Poor Kyrgyzstan
Mini Teaser: A snapshot of how well-intended but misguided development assistance has failed one of America's new Central Asian partners.
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.
There are two primary cultural threads at work. The first, nomadic
and tribal, harks back to the Mongol invasions of the 13th-14th
centuries, when prior civilizations were either eliminated or driven
westward to Turkey. There is little architecture in the region
(except in Samarkand), no art, and no cultural descendants left from
before that time. Both the Kazakhs and the Kyrgyz are descended from
the invaders, speak similar Turkic languages and share many customs.
The other cultural thread is Persian, which spread into the Central
Asian vacuum over the past several centuries. Persian influence is
strongest in Uzbekistan and Tajikistan, the latter being the only
Central Asian country whose main language, Dari, is closer to Farsi
than to Turkish. The Kyrgyz look down on the Uzbeks as "market
people" in the same way that most English aristocrats viewed someone
"in trade" in the 19th century. The difference is that the Kyrgyz are
not aristocrats but horse traders and nomads. They discount the
future at a much higher rate than do the Uzbeks (or than did
19th-century English aristocrats), and are much poorer as a result.
Both Turkic/nomadic and Persian threads were overlaid by the Russian
Empire in the 19th century, and the country has been much affected by
both that overlay and its recent recession. Today, for example, the
Kyrgyz, as the governing ethnic group (now become again a small
majority as many Russians and Germans have left), hold the public
positions formerly held by Russians, who still make up 18 percent of
the populace. These public positions, including most police, military
and ministerial jobs, provide the best opportunity for extra income
by charging under-the-table access fees. These opportunities are
unavailable to the Uzbeks,who number 14 percent of the total
population nationally but over 40 percent in the southwest. This is
producing growing ethnic friction.
Geography also mixes cultural differences with economic problems.
Southerners see northerners as leeches living off their labor,
because the south is the country's food basket and the northern
industrial base collapsed in the early 1990s. While southerners
detest the "parasites" in the north, northerners look with disdain on
the more traditional south. Among our project staff, the Bishkek
people almost invariably start a conversation in Russian, the
colonial language; those from Jalal-Abad speak first in Kyrgyz or
Uzbek, the languages of emerging nationality. Many conversations will
contain all three languages, frequently with a healthy sprinkling of
English. The differences find many expressions. On one flight to
Jalal-Abad, my flatmate (tall, blond, pale and obviously American)
was seated next to a Bishkek woman who, practicing her English,
inquired where he was from. He said "Jalal-Abad." She pressed
further: "I mean, in what city do you live." He answered, in Russian,
"Ya iz Jalal-Abada" (literally, "I am from Jalal-Abad."). Her
immediate response, accompanied by a look of deep concern, was "Oh, I
am so sorry."
In many ways, however, life in the more rural Jalal-Abad has its
attractions, at least for sojourning foreign technical specialists.
Unlike Sovietized Bishkek, Jalal-Abad is truly Central Asian. It
evinces the Uzbek-Kyrgyz mix and feels more like a large village than
a city. The predominant housing is the traditional Central Asian
communal compound. Roosters crow and dogs bark from sunrise to
sunset; mullahs call the faithful to prayer several times a day,
women sell by sing-song their butter and eggs in the morning, and the
neighbors' sheep drop scented marbles in one's path in the afternoon.
Life seems juxtaposed between centuries. Rural housing is primarily
adobe, with an average structural expectancy of about six years.
Ninety percent of the population live in their own homes and have
electrical power, but outages are both random and frequent. Voltage
is usually below standard; gas pressure is extremely variable, and
since there are no safety valves, it is possible for a gas burner to
go out during the afternoon with the flow resuming during the night.
Schools and hospitals are largely built of mud and straw or Soviet
concrete slab construction; most roofs, of compressed asbestos, leak.
Hot water for sterilization in a hospital might consist of an
electrified coil dipped into a bucket. Donkey carts, side by side
with cars and trucks, transport everything from asbestos roof tiles
to television sets. While installation of a telephone land line ($1 a
month) might take six months, a cell phone can be had in a half hour
(at international prices, and one must pay in cash for air time in
advance). While internet servers are not dependable, they and the
phone system work well enough that business can be conducted around
the world at any time of day or night, power or no. I have arranged
dinner meetings in Boise, Idaho with speakers in Virginia or Texas
and staff in Washington using e-mail in the dark at a hall table in
Jalal-Abad.
Life centers on small-scale economic activity; most businesses are
small retail operations, ranging from old women selling candy and
cigarettes from a TV tray in front of their homes to kiosk-like
stalls on the street, in the bazaars or in pedestrian tunnels under
main streets. While the population is 98 percent literate and higher
education is prized, there is no demand for educated workers, leading
to downward pressure on wages and massive underemployment. The
primary driver for our ADB assistance crew was formerly an assistant
factory manager; our translators, with college degrees, were happy to
be paid $250 a month, our Jalal-Abad cook and housekeeper $15 a week.
