V- -A
OREIGN ASSISTANCE LEGISLATION
FOR nSCAL YEAR 1994
(Part 2)
Y4.F76/1:F 76/57/994/
PT.2
Foreign Assistance Legislation for...
HEARINGS
BEFORE THE
SUBCOMMITTEE ON
EUROPE AND THE MIDDLE EAST
OF THE
COMMITTEE ON FOREIGN AFFAIRS
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRD CONGRESS
FIRST SESSION
Economic and Military Aid Programs in Europe and the
Middle East
APRIL 28 AND MAY 11, 1993
Printed for the use of the Committee on Foreign Affairs
FOREIGN ASSISTANCE LEGISLATION
FOR nSCAL YEAR 1994
(Part 2)
HEARINGS
BEFORE THE
SUBCOMMITTEE ON
EUROPE AND THE MIDDLE EAST
OF THE
COMMITTEE ON FOREIGN AFFAIRS
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRD CONGRESS
FIRST SESSION
Economic and Military Aid Programs in Europe and the
Middle East
APRIL 28 AND MAY 11, 1993
I*rinted for the use of the Committee on Foreign Affairs
U.S. GOVERNMENT PRINTING OFFICE
70-701 CC WASfflNGTON : 1993
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-0A1566-7
COMMITTEE ON FOREIGN AFFAIRS
LEE H. HAMILTON, Indiana, Chairman
SAM GEJDBNSON, Connecticut
TOM LANTOS, California
ROBERT G. TORRICELLI. New Jeraey
HOWARD L. HERMAN, California
GARY L. ACKERMAN, New York
HARRY JOHNSTON, Florida
EUOT L. ENGEL, New York
ENI F.H. FALEOMAVAEGA American
Samoa
JAMES L. OBERSTAR, Minnesota
CHARLES E. SCHUMER, New York
MATTHEW G. MARTINEZ, California
ROBERT A. BORSKI, Pennsylvania
DONALD M. PAYNE, New Jersey
ROBERT E. ANDREWS, New Jersey
ROBERT MENENDEZ. New Jersey
SHERROD BROWN, Ohio
CYNTHIA A McKINNEY, Geoiigia
MARIA CANTWELL, Washington
ALCEE L. HASTINGS, Florida
ERIC FINGERHUT, Ohio
PETER DEUTSCH, Florida
ALBERT RUSSELL WYNN, Maiyland
DON EDWARDS, California
FRANK MCCLOSKEY, Indiana
THOMAS C. SAWYER, Ohio
(Vacancy)
Michael H. Van Dusen, Chief of Staff
RlCHARO J. Gabon, Minority Chief of Staff
Deborah Burns, Staff Msociau
BENJAMIN A. OILMAN, New York
WILUAM F. GOODLING, Pennsylvania
JAMES A. LEACH, Iowa
TOBY ROTH, Wisconsin
OLYMPIA J. SNOWE, Maine
HENRY J. HYDE, Illinois
DOUG BEREUTER, Nebraska
CHRISTOPHER H. SMITH. New Jersey
DAN BURTON, Indiana
JAN MEYERS, Kansas
ELTON GALLEGLY, California
ILEANA ROS-LEHTINEN. Florida
CASS BALLENGER, North Carolina
DANA ROHRABACHER, California
DAVID A LEVY, New York
DONALD A. MANZULLO, Illinois
UNCOLN DIAZ-BALART. Florida
EDWARD R ROYCE. California
Subcommittee on Europe and the Middle Eact
LEE H. HAMILTON, Indiana, Chairman
ELIOT L. ENGEL, New York
CHARLES E. SCHUMER, New York
ROBERT A. BORSKI, Pennsylvania
ROBERT E. ANDREWS, New Jersey
SHERROD BROWN, Ohio
ALCEE L. HASTINGS, Florida
PETER DEUTSCH, Florida
TOM LANTOS, California
KatHERINB a Wilkens, Staff Director
Deborah BodlandER, Republican Profe$8ional Staff Member
Martin SLETZINCER, Professional Staff Member
BENJAMIN A. OILMAN. New York
WILLIAM F. GOODLING. Pennsylvania
JAN MEYERS, Kansas
ELTON GALLEGLY. California
DAVID A. LEVY. New York
JAMES A. LEACH. Iowa
ai)
CONTENTS
Page
RECOMMENDATIONS FOR FISCAL YEAR 1994 FOREIGN ASSISTANCE
LEGISLATION
Economic and Military Aid Programs In Europe and the Middle East
General Recommendations 1
