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E. Anthony Wayne Assistant Secretary of State for Economic and Business Affairs Testimony before the Subcommittee on European Affairs, Committee on Foreign Relations, U.S. Senate Washington, DC, June 29, 2000 |
The Environment for Business in Central and Eastern Europe Introduction Thank you, Senator for inviting the Department of State to join you in your probe of challenges and opportunities for the American business community in central and eastern Europe. I am pleased to be here, and would personally like to thank you for your leadership on this vital topic. The Department shares your deep concern about the frequent incidences of corruption and weak rule of law which impede free trade in many of these emerging economies. On behalf of Under Secretary Larson who, as you know, is in Japan today, I would also like to thank you for your dedicated service as a judge for the Ambassador Charles E. Cobb Awards -- warm appreciation to you and to your Chief of Staff for helping the Department select the Ambassador and Economic Officer who exhibit the most dedication, innovation, and success in promoting U.S. exports and trade overseas. Senator, I am pleased to have this opportunity to discuss the current environment for business in central and eastern Europe. The region's ability to attract private sector involvement, including trade as well investment, is critical to its ability to complete its transition to free market prosperity and democracy. We have long stated that as important as the assistance we give these countries is, private sector involvement in their economies is essential. The region provides opportunities to a wide variety of American enterprises -- small and medium-sized enterprises as well as large corporations, farmers as well as business people. At the same time, supporting American business, identifying economic opportunities, and leveling the playing field for American exporters and investors are top priorities for the State Department and for our embassies in this region and around the world. Americans from Oregon to Washington, DC are increasingly aware of the role trade is playing in our current economic prosperity and overall growth. Data show that open markets helped make the United States the fastest growing economy in the G-7 with an annual growth rate of 3.9% from 1994 to 1997. Jobs supported by American exports grew by 1.4 million between 1994 and 1998 and statistics show these American jobs supported by goods exports pay about 13% to 16% above the U.S. national average. We in the State Department play a central role in working with American companies and with the firms, governments, and other institutions in central and eastern Europe to create open markets and rule of law. This has been a challenging process and one that will continue to require our attention. The numbers show we will be successful: Those countries that have made the most progress towards open markets and democratic rule of law are the ones that have been most successful in attracting private sector U.S. investment. Situation in the Region Ten years after the fall of the Berlin Wall and the demise of Communism, the countries of central and eastern Europe are continuing their work to realize free market prosperity. The transition has been difficult and has moved at different speeds in the different countries. Although the situation varies from country to country, certain problems remain all too common in the region. One is the lack of transparency. "Sunshine," as Justice Holmes once remarked, "is the greatest of all disinfectants." We find, however, that governments and other institutions in the region are not always open in their decision-making. Too often it is not apparent, either to Americans or even to the citizens of that particular country, why an official does what he does or what the reasons are behind the government instituting a particular regulation or procedure. In some cases, the governments do not publicize laws or regulations. The lack of transparency feeds directly into another barrier to trade and investment: bribery and corruption. Worldwide, bribery results in tens of billions of dollars in lost exports for American companies and others that play by the rules. However, bribery and corruption also impede governments from delivering the services their citizens need and expect and undermine their confidence in their governments and in democracy. An additional problem in a number of countries in the region is the high level of criminal activity. Domestic and transnational criminal activity is a powerful deterrent to domestic, let alone international investment in certain of the countries of central and eastern Europe. Such criminal activity includes intellectual property rights piracy in sectors including pharmaceuticals, audio recordings, and the optical media. Problems with infrastructure, physical as well as institutional are further concerns. Roads, ports, telecommunications systems, and other physical infrastructure are often not up to the standards we take for granted in Western Europe or the U.S. The people of central and eastern Europe and their present governments have inherited the results of decades of mismanagement by Communist governments. Albania is perhaps the most extreme example where the public still lives in decrepit apartments and there is no rail link to the rest of Europe because of the Hoxha paranoia. Estimates are that the imported Swedish concrete used to