Our Jalal-Abad driver charged $10 a day for himself and his car,
including gas, which sells--like everything else imported--at world
prices. At that rate, he was subsidizing us.
The picture one gets from a close-up view of Kyrgyz politics is
similarly mixed and colorful. In the beginning there was great hope
for democracy in independent Kyrgyzstan. President Askar Akaev made
democratic-sounding noises, the press was mostly free, and the
republic acceded to the WTO in 1998. These impressions, however,
belied deeper problems. The 2000 presidential election was largely
determined in advance through language proficiency tests, the
imprisonment of political challengers for alleged corruption, and
other means of eliminating serious opposition to Akaev's third term.
The irony was not lost on the people; when I asked my Bishkek driver
and good friend how long it had taken to count the ballots, he
replied that "the results were known months ago."
The Origins of Kyrgyz Poverty
Poverty is unevenly distributed in Kyrgyzstan, and is particularly
endemic in the Kyrgyz countryside. A 1997 survey conducted jointly
between the Kyrgyz statistical agency and the International
Development Association (IDA) determined that, according to IDA
criteria, almost two-thirds of the rural population was poor, while a
bit more than one-quarter of urban residents were so situated. The
study also found that population had been shifting from urban to
rural areas. GDP has declined by over 60 percent since 1990 due to
the disruption of old Soviet trade patterns. The 1998 Russian
economic collapse further set back what had been a satisfactory
recovery to that point. In Bishkek, however, the streets are full of
cars and people have money to spend, even as elderly widows beg
because inflation has undermined their survivors' pensions.
The finding that Kyrgyz poverty is most prevalent in rural areas--and
this, of course, it has in common with much of the Third World--has
had a bracing impact on the international aid agencies active in
Kyrgyzstan. These include the aforementioned European Bank for
Reconstruction and Development (EBRD), but also the Swiss
Coordinating Committee, the U.S. Agency for International Development
(USAID), the U.S. Treasury Department, and the Asian Development Bank
among others. Deploying their input-output model, they have focused
on rural poverty: agricultural aid, school and hospital
rehabilitation or construction, and modification of subsidies to
target them more specifically to the poorest in society. The strategy
is not likely to succeed for the simple reason that the assumptions
underlying it are wrong--on two critical counts.
First, the source of Kyrgyz poverty is fundamentally urban (not
rural) and is political (not economic) in origin. Second, raising
agricultural productivity on a fixed land base will reduce, not
raise, agricultural wages. Since there is little value-added food
processing and Uzbekistan interferes with shipments to external
markets, higher production translates into lower market prices. This
latter point is economically obvious, or should be, and there is no
reason to belabor it. The first point, however, is critical, and
illustrates, among other things, the utility of the institutional
model of economic development.
The Kyrgyz poor are in the countryside partly because the private
response to economic collapse in 1993 and again in 1998 was for
urbanites to move to villages where there was family support and
where one could engage in subsistence farming. So while nominal
incomes declined sharply on the national level, the rural population,
household production, and barter trade rose. Few people went hungry.
Economic growth tends to occur in cities, and for good reason. Rural
areas are frequently poorer than urban areas because low population
density and the greater distance to markets raise transportation
costs and inhibit economies of scale. The residents of mountainous
areas are doubly affected by this fundamental economic fact of life
because, by definition, they are low-density populations with little
arable land that suffer very high transportation costs. Appropriate
technology in rural villages and micro-credits help, but are not
sufficient. Large-scale subsidized infrastructure investment, in the
absence of supportive legal and financial institutions, is not the
answer either, having led Kyrgyz debt from zero to more than 150
percent of GDP in less than ten years. Because social infrastructure
investment must be paid for from general economic gain, the new
infrastructure--whether improved transportation or better
schools--must help to generate those gains. Too often this is wishful
thinking because institutional structures inhibit the economic
activity that the infrastructure would otherwise support, while
public works corruption diverts up to 90 percent of the capital into
private pockets. If the anticipated growth does not occur,
expenditures on infrastructure perversely weigh down the rest of the
economy.
It is indisputable that an underdeveloped country requires investment
capital. How the capital is obtained, however, matters a great deal.
In the Kyrgyz case, it is obtained almost entirely through foreign
loans (for infrastructure) or subsidized foreign investment (for
industry). Almost no capital investment in Krygyzstan comes from its
own citizens. This contrasts with nearly all successful development
cases, where most capital is raised internally and most foreign
direct investment is private.
Foreign loans underwrite the entire infrastructure program, social
sector rehabilitation and reform and other projects in Kyrgyzstan.