New Independent States 5
Eastern Europe Regional 11
Israel 17
Egypt 23
West Bank/Gaza and Middle East Regional Programs 25
Jordan 28
Lebanon 30
Yemen 33
Oman 34
Greece 36
Turkey 39
Cyprus 43
Portugal 46
Ireland and Northern Ireland 48
WITNESSES
Middle East
Wednesday, April 28, 1993
Dennis M. Chandler, Acting Assistant Administrator, Near East Bureau,
Agency for International Development 52
Edward P. Djerejian, Assistant Secretary of State, Bureau for Near Eastern
Affairs, Department of State 60
APPENDIX
Prepared statements:
Mr. Dennis Chandler „ 97
Hon. Edward Djerejian 110
Response of Mr. D)ereji£m to a question from Hon. Tom Lantos regarding
how Omar Abdurrahman repeatedly obtained visas to enter the Unilcd
States (Chronology of Events) 117
Report on Cash Flow Financing Foreign Military Sales Program 120
Information provided by Mr. Chandler regarding reports in the Israeli press .. 123
Report on Economic Conditions in Egypt 1991-1992 125
Report on Economic Conditions in Israel 1991-1992 143
Taoles of estimated assistance provided to Egypt and Israel in fiscal year
1993 and estimated outlays for the requested fiscal year assistance to
the Near East countries 155
Material Submitted for the Record
Prepared statements:
Thomas A. Dine, executive director, American Israel Public Alfaim Com-
mittee (AIPAC) 158
Hon. Thomas Nassif, chairman, American Task Force for Lebanon 193
(III)
IV
Pate
Prepared statements — Continued
Linda Heller Kamm, Americans for Peace Now (APN) 197
Khalil E. Jahshan, executive director of the National Associatioii of Arab
Americans (NAAA) 201
Supplemental questions submitted to the Department of State and responses
uiereto for April 28, 1993 hearing on VS. Foreign Assistance to the Middle
East 218
Supplemental questions submitted to the Department of Defense and re-
sponses thereto for April 28, 1993 hearing on UJ5. Foreign Assistance
to the Middle East 243
Supplemental questions submitted to Uie Agency for International Develop-
ment and responses thereto for April 28, 1993 hearing on \J3. Foreign
Assistance to the Middle East 258
Central and Eaotern Europe, Greece, Turkey, Cyprus, Portugal, Ireland,
Russia and the New Independent States
Tuesday, May ii, 1993
Steiihen A. Oxman, Assistant Secretary of State, Bureau for European Af-
fairs, Department of State 288
Hugh Hamilton, Acting Special Advisor for East European Assistance, De-
partment of State ......,,„ 297
David Merrill, Acting Assistant Administrator, Bureau for Europe, Agency
for International Development , 300
GeoT^ Bader, Principal Du«ctor for European and NATO Policy, Department
of Defense 314
APPENDDC
Prepared statements:
Hon. Stephen A. Oxman 333
Mr. George W. Bader 347
Mr. David N. Merrill 352
Letter of Marianne O'Sullivan, Acting Assistant Administrator for Legislative
Affairs, dated June 25, 1993, to Hon. Robert E. Andrews, regarding infor-
mation on private sector banks in Pbland 372
Pipeline Table for Eastern Europe, submitted by Mr. Merrill 374
FY 1994 U.S. Economic and Aulitary Assistance, a table, submitted by Mr.
