Assessing the Input Markets for Cashmere Production in Mongolia

Table of Contents ii

  I Table of Contents  

1.  Introduction  5

2.  Cashmere Production in Mongolia  7

2.1.  Role of the Livestock Sector in the Mongolian Economy  7

2.2.  Importance of Cashmere for Mongolia  8

2.3.  Introduction of Input Markets for Cashmere Production  10

3.  Natural Input Markets  12

3.1.  Unresolved Market for Land  12

3.1.1.  Common Property and Associated Problems  13

3.1.2.  Change in Traditional Grazing Techniques  13

3.1.3.  Deterioration of Pasture Land  14

3.1.3.1.  Overgrazing and Degradation  14

3.1.3.2.  Carrying capacity  16

3.1.4.  Improvement of Pasture Management  17

3.1.4.1.  Enhanced Implementation of the Law on Land  17

3.1.4.2.  Land Privatization Option  18

3.1.4.3.  Exclusive User Rights through Leasing  20

3.1.4.4.  Reducing Number of Livestock and Herders  20

3.1.4.5.  Tax System  22

3.1.4.6.  Cooperation between Herders  23

3.1.5.  Summary  24

3.2.  Insufficient Water Supply for Herders  25

3.2.1.  Limited Water Resources  25

3.2.2.  Linkages between Water and Pasture Use  26

3.2.3.  Current Situation on Water Points  27

3.2.3.1.  Water Facilities in Place  27

3.2.3.2.  Water point Ownership  28

3.2.3.3.  Water User Rights  28

3.2.4.  Water Point Management  28

3.2.4.1.  Operation and Maintenance of Water Points  28

3.2.4.2.  Rehabilitation of Wells  29

3.2.5.  Towards Sustainable Use of Water  30

3.2.5.1.  Long Term User Rights  30

3.2.5.2.  Herders Contribution  30

3.2.5.3.  Water User Fee  30

3.2.6.  Summary  31

3.3  Lack of Fodder  31

3.3.1.  Fodder Production in Mongolia  32

3.3.2.  Factors affecting the Demand of Fodder  33

3.3.3.  Impediments of Fodder Market Development  34

3.3.4.  Summary  35

Table of Contents iii

4.  Markets for Services  36

4.1  Financial Services in Rural Mongolia  36

4.1.1.  Common Problems with Agricultural Lending  36

4.1.2.  Supply of Rural Finance  37

4.1.2.1.  Commercial Banks  38

4.1.2.2.  Non-Bank Financial Institutions  39

4.1.2.3.  Savings and Credit Cooperatives  39

4.1.2.4.  Informal Sector  40

4.1.3.  Demand for Financial Services in Rural Areas  41

4.1.3.1.  Savings  41

4.1.3.2.  Credits and Loans  43

4.1.4.  Role of Government  45

4.1.4.1.  Interest Rate Ceilings  46

4.1.4.2.  Support of micro finance organizations  46

4.1.4.3.  Credit Information System  47

4.1.5.  Summary  48

4.2.  Need for Livestock Insurance  49

4.2.1.  Risk Coping and Risk Management Strategies  49

4.2.2.  Situation on the Insurance Market  52

4.2.3.  Classic Problems with Insurances  52

4.2.4.  Insurance schemes for Livestock in Mongolia  54

4.2.4.1.  Traditional Insurance  54

4.2.4.2.  Compulsory Insurance  55

4.2.4.3.  Weather insurance  56

4.2.4.4.  Mortality Index Insurance  57

4.2.5.  Summary  58

4.3.  Enhanced Use of Veterinary Services  59

4.3.1.  Reflections on Livestock Service Delivery  59

4.3.2.  Veterinary Service System in Mongolia  60

4.3.2.1.  Provider of Livestock Service  61

4.3.2.2.  Services offered by Veterinarians  61

4.3.2.3.  Impediments of Sector Delivery  63

4.3.3.  Use of Veterinary Services  65

4.3.3.1.  Herders Demand for Veterinary Services  65

4.3.3.2.  Potential Benefits from Veterinary Services  66

4.3.4.  Summary  67

5.  Summary and Conclusions  68

6.  References  71

  Annex  76

Table of Contents iv

  II List of Abbreviations  

  ADB Asian Development  Bank

  CIB Credit Information Bureau  

  EPSP Economic Policy Support Project  

  FAO Food and Agriculture Organization of the United Nations  

  GDP Gross Domestic Product  

  GTZ Deutsche Gesellschaft für Technische Zusammenarbeit  

  IFPRI International Food Policy Research Institute  

  RPRP Rural Poverty Reduction Program  

  SCC Saving and Credit Cooperatives  

  SDC Swiss Agency for Development and Cooperation  

  TACIS Technical Assistance to the Commonwealth of Independent States  

  UNDP United Nations Development Program  

