FROM THE OFFICE OF PUBLIC AFFAIRS

Good afternoon.

The nations that have emerged from the former Soviet Union are among the most promising and dynamic in the world, teeming with human talent and economic potential. On my tour this week through several of those nations – Ukraine, the Kyrgyz Republic, Uzbekistan, and Georgia – I plan to see for myself the results of a decade of economic and political reform, and see the considerable challenges that remain. I expect to see gains, and also disappointments.

By coming here, I hope to understand how the United States and our international partners can best help your leadership to build on those gains, and overcome the great challenges that remain, so that the people of Eastern Europe and Central Asia can enjoy the rewards of the global economy, and build prosperity at last.

I am not here to write prescriptions, or give a "how-to" course on economic development – there’s no such thing, and I wouldn’t presume to have the answers. I am here to listen, and learn from your experience. At the same time, I want to share what we have learned from around the world, and help apply those lessons to your unique situations. In particular, I want to emphasize the key principles of economic development: just rule, economic freedom, and investment in people.

Your nations – your people – are important to the United States. We hold a mutual interest in international security, including the war on terrorism and the fight against weapons of mass destruction. And true security depends on more than military might, intelligence, and arms control – it depends on a shared stake in the future of the global economy, ties of trade, investment, and enterprise. It depends on common values of political and economic freedom, even as we respect diverse cultures and appreciate historical traditions.

There are many differences among our nations, and great differences among the many nations of this part of the world. But in my travels to every part of this globe, as a private sector leader and a government official, I have witnessed three common principles that are beyond dispute.

The first was best expressed in the American Declaration of Independence, which we celebrated last week: all people are created equal. It is self-evident. People everywhere can do great things when they have the tools and incentives for success.

The second is that with leadership – honest, accountable, and committed to progress – everything is possible. Without leadership, nothing is possible.

The third is that a flourishing private sector drives sustainable growth, higher incomes, and a rising standard of living for everyone. Governments can create environments for growth, but the private sector drives it.

Knowing these principles, I can also say this: the gap between the enormous potential of this region compared to real performance has been unacceptable. Goals can and should be set high. A few points of growth each year or spurts of high growth interspersed with declines are not enough to achieve prosperity.

The road from the former Soviet Union has been difficult. After more than ten years of transition experience, this is the time to take stock, to look critically at what has worked and what has not. This is the time for accountability and results. This is the time for leadership.

My visits this week and next will include meetings with national leaders. I will also visit businesses, large and small, nongovernmental organizations, schools, banks, farms, and Peace Corps projects. I will visit a village water project in the Kyrgyz Republic, a dam in Uzbekistan, and a maternity hospital in Georgia.

In these visits and others, I will be looking for examples of just rule, economic freedom, and human investment, especially in clean water, primary education, and health care. I will also look for examples of new private enterprise, which drives economic growth. I will look for civic engagement which is fundamental to a vibrant democracy. These are the ingredients for success that I saw in my recent trip to Africa and my previous trips to Russia and Romania, and while the details will vary in Europe, Africa and Asia, the principles are constant.

Today I will focus my remarks on Ukraine’s progress in these areas.

First, regarding just rule. Countries that want to unleash private sector productivity and raise living standards practice good governance. They enforce law and contracts, respect human rights and property rights, and they fight corruption. The facts show that low income, high poverty rates, and low foreign direct investment correlate strongly with excessive regulation and government intervention, and weak property rights.

In some areas, Ukraine has taken bold steps. A little more than two years ago, Ukraine’s government failed to pay for goods and services. Businesses followed that example and failed to pay taxes. The government bartered its obligations for taxes. The result was an impossibly opaque and distorted economic system and low tax compliance, while wages and pensions went unpaid.

When the government took steps toward reducing barter and insisting on cash payments for taxes and energy, we saw a huge response in the economy, which started to confront budget constraints, market forces, and the need to create real value.

Ukraine’s government is now pursuing the next items on the good governance agenda: a fair, predictable tax system with low rates, uniformly applied, additional budget accountability, and judicial reform and contract enforcement. The word "contract," incidentally, does not appear in basic Ukrainian laws. Contracts must have meaning and courts must enforce them. When businesses must rely on special actions from political leaders to solve disputes, the whole country suffers.

Second, countries seeking economic growth must encourage and protect economic freedom. This includes removing barriers to trade – both internal and external – and opening the national economy to investment. It also includes allowing companies – especially small and medium size companies – to compete without excessive government interference.

Surely, the fall of the Soviet Union proved the folly of putting central planning over economic freedom, which is the heart of the free enterprise system.

Ukraine has made progress on improving the climate for the creation and growth of small and medium enterprises through deregulation and reduced inspections. As a result, the number of small businesses has grown by about 140,000 between 1999 and 2001 – an increase of 31%. But Ukraine still has a long way to go in improving economic freedom throughout the country.

Two areas are especially critical to establishing a foundation for prosperity: land reform and banking reform. A market-oriented banking system allocates capital based on creditworthiness, far more efficient than allocation based on political connections. Ukraine has made progress reducing state ownership of land, and largely as a result agricultural production has soared in recent years. Yet the potential is so much higher, here in the Bread Basket of Europe.

The third essential component of development is investment in people. That means targeting government spending where it can make the greatest difference for people, thereby enabling them to achieve their potential in the free enterprise system. Governments need to invest in clean water, primary education, and health care – especially the fight against AIDS.

These are the facts for Ukraine: The percentage of children completing primary education in Ukraine is 58%, about the same as in Kenya. Health care is weak. Life expectancy for men fell by three years between 1990 and 1999, and the rate of HIV infection is now 1.29%, already above the global average, and soaring rapidly. Intervention right now could avert disastrous infection levels.