Merrill 386
Material Submitted for the Record
Andrew E. Manatos on behalf of the United Hellenic American Congress,
the Pancyprian Association of America, the International Coordinating
Committee (Justice for Cyprus), and the American Hellenic Alliance 387
Eugene Rossides on behalf of the American Hellenic Institute Public Affairs
Committee, Inc. and the Cyprus Federation of America, Inc 390
Supplemental questions submitted to the Department of State and responses
tnereto for May 11, 1993 hearing on U.S. Foreign Assistance to Europe 403
Supplemental questions submitted to the Department of Defense and re-
sponses thereto for May 11, 1993 hearing on U.S. Foreign Assistance to
Europe 443
Supplemental questions submitted to the Agency for International Develop-
ment and responses thereto for May 11, 1993 hearing on U.S. Foreign
Assistance to Europe ^^^
Letter from Hungarian-American Enterprise Fund to Hon. David Obey 462
Report on Economic Conditions in Turkey 1993 470
Report on Economic Conditions in Portugal 1993 479
HEARINGS ON FOREIGN ASSISTANCE LEGISLATION FOR
FISCAL YEAR 1994
Part 1 — ^FuU committee
Part 2 — Subcommittee on Europe and the Middle East
Part 3 — Subcommittee on Economic Policy, Trade and
Environment
Part 4 — Subcommittee on International Security, Inter-
national Organizations and Human Rights
Part 5 — Subcommittee on Western Hemisphere Affairs
Part 6 — Subcommittee on Asia and the Pacific
Part 7 — Subcommittee on Africa
Part 8 — ^FuU committee markup
(v)
General Recommendations
1. The subcommittee recommendations, pursuant to instructions from the
Committee, are to authorize $7,365 million for the fiscal year 1994 programs under
the jurisdiction of the subcommittee.
These authorizations include:
o $5,202 billion to promote Middle East Peace;
o $1,113 billion to build democracy in the Newly Independent States of
the former Soviet Union and in Central and Eastern Europe:
o $980 million to support base rights countries in Southern Europe: and.
o $35 million for projects to promote reconciliation in Cyprus and
Northern Ireland.
These recommendations include a $311 million increase in technical assistance
for the Newly Independent States of the former Soviet Union, and $5 million to
supix)rt the Multilateral Peace talks in the Middle East, a new program requested by
the administration.
2. The subcommittee is recommending the following changes from the amounts
requested by the administration:
- Turkey, minus $18 million in ESF funding, for an authorization of
$125 million in ESF. This represents a straightlining of ESF funding
for Turkey from the Fiscal Year 1993 level:
- U.S.-Israel Cooperative Development Program (CDP) and U.S.-Israel
Cooperative Research Program (CDR), not less than $10 million.
There was no request:
- West Bank and Gaza, plus up to $7.5 million, for a total authorization
of up to $32.5 million. The administration's request was $25 million;
~ American Schools and Ho^spitals Abroad (ASHA), $35 million in
development assistance. There was no request.
3. Eighty-seven percent of the fiscal year 1994 worldwide securitv assistance
request is mtended for programs in the .Middle East. 98 percent of this assistance
represents economic and military aid to Israel and Egypt. The remainder funds
small programs elsewhere in the .Middle East including: $25 million ESF for the West
Bank and Gaza. S21 million ESF and FMF for Jordan. $4 million ESF for Lebanon. $7
million ESF for Middle East Regional Cooperation, and $5 million to support the
Multilateral Peace talks.
The high levels of U.S. military and economic assistance to countries in the
Middle East, and primarily Israel and Egypt, have promoted peace and security in
this region and to further the search for peace in the Middle East.
(1)
In this regard, the subcommittee is pleased with the continuation, despite
numerous difficulties, of the direct engagement of Israel with its Arab neighbors
Jordan, Lebanon. Syria, and the Palestimans in face-to-face peace negotiations. The
subcommittee welcomes the Administration's assessment that the Apnl-May session
of talks produced a new evolution of positions and the beginning of the emergence of
common elements in their stance on key issues. The subcommittee looks forward to a
re-engagement of the parties next month and the beginning of true progress toward
substantive agreements.
The subcommittee urges all the parties to adopt the U.S. Administration's
suggestion of meeting in continuous session, with only short breaks, in order to speed
up and enhance chances for success in the negotiating process and to avert constant
uncertainty over the parties' commitment to attend subsequent sessions. The
subcommittee supports the Administration's decision to become a "full partner" in the
peace process. The term "full partner" was used to describe the U.S. role during the
Israel-Egypt talks of 1978-79, and the subcommittee anticipates an emboldened U.S.
effort to bring the negotiating parties to agreement, recognizing that the primary
responsibility for making peace rests with the parties themselves.
