Note: This document may not always reflect the actual appropriations determined by Congress. Final budget allocations for USAID's programs are not determined until after passage of an appropriations bill and preparation of the Operating Year Budget (OYB).
EUROPE AND THE NEW INDEPENDENT STATES
FY 1997 FY 1998 FY 1999 Actuals Estimate Request Support for East European Democracy $475,000,000 $485,276,000 $464,500,000 FREEDOM Support Act............... $625,000,000 $770,798,000 $925,000,000 Economic Support Funds............. $56,600,000 $34,600,000 $44,600,000 Development Assistance Fund....... $4,400,000 $4,000,000 $4,000,000 P.L. 480 Title II........................... $60,358,403 -- --
U.S. NATIONAL INTERESTS
The incorporation of Central and Eastern Europe (CEE) and the new independent states (NIS) of the former Soviet Union into the ranks of democratic and free market economies contributes to a more secure, prosperous, and democratic world. The benefits of this transition are as important to the people of the United States as they are to the people of the recipient countries.
National Security. The end of the East-West rivalry continues to free up resources for U.S. domestic needs, as CEE and NIS countries cooperate to build new security arrangements to promote peace and prosperity. Current discussions to enlarge the North Atlantic Treaty Organization (NATO) to include Poland, Hungary and the Czech Republic represent significant progress. In Bosnia, the U.S. Government -- in concert with NATO allies and a large international donor community -- is committed to stabilizing the post-war situation, providing a foundation for economic revitalization and assisting the establishment of effective political and constitutional institutions. Continued evolution of a U.S.-Russia partnership is a primary goal of U.S. foreign policy, requiring ongoing support for the building of a stable, market-oriented democracy in Russia and sustained support for economic reform, the rule of law and political pluralism in Ukraine, the Caucasus and Central Asia.
Economic Prosperity. A substantial portion of U.S. assistance to the region is devoted to strengthening the conditions needed for economic competition, open markets, trade and investment. U.S. merchandise exports to the region have nearly tripled in the last decade and have the potential to multiply several fold in the coming years, translating into well-paying, export-related jobs. Growth of trade for the region from 1994-96 was a robust 13%; and higher for the CEE northern tier (18%). Increasingly, this trade is with the West. The proportion of CEE trade with advanced economies has increased from 40% of exports in 1989 to 70% in 1995.
The lion's share of foreign direct investment (FDI) to the region is going to a handful of northern tier countries, demonstrating that foreign investment does follow reform. The cumulative inflow during 1991-1996 for the region is close to 4% of the transition economies' GDP. This compares to 6% for Latin America and 13% for the East Asian developing economies. The potential for increased FDI flows will be better realized as fundamentals in reforms are put in place throughout the region.
Law Enforcement. Crime and corruption is a major issue in the region with cross-border implications, as illustrated by recent U.S. business disputes in Ukraine. USAID programs are working to establish the rule of law and commercial legal frameworks required to improve international investor confidence. Transfers to the Departments of State and Justice focus on improved law enforcement skills and technology.
Democratic Expansion. Democracy has taken root in the CEE. While gains in the NIS are less pronounced, important strides have been taken in the development of democratic elections and independent media. Hundreds of active nongovernmental organizations (NGOs) across CEE and NIS now serve advocacy functions for their respective interests and help open up the political process. Their maturation and sustainability over the long-term, however, remains a fundamental challenge. In
FY 1999, USAID proposes a new, visionary public - private partnership with the American philanthropic community to create an endowment which will engender even greater successes in civil society building in Central and Eastern Europe.
Global Issues. SEED and FSA resources will support the Presidential initiative in Global Climate Change. Activities will be focused in Russia, Ukraine, Poland, and the Central Asian Republics -- four of ten priority programs identified by USAID. Success in areas receiving family planning services has demonstrated that programs are reducing abortion rates by promoting alternative family planning modes. USAID also has a growing infectious disease program for the NIS countries, including tuberculosis and AIDS prevention.
DEVELOPMENT CHALLENGE
The challenge in the CEE and NIS is to help these countries in their transition to become market-based democracies so that they can enter into normal political and economic relations with other countries and complete the journey on their own.
