During the 19th century it became increasingly clear to Western
economists (and at least some statesmen) that genuine wealth did not
come from the exploitation of colonial resources and markets, but
from increased production made possible by education, technological
innovation, specialization and trade. In time, this recognition
raised the revolutionary idea that wealthy, advanced nations had an
enlightened self-interest in helping poorer nations to thrive
materially. This idea, which in due course was assimilated into the
Wilsonian pantheon of political virtue that makes up democratic peace
theory, has taken on special significance since September 11 of last
year. Now nation-building, and the sine qua non of economic
development that is the precondition for it, are recognized almost
universally as security issues. Unfortunately, we do not do these
things well.

Despite--or perhaps because of--the existence of several large
professional bureaucracies whose very raison d'être is to work the
foreign poverty problem, no professional consensus exists to explain
why some countries succeed and others fail to grow. This lack of
consensus is reflected in the record of the many methods that have
been tried, discarded, combined, recombined and recycled over the
years: free trade, direct aid, technology transfer, infrastructure
support, foreign direct investment, technical assistance for
institutional reform, and so on. All this is despite the fact that
over the past half century there have been three phases of assisted
economic development in U.S. foreign policy from which to draw
lessons.

The first of these, involving the Marshall Plan and the economic
resuscitation of Japan, was clearly successful. The second, in which
the United States shared the effort with others, focused on the
former colonies of the European powers in the 1960s and 1970s. Its
record was decidedly mixed. The third effort began in the wake of the
Soviet collapse; here, too, success so far has been spotty. A few
countries--Poland, Estonia, Slovenia--have done well, but most,
particularly those in the Caucasus and Central Asia, have not. The
obvious high-stakes question before us is: What have we learned from
all this?

I spent the better part of a year recently on an Asian Development
Bank (ADB) technical assistance project in Kyrgyzstan, and I shall
consider the question with respect to that country. Studied without
illusion, the example of Kyrgyzstan shows that the standard
prescription of foreign aid and investment flows from the developed
to the non-developed world may be neither necessary nor sufficient
for growth or democratization.

Theory and Practice

A strategy for assisted economic development should logically be
based in a theory of how economies work. In the immediate post-World
War II experience, however, the task of connecting aid efforts to
economic theory was derailed by the very speed of the success
achieved. The pre-war democracies needed only investment and free
trade; they had human capital and institutional coherence. Germany
and Japan, both of which had ample human capital, were occupied and
their entire economic and political structures rebuilt with Western
oversight. After 1953, the European states had the additional benefit
of the Coal and Steel Community, and then the European Economic
Community, to assist transparency and to reduce trade barriers.

The post-colonial aid experience, it came to be believed, required
more work, time and money than were forthcoming. The theory thus took
root, in rather circular fashion, that development failures were
caused by a dearth of external inputs. But this was not so. No amount
of investment, concessional loans, and market access would have been
enough to spark growth in countries whose political institutions
operated on a model more akin to 15th-century Spain than to
17th-century Britain or 20th-century America.

The post-Soviet era in Kyrgyzstan and the rest of Central Asia bears
no resemblance to the foreign aid circumstances of the late 1940s and
1950s. Despite being joined to an essentially European industrial
core, the newly independent states resemble the former European
colonies in Africa much more than they do the former East European
satellites of the Soviet Union. In many, the rule of law--in the
particular sense of limited government and protection for private
property rights--has still not taken hold; arbitrary rule by, for and
on behalf of the ruling ethnic group continues to breed violence and
poverty while limiting growth. Such circumstances can, and often do,
co-exist misleadingly with elections and a relatively free press.