The subcommittee also welcomes the continued engagement of more than thirty
parties, including Israel and several Arab states, in five regional multilateral
negotiations focusing on water issues, economic development, environment, refugees,
and arms control and regional security. The multilaterals have been a source of new
ideas and an additional forum for productive Arab-Israeli engagement. The
subcommittee supports the administration's request for $5 million in funding to assist
the work of the multilateral talks.
4. The most dramatic change in the programs under the subcommittee's
jurisdiction in recent years has been the significant increase in support for building
democracy and free market economies in Central and Eastern Europe and the former
Soviet Union. Assistance for these countries has gone from near zero funding prior to
fiscal year 1990 to $1,113 billion in fiscal year 1994. This total represents $409 million
in support for Central and Eastern Europe and $704 billion for Russia and the other
Newly Independent States of the former Soviet Union. The single largest increase in
total worldwide country assistance for fiscal year 1994 is the expansion of U.S.
programs in the former Soviet Union up $311 million from the fiscal year 1993
foreign assistance request.
5. The fiscal year 1994 request before the subcommittee includes important
requests for three NATO allies - Portugal. Greece and Turkey - that form an
important link across the northern edge of the Mediterranean Sea. These allies have
long traditions of security cooperation with the United States. Despite dramatic
changes in the security environment in Europe in recent years, the subcommittee
continues to believe that close U.S. relations with these allies, including defense
relationships, remain an important U.S. interest.
The subcommittee welcomes the shift in recent years in U.S. relations with
these allies away from the previous model of the provision of economic or military
assistance in return for multi-year base access commitments. The subcommittee
believes this shift is a healthy evolution toward a new set of security relations with
these countries based on equality and genuine mutuality of interests. The
subcommittee realizes that some U.S. assistance to supplement domestic military
budgets will continue to be required for a transition period. The subcommittee
welcomes the shift to an all concessional FMF program in the base rights countries in
southern Europe for fiscal year 1994.
6. The subcommittee recommends an authorization of $35 million for the
American Schools and Hospitals Abroad (ASHA) program for fiscal year 1994. The
Administration made no FY 1994 request for ASHA funding. The subcommittee
believes continuation of this program serves important U.S. interests by assisting
private, non-profit institutions that serve host-country citizens. This program is
designed to support institutions of excellence, flagship institutions which serve as
important study and demonstration centers for American ideas and practices in
education and m medicine.
The demand for men and women with the open, inquisitive minds which a
liberal American education produces is still great. These mstitutions have been a
formative force in the lives of literally thousands of dynamic leaders in these
countries. ASHA-funded educational mstitutions are generally among the foremost
in their nations in promoting freedom of thought and free academic mquiry. two of
the primary foundations of democracy and democratic development.
7. The subcommittee recommends that the Committee favorably consider an
amendment to adopt the Competitive Pricing initiative that will end the practice of
permitting defense contractors to charge higher rates for foreign military purchases
financed through cash FMF. than they do for U.S. government purchases. The
subcommittee understands that this initiative will have no U.S. budget impact. It will
result in savings to recipients of cash FMF assistance and enable these countries to
spread the FMF funds they receive from the U.S. wider and facilitate the purchase
of additional U.S. equipment within the same FMF funding levels. The
subcommittee believes this to be a meritorious proposal and urges the Full
Committee to give it favorable consideration.
8. The subcommittee understands that the administration plans to cease new
cash flow financing for Greece, Turkey and Portugal. The subcommittee strongly
endorses this change in policy.
9. The subcommittee is distressed that the secondary and tertiary Arab boycott
of Israel continue despite assurances during and after the Gulf War that they would
be modified. According to some estimates, has cost Israel $16 billion in investments
and $1 billion annually in lost exports.
10. The subcommittee is concerned about the threat to global security posed by
terrorism based on extremist religious ideology and believes that the U.S. should
vigorously counter this threat. The subcommittee urges the administration to
increase its monitoring of terrorist activities worldwide, and to increase its
coof)eration with its allies in such monitoring, in order to deter terrorist attacks.