Status of the Transition
Figure
Graphic file number 0 named summary4.wpg with height 260 p and width 326 p Center aligned
Results are showing that after nine years of assistance in the CEE and six years in the NIS, the pace of reform is not uniform between countries and sub-regions. The following chart compares economic and political transition trends within the region. Countries fall into 3 reform categories.
Most Advanced: Most northern tier countries (Czech Republic, Hungary, Poland, Slovenia and the Baltics) are clustered in the upper right end of the trend line as they have come the farthest in their economic and democratic reforms. They are experiencing robust economic growth (well over four percent since 1994) and private sector share of GDP was over 64% in 1996. These countries have achieved levels of democratic freedom nearly on a par with Western Europe. USAID has already closed out its missions in the Czech Republic, Estonia, and Slovenia. Additional USAID programs in this sub-region are accelerating toward close-out as further progress is made, as evidenced by the start of European Union membership talks with Poland, Czech Republic, Hungary, Slovenia and Estonia.
Intermediate Stage of Transition: The southern tier countries (Albania, Bulgaria, Croatia, Macedonia, Romania), Slovakia and the most advanced NIS reformers (Russia, Kyrgyzstan, Moldova, Ukraine) populate the middle of the graph. Most of these countries and relatively modest reformers (Armenia, Georgia, Kazakhstan) are positioned to take maximum advantage of U.S. assistance as they progress in their transition. Inflation in the CEE southern tier increased sharply in 1996 and 1997. These economies contracted on average by almost 3% in 1997 due to lackluster progress in policy reform through 1996. Performance is expected to improve with reform-minded governments now in power
in Romania, Bulgaria and Albania. Private sector share of GDP in 1996 was 56% in the CEE southern tier and 49% in the NIS. Although the largest NIS economies were still contracting in 1996, inflation was significantly reduced from nearly 175% in 1995 to 36% on average in 1996. Forecasts suggest inflation will remain roughly the same (at 37%) in 1997. Preliminary estimates also show positive economic growth for the sub-region in 1997 -- the first time since the transition began. Assistance needs for all the countries in this category continue to be great and, in general, they have exhibited a willingness to reform, albeit at a slower pace than in the CEE northern tier.
Slowest to Reform: The NIS countries clustered in the lower left of the graph (Azerbaijan, Belarus, Tajikistan, Turkmenistan, Uzbekistan) have been poor performers on both the economic and democratic fronts. While some countries have recently registered positive economic growth despite their lack of reform, this is either the result of avoiding painful reforms (e.g., Belarus) or the result of natural resource extraction (e.g., Azerbaijan), and would be even greater if economic reforms were adopted. The lack of concurrent democratic reform makes it unlikely that such growth will benefit the society as a whole. Private sector share of GDP -- a good indicator of progress in economic policy reform -- remained low during 1996, ranging from 20%-45%. Some of these countries are held back by civil strife; others suffer from autocratic rule. The governments of Turkmenistan, Tajikistan and Uzbekistan rank among the least democratic worldwide, according to Freedom House. USAID's approach is to maintain a modest presence in these countries, watching after U.S. strategic interests and looking for opportunities to support reformers, especially non-governmental organizations and the private sector.
Regional Strategy, Goals and Objectives.
USAID manages the largest portion of U.S. assistance to the region while a dozen other U.S. Government agencies also implement programs financed through FSA or SEED resources. The Gore-Chernomyrdin Commission, under the direct leadership of the Vice President, provides focused leadership and a high-level impetus for change in Russia. The Gore-Kuchma Commission is a parallel structure for Ukraine.
The strategy for the region emphasizes three goal areas: economic restructuring and growth; democracy and governance; and social stabilization. Because of the integrative nature of the transition process, USAID's work emphasizes the importance of moving forward on both economic and democratic fronts and to seek program synergies across sectors. Contrary to earlier concerns that democratization might slow economic transition, experience has proven that democratic elections and growing civil societies strengthen the resolve and robustness of economic reforms and that credible rule of law is key to economic growth. USAID's strategy also recognizes the links between social conditions and political and economic reforms by underscoring the fiscal sustainability issues related to social benefits and service systems.
