Saturday, December 24, 2011

History Matters: Two Significant Barriers to the Regional Policy of Mongolia

by Manlaibaatar Zagdbazar

According to the New Economic Geography theory, history matters because increasing returns to scale generate positive feedbacks that tend to cause economies to “lock in” to particular locations. Here, however, I would like to analyze other kind of reasons to show that history really matters.

1) Path dependence in railway standards.
As railways developed and expanded, one of the key issue was that of the track gauge (the distance, or width, between the inner sides of the rails) that should be used. A large part of the world uses a "standard gauge" of 4 ft 8 1⁄2 in (1,435 mm), while the former Soviet Union countries use a “broad gauge” of 5 ft (1.524mm). When a railway line of one gauge meets a line of another gauge, a break of gauge occurs, which entails big cost and inconvenience to traffic that passes from one system to another. For example, Transmongolian Railway, where Russia and Mongolia use broad gauge while China uses standard gauge; on the border, each carriage has to be lifted in turn to have its wheels changed. The whole operation can take several hours.

This challenge of gauge size does not only inhibit the trade between China and Mongolia, but also makes it more difficult to implement many regional projects in South and East Mongolia – greatly endowed regions full of mineral resources and suitable for other development potentials. In the picture shown below, red dashed lines are new railroad building projects that use “broad standard” gauge. Unfortunately, no one wants to invest into these projects because they still have the break of gauge problem with China’s railways.

2) Political and psychological inertia.
The country of Mongolia is divided into 21 provinces and the capital city. Provinces are subdivided "sums", in total number of 331 items. Such “patched” administrative division is too costly for only 1 million of rural people (total population of Mongolia is about 2.7 million), because each sum has a permanent settlement as administrative center having its own secondary school and dorm, a hospital, a cultural center, and police that are subsidized by central government. To demonstrate, in most sums, school has only few students, while required operational costs are huge: salary for teachers, building maintenance costs, and heating, especially during very cold winter. All these costs cannot be well reasoned under low quality of education. 

Historically, this administrative division was inherited from the socialist time and was originally created to develop the network of collecting livestock by-products. Now, as people migrate to big towns, these artificial administrative centers are being almost deserted. For last two decades, some politicians tried to change the situation by creating bigger administrative units which were supposed to be more efficient and natural, but the majority of politicians and public were against this idea, being morally and emotionally used to having these old units. In addition, the Constitution and the Election code also make it difficult to change the old system and, therefore, “locked in” inefficient artificial spreading still exists.

Consequently, in real life, regional policy can face bigger historical barriers than initially expected. If you create and find better solutions you have to invest enormous amount of efforts and resources to implement it. 


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