Cooperation in this area should include sanctions against countries which provide
funds and arms for such activities. The goals and tactics of Hamas, Palestinian
Islamic Jihad. Hezbollah. Hizb-e-lslami. Jamaat-i-Islam. the Egyptian Islamic
Groupings (al-Gamaat al-Islamiyya) and similar organizations, are inimical to the
interests of the U.S. and its allies, and pose a threat to world peace and security. The
subcommittee requests that the administration report to Congress on diplomatic and
other efforts taken by the United States to stop the flow of arms and funds to such
organizations.
The subcommittee understands that the Kingdom of Jordan continues to permit
members of the extremist group Hamas, including leaders Ibrahim Ghawsheh and
Muhammad Nazzal. to operate openly in Jordan. The subcommittee urges the State
Department to express concern about this matter to the Jordanians.
11. The subcommittee remains concerned about on-going Syrian restrictions on
travel and emigration, particularly affecting the Syrian Jewish community. Almost
2.600 Syrian Jews were permitted to leave Syria after changes in the Syrian
government's policies in April 1992. Since October 1992, however, few Syrian Jews
have been granted travel papers. During the first four months of 1993, only 75
Syrian Jews exited Syria, and reliable reports indicate that travel papers are being
issued only to 2-5 people per week. Moreover, hundreds of families are unable to
travel together because Syrian officials have granted travel documents only to some,
but not all, family members. Syria's retreat from its hopeful liberalization of April
1992 is not only a serious human rights issue and a potential imjjediment to progress
in the Syrian-Israeli track of the Middle East jjeace process, but a major obstacle to
improving U.S.-Syrian bilateral relations.
The subcommittee wiU oppose — and urges that the Administration not consider
— any foreign assistance package for Syria unless Syria demonstrates clear progress in
satisfying U.S. concerns about travel and emigration restrictions. Syria would also be
expected to:
o end major human rights abuses including: torture; arbitrary
harassment, arrest, and detention: lack of fair trials in security cases:
restrictions on workers' rights: and denial of freedom of press, speech,
and association;
o end all support of terrorist groups and international terrorism. Syria
continues to provide support and safe haven to terrorist groups,
several of which maintain training camps and other facilities on
Syrian territory. These practices require Syria's continued inclusion
on the U.S. government list of state sponsors of terrorism;
o fully implement the Taif Accord on Lebanon. The subcommittee
notes that negotiations on a pullback of Syrian forces to the Bekaa
Valley have not yet begun. According to the Taif Accord, these talks
were scheduled to begin in October 1992. Ultimately, Syria should
withdraw entirely from Lebanon;
o cease efforts to acquire or produce non-conventional weapons,
including nuclear, biological, and chemical weapons and long-range
ballistic missiles. Moreover. Syria should provide credible assurances
that any such weapons now in the Syrian arsenal will not be used to
threaten Syria's neighbors;
o end support for drug trafficking, both from its own territory and
from that of Lebanon: and
o actively assist in efforts to ascertain the location and obtain the release
of Israeli MIAs Rachamim Alsheikh. Zachary Baumel. Zvi Feldman.
Joseph Fink, and Yehuda Katz and POW Ron Arad. all of whom were
lost or captured in Lebanon in areas controlled by the Syrian military
and populated by various terrorist elements.
The subcommittee notes several positive steps taken by the Syrian government
in recent years, including its role in the coalition during the Gulf War. its assistance
in obtaining the release of .American hostages in Lebanon, and its participation in
direct p»eace negotiations with Israel. In the subcommittees view, these actions
demonstrate the ability of the Syrian regime to make fundamental and positive
changes of the sort discussed above.
NEW INDEPENDENT STATF.S
(In millions of dollars)
Fiscal Year
Subcommittee
Recommendation
1991
1992 1993
1994
Request
1994
Technical Assistance to
Russian Republics
Peace Corps
IMET
P.L. 480-Title I
TOTAL
.0
.0
.0
.0
.0
193.7 389.8
3.1 10.0
.2 1.2
67.3 60.1
264.3 461.2
704.0
11.6
2.0
•
717.6
704.0
11.6
2.0
717.6
• Figure for P.L. 480-Title I not yet
available.