In all goal areas, the strategy targets policy reform, institutional strengthening at both national and local levels, and citizen involvement through grass-roots organization. As countries prepare to graduate in the CEE, USAID is developing an innovative post-presence strategy to manage remaining activities and reinforce the sustainability of results achieved. The centerpiece of this strategy is the Trust for Civil Society in Central and East Europe, a public-private partnership between the U.S. Government and U.S. foundations designed to sustain support for democracy and economic reform where U.S. direct assistance is being phased-out. In the NIS, under the Partnership for Freedom (PFF) initiative, USAID's traditional technical assistance program will diminish in countries as they achieve the basic democratic market transition. Follow-on activities will use a more mature set of mechanisms, such as mutually beneficial partnerships and cooperative activities with the private sector, local government, and non-governmental organizations rather than with central governments. New emphasis on trade and investment and cooperation to promote democracy are intended to sustain the transition and encourage lasting ties with the U.S.
Economic Restructuring and Growth.
To achieve this goal, USAID pursues six strategic objectives: increased transfer of state-owned assets to the private sector; sound fiscal policies and fiscal management practices; accelerated development and growth of private enterprises; a more competitive and market-responsive private financial sector; a more economically sound and environmentally sustainable energy system. In FY 1998, USAID added a new objective -- improved environmental management capacity to promote sustainable economic growth -- to more closely link environmental issues to the overall economic restructuring agenda.
USAID first undertakes activities aimed at systemic reform - laws, policies, institutions, information flows - which are fundamental to free enterprise and private markets, energy restructuring and environmental management. Beginning in FY 1998, the PFF is emphasizing trade and investment necessary for growth in the NIS, and to support businesses' efforts to expand U.S.-NIS trade. Russia and Ukraine are major participants, while other NIS countries will benefit as the economic restructuring fundamentals are put in place.
Democracy and Governance.
Under this goal, USAID pursues three strategic objectives: informed citizens' participation in political and economic decision-making; legal systems that better support democratic processes and market reforms; and more effective, responsive, and accountable local government. USAID activities include election support, political party development, independent media, improved parliamentary and judiciary processes, NGO and local government strengthening. These latter aspects are critical when the central government is not moving fast enough on democratic reforms. As part of the Partnership for Freedom, funds are provided to make change permanent by endowing key U.S. and NIS institutions and activities.
Social Stabilization.
Under this goal, three strategic objectives are pursued: reduced human suffering and crisis impact, improved sustainability of social benefits and services, and reduced environmental risks to public health. The U.S. assistance program in Bosnia falls under this goal area. The socio-economic problems that have accompanied the transition to market economies are enormous -- unemployment, unpaid wages and old age pensions, and hyper-inflation among others. USAID, in cooperation with the World Bank, the IMF, and other bilateral donors helps governments address the problem of deteriorating services and contain the "backlash" against economic reform. Ultimately, as these countries grow stronger (with U.S. help), these countries will have a greater capacity to solve these problems themselves. In addition to emergency relief, USAID activities include health care reform, development of a market-based housing sector, and nuclear safety.
External Debt.
External debt trends in the region vary widely. By World Bank standards, two countries in 1996--Albania and Georgia (with a total debt-export ratio greater than 220%)--were severely indebted, and four--Armenia, Bulgaria, Hungary and the Kyrgyz Republic (with a debt-export ratio greater than 132%)--were moderately indebted. Debt is relatively high for Moldova and Russia, as well, at levels just under the moderately indebted threshold. Progress has been made in reducing debt burdens in Albania, Bulgaria, Poland, Croatia, Macedonia, Slovenia, and Russia, largely due to debt restructuring agreements. Hungary has made good progress as well since 1994. In general, USAID does not provide balance of payments support to CEE and NIS countries, although USAID does address many of the structural issues which impact on debt through its assistance in economic reform. An exception to this trend is being made for Albania, the poorest country by far in the CEE. Following the collapse of pyramid investment schemes in early 1997 and subsequent civil insurrection, $10 million in P.L. 480 Title I (a USDA Food for Progress grant) was pledged for FY 1998 funding. An additional $10 million
is proposed in Economic Support Funds (cash transfer grant) for FY 1999.
PROGRAM AND MANAGEMENT CHALLENGES
With the pace of reform varying so greatly between sub-regions, USAID has had to adapt its management approaches and program interventions to meet substantially different circumstances. Resource allocation trends also reflect these differences as USAID phases-out successful programs in the CEE northern tier, exploits new opportunities for reform in the CEE southern tier, and intensifies efforts in the NIS where reform is slower and assistance will continue far into the next decade.