build the more than 700,000 bunkers could have been used instead to build as many two-bedroom apartments. Institutional infrastructure also varies from country to country in the region, but again in many cases its weakness constitutes yet another challenge for investors, domestic as well as foreign. For example, the banking systems in a number of these countries are saddled with bad debts left over from the period of Communist rule or continue to suffer from out-of-date, uncompetitive operating procedures. Financial and regulatory supervision authorities in a number of these countries also need to be strengthened. The banking system of the Czech Republic was recently shaken by the collapse of the country's third largest bank. A similar situation also occurred recently in Romania. The failure of a number of countries in the region to complete the process of privatizing state-owned entities not only perpetuates the inefficiencies and economy-damaging distortions of the Communist era, but raises questions in the minds of some as to how serious those governments are about making the needed reforms. Again, the figures show those countries that have made the most progress toward free market institutions and good governance have attracted the most American and other foreign direct investment. The amounts of investment can be substantial. To date, American firms have invested more than $7 billion in Hungary, $5.1 billion in Poland, and $1.5 billion in the Czech Republic, according to data published by the recipient countries. What the United States Is Doing In partnership with the governments of the region, as well as with our own private sector and with interested non-governmental organizations, the State Department and we in the Department's Bureau of Economic and Business Affairs are working to address these concerns and to help foster a framework that opens these countries further to American business and investment. We remain convinced that such a partnership will yield real benefits to both sides. There are a number of overarching efforts, for example, our efforts to battle corruption through encouraging countries in the region that have signed the OECD Anti-Bribery Convention to ratify and fully implement it. The Czech Republic and Hungary, both of which are members of the OECD, have ratified and implemented the Convention, as have Bulgaria and the Slovak Republic. Poland has signed, but has not yet ratified or implemented. We are pressing governments in central and eastern Europe, as we do elsewhere in the world, to take action to protect intellectual property rights. We are working with the American Bar Association's Central and Eastern European Law Initiative (CEELI) to help these countries develop stronger legal systems. We have worked with the governments of the region to strengthen their piracy of intellectual property (IPR) regimes. Bulgaria has been a particularly good example where, working with us, the Bulgarian government authorities have taken effective action to combat a serious problem with piracy of intellectual property in that country. We have pursued bilateral investment treaties (BITs) with many of the countries in the region. The basic aims of the BIT program are to protect U.S. investment abroad and, in particular, to guarantee national treatment for U.S. investments; the free transfer of all funds related to investment; access to international arbitration to settle investment disputes with host country governments; freedom from performance requirements, such as local content or export quotas; the right to engage top managerial personnel of the investor's choice; and expropriation only under internationally recognized standards and with prompt, adequate and effective compensation. The BITs also encourage adoption of market-oriented domestic policies that treat private investment fairly and support the development of international legal standards consistent with all these objectives. We currently have signed BITs with 15 countries in the region, though not with Russia. Twelve of these are now in force. In addition, I must point out the State Department and our embassies and consulates in the region constantly work hard on behalf of American commercial interests. In central and eastern Europe -- from the Baltics to the Balkans -- U.S. Ambassadors and our embassy officers are the eyes, ears, and in-country negotiators for U.S. commercial and economic interests -- from trade and investment to anti-corruption, environmental safeguards, and cultural, people-to-people exchanges. Furthermore, as experts on host-country markets and business practices, these officials can and do identify opportunities for American firms and advocate on their behalf, companies that range from small and medium enterprises like bagel bakeries to major firms such as Enron and Ford. Exemplary business practices overseas and good corporate citizenship are among the best exports that the United States can offer. To emphasize this, the State Department initiated an annual Award for Corporate Excellence, an award recognizing outstanding corporate citizenship, innovation, and exemplary business practices overseas. America business leaders are frequently Ambassadors in transition economies. They lead by their conduct: strict adherence to the Foreign Corrupt Practices Act, high labor, environmental and human rights standards; shared technology, training and professional exchanges with local firms; and, their own democratic values. In many central and eastern