budget allocation for science and technology sector must be 1.5 percent of the country`s GDP, this is merely a statement and has not been verified in real life. For instance, the MNT 20 billion allocated for 2012 is a mere 0.17 percent. If the allocated budget is lower than 0.2 percent, it is usually considered by scientists that the science and technology sectors of the country are no more than a symbol. The number has to be at least 0.6 percent in order to anticipate first stage results, and if it reaches 1 percent, then results suitable for the countrys economic condition can be expected. Countries which have developed knowledge based economy have raised this number to 4 percent. In order to understand the results of our technological sectors, we need to pay attention to some specific aspects of knowledge sector. Usually, technological research starts with funding being granted and ends with a prototype being developed. The pat-
The EPCRC talks to B.Ganbat, Director of Department of Innovation Policy of the National Development and Innovation Committee (NDIC). -What should we do in order to shift to a knowledge based economy? -I think it starts with interpreting correctly what a knowledge based economy is. It can be defined as creating national wealth by producing goods and services based on new knowledge and technologies. Questions like: Does Mongolia has the potential to shift into a knowledge based economy? What should be done firsthand in order to achieve this? are open to us today. For instance, if no new economically valuable knowledge is found by science, shifting to a knowledge based economy cannot be done. However, new knowledge and technologies are mostly being imported to Mongolia directly via foreign investments. Moreover, in today`s time where the mining sector is prevailing it may even threaten the national security in the long run. Therefore, Mongolia must also become a country which develops not only mining enrichment but also agriculture and high technology sectors. In order to do that, we need to develop and follow a model suitable for the specific features of Mongolia and come up with the right strategy to implement the model in practice. Then develop an educational policy that supports all of the above. Science and educational sectors are considered to be the knowledge sector of the country. Since whether a country can develop depends on the knowledge sector, educational and scientific institutions need to be reliable knowledge sources. Unfortunately, our educational and scientific sectors have had very little innovation in this regard. Even though Mongolia has
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ent is obtained and a final report is provided to whoever paid for the research. Academic research, on the other hand, is evaluated based on whether the study is published in a high-impact professional journal and the number of quotation of the article. In Mongolia, the number of patents granted per year range from 120-160 and most of them are registered at the Intellectual Property Office of Mongolia; there is no patent registered at the international level for commercial purposes. New products used through license agreement in an economically beneficial manner are almost nonexistent. As for academic research, very little has been published in acclaimed professional journals most of it is research in Mongolian studies, religion, history, language, culture, paleontology, archeology, and the like. Based on this, one can easily conclude that the science and technology sectors` contribution to the country`s development is unsatisfactory. -What is the reason behind it? -First of all, one of the primary reasons for the not so fruitful outcome of our science and technology organizations is that the scientists and researchers` salaries are very low. Secondly, laboratories and their working conditions are unsatisfactory. Thirdly, the methods of operation and cooperation of our scientific institutions with other sectors within society are backwards. Moreover, all science and technology sector activities are funded solely by the state budget. On the other hand, in the U.S. and other industrialized countries, 70 percent or more of these kinds of research are financed by the private sector. The reason why the private sector of Mongolia does not approach scientific research institutions is that the two sectors do not have a history of cooperation or a trust in each other. Additionally, scientific institutions` research only goes as far as the laboratory level, not bridging the gap between laboratory and practical utilization. In this regard, a lot needs to be accomplished; more investments and new forms of cooperation with industries have to emerge. -Will the situation get better as the government has approved the Law on Innovation? -For a long time, Mongolia has been lacking the legal environment to support the development of new kinds of production processes and industries based on creating and utilizing economically beneficial knowledge. In order to create exactly that kind of environment, we have worked on drafting the Law on In-
novation for 2 years and the Parliament has approved this law on May 22 nd 2012. By approving this law, the above-mentioned investment issues, or lack thereof, can be solved by establishing venture capital and innovation funds to create investment mechanisms that promote innovation. Furthermore, the legal environment for developing the infrastructure of innovation shall be created so that science parks, incubators, and technology transfer centers shall be able to operate. -You mentioned that the salary of scientists and researchers is low and their working conditions are poor. What needs to be done in order to encourage them to improve their effectiveness and to develop economically beneficial intellectual property? -This law states that unless the funding agreement specifies otherwise, results of research developed with state funding, such as technology and product patents, is owned by the researcher so that he/she can use it in practice and production. By doing so, the researcher has the opportunity to establish a start-up company and sell his product in the market and take the profit for himself. This in turn would encourage researchers to do more studies. The U.S. Bayh-Dole Act of 1980 started the second academic revolution. Many researchers and scientists published their works and used them in the market. It was an academic boom. So, the Bayh-Dole Mongolia is about to emerge. -Many doubt that Mongolians will be able to sell computer chips produced at home in the international market. Can Mongolia really develop high technology? -I am 100 percent confident in that possibility. If Mongolia wants to survive in the 21st century world as a competitive nation, there is no other way but to do it. Capital and labor intensive industries are not suitable for a scarcely populated country like Mongolia. Developing only those sectors is a bit on the backwards side. For instance, by only developing the mining sector, we cannot compete with other countries. Countries such as Israel, Singapore, Norway, South Korea and Finland are some of the countries which showed that developing knowledge based industries can provide a country with sufficient benefits to sustain its national security, increase its level of competitiveness, and globalize in 20 short years. I believe we can also do the same in the coming two decades.
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LAbOR MARKET
THE LAbOR MARKET PARADOx