CEE Northern Tier Focus: Graduation.
Text Box
CEE Northern Tier
Projected Graduation Schedule
1996 - Estonia
1997 - Slovenia
1997 - Czech Republic
1999 - Hungary
1999 - Latvia
2000 - Lithuania
2000 - Poland
USAID is actively graduating successful countries in the northern tier of Central Europe, as illustrated in the chart below. At present, plans also include FY 1999 as the last year of funding for Slovakia, despite the fact that they have not achieved the same level of democratic freedom as other northern tier countries. The assistance challenge for all these countries is to ensure remaining funds are focused on the most critical constraints to graduation and that sufficient indigenous institutions are in place to support economic and political integration with the West in general, and the European Union, in particular. As part of its post-presence strategy in the CEE, USAID is developing various mechanisms to manage remaining activities and reinforce the sustainability of results achieved. In partnership with several major American foundations, USAID proposes the creation of a publicly- and privately-endowed trust to continue important civil society linkages with Central and Eastern Europe. Democratic reform in the CEE has spawned a network of non-governmental organizations, advocacy groups and professional societies. As these countries approach graduation, however, the challenge will be to ensure the vibrancy and endurance of such organizations absent direct transitional assistance. A trust of the magnitude of approximately $100 million will be established as a bridge between traditional bilateral assistance and NGO self-sufficiency, and will include new, original grants to both stimulate organizations in-country and to shape hospitable climates for their success. The trust will be developed over the next year as part of the regional strategy and will begin in countries where USAID is phasing-out.
CEE Southern Tier Focus: Capitalizing on New Reform Opportunities.
Results of elections in Romania and Bulgaria have greatly improved prospects for success there and given U.S. assistance programs new opportunities to accelerate reform. The situation in Albania has also stabilized, enabling the U.S. government to proceed with its assistance program. In concert with development partners, USAID is focussing on economic restructuring and privatization, and melding earlier initiatives in grass-roots organization and local development with newer national level policy reform programs. Strategies are being put in place in all the southern tier countries to best affect new opportunities for change. Provided the current pace of reforms can be sustained, graduation from U.S. assistance may commence by 2002, although Albania, starting from a much poorer base, may require a longer development assistance period. Resource allocations to southern tier countries represent 59% of the non-Bosnia portion of the FY 1999 SEED request, up from 54% in FY 1998.
Bosnia/Serbia and Montenegro: Bridging Reconstruction and Systemic Reform Needs.
Progress continues to be made in Bosnia, however many communities are still experiencing hardships brought about by the devastation of war. In addition, refugee and displaced person returns need to
be accelerated. The Federation economy is slowly improving, but the economy in the Republika Srpska is stagnant. Overall, democracy remains fragile. Progress is needed in the reform of the media sector and in the installation of multi-ethnic governments resulting from the September 1997 municipal elections. Given the large problems remaining in the institutionalization process in Bosnia, USAID will continue to support implementation of the Dayton Peace Accords and cooperation between the entities. As part of that process, assistance toward a market economy and democratic system in Bosnia is consistent with and supportive of USAID's broader goals in the region. USAID will also expand support for the nascent democracy movement in Serbia and Montenegro as part of U.S. interests in regional stability. It is anticipated that targeted assistance in the democracy area will strengthen the Government's commitment to the terms and principles of the Dayton Peace Accords.
NIS Focus: Fundamental Reform and Partnership for Freedom.
Assumptions regarding U.S. assistance to the NIS have changed drastically during the last eighteen months as programs are tempered by two fundamental trends. First, these countries have the farthest to go in their transitions. Macro stabilization and economic growth continue to be new phenomena; private sectors remain small; and democratic reforms continue to lag, and in some cases have regressed. Second, the NIS transition path may be less sustainable than that experienced in the CEE. The inequities of the transition process have been much greater in the NIS: the gains and costs have been more concentrated; corruption and informal economies are bigger; and the will to reform is not a given as it is in most of CEE. Special country circumstances are also having an impact on the nature and duration of reform assistance. For instance, the Central Asian Republics are facing some typical sustainable development issues, such as poverty alleviation. Transition in the Caucasus is heavily influenced by the large oil and gas reserves of the Caspian Sea as well as political conflict among the countries. Ukraine has slowed its reform pace due to resistance in the socialist-led parliament and problems with corruption.