European countries, business executives are close and effective partners with our Ambassadors and Embassy teams. I should point out that the European Union (EU), as it pursues enlargement to include most of the countries of the region, shares many of our goals, and seeks many of the same reforms. We are consulting closely with the EU on how our efforts can be coordinated to achieve the best results. Still, from time to time, some in the EU try to influence commercial decisions by saying that choosing a U.S. firm or partner over a EU firm could harm the EU accession prospects of a country. We rebut such assertions quickly and firmly to the EU and to the recipient country. In addition to these general policies and programs, there are a number of specific initiatives geared to particular parts of the region designed to improve the investment and business climate. Southeast Europe One such international partnership is the Stability Pact for Southeast Europe. The Pact was announced at the July 30, 1999 Sarajevo Summit with President Clinton and other leaders -- both western European and from the region. The Pact is a straightforward bargain in which the international community will work to integrate Southeast Europe into the broader European and Transatlantic mainstream and the countries of the region will implement the reforms that are necessary for such integration to take place. Part of the Stability Pact is the Investment Compact under which the region's countries take steps to improve the investment climate. In return, the other Stability Pact members, including the U.S. committed to help the region in this effort and to work together with the international financial institutions to develop appropriate vehicles to mobilize private finance and mitigate risk. On the investment side, OPIC is using its investment guarantees to mobilize up to $150 million in private equity financing by creating one or more private sector investment funds which will provide a $200 million credit line for companies or commercial partnerships with significant U.S. participation; and establish an OPIC on-the-ground presence in the region to serve as a resource for the U.S. investment community. We are working with the European Bank for Reconstruction and Development (EBRD) to develop an initiative for providing up to $130 million to support small and medium-sized enterprises (SMEs) in this region. A U.S. contribution of $10 million this year towards a total U.S. contribution of $50 million is expected to leverage an additional $80 million from the EBRD in debt financing for SMEs from other European donors. Part of the U.S. contribution will provide technical assistance to accelerate the transition of these countries to more market-oriented economies. Specifically, EBRD teams will identify legal and regulatory constraints for private sector development and provide technical assistance to promote sound business practices and good governance. On the trade side, Stability Pact Partners underscored the importance of Southeast Europe's integration into and access to the European Union's more developed markets and the global trading system. Connected with this is the proposed Southeast Europe Trade Preferences Act (SETPA). President Clinton discussed SEPTA during the July 1999 Sarajevo summit as an important mechanism to stimulate economic growth in the region and to integrate countries of the region into the broader European and Transatlantic mainstream. We note Senator Moynihan has introduced legislation to create a preference system for Southeast Europe. The SETPA would demonstrate American commitment to the economic development of Southeast Europe by extending duty-free treatment for 5 years to a number of products that are currently ineligible under the GSP program: iron and steel products, agricultural products, footwear, glassware, ceramics, automobiles, bicycles, clocks, and watches. The only product area not to receive additional coverage under SEPTA is textiles and apparel. Through SETPA, the United States aims to strengthen the economies of the region, promote the robust development of the private sector, and encourage further integration of countries of the region into international trade regimes such as the (World Trade Organization (WTO). The announcement of SETPA also prompted the European Union to propose expanding its existing autonomous trade preference package for western Balkan countries, further boosting the region's economies and commitment to reform. At the urging of the United States, the Stability Pact also includes an anti-corruption initiative that brings together the United States, the European Union, and regional countries in a common effort to promote good governance and to combat official corruption. The initiative will thereby help improve the environment for trade and investment in the region. Let me note as well that while we support Southeast Europe's integration into the European Union's markets, we strongly believe this should be done in a way that avoids commercial problems with the U.S. Enlargement is not a zero-sum game, but rather should serve to strengthen the transatlantic relationship through stronger linkages between candidates for accession to the EU and the United States as well as to the European Union. Enlargement Commissioner Verheugen agrees and has argued strongly there is no contradiction between our growing transatlantic partnership and enlargement. Central Europe Results on the trade front are already impressive. In 