Christian-Albrechts-University of Kiel
Department of Agricultural Economics

Assessing the Input Markets for Cashmere Production in Mongolia

Michael Lutzke

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

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

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.

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 aimags², 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. 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 2002, due to very harsh weather conditions with dzuds⁶ 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.

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1 see Center for Policy Research (2002), p. 30
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
4 see Griffin (2001), p. 41 f.
5 Mongolian Statistical Yearbook 2005
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.