The Administration and the Congress renewed their commitment to the NIS last year through the Partnership for Freedom (PFF). This initiative extends the time period of U.S. involvement to FY 2006 and substantially increases resource allocations to the region. As progress is made in the NIS, resources will be focused on alternative mechanisms to traditional technical assistance, working more closely with the private sector (including small and medium enterprises) and local governments to consolidate reform efforts and make them irreversible by increasing trade, investment and other linkages between the United States and the countries of the former Soviet Union. Under the PFF, the new Presidential Management Training Initiative (PMTI) will have a major impact on business management skills through partnerships between U.S. and NIS business schools, expanded university scholarships, business internships and training.
Donor Coordination
Within the context of the Transatlantic Initiative, USAID has coordinated with the World Bank, the European Bank for Reconstruction and Development (EBRD), and the European Union (EU) to leverage hundreds of millions of dollars, beyond its own contributions, for the region. USAID also works with the Asian Development Bank regarding programs in the Central Asia Republics.
USAID's technical assistance often sets the stage for World Bank and EBRD work in energy, housing, infrastructure, and social sector restructuring loans. For example, USAID and the World Bank are in the process of implementing several programs in Russia, including a Gas Distribution Rehabilitation and Energy Efficiency Loan I ($106 million) and a Medical Equipment Loan totaling $300 million. USAID/EBRD collaboration with the Enterprise Funds continues. USAID recently signed two $1 million grant agreements to implement Venture Capital investment activities in Slovenia via the Slovenian Development Capital Fund and the Horizonte Slovene Enterprise Fund.
In all countries, USAID has provided leadership in bringing other donors together to promote program
synergies and coordinate implementation. Donors have been particularly effective when presenting a united front in seeking reform, as was the case in Ukraine when the privatization process started to lag. The U.S. Government, World Bank and EU sent joint letters to the Government of Ukraine successfully urging resolution of problems that would permit acceleration of the privatization program.
In Bosnia-Herzegovina, the international community is working closely on all aspects of economic recovery, in full coordination with the North Atlantic Treaty Organization (NATO) Stabilization Force (SFOR) mission. The U.S. contribution is expected to be 20% of the total World Bank estimate of bilateral aid needs, while the European Union and its member states continue to contribute the lion's share of these needs. Through regular meetings of the Steering Board of the Peace Implementation Conference, semi-annual convening of the full Peace Implementation Conference, and daily cooperation with the High Representative and World Bank representatives, the United States and its partners seek to streamline the coordination of civilian program implementation.
FY 1999 PROGRAM
The SEED request level of $464.5 million will enable the U.S. Government to continue its commitment to support the Dayton Peace Accords in Bosnia, Croatia, and Serbia and Montenegro; systematically closeout CEE northern tier countries while supporting new opportunities in the CEE southern tier; and establish the Trust for Civil Society in Central and Eastern Europe, which will help institutionalize democracy and economic reform throughout the CEE region. The FSA request level of $925 million will enable the U.S. Government to support the PFF at the level necessary to achieve its objectives in Russia and across the NIS; fund the Presidential Management Training Initiative (PMTI); redouble efforts in Central Asia's transition; support the Administration's TransCaspian energy initiative; increase attention to infectious diseases and address global climate change in Russia, Ukraine and Central Asian.
Under the economic restructuring and growth goal, USAID proposes $89,193,000 for SEED and $343,762,000 for FSA funds to foster the emergence of competitive, market-oriented economies in which the majority of economic resources is privately owned and managed.
Under the democracy and governance goal, USAID proposes $89,140,000 for SEED and $74,525,000 for FSA funds to support the transition to transparent and accountable governance and the empowerment of citizens through democratic political processes and freedom of information.
Under the social stabilization goal, USAID proposes $236,562,000 for SEED and $71,785,000 for FSA funds to respond to humanitarian crises and strengthen the capacity to manage the human dimension of the transition to market-oriented democracy. Funding for economic reconstruction and other activities in Bosnia comprises about half of the total SEED request for FY 1999 and about 94% of the SEED request under this goal area.
