Urgent action needed to strengthen Mongolia's small businesses

Mongolia’s economy is one of the fastest-growing in the world, but the continued expansion of the informal sector remains a significant barrier to the country’s future economic success, according to a new report launched today in Ulaanbaatar.

Press release | 11 March 2015
ULAANBAATAR (ILO News) – Mongolia’s economy is one of the fastest-growing in the world, but the continued expansion of the informal sector remains a significant barrier to the country’s future economic success, according to a new report launched today in Ulaanbaatar.

The report, “Formalizing enterprises in Mongolia: Challenges and policy directions”, was compiled by the Mongolian Employers’ Federation (MONEF), the Economic Policy and Competitiveness Research Center (EPCRC) and the International Labour Organization (ILO).

Estimates quoted in the report suggest the informal economy may account for as much as 44 per cent of Mongolia’s official total GDP, although an accurate assessment is difficult. The number of people employed in the informal sector is also rising; in 2013 the number of people in formal employment increased by just 4 per cent while those in the informal sector rose by 15 per cent. Most concerning is the increase in the number of younger workers. Amongst those aged 15-34, employment in the informal sector increased by 23 per cent between 2009 and 2013.

Almost 90 per cent of businesses in Mongolia employ fewer than 10 people. Hence, supporting small and micro enterprises (SME’s) is a clear priority in tackling poverty and unemployment, the report says, noting that the Government is to be applauded for the improvements it has already made to the business environment.

The report’s key findings include:
  • Enterprises fully understand the benefits of registering; security, stability and -- particularly -- easier access to finance. The primary reasons businesses were unable to get loans were insufficient collateral, high interest rates and a lack of support services.
  • The Government’s enterprise registration process has become easier. Better information and advice will incentivise additional enterprises to register.
  • Enterprises need more help to understand and comply with labour laws. More than half of those surveyed described labour laws as “ambiguous and complicated.”
  • The costs of formalization are a concern. 55 per cent of firms surveyed cited tax laws and regulations as the biggest barrier to registering their businesses.
  • Requests for informal payments remain a significant challenge for nearly half of enterprises. The most frequent request for an informal payment is in order to get a necessary permit or to win government business.
  • More could be done to help smaller enterprises bid for Government tenders. When asked if Government tenders favour and support new enterprises, 65 per cent of respondents answered no.
  • The number of SMEs who compete successfully in export markets is very low. Only 4 per cent of firms surveyed directly exported their goods or services. Many cited difficult export procedures as a barrier.
  • Small enterprises need more support to provide training for their employees. Only 40 per cent of formal economy enterprises offered employees anything beyond basic 'on the job’ training, and only 9 per cent of informal businesses offered such training.
The report lays out a number of key recommendations. These include creating a more business-friendly environment for SMEs, including easier access to finance, simpler regulations and taxation, and help for enterprises wanting to export.

Mr Tim De Meyer, Director of ILO Country Office for China and Mongolia said “Nine out of 10 workers in Mongolia work for an SME. Poverty nor productivity levels are helped if arcane tax laws and labour laws written for a different era cause this workforce to linger in informality. Enterprises can only succeed in the long run if they are given the opportunity to invest in their people and offer them decent working conditions.”

The Director General of MONEF, Mr Ganbaatar Khuyag, said “The key premise of the Report’s recommendations is the need to create adequate incentives for enterprises to formalise. For example, the tax burden on business affects investment and growth. If taxes appear too high then the corresponding gains seem low and the incentive for enterprises to opt out of the formal economy increases."

Ms Lakshmi Boojoo, Director, Economic Policy and Competitiveness Research Center (EPCRC) said “One if the more worrying aspects of the report was the very low number of small enterprises that currently look to export markets. These low figures are mostly attributable to the very lengthy time to clear goods through customs and securing the necessary documentation for export. Clearly more practical assistance and information is needed to make it easier for enterprises that could export goods to do so.”

"A key feature of ILO technical work throughout Asia Pacific is the development of strong empirical evidence, to support the development of policies that create effective and sustainable change,” said Gary Rynhart, ILO Senior Employers Specialist for Asia and the Pacific. “This report provides the basis for a focused discussion on measures to tackle what has been identified as a growing threat to sustainable economic development in Mongolia. I strongly encouraged the Government, employers’ and workers’ organizations, to work together and intensify their efforts to follow up on the recommendations outlined by the report.”

Mr Rynhart and Mr Ganbaatar called on the Government to begin roundtable discussions with the business community on the recommendations of the report, and help devise an immediate plan of action to tackle the growth in informal economic activity.

The report is based on interviews with senior managers from 100 formal and informal economy enterprises based in Ulaanbaatar, decision makers from 17 state organizations that provide public services to private businesses, and representatives from 10 service providers that offer financial and non-financial business support services.

For further information please contact:

Ms Bolormaa Purevsuren
National Coordinator, Mongolia
ILO Country Office for China and Mongolia
Tel: 976 11 320624

Mr Tsend-Ayush Erdenebaatar
Deputy Executive Director
Head of Policy and General Coordination Department
Mongolian Employers' Federation
Tel: 976 11 314579