Tax concessions include a Free Economic Zone in which manufacturing
activity is freed from 70 percent of taxes that would otherwise
apply, and concessions are offered for specific projects. These
concessions result in a very uneven playing field for business. In
Bishkek, the new American hotel enjoys tax-free status, while the
older Turkish hotel does not. The difference enables the more
luxurious hotel to offer rates competitive with its less desirable
cousin, and may well drive the latter out of business. On another
front, the government has made a large investment in the Kumtor gold
mine, which now accounts for one-third of the debt service. Total
debt service accounted for 25 percent of government outlays in 1999,
and nearly 50 percent in 2000. Mine profits, of which the government
is to receive two-thirds, have made scarce appearance.
International best practices, too, coming from a different economic
environment, sometimes have perverse effects in Central Asia. One
example is pension reform. In Kyrgyzstan, the pension tax was raised
to fund future obligations, in line with defined benefit systems
standards. The resulting tax rate, 38 percent combined tax on
employee and employer (since reduced to 33 percent) is higher than
the individual and business income tax rates. In a country whose
relevant experience has been rapid inflation with non-indexed Soviet
pensions, the population has no faith in the system. People work as
hard to avoid the pension tax as they do to earn a living. Most
workers outside what is left of the old industrial sector record the
monthly minimum wage (now about $2), and take the remainder under the
table, while their employers cook the books and negotiate with both
suppliers and customers to make things balance for the tax inspector.
When a problem is found, the tax inspector, for a fee, will provide
advice on how to fix it. The result is a massive loss of tax revenue
(and an underestimation of GDP) with a stifling effect on growth.
Combined with trade restrictions imposed by Kyrgyzstan's neighbors
(the Uzbeks and Kazakhs) in retaliation for Kyrgyz entry into the
WTO, the tax structure and administration drive the economy
underground and stifle growth.
Another example of institutional dysfunction is provided by energy
policy. Energy, which inhibits economic development in Kyrgyzstan
because it is unreliable, is wasted on a massive scale because
subsidies leave no incentive for modernization or conservation. The
Kyrgyz consume between three to five times as much energy as do
Americans per unit of GDP, and yet produce, officially, 1/200 as much
income.
For most consumers, there is little incentive to conserve electricity and much incentive to waste gas. Our house in Jalal-Abad had an electric furnace, while the cookhouse had a gas stove and a gas-fired heater
for washing and for the sauna. The electricity was metered at six
mills per kilowatt--about a fifth the cost of its production and
delivery. The gas was metered, too, but because the meter only had
three digits, the monthly bill was negotiated with the meter reader.
Our landlady would regularly turn the electric furnace off at six
every morning, in freezing weather, to save "that expensive
electricity", but she cared less about the gas, even though the
burners are so crude that they waste most of the energy used. We once
fired the sauna for four hours; because the gas pressure was low, it
would not heat to the required temperature. From the standpoint of
the individual consumer, such profligate behavior is entirely
rational.
Other features of Kyrgyz fiscal policy are also dysfunctional in
macroeconomic terms. Most derive from political conditions that
reward favoritism, nepotism and patronage, or are part of the social
safety net (e.g., utilities priced well below cost). Public service
amounts to clan-based sinecures for the connected.
Corruption is endemic. It is tempting to think that ending corruption
could bring an end to poverty, and some development agencies assume
exactly that. But it isn't that simple when everyone (including young
children) is involved in demanding payments, making them or evading
taxes; where tribes and empire, not the nation-state, have been the
political norm for millennia, and where Western legal and financial
institutions have never existed. It would be a mistake, however, to
ascribe corruption, inequality and poverty to traditional patterns
alone. The present corruption in Central Asia--the "informal economy"
as it is locally known--arose out of the collapse of the Soviet
Union. Industry designed to serve European Russia succumbed quickly
to market realities and most workers reverted to home production and
barter. While the Soviet system had many problems, including its own
forms of corruption, it was breathtakingly efficient compared to what
exists now.
Corruption exists on several levels in contemporary Kyrgyzstan, two
of which are of particular significance. The first is technically not
corruption because it is government policy; it consists of the almost
literal confiscation of cash flows wherever they can be found. The
second, resulting from economic collapse, is best termed functional
corruption. From the cop who bids for lucrative street corners to the
teacher who sells access to class, passing grades and good
references, to the public health surgeon who demands an
under-the-table fee, corruption is a rational response to the absence
of other economic opportunities. Most Kyrgyz engage in the informal
cash economy, which produces no tax revenue at all.
