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Statement for the Record of James H. Holmes
Coordinator for East European Assistance
U.S. Department of State
To the House Appropriations Committee
Subcommittee on Foreign Operations
April 9, 1997

Mr. Chairman, Members of the Committee, I welcome this opportunity to
discuss with you the U.S. Government's program of Support for East
European Democracy (SEED). The support for this program shown by the
Congress, and the strong bipartisan support of this Committee in
particular, has been instrumental to our success. I would like to
believe that your support reflects not only the importance you attach
to the SEED program, but also your regard for the stewardship we
exercise in administering it and hewing to its underlying principles.
I am pleased to report, Mr. Chairman, that the SEED program is on
target, on budget, and on schedule.
-- The transitional objectives of the original SEED legislation are
being met.
-- Our budget request, less the exceptional funding related to the
Balkan conflict, continues to be on a declining slope, and
-- Funding is shifting from the Northern to the Southern Tier as
graduations of our national programs occur.
As introduction to the administration's request for FY 1998, I offer
you an overview of the SEED program.
OVERVIEW
Seven years after inception of the SEED program, the first country --
Estonia -- demonstrated that its transition from its command economy,
authoritarian past to a free market, democratic future had progressed
sufficiently that direct U.S. economic assistance was no longer
necessary to sustain it. Thus, Estonia "graduated" from the SEED
program in September 1996. Two more countries -- Slovenia and the
Czech Republic -- will join Estonia in FY 1997 in moving their
relationship with the United States beyond that of assistance
recipient to full partnership in the world community.
These graduations, coming after a relatively short period of SEED
assistance, validate the underlying premise of the Program: that the
countries of Central and Eastern Europe are fully capable of making
the transition to free market democracies with limited, focused
assistance from the American people and others.
The Support for East European Democracy (SEED) Act supports the
adoption of constitutional, legal and administrative measures that
affect the powers of the executive and legislative authorities and the
independence of the judiciary, affect the formation and operation of
independent political parties and groups, and affect fundamental human
rights and civil liberties. In the economic realm, SEED promotes free
market economies characterized by privatization of economic entities,
the right to acquire and hold private property, simplification of
regulatory controls regarding businesses, removal of trade
restrictions, liberalization of investment and capital regulations and
dismantling of wage and price controls. The SEED program provided
technical assistance and training to facilitate the reform process.
SEED program activities have been carried out in Albania,
Bosnia-Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia,
Hungary, Latvia, Lithuania, the Former Yugoslav Republic of Macedonia,
Poland, Romania, Serbia, Slovakia, and Slovenia. Today, most of these
countries are well on their way. Most have established functioning
democratic institutions, elected parliaments, allowed some variation
of a multi-party system, and made irreversible changes in their
economies. However, the transition is uneven and, certainly in the
Southern tier of the region, also incomplete. The severe economic
downturns which accompanied the collapse of communism and the loss of
the Warsaw Pact and Soviet markets led to a lower living standard for
many groups, and economic reforms remained unfinished. Although new
democratic institutions are gaining strength, they are not yet deeply
rooted.
Central and Eastern Europe remain as important to U.S. interests today
as when the original SEED Act was passed. In six years, these nations
have begun to provide a clear demonstration that democracy and
economic prosperity can be built on the ruins of failed communist
systems -- a valuable example for countries farther to the East.
Central Europe is a growing market for U.S. good and services, and a
gateway to the vast potential markets in Russia and Ukraine. Finally,
a peaceful, democratic Central European order gives the United States
and the Atlantic Alliance substantially greater assurance of security
at a lower cost.
SEED Act programs are coordinated by the Department of State and
administered by other government agencies, principally the United
States Agency for International Development (USAID), primarily through
grants and technical assistance programs. To allow the flexibility to
shift resources quickly to address fast-changing situations in the
region, SEED was originally developed as a regional program without
specific country allocations. At the request of Congress, we have
shifted over time to individual country budgets and much smaller
regional accounts.
