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(text taken from the FY 2003 Congressional Budget Justification)

U.S. NATIONAL INTERESTS.

Assisting the transition countries of Europe and Eurasia (E&E) ¹ furthers U.S. national interests in security, freedom, open markets, justice, and the resolution of global issues. During 2001, U.S. assistance programs served the national interests of the United States in significant ways.

Security. Economic, political, and social stability mitigates conflict and the likelihood of war, decreases diversion of nuclear weapons, and enhances opportunities to secure U.S. commercial access and viable outlets for oil and gas resources. In 2001, the largest security issue in the E&E region was the beginning of the war on terrorism in Central Asia.

Freedom. Encouraging citizen participation and fair and transparent governance supports the historic U.S. commitment to democratic ideals and human rights. During the last year, the United States began the difficult work of consolidating and extending the democratic gains made in Southeast Europe in 2000.

Open Markets. Helping these countries reform their economies, develop private enterprises, and compete in global markets expands opportunities for U.S. trade and investment. To date, 15 of 27 countries in the region have achieved full membership in the World Trade Organization (WTO). This promises to expand exports for the region, which fell from 20% in 2000 to 10% in 2001. The lion's share of foreign direct investment continues to go to a handful of European northern tier countries. For many of the transition countries, the ability to attract foreign investment continues below potential and will only improve as they restructure their economic and political systems.

Justice. The development of transparent legal frameworks and support for strengthened rule of law foster improved governance and greater public sector credibility. They also promote international investor confidence and help countries systematically address crime and corruption. Funding transfers to the State Department and Justice Department are aimed at improving law enforcement skills and technologies, including combating international crime and terrorism.

Global Issues. Although the global issues cited in 2000 (HIV/AIDS and infectious disease) remain critical, the overwhelming global issue to emerge in 2001 in the region is terrorism. The Central Asian Republics of Uzbekistan, Tajikistan, Turkmenistan, Kyrgyzstan, and Kazakhstan are playing a critical role in the war on terrorism. To support them in that effort, increased budget resources have been allocated to USAID for a variety of programs, including HIV/AIDS and infectious disease, but extending to programs to mitigate conflict and improve democratic development in the region. Such programs help reduce threats to stability, such as social unrest due to poverty, lack of employment opportunities, and inadequate social and communal services.

DEVELOPMENT CHALLENGE.

Transition Status and Obstacles

The development challenge in the E&E region remains one of transforming previously authoritarian, centrally planned societies into participatory democracies with strong market economies. Since the beginning of the transition in 1989, remarkable changes have occurred. The private sector now accounts for about 65% of Gross Domestic Product (GDP) throughout the region and Freedom House ranks 11 of the 27 formerly totalitarian E&E countries as free and 11 as partly free.

Thirteen years of experience reveals, however, that the region's transition cannot be accomplished quickly nor without setbacks, and ending U.S. assistance prematurely would undermine transition goals. Under Congressional directives, limited assistance activities were undertaken in the Baltics and Slovakia, countries whose USAID missions were closed. No USAID missions were closed in 2001.

Key economic and political institutions are still weak, and corruption is widespread. Ethnic clashes in the Former Yugoslav Republic of Macedonia escalated in 2001, causing temporary withdrawal of some USAID personnel. In Eurasia, Ukraine and Russia registered progress in economic reform, but key democratic indicators across the region lag. The lack of democratic progress in the Central Asian Republics was thrown into sharp focus as they gained new international visibility in the war on terrorism.

Regional Strategy and Linkages to USAID's Four Pillars

While policy reform, institutional development, and broad-based citizen participation are at the core of the E&E program, both regional and bilateral, USAID develops cross-sector approaches to address critical obstacles and changing circumstances in the region. During FY 2002 - FY 2003, these include: developing conflict mitigation programs to support the war on terrorism as well as to contribute to a better climate for reform, further developing social sector initiatives to broaden the benefits of reform and thereby sustain public support for it; and continuing to fight corruption on many fronts.

E&E sector programs support Agency goals and are highlighted within the context of USAID's four pillars: Economic Growth, Agriculture and Trade; Democracy, Conflict Prevention and Humanitarian Assistance; Global Health; and the Global Development Alliance.

Economic Growth, Agriculture and Trade: Half of USAID E&E resources were targeted to economic and related reforms during FY 2001. The program's focus is on development of market systems, and performance in this area is strong. Per capita foreign investment flows, while improving overall, have been ten times higher in the European northern tier than in Eurasia. Land reform continues to be the USAID's most significant contribution to agricultural development in the E&E region.

Democracy, Conflict Prevention and Humanitarian Assistance: About 42% of USAID resources to the region were allocated to this pillar during FY 2001. Increasingly, USAID is integrating conflict prevention modules into strategies in countries at-risk, such as Macedonia, Georgia, and the republics of Central Asia.

