Moving Beyond Assistance

MOVING BEYOND ASSISTANCE

FINAL REPORT OF THE IEWS TASK FORCE ON WESTERN ASSISTANCE TO TRANSITION IN THE CZECH AND SLOVAK FEDERAL REPUBLIC, HUNGARY AND POLAND (Revised Edition)

Members of the Task Forcé: Raymond Barre (France) Stephen B. Heintz (USA) William H. Luers (USA) John Edwin Mroz (USA) Krzysztof J. Ners (Poland) Jerzy Osiatynski (Poland) Michael Palmer (UK) István Salgó (Hungary) Anthony Solomon (USA) Judita Stourafcová (¿SFR)

The Report was written by: Krzysztof Ners, with Arjan van Houwelingen, Michael Palmer and Kate Storm Steel

O Routledge Taylor & Francis Group

LONDON AND NEW YORK

Stirín, June 1992 First published 1992 by Westview Press

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ISBN 13: 978-0-367-01109-3 (hbk) GLOSSARY OF ACRONYMS

ACC - Assistance Coordination Council BIS - Bank for International Settlements CMEA - Council for Mutual Economic Assistance COCOM - Coordinating Committee for Multilateral Export Controls CSCE - Conference on Security and Cooperation in Europe CSFR - Czech and Slovak Federal Republic DAC - Development Assistance Committee of the OECD EBRD - European Bank for Reconstruction and Development EC - European Community ECE - Economic Commission for Europe of the UN ECOSOC - Economic and Social Committee of the EC ECSC - European Coal and Steel Community ECU - European Currency Unit EFF - Extended Financing Facility EFTA - European Free Trade Association EIB - European Investment Bank FY - Fiscal Year G-7 - Heads of State or Government of the seven major industrial countries G-10 - Central Bankers plus Finance Ministers of the G-7 and Sweden, Switzerland and Benelux G-24 - 24 OECD members taking part in the assistance initiative (twelve EC member states, the six EFTA countries, Australia, Cañada, Japan, New Zealand, Turkey and the United States) GATT - General Agreement on Tariffs and Trade GDP - Gross Domestic Product GDR - Germán Democratic Republic GEV - Grant Equivalent Valué GSP - General System of Preferences IAEA - International Atomic Energy Agency IBRD - International Bank for Reconstruction and Development (the World Bank) IEWS - Institute for EastWest Studies IFC - International Finance Cooperation IFI - International Financial Institution IMF - International Monetary Fund ILO - International Labour Organization of the UN LDC - Less Developed Country NATO - North Atlantic Treaty Organization NGO - Non-Governmental Organization OECD - Organization for Economic Cooperation and Development OEEC - Organization for European Economic Cooperation PHARE - Poland and Hungary: Assistance in Restructuring Economies SAL - Structural Adjustment Loan SDR - Special Drawing Rights (created by the IMF) SIGMA - Support for Improvement in Governance and Management UN - United Nations UNIDO - United Nations Industrial Development Organization USAID - United States Agency for International Development CONTENTS

FOREWORD Page iii

I. INTRODUCTION Page 1

II. THE CONTEXT FOR WESTERN ASSISTANCE Page 5

Initial Euphoria: Sober Realities The Challenge of Economic Transformation An Uneasy Mix: Stabilization and Structural Transformation Extemal Challenges to the Reform Effort Internal Challenges Redefining Western Security Ecological Jeopardy Investing in a Common Future

III. DEFINITION AND FORMS OF WESTERN ASSISTANCE Page 13

What is Assistance? Forms of Western Assistance to Transition Comparative Views

IV. EXPERIENCE OF WESTERN ASSISTANCE TO DATE Page 19

The G-24 Initiative Western Assistance Commitments Different Forms of Assistance Multilateral Assistance Bilateral Assistance Non-Reimbursable Aid Non-Economic Assistance The Role of Prívate Funding Mechanics of Prívate Funding Humanitarian and Emergency Assistance The Recipients’ Perspective

V. DISBURSEMENT AND ABSORPTION Page 38

Organization of the Assistance Process Competition and Conditionality Disbursement to Date Absorption Impediments to Absorptive Capacity