1991, U.S. companies exported $1.6 million worth of goods to the 15 countries of central and eastern Europe. By the end of 1999, U.S. exports had doubled, to $3.2 million. We have a good and very active dialogue with Hungary, which, as one of the most advanced of the EU accession candidate countries, is progressing in its negotiations with the EU. At the same time, the Hungarians are working very constructively with us on trade problems associated with accession, including the issue of tariff differentials. Hungary also ratified early the OECD Bribery Convention, and is now working on its implementation. Poland too is a leading candidate for EU accession, and we have been successfully engaging the Poles in a number of economic areas important to the U.S. On IPR, Poland is in the process of updating its antiquated copyright law to bring it into compliance with its WTO obligations. The Polish Government is also in the process of enacting legislation to restructure and privatize the Polish Railways. We expect this to result in a number of business opportunities for U.S. railroad companies. In this connection, I note that Paul Nevitt, Chairman of Greenbrier Europe, will be testifying on the next panel. I would like to point out that our embassy in Warsaw as well as senior officials here in Washington have convinced Polish officials to take steps to meet the concerns that Greenbrier had regarding the sale of rail cars to Polish Railways. United States investment in Poland continues to grow. Citibank, for example, is in the process of becoming a major participant in the Polish banking sector, with its acquisition of Bank Handlowy. Like Hungary, Poland has ratified the OECD Bribery Convention; it still is in the process of passing implementing legislation. American firms are also active in the Czech Republic. Boeing is a 35% owner in a Czech fighter trainer manufacturer (called Aero Vodochody) with Czech Airlines (CSA). Boeing will also be competing for a number of civilian aircraft tenders by CSA. One problem we are discussing with the Czech Government is eliminating the current 4.8% tariff on large civil aircraft so that Boeing can compete fairly with Airbus which pays zero duty. The Poles and Bulgarians have done so and the Hungarians have agreed to a waiver. We expect the Czech Republic to do the same. I note that Ronald Lauder, Chairman of Central European Media Enterprises (CME) will be speaking on the next panel about the problems his company encountered in the Czech Republic. American shareholders have a significant investment in the Czech broadcasting sector through CME. We have been very active in support of CME, and there is a process underway in the context of our Bilateral Investment Treaty (BIT) to resolve CME's BIT dispute through international arbitration. Northern Europe Initiative The U.S. is looking at trade and business development in the Baltic Sea region as well, a key component of our Northern Europe Initiative (NEI). NEI is a U.S. Government strategy to promote stability, strengthen free market and democratic institutions and security structures, and bolster U.S. trade and investment in the Baltic Sea region. Two of the six priority areas for NEI activity are business promotion and law enforcement. For FY 2000, we have allocated $1 million in regional Support for East European Democracy (SEED) Act funds for NEI activities. Working closely with American businesses, we established a business/government dialogue with the governments of Lithuania, Latvia, and Estonia to remove specific investment barriers and to promote U.S. investment and exports. The NEI law enforcement programs have also targeted problems such as IPR protection and contract enforcement. Among the results are NRG's $500 million investment in Estonia's energy sector, which Estonia's cabinet approved June 27, 2000. Overall trade between the U.S. and the three Baltic states has nearly doubled since 1996. Russia The United States' efforts to foster investment and other business ties with Russia deserve particular attention. Russia's new President, Vladimir Putin, has stated that foreign investment will be essential to improving the economic outlook for Russia, and that significant progress on economic reform will be necessary to attract that investment. However, Russia still lacks a genuine competitive environment for investment, both domestic and foreign, and it lags far behind central Europe in attracting foreign investment. In the 10 years from 1988 to 1998, Russia received only $61 per capita in foreign investment, compared to $389 for Poland and $967 for the Czech Republic. The United States is the leader in foreign direct investment in Russia, with over $2 billion invested in 1999 alone. Many household names in the United States are now household names in Russia. However, Russia has yet to realize the potential offered by its abundant natural resources and educated workforce. The financial crisis of 1998 dealt all investors in Russia a setback. During his meetings with President Putin in Moscow this month, President Clinton emphasized that major new flows of foreign investment to Russia are possible, but only if action on the necessary structural reforms is forthcoming. The United States Government has consistently urged the Russian Government to institute reforms to improve the climate for doing business in Russia, while continuously supporting U.S. investors who have undertaken the risks of establishing businesses there and encouraging the development of domestic Russian entrepreneurship. We have used the U.S.