Employment
1.4.02
The World Bank reports that Mongolias foreign direct investment reached USD 5.3 billion in 2011 (almost 62 percent of GDP). Such an amount has never been seen before by Mongolians, with 85 percent of it going solely into the mining sector. As world mining giants like Rio Tinto, Vale, and Peabody Energy are operating in this country, Mongolia ought to obtain not just financial investments but also skills and knowledge from these long-standing companies. In other words, foreign investments should also be used to ensure the transfer of skills to the local workforce. However, the situation is reversed; foreign mining companies are taking the best workers out of other sectors human capital. This in turn is causing shortages of capable labor within domestic companies and as a result their competitiveness is decreasing. The Executive Opinion Survey included in the Competitiveness report shows that Mongolia is already facing a human resources shortage. The private sector has expressed that not only are capable workers with IT and finance skills not readily available but also the process of finding and hiring qualified engineers and competent senior managers is difficult to accomplish. The non-stop advertisements for hiring employees in television channels, newspapers, and radio programs reveal that a high demand for labor is
EMPLOyMENT (%)
Percentage of population
Ranking QATAR SINGAPORE THAILAND PERu KAZAKHSTAN RuSSIA KOREA SLOVENIA uKRAINE SLOVAK REPubLIC CHILE MExICO buLGARIA MALAySIA MONGOLIA
2010
%
Employment
1.4.06
uNEMPLOyMENT RATE
Percentage of labor force
Ranking QATAR THAILAND SINGAPORE MALAySIA PERu KOREA MExICO KAZAKHSTAN SLOVENIA RuSSIA CHILE uKRAINE MONGOLIA buLGARIA SLOVAK REPubLIC
2010
%
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present. Demand aside, the supply side of this issue can also shed some light onto this problem. Mongolia stands 6th among our 15 comparable countries in terms of the number of people between the ages 25-34 who have a higher education degree. While only 25 percent of young adults in Russia have attained tertiary education, that number reaches 32.7 percent in Mongolia. Its surprising to see that there is a good supply of human resources but the private sector is still facing skill and labor shortages. Employers explain this trend by the fact that higher education institutions do not create the capable workers that are needed. Thus, every year over twenty thousand college graduates enter the unemployed stratum. As of 2011, among the 35,847 college graduates of that year, only 12,975 found jobs and the remaining 64 percent were left behind. As new graduates have inadequate skills for effective adaptation into the labor market, a silent war for experienced and skilled employees has started. Even though private colleges are criticized for producing the unemployed with diplomas by being socially irresponsible business in the educational sector, they are not the main reason behind the problem. As of today, 101 colleges and universities are educating 172,798 students, but most of them (104,101) are attending the 15 state universities. If the state budget allocation to education is increasing every year, why is the quality of the products of universities not improving? Only 6.8 percent of our university funding comes from the state and the remaining comes from the students tuition, but 70 percent of it goes out to teachers as salary. So theres no room for improving the study environment or the facilities says S. Tumur-Ochir, Director of the National University of Mongolia at the 2011 Mongolia Economic Forum. Its time to study whether the purpose of the state funding is being met and to take a good look at the structure of higher education to preference quality over quantity when it comes to educating. There is a need to adopt the practice of having business sector representatives on the governing boards of higher education institutions in order to provide direct input about what skills and abilities businesses need from university graduates. Chile has successfully implemented such a policy.
Education
4.5.06
HIGHER EDUCATION ACHIEVEMENT (%)
2008
Percentage of population that has attained at least tertiary education for persons 25-34
Ranking SINGAPORE KOREA KAZAKHSTAN PERU CHILE MONGOLIA SLOVENIA BULGARIA RUSSIA QATAR MALAYSIA MEXICO SLOVAK REPUBLIC THAILAND UKRAINE %
Labor Market - Availability of Skills
3.2.18
FINANCE SKILLS
Finance skills are not readily available
Ranking CHILE MALAYSIA SINGAPORE RUSSIA KAZAKHSTAN THAILAND QATAR SLOVAK REPUBLIC MEXICO KOREA SLOVENIA UKRAINE PERU BULGARIA MONGOLIA
2011
are readily available
4.2.14
INFORMATION TECHNOLOGY SKILLS

