Cash handouts and why they don't work

The Mongolian government has acquired the nasty habit of giving universal cash handouts to its citizens in accordance with a pledge that said that the country's mineral wealth would be shared with all the Mongolian people.  But the cash handouts don't help anyone, they just creates inflation.  They increase the money supply without adding any real value to the economy.  Yesterday I met a young Mongolian guy who recently graduated in economics from Hunter College in NYC.  When I asked him if he got his cash hand-out he laughed  and said, "No but it was worth 66 US dollars, so I don't care, it wouldn't have made a difference.  It just made everything more expensive."  We were sitting in a restaurant in Ulaanbaatar, a city where rent prices are comparable to New York City.  Here prices are rising continuously while fifty percent of people continue to live in overcrowded ger districts and do not participate in the national economy.  


Cash handouts pose the greatest threat to the government's pledge to honor its Fiscal Responsibility Law.  Moody's Investors Service: "Election promises by the ruling coalition have compelled the government to distribute cash payments in its Human Development Fund amounting to 250,000 tughriks (about $210) per citizen this year.  Such transfers may account for almost two-thirds of the projected budget deficit in 2011."  With an election coming up next year, there is increased pressure on the government to honor its revenue-sharing commitment.  Economists are expecting more cash handouts and for this reason they predict inflation will reach a crippling 18%.  President Ts.Elbegdorj has acknowledged that the practice is harmful and must stop, but few believe he will be able to stand up to public pressure.  


Instead of cash handouts, the Mongolian government should expand their foreign currency reserves to demonstrate to investors that Mongolia is a safe place to invest because it has the ability to withstand shocks to commodity prices without foreign aid (not even Europe can say that).  They should also invest in transportation, health-care and education, rather that diminish the Mongolian people's purchasing power with ill-advised cash handouts.