Global Health: In FY 2001, about 8% of USAID resources were allocated to health priorities in the region, including HIV/AIDS, infectious disease control, and maternal-child health. According to UN statistics, the steepest rise in new HIV infections worldwide took place in the former Soviet Union, most of it linked to illegal drug use. The introduction of community-based, primary health care practices has upgraded the clinical skills of family physicians, achieved cost-efficiencies, saved lives, and reduced the number of abortions.

Public-private Alliances: Currently, public-private alliances operating in the region include Enterprise Funds, the American International Health Alliance, and the Baltic American Partnership Fund. Building on this experience, USAID is developing new ways to engage present and potential partners.

External Debt

For most of the region, the volume of external debt remains manageable. While the ratio of external debt to exports has increased in many countries, the debt burden is manageable for most. For example, the ratio of external debt to exports increased in the region overall from 123% in 1996 to 137% in 2000, yet debt service (or debt payments as a percentage of exports) was 14% in 2000 regionwide (vs. 21% in Less Developed Countries (LDCs)). Debt service has been the highest in the Central Asian Republics (Kyrgyzstan and Uzbekistan 26%, Turkmenistan 22%) and Moldova, 22%.

PROGRAM AND MANAGEMENT CHALLENGES.

USAID approaches differ with each of the three sub-regions of Europe and Eurasia.

Southeast Europe: Promoting Stability through Regional Integration

In Southeast Europe, USAID focuses on mitigating conflict, supporting democratic processes, furthering economic reforms, and promoting regional cooperation among these countries and their speedy integration into Europe proper. A major management challenge for FY 2003 will be accomplishing these objectives under conditions of large budget reductions from FY 2002 in several countries.

Europe Northern Tier: Maintaining the Legacy

In the European northern tier, where there are no longer USAID missions, legacy mechanisms are grant-making funds, managed by private foundations, such as the Baltic-American Partnership Fund.

Eurasia: Staying the Course and Broadening the Benefits of Reform.

Progress on democratic transition and economic restructuring in Eurasia is a longer-term challenge, requiring a balance between a steady course on advancing reform at the national level and tailoring assistance programs to work with reformers at all levels of society. The differing rates of progress between economic and democratic reform also challenge the belief that the two are inevitably linked and may require the development of more creative approaches to democracy-building. An important objective is to reduce the potential for conflict and terrorism while promoting human rights and democratic freedoms and strengthening economic opportunities in Central Asia.

OTHER DONORS.

Principal partners include the European Union's programs for technical assistance to transition countries in Europe (PHARE) and Eurasia (TACIS), the World Bank, European Bank for Reconstruction and Development (EBRD), European bilateral donors, and Japan. Based on the latest available information for official development assistance (1999), the United States stands out as the largest bilateral donor in Eurasia, followed by Japan and Germany. USAID also partners with the Asian Development Bank on activities in the Central Asian Republics. In Europe, the European Union is the largest donor, with a contribution about four times that of the United States, which is the second largest bilateral donor after France. In 2000, European donors stepped up their assistance to Southeast Europe, but "burden-sharing" continues to be a major foreign policy issue for the U.S. Government.

FY 2003 PROGRAM.

The FREEDOM Support Act (FSA) request level for Eurasia totals $755 million to fund continuing programs of USAID and other agencies supporting economic and democratic transition and the war on terrorism.

The Assistance for Eastern Europe and the Baltic States Act (AEEB) request level totals $ 495 million, a reduction of over 20% from FY 2002. The lower levels will require considerable adjustments to USAID's development strategies and programs in the region.

Under the Agency's Economic Growth, Agriculture and Trade area, USAID proposes $ 194.5 million under AEEB and $ 416.9 million under FSA to foster the emergence of competitive, market-oriented economies in which the majority of economic resources is privately owned and managed. USAID programs will place increasing emphasis on partnerships, assistance to small and medium enterprises, and corruption. Energy and environment programs are also included under this rubric, as well as a new initiative to help mitigate the social costs of transition through such activities as social insurance reform, employment generation, and education reform.

Under the Agency's Democracy, Conflict and Humanitarian Assistance area, USAID proposes $287.8 million in AEEB funds and $274.6 million under FSA to respond to humanitarian crises, facilitate the transition from emergency relief to more traditional development programs, and support transparent and accountable governance and the empowerment of citizens through democratic political processes and freedom of information. USAID also proposes use of $44 million in Economic Support Funds (ESF), including $29 million for Ireland and $15 million for Cyprus to promote reconciliation and conflict resolution.

Under the Agency's Global Health area, USAID proposes $12.6 million in AEEB funds and $ 63.5 million under FSA to fight the spread of infectious diseases, including HIV/AIDS and tuberculosis, and improve primary health care practice.

Proposed AEEB and FSA funding under the economic growth and conflict prevention areas include other USG agencies participating in technical cooperation programs through inter-agency transfers from USAID, such as the Departments of State, Justice, Energy, Treasury, Agriculture, and Commerce, and the Environmental Protection Agency.

The E&E bureau has no regular, non-emergency P.L.-480 funds in the FY 2003 request year.