Information technology skills
are not readily available
Ranking SINGAPORE MALAYSIA SLOVAK REPUBLIC RUSSIA QATAR CHILE KOREA BULGARIA SLOVENIA UKRAINE KAZAKHSTAN MEXICO THAILAND PERU MONGOLIA
2011
are readily available
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3.2.17
On the other hand, as the economy grows the shortage of skilled workers is becoming the most difficult issue. While 70 percent of college students are studying in universities and only 30 percent of them are attending vocational education and trainings, when it comes to finding a job, there is a clear need for the opposite. Thus, people with college degrees are reluctant to work in construction or as miners yet they do not have the qualifications to work in the fields of their interest. As of today, even though the Law on Vocational Education and Training was approved in 2010 and the system of supplying skilled labor to employers has been created, it has been difficult to keep up with the market demand. Oyu Tolgoi, Tavan Tolgoi, as well as other huge mining projects and big infrastructure projects such as the government implemented New Development program, need even more skilled workers. However, according to the World Bank report, skilled workers compose only 20 percent of the workforce of the country and most of them are already drawn into the mining sector. Due to the shortages of skilled workers, it is essential for construction and mining companies to obtain workers from abroad. According to kh.Ganbaatar, Vice President at Mongolian Employers` Federation, in 2011 or in Employment Support year, the private sector created over 72 thousand new jobs for Mongolians and 60 thousand for foreigners. And this year over 50 thousand Chinese workers are expected to be imported while the number of unemployed registered with the Labor & Social Welfare Service increased by 51.6 percent to 58,400, according to the NSO (National Statistical Office). While businesses are failing to find enough skilled laborers and capable personnel and have no other option than to import workers from abroad, Mongolias unemployment rate has reached almost 10 percent. Human capital is the most valuable asset in any organization and the development of a country depends on the citizens employment and related capabilities. Thus the labor market must receive special attention.
SKILLED LABOR
Skilled labor is not readily available
Ranking MALAYSIA SINGAPORE THAILAND SLOVAK REPUBLIC RUSSIA MEXICO QATAR KAZAKHSTAN SLOVENIA CHILE UKRAINE KOREA PERU BULGARIA MONGOLIA
2011
is readily available
4.2.15
QUALIFIED ENGINEERS
Qualified engineers are not available in the labor market
Ranking CHILE SINGAPORE MALAYSIA SLOVAK REPUBLIC QATAR THAILAND MEXICO KOREA PERU RUSSIA SLOVENIA KAZAKHSTAN UKRAINE BULGARIA MONGOLIA
2011
are available in the labor market
3.2.12
LABOR FORCE (%)
2010
Percentage of population
Ranking % QATAR SINGAPORE THAILAND PERU RUSSIA KAZAKHSTAN SLOVENIA KOREA SLOVAK REPUBLIC UKRAINE CHILE BULGARIA MEXICO MONGOLIA MALAYSIA
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EMPLOyERS SHOuLD bLAME THEMSELVES, NOT THE GOVERNMENT

