Capitalism has brought Mongolians unemployment and alcoholism along wit h their shares, writes Teresa Poole in Ulan Bator

`I preferred the old system. Economically, it was better. But I like the freedom now, freedom to talk, a free press'

Night lends enchantment to Ulan Bator. Despite temperatures of -30C, families dressed in traditional Mongolian del coats and heavy sheepskin boots linger by the statue of the national hero, Sukhbaatar, which dominates the huge main square. Beneat h the icy winter sky, fairy lights festoon the Russian-style colonnaded buildings on either side in anticipation of the Mongolian New Year festival at the end of this month.

Apart from the drunks staggering home across the square, night-time conceals the uglier side of Mongolia's capital. Darkness hides the belching, antiquated Soviet-built power stations that daily threaten to expire and turn Ulan Bator into an uninhabitable frozen wasteland. Even the grim concrete apartment blocks which house half the city's population twinkle with welcoming lights - at least when there has not been a power cut.

In the gloom, the traditional, round ger tent encampments on the outskirts of the city no longer resemble a shanty-town, but conjure up the romance of Mongolian nomad life. And by late evening, the estimated 4,000 street children struggling to survive the sub-zero temperatures have scuttled back to the warmth of hidden alcoves and underground pipelines.

It is exactly five years since the pro-democracy rallies at the foot of Sukhbaatar's statue heralded the collapse of Mongolia's old-style Communist regime. For nearly 70 years, Mongolia had been a client state of the Soviet Union. Since the demonstrations of January 1990, the political transition to democracy has been peaceful; but the economic ruptures accompanying the demise of the Soviet Union have been traumatic.

Today, the country is still reeling from the shock. In 1989-90, Soviet aid amounting to a third of Mongolian GDP was abruptly withdrawn. Mongolia - half the size of India but with 2.2m people and 24m head of livestock - was left stranded. The economy wasdevastated, contracting for four years in succession. Industry ground to a halt because of shortages of Soviet spare parts and machinery; exports and imports collapsed; inflation soared to a peak of 420 per cent in January 1993, and by March 1994 more than a quarter of the population had sunk below the official poverty line, defined as $8 (£5) per person per month.

The social costs, both in the cities and across the steppes, have been severe. Unemployment soared and the old socialist welfare safety net disintegrated. One in eight children have dropped out of school because their parents cannot pay the newly introduced fees. The closure of rural health-care facilities has doubled maternal mortality rates. Perhaps most vivid is the sight of drunks - both men and women - in a vodka-drenched stupor, stumbling in the street at all hours. Alcoholism and its attendant criminal behaviour are serious social problems. Until a recent police campaign, most Ulan Bator residents considered it too dangerous to go out after dark.

Many Mongolians remain ambivalent about the revolution in their lives. In the "Ocean Mother" indoor food market, Norst (Mongolians generally use just one name), a 49-year-old state ranger from the steppes, weighed up the pros and cons: "I preferred the old system. Economically, it was better. But I like the freedom now, freedom to talk, a free press." An unemployed construction worker, 27, said: "We knew that democracy would happen. But my own standard of living was better in the old times because I always had a job."

In the daily struggle to make ends meet, many Mongolians admit they take the benefits of democracy for granted. But they are real. A visiting journalist can walk uninvited into the Hural (parliament) building, request meetings with various democratic party leaders, and hear open criticism of the government.

Mongolia's transition to democracy is incomplete, but the shortcomings of the electoral system are a subject which is freely debated. Two parliamentary elections have left the former Communists, still called the Mongolian People's Revolutionary Party (MPRP), firmly in control. There are now 19 political parties in the country, which has led to a "one party and other parties" form of pluralism. In 1992 the MPRP won 56 per cent of the votes, but took 71 out of 76 Hural seats.

Gonchigdorj, an MP and chairman of the Mongolian Social Democratic Party, said: "In a formal sense, democracy in Mongolia is safe. The multi-party system in parliament is a good institution. But when we lose this institution to a single party, then the democratic system becomes non-democratic."

Last April Gonchigdorj took part in a hunger strike in the main square to protest against the impotence of parliamentary opposition, the MPRP's abuse of the media and rampant corruption. A test of the MPRP's commitment to democracy will be whether it allows the promised electoral reform before the 1996 elections.

Mongolians fear that, with world attention focused on the chaotic former Soviet Union to the north, and China's booming economy to the south, their country will be forgotten. Their leaders are confronted by a formidable challenge. Since the foundation ofthe modern Mongolian state in 1921, the country has never looked financially viable. Reliance on Soviet subsidies has been swapped for dependency on international aid agencies, which this year will stump up $210m (£140m).

The problem is compounded by the country's unique demography. Nearly a third of the population is crammed into Ulan Bator, but another third maintains a nomadic herding life across Mongolia's empty, and often frozen, grasslands.

Faced with the shock of Soviet withdrawal, Mongolia opted for shock therapy. Most extreme was the "privatisation" programme which, in theory, turned Mongolia into a nation of shareholders. In 1991 each citizen was given vouchers with which to buy state assets. "Red" vouchers were successfully exchanged for small state assets including agricultural goods and livestock, small businesses and shops. "Blue" vouchers were swapped for shares in large public enterprises, although in many cases the state retained partial or majority holdings.

A converted children's cinema in Ulan Bator's main square represents the most ambitious part of the programme. This is Mongolia's stock exchange where much-delayed secondary trading in the "blue" voucher shares is due to begin by spring. Mongolia has trained 29 stockbroking firms and 400 licensed individual brokers, who are poised for action. For now, the trading floor sits empty, its rows of computer screens blank. The absence of accurate financial information about the companies would seem to make rational share trading impossible. And since privatisation scarcely altered management practices, most of the country's enterprises still lose money.

Yet passing through the doors of the exchange on to Peace Avenue, Ulan Bator's main thoroughfare, there are signs that life is finally improving. Compared with two years ago, the shops and markets are full of food and consumer goods, although virtually everything is imported either from China or the former Eastern bloc. Inflation had dropped to 70 per cent by the end of 1994, and preliminary figures suggest the economy actually grew last year.

The most obvious indication that at least some people now have money to spend are the thousands of Mongolian merchant adventurers who return weekly on trains from Peking and eastern Europe, laden with consumer goods destined for the city's new shops. Andwhat trophies the traders deliver! In one store, the booty was laid out in glass cabinets: Marlboro cigarettes, balloons, a toy lorry, a television remote control unit, a 100-watt bulb, a Russian bra, a fake Seiko watch and - just the thing to monitor shopping fever - an instrument for testing blood pressure.