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By Barry Metzger

President Bush, in making the point that America's war against terrorism will be a protracted war on military, diplomatic and economic fronts, has made clear that we will seek to foster economic development in Afghanistan and elsewhere to address poverty and isolation as factors which breed recruits to the terrorists' cause. American foreign aid and the multilateral institutions in which the United States has a voice - World Bank, Asian Development Bank, European Bank for Reconstruction and Development, and the United Nations -- will mobilize support for Afghanistan's reconstruction, Pakistan's economic rehabilitation and broader aid to other countries of South and Central Asia and, inevitably, the Middle East.

But America's policies of economic reconstruction and development elsewhere have been most effective when such efforts were not those of the public sector alone. Private sector investment and trade are the driving forces of economic development, and the economic war against terrorism requires the active participation by American businesses in the countries of South and Central Asia and among the broader Islamic world.

During the 1990s, as American businesses' investments in East and Southeast Asia grew dramatically, their investments in South and Central Asia, by comparison, were paltry. American private sector direct investment in these countries is scattered and totals less than $6 billion, a mere fraction (less than 4%) of American direct investment elsewhere in the Asia Pacific region. American private sector direct investment in the Middle East (other than investment in Israel) has been even less, approximately $5 billion.

Opportunities were more promising in East and Southeast Asia, and those parts of Asia were more familiar territory to most American businessmen. India, Pakistan, Bangladesh and Sri Lanka were slow to open their economies and further policy reforms are indeed necessary to further encourage American and other foreign investors. Most Central Asian countries were in the early stages of transition to market economies from their communist heritage as republics of the Soviet Union. Afghanistan was mired in civil war, and foreign investment was an unthinkable proposition in the Taliban's Afghanistan. More broadly, the Middle East was often politically hostile to American investment and was perceived as carrying high degrees of political risk for investors.

Much needs to be done by the American government and multilateral institutions to encourage further the countries of South and Central Asia and the Middle East to adopt policies and reform institutions to rapidly develop their private sectors and to attract the active involvement of American, European and other Asian investors.

In encouraging private sector development and the involvement of American businesses in South and Central Asia and the Middle East, the United States should drawn on its experiences elsewhere. With the collapse of communism in Eastern Europe and the Soviet Union, a decade ago, the United States acted decisively to encourage the private sectors of these countries and to attract American and other foreign investors. Among such initiatives was the creation of the American enterprise funds in a number of Eastern European countries, Russia and Central Asia.

During the first Bush Administration and the Clinton Administration, ten enterprise funds were created by the United States, with the mission of promoting democracy in post-communist states through a combination of public moneys and private management. With total capital of $1.3 billion, the funds dispersed businesses loans and equity investments in private sector businesses in the countries in which they operate, and also provide technical assistance to local enterprises. The enterprise funds capital was provided by Congressional approval through USAID, but each of the funds is privately managed by independent boards of directors which are accountable to Congress. While there have been disappointments at some funds, they have on balance made an important contribution to encourage economic development and attract American businesses and other foreign companies. Investments have been made in local enterprises and many co-investments have been made in partnership with American and European companies that establish local operations in these countries. John Birkelund, the Chairman of the Polish fund, estimates the funds have collectively created 150,000 jobs, and made more than 50,000 small business loans.

A similar $1 billion American Enterprise Fund for Asian Recovery and Growth should be established to operate in South and Central Asia, building in part upon the small Central Asian enterprise fund established in 1994. More boldly, Congress should consider establishing a larger and more comprehensive American Enterprise Fund for Islamic Development to operate in South and Central Asia and in the Middle East. Such funds would build bridges for investment by American and other investors, emphasizing co-investment in projects in partnership with such investors and local businesses and also supporting local businesses. Only through the encouragement of American businesses to invest in South and Central Asia and the Middle East will the resources required for these regions' economic rehabilitation and development be mobilized and a sound basis established for the pursuit of American strategic interests.

Mr. Metzger is a senior partner of the Coudert Brothers international law firm and previously served as General Counsel of the Asian Development Bank. His opinions do not necessarily reflect those of KWR International.