The EPCRC talks to Kh.Ganbaatar, Vice President at Mongolian Employers` Federation (MonEF) and Vice-Chairman of National Employment Committee. -What were the achievements of Employment Support Year? -The labor market in Mongolia is just becoming formed. It seems that over past 20 years we have been busy changing policy in the fields of politics and economics and have not have time to pay attention to the more important human development considerations and labor markets. But recently the government has created a new legal environment for creating new jobs and supporting employment. Legal and policy reform could be inferred from the 2010 Law on Vocational Education and Training and the 2011 Law on Employment Promotion. Renovation of the legal environment regarding employment and labor was the most important achievement of the 2011 Employment Support Year, more than just creating new jobs. In general, as a result of 2011, 73,000 Mongolians were able to secure long-term jobs. Additionally, 2012 was announced as the Year of Supporting Citizen`s Participation and Family Development, which also aims at reducing poverty and unemployment by inventing new structures of financing such as low interest rate loans for small and medium enterprises, changes that are the contributors to job creation. Generally due to the economic growth, the employment rate will increase and MonEF reach data shows that by 2016 there will be about 160,000 new jobs created. -Mining and construction sectors are growing at a furious pace, prompting employers to complain that the deficit of skilled workers is becoming the most difficult issue... -As the above mentioned Law on Vocational Education and Trainings framework suggests, the government is collaborating with Millennium Challenge Account, Asian Development Bank, and other donors. Roles and responsibilities of educational organizations and employers are now clear; cooperation with each other is absolutely needed. Employers have full rights to cooperate with vocational education organizations and observe the education process, give hands-on opportunities to the students, and examine their post-graduation abilities. Within this framework was established the public and private sector partnership, the National Advisory Board for Vocational Education and Training, in addition to other regional and local boards. The government aims at ensuring that skilled laborers possess the relevant training to meet the demand of employers and though they will be spending money from the national budget, donors will have to help as well. Therefore, employers should put 0.5-1.5 percent of their wage-fund into the Vocational Education and Training Fund in order to prepare their employees with the skill sets they need. If an employer does not do so, it is a shame. For instance, Oyu Tolgoi is investing about MNT 30 billion in training and education as well as upgrading two educational centers to prepare the 3000 workers they need. I just want to say that employers, like Oyu Tolgoi, must pay attention on education in order to get their desired workers. -Only 36 percent of 36,000 graduated students in 2011 were able to find jobs. On the other hand, employers cannot find component staffs as they need and often criticize that colleges and univer-
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sities are pursuing quantity over quality. What do you think about the increase in public expenditures on higher education, which has not given significant improvement in the skills of students? -The private sector is always for increasing public expenditure on education. However those investments should be spent towards a demand driven educational system. As of today, most Mongolians do not understand that people should choose their career according to the market demand. That could be one reason of the low employment rate among graduates. On the other hand, universities enlist as many students as possible in order to make a profit. If we look at the educational system as a pyramid, the bottom part of the pyramid must consist of a large quantity of skilled workers and as you go higher the number of higher educated professionals such as economists, lawyers, and doctors should decrease. As of today, this pyramid`s top is pointed downwards in Mongolia. Therefore, we made a proposal to the Ministry of Education, Culture and Science about inventing new recipient rules based up on labor market demand. For example, we need to do a study on how many accountants or construction engineers will be needed tomorrow, and then we should train them. The Minister gave a positive reaction on that and promised to review the new law on Higher Education. Moreover, there is a need to revamp higher education curriculum in order to ensure that students possess the relevant skills to meet the demand of employers and align our education with international standards. -Human resources have become a constant challenge for domestic companies as the high salaries of mining companies have lured away many of their competent staffs. What should we do in order to prevent brain drain caused by mining? -There should be a Mongolian national salary policy and within this framework three stakeholders, the government, trade union and employers, should discuss and agree on each sector`s standard salary. No matter where the personnel work: public, private, or a company with foreign capital; there must not be a big salary gap. For example, if an electric engineer in foreign-owned company gets a salary of MNT 1.5 million, in order to keep engineers at state owned CHP 4 they should give a competitive salary. Of course there should not be a too strong regulation and bonuses should be able to vary.
ANNEx 2. THE GOLDEN RuLES OF COMPETITIVENESS

