U.S. Assistance to Eastern Europe and the Former Soviet Union.

Testimony before the Committee on Foreign Affairs
Subcommittee on Europe and the Middle East
U.S. House of Representatives
April 7, 1992

Thank you for this opportunity to share my thoughts with you concerning U.S. assistance programs in eastern Europe. I am testifying today as a specialist on eastern Europe who has spent six years in the region and as a Fulbright scholar who recently returned from four months in Poland. I have focused my study on U.S. grant aid to Poland and Hungary, to which most aid has been provided, and technical assistance, the most common form of aid. I have talked with many people involved in these efforts, including American officials in the United States and eastern Europe, east European officials working at all levels of government and aid coordination, consultants on contract, representatives of non-governmental organizations and east European enterprises, and direct recipients of aid.

Although the $1 billion stabilization fund, to which the United States contributed, helped ease Poland's transition (and never was drawn upon), many other endeavors appear to be less successful and should serve as lessons for working with the former Soviet republics. Much of the $2 billion in aid the United States has provided since 1989 under the Support for East European Democracy (SEED) Act helped deflect energy away from the institution building and investment that are critical if post-Communist countries are to compete globally.

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Problems of U.S. Grant Aid

The cornerstone of U.S. assistance to post-Communist Europe is technical assistance, accounting for more than two-thirds of the grant aid administered through the Agency for International Development (AID) in 1991, in such areas as economic restructuring and privatization of state-owned companies. U.S. aid officials emphasize that their philosophy is to assist the private sectors of eastern Europe. Ambassador Robert Barry, Special Adviser for East European Assistance to the Deputy Secretary of State, recently reiterated that "We do not have government-to-government agreements ... Our task is to promote growth of the private sector rather than to encourage the growth of new bureaucracies."1

Although direct aid to private sectors makes sense when the goal is to promote private businesses, our insistence on avoiding governments almost entirely is counterproductive when, for example, the goal is to privatize state-owned resources. U.S. aid works around the institutions it is supposed to help in some key areas of assistance.

For example, three Western consulting consortia were awarded "indefinite quantity contracts" ("IQCs") to help the countries of eastern Europe restructure and privatize their state-owned enterprises. These consortia are expected to receive at least $50 million over a three-year period for activities throughout eastern Europe, according to AID official Peter Orr. The circumstances under which AID funded the consortia and the procedures of AID itself have baffled many Polish and Hungarian officials. The Polish government was not consulted about the IQC structure or strategy or the particular firms chosen and was not even officially informed after the decision was made. Stefan Kawa1ec, until recently Poland's Vice Minister of Finance, says he found out about the IQCs after the selection process was completed and only by accident. Kawalec told me that: "A number of consultants are looking for profitable assignments that may be completely unnecessary ... The U.S. government is paying them to provide advice to us without asking us [what advice we need], even without informing us [about who will be providing advice]." Kawa1ec says that the one time the Ministry of Finance itself tried to use the IQCs, its request was turned down by Washington.

When they have tried to use American aid, officials in Polish ministries responsible for privatization and economic restructuring have been given little authority to assess the work of consultants, determine schedules, or terminate a contract for nonperformance or poor performance. As a result, they have used American aid infrequently, and then, with often unsatisfactory results. Marek Krawczuk, an official in the Ministry of Industry who oversees Western consultants, compared the situation to that of "a surgeon who comes [in] and doesn't talk with the patient and goes away without asking or checking the patient to see if the operation was successful."

It is illuminating that Ambassador Barry recently acknowledged, "I'm not sure we hit on the right model for technical assistance for privatization."2

From the outset, U.S. assistance has been scattershot. The organizations and consultants carrying out grant aid projects, which are administered through AID, do not seem to follow any coherent, overall strategy. Speed is critical, but by the time Washington gets a project under way it may no longer be needed by the agency that requested it. More disturbingly, aid recipients are seldom allowed to contribute to the process in a way that would make a difference. The January conference held in Washington to discuss and coordinate aid to the former Soviet Union failed even to invite the recipients.

Ignoring the input of the aid recipients almost guarantees that aid will be wasted. Yet officials in Warsaw and Budapest complain that their suggestions have been ignored even though there are AID bureaus in these cities (by now well-staffed), and despite numerous fact-finding missions from Washington.

Washington is the center of aid decision making. AID bureaus in eastern Europe have little authority. This has delayed decision making, complicated coordination, and impaired the flow of information. Indeed, Western consultants and AID officials based in eastern Europe report that the overseas AID offices often learn about contracts signed in Washington only when contractors arrive on assignment. AID's Budapest representative remarked that "I get surprised every day [when] people on contract for AID call and I don't know anything about it."

AID's regional approach to administering programs has caused further problems. East European officials who coordinate assistance complain that Washington shifts its priorities when geopolitical winds change. This encourages competition among countries for assistance and makes planning and monitoring of aid difficult. Officials in the Polish ministry responsible for assistance coordination have expressed frustration at their inability to obtain reliable information on AID spending in Poland for particular projects, although the AID office, located in the American embassy, is just two blocks away. Furthermore, although problems such as pollution cross national boundaries, each country has its own politics and policies such as those guiding the privatization of state enterprises.

U.S. grant aid programs in eastern Europe generally have the worst reputation because they allow recipients the least leverage to set terms or to select experts. In contrast, the European Community's PHARE program permits recipient ministries to supervise funds, with oversight by PHARE officials. The British Know-How Fund, small by comparison, responds quickly to recipients' requests.

Aid programs risk contributing to the crisis of governance. With leadership changes, rapid employee turnover, acute budgetary crises, and lack of sufficient administrative skills, coordinated governance is hard to imagine, let alone implement. While developing and implementing their own policies, east European officials must try to fit into the structures of U.S. aid organizations. Officials such as Jacek Poznanski who help to coordinate assistance have concluded that aid programs are failing "to create working sustainable institutions that can promote the process of reform."

