20 YEARS OF USAID ECONOMIC GROWTH ASSISTANCE IN EUROPE AND EURASIA July 2013 20 YEARS OF USAID ECONOMIC GROWTH ASSISTANCE IN EUROPE AND EURASIA July 2013 This publication was produced under the direction of the United States Agency for International Development. It was prepared by SEGURA Partners LLC under the SEGIR Global Business, Trade and Investment II Indefinite Quantity Contract (IQC), Number EEM-I-00-07-00001-00 Task Order # 05, Regional Competitiveness Initiative. Table of Contents DEDICATION .................................................................................................................. ii ACKNOWLEDGEMENTS .............................................................................................. iv LETTER FROM USAID ASSISTANT ADMINISTRATOR, PAIGE ALEXANDER .......... v LIST OF ACRONYMS ................................................................................................... vii Highlights of Economic Assistance in the E&E Region ............................................ 1 Executive Summary ................................................................................................................................................................ 2 I. LESSONS LEARNED ................................................................................................ 12 II. INTRODUCTION ....................................................................................................... 16 SEED and FSA Acts ................................................................................................................................................................ 16 USAID’s Operational Response ........................................................................................................................................ 19 III. CONTEXT FOR ECONOMIC ASSISTANCE ........................................................... 22 Requirements to Transition to a Market Economy ................................................................................................. 23 Differences among the Countries .................................................................................................................................... 25 IV. USAID APPROACHES BY TECHNICAL AREA ..................................................... 28 Overview ................................................................................................................................................................................... 28 Macroeconomics and Fiscal Reform .............................................................................................................................. 29 Privatization ............................................................................................................................................................................ 36 Financial Sector and Capital Market Development ................................................................................................. 41 Private Enterprise Development..................................................................................................................................... 59 Energy/Infrastructure ......................................................................................................................................................... 72 Agriculture/Land ................................................................................................................................................................... 86 IV. TRANSITION SCORECARD – INDICATORS OF PROGRESS.............................. 94 V. CHALLENGES REMAINING .................................................................................. 100 APPENDICES ............................................................................................................. 102 Appendix 1 - Chronology of USAID Presence in the Region ............................................................................. 103 Appendix 2 - Chronology of Major Events in the Region ................................................................................... 104 Appendix 3 – List of Interviews .................................................................................................................................... 109 Appendix 4 – Bibliography ............................................................................................................................................. 112 Appendix 5 – Legacy Institutions ................................................................................................................................. 116 Appendix 6 – Funding Summary .................................................................................................................................. 120 Appendix 7 – U.S. Objectives and Measuring the Contribution of Aid .......................................................... 125 Appendix 8 – Interpreting the “Transformation Depression” ......................................................................... 129 Appendix 9 – Twenty Years of USAID EG Work in Russia ................................................................................. 135 Appendix 10 – Country Groups and Classifications ............................................................................................. 138 Appendix 11 – Guidance for Revised AEECA Phase-Out Framework ........................................................... 140 Appendix 12 – The Development Credit Authority – Europe and Eurasia Region .................................. 148 Appendix 13 – The Enterprise Funds in Europe and Eurasia: Successes and Lessons Learned (excerpt) ................................................................................................................................................................................. 150 20 Years of USAID Economic Growth Assistance in Europe and Eurasia i DEDICATION Dedicated to the nationals of the 29 countries in the Europe and Eurasia region who over more than 20 years became our friends, co-workers, counterparts, and partners in what might well be the greatest political and economic transition in modern history. Thank you for the manner in which you received the assistance that the American people sought to give; and thank you for what you gave to us in return. Together we were able to tear down a wall, assist in your historic economic and political transformation process, and create jointly the institutional, legal and regulatory frameworks that underpin a market economy; from independent central banks to advocates for business interests; from high value agriculture to increasing eco-tourism; from sound pension schemes to inclusive economic opportunity. Together, we are traveling the path toward competitive markets and individual fulfillment. “General Secretary Gorbachev, if you seek prosperity for the Soviet Union and Eastern Europe, if you seek liberalization, come here to this gate. “Mr. Gorbachev, open this gate. “Mr. Gorbachev, tear down this Wall.” Delivered June 12, 1987 by Ronald Reagan from the Brandenburg Gate. 20 Years of USAID Economic Growth Assistance in Europe and Eurasia ii “A society in which individuals have freedom of economic choice, freedom to own the means of production, freedom to compete in the market place, freedom to take economic risk for profit and freedom to receive and retain the rewards of economic decisions is a fundamental objective of the A.I.D. program in less developed countries. Such a private enterprise economy is held to be the most efficient means of achieving broad-based economic development. Private enterprises that respond to profitable opportunities in a free market produce jobs, managerial skills and economic growth. They contribute wealth to society and improve the quality of life. Moreover, significant equity objectives can be achieved when market forces operate to stimulate an economy toward full employment.” A.I.D Policy Paper: Private Enterprise Development, March 1985 “The Congress finds that the development of private enterprise, including cooperatives, is a vital factor in the stable growth of developing countries and in the development and stability of a free, open and equitable international economic system. It is therefore in the best interest of the United States to assist the development of the private sector in the developing countries and to engage the United States private sector in that process.” The Private Sector Investment Program Section 108 of the Foreign Assistance Act of 1961, as amended 20 Years of USAID Economic Growth Assistance in Europe and Eurasia iii ACKNOWLEDGEMENTS The findings in this report reflect a great number of interviews with current and former U.S. government officials, Congressional staffers, implementing partners, international financial institution staff, and counterparts, both U.S. citizens and nationals from the region. The authors thank all of them for the time allotted to share their personal papers, knowledge and experience. The team also reviewed key documents produced by USAID as well as other leading donors such as the World Bank, IMF, and EBRD. (See appendices 3 and 4 that list those interviewed and key documents reviewed.) The idea for initiating this 20 Year Review originated in the Office of Economic Growth within USAID’s Europe & Eurasia Bureau. Technical guidance was provided by: Jerry Bisson, Steve Eastham, Neal Nathanson, Robert Archer and Skip Kissinger. The team of authors was contracted by SEGURA Consulting LLC under the