VI. CONCLUSIONS AND PRINCIPLES GOVERNING WESTERN Page 48 ASSISTANCE VII. RECOMMENDATIONS Page 53

VIII. THE ASSISTANCE COORDINATION COUNCIL Page 65

Structure and Goals Funding of the ACC Proposal to the G-7

IX. LESSONS FROM THE THREE COUNTRIES’ EXPERIENCE Page 73 FOR THE OTHER POST-COMMUNIST STATES AS THEY ENTER TRANSITION

APPENDIX 1. Grant Equivalent Valué (GEV) Page 78 APPENDIX 2. Notes on Task Forcé members and other contributors Page 79

TABLES, GRAPHS AND FIGURES

T ah le 2 .1 Recession Indicators for the CSFR, Hungary and Poland Page 7 Table 4.1 IMF Arrangements with the CSFR, Hungary and Poland in 1991 Page 24 Table 4.2 Financial Commitments of the World Bank to the CSFR, Hungary Page 25 and Poland Table 5.1 Disbursement Rates 1990 (percentage of commitments) Page 42 Table 5.2 Disbursement Rates of G-24 Assistance Page 43

Graph 4.1 Total Assistance by Type of Assistance Page 21 Graph 4.2 Total Assistance by Sector of Destination Page 22 Graph 4.3 Shares of Multilaterals and Bilaterals in Western Assistance Page 26 Commitments Graph 4.4 Total Bilateral Commitments broken down to show Individual Page 28 Donor’s Shares Graph 4.5 Total Bilateral Grants broken down to show Individual Page 29 Donor’s Shares

Figure 1 Central European Assistance Pyramid Page 23 Figure 2 Function of the ACC within the Area of Assistance Coordination Page 71 Figure 3 ACC Organigram Page 72 FOREWORD

The reaction of the international community to the release of the provisional text of this Report on May 7, 1992 in Bonn, Warsaw, Prague and Budapest has been immediate and gratifying. We are indebted to the Western as well as Czechoslovak, Hungarian and Polish leaders, experts and journalists who have studied this Report and responded to it, giving us new, unpublished or hitherto unavailable information, as well as making constructive comments on policy recommendations. We welcome all the suggestions made since the release of this provisional text. Suggestions we consider particularly constructive include the immediate need for on-the-spot coordination in each country to complement an effective international coordinating body such as the one advocated in this study (the Assistance Coordination Council or ACC). This Final Report incorporates a number ofthese suggestions, including specific proposals made by decision-makers in both the donor and recipient countries, which have been thoroughly tested and discussed. Among the most frequent concerns expressed to the Task Forcé since release of the Report is the increased fear on the part of the states of Central and Eastern Europe that they will have to compete with the Commonwealth of Independent States for the limited assistance resources which are available or are likely to become available. A number of individuáis from neighboring states have asked whether the Task Forcé is proposing the establishment of "a closed club" of three countries (the CSFR, Hungary and Poland). In the few weeks since the provisional text was released, events have moved rapidly in this regard. The European Community has signed Cooperation Agreements with Estonia, Latvia and Lithuania, and has decided to intensify negotiations towards Association Agreements with Bulgaria and Romania. The time may come shortly when some or all of these countries, too, will take their place in the Assistance Coordination Council (ACC) proposed in this Task Forcé Report. The ACC has been designed as a flexible operational vehicle, and should not be regarded as an inflexible proposal. The head of a major international organization has recently suggested that the chairmanship of the ACC could be held on a rotating basis. We encourage suggestions of this sort, and intend that the debate triggered by this Report should be studied and considered by officials responsible for Western assistance as carefully as the recommendations contained within it. In this Final Report of the Task Forcé on Western Assistance to Transition in the Czech and Slovak Federal Republic, Hungary and Poland, the Board of Directors of the Institute would like to note that it is deeply indebted to Raymond Barre, Tony Solomon and Bill Luers for their extraordinary devotion and firm leadership of the Task Forcé during this past year. All of us are particularly gratified that the provisional text of this Report has been carefully studied by those preparing for the July 1992 Summit of the G-7 in Munich, as well as for the Lisbon Summit of the European Community in June. We welcome the interest shown by govemments and international organizations in studying and publicizing the findings of this Report. For example, the Polish Ministry of Foreign Affairs has issued to all governmental agencies a statement

iii in support of the Report’s recommendations. We welcome the serious reception of the Report by the European Community. The Office of the President of the Commission of the European Communities, Mr Jacques Delors, has stated that:

This Report provides a thoughtful and broad-ranging analysis of Western assistance to transition in the Czech and Slovak Federal Republic, Hungary and Poland... The Report also gives a list of concrete and practical recommendations which deserve to be carefully studied by decision-makers in both donor partner countries and recipient partner countries.