-Russia Joint Commission and its Business Development Committee to keep investment-oriented reform issues at the forefront of our bilateral agenda. The U.S. has also supported the activities of the international financial institutions in Russia, while insisting that their assistance be additional to private sector resources and be conditioned on structural reforms that benefit foreign and domestic investors alike. Reflecting the importance of Russia's vast reserves of oil and gas, U.S. and other western oil companies have been among the pioneers of investment in Russia. TheU.S. Government has long encouraged the development of the legislative and regulatory framework for Production Sharing Agreements (PSAs) in Russia, with the goal of establishing a stable and transparent legal, financial, and regulatory environment for investments in the oil and gas sector. In Moscow, President Putin assured President Clinton of his commitment to completing the framework for PSA's. The election of many new Duma members last December opened an opportunity, which we are pursuing, for the Duma's ratification of our 1992 Bilateral Investment Treaty with Russia. This treaty would ensure treatment for U.S. investors no less favorable than that accorded to Russian investors in many areas of the economy, provide protections against expropriation, and set rules for adjudicating investment disputes. Another avenue for reform is Russia's accession to the World Trade Organization, a process that involves bringing Russia's regime for trade and investment into line with internationally accepted standards. We have actively encouraged and supported that process. We are also encouraging the Organization of Economic Cooperation and Development to deepen its dialogue with Russia on policy reforms to improve its investment climate. We are, moreover, committed to enhancing the rule of law and protection of shareholder rights in Russia and have acted on this commitment in a very tangible way. Late last year, Secretary Albright made a difficult decision to delay $500 million in Ex-Im Bank guarantees to the Russian oil company TNK, in order to give time for a review of that company's business practices before the transaction was completed. Also, advocacy by U.S. Government officials in Washington and our embassy in Moscow helped to convince Russian officials to terminate an attempt to re-privatize the Lomonosov Porcelain factory near St. Petersburg. It also blunted efforts to reduce the scope of foreign investment in the Russian insurance industry. We have repeatedly raised, at both the local and federal levels, the difficulties U.S. investors have had in securing enforcement of favorable judgments made by Russian courts. The focus of our bilateral assistance in the economic area has turned to the regions of Russia, where we support: the implementation of international accounting standards; development of small and medium-sized enterprises; and improvement of legislation affecting business. The U.S.-Russia Investment Fund makes equity investments in Russian enterprises and Russian-American joint ventures, as well as providing capital to business through Russian banks. We have funded thousands of exchanges that give Russian citizens an opportunity to develop their skills and establish valuable contacts with U.S. counterparts. Admittedly, progress toward a welcoming climate for investment in Russia has been slow and the environment for doing business in Russia remains extremely difficult. However, as President Clinton noted in his speech before the Duma earlier this month, with a new President, a new government, and a new Duma, Russia has a new chance to build prosperity and strength, while safeguarding democratic freedoms and the rule of law. The President emphasized to both President Putin and the Russian people that the United States welcomes a strong Russia that uses its strength to promote economic development, reinforce the rule of law, fight crime and corruption, defend democratic freedoms, and build good relations with its neighbors and the world. We will continue our efforts to promote a better climate for investment in Russia as a means to that end. Ukraine Perhaps no other country in the region has experienced such a large gap between economic performance and potential as Ukraine. Endowed with good natural resources, superb agricultural land, a well-educated population, ethnic peace, and a strategic location in Europe, Ukraine was positioned to be one of the most successful of the former Soviet states in attracting the foreign investment needed to restructure its economy. Yet at $55 per capita, Ukraine has one of the lowest rates of direct foreign investment in the region. The U.S., with some $570 million out of $3 billion total, is the single largest source of foreign investment in Ukraine. These figures have both remained static for several years and are very small for a country of 50 million people with the resource base and economic potential of Ukraine. In contrast, the figures for Poland, a country of 40 million which aggressively embraced reform, are $5.1 billion and $30 billion. The United States, together with the IMF, the World Bank, and other donors, has consistently delivered the same message to Ukraine for the past 5 years: market economics can only be successful in Ukraine when the government reduces its role in the economy and gives freer reign to private enterprise. When this happens, we will begin to see