1. The subcommittee believes that the transformation of the nations of the
former Soviet Union, Russia in particular, is the most important challenge facing
U.S. foreign policy today. The success of these reforms is critical to U.S. domestic
and foreign policy interests. The subcommittee believes that the U.S. must actively
assist democratic and economic reform in Russia. Ukraine and other former Soviet
republics.
The subcommittee recommends that assistance for Russia and the NIS states
should be targeted on initiatives that seek to transform these formerly centralized
command economies, including privatization of state-owned entities, banking reform,
credits for small business and private firms, housing for military jjersonnel,
assistance to cities and regions where reform is moving ahead, and programs for
dismantling nuclear weapons.
2. The subcommittee believes that, while assistance to Russia should remain the
focus of U.S. policy, the U.S. and the G-7 nations cannot overlook other NIS states, in
particular Ukraine, that have enormous economic and political needs and are also
important to U.S. security interests.
The subcommittee considers that the U.S. must make a greater effort to treat
Ukraine as a separate and important entity. U.S. prolicy towards Ukraine must not be
a derivation of our fwlicy towards Russia.- The U.S. must initiate a larger, more
effective assistance program for Ukraine that promotes political and economic
reform and is country-specific to Ukraine.
The subcommittee believes that the U.S. should continue to press Ukraine to
ratify the START I and NPT treaties but should balance this with a policy for
seeking to address Ukraine's security concerns incrementally, starting with modest
military cooperation. The subcommittee finds that a one-dimensioned U.S. policy of
pressure on Ukraine to ratify ST.ART I is unlikely to be successful and could be
counter-productive.
3. The subcommittee supports the three-step strategy to assist Russia and the
NIS states outlined by Secretary of State Christopher in testimony before the House
Foreign Affairs Committee on May 18, 1993.
These steps are as follows:
o The $1.6 billion package of bilateral programs announced at the
Vancouver Summit. This program will be funded within already
authorized and appropriated resources, and builds upon programs
outlined in the Freedom Support Act.
o The multilateral support program announced at the G-7 Summit in
Tokyo. This includes $28.4 billion in loans from international
financial institutions to help stabilize Russia's economy and finance
structural reforms.
o Additional bilateral assistance in the President's FY 94 budget request
totalling $704 million for Russia.
The subcommittee recommends the authorization of $704 million in FY 94 for the
implementation of programs contained in the Freedom Support Act.
4. The subcommittee supports in principle President Clinton's proposed expanded
package of U.S. bilateral programs for Russia totalling $1.8 billion announced at the
Tokyo Summit, and intended to build upon the initiative announced at Vancouver and
the FY 94 assistance program. The initiative is intended to supplement existing U.S.
assistance efforts in energy, privatization and housing for military personnel as well as
to provide suppjort for environmental clean-up. trade and investment, and exchange
programs. An important part of this expanded package would be creation of a G-7
privatization fund of which the U.S. share would be $500 million, if met by
corresponding contributions, by other G-7 members.
The subcommittee urges the Administration to expeditiously address important
questions on sjjecific comp>onents of this expanded package, particularly how these
additional spending requests will be funded. The subcommittee strongly urges the
Administration to consult closely with Congress on these issues before moving forward
with specific requests.
5. The subcommittee believes that the U.S. Congress should respond to President
Yeltsin's request to remove remaining Cold War provisions in U.S. legislation. The
subcommittee notes that there are some legitimate, although minor, security
considerations for the U.S. in lifting Cold War-era high-technology trade restrictions on
Russia and that these must be taken into account. .Nevertheless, it is the subcommittees
assessment that not allowing Russia to participate fully in the world economy and the
community of nations poses even greater risks to international peace and security. We
should moN'e cautiously, but deliberately and expeditiously, to facilitate the full
integration of Russia into the world economy at the earliest possible occasion.
The subcommittee believes that the U.S. should consider the current status of the
Jackson-Vanik immigration provisions and repealing Captive Nations legislation. The
subcommittee also supports:
o allowing Russians to act as commercial agents in the U.S. without
registering w ith U.S. authorities:
o removing special review procedures on e.xports of DOD-financed goods
and technology:
o allowing Russia to participate in the international satellite launch
market: and
o progressively lifting the applicability of COCOM to Russia as it
improves its export controls.
