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'Don't borrow, but safe'

Interview with Hans-Werner Sinn, Mongolian Economy, 1.10.2013, S. 10-12

Hans-Werner Sinn, 65, is a renowned economist in Germany and worldwide. He is a professor in the faculty of economics at the University of Munich and president of the Ifo Institute for Economic Research. The British newspaper The Independent named Sinn among the ten most influential people to change the world in 2011 and he was included in Bloomberg Markets Magazine's 2012 "50 Most Influential" list. In 2013, the Frankfurter Allgemeine Zeitung placed his first on its list of economists with the greatest influence on politics.

Is it your first trip to Mongolia? What is your impression?

Yes, it is my first visit in Mongolia. I am impressed with its wideness and the energy of Mongolian Economy the people here—a wonderful country.

What is the current status of the economic crisis in Europe?

The European crisis has two facets. It is a financial crisis and it is a real crisis. The financial crisis has calmed down due to the promises of the central bank to buy government bonds if necessary and the risk measures taken. The real crisis is unmitigated. Southern Europe has lost its competitiveness and is suffering from huge unemployment, in particular among young people.

What countries are most affected?

The six crisis countries. I call them GIPSIC: Greece, Ireland, Portugal, Spain, Italy, Cyprus.

Which challenges are confronting the global economy?

The global economy is suffering from a slowdown of the emerging countries China, Russia, and Brazil, so there is a downturn in the business cycle. But I don't think it will be a major crisis. Neither do I think that it will be a long-term interruption of this fantastic growth the emerging countries have had. So for Mongolia, it is of course a negative sign that the Chinese buy less goods (coal in particular) from Mongolia, but I think that the demand will recover.

What do you think of the doubledigit growth experienced in 2011 and 2012?

Yes, that is fantastic. It follows the Chinese growth. In economic terms, Mongolia is an attachment to China, with 90 percent of exports going there. I find the process a little bit too tempestuous and think it could be organised better. I find certain disproportions between the tempestuous growth of the private economy, the lack of government regulation and public infrastructure. Also Mongolia has too much capital imports. It is too dependent on the inflow of goods and services from other countries. The trade deficit is 30 percent of GDP, which is astronomical. I think that is not sound and Mongolia should definitely stop that. Given that it has natural resources to sell, it should not also sell government bonds. In particular, things like the Chinggis bond, and everything that allows for capital import and goods imports are dangerous because you borrow in a foreign currency, in dollars, and your currency inflates and depreciates. So you will have enormous difficulties in repaying that debt.

Do you see any solutions for this situation? What could government do?

Austerity is necessary. You cannot spend more than you earn. And the government should not counteract the policies of the Mongolian central bank. The Mongolian central bank increases the interest rate, and the government gives interest subsidies from the Chinggis fund. This is contradictory. The growth process should be slowed down. It is too overheated and artificial. It is a bubble.

How can we remove the bubble?

By not spending so much now. You should not give people cash. Instead you should build up a pension fund so that they have something for the future.

What would you recommend to readers for the current economic situation?

People should be saving. Expenditure is definitely too high. Bubbles can burst, as we saw in Europe. Don't borrow but save, not necessarily by putting money into bank accounts but by buying shares of companies.

What is the role of an economist to the country?

The economist considers the macro-economic realtionship of individual behaviors. Their role is to set rules and institutions for the economy which makes private agents. It is like how the policeman prevents traffic jams. The private economy are the motorists and the economist is the policeman who regulates the traffic.

The theme of your dissertation was "Economic Decisions Under Uncertainty". What can we apply and learn from that paper today?

One of my main themes was excessive risk taking when equity is small and liability is limited. I heard of the Mongolian bank bankruptcies and the bail-out activities of the government. This is the sort of problem that has to be avoided by forcing banks to operate with the multitude of the equity they are holding today. Otherwise they gamble at the expense of tax payers.

What from your body of work has most reformed German governance?

My work on activating social aid influenced the Schröder reforms assumed under the 2010 title agenda. The idea was to bring wages for the less qualified down to generate more jobs without reducing their living standard. This was achieved by reducing the unemployment benefits and paying work subsidies. The policy was an employment miracle, especially for the non-skilled. The jobs brought them a modest labour income, and the government subsidies were added to that income. It was better for the less-qualified and the rest of society. It makes no sense to build a welfare state on the idea of paying people for not working.

Germany has taken it upon itself to support the flagging countries in the European Union? Is this a longterm role for Germany?

It is a long-term process because the prices that went up too much have to come down. We need a realignment of the prices of goods between the countries. This is a very difficult process. Either you inflate the Northern countries or you deflate the Southern countries. But the Northern countries don't want to inflate because people are afraid of losing their savings, and the southern countries don't want to deflate because debtors would not be able to repay their debt.

What is the function of the Ifo Institute for Economic Research?

The Ifo Institute is one of five publicly financed institutes in Germany. It conducts significant economic surveys. We ask 7,000 firms every month about their business status and their expectations. We cooperate with many researchers throughout the world. In our research network there are over 1,000 economic professors worldwide.

What political reform do you think is needed in Mongolia?

In my opinion, the dual education system is notably required here. There are over 100 universities in Mongolia, which is obviously too much for 2.9 million people. I think two or three would be sufficient. Instead technical schools where the technical professions can be learnt are needed. Every job requires lots of know-how and detailed knowledge. The dual education system can be implemented in collaboration with firms.

I think law and order should be established. That is essential. The city cannot be built without any planning and strict zoning rules. To give an example, the government should tear down one or two illegal buildings. After that, people will stick to the rules. Ulaanbaatar, and the country as a whole, urgently need better infrastructure. There has been too little public infrastructure investment relative to private consumption. Everyone has mobiles and flat screen TVs. The electronic gadgets are really astonishing. I would recommend buying fewer Japanese cars and more and better streets, parks and other public spaces, like city parks and recreation spots between the buildings. More hospitals would also be more necessary. I think living infrastructure is missing here.

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