  USAID United States Agency for International Development  

  IV List of Tables  

Table 1  Number of Livestock by Type and Year  8

Table 2  Number of Goats and Share of Total Livestock  9

Table 3  Annual Cashmere Production in Mongolia  9

Table 4  Description of Participating Herders  12

Table 5  Classification of Land Degradation  14

Table 6  Movement Pattern by Size of Herd  16

Table 7  Grouping of Herder Households by Number of Livestock  22

Table 8  Conversion Rates  23

Table 9  Number of Wells by Type  27

Table 10  Evolution of Fodder Supply  32

Table 11  Formal Provider of Financial Services in Mongolia  38

Table 12  Annual Interest and Inflation Rates  43

Table 13  Annual Loan Interest Rate  44

Table 14  Losses of Adult Animals  49

Natural Input Markets 5

1. Introduction

The cashmere production, which has been growing steadily over the last 15 years, represents today an essential component of the Mongolian economy and is a principal source of livelihood for Mongolia’s poor rural herding community. Developing an efficient and competitive cashmere industry that enables the country to facilitate development and mitigate poverty will be one of the main measures of Mongolia’s successful transition from a command to a market economy.

In Mongolia, the situation for cashmere herders is extremely difficult nowadays and has even worsened in many areas of the country. The government of Mongolia recognized these concerns and specified in its Rural Development Strategy the primary objectives for the livestock sector as follows: 1

- Sustainable pasture management

- Improving the supply of water

- Increasing the use of supplementary fodder

- Increasing access to financial services

- Improving the risk and disaster management

- Improving the veterinary services

All the objectives mentioned above are related to specific input markets for livestock herding. Many of these input markets are handicapped primarily by a lack of regulation while others are simply underdeveloped or entirely missing. The objective of this paper is to assess these most important input markets for cashmere herding. In order to do so, the markets are first described in detail followed by an assessment of problems which occur in relation to livestock herding. It is clear that any improvement in this area will require a deep understanding of how these markets operate and what obstacles will impede further development. In addition, this paper will evaluate the enforceability and appropriateness of solutions suggested by the Mongolian government and by foreign donor agencies.

1 see Center for Policy Research (2002), p. 30

Natural Input Markets 6

To support our findings, we conducted a survey of Mongolian cashmere herders who were asked what daily difficulties and major obstacles they face on their livelihoods. The survey took place in October 2006 and covered 50 herding households in five aimags 2 , focusing on the two provinces, Bayankhongor and Uvorkhangai, that have a high number of cashmere goats. 3 Herders were selected randomly from a widely dispersed population in order to cover a variety of cases. The answers we received helped us to better understand the nature of the traditional pastoral livestock husbandry and comprehend how herders see their own situation within difficult circumstances. It is obvious, that any reform of the input markets for cashmere production should be made in close collaboration between herders and the authorities.

This paper is structured as follows: First, chapter two gives an overview of the Mongolian livestock sector and the cashmere production in particular, including a small introduction of the input markets essential to cashmere herders. These input markets are examined in more detail in chapter three and four. Whereas chapter three focuses on the classic natural markets for land, water and fodder, chapter four concentrates on services like finance, insurance and veterinary care. This paper ends with a summary and conclusions in chapter five.