6. The subcommittee strongly believes that the United States should restructure the
organization and management of its assistance programs in Russia and Ukraine. The
subcommittee urges that the traditional approach of concentrating program decisions in
Washington should be discarded and replaced with a more field-oriented approach. More
personnel, with greater design and decision-making authority, should be based in Russia,
the Ukraine and area offices for Central Asia and the Caucasus. The subcommittee
acknowledges that the "Washington Mission" approach may have made sense at the
beginning of the assistance program when the desire was to fund those in the U.S. with
projects ready to go or to fund those in Russia already on the ground. Now, AID officials
m the field are in a better position to assess individual needs of these states and respond
to problems and changing circumstances.
The subcommittee strongly believes that Ukraine should have its own separate
country strategy and field presence for AID assistance programs and that Central Asia,
the Caucasus and, possibly, eastern Russia, would merit a more area-specific focus on the
priorities and requirements of economic and political transformation of these areas.
7. The subcommittee strongly believes that U.S. assistance for Russia must be
delivered expeditiously to maximize the impact on the reform movement. The
subcommittee is deeply concerned at the slow pace 3t which funds already appropriated
by Congress have been expended in Russia and the other NIS states. Only a small portion
of the $650 million appropriated in FY 92 and FY 93 in foreign assistance funds has been
spent. In this regard, the subcommittee welcomes President Clinton's announcement at
the Vancouver Summit of a $1.6 billion package made up of existing authorized and
appropriated resources to be delivered by or near the end of the calendar year. This is an
important step in breaking the bottleneck on delivery of these funds and a helpful signal
that future funds will be provided to the NIS states in an expeditious fashion.
The subcommittee warns that the slow expenditure of funds risks making U.S.
assistance to the region irrelevant. If the pace does not increase dramatically, U.S. efforts
could be too late to help reform. The subcommittee further believes that failure to
expend appropriations from previous years will make it more difficult to secure
congressional approval of additional funds for Russia and the .NIS. despite the critical
important of U.S. programs to assist the pxjlitical and economic transformation in the
former Soviet Union.
The subcommittee believes it is essential that the Ambassador-at-Large for NIS
affairs and the administration's coordinator for assistance to the NIS have adequate
authority to cut through interagency red tape and move assistance flexibly and rapidly, as
required by the Freedom Support Act. A strong and effective coordinator is critical to
expeditious and optimal provision of U.S. assistance. The subcommittee hopes to work
closely with the newly designated NIS Coordinator. Ambassador Tom Simons, to promote
common objectives in this area.
8. The Freedom Support Act explicitly states that a criteria for aid to the Newly
Independent States is the extent to which they terminate support for the communist
regime in Cuba, including the removal of troops, closing of military facilities and ceasing
trade subsidies and economic, nuclear and other assistance. The subcommittee supports
Russian efforts to reduce military and economic subsidies to Cuba and withdraw the
combat infantry brigade. Further, the subcommittee urges Russia to continue its
disengagement from Cuba by discontinuing its oil shipments to Cuba.
8
9. The Subcommittee notes that the Freedom Support Act contains important
criteria for assistance to Governments of the Independent States, inter alia, the extent to
which these states are implementing responsible security policies, including restraining
conventional arms transfers. In addition, the Freedom Support Act provides that no
assistance should go to any NIS state that has transferred missiles or missile technology to
any other state or any nuclear equipment or technology that would contribute
significantly to the ability of any country to manufacture any weapon of mass
destruction, including nuclear, chemical and biological weapons.
In light of this language, the subcommittee considers that assistance to any NIS state
should be terminated if the President finds it has transferred weapxjns of mass
destruction, related technologies or related scientific expertise to Iran. Consistent with
the Freedom Support Act, the subcommittee strongly urges the governments of the NIS
states to cease the export of military and military-related goods, services and technology
to Iran. Continued exjjort of such goods to Iran could lead to the susp)ension or
termination of U.S. assistance under the terms of the Freedom Support Act.
