2009 Index of Economic Freedom

Quick Facts

Population:

• 2.6 million

GDP (PPP):

• $7.5 billion
• 8.6% growth
• 7.3% 5-year compound annual growth
• $2887 per capita

Unemployment:

• 3.0%

Inflation (CPI):

• 9.0%

FDI Inflow:

• $166.5 million

Mongolia's economic freedom score is 62.8, making its economy the 69th freest in the 2009 Index. Its score is 0.8 point lower than last year, reflecting minor declines in six of the 10 economic freedoms. Mongolia is ranked 11th out of 41 countries in the Asia–Pacific region, and its overall score is just above the global average.

Mongolia's economy has enjoyed steady economic growth of over 7 percent in recent years. The economy has benefited from relatively high levels of fiscal freedom, financial freedom, business freedom, investment freedom, and trade freedom. The top income and corporate tax rates are competitive. The tariff barrier is also moderate, but non-tariff restrictions undermine overall trade freedom. Although commercial registration and licensing are efficient, closing a business is time-consuming. The government has eliminated almost all price supports and market distortions.

Mongolia is weak in property rights and freedom from corruption. The judicial protection of property rights is lax, and the enforcement of contracts needs to be strengthened. The judiciary is compromised by corruption. Despite some progress in privatization, the government remains involved in the economy and has passed legislation that reinforces its involvement in strategic sectors like mining.

Background Back to the top

Mongolia emerged from the shadow of the former Soviet Union with the adoption of a multi-party system and a new constitution in 1990. In 2000, however, the old Communist Mongolian People's Revolutionary Party regained power. Mongolia is a primary transportation conduit for trade between Russia and China, which together account for 40 percent of its foreign direct investment. Mongolia's trade is tilted heavily toward China; two-way trade increased 43 percent in 2007 to $2.08 billion, accounting for 52 percent of Mongolia's total trade. Livestock herding employs a majority of the population, but mining attracts the largest portion of foreign direct investment.

Business Freedom 71.0 Back to the top

The overall freedom to conduct a business is relatively well protected under Mongolia's regulatory environment. Starting a business takes an average of 13 days, compared to the world average of 38 days. Obtaining a business license takes less than the world average of 225 days. Bankruptcy proceedings can be lengthy and burdensome.

Trade Freedom 81.2 Back to the top

Mongolia's average tariff rate was 4.4 percent in 2006. Liberalization is progressing, but import and export restrictions, import and export taxes, weak enforcement of intellectual property rights, and non-transparent, inefficient, and corrupt customs implementation add to the cost of trade. Ten points were deducted from Mongolia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 81.3 Back to the top

Under a comprehensive tax reform implemented in 2007, the individual income tax rate is a flat 10 percent, and the top corporate tax rate is 25 percent. Other taxes include a value-added tax (VAT), an excise tax on alcohol and vehicles, and a dividend tax. In the most recent year, overall tax revenue as a percentage of GDP was 33.8 percent.

Government Size 69.9 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 31.7 percent of GDP.

Monetary Freedom76.7 Back to the top

Inflation is high, averaging 8.4 percent between 2005 and 2007. Although most price controls and many subsidies have been phased out, the government influences prices through the public sector or through regulation, sometimes intervenes in the market to stabilize commodity prices, and still controls air fares and fuel prices. Five points were deducted from Mongolia's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom60.0 Back to the top

Foreign capital and domestic capital are legally equal. Investment is not screened. Foreign investment is subject to additional regulations or restrictions in activities involving petroleum extraction and strategic mineral deposits. Regulations and investment-related laws are changed frequently and may not be communicated adequately. Consequently, rules may be inconsistently applied or misunderstood. Domestic and foreign investors report abuses of inspections, permits, and licenses. Residents and non-residents may hold foreign exchange accounts, subject to minimal restrictions. There are no restrictions on payments and transfers. Most credit and loan operations must be registered with the central bank. Foreign investors may lease but not own land.

Financial Freedom60.0 Back to the top

Mongolia's small financial system has undergone modernization. The restructuring of the banking sector has improved access to financing and helped to facilitate the development of a vibrant private sector. Overall, the government imposes few restraints on the flow of capital, and foreign investors may tap domestic capital markets freely. The four largest banks control over 60 percent of assets. Two of the 16 commercial banks operating in Mongolia are foreign-owned. State shares in banks have been reduced, but there is one wholly state-owned bank. Non-performing loans have been increasing as a result of the rapid expansion in short-term borrowing by the private sector. There are about six dozen smaller, largely unregulated non-bank lending institutions. The government is refining regulation of the insurance sector. Capital markets are not fully developed. The stock market was set up to facilitate privatization of state-owned enterprises but now functions as a regular exchange.

Property Rights30.0 Back to the top

The enforcement of laws protecting private property is weak. Judges generally do not respect such commercial principles as the sanctity of contracts and regularly ignore the terms of contracts in their decisions. The legal system does recognize the concept of collateralized assets. There is no mortgage law. Pirated optical media are readily available and subject to spotty enforcement.

Freedom From Corruption30.0 Back to the top

Corruption is perceived as widespread. Mongolia ranks 99th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption is both significant and growing. Allegations of public-sector corruption include cases involving cabinet-level officials.

Labor Freedom67.7 Back to the top

Mongolia's relatively flexible labor regulations enhance employment and productivity growth. The non-salary cost of employing a worker remains moderate, and dismissing a redundant employee is costless. Regulations related to the number of work hours are not flexible.