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Europe & Eurasia
The Development Challenge
The Foreign Policy Context From the collapse
of the Berlin Wall to the post-September 11, 2003 war on terrorism,
the United States has continually supported Europe and Eurasia's
(E&E) transition to democratic freedom and economic opportunity.
A peaceful and growing E&E region expands possibilities for
U.S. trade and investment - including commercial access to
oil and gas reserves - and encourages the integration of these
countries into regional organizations and global markets.
The United States also looks to the E&E region for cooperation
on a range of critical national security issues, ranging from
support for the international coalition in Afghanistan and
Iraq to the future make-up and viability of trans-Atlantic
institutions.
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President Bush's National Security Strategy emphasizes development,
diplomacy, and defense as the fundamental pillars of U.S.
foreign policy. In the E&E region, USAID is implementing the
National Security Strategy by focusing on three strategic
areas: economic restructuring and growth, promotion of democracy
and governance, and the amelioration of the social impacts
of the post-communist transition. USAID's work has the goals
of promoting peace and prosperity in the strategically important
E&E region.
Transition Status and Obstacles The U.S.
Government has always assumed that assistance to the 27 country
E&E region would be temporary, lasting only long enough to
ensure a sustainable transition to market-oriented democracies.
While this goal has been met in selected countries, most countries
in the region have not fully achieved it, both in democratic
and socio-economic terms. Continued failure to achieve this
goal of sustainable transition would leave the region vulnerable
to instability. U.S. Government engagement confronts high
priority national security concerns such as HIV/AIDS, international
organized crime, and trafficking in persons, arms and drugs,
which have implications far beyond the borders of the E&E
region.
Already, USAID has helped facilitate extraordinary progress
across the E&E transition area.
- The private sector share of GDP in the E&E region has
risen from 12% in 1990 to 62% in 2002.
- After years of economic contraction, the region has recorded
positive growth since 2000, and most states today can be
characterized as market, rather than command, economies.
- As of 2002, Freedom House ranks 21 of the former communist
states as free or partly free, and only two (Turkmenistan
and Belarus) as not free. A return to communism in most
E&E countries is highly unlikely.
- Responsive social protection systems have emerged in most
of the European northern tier countries.
- E&E countries are integrating into regional and global
organizations. To date, 17 have gained membership in the
World Trade Organization (WTO); eight are on track for European
(EU) membership by 2004, with two more by 2007; and ten
will have become members of NATO by 2004.1
- Overall, performance has been sufficiently good that the
European northern tier countries of Central and Eastern
Europe (CEE) have graduated from major levels of U.S. bilateral
assistance,2 and USAID Missions
in several other E&E countries, most notably Bulgaria, Croatia,
and Russia, are moving towards a similar phase-out process
1Those that have joined the
WTO are: Albania, Armenia, Bulgaria, Croatia, the Czech Republic,
Estonia, Georgia, Hungary, Kyrgyzstan, Latvia, Lithuania,
Macedonia, Moldova, Poland, Romania, Slovakia, and Slovenia.
The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland,
the Slovak Republic, and Slovenia will join the EU in 2004.
Bulgaria and Romania are expected to accede by 2007. Those
that have joined NATO are: Hungary, Poland, and the Czech
Republic; while Bulgaria, Estonia, Latvia, Lithuania, Romania,
Slovakia and Slovenia are poised to enter in 2004.
Still, there is much unfinished business within the region.
In contrast with the Northern Tier, the Southern Tier CEE
and Eurasia differ widely in development status, especially
Eurasia.3
On balance, the Southern Tier CEE has been making impressive
progress in reform, finding itself somewhere between the Northern
Tier CEE and Eurasia in terms of economic and social development.
At one end of the reform spectrum, progress has been sufficiently
good that Bulgaria and Croatia are candidates for phase-out
of USAID assistance. Also in the CEE Southern Tier, areas
of the former Socialist Federal Republic of Yugoslavia - Bosnia-Herzegovina,
Macedonia, Kosovo, and Serbia and Montenegro - are recovering
from the ethnic conflicts of the 1990s and other related economic
disruptions and making progress towards Euro-Atlantic integration.
Albania similarly is working on an ambitious reform agenda.
While considerable reform progress has been made in Eurasia,
there is much yet to be accomplished before the transition
can be considered sustainable. Of particular concern is that
since the collapse of the Soviet Union, democratic freedoms
have stagnated and, in some instances, declined in most of
Eurasia. While economic growth since 2000 has been the highest
in Eurasia, much of it is not sustainable, as it is driven
by high prices for commodity exports (energy, metals, and
cotton) and devaluations in the aftermath of 1998 Russian
financial crisis. The most alarming trend may be the growing
health gap between the CEE and Eurasian countries, which have
the highest under-five mortality rates in the transition region,
declining life expectancies, and the highest gender differences
in life expectancy worldwide.