The combined effect of an irrational tax structure, functional
corruption and rent-seeking by government is that 80 percent or more
of the Kyrgyz economy is underground, unreachable by taxes--which, of
course, has the effect of leading government, under pressure from the
IMF, to raise tax rates on the economic activity it can reach. The
official GDP for 2000 was $242 per person, of which 25 percent was
estimated to be underground, and from which the government collected
35 percent in taxes. Estimates of GDP on a purchasing power parity
(PPP) basis range from $1,800 to $2,500 per person. While PPP
estimates have different meanings, the true level of economic
activity is up to ten times what is reported and taxed. So Kyrgyzstan
is not as poor as it seems. On the other hand, the greater the extent
to which an economy is driven underground to home production, barter
and unreported cash--the greater the extent to which economies of
scale cannot be achieved and growth is inhibited. This and other data
lead to the conclusion that if Kyrgyzstan and its neighbors were to
adopt institutional forms that enable the realization of potential
output, they would no longer be poor.
It is clear from talking with businessmen and officials in the
Finance Ministry that to do business in Kyrgyzstan one must either be
based in a fez, plan to go bankrupt or operate illegally, all the
while paying for official favors and evading taxation. Smuggling,
keeping duplicate sets of books, negotiating tax evasion with
employees, suppliers and clients, and paying bribes--all of which are
rampant in Kyrgyzstan--would not occur if it were possible to make
money legally. In short, a downward spiral is at work: economic
activity produces little revenue for the government, leaving it with
no money to invest or even to pay rudimentary salaries, so it
attaches what it can find; and because government cannot pay for
services and preys on whatever wealth it can locate, economic
activity remains rudimentary and veiled. This cycle is death for any
prospect of sustained or serious economic growth. This is, of course,
precisely what the institutional theory of development predicts: If
the system rewards unproductive expenditures of human time and
energy, then unproductive consequences will inevitably ensue.
The government is not unaware of this reality. In 2001 the income tax
was reduced from 30 percent to 10 percent--but the IMF objected, so
the new rate is 20 percent. Small business (under $62,000 annual
sales) taxes have been simplified. The pension system is under
discussion, but President Akaev is opposed to change for financial
reasons. The value-added tax remains 20 percent and the tax
inspectorate has not been reformed.
In March, international creditors agreed to re-schedule the Kyrgyz debt on favorable terms, with five- and ten-year grace periods. This re-scheduling, together with the economic boost provided by the new U.S. military presence, should enable the government to resurrect social programs, adjust education, health, and police wages for past inflation, and institute necessary reforms. Such measures are not likely, however, and the government is running out of time. On March 17, a protest in Jalal-Abad triggered by the corruption trial of a popular southern parliamentarian turned deadly, producing the worst violence since a minor riot the night of the presidential elections in October 2000. For the last year President Akaev has increased the suppression of political dissent in the face of escalating opposition efforts to provoke incidents. After twelve years in office, busily supervising the disintegration of his country's economy, the President is becoming increasingly unpopular; he is openly blamed for persistent corruption and worsening poverty. Combined with the ethnic discrimination felt by the Uzbek population in the south, the potential for violence is increasing even if the Taliban-backed Islamic Movement of Uzbekistan (IMU) is no longer a threat, having been largely eliminated by the U.S. campaign in Afghanistan.
Some point to the memorandum of understanding (MOU) signed between the Kyrgyz Republic and the United States on February 15, 2002 (outlining commitments made by the Kyrgyz to open their economy and make progress toward democracy in return for international development aid) as proof that change is in the wind. The MOU should be seen as official cover for the U.S. military presence, however, because the international community, locked into its development model, really has no choice but to take Kyrgyz assurances at face value. Our experience has been that the Kyrgyz, not being irrational, have learned that they can tell the international community what it wants to hear and then use the money in the traditional way. They have not yet failed to get away with this approach. President Akaev, under domestic pressure because of growing impatience with development failures and growing repression, will most likely use his new breathing room to alleviate the symptoms a bit, while further padding the pockets of existing gatekeepers.
THREE GENERAL conclusions about assisted economic development can be drawn from the Kyrgyz experience. First, development assistance should not be burdened with equity and poverty reduction agendas. Such objectives tend to undermine the core development focus on basic institutions, defeating both goals in the end. Successful development will both reduce poverty of its own accord and provide revenues for the social safety net. We need to focus on the engine of growth, not its downstream effects.
Second, concessional lending in the absence of institutional reform leads to a trap, because the resulting infrastructure provides insufficient growth to pay its cost. The benefits of better infrastructure can only be realized if the economic activity it supports can provide a positive legal return to entrepreneurs. Otherwise, the governments of developing states will be smothered by rising debts that will, in turn, discourage both domestic and foreign, investment.
Finally, and most important, governmental institutions must be designed to reduce, not increase, the costs of doing business. Regulation must provide transparency, not enable official rent-seeking. Contracts must be enforceable and taxes must be predictable and consistently applied. If these conditions can be met, many other problems will be easy to solve. If they are not met, no amount of inputs and no number of development entrepreneurs will make much of a difference.
Richard Slaughter is an international consulting political scientist and economist based in Boise, Idaho.
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