2 Mongolia is divided administratively into 21 aimags (provinces) and the capital city Ulaanbaatar

3 Small samples were also taken in Tuv, Bulgan and Arkhangai aimag

Natural Input Markets 7

2. Cashmere Production in Mongolia

Mongolia is one of the last truly pastoral countries in the world where the environment is well suited to extensive and nomadic livestock herding, a tradition that Mongolian herders have followed for hundreds of years, moving frequently with their herds in search of grazing areas, depending on the seasons and weather conditions. Even under the socialist regime, herders never abandoned their nomadic lifestyle although most of the livestock was state-owned and the state controlled their movements.

2.1. Role of the Livestock Sector in the Mongolian Economy

In 1990, Mongolia started radical economic reforms that were intended to transform the country from a centrally planned economy to a market economy. This transformation led to an adjustment in the general composition of output away from industry and toward agriculture. Within the agricultural sector, the livestock husbandry, which was always dominant, became increasingly important. At the end of the transition, all formerly state-owned livestock was privatised and the state was no longer involved in the nomadic animal husbandry. During this period, Mongolia was undergoing a difficult development with many people facing unemployment and poverty. This economic crisis induced many urban people to move to the countryside and return to herding, mainly at the subsistence level. An increasing share of the labour force was absorbed by the agricultural sector. Before the transition began, agriculture provided employment for less than a third of the labour force, eleven years later it accounted for nearly half. By then agriculture was by far the largest sector in the economy with almost complete specialization on livestock. 4 Agriculture share in GDP has declined since 1996, when it reached its peak of nearly 44 percent, to around 22 percent of GDP in 2005. Within the gross agricultural output, the share of livestock is currently about 85 percent. 5 As can be seen in Table 1, the number of livestock increased between 1992 and 1998 by almost eight million heads and reached its peak in 1998 of 33 million heads. The number decreased drastically in the following three years 2000 to

4 see Griffin (2001), p. 41 f.

5 Mongolian Statistical Yearbook 2005

Natural Input Markets 8

2002, due to very harsh weather conditions with dzuds 6 and droughts. More than eleven million animals died during this time and herders’ livelihoods were adversely affected with some of them losing their entire livestock.

Table 1 - Number of Livestock by Type and Year (in thousand)

Source: Mongolian Statistical Yearbook 2005

Looking at the composition of the national herds a considerable change can be observed. While horses and cattle increased their number moderately until 1998, the number of camels declined and the number of sheep remained constant. After the following winter, at the end of the decade, all livestock suffered tremendous losses and is still recovering from this incidence. The tremendous increase in the number of goats even after the harsh weather disasters will be further addressed in the next section.

2.2. Importance of Cashmere for Mongolia

After the liberalization of the herding sector in the early 1990s, the goat population increased dramatically, much faster than the population of other herding animals such as sheep, cattle, and camels, from five million in 1990 to over eleven million in 1998. Two reasons led to this increase: experienced herders increased the size of their herds, and a significant number of new small herders, who saw raising goats as a way to supplement their falling income, entered the sector. As shown in Table 2, the severe winters of 2000–2002 drastically reduced the goat population from 1999 by around two million heads. Additionally, a significant share of the offsprings did not survive these winters. By 2005, however, the goat population had recovered and surpassed its pre-dzud level to over 13 million heads. 7

6 A generic term denoting weather conditions which prevent livestock from obtaining sufficient forage from open grazing. Dzuds are manifested in different ways, such as deep snow or a layer of ice covering pastures.

7 see Lecraw et al. (2005), p. 9 f.

