Partnership for Freedom

Ambassador Richard Morningstar
Special Adviser to the President
Secretary of State on Sssistance to the New Independent States.
House of Representatives International Relations Committee
March 11, 1997

Mr. Chairman and members of the Committee, I am very pleased to have the opportunity to testify here today about the Administration's plans for assistance to the New Independent States of the former Soviet Union, and most importantly about one of the top priorities of the foreign affairs budget, the Partnership for Freedom. The Partnership for Freedom supplies the vision and the framework for sustainable, mutually-beneficial cooperation between the people of the United States and the people of the New Independent States, and thus for a more secure and prosperous future.

U.S. foreign policy and U.S. assistance to the New Independent States of the former Soviet Union rest on a simple principle: The security of the United States and the rest of the world is immeasurably enhanced if Russian Ukraine and the rest of the NIS are stable market democracies. We must continue to deal directly, and at close range, with the fact that reform in the NIS is a complex generational process, the outcome of which is by no means secured. Although last summer's presidential election in Russia was remarkably free and fair, a monumental signal in its own right of reform's progress, 40 percent of Russian voters opted for the past. This is not ideological nostalgia, it is pure economics. Many people in the NIS are still significantly worse off economically than they were in the Soviet Union. We must stay visibly and materially engaged to help ensure that lasting democratic and market institutions take root in the region. Over the next few years, we mud help give people throughout the NIS region a more tangible stake in reform.

With Congress' support, the Partnership for Freedom will respond to this imperative. As we recognize that countries in the region are turning the corner from wild inflation and economic contraction to basic macroeconomic stabilization, the United States must seize the moment, and continue to play a leadership role in working with these countries. Now the focus of our assistance will be different -- it will be on fostering economic growth and investment, and no less important, on strengthening the myriad of new democratic institutions, most of them non-governmental, that have emerged over the past five years. These dual tracks for a reinvigorated program effort will give us the greatest chance of success in sustaining the political impetus for reform and democracy.

The responsibility and the opportunity to strengthen our economic, professional, academic and social ties with the NIS are crucial as Russia and the United States develop a more mature relationship. The U.S. and Russia will continue to have differences in policy and outlook, as well as compelling common interests. All of the activities and outcomes expected from the Partnership for Freedom will be even more significant at the times that tensions between our nations are high -- more significant because business, people-to-people, and institutional ties are mechanisms that increase the probability of stable market democracies over the long term.

There are numerous important lessons learned over the past five years in our assistance program about what works and what doesn't, and how we can most efficiently make a difference. These lessons, plus the specific accomplishments and failures in the reform experience of each NIS nation, other key strategic interests, and the larger role now being played by the European Union and the international financial institutions (IFIs) -- have all been factored into our assistance strategy for 1998 and beyond.

The Partnership for Freedom, a strategic refocus of our assistance resources, can leverage far greater human and financial resources for the long-term mutual benefit of the United States and the NIS than the dollars it invests up front. How? The PFF will support private sector investment, and require even more cost sharing and private matching contributions from the participants and recipients. We will continue to phase out the more traditional "aid" activities, primarily in the form of U.S. technical advisors who have contributed so significantly to the historic dismantling of the world's largest command economy, the construction of all new, market-driven systems, and the opening of formerly closed societies to the world. We can do this now, first primarily in Russia, and hopefully soon in other nations, because of the changes that have been made in such areas as:

-- Private ownership: The private sector's share of GDP is now over 60 percent in Russia, 50-60 percent in Moldova, 50 percent in Ukraine, 40 percent in Kyrgyzstan and 35 percent in Kazakstan. Privatization to this degree is a key building block for future economic reform and growth.

-- Elections: Reasonably fair and open elections have had a significant impact on the political process in Russia, Ukraine, and Moldova -- Russia now has held parliamentary, presidential, and regional elections since December 1995. In those countries whose commitment to elections and independent political parties appears more tenuous, and where elections have been tainted, political leadership has had to accept the consequences of international scrutiny and condemnation.

-- Civil society: Non-governmental organizations (NGOs) did not exist in the NIS in 1992; since that time, there has been explosive growth in that sector, particularly in civic associations, policy think tanks, private universities, business and industry associations, citizen action groups, environmental groups and many more varieties of public interest and advocacy organizations.