2 The Northern Tier Central
European countries that have graduated from USAID assistance
include: Estonia (1996), Slovenia (1997), Czech Republic (1997),
Hungary (1999), Latvia (1999), Poland (2000), Lithuania (2000),
and Slovakia (2000).
3 The CEE southern tier includes
Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Macedonia,
Romania, Serbia-Montenegro, and Kosovo. The Eurasian countries
are Belarus, Moldova, Russia, Ukraine, Armenia, Azerbaijan,
Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan,
and Uzbekistan.
The State/USAID Joint Strategic Plan and the E&E
Strategy To better integrate the new focus on development
in the U.S. National Security Strategy with other U.S. foreign
policy objectives, the U.S. Department of State and USAID
developed a Joint Strategic Plan. The E&E Bureau is focusing
on three of the Plan's twelve strategic goals: a) democracy
and human rights, b) economic prosperity and security, and
c) social and environmental issues. USAID programs in the
E&E region also advance the joint strategy's strategic goals
of humanitarian response, regional stability, and the promotion
of international understanding.
Democracy and Human Rights: Democracy and
human rights efforts received 36% of USAID's E&E Bureau resources
in FY 2003. The entire E&E region is making headway in the
development of advocacy NGOs; a strong civil society, a focus
of USAID programming, provides a check on repressive political
leadership. Democratic reforms are moving forward in the Southern
Tier CEE, and most countries in this group are catching up
to the Northern Tier CEE. Notwithstanding the progress in
civil society, democratic reforms are lagging in Eurasia.
The recent popular rejection of a stolen election in Georgia
is one of the few positive developments in that region. Enhancement
of the rule of law, particularly in terms of protecting human
rights and guaranteeing civil liberties, is an important element
of USAID's democracy work and includes ensuring the rights
of minority groups and other disadvantaged elements of the
population. Other key elements of USAID's democracy strategy
consist of promoting free and fair elections, independent
media, political party development, and municipal governance.
Combating trafficking in persons, including its prevention
and the protection of its victims, and the promotion of democracy
in historically Islamic areas are other areas of emphasis.
Economic Prosperity and Security: In FY
2003, roughly 42% of USAID E&E Bureau's resources were targeted
to programs in the economic transition arena, including promoting
effective economic governance, competitive products and financial
markets, and efficient and reliable infrastructure systems.
A large number of E&E transition countries have implemented
major macroeconomic reforms that are producing results. Inflation
has come down and is in single-digit levels in most countries.
Vibrant and more inclusive private sectors have emerged in
both the Northern and Southern Tier CEE. Most recipient countries
are increasingly integrating into global markets. USAID is
working to increase transparency within the region's energy
sector by ensuring that tariffs are collected and returned
to the operation of utilities. USAID also works to create
jobs through small and medium enterprise development, competitiveness
initiatives that marry macroeconomic reforms to the microeconomic
foundations for business expansion, agri-business development,
rationalized financial sectors, and work in anti-corruption
and business ethics.
Social and Environmental Issues: Seventeen
percent of USAID's E&E Bureau allocations in FY 2003 went
to support social transformation and environmental engagement.
Due in part to recipient country governments' low budgetary
emphasis on social issues and wide variation in economic reform,
performance has been mixed. Social indicators are improving
in the Northern and Southern Tier CEE and deteriorating in
Eurasia. USAID has aggressive programs to combat the spread
of HIV/AIDS and tuberculosis, to address the causes of infant
and child morbidity, and to promote women's reproductive health.
HIV/AIDS has been especially virulent in Russia, which is
recording one of the steepest rises globally. USAID also is
working to give citizens the skills and capabilities they
need to meet the labor demands of the private marketplace.
In addition, USAID will pursue programs in the cross-cutting
areas of the promotion of values/social capital, anti-corruption,
and combating trafficking in persons. USAID has always recognized
that sustainable development is strongly supported by widespread
acceptance among the beneficiary population of certain values
necessary to the fair and efficient functioning of the state
and the economy. Examples of these values include: respect
for personal freedom, the sharing of power democratically,
respect for private property, and economic freedom within
the rule of law. Corruption is endemic to much of the transition
region, undermining the achievement of prosperity, democracy,
and stability. The E&E Bureau is taking an integrated approach
to combating corruption, targeting the key elements of transparency,
accountability, awareness, prevention, and enforcement across
the program portfolio. Trafficking in persons is an abuse
of human rights that is also a highly lucrative, illegal,
and dangerous business. USAID combats trafficking through
its democratic, economic, and social sector programs. All
E&E countries are source and transit countries and some are
becoming destination countries as well.