Natural Input Markets 9

Table 2 - Number of Goats and Share of Total Livestock

Source: Mongolian Statistical Yearbook 2005

This remarkable increase of goats naturally changed the composition of the herds drastically. The share of goats in percent of total livestock increased from 20 percent in 1990 to 44 percent in 2005, reflecting the lucrative opportunities of cashmere production. When asked which animals they planned to increase in the near future, 50 percent of the surveyed herders indicated that they will increase the number of goats. Thus, the goat population is likely to further increase in Mongolia.

Today Mongolia produces nearly four thousand tons of raw cashmere per year which makes it the second largest producer in the world, after China. Mongolia has a strong comparative advantage in cashmere production. Its climate and terrain are extremely well suited for goat production, and its herders have a long tradition and reputation for high quality cashmere production. 8 The average output of cashmere per goat throughout Mongolia has remained the same for the last 15 years, around 315 grams per year. Since herders are not able to increase the cashmere yield per goat within a short period of time, the production of cashmere is primarily determined by the size of the goat population which, as discussed above, is increasing year by year. 9 Table 3 presents the annual cashmere output for Mongolia. After reaching a peak in 1999, the cashmere production declined due to a drop in world demand and bad domestic weather conditions. From 2003, the cashmere production started to recover and reached a new peak of nearly 4 million tons in 2005.

Table 3 – Annual Cashmere Production in Mongolia (in million tons)

Source: Mongolian Statistical Yearbook 2005

The majority of cashmere is exported without or with minor processing. Cashmere is Mongolia’s third largest official export, after copper and gold, and provides

8 see World Bank (2003), p. iv

9 see Bakei (2003), p. 6

Natural Input Markets 10

income and employment to over a third of its 2.5 million people. 10 It should also be mentioned that a considerable amount of cashmere is smuggled to China.

2.3. Introduction of Input Markets for Cashmere Production

The basic inputs for livestock production are pasture land and water. For centuries, Mongolian herding has relied on these two inputs augmented only by herding skills and labour. Even today, the situation is still the same for many herders who have no access to other inputs or simply lack the resources to use them. Recently, the importance of fodder markets is increasing due to deteriorating pasture land in many regions and a more sedentary lifestyle by herders.

In the past, services were rarely used in the rural herding economy and this situation did not change for a long time. Today, herders are able to participate in many markets if they can afford it. Financial services are available in almost all rural centers and herders are becoming aware of the benefits they are offering. During the socialist time the state was running a livestock insurance system, which was abandoned after the transition to a market economy. Nowadays, herders are still more than sceptical about the advantages such an insurance can provide. Although, a suitable insurance system has been missing for a long time, recent pilot programs show that an insurance market can exist if it is well adjusted to the specific circumstances in Mongolia. The availability of veterinary services in the rural area is very limited and herders are seldom in a position to afford veterinary treatment for their animals. Additionally, many herders do not believe that better veterinary care would result in more animals surviving during winter and weather disasters.

Many of these inputs were either provided or managed by the former state collective farm system with almost no involvement by the herders. The management of the farm was responsible for moving patterns and livestock numbers and fodder was provided free of charge from state crop farms in the northern part of the country. Herders had no need for financial services and the livestock insurance was only negotiated between the state and the collectives. Finally, all veterinarians were employees of the state and all treatments were covered by the government. Herders were used to get inputs free of charge which

10 see Lecraw et al. (2005), p. 1

Natural Input Markets 11

was reasonable since the livestock was not privatised then and herders were just employed to tend the state-owned animals. After the transition to a market economy, the herders were suddenly responsible for their own animals without enough experience in using the input markets. Even worse, most of these inputs were privatised before an appropriate legal and constitutional environment was in place, a situation that doomed many markets to failure.

Natural Input Markets 12

3. Natural Input Markets

Natural input markets for livestock herding comprise the markets for land, water and fodder. During our survey, we asked the herders how they use these inputs and which are the impediments to better utility. Starting with general information on animal numbers and herder lifestyle, we also examined whether herders are generally satisfied with their situation and what obstacles impede their development.

