Poor Kyrgyzstan.

• Author: Slaughter, Richard A.

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'etre 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 nondeveloped world may be neither necessary nor sufficient for growth or democratizaton. (1)

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 prewar 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 l5th-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 t heir 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. (2) 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...