I Create a stable and predictable legislative and administrative environment. II Ensure speed, transparency and accountability in the administration, as well as the ease of doing business. III Invest continually in developing and maintaining infrastructure both economic (road, air, telecom, etc.) and social (health, education, pension, etc.). IV Strengthen the middle class: a key source of prosperity and long-term stability. V Develop privately-owned medium-sized enterprises: a key element of diversity in an economy. VI Maintain a balanced relationship between wage levels, productivity and taxation. VII Develop a local market by promoting private savings and domestic investments. VIII Balance aggressiveness on international markets with attractiveness for added-value activities. IX Counterweight the advantages of globalization with the imperatives of proximity to preserve social cohesion and value systems. X Always return the tangible signs of successful competitiveness to the people by providing a higher level of prosperity for all.
Source: IMD
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ENERGy
ON THE WAy TOWARDS AN ENERGy PARADISE
Many believe that Mongolia`s vast coal deposits and large untapped wind, solar, and water energy resources will transform the country into an Energy Paradise. However, the research paper titled Baseline Paper for Low Carbon FDI into the Electricity Sector of Mongolia conducted by EPCRC and coorganized with Mongolia Economic Forum`s subsession Coal or Wind? shows that more needs to be done in order to a achieve such high expectations. Mongolia is now experiencing rapid economic growth, which has resulted in a dramatic increase in energy consumption. The economy is expected to grow even faster as Oyu Tolgoi and Tavan Tolgoi become operational and ambitious projects such as The New Development Program (including 100,000 Household Housing) starts. However, extensive min ing production and large scale reconstruction will not happen without meeting the resulting energy needs. As of today, the countrys peak in energy demands have been met thanks to imports from Russia, as well as China provinding power to a number of mining companies operating in Gobi region. However, the imports have been problematic due to the fact that Mongolias neighbors are not able to give guaranteed supplies at reasonable prices. For example the power plant at Oyu Tolgoi is scheduled to be built by 2017, until then power
must be imported from China to conduct the project. However, Ivanhoe Mines announced that if talks of importing energy fall through, the company may have to build a temporary power plant which would undoubtedly delay commercial production. Though China eventually agreed to supply, this example demonstrates how Mongolia is becoming more dependent on energy imports, especially for mining. Mongolian energy consumption is estimated to increase approximately by 1500-3000 MW by 20152030, in comparison to the current 857 MW total capacity of country`s thermal power plants. Moreover due to age, deterioration, and unreliability of the equipment, the actual available power capacity may be significantly lower. The Executive Opinion Survey shows that business owners do not believe that future energy supply is adequately ensured and are afraid of potential energy shortages. According to the Mongolia in World Competitiveness Report, Mongolia ranks at the 15th position out of the 15 comparable countries in terms of energy infrastructure and future energy supply. It is clear that the country needs to increase energy supply by creating new capacity. Therefore, a long-awaited CHP-5 is to be built on site of CHP 3 in Ulaanbaatar. The construction of first section, which will have 450 MW electricity and 587 MW thermal capacity, is expected to be completed by
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2015. Moreover, in order to meet this growing demand and start exporting energy, Mongolia needs to build power plants at Tavan Tolgoi, Shivee Ovoo, Baganuur, Aduunchuluun, Khotgor, Boorooljuut and Chandgana coal deposits. However, there might be an even bigger problem than energy supply. According to the World Health Organization (WHO), Ulaanbaatar ranks as the most polluted capital in the world. If the WHO considers particulates over 20 micrograms per cubic meter to be dangerous, in Ulaanbaatar that level is 14 times higher than the limit and reached 279 micrograms. The greenhouse gas produced by each person is alarming because of the aging and deteriorating coal-fired power plants, which dispense a huge level of emissions. Therefore, if this country wants to slow down air pollution, Mongolia needs to start considering cleaning up the energy sector. In 2005, Mongolias parliament approved the National Renewable Energy Program, which aims at increasing the countrys renewable energy share from 20 to 25 percent by 2020. And in 2007, a Law on Renewable Energy was adopted. As a result, large scale private sector activities have been initiated like the development of the Mongolia`s first wind energy park. Newcom Group is working to put into operation a wind farm in Tuv aimag`s Salkhit Mountain with a capacity of 50 MW, which would supply almost 5 percent of the countrys electricity when it starts operating in November of 2012. If Newcom Group successfully completes its wind power plant, it shall lead to many other projects for renewable energy. However, experts warn that there might be more barriers than opportunities for private investors. Lack of infrastructure and uncertainty in the regulations remain major problems. For example, Newcom Group has purchased 31 huge turbines from General Electric. As each wind turbine weighs 240 tons and its basement weighs 1000 tons, transporting them is a big problem. Transporting huge equipments by dirt road is extremely difficult, as the road from Zamiin Uud to Choir is not completed yet says B.Byambasaikhan, CEO of Newcom Group. D.Samdan, senior engineer and an expert at MCS International said that it took two years to transport equipment for the Ukhaa khudag thermal power plant. In order to improve renewable energy sector and introduce advanced coal technologies, foreign direct investments are vital for Mongolia. However, the
4.4.12
ENERGY INTENSITY
2007
Commercial energy consumed for each dollar of GDP in kilojoules
Ranking SINGAPORE PERU SLOVENIA CHILE KOREA MEXICO SLOVAK REPUBLIC QATAR THAILAND BULGARIA MALAYSIA RUSSIA KAZAKHSTAN MONGOLIA UKRAINE kilojoules
4.1.19
FUTURE ENERGY SUPPLY