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If we are to send grant aid to eastern Europe and the former Soviet Union:

l) We should establish missions staffed with senior people of stature who know eastern Europe and are able to establish effective working relationships with local aid officials.

2) We should abandon the regional approach, which makes for bumbling implementation and bad politics, and tailor our programs to the needs of individual countries.

3) We should stop bypassing existing east European governmental structures that carry out the critical policies of transition. In areas such as privatization and environmental clean-up, we should work with government agencies directly to design and implement policies.

4) We should promote exchanges at all levels, including those that offer hands-on management training for east European executives.

5) More attention should be given to governance, public administration and the information infrastructures crucial to it. Two small programs that appear to be successful are the senate-initiated Gift of Democracy program and the Frost Task Force program of assistance to the parliamentary institutions of eastern Europe, which have received support from the Congressional Research Service. This effort provides information technology and resources to parliaments, as well as training for parliamentary staff, including research and library personnel. For example, the Gift of Democracy program purchased computers for the Polish Parliament and Senate. This enabled them to set up a local area network with local data bases and connections to American and European data bases. The Frost Task Force is providing similar assistance to other parliaments in eastern Europe.

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Trade and Investment

Post-Communist Europe is in danger of becoming not only a playground for consultants, but a dumping ground for surplus commodities of only marginal value. Consider the distribution of some Department of Defense surplus shipped to Poland from military bases in Turkey, Germany, and the Persian Gulf. Although some military rations and first-aid equipment not available in Poland were welcome at hospitals and homeless shelters, the Warsaw staff of an American relief organization responsible for distributing the surplus determined that most goods cost more to ship and distribute than they were worth. Nine trucks and ambulances were flown from Germany to Poland. Half were in such poor repair (with defective brakes, steering, and engines) that they could not be driven safely to their final destinations. Not only did the transportation costs exceed the value of these vehicles, but the institutions that could have used them couldn't afford repairs or maintenance. And both U.S. government and Polish regulations prohibited the sale of the vehicles.

Essential goods such as medicines unavailable in Russian markets are urgently needed from abroad. But some "humanitarian" goods are redundant. Poland, for example, is saturated with imports that may harm such staple industries as textiles. Yet the U.S. Department of Defense sent 400,000 pairs of trousers to Poland--enough to outfit nearly four percent of the adult male population and more than enough to raise questions about disruption of domestic markets. "On the one hand, we should be grateful [for the clothing]," said the organization's office director. "But frankly, I was afraid the whole time that someone from NIK [the Polish government's chief auditing agency] would call and say 'who is sabotaging Polish light industry?'"

Aid that is not much help to the east Europeans is also not much help to America's image in the region. Articulating the growing resentment toward Western patronage, Polish president Lech Walesa recently accused the West of opportunistically betraying his nation by deluging it with consumer goods but failing to make major investments. "It is you, the West, who have made good business on the Polish revolution," Walesa charged. "The West was supposed to help us in arranging the economy on new principles, but in fact it largely confined its efforts to draining our domestic markets."3

The U.S. government should refocus its efforts not on assistance designed to make the West feel it has done its charitable duty, but on exchanges and building partnerships that would marry post-Communist economies to western ones. I make the following recommendations:

1) Trade over aid: What the region needs, its chastened statesmen now say, is not monetary or technical aid, but better access to markets. Although the United States has made some progress in reducing trade barriers, further opening of markets to east European export goods such as agricultural commodities, textiles, and steel is needed. Policies that encourage investment, trade, and especially exports to the West from eastern Europe, the Baltics and the CIS are crucial. Trade imbalances are growing, with exports to some eastern European countries generally accelerating at a more rapid pace than imports from the region. We could help to rectify this by providing a system of information for east European exporters about U.S. tariffs, commercial regulations and laws, and supplying financial, distribution and marketing services as part of an overall strategy for east European export enhancement. Trade offices in major U.S. centers of commerce could be established to support these endeavors.

2) Investment: The U.S. government should help to broker interactions between east European and American industry as part of a coherent plan to penetrate eastern Europe with long-term business activity. The Commerce Department puts out newsletters, provides information and responds to inquiries from potential investors in eastern Europe. These initiatives could be expanded, starting with increased staffing of U.S. commercial offices in eastern Europe and the former Soviet Union.

The idea of setting up a business center in each east European country (contained in the SEED legislation) was only partially implemented with the recent opening of a center in Warsaw, which provides temporary office space to American businessmen. Business centers should be established throughout the region to assist potential investors with contacts, business counseling, and with locating facilities and services such as translation. This is especially critical where such services are unavailable in the private sector.

Fifth, U.S. officials and advisers need to establish contact and ties with a wide cross-section of the Russian leadership -- politicians, economists, and social and political activists -- and not only Yeltsin and his allies. How Russian elites perceive the efficacy of U.S. aid programs and politics should be a source of concern, especially because many Russians have questioned American intentions.

Further, these American business centers and businessmen could use east European expertise to help them invest in the former Soviet Union. The east European experts would draw on their contacts, trade agencies and transportation networks to assist Americans investors in establishing partnerships and brokering deals.

Eastern Europe and the former Soviet Union are at a turning point. How the United States handles assistance will critically affect not only European political and economic development, but the integration and stability of the world economy.

1 Talk before the American Committee to Aid Poland (ACAP), Washington, D.C., March 12, 1992.
2 Talk before the American Committee to Aid Poland (ACAP), Washington, D.C., March 12, 1992.
3 The Washington Post, Feb. 5, 1992; p. Al.

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© , Janine Wedel