USAID proposes $49,605,000 for SEED and $434,928,000 for FSA funds under cross-cutting and special initiatives. Examples of cross-cutting efforts include training programs and USAID's work with the Eurasia Foundation which provides small grants to grass-roots organizations under both the economic restructuring and democracy rubrics. In those instances where activities implemented by other U.S. agencies do not directly support USAID strategic objectives, they are included under this rubric (e.g. Peace Corps, U.S. Information Agency, State Department Science Centers program, etc.).
The Administration also proposes $44,600,000 for Economic Support Funds (ESF) and $4,000,000 for Development Assistance (DA). Of these amounts, the Administration requests $4,000,000 in DA for Turkey; $19,600,000 in ESF for Ireland; $15,000,000 in ESF for Cyprus; $10,000,000 in ESF for Albania.
EUROPE FY 1999 COUNTRY SUMMARY
(in Thousand of Dollars)
COUNTRY Economic Restructuring Democratic Transition Social Stabilization Cross-cutting and Special Initiatives Total EUROPE* -- -- -- -- -- Albania -- -- -- -- 45,000 -- SEED Act 20,150 12,090 1,000 1,760 [35,000] -- ESF -- -- -- 10,000 [10,000] Bosnia -- -- 225,000 -- 225,000 Bulgaria 10,550 11,450 -- 8,000 30,000 Croatia 700 3,300 4,380 1,620 10,000 Cyprus -- -- -- -- 15,000 -- ESF -- -- -- 15,000 -- FYR Macedonia 9,090 3,860 -- 3,050 16,000 Ireland -- -- -- -- 19,600 -- ESF -- -- -- 19,600 -- Lithuania 1,510 125 -- 565 2,200 Poland 5,600 13,300 -- 1,100 20,000 Romania 22,000 5,500 4,500 4,000 36,000 Serbia and Montenegro -- 15,000 -- -- 15,000 Slovakia -- 2,000 -- -- 2,000 Turkey -- -- -- -- 4,000 -- Devel. Asst. (DA) -- -- 4,000 -- -- CEE Regional 19,593 22,515 1,682 29,510 73,300 EUROPE TOTAL 89,193 89,140 240,562 94,205 513,100 -- SEED 89,193 89,140 236,562 49,605 464,500 -- ESF -- -- -- 44,600 44,600 -- DA -- -- 4,000 -- 4,000
* All funds under EUROPE are Support for East European Democracy Act (SEED) unless otherwise noted.
NEW INDEPENDENT STATES
FY 1999 COUNTRY SUMMARY
(in Thousand of Dollars)
COUNTRY Economic Restructuring Democratic Transition Social Stabilization Cross-cutting and Special Initiatives Total NIS** -- -- -- -- -- Armenia 32,865 12,000 5,000 30,135 80,000 Azerbaijan 5,000 3,000 12,600 10,900 31,500 Belarus -- -- -- 11,300 11,300 Georgia 29,050 6,320 20,430 24,900 80,700 Kazakhstan 21,200 7,500 2,510 14,790 46,000 Kyrgyzstan 12,000 4,050 500 12,450 29,000 Moldova 21,200 1,500 -- 12,800 35,500 Russia 76,650 20,900 14,700 113,150 225,400 Tajikistan 6,710 1,875 1,965 8,200 18,750 Turkmenistan 5,200 -- -- 9,800 15,000 Ukraine 110,450 13,000 9,900 90,150 223,500 Uzbekistan 13,950 3,280 1,500 13,320 32,050 CAR Regional 3,000 -- -- 6,000 9,000 NIS Regional 6,487 1,100 2,680 77,033 87,300 NIS TOTAL 343,762 74,525 71,785 434,928 925,000 -- FSA 343,762 74,525 71,785 434,928 925,000
** All funds under NIS are FREEDOM Support Act (FSA) unless otherwise noted.
EUROPE AND THE NEW INDEPENDENT STATES
FY 1999 TOTALS
(in Thousand of Dollars)
Funding Source Economic Restructuring Democratic Transition Social Stabilization Cross-cutting and Special Initiatives Total GRAND TOTAL 432,955 163,665 312,347 529,133 1,438,100 -- SEED total 89,193 89,140 236,562 49,605 464,500 -- FSA total 343,762 74,525 71,785 434,928 925,000 -- ESF total -- -- -- 44,600 44,600 -- DA total -- -- 4,000 -- 4,000
Donald Pressley
Acting Assistant Administrator
Bureau for Europe and the New Independent States
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