Notes from the Field

Business Conditions Dull, but Corruption Dips in Mongolia

July 9, 2014

The Asia Foundation and the Sant Maral Foundation on July 7 released the latest Study on Private Perceptions on Corruption (STOPP), revealing a troubling decline in satisfaction with the business environment and how some debilitating conditions for business could be improved. Implemented since December 2012, the fourth issue of the STOPP survey interviewed 330 senior-level managers of Mongolian businesses in Ulaanbaatar in April 2014.

How do you reduce corruption? This is a question Mongolians are scrambling with as the country is set to pile up a staggering amount of wealth in coming years. Stronger legislation is always helpful in reducing corruption, but most important is to see that the political will to enforce this legislation exists and endures. This takes creation of multi-sectoral checks on growing conflict of interests and a demand for a corruption-free society, and such an alliance would need the private sector’s cooperation.

The private sector is often assumed as the perpetrator of corruption. We cannot assume markets to be equitable on their own. It is also true that they are often vulnerable to corruption. But by creating jobs and wealth, markets serve an important socio-political function just like civil society groups and politicians. In addition, it has a stronger incentive to reduce corruption because of the escalating transaction costs of doing business.

According to the survey, the private sector overall remains skeptical about the general business environment in Mongolia. The satisfaction level shows an unmistakable declining trend, with those satisfied making up only 12 percent of the responding firms. It is already very low, but what gives a sense of a declining situation is that this number has been halved from 25 percent since December 2012.

When we know firms are unhappy about business conditions, the next question is what the problems are, and the time and resources firms are “wasting” when overcoming problems. The number of firms that are “not wasting” any time overcoming “obstacles” is just about 9 percent in 2014. The first survey in 2012 showed the same result, whereas it has declined nearly by a half from 19 percent since May 2013. This means that these obstacles trouble more firms now than they did in May 2013. At the same time, the number of firms that had spent “no resources” has almost doubled since 2012 from 10 percent. Despite the low baseline, the increase is substantial.

The obstacles are real in the sense that they are absorbing valuable resources and time that could be spent more productively. Respondents cited high taxes (52.4 percent) followed by obtaining and renewing licenses as the biggest obstacles. Interestingly, both have declined since 2012 by about eight percentage points. So, here is a situation where business conditions are deteriorating but the impact of major obstacles, if you may, is declining. There are marginal increases (by less than 5 percent) in “access to credit” and “conditions for labor market” (the other two biggest obstacles), but the substantial increment is in “strong competition from other companies” showing an increase of more than double or by 15 percentage points since 2012. This is a noteworthy increase, but it doesn’t tell us in what ways this is an obstacle or whether this leads to corruption.

Similarly, the Tax Office and the Specialized Inspection Agency are believed to be the two leading agencies creating obstacles, but what must also be noted is over time the number of firms saying so has also declined (respectively by 3 and 7 percentage points). It is also critical to be clear about whether the agencies are indeed creating obstacles, or if they are just unpopular for something they cannot control or have to do as part of their jobs (for example, high taxes and regular inspections).

Overall, it is possible that while bureaucratic red tape is still high, the real costs of doing business have declined (less resources being wasted), which possibly hints at a decline in overall corruption levels. The number of respondents who have not experienced or heard of corrupt transactions in the last 12 months has also declined by 8 percentage points from 48.5 since 2012. When compared with data of October 2013, it has declined by almost 16 points.

MongoliaSTOPPGraph

Although the drop since October 2013 is troubling, it must be comforting to know that there are now fewer businesses that consider unofficial charges (often viewed as corruption) as a major obstacle. The number of those considering this an obstacle has declined by nearly a half since 2012 (from 18 to 10 percent). It may mean either the size, frequency, or both of bribes have declined.

What made the above progress possible? The levels of “awareness of anti-corruption measures” and “government efforts against corruption” among the surveyed firms are not particularly inspiring. Those believing they have extensive knowledge and that the anti-corruption laws are very effective make up 4 percent or less, both either stable or has declined since December 2012. Only 7-9 percent have ever reported incidences of corruption (since 2012) and 14 percent said they had some kind of anti-corruption measures in place. However the good news is the number of surveyed firms that now have a written policy to deal with corruption has increased since 2012 from 10 to 17 percent. Still a low number, but an inspiring growth over time.

Obstacles to firms seem real, yet many that were previously thought pervasive have shown declining trends. From those that have shown increasing trends, it is very difficult to say whether they actually lead to corruption. Although agencies that played a part in improvements must be applauded, the problem of corruption remains grave. The government’s main concern now should be reassuring the business community of its commitment to partnering in fighting corruption as fears for a protracted slowdown grow.

The Survey on Perceptions and Knowledge of Corruption (SPEAK) was funded by the United States Agency for International Development (USAID), as part of The Asia Foundation’s Strengthening Transparency and Governance in Mongolia (STAGE) program, which aims to strengthen democratic governance by building a more transparent and accountable regulatory and legislative environment while promoting principles of checks and balances.

Basanta Pokharel is The Asia Foundation’s chief of party for the STAGE program in Mongolia. He can be reached at basanta.pokharel@asiafoundation.org. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.

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