Future energy supply
is not adequately ensured Ranking SINGAPORE MALAYSIA SLOVAK REPUBLIC THAILAND KAZAKHSTAN KOREA SLOVENIA PERU QATAR RUSSIA BULGARIA CHILE MEXICO UKRAINE MONGOLIA
2011
is adequately ensured
4.1.18
ENERGY INFRASTRUCTURE
2011
Energy infrastructure is not adequate and efficient
Ranking SINGAPORE QATAR MALAYSIA SLOVAK REPUBLIC KOREA THAILAND SLOVENIA CHILE KAZAKHSTAN PERU MEXICO RUSSIA BULGARIA UKRAINE MONGOLIA
is adequate and efficient
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state monopoly, strong regulation, and fixed prices scare investors. As a result, the country`s energy sector with its power plants dating back to Soviet times, is lagging behind global development. As the EPCRC`s research findings suggest, there is an urgent need to transform energy tariffs into market principles. A more liberalized market scheme would help prevent the high risks of operational failure of the state controlled power plants and would create a more attractive environment for investors. It is vital for Mongolia to liberalize the energy sector, said D.Zorigt, the Minister of Mineral Resources and Energy at the Mongolia Economic Forum. As a result, more reliable and modern technologies would be introduced to the sector and energy supply would be ensured.
4.4.24
POLLUTION PROBLEMS
Pollution problems
2011
do seriously affect the economy

Ranking SINGAPORE MALAYSIA CHILE SLOVAK REPUBLIC SLOVENIA QATAR THAILAND RUSSIA KOREA UKRAINE BULGARIA KAZAKHSTAN MEXICO PERU MONGOLIA
do not seriously affect the economy
ANNEX 2. COMPETITIVENESS - A DIVERSITY OF THOUGHTS

