Macro stability proved the greatest challenge early in the transition, but reformers nonetheless focused on privatization. The avowed aim was to turn a proletariat with nothing to lose into owners with a real stake in the system, while depriving politicians of control of the country's resources. Large-enterprise privatization was a significant organizational accomplishment in a country lacking the infrastructure of a market economy. Moreover, in contrast to privatization in post-Soviet Russia, corruption was minimal.
Research later showed that the privatization did, indeed, succeed in lessening the state's economic influence, but failed to increase productivity. One unanticipated development: Managers and workers were able to amass commanding ownership positions by using the vouchers issued to members of their extended families. By the end of the privatization process, half of the enterprises were controlled by insiders -- evidence of Mongolian society's inclination and capacity for collective action.
The most controversial aspect of privatization involved the aforementioned rural cooperatives. Each carried out its own privatization scheme, resulting in large inequalities and frequent allegations of corruption. Some families accumulated huge herds, while others sank into poverty. But free markets did eventually make a big difference to productivity: The number of animals increased from 26 million in 1990 to 44 million in 2009, and herd composition began to respond to export price incentives.
The decline in output, combined with runaway inflation and opposition to privatization, brought the early reformers into disrepute. A parliamentary election in 1992 -- the first under the new constitution -- led to a big win for the old-guard MPRP, which ruled alone until 1996. The MPRP government was pragmatic, centrist and cautious. It did, however, complete the privatization plan, deregulate prices, and make the currency freely convertible despite its communist DNA. Market democracy, it seems, had become an uncontested goal in Mongolia.
Meanwhile, the reformist parties finally proved able to forge a united platform, capturing two-thirds of the seats in the 1996 parliamentary elections. And the new government set about revitalizing reform. The centerpiece was, again, privatization, but this time of the very large (and much more valuable) companies omitted from the first round. From 1996 to 2000, nearly 1,000 enterprises were privatized through a variety of schemes, all requiring the new owners to pay cash up front.
Although Mongolia was in the bottom-quarter of all nations in per capita GDP in the late 1990s, it was easily in the top half on all six Worldwide Governance Indicators compiled by the World Bank. This was the case even for the category of regulatory quality (an aspect of institutional development with which Mongolia had no experience prior to 1991) and for control of corruption (in which the transition countries have generally fared badly).
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