## 1 -2-2 Collapse of the COMECON System

The Mongolian economy is characterized by international trade and national finance occupying the majority of its national income. The striking feature of the Mongolian economic structure is that international trade and national finance have an extraordinarily large share in the national economy. In 1988, the budget deficit as a share of GDP amounted to 19.5 percent (see Appendix 13). The budget deficits were entirely financed by Soviet aid. However, with the cessation of Soviet aid in 1991, Mongolia has had a huge debt problem to the former Soviet Union. The degree of dependency on foreign trade ((exports+imports)/national income) amounted to 65 percent in 1989. This means that the Mongolian economy had a frail structure, and was heavily dependent on the former Soviet Union. Under the influence of the democratization of the Eastern European countries, a multi-party, democratic, general election was implemented in July 1990, and in September a democratic new government was created. Economic and political reforms were carried out extensively. A transition to the market economy from the centrally planned economy was declared. The peculiar economic structure of the Mongolian economy was strongly influenced by three events: 1) the general confusion resulting from the transition of an economic system; 2) the collapse of COMECON system; and 3) the disintegration of the former Soviet Union, the Mongolian economy rapidly fell into a serious depression. From the beginning of 1991, Soviet aid basically stopped, and the previous COMECON trading arrangement was replaced with world-market pricing and hard-currency settlements. These two external shocks plunged the economy into turmoil. Imports from former Soviet Union dramatically decreased; the shortage of oil, materials, machinery, equipment and spare parts was the greatest factor in the damage to the transportation system and production activity. For example, combine harvesters for wheat did not work, and could not transport them to the factories. Production and transportation of coal were also damaged. This was connected directly with the power shortage, and led to the drop in copper production. Finally, exports were reduced.

## 2 Economic Reform

With the advent of Perestroika in the former Soviet Union in the mid-1980's the government of Mongolia embarked on a series of economic reforms designed to limit the role of state planning and give greater autonomy to the state-owned enterprises. The reform process gained momentum towards the end of the decade with the aim of improving the efficiency of the command economy. Although Mongolia experienced growth in the 1980's the economy suffered from the inefficiencies and distortions associated with a centrally-planned economic system. Since the 1930's virtually the whole economy, from agriculture to heavy industry, fell under the control of state and central planners, and the private sector was limited to the ownership of a small number of livestock. The economy was closely integrated with, and dependent on, the economies of the former Soviet Union and COMECON members. Large former Soviet Union investment and loans also fuelled the development of Mongolia's industrial sector. As a result of popular demonstrations in March 1990 Mongolia's first multiparty elections were held in July of that year. The new coalition government pledged to create a market economy and embarked on a comprehensive series of economic reforms.

At the same time as the nascent reforms were being imposed the external environment