Scholars and institutions have been very prolific in proposing their own definition of competitiveness. This diversity is an indicator of the popularity of the subject but also of its multifaced nature.
Definitions of Competitiveness
A field of economic knowledge, which analyzes the facts and policies that shape the ability of a nation to create and maintain an environment that sustains more value creation for its enterprises and more prosperity for its people. The set of institutions, policies and factors that determine the level of productivity of a country. Competitiveness is relative and not absolute. It depends on shareholder and customer values, financial strength which determines the ability to act and react within the competitive environment and the potential of people and technology in implementing the necessary strategic changes. Competitiveness can only be sustained if an appropriate balance is maintained between these factors which can be conflicting nature. A firm is competitive if it can produce products and services of superior quality and lower costs than its domestic and international competitors. Competitiveness is synonymous with a firm`s long-run profit performance and its ability to compensate its employees and provide superior returns to its owners.
Source
IMD`s World Competitiveness Yearbook, 2003.
World Economic Forum, Global Competitiveness Report, 20042005. Feurer, R. and K.Chaharbaghi, Defining Competitiveness: A Holistic Approach, Management Decision, 1994, Vol.32, pg.58.
Report of the Select Committee of the House of Lords on Overseas Trade, 1985
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The immediate and future ability of, and opportunities for, entrepreneurs to design goods worldwide whose price and non-price qualities form a more attractive package than those of foreign and domestic competitors. National competitiveness refers to a country`s ability to create, produce, distribute and/or service products in international trade while earning rising returns on its resources. Competitiveness includes both efficiency (reaching goals at the lowest possible cost) and effectiveness (having the right goals). It is this choice of industrial goals which is crucial. Competitiveness includes both the ends and the means towards those ends. Competitiveness implies elements of productivity, efficiency and profitability. But it is not an end in itself or a target. It is a powerful means to achieve rising living standards and increasing social welfare - a tool for achieving targets. Globally, by increasing productivity and efficiency in the context of international specialization, competitiveness provides the basis for raising peoples` earnings in a noninflationary way. Competitiveness should be seen as a basic means to raise the standard of living, provide jobs to the unemployed and eradicate poverty.
European Management Produce and Market, 1991
Scott, B. R. and Lodge, G. C., US Competitiveness in the World Economy, 1985, pg.3. Buckley, P. J. et al, Measures of International Competitiveness: A Critical Survey, Journal of Marketing Management, 1988. Competitiveness Advisory Group, (Ciampi Group). Enhancing European Competitiveness. First Report to the President of the Commission, the Prime Ministers and the Heads of State, June 1995. Competitiveness Advisory Group, Enhancing European Competitiveness. Second Report to the President of the Commission, December 1995. OECD, Technology and the Economy: The Key Relationships, 1992, pg.237.
Competitiveness is the degree to which a nation can, under free trade and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its citizens. Industrial competitiveness is the ability of a company or industry to meet challenges posed by foreign competitors. The ability to produce goods and services that meet the test of international markets while citizens earn a standard of living that is both rising and sustainable over the long-run. Supporting the ability of companies, industries regions, nations or supra-national regions to generate, while being and remaining exposed to international competition, relatively high factor income and factor employment levels. Competitive advantage at firm level is the ability to consistently and profitably deliver products and services which customers are willing to purchase in preference to those of competitors.
US Department of Energy.
The First Report to the President and Congress, 1992.
OECD, Industrial Competitiveness: Benchmarking Business Environments in the Global Economy, 1996 Department of Enterprise, Trade and Employment, UK.
Source: US National Competitiveness Council
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THE ENERGy SECTOR HAS A bRIGHT FuTuRE
EPCRC talks to T.Tserenpurev, Chairman of Energy Regulatory Committee. -What changes are expected after the amendments and updates of the Law on Energy? -Due to social development and market conditions, some legal changes were required in the energy sector. Therefore, on December 10th 2011, the parliament amended the Law on Energy, originally introduced in 2001. Within this framework, policy and institutional changes happened; among them was the transformation of the Energy Regulatory Agency into the Energy Regulatory Committee. I can also tell you specifically about changes in tariff and regulations that came from our organization. Because energy tariffs in Mongolia are lower than the global average, the power plants can not carry out technological overhauls, and as a result, they can not reduce their expenses and are falling into debt Therefore, it is necessary to gradually increase tariffs in order to create attractive conditions for investors. Energy tariffs used to be fixed by the expense-based methodology. Now, thanks to the new amendment, it will be fixed based upon the idea that investors will be able to justify their investments. This move may potentially make the sector more financially viable. Consequently, according to the Parliament resolution #72 passed in December 2010, energy tariffs are increasing step-by-step to match marwww.ecrc.mn
ket demands and by 2014 the sector will operate without incurring losses. -The Executive Opinion Survey shows that business owners don`t believe in future energy supply. Will we face an energy shortage? -Even if some people say that Mongolia will face energy shortage, we are still fulfilling our main obligations of supplying consumers with reliable supply of electricity and heating. Of course the energy consumption has increased due to the country`s development, especially during the last 3-4 years. But we have a precise plan to meet this growing demand. For example, the CHP 5 tender is now at its final stage and by 2015 when the construction of its first section will be completed, we will produce 450 MW of electricity and about 600 Gcal of heat. Currently CHP 4`s capacity have expanded by 40 MW and we are talking about installing an additional 100 MW capacity. By 2013 the thermal power plant in Darkhan will also be expanded by 30 MW. Moreover, the Energy Resource program successfully put into operation a 18 MW power plant in Ukhaa Hudag. We also built new blocks of 3 MW at the Dalanzadgad power plant. As for the east area, the plan to expand Dornod`s Choibalsan power plant by 100 MW was announced. And in order to connect consumers of Zavkhan and Gobi-Altai aimags with reliable sources of energy, a 60 MW power plant will be built near Mogoin Gol coal deposit.
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-Mongolian energy consumption is estimated to increase approximately by 1500-3000 MW by 2015-2030. How will this demand be met? -In 2010 we made an announcement to the government and the National Security Council about increasing energy demand and its supply. Due to large scale projects, such as 100,000 Household Housing program in Ulaanbaatar, 310 MW of power and 700-800 Gcal of heat will be needed. Due to the planned metallurgical complex in Erdenet and Darkhan and the industrial park at Sainhsand, 1,000 MW of capacity will be needed in central area according to the WorleyParsons. CHP 5 will supply central area. Moreover, the government granted a license for a new 600 MW thermal power plant in Chandgana Tal coal deposit, which will be operational by 2015. In Tuv aimag`s Bayan soum`s Buuruljuut we will also build a 600 MW power plant. And we granted a new 300 MW license in Tsaidam. The 600 MW power plant at Tavan Tolgoi and the 400 MW at Oyu Tolgoi will fully supply the areas demand even with Tsagaan Suvarga. Since the western area has no ambitious demands, the 24 MW power plant at Khushuut coal deposit and the 36 MW power plant that will be built in Khotgor are enough. -Oyu Tolgoi announced that the problems encountered while dealing with China would delay commercial production projects. Even if the problem is now resolved, doesn`t it show that Mongolia became more dependent on energy imports? -Currently we import electricity from Russia in order to cover the peak load and regulate the grid frequency. In 2011 200 million kW/h of electricity were imported, and that amount is expected to grow this year. Concerning Oyu Tolgoi, according to its investment agreement, the project will import the power from China until its own power plant is finished by 2016. Talks of importing electricity from China have reached an agreement. The construction of a 220 KV line at the southern border is completed and the connection in Inner Mongolia will be built by July 2012. Therefore, there will not be any power supply problem at Oyu Tolgoi. It is estimated that Oyu Tolgoi`s power demand will be 100 MW at first stage, and will reach 310 MW in peak of production.
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-How do you see prospects of private sector involvement into the energy sector? -As the country develops, Mongolian companies become more capable. The Law on Concessions adopted in February 2010 created a favorable legal environment to increase private sector participation, especially, in regard to domestic and foreign investors. For example, it is within this framework that the Mogoin Gol power station project is being implemented. Also CHP 5`s construction and Dornod power plant`s expansion will happen within the framework of the Law on Concessions. Generally, private sector role in the energy sector is likely to expand further. -As much of the machinery and equipment in electricity sector dates back to Soviet times, power plants are a considerable cause of Ulaanbaatar`s air pollution. What is the government`s strategy to support the low carbon new capacities? -I think we are in the transition period as the energy sector is entering a new stage. The CHPs which were constructed in 1960-80`s do have served their purpose. Therefore, it is time to introduce new modern technologies. There is more than one way available to drastically improve efficiency and reduce harmful emissions. For example, CHP 5 will be reducing its pollutants by 97-99 percent. There are already power plants which are more efficient and economical, which consume less water, with fewer personnel and have higher capacity. For example, in Korea, China, and Japan only 200 people work at a thermal power plant with a capacity of 600-1,200 MW, which is similar to our CHP 4 where 1,400 people work. In other words, with the benefits of new techniques and technologies they are able to save on workers salary. Therefore, the private sector will be very active in terms of introducing modern technologies. As for renewable energy, hydro power plants Durguun 12 MW and Taishir 11 MW are being put into operation and supplying its customers with power. Newcom Group`s Salkhit power park will be operational by November of 2012. In addition, there are a number of great projects such as two 50 MW wind parks at Sainshand and Choir. We aim at increasing the renewable energy share to 20-25 percent by 2020, as stated by the National Renewable Energy Program.
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'Mongolia Competitiveness: Where Are We Heading?' Guidebook