As countries complete and consolidate their political and economic
transitions, they will be "graduated" from the assistance category and
funding for bilateral SEED programs phased out. Graduation varies
according to each country's individual progress and must be flexible
enough to accommodate uneven political and economic performance,
including instances of backsliding. It is important, therefore, that
SEED graduates remain eligible for certain regional programs. Programs
have already begun to wind down in some Northern Tier countries where
Western political and economic standards have taken hold. Progressive
phasing-out and completion of assistance in the Northern Tier will
facilitate a progressive shift in U.S. assistance resources to
countries in the Southern Tier, such as Romania and Bulgaria, which
have further to go in their transitions but where recent governmental
changes make real reform a genuine possibility. Still other countries
-- notably Albania and parts of the former Yugoslavia -- may need
assistance for years to come.
BOSNIA
Bosnia is in every way a special case within the SEED Program. Since
receiving a small amount of reconstruction assistance in FY 1995, it
has quickly become the single largest program of U.S. assistance in
Central and Eastern Europe. The Dayton Agreement represents only the
first, and arguably the most straightforward, step in the arduous
process of bringing a lasting peace to Bosnia. The international
effort to reconstruct Bosnia after years of conflict is a critical
element in the peace implementation process. It is essential that the
U.S. remain a major contributor to this effort. By far, the most
important components, however, will be the quality of Bosnia's
leadership and the strength and durability of Bosnian citizens'
self-will and self-help.
The President's pledge of $600 million in economic reconstruction
funds over three years was never intended to address either the most
traditional SEED activities of economic and political restructuring or
the major commitments required for police training, the conduct of
elections and monitoring, etc. In 1997, we have been successful in
keeping the costs of Bosnia's reconstruction within budget and not at
the cost of our other assistance programs in Central and Eastern
Europe. But substantial additional costs, such as support for Bosnia's
police training and IPTF program, were once again off-budget and were
funded at cost to other priority programs. We have requested for FY
98, therefore, an additional $25 million to cover policy training,
criminal law, judicial training, and similar contingencies not covered
by the President's reconstruction request.
The administration believes that programs to provide reconstruction
assistance and economic and political reform will lay the basis for
economic recovery and self-help, and will serve long-term U.S.
interests in the region. The evidence of the past year is that U.S.
assistance is vital to ensure that war does not return to Bosnia, and
that the region's ethnic communities begin to feel a vested interest
in the fruits of peace.
Agency coordination in Bosnia has been exemplary. The bulk of our
reconstruction assistance funding has gone to USAID (U.S. Agency for
International Development), which has done an outstanding job. But
Treasury, Commerce, USIA, State and TDA have also been standouts.
USAID major programs in 1996 -- emergency shelter repair, municipal
infrastructure, and business reconstruction loans became models for
the rest of the donor community for their targeting and timeliness. At
the end of 1996, 85% of our first year reconstruction assistance had
been obligated.
KEY ROLE OF THE ENTERPRISE FUNDS
The seven enterprise funds continue to be an important part of the
SEED program. The enterprise fund concept harnesses private sector
talent to assist in the economic transformation of Central Europe. Set
up as non-profit corporations with high-level, private sector boards
of directors, the funds have maximum flexibility to promote the
development of private companies, including small- and medium-sized
enterprises (SMEs) through equity investments, loans, and grants.
Our seven Central European enterprise funds operate in ten countries
with a combined capitalization of $576.5 million. Since their
inception in 1990, these funds have provided $393 million in financing
to approximately 8000 enterprises in Central Europe, employing more
than 80,000 people. Because of their flexibility and orientation to
the private sector, most of the funds have been able to start up
quickly and proved to be a particularly effective tool for financing
the new entrepreneurial class in the region. Among the funds' most
successful activities have been their equity investments, small and
micro enterprise lending, and housing and mortgage finance programs.
1997 promises to be a particularly exciting year for this tool of
foreign assistance. We look forward to returning to you and other
interested Members shortly with a proposal that arises from the
outstanding investment success of the Polish American Enterprise Fund.
There have been outstanding disappointments as well, including the
need for the U.S. government to intervene with a new Board of
Directors for the Czech and Slovak American Enterprise Fund. The loss
of 90 cents on the dollar of investments made in the Czech Republic
was particularly discouraging.