External Debt While external debt levels
and burdens vary widely in the transition region, they generally
remain manageable in most countries. The countries of greatest
concern are the five relatively poor Eurasian countries where
the debt service ratio (annual debt service as a percent of
annual exports) is very high: the Kyrgyz Republic (341%),
Tajikistan (321%), Moldova (203%), Georgia (189%), and Armenia
(168%). With the exception of Georgia, these ratios are higher
than those in 1995. Total debt as a percent of GDP, another
indicator of the debt burden, is highest in the Kyrgyz Republic
-- 135% of GDP in 2002. Some concerns also exist in CEE as
these countries move towards EU membership. Two CEE countries
scheduled for EU accession in 2004 exceeded the Maastricht
debt ceiling of 60% of GDP during 2002: Latvia (83%), and
Estonia (72%). While Bulgaria will not accede to the EU in
2004, it also exceeds the Maastricht criteria with a debt
level of 70% of GDP.
Program and Management Challenges
USAID is adjusting the ramp down of programs and budget levels
as E&E countries reach sustainable and irreversible reform
thresholds. Through this period USAID is working to enhance
its focus on building alliances with the private sector. Already,
a number of alliances have been developed, and additional
alliances will be encouraged through the establishment of
a $15 million Global Development Alliance-incentive fund for
the E&E region. USAID will also work to enhance E&E countries'
access to Millennium Challenge Account funds.
On the management side, E&E Bureau continues to implement
improvements and reforms. Chief among these are the workforce
and staffing assessments that have been carried out over the
past year. These are being used to allocate workforce and
OE in a manner that enables its overseas missions to maximize
the benefits that their programs produce for their countries'
populaces. As part of the State Department/USAID Joint Policy
Group work plan, the E&E Bureau will work to enhance its close
long-standing relationship with the Department of State's
Office of the Coordinator for Assistance to Europe and Eurasia
to coordinate policy, strategy, results reporting, budget
and management.
Other Donors The United States is the largest
bilateral donor in Eurasia, followed by Japan and Germany.
USAID also collaborates with the ADB on activities in the
Central Asian Republics. In CEE, the EU is the largest donor,
contributing about three times what the United States contributes.
EU programs include technical assistance to transition countries
in Europe (PHARE) as well as Eurasia. The United States is
the single largest bilateral donor to CEE, followed by Germany,
France, Austria, and the Netherlands.
Since reaching a peak of $8.6 billion, other donor flows
(net disbursements of official development assistance from
OECD countries) to the E&E region have been declining since
1999 to stand at roughly $8 billion. The pattern of decline
in other donor assistance occurred in each sub-region and
was true of both multilateral and bilateral donors, including
the European Union (EU), World Bank, European Bank for Reconstruction
and Development, Asian Development Bank (ADB), European bilateral
donors, and Japan. The largest declines in this type of donor
support have occurred in countries that will imminently be
members of the EU.
FY 2005 Program
The FREEDOM Support Act (FSA) FY 2005 request level for Eurasia
totals $550 million to fund USAID and other USG agencies'
programs in the economic, democratic, and social transition
areas. The FY 2005 FSA request is an approximately 8% decrease
from the FY 2004 level. The FY 2005 SEED Act request level
is $410 million, a decrease of 8% from the FY 2004 level.
Proposed SEED and FSA funding includes other USG agencies
that manage technical cooperation programs using inter-agency
transfers from USAID such as the Departments of Agriculture,
Commerce, Energy, State, and the Treasury.
In addition, the FY 2005 request includes $75.5 million in
Economic Support Funds. In recognition of its role as a frontline
state in the war against terrorism, Turkey will receive a
$50 million allocation for debt-servicing and economic stabilization.
To promote reconciliation and conflict resolution, USAID is
requesting $13.5 million for Cyprus and $12 million for Ireland.
To support the Democracy and Human Rights goal, $254.5 million
in SEED funds and $178.3 million in FSA allocations are requested
to pursue programs focusing on the empowerment of the citizenry
via interventions in the areas of the transparent conduct
of elections, rule of law, civil society advocacy, independent
media, political party development, and municipal governance.
To buttress the Economic Prosperity and Security goal, allocations
of $108.5 million in SEED funds and $199.3 million in FSA
monies are proposed to support broad-based economic growth
via transparent and accountable economic governance, SME development,
agri-business promotion, financial sector reform, work in
anti-corruption, and energy sector rationalization. Competitiveness
and jobs creation will be important emphases.
The FY 2005 request for Social and Environmental Issues is
$44.3 on the SEED side and $143.8 million on the FSA side.
These funds will target (a) infectious diseases including
HIV/AIDS and TB, maternal and reproductive health and child
survival focusing on mothers and children, (b) human capital
inventories and workforce planning to ensure that a minimum
level of management and technical expertise is in place to
compete globally, and (c) the roles and responsibilities of
the public, private, and NGO sectors in financing and delivering
social services.
Finally, the FY 2005 request for the Humanitarian Response
goal provides $2.7 million in SEED monies and $28.6 million
in FSA funds. The allocations will promote inter-ethnic dialogue
and cooperation and facilitate the transition from emergency
relief to more traditional development programs.
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