The survey took place in October 2006 and focused on the aimags Bayankhongor and Uvurkhangai, where 39 herders were interviewed. Additionally, eleven herders were interviewed in Tuv, Bulgan and Arkhangai aimags. On average, the herders had 294 animals mostly goats and sheep, as shown in Table 4.

Table 4 – Description of Participating Herders

Source: Own Survey

Inherently, the small number of herders interviewed during this survey limits the representativeness. Nevertheless, it is considered to be sufficient to identify the main problems and concerns of herders and draw some conclusions from it.

3.1. Unresolved Market for Land

Land is the key input for cashmere production. In Mongolia, privately owned livestock is grazing on public common pasture. This combination is considered to be the worst in terms of sustainable use of inputs. The Mongolian cold and arid climate is well suited to extensive and nomadic herding, a practice which makes best use of pastures where forage availability across areas can vary greatly from season to season and year to year.

Natural Input Markets 13

3.1.1. Common Property and Associated Problems

In Mongolia, almost all pasture land is used as common property, which directly affects the way it is used. If pasture is open for all, each herder will try to keep as many animals as possible on the common pasture. As long as natural or man- made disasters keep down the number of herders and animals, this will work effectively but without any regulation this behavior will lead to what is called “a tragedy of the commons”. 11 Each herder will try to maximize his utility by adding more animals to his herd. This leads to a positive component, the additional outcome from one animal, and a negative component, the overgrazing created by one more animal. Overgrazing will damage the herd in two ways: animals will suffer from insufficient forage and from additional degradation of pasture. Since the effects of overgrazing are shared with all herders, the negative impact for the single herder is only a fraction of the total negative impact. Consequently, the cost of the negative externalities, that each herder’s activities impose on his neighbors and on subsequent generations, will not be fully taken into account. 12 The individual cost-benefit calculation will inevitably lead to an increasing degradation since the individual has no incentive to invest in land improvement and use the pasture in a sustainable way unless he is sure that other herders will do the same. 13 Consequently, the only rational behavior for the herders is to add more animals to their herds and a tragedy is unavoidable. 14

3.1.2. Change in Traditional Grazing Techniques

During the 30 years under socialist government (1960-1990), the state regulated the use of pasture by creating collectives which allocated pastures and campsites and directed large seasonal movements. After the transition to a market economy and the privatization of livestock, pasture use was not formally controlled and grazing patterns were characterized by out-of-season grazing of winter and spring pastures as well as pastures reserved for emergencies. The beginning of the transition period was characterized by an urban-to-rural migration, and many Mongolians started livestock herding as a new source of income. These new herders were small and inexperienced. They started to concentrate close to the

11 see Hardin (1968), p. 1244 f.

12 see Demsetz (1967), p. 8

13 see Finke (2000), p. 14 f.

14 see Hardin (1968), p. 1244

Natural Input Markets 14

roads, urban settlements and water points, and became less mobile. 15 These herders still do not have customary grazing rights which remain powerful in Mongolia and are a major factor when considering land use issues.

3.1.3. Deterioration of Pasture Land

In Mongolia, pasture productivity and carrying capacity is decreasing each year due to human and environmental factors. The low precipitation and its uneven distribution together with a lack of appropriate technologies, protection and improvement of pasture are the main factors contributing to the recent pasture land deterioration. This situation is also an outcome of an insufficient legal environment and inappropriate pasture management. 16

3.1.3.1. Overgrazing and Degradation

Overgrazing and degradation are the main threats that affect the overall situation of herders in Mongolia. Natural circumstances like the high elevation, sparse vegetation and severe climate combined with overgrazing, chaotic roads and poor land cultivation practices lead to land degradation. Moreover, the majority of the country is considered to be highly vulnerable to desertification. 17 Table 5 shows that only 1,7 percent of Mongolian pasture is not at all degraded while around 75 percent of pasture are medium to very highly degraded.

