What are SMEs and the SME Fund?

By Marissa J. Smith

Asking questions about the international politics of the Mongolian economy

After reading the South China Morning Post article on the SME scandal, I decided to look more closely at the company profiled, Mongolian Charcoal. I soon located Mongolian language coverage of the scandal profiling the company, and also one called ИНАХУС. The directors of both companies participated in a press conference written up by state press agency Montsame. A video by the news agency MASS.mn  and featured on the website of the “Wealth-Builders’ Support Organization” (Баялаг бүтээгчдийг дэмжих холбоо ТББ) also includes some of the conference.

Mongolian Charcoal produces a consumer product for use in BBQ grills (shorlog). ИНАХУС recycles tires into rubber tiles used under childrens’ play equipment. In the Montsame write up of the company directors’ statements at the press conference, Mongolian Charcoal states that the company sought loans to increase their production and increase sales on the world market through Alibaba.

The Structure of the Mongolian SME Sector

In a very recent article, Narantuya Chuluunbat and Rebecca Empson combined a survey conducted in 2015-16 of over 1500 SMEs with ethnographic interviews and site visits. They characterize the Mongolian SME sector in opposition to East Asian ones, showing how the Mongolian SME sector bears much more resemblance to and relation to contexts across the former Soviet space. Mongolian SME actors buy and sell to one another and finance one anothers’ businesses in a much more hierarchically flat or shifting set of relations (though large companies like Erdenet certainly supply and are supplied by a constellation of smaller and medium companies), and just over five percent of the companies in Narantuya’s survey exported their products.

As noted by Julian and Mendee in their post about the SME scandal, the SME fund was set up by “donors” before being turned over to the Mongolian government. The scandal, and the disjuncture between the character of the companies highlighted and the sector more broadly, raise questions about how international organizations’ programs to support SMEs as part of economic development not just in Mongolia but around the world are developed and applied.

International Aspirations

For instance, securing a position in international supply chains has been a characteristic of the development of “Asian Tiger” economies, including more recently, Vietnam. Emulating this has been an aspiration of Mongolians (see also a troubled attempt to process and export sausage casings in ethnographic film The Wild East), and in line with the economic theories of international development agencies. However, Mongolia’s integration with the Soviet sphere has made this difficult – as noted by Giovanni Arigghi in his contribution to the Cambridge History of the Cold War, these supply chains are constructed not just through the domestic vertical integration described by the research that Chuluunbat and Empson cite, but through international relationships within East Asia:

As the number and variety of vertically integrated, multinational corporations increased worldwide, their mutual competition intensified, inducing them to subcontract to small businesses activities previously carried out within their own organizations. (…) Starting in the early 1970s, the scale and scope of this multilayered subcontracting system increased rapidly through a spillover into a growing number and variety of East Asian states. Although Japanese business was its leading agency, the spillover relied heavily on the business networks of the overseas Chinese diaspora, which were from the start the main intermediaries between Japanese and local businesses in Singapore, Hong Kong, Taiwan, and most Southeast Asian countries. The region-wide expansion of the Japanese multilayered subcontracting system was thus supported not only by US political patronage “from above,” but also by Chinese commercial and financial patronage “from below.” (43)

Mongolian SMEs are for the most part restricted to the Mongolian market of contracts and consumers. To what extent have SME programs, designed by international development economists (including Mongolians trained abroad and working in concert with development organizations) actually taken this into account?

International Abstractions

Chuluunbat and Empson also note that the SME loan program requires “movable and intangible property as collateral.” While they find that the collateral requirements pose major obstacles for SMEs, the notion that “dead capital” held by individuals and households must be “activated” is a major tenet of development economics, emphasized by major actors such as Hernando de Soto, well regarded in Mongolian “procapitalist” circles. To what degree have these tenets guided the drafting and application of the SME program in Mongolia (and elsewhere), and defined (perhaps differently for different Mongolian as well as international actors) who has received the loans and what they have done with them?

This entry was posted in Business, Corruption, Development, International Cooperation Fund, Mongolia and ..., Public Policy, Research on Mongolia and tagged . Bookmark the permalink.

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