Beginning 120 days after the date of enactment of this Act and very 120 days
thereafter, the President shall submit a report to the appropriate congressional
committees with respect to the indep)endent states of the former Soviet Union. Each such
report shall describe the numbers and typjes of any military or military-related goods,
services or technology exported or otherwise transferred by the independent states to
Iran.
The term "military or military-related goods, services or technology" includes (a)
weapons of mass destruction and related technology and scientific expertise, as well as
civilian nuclear material, equipment and technology; (b) sophisticated and destabilizing
conventional weapons; and (c) conventional weapons that are subject to the reporting
requirements of the United Nations Conventional Arms Transfer Registry.
10. The subcommittee wishes to underscore the importance of U.S. efforts to assist
disarmament and non-proliferation activities in the NIS states. The subcommittee
supports the Administration's fiscal year 1994 request for another $400 million of EX)D
funds for these purposes in fiscal year 1994. Nevertheless, the subcommittee strongly
believes that the U.S. must do a better job of implementing already existing assistance
programs to dismantle and destroy weapons of mass destruction in the former Soviet
Union.
The subcommittee is concerned that very little of the $800 million in FY 92 and 93
funds appropriated for the destruction of nuclear, chemical and other weapons of mass
destruction has been expended to date. The subcommittee notes that, while the focus of
U.S. exp)enditures to dale has been on safe transportation and storage of weapons, very
little has been done yet actually to destroy and dismantle such weapons. The
subcommittee believes that the U.S. should place higher priority on the actual destruction
of weapons.
11. The subcommittee supports an active, well-targeted U.S. assistance effort to the
new nations of Central Asia. These nations are in the early stages of democratic and
economic institution-building and require a well-focused assistance strategy. They must
not be treated as appendages of the former Soviet Union.
The subcommittee cautions that the nations of Central Asia are not implementing
political and economic reform at the same pace. The subcommittee notes that, according
to criteria set forth in the Freedom Support .Act. those nations which are making
significant progress in implementing these criteria should be rewarded and targeted for
larger shares of assistance.
The subcommittee notes that a shortage of specialists with linguistic and cultural
experience of the nations in the region could hamper the development of U.S. relations
and the efficiency of U.S. assistance projects unless expeditious steps are taken to remedy
this deficiency.
12. The subcommittee supports the continuing authorization of the Soviet-Eastern
European Research and Training Program as authorized by Section 105(3) of Public Law
101-246. The subcommittee feels the training of American scholars and the development
of expertise about this region is of such compelling importance to warrant its contmued
fundmg. The subcommittee believes the emphasis of the program should be support for
training in East European and non-Russian languages and cultures of the former Soviet
Union. The subcommittee understands that the administration intends to fund this
program at its previous level of $10 million in fiscal year 1994 and that these funds will
come from the State Department budget.
13. The subcommittee welcomes continued emergency humanitarian assistance to
Armenia, including food, medicine and energy supplies, in view of the ongoing blockage
of Armenia by its neighbors. Since this blockade is a direct result of the confUct in
Nagorno-Karabakh, the subcommittee urges all parties in the conflict to settle this issue
peacefully through direct negotiations.
The subcommittee supf)orts the new CSCE-sponsored peace plan for
Nagorno-Karabakh, drawn up by the U.S., Russia and Turkey and submitted to the
Armenian and Azerbaijan governments and the Nagorno-Karabakh representatives for
their endorsement. The subcommittee urges all parties to reach a ceasefire on the basis of
this peace document which will open the way for continuation of the CSCE-spwnsored
peace negotiations in Geneva and Rome.
14. The subcommittee notes that, as part of AID's special initiati%es program in the
NIS, two cooperative programs have been established to initiate pilot programs in the
Central Asia region. In the U.S.-Israel Cooperative Program, technical assistance and
training, particularly in water management and irrigation, is provided to senior
government officials, farm planners and managers throughout Central .Asia. In the
U.S. -Turkey Cooperative program, the U.S. and Turkey are to work on a bank training
and maternal-child health program in Central Asia.
The subcommittee finds that the U.S.-Israel Cooperative program has been warmly
welcomed in Central Asia where it has brought much needed expertise. The
subcommittee expects that this program will continue to help build goodwill between the
peoples of the U