PERFORMANCE
In partnership with other donors and leaders of the Central European
states, U.S.-funded technical assistance and training are being
effective in restructuring the economies and politics of Central
Europe. Feedback affirms that the SEED Program is among the most
successful assistance programs of the post-war period.
After suffering through a period of negative growth and rising
unemployment immediately following the fall of the Iron Curtain, the
SEED Act countries generally enjoyed in 1996 continued economic
growth, declining inflation, and expanding private sectors. Real GDP
has continued to rise in most countries, the one exception being
Bulgaria, which saw its economy shrink 4 percent. In ten of the
fourteen SEED countries, annual GDP growth was over three percent in
1996. By contrast, in 1991 the best performing economy in the region
suffered a decline of 7.6 percent in GDP. The growth in 1996,
therefore, continues a major turnaround for the economies of these
countries, showing that recovery is firmly established and that growth
is liable to accelerate and spur the process of reform.
Inflation generally continued its downward trend, although it
increased in four countries -- Albania, Bulgaria, Croatia and Romania.
However, the hyperinflation of the early '90s has effectively been
vanquished; only Bulgaria had a 1996 inflation rate above 40%.
Through our assistance programs and policy dialogue, the U.S. has
actively encouraged the process of privatization throughout the
region. In all SEED countries, efforts to privatize state enterprises
have continued. The pace of privatization varied from country to
country by sector, but the overall trend was toward a larger role for
the private sector in all countries. In all but Slovenia and Bulgaria,
the private sector share of GDP now exceeds 50%.
Unemployment continued to decline generally, with no country (apart
from Bosnia) reporting an unemployment rate over 15% in 1995 (the last
year for which figures are available). Nine countries achieved an
unemployment rate below that of the European Union average (11.2%).
Most SEED countries maintain open political systems. Free and fair
elections are now the norm throughout the region, and were held in
several SEED countries during 1996. However, in Albania, international
observers considered the May 1996 parliamentary elections to suffer
from widespread irregularities. While the October 1996 municipal
elections were judged an improvement, we have seen in recent weeks
that we still have a very long way to go before we can consider
Albania's democratic roots to be firmly entrenched.
Problems continued to be noted in some countries regarding the
treatment of minorities and the extent to which the media are free
from government interference. Elections in early 1996 in Romania and
Bulgaria opened new opportunities for genuine reform. We are recasting
our assistance, and coordinating with other donors, to assure maximum
use of this perhaps one-time opportunity in these two countries.
FY 1998 BUDGET REQUEST
The Department of State is requesting $492 million for SEED for FY
1998. This is, on its face, an increase of $17 million over the FY
1997 appropriation, and it is incumbent upon the administration to
explain, in these times of budget stringency, why this increase should
be approved.
Of the $492 million, $225 million will be allocated for Bosnia
reconstruction and reform programs, and a further $25 million for
activities in the region related to implementation of the Dayton Peace
Accords. This leaves $242 million for the ten other recipients, a
decrease of $18 million from the FY 1997 level and $31 million from FY
1996. This reduction is in spite of the fact that we had not budgeted
any funding for the stretched-out program in Latvia, for example.
I believe this trend, together with our planned country graduations,
maintains the fidelity of our compact with Congress: SEED is
transitional; we can be successful in influencing economic and
political reforms; and, with success, we'll get out of the assistance
relationship.
The Northern Tier Countries
The SEED program began in the Northern Tier. The countries there have
come the farthest in the transition to fully democratic and free
market societies. We anticipate that, by the end of FY 1998, Estonia,
Latvia, Lithuania, Slovenia, the Czech Republic, and Hungary will have
graduated from our bilateral assistance relationship, although they
may continue to participate in certain follow-up or other programs
addressing regional issues. This will permit needed funding to shift,
in a relative sense, to the Southern Tier, which got a later start on
the road to reform.
In Hungary, we will emphasize fiscal reform and democratization as the
privatization energy and private sector enterprise development
objectives approach completion. The program in Latvia has been
extended through 1998, to concentrate on capital market reform,
citizen participation, and energy sector regulation. Lithuania is
expected to receive resources focusing on reform of the fiscal and
financial sectors as well as continuing efforts in NGO development and
strengthening of local government. The SEED program in Poland will
focus through the last year of funding in FY 1999 on three objectives:
private enterprise development, financial sector efficiency; and local
government effectiveness, responsiveness, and accountability. With
over 60% of GDP privatized in Slovakia, our closeout program, also
through FY 1999, will have a strong focus on democratization and the
environment.