The media coverage of the Task Forcé Report will help contribute to a much needed debate on Western assistance and its complexities. Mr Barre and the other leaders of the Task Forcé are pleased that elements of the philosophy and language of this Report are being adopted by the media in both the donor and recipient countries as, for example, in "Crossing the East-West Chasm" in The Economist ofMay 16-22,1992. We welcome the press debate over the Task Forcé Report in the CSFR, Hungary and Poland, as well as the interest shown in the Report’s findings by Bulgaria, Romanía, Russia and Ukraine. I would like to emphasize that although it is not specifically dealt with in this study for reasons that are explained in the Report itself, the Task Forcé regards direct prívate investment as an essential element of success in transition. This Final Report represents the results of the first year of the Institute’s work on the subject of Western assistance to the new democracies of Europe. Continued work will be undertaken in the future, enabling the Institute’s team, under the capable difection of Professor Krzysztof Ners, to explore in greater depth some of the issues which cannot be covered in this report. The authors and the Institute wish to express their particular gratitude to Bundestag President Rita Süssmuth, a member of the IEWS Board of Directors, who first encouraged the Institute to undertake this study. Others who played a special role include Ambassador Henning Wegener and his exceptional staff in the Federal Press Office in Bonn. We thank them for their assistance in arranging the Bonn press conference as well as the translation of the entire document into Germán. Copies of this Report are available in Germán from the IEWS. We also thank the Grey Gruppe Deutschland for its pro bono assistance, and for making the release of the Report such a success in Europe. To Bemd Michael, Christine Listl and Ulla Burkard we are deeply indebted. Special thanks to Thomas Lauffer in the Bundestag President’s Office are very much deserved as well. We are grateful to Minister Jacek Saryusz-Wolski for accepting the responsibility of preparing the Polish edition; to Foreign Minister Géza Jeszenszky, another IEWS Board member, for the Hungarian edition; and to Deputy Minister Zdene’k Pírek for the Czech and Slovak editions. A large number of people have cooperated to produce this Report, not least among them Stephen B. Heintz, Director of the IEWS European Studies Center at Stifín and his staff. Our New York staff, under the leadership of Ambassador-in-Residence Heyward Isham, devoted great time and care to the preparation of the Report. We are all grateful, of course, to the members of the Task Forcé itself and to the co-authors of the Report, Arjan van Houwelingen, Michael Palmer and Kate Storm Steel. Without their devotion and talents, this Report would not have been possible. The principal author of the Report and the dynamic engineer of the project itself is Polish educator Krzysztof Ners. He and his wife Ewa are to be complemented on their remarkable flexibility and dedication. This study could not have been undertaken without the generous support of the Charles Stewart Mott Foundation of Flint, Michigan, and the Rockefeller Brothers Fund of New York. In addition to its core support, the Charles Stewart Mott Foundation also provided a generous dissemination grant which has enabled the IEWS to do large scale printing, the foreign language editions and outreach activities with Parliaments, governments and media. The willingness of the Mott and RBF foundations to support an independent study of this type is a tribute to the visión of their respective Presidents, Bill White and Colin Campbell. The extensive work involved in this study was made possible by the strong support given to the Institute’s European Studies Center at Stirín, near Prague. Here ah exemplary team of women and men from many countries work day to day to contribute to the process of transition and the building of civil societies in post-communist Europe. The IEWS would like to thank the John D. and Catherine T. MacArthur Foundation of Chicago; the Ford Foundation of New York, the Florence and John Schumann Foundation of New Jersey, the Commission of the European Communities in Brussels and the McKnight Foundation of Minneapolis for their core support of the IEWS European Studies Center at Stirín. Ñor should we forget the countless women and men in the donor and recipient countries - from governments, the prívate sector and international organizations - who are working hard to help assure a successful and peaceful transition to civil societies in post-communist Europe. This Report is dedicated to them.