We can consider the first phase of our engagement in the NIS to be complete when basic structural and institutional changes to a market democracy have taken place. In addition to what is outlined above, other key building blocks are the rule of law, independent media, and functioning capital markets and financial institutions. Russia is closest to meeting these criteria, and Ukraine, Moldova, Kyrgyzstan and Georgia are next in line. The other NIS countries are reforming at a slower pace.

The Administration's current proposal for introducing the Partnership for Freedom creates a staggered transition for the NIS countries from our broad-based technical assistance programs to the concentration of resources on fewer activities. For example, over 91 percent of the FY1998 program in Russia will be under PFF, in Ukraine, 51 percent under PFF and in Kazakstan, 53 percent. Over the next four to five years, technical assistance will phase out in every country, and the longer-term framework for remaining Freedom Support Act activities in the New Independent States will be the Partnership for Freedom package.

Phase II: Partnership for Freedom

The United States and the New Independent States all ultimately want constructive bilateral relationships based on mutual geopolitical, economic and trade interests, not based on assistance. The Partnership for Freedom is structured to be the bridge between the first phase of the NIS transformation and this highly desirable goal.

The strategy for investing our resources in the PFF revolves around leveraging, and the expansion of the kinds of bilateral cooperative activities that the U.S. has with many nations. The investment of U.S. resources in this second phase should remove bottlenecks, forge ties and facilitate relationships that enable new private, community and governmental resources to be put to full use.

The Partnership for Freedom is structured to operate in parallel with U.S. government security-related programs to promote arms control, non-proliferation, and regional stability. These include Department of Defense programs for Cooperative Threat Reduction, Counterproliferation, and Warsaw Initiative/Partnership for Peace efforts, as well as Department of Energy programs such as the Materials Protection, Control & Accounting activities. The PFF helps to strengthen our efforts in these security areas, and vice versa. All of these programs should be reviewed as a cohesive package, which together fulfill U.S. national security objectives.

The Partnership for Freedom will include the following activities:

Investment and Capital Mobilization

1. Increase investment support in the regions, emphasizing the involvement of American and NIS small and medium business, and microcredit.

2. Remove impediments to trade and investment.

3. Support U.S. firms investing in and exporting to the NIS.

4. Facilitate and accelerate World Bank and other IFI loans to NIS governments.

5. Focus and link training to specific investment projects.

Consolidation of Democracy and Civil Society Gains

1. Endow foundations on a matching basis to create sustainable programs.

2. Significantly expand law enforcement activities to address problems of crime and corruption.

3. Expand institutional partnerships to support cooperative activities at community levels in such areas as health, environment, energy and technology commercialization.

4. Increase professional and academic exchanges with emphasis on young leaders.

5. Strengthen democratic political organizations as they become part of the greater network of citizens organizations.

The FY1998 request for $900 million is a 44 percent increase above the current fiscal year's budget for the NIS. This level of funding will be able to support more than double the number of exchanges and partnerships that can be supported. These funds will be able to direct more than five times the amount of resources into investment programs, and more than double the level of effort on law enforcement and anti-crime activities compared to FY1997.

Another major effect of these additional funds will be more resources for democracy and economic restructuring work in Central Asia (+60 percent), Georgia (+60 percent) and Azerbaijan (+90 percent) -- countries of key geopolitical and economic interest to the United States that have not been adequately supported due to overall budget constraints combined with congressional earmarks. Russia's budget will be up significantly from this year's $95 million to $241 million. Over 91 percent of the Russia budget will be directed to PFF activities.

Lessons Learned

I have been in this position now for almost two years. The approach that I have taken in this time period, and presented to this committee on numerous occasions, has been aggressively focused on the notion of continuous improvement to maximize our effectiveness in meeting U.S. national interests, and to maximize our return on the investment of U.S. taxpayer dollars in the reform process. The implementing agencies and organizations have accomplished a tremendous amount in this regard, and Mr. Dine will get into more of that detail for USAID later in this presentation. The lesson that I have had reinforced to me time and time again is that this region is changing so rapidly and in such fundamental ways, that as policymakers and leaders it is quite dangerous to be solely reactive to events. While keeping our principles and goals in sight, developing and managing assistance to Russia, Ukraine and the other NIS requires proactive creativity and constant review of our assumptions and conclusions about what works. Old roadmaps have been of limited utility.