The Southern Tier Countries
The commitment of countries in the Southern Tier to economic and
democratic reform has been, for the most part, less than that of the
Northern Tier states. Accordingly, they have gotten off to a slower
start and have received a much smaller share of SEED resources than
the Northern Tier. Increased resources in the Southern tier, as
Northern Tier programs draw down, are now timely and needed.
Forty-five percent of the non-Bosnia SEED budget is thus allocated to
the Southern Tier in FY 1998, up from 35% in FY 1996.
Albania's FY 1998 share increases due to relatively greater need and
U.S. interest in promoting democratization, especially in light of the
continuing unrest there. Indeed, the destructive, anarchistic rampages
of March have led to a full, ongoing review of our Albanian assistance
program. In concert with other donors and the international financial
institutions, we anticipate resuming assistance, along with
reconstruction and limited humanitarian assistance to offset the
effects of the economic collapse and the emerging political situation.
It is likely we will need further discussions of this particular
program with this committee in the weeks ahead.
Economic collapse in Bulgaria, which precipitated political change,
gives us the opportunity to revise our program and make it more
effective. Grassroots efforts supporting private sector enterprises,
citizen participation/NGO strengthening, and local government will
constitute the core of the new program.
The increased level in Croatia reflects the need to support economic
reform and reconciliation efforts in Eastern Slavonia, with the
country-wide program concentrating upon democracy programs and
financial sector reform. Assistance in FYROM will be focused on legal
system development, private sector enterprise development, and citizen
participation. The program in Romania has been adjusted in light of
its new reform-minded government, and will see resource shifts to
democracy and environmental health programs while maintaining the
emphasis on energy sector reform, which is critical to its long-term
growth prospects. The South Balkan Development Initiative will
continue to support regional transportation infrastructure
development.
Bosnia
The administration is requesting $200 million in FY 1998 as a third
tranche fulfilling the President's commitment for Bosnia economic
reconstruction. An additional $25 million is required to assist in the
development of democratic political instructions and a free market
economy in Bosnia and to fund the International Police Task Force
(IPTF) as well as longer-term and more traditional SEED activities. A
further $25 million is requested for programs related to the Dayton
Process but external to Bosnia itself. The longer-term reconstruction
assistance package includes:
-- Reconstruction finance, focusing on small- and medium-sized
businesses;
-- Municipal infrastructure and services, including social services;
-- Economic transformation, including privatization, banking reform,
budget and taxation systems, customs, capital markets, and
legal/regulatory reform; and
-- Democratic reforms, including dispute resolution, human rights
monitoring, independent media, public administration,
elections/political process, NGO development, civic education, and
judicial reform.
Federal Republic of Yugoslavia (Serbia and Montenegro)
If and when there is satisfactory progress/compliance by the FRY
permitting the lifting of the outer wall of sanctions (which include
restrictions on USG assistance and prohibition on membership in
international financial institutions and international organizations),
a modest assistance program -- focused on development of a free market
economy and building on an enhanced democratization program begun in
FY 97 -- would be merited. In the meantime, and following
Congressional consultations, we mounted a modest democracy program in
Serbia and Kosovo of less than $1 million in FY 1996 and $2 million in
FY 1997. Increasing formal assistance to the $10 million level would
be consistent with U.S. interests in the FRY, the size, condition, and
promise of the Serbian economy; and the needs of democratic reform. A
$2 million program in Kosovo would also be desirable, assuming a
modest level of receptivity of the Belgrade authorities to permit the
USG to operate a comprehensive assistance program.
CONCLUSION
The process of reform and integration in Central Europe must continue.
U.S. assistance is vital to that process. The SEED program represents
the fulfillment of the long-standing U.S. pledge to welcome the
countries of Central and Eastern Europe into the West once the Soviet
yoke was broken. Even in a time of limited resources, it is essential
to maintain the vitality and momentum of the highly successful SEED
program while responding to the special requirements of Bosnian
reconstruction.