John Edwin Mroz President lnstitute for EastWest Studies June 1, 1992

v I. INTRODUCTION

We present the fírst assessment of Western assistance to the Czech and Slovak Federal Republic (the CSFR), Hungary and Poland since the self- liberation of these countries in 1989. Our Report examines the assistance process to date, focuses on the issues of major importance to both donors and recipients, identifies strengths and weaknesses in the assistance process, and makes policy recommendations for improving the effectiveness of assistance to transition. The transition the countries of Central Europe are undertaking - from command to market economies and from communist to civil societies - is unprecedented. Traditional models of development aid are only partially applicable; for the three countries, it is not a question of moving from "underdevelopment" to "development," but from "misdeveloped" to market economies. We are disappointed that existing data and mechanisms are inadequate for precise evaluation of the assistance process. This Report is only a first step towards a comprehensive evaluation of Western assistance. Nonetheless, we believe it will serve as the benchmark for future evaluation of Western assistance to post-communist countries. At this stage of the transition, it is particularly important to focus our Report on the broad process, the overall strategy, and the need for partnership. Therefore, the reader will find here neither "success" ñor "horror" stories. We are concerned that the achievement of the main goals of macro- economic stabilization in the three countries should not give rise to complacency. This achievement is not irreversible. In particular, we fear that: • the proliferation of new states in Europe will cause competition for fínite resources in an unfavorable global economic climate; • Western publics may experience disillusionment concerning the duration of the process and the amount of assistance required, at a time ofincreasing concern that solving domestic problems should be a priority; • neither the donors ñor the peoples of the región will have the patience to stay the long, diffícult course of structural transformation, which will not have rapid or dramatic results. Above all, the West should seek to ensure that the Coid War división in Europe between East and West is not replaced by a new destabilizing división between rich nations and poor ones. Ensuring the success of the political and economic transformation of Central Europe constitutes one of the greatest challenges now confronting the international community. For Western business, making good use of Central Europe’s rich potential in skilled labor and natural resources is an enormous challenge. Central European countries constitute an emerging consumer market of 65 million people with an anticipated per capita purchasing power of the same order as Spain within 10-15 years if reforms go well. In the interim, these countries represent a growing market for capital goods. In view of these concerns and incentives, we have willingly devoted our time to the work of this Task Forcé. We appreciate both the initiative of the Institute for EastWest Studies in undertaking this year-long study and its commitment to making this a shared assessment between recipients and donors

1 drawing on the experience of assistance. We are grateful to those individuáis who have given their help, many of them from major institutions, for the extent of their cióse cooperation in this study. It is an encouragement to us that leading international organizations, including the EC, the OECD, the UN’s ECE, and the EBRD, as well as the World Bank and the IMF, together with the governments of the CSFR, Hungary and Poland were ready to assist the research of the Task Forcé. We were personally impressed at our meetings in Bardejov, Stirín, Budapest, Dobris, New York, Prague and Warsaw by the methodology, the balanced and authoritative level of participation, and the spirit of constructive cooperation displayed throughout. We consider that the main long-term aim of Western assistance to transition is to enable the recipients to help themselves to build viable civil societies and self-sustaining market economies. The primary short-term goal is to secure the continuity of transition until it has successfully fulfilled its aims. Effective economic reform will underpin pluralist democracy and human rights, and will also act as a form of security expenditure in curbing massive emigration and in helping to achieve stability in Europe. Although the recipients bear the main responsibility for making transition succeed, Western support is crucial to this process. Whereas the specific goals of assistance to individual countries may be open to debate, there is consensus concerning its broader goals. Paramount among these - in recognition that the future prosperity and security of East and West must be interdependent - is the creation of a politically stable and economically unified Europe. To this end, Western assistance also aims to support the countries of Central Europe in their efforts to achieve political and economic stability. Estimates of how long transition will take vary, but it is likely to last from to 10 to 15 years or until the three countries have achieved full EC membership. In any event, assistance will not have served its function until transition is complete or until the CSFR, Hungary and Poland have joined the EC. Western assistance to the Central European states - and our Report gives a new definition of "assistance" - includes stabilization funds, balance-of-payments support, debt management, the provisión of market access, prívate source funding on a non-commercial basis, and technical and non-economic assistance [see Chapter III]. Important as these forms of assistance are, it should be clearly understood that domestic and foreign prívate investment, for the long term, will be the engine for reconstruction of these economies. Western assistance should therefore pave the way for prívate investment, both domestic and foreign. We accept the view that prívate investment is not a form of assistance, and therefore it is not dealt with in this Report. Our decisión to focus exclusively on the three countries of Central Europe is due to the early start they enjoyed in beginning to move towards free market economies. Because of this early start, the experience of the three countries as recipients of Western assistance is now sufficiently long to enable the Task Forcé to examine and assess the process and to draw some conclusions from it. This is not the case with other post-communist European states. The Association Agreements provide the three countries with a special and growing relationship