investment rise again, and with rising investment will come sustained growth. Much of U.S. assistance, $200 million last year and, $2 billion since independence, has been focused on helping Ukraine reform its economy and its governing institutions. We remain committed to making Ukraine's future a success and improving the climate for investment and opening up Ukrainian markets is crucial to a positive outcome. We are also seeking ways to support the reform efforts of Prime Minister Viktor Yushchenko's Government -- leveraging resources and cooperating with other international donors whenever possible. USAID and other agencies continue to target economic reforms, privatization efforts, private sector development (small and medium enterprises), and civil society for crucial assistance. As I have said, U.S. investors are the single largest source of foreign investment in Ukraine. Their problems, both specific and general, are a regular agenda item in all high-level bilateral meetings, most recently during President Clinton's trip to Kiev on June 5. We have been pleased with the more business-friendly policies of the Yushchenko Government. Investors report they have encountered a more cooperative, businesslike attitude when dealing with officials under the new government. We remain concerned, however, about U.S. investor problems that remain unresolved, and more generally about Ukraine's poor investment climate and slow pace of economic reform. In addition to resolving the investment disputes, we have urged Ukraine's government to take specific steps to improve its investment climate, including instituting more transparent procurement and licensing requirements, implementing regulatory reform, improving protection of shareholder rights, improving enforcement of judicial decisions, and enforcing a strong code of ethics. Ukraine has a reputation as a difficult place to do business. In its Corruption Perceptions survey of 85 countries, Transparency International ranked Ukraine 69th. Corruption is a major obstacle to genuine reform and long-term economic recovery in Ukraine, Russia, and indeed throughout the former Soviet Union. Again, we have and will continue to provide assistance in this area. However, it is the responsibility of Ukraine's government to tackle this problem, through deregulation, legal reform, and greater transparency. Conclusion In closing, let me reiterate that these initiatives in central and eastern Europe yield benefits to Americans in terms of peace and stability in a part of the world that not so long ago was an alliance threatening the United States. Moreover, these initiatives translate into economic benefits for American workers, farmers, and business people. In 1998, for example, aggressive advocacy by the U.S. Ambassador to Croatia and the Under Secretary of State for Economic, Business, and Agricultural Affairs resolved a number of obstacles with the Croatian Government. As a result, the San Francisco-based corporation Bechtel was able to sign a $600 million highway construction contract with the Croatian Government. Since then, Bechtel has succeeded in concluding agreements to commence work on the first stage of the project and renegotiated the contract at greater value to provide a more extensive Croatian highway than was first planned. Bechtel's story is only one of many. In recent days, work by the U.S. Ambassador in Sofia and others in the U.S. Government bore fruit when the Bulgarian Government finalized for signature a loan agreement with Citibank in connection with Westinghouse's $77 million contract to upgrade the safety of the Kozloduy nuclear power plant. This project, which involves the first Ex-Im bank loan to Bulgaria, will make a vital contribution to improving nuclear safety in the region and improving the environment there. Another recent success is the decision by the shareholders of Eastern Slovak Ironworks (VSZ) to endorse a deal by U.S. Steel to buy all steel and related assets of VSZ Kosice, the Slovak Republic's largest company. The deal will make U.S. Steel the largest U.S. investor and largest private sector employer in Slovakia. In all candor, however, I must say that our budget and our personnel are stretched too thin to provide the protection American business deserves in today's global economy. If anything, America's economic well-being is becoming increasingly intertwined with decisions and developments around the world. We must bolster our ability to defend and promote our core interests overseas. U.S. diplomatic programs defend these core national interests, including commercial advocacy. Yet today only one penny out of every dollar the federal government spends is devoted to international affairs. We are not talking about foreign aid. Every year, when the State Department processes some 44,000 export licenses for defense articles valued at more than $25 billion, we sustain 120,000 American jobs. When the State Department negotiates agreements to safeguard U.S. intellectual property rights to save America's film, music, and software industries as much as $200 billion a year, we do so not to aid others, but principally to advance America's prosperity. Even when the State Department promotes economic reform and good governance in central and eastern Europe, we do so not only to help these countries, but to promote America's economic and national security interests. Thank you. I will be happy to respond to your questions. [end of document]
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