In order to solve these problems, the various constituent parts of
the international foreign aid armada (both the post-World War II
donor agencies and newer contenders such as the European Bank for
Reconstruction and Development), accompanied by a horde of NGOs and
consultants, has come loaded with external inputs. There are four
principal arrows in their collective quiver: privatization, loans,
direct grants and technical assistance. They have not worked any
better in Kyrgyzstan during the last decade than they did in the
Third World starting in the 1960s. Privatization has allowed
unscrupulous managers to asset-strip enterprises, effectively
de-industrializing the country. Development loans are viewed as "free
money" by receiving ministries. Targeted grants are usually
successful in meeting short-term objectives, but do little to
inculcate responsible habits or construct the institutions needed to
encourage long-term, stable growth. Foreign consultants regularly
arrive to provide counsel and guidance, but their advice is not
translated into practical action. The Kyrgyz run the risk of becoming
ever more dependent on foreign aid; one village mayor, speaking of a
school renovation underwritten by a foreign-aid loan, said, "It will
last for twenty years, and then someone else will repair it for us."
A fifth tool is the development of indigenous natural resources via
foreign private investment, facilitated by tax concessions, free
enterprise zones (FEZs) and special terms for joint ventures. In
Kyrgyzstan, however, these efforts are often launched without
consideration for what the investment will do to local
entrepreneurial activity, domestic savings, or the potential economic
return relative to the subsidy provided.

The difficulty with all these tools is not so much the tools
themselves but the theory of economic development that directs their
employment. The development agencies mechanistically attack poverty
and maladministration as symptoms indistinguishable from the disease
that causes them. They deploy what amounts to an input-output model
which assumes that a given mix of inputs (in this case, public
administration, macroeconomic policy, directed infrastructure and
investment subsidies) will produce a given set of outputs--a growing
export sector and higher income, generating government revenues to
fund education, health care and social welfare. But just how the
transformation is to occur is a "black box", partly undefined and
partly ascribed to local politics and culture--factors that can be
neither quantified nor much affected by the "deliverables" of aid
agencies and consultants.

A better theoretical approach to the problems of development, which
we might call the institutional approach, has been elaborated in
recent years by several scholars, including Nobel prize-winning
economists Douglass C. North and Ronald Coase, as well as Latin
American economist Hernando de Soto, British analyst Peter Bauer, and
others. Coase was interested in how transactional costs--the costs of
obtaining information and enforcing agreements--explain the
development of human organizational and legal systems. North has been
interested in the derivative question of how the institutions that
arise from those organizational patterns and systems promote or
inhibit economic growth. De Soto identifies the lack of property
rights--the right to have legal title to property and to be able to
mortgage or sell it at low administrative cost--as the primary
obstacle to Third World development. Bauer, who passed away on May 2,
focused on culture, corruption, and the failure of input-output
approaches to take them and other aspects of political reality firmly
into account.

When one looks at Kyrgyzstan, where only the input-output approach
has been put to the test, one sees proof of North's observation that
such countries are "poor because the institutional constraints define
a set of payoffs to political/economic activity that does not
encourage productive activity." This bespeaks the potential value of
the institutional approach, but also draws attention to the inherent
difficulty of economic development and nation-building in places
without the institutional and attitudinal predicates for them.

Backdrop

The Kyrgyz Republic is one of five Central Asian Islamic republics on
the southern fringe of what was the Soviet Union, all of which came
within the Russian sphere during the 19th and early 20th centuries.
The region's contemporary resource base consists of Caspian oil and
natural gas, to which the Kazakhs and Turkmen have access through
control of the Caspian Sea's eastern shore, as well as some gold
mines, hydroelectric power, and agriculture. At the forefront of
agricultural production is the Fergana Valley, which formed part of
the fabled Silk Road and which runs west to east from the current
border of southern Uzbekistan into southwestern Kyrgyzstan.
Kyrgyzstan, Uzbekistan, and Tajikistan all own part of the lower
Fergana Valley, the borders twisted together in awkward fashion.
Significant Uzbek enclaves lie inside Kyrgyzstan, and a tongue of
Uzbekistan separates the two major southern Kyrgyz cities, Osh and
Jalal-Abad.

While Kyrgyzstan's southwest contains part of the Fergana Valley, its
mountainous eastern provinces, lying just north of China's Xinjiang
province, are both poor and sparsely populated. The northwest, which
lies on the Kazakh steppes, features only Bishkek, the country's
capital. It is the richest part of the country because it contains
the capital, what is left of the industrial base, and the rail line
from European Russia. The north and south are split by the Tien Shan
range, one of several high mountain ranges in Central Asia. Peaks
there reach almost 23,000 feet; even the passes exceed 9,800 feet,
and can be altogether impassible in winter.