From Goats to Coats : Institutional Reform in Mongolia's Cashmere Sector
The Mongolian cashmere industry has experienced a series of booms and busts over the last decade. Unsatisfactory public sector policies contributed to this result. External factors such as the unfavorable economic environment of the early 1990s, the East Asia crisis, and weather conditions have also affected its performance. Over 1993-96 cashmere exports doubled from US$33.5 million to US$71.2 million, as cashmere's share in exports increased from 9.2 to 16.8 percent. Cashmere exports weakened in 1997 and 1998, recovered briefly in 1999-2000, and faltered again in 2002 to US$45.2 million, below their 1996 levels. Cashmere's share in exports fell from 16.8 to 8.6 percent over 1996-2002. Within this background, the report examines the industry's five principal shortcomings: supply distortions; decreasing cashmere quality, demand imperfections, inadequate marketing and distribution systems, and poor public and private institutional capacity to guide industrial policy development. The lack of an efficient public sector to provide public goods, inadequate strategic business development policies, and unregulated and outdated production patterns have stifled competition, and prevented the industry from reaching its potential. Mongolia's cashmere industry has moved only marginally up the value-added chain beyond primary production, leaving it especially vulnerable to changes in market demand. It also examines Mongolia's current legal and administrative mechanisms for regulating grazing land - poorly understood by central and local governments that also frequently lack the capacity to implement the laws. The 1995 Land Law gave local governments broad authority to regulate grazing. With clarification of their legal mandates and capacity-building interventions, local governments, perhaps in partnership with local herding associations, would be capable of regulating pasture use. This paper examines the structure, conduct, and organization of Mongolia's cashmere industry and discusses the strategic supply chain linkages needed to improve its production, marketing, and competitiveness. The paper looks at how agents along the cashmere industry supply chain can generate collective efficiencies and gain competitive advantages by deepening collaboration. It also examines how public policy affects industry and firm decisions on cashmere production and marketing systems, and the incomes of herders and rural communities. It suggests a set of actions and policies for the private and public sectors - including the donor community - to facilitate cashmere's transition to a truly competitive industry. Highlighted are existing initiatives to improve market coordination, and generate cost savings, and propose areas for expansion.