We have learned how far small amounts of funding can go to support reformers in real and lasting ways. Smaller, regionally based programs, that are encouraged to be flexible and adapt to local needs work best. We have never, and will never, invest as much as it would take to do it all, make "the" critical difference. I actually do not believe that is even possible. But, we have made, and must continue to make, many small differences. Today, regions in Russia such as Novgorod, Samara, Nizhny Novgorod have become models of accomplishment for the rest of the country on what is achievable by taking advantage of targeted assistance programs. We must and will do more in regions to create visible community-based impact. The heroes of the new market democracies in the NIS are not USAID, not the World Bank, not the EBRD; they are the people that we have supported, educated and made small loans to over the past five years -- reformers, entrepreneurs, and advocates for change from all levels of society, who deserve the credit for all the real and lasting accomplishments. They are winning a courageous battle.

We have learned that cost sharing works. Programs such as USAID's small business service centers and the Morozov small business training project in Russia have achieved 40 percent to 50 percent cost recovery from fee-for-service. The programs that recruit volunteer experts to assist and train private entrepreneurs and farmers all rely on major cost sharing with their NIS clients, in addition to the valuable, donated time of the skilled Americans who volunteer. One of our most important exchange programs, Community Connections, (also known as PEP in some regions), is achieving great success in a pilot effort to have the professional exchange participants pay all of their travel costs to the United States, and some of their per diem expenses while they are here. All of theme community-based exchanges receive a tremendous amount of in-kind contributions of organizing time, accommodations, local transportation and training from American communities all over the country that host these NIS groups.

We have learned that the time lag between capital availability in our investment programs, such as TUSRIF, OPIC, EXIM and some smaller ones, and the disbursement of that capital has been partially unavoidable, as the business people in the NIS come up the learning curve and the impediments to investment in these countries remain numerous. Nonetheless, we have also observed that with skilled shepherding, and high quality training of local financial institutions, more can be achieved -- particularly with smaller projects and companies, and that we can now direct more resources where there are gaps, and make the proper adjustments to the programs that have not been performing as well as they should be.

We have learned that it doesn't make sense for us to spend assistance dollars on restructuring large, formerly state-owned companies. Any of these companies who has any hope of pulling through this transition, will be able to find the resources to pay for the consulting or training that it needs. A multitude of service providers exists now, both indigenous and foreign. We have ended programs that were funded back in 1994 and 1995 to do this kind of work, and retargeted private enterprise training resources to small and medium enterprises.

We have learned that we can accomplish tremendous leverage by focusing our technical assistance in some instances on helping Ukraine or Russia or even the city of Lviv meet structural reform conditions for major loans from international financial institutions. We, and most importantly the NIS side, achieve a tremendous return on our assistance investment through this kind of coordination. In Ukraine, a good illustration of this is the $317 million World Bank electric power loan, which began disbursing last month. Our technical assistance to the Ukrainians helped them organize and implement a wholesale market for power, one of the most complex conditions the Ukrainians had to meet in order to secure this loan, and a key building block for a sustainable, market-oriented power industry.

We have also relearned some old lessons about U.S. assistance -- that well managed, internationally coordinated, humanitarian assistance efforts can save lives and help to maintain the stability of a region or country. In Armenia, Georgia and Azerbaijan, a region that faces numerous ethnic and cross-border conflicts since the breakup of the former Soviet Union, U.S. resources and leadership to bring in food, fuel and medical commodities and to fund the Caucasus Logistics Advisory Unit, have made a difference in helping these nations get through their most challenging early years. President Shevardnadze has stated on several occasions that it was U.S. humanitarian assistance that made the critical difference in helping Georgia maintain its stability and independence. The leverage that we have been able to achieve in our humanitarian program since inception in the NIS -- $1.6 billion worth of 100 percent donated and surplus commodities delivered to 12 NIS countries in 480 airlifts, costing under $174 million (through the end of calender year 1996) -- is very significant. We should be very proud of this accomplishment.