Still, there is progress. Tomorrow I will visit a project to fight trafficking in women. Projects like these are encouraging because it shows that the Ukrainian people are willing to protect women and give them better alternatives so that they can achieve their potential.

In addition, through the Agency for International Development, the United States has been working with the Ukrainian government and various nongovernmental organizations to stem the rise of tuberculosis and HIV/AIDS. The fight against tuberculosis has focused on identifying systemic problems in drug management and health care diagnostic systems. For HIV/AIDS, we are helping to develop a national prevention program in Ukraine, which includes new programs for reaching at-risk youths in cities and distant regions.

Challenges in the Caucasus and Central Asia

Tomorrow I will leave here to visit three more countries: the Kyrgyz Republic, Uzbekistan and Georgia. While unique in culture and history, these countries share a Soviet past with Ukraine, and know the social and economic challenges of charting a new, independent course.

In the Kyrgyz Republic, 49% of the population lives on less than $2 per day; in Georgia and Uzbekistan 24% and 22% do. In the Kyrgyz Republic, just 66% of the rural population has access to clean water. In Georgia, secondary school enrollment has fallen sharply – by 30 percentage points between 1980 and 1998.

Each of these countries needs a healthy private sector, especially new small businesses and foreign investment, to move ahead. Former state enterprises cannot drive an economy. And without good governance, smaller businesses hide in the shadows, staying small to avoid attention from corrupt officials. Weak rule of law, corruption, and poor enforcement of contracts scare away domestic and foreign capital, and prevent individuals lacking political connections from making their full contribution to economic growth. And these countries need to think differently about water and energy. Reforms in these sectors will bring higher productivity and regional integration.

When I visit these countries I will address those issues, as well as call attention to local success stories.

But I will also point to Ukraine. Ukraine, at the nexus of Europe and Russia and on the cusp of Central Asia, is an important country in the region, especially with respect to its transition experience. Ukraine’s successes and setbacks can be important lessons for these countries to draw upon.

I will also emphasize how transition economies as different as China and Hungary have relied on trade to grow. Not just trade with rich countries such as the United States, but regional trade with their neighbors. Central Asia was once a crossroads for half the world, the center of the old Silk Road, and a hub for trade in all directions. It must become so again.

Over the last decade, the United States has worked with the international community to support the transition of Ukraine and all of the former Soviet states to market economies, with market institutions, and representative, democratic governments. Multilateral and bilateral assistance has helped put an end to hyperinflation, stabilize Ukraine’s economy, and lay the foundations for essential structural reform in agriculture, energy, banking, and the business environment. But substantial work remains to be done.

The United States, our partners, and the multilateral institutions cannot dictate solutions to local problems—not in Ukraine, or anywhere – we can only support dedicated local and national leaders as they make difficult decisions – decisions that are in the interest of the majority of the Ukrainian people, and not just for a privileged few.

I have long believed that small and medium businesses play an important role in this process -- not just in creating jobs and generating growth, but also in building institutions and shaping democracy.

• It is for these reasons that official development aid and financial assistance programs must target well-managed businesses that would not otherwise have access to capital. In particular, the European Bank for Reconstruction and Development is supporting micro and small lending operations in Ukraine, such as the creation of a dedicated microfinance bank in 2001. The U.S. has contributed $4 million to support the start-up of this bank and other partner banks. In 18 months, the Microfinance Bank has extended loans totaling $111 million. I will have the privilege of opening a branch of this bank tomorrow in Donetsk. By the end of 2003, our hope is that this branch will have made 7,500 loans totaling $55 million. The United States believes so strongly in this endeavor that it is mobilizing $3.4M for the expansion of these operations elsewhere in the region – to Georgia, the Kyrgyz Republic, and Uzbekistan.

Other U.S. initiatives, like our enterprise fund in Ukraine, make direct investments in business ventures and are making a big difference here. But success requires good corporate governance and strong shareholder rights, which the government must address. And private financial institutions in Ukraine have far more potential than they can realize today. This country lacks a legal basis for asset-backed lending such as mortgages and equipment leases.

But just as concrete results require tough decisions and good leadership on the part of the country, so too do they require responsibility on the part of the international community to insist that aid makes a meaningful contribution to the lives of the people it serves.

Since I became Treasury Secretary, I have been determined to reform the way in which the World Bank and the other multilateral development banks do business. They must improve the effectiveness of their assistance. Rather than focusing on inputs, I want them to focus on results. In Ukraine, the focus on results in recent years has in fact produced results. The international community worked with Ukraine to set explicit targets for cash collections in energy and for reducing wage and pension arrears. Reaching these targets brought real improvements in Ukraine’s budget and energy sector and set the stage for strong growth.

We know from simple observation that the people of Eastern Europe and Central Asia have the potential to reach a level of fulfillment and economic prosperity that matches the highest attainment in the world. But in the ten years since the break up of the Soviet Union the transition to that condition has been painfully slow. In some places, democracy and private enterprise are seedlings, their roots still shallow. Instability and extremism still threaten them.

But the attention of the world, and the United States, has turned to these regions, their vast potential for growth, and our common security interests. We are ready to help where responsible, accountable leadership is committed to sound policies: ruling justly, encouraging economic freedom, and investing in people. We also appreciate your efforts to fight the war against terror.

I believe that Ukraine can again be the breadbasket of Europe; and Central Asia can again be a hub for trade in all directions. Working together to achieve real results, we can unleash the human potential – we will not be satisfied with anything less.