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MONGOLIA`S COMPETITIVENESS: WHERE ARE WE HEADING?

Evolution Twenty Strongest Criteria Forty Weakest Criteria and Simulation

WHERE ARE WE HEADING?

What is the Solution?

What is the Solution?

What is the Solution?

4. Bureaucracy and Corruption

What is the Solution?

What is the Solution?

MONGOLIA IN WORLD COMPETITIVENESS

MONGOLIA IN WORLD COMPETITIVENESS SCOREBOARD 2011

COMPETITIVENESS FACTOR RANKINGS

ANNEx 1. ECONOMIC ASSuMPTIONS FOR COMPETITIVENESS FACTORS I. Economic Performance

II. Government Efficiency

III. Business Efficiency

2.8 (2009) 27.9 (2010)

Productivity & Efficiency

Attitudes and Values

Health and Environment

COMPETITIVENESS bALANCE SHEET

1.3.14 Relocation threats of R&D facilities (Survey)

Economy`s Value 27.88 7.1

Average Value 4.75 4.7

8.13 6.92 6.08

6.26 5.65 4.57

4.5.03 1.2.02 3.2.17

1.5.01 4.4.10 1.1.21 2.3.04 4.2.13 3.2.18

1.1.20 4.4.12 3.1.10

4.5.04 3.1.04 1.3.01 4.1.05

3.2.12 4.4.24 4.4.11

1.4.02 3.1.01 4.1.19

1.4.06 4.2.04 4.2.12 4.2.23

THREE COMPETITIVENESS CHALLENGES FACING THE ECONOMy

FROM NATuRAL POWER TO bRAIN POWER

PuPIL-TEACHER RATIO (PRIMARy EDuCATION)

PuPIL-TEACHER RATIO (SECONDARy EDuCATION)

Health and Environment

HuMAN DEVELOPMENT INDEx

HIGH-TECH EXPORTS (%)

Health and Environment

do not have a significant impact on companies

Health and Environment

LIFE EXPECTANCY AT BIRTH

WE CAN DO IT IN THE COMING TWO DECADES

THE LAbOR MARKET PARADOx

HIGHER EDUCATION ACHIEVEMENT (%)

Labor Market - Availability of Skills

INFORMATION TECHNOLOGY SKILLS

are readily available

Labor Market - Availability of Skills

are available in the labor market

Labor Market - Availability of Skills

LABOR FORCE (%)

EMPLOyERS SHOuLD bLAME THEMSELVES, NOT THE GOVERNMENT

ANNEx 2. THE GOLDEN RuLES OF COMPETITIVENESS

ON THE WAy TOWARDS AN ENERGy PARADISE

Health and Environment

FUTURE ENERGY SUPPLY

is adequate and efficient

Health and Environment

do seriously affect the economy

do not seriously affect the economy

ANNEX 2. COMPETITIVENESS - A DIVERSITY OF THOUGHTS