2 with the EC, designed to lead to eventual full membership. This places the three countries in a different category from other post-communist states. Although the economic reforms and progress made by each of the three countries are specificand different, and although this is reflected by differentiated assistance policies to each of the three on the part of donors, we have chosen, in this Report, to analyze and make recommendations concerning the common problems faced by the Central European states as recipients, and also the common problems confronting donors. One of the most difficult challenges which confronted us was how to address this recent phenomenon of transition. Since July 1989, the West has responded to the needs of transition with pledges by the G-24 states1 of $23.4 billion to the CSFR, Hungary and Poland. With the contributions of the IMF and the World Bank group, the overall total amounted to some $33.8 billion by the end of 1991. Only about 14% of assistance commitments were in grant form until the beginning of the fourth quarter. Non-concessional assistance consists mainly of loans and export credit guarantees. The assistance committed in 1990-1991 represents $795 per capita for Hungary, $545 for Poland (or $305,excluding debt reorganizaron) and $310 for the CSFR.2 But let us be realistic. The impressive figures quoted above are only pledges, not money that has been disbursed as assistance. According to the best available figures on disbursement, the disbursement rate in Poland in 1990 was 27%, in Hungary 16%, and in the CSFR less than 2% .3 The Task Forcé considere that the issue of the low disbursement of committed assistance is central. In order to show the real valué of assistance and to limit misunderstandings on both donor and recipient sides, it is essential to identify roadblocks to disbursement and impediments to absorption. On the donors’ side, the problems include cumbersome bureaucracies, inappropriate procedures and haphazard coordination. On the recipients’ side, problems include weakness of administrative capacity, erratic in-country coordination and grave deficiencies in infrastructure. We recognize that these issues are complex and difficult for all involved. For instance, to take up a foreign loan might lead to an unacceptable increase in foreign debt burden for the recipient governments. The reaction against overspending by the former communist regimes of the región, coupled with sensitivity concerning the misuse of public funds under these regimes, has made the three governments understandably prudent in accepting loans. The Task Forcé has found no evidence that monies have been misappropriated. Given the limited absorptive capacity of the recipients, the Task Forcé concludes that the emphasis for the present should not be so much on increasing fmancial commitments as on improving disbursement and absorptive capacity.

1 The G-24 is the coordinating and Consulting group providing assistance to East and Central Europe. Us members are the twelveEC member states, the sixEFTA countries, Australia, Cañada, Japan, New Zealand, Turkey and the United States. 2 Task Forcé calculations based on official data published by the G-24 in April 1992.

3 For commentary on the availability of data, see Chapter V, Section 5.3.

3 Henee, fínance should be combined with other forms of assistance, such as improved access to Western markets or assistance to debt management. We believe that the single most important recommendation made in this Report responds to the urgent need to create a long-term and coordinated strategy for assistance to transition in the CSFR, Hungary and Poland, so that the various tools and sources of the assistance effort can be used to best effect. The main proposal of this Report, the Assistance Coordination Council (ACC), will be the operational vehicle without which it will be difficult to achieve the necessary coordination. The ACC is central to the implementation of all our recommendations. The Task Forcé recommendations are all the more important because of the increasing number of organizations - public and prívate - currently involved in supporting transition in Central Europe. As each has its own priorities and procedures, effective deployment of assistance is increasingly going to depend on effective coordination of the diverse resources available. During the stabilization phase of transition, the G-24 Coordination Unit played an important part in coordinating the assistance efforts of the G-24 countries. However, it was established as a temporary mechanism, and was designed chiefly to facilítate emergeney support measures. The Task Forcé concludes that the new, more complex and longer-term tasks of the second phase of transition, structural transformation, require a new and better system of coordination. Imaginative long-term Western assistance to the transformation of this región can help to ensure that the unprecedented prospeets for pluralist democracy and economic opportunity in Central Europe become reality. The policy recommendations proposed in this Report, if implemented, will improve the effectiveness of assistance and hasten the achievement of its goals. The utility of this Report is not limited to Hungary, Poland and Czechoslovakia. Rather, it contains much of relevance for other post-communist societies of Europe, including the former Soviet republics. Although this Report concludes the work of the Task Forcé on Western Assistance, we look to the Institute for EastWest Studies to continué its independent work of study and assessment of Western assistance to post- communist societies. In particular, we would encourage the Institute to conduct an in-depth assessment of public and prívate program and project assistance to Central Europe.

May 1992 RAYMOND BARRE

ANTHONY SOLOMON

WILLIAM H. LUERS