Russia

While recognizing that some crucial forms of assistance, particularly those that address key impediments to investment like tax reform, will require work with Moscow-based policymakers, the implementation of the Partnership for Freedom in Russia will work to create a greater emphasis on Russia's regions and creating mutually beneficial ties with the United States with the following goals:

1. Working with regional governments to address key obstacles to investment, helping them to gain access to international capital markets, and strengthening regional financial institutions.

2. Increasing the availability of financing in the regions through EXIM, OPIC, the U.S.-Russia Investment Fund, other small and medium-sized lending and equity investment programs, and microcredit activities.

3. Increasing the level of support for exchanges and regional and community-based institutional partnerships, that will link cities, universities, law schools, policy think tanks, and a variety of NGOs and citizens' organizations. Russia's non-governmental sector has benefited greatly from U.S. support, through small grants and also through partnerships.

One very notable example is the partnership between the World Institute for the Disabled and the All-Russia Society of Disabled. With the material support, know-how, and encouragement of their U.S. partner, the Russia group's membership has climbed to 2.4 million in 78 different regions. They have helped members set up over 1700 enterprises, as well as manufacturing companies that make wheelchairs and other equipment for the disabled. Their public education and outreach, leadership training, legislative advocacy, and efforts to bring disabled children more into the mainstream of Russian life add up to an incredibly powerful lesson for all NGOs in the NIS. Partnerships such as this one must have an important place in our long-term engagement with Russians through the Partnership for Freedom. Many more existing relationships between U.S. and Russian organizations will be able to have significantly greater impacts on their communities with relatively small amounts of money.

I have already mentioned that impediments to investment will be a major component of the PFF. This is not something new, as, for example, we have been intensively engaged in supporting Russia's efforts to pass a new tax code, and improve their administration and collections organizations. These activities will have even greater emphasis under the PFF, 1) because the Russian government and the private sector have made it clear that this is a priority and 2) improving revenue collection for the government and creating a transparent, fair system for the private sector are two of the most crucial next steps in securing Russia's economic future. This is important for American business, and will help Russia move towards more normal trade and economic relations with the United States.

Ukraine, Central Asia, the Caucasus

The non-Russian NIS are still facing the most fundamental challenges of building new market democracies. These nations are building all of their government institutions from the ground up. The rule of law, media, and basic market institutions, such as banks, capital markets, and regulatory institutions are also at early stages in their development. Our national interest in supporting these countries through their transitions is clear. The Partnership for Freedom approach, and the Administration's FY1998 budget request of $900 million, will allow the appropriate level of assistance resources to be directed to the non-Russian nations.

In Ukraine, with the second largest population and economy of the NIS, stability and growth are crucial to a secure and undivided Europe. Several events in 1996 indicate that reform efforts in Ukraine are progressing and merit ongoing support. The last nuclear weapons were removed from Ukrainian soil in May: A democratic constitution was adopted in June; the new currency was successfully introduced in September; the U.S. and Ukraine declared themselves to be "strategic partners"; and President Kuchma introduced an extremely ambitious economic restructuring package to the Ukrainian Parliament in November.

Assistance to the fledging market democracies of Central Asia and the Caucasus are strongly in our national interest. Their strategic location between Russia, the Middle East, and China, coupled with vast energy resources, make their stability vital to U.S. interests. We will continue to help nascent democratic organizations and institutions, such as the independent media, non-governmental citizens groups, and educational institutions establish active, effective roles in these countries. Economic restructuring and support for small businesses will also continue to be a prominent part of our assistance program in Central Asia.

Conclusion

The courage of the citizens of Russia and the New Independent States to stay on the path of reform is bolstered by our investment in democracy, free markets, and building strong people-to-people linkages with Americans. We must consider the strategic importance of Russia and the NIS both in a historical context, and as a part of our vision of the world that our children will inherit. The New Independent States greatly appreciate U.S. assistance, but do not want to rely on aid. The Partnership for Freedom is one of the top priorities of the Administration's foreign affairs budget. This is because the vital importance of constructive, mutually-beneficial relations with the NIS, and, as Secretary Albright recently expressed it this committee, "the ultimate victory of freedom over despotism" are so important for the security of every American. U.S. assistance to date, and looking ahead to the Partnership for Freedom, is one of the smartest investments we can make to help insure the security, health and prosperity of future generations.