Table 5 – Classification of Land Degradation

Source: Ickowitz (2001), p. 75

After 1990, livestock increased dramatically. In particular, the number of goats increased by far the most, putting additional pressure on pastures since goats, unlike other animals, are cutting the soil with their sharp hooves making the pastures more vulnerable to degradation by wind and storm. 18

15 see Fernandez-Gimenez et al. (2004), p. 2

16 see Dorligsuren (2006), p. 1 f.

17 see Tumenbayar et al. (2000), p. 5

18 see World Bank (2003), p. 12

Natural Input Markets 15

Many herders recently perceive that pasture conditions are declining because of an increasing number of animals and a decline in herd mobility. Especially, the trend of households camping in one place year-round and grazing the surrounding pasture without an opportunity for the land to recover, is negatively affecting the condition of the pasture land.

An essential feature of pastoral land use is the practice of setting aside certain areas for use only during the winter and spring seasons. Because these areas are not used for grazing in summer and fall, they can provide forage to the animals in the harsh non-growing seasons. Poor households often do not set aside pasture land for winter and emergencies because they often do not possess a campsite and so they do not know were they will spend the winter. 19 In the past, the large distances between summer and winter pastures precluded out-of-season grazing and herders who refused to move were subject to a 30 percent cut of their salaries. 20 Today, a sufficient segregation between winter and summer pastures is missing and no effective sanctions are in place to prevent out-of-season grazing of reserved pasture.

Herders with few animals try to live close to urban centers, sum 21 or aimag, as they are looking for job opportunities in the city. They do not move their animals and consequently, pasture around the cities is heavily degraded. For small and new herders outside the cities, making several moves in a year is sometimes too expensive and draft animals or other means of transportation are often not available. Even if they try to move to better pastures, the distances are usually very short, between 5 and 10 km, while herders with more experience and a higher number of animals are moving more often and cover larger distances, sometimes across sum borders. Officially herders are required to pay for pasture in sums where they are not residents, but almost in all cases these fees are not collected. 22 Our own survey also showed that herders with more than 500 animals are moving almost 4 times more often than those with the lowest number of animals, as presented below in Table 6.

19 see Fernandez-Gimenez et al. (2004), p. 11 ff.

20 see Fernandez-Gimenez (1999), p. 333

21 District, Mongolia is divided into 329 sums

22 see Fernandez-Gimenez et al. (2004), p. 15

Natural Input Markets 16

Table 6 – Movement Patterns by Size of Herd

Source: Own Survey

We found only seven herders who were selling their cashmere at the farm level while the majority (40) was selling cashmere in the aimag center. Not all the herders we interviewed were living close to urban centers. This implies that they either have good means of transportation themselves or relatives and friends are helping them market their cashmere in the aimag center.

3.1.3.2. Carrying capacity

Mongolia is a geographically large country with vast pasture lands but contrary to what is sometimes assumed, the carrying capacity of the Mongolian steppe is not unlimited. Different sources give different numbers of carrying capacity. The common conclusion of all these sources is that the current number of livestock is reaching the carrying capacity limit of the steppe or was possibly even beyond it in the years 1997 to 1999. 23 These claims should be carefully scrutinized. While the growth of animal population has undoubtedly increased pressure on the pasture, it is likely that the intensity of grazing varies considerably between regions, reflecting institutional arrangements and market forces. 24 It is misleading to suggest that the increase in average pressure has been uniform across regions, or that the level of pressure on grazing land is the same for all regions of Mongolia. 25 In some areas, grazing intensity may be less today than it was before the transition to a market economy began. Some of the reasons, for example, may be the lack of reliable water supply or missing marketing opportunities. Other areas, most likely those near urban centers are heavily overgrazed. After the disastrous winters of 1999 to 2001, the number of livestock decreased drastically but herders believe that the pasture cannot easily recover and needs more time to regain its initial condition. For them it is clear that the overall carrying capacity of the Mongolian pasture is declining every year.

23 see World Bank (2003), p. 12 f.

24 see Griffin (2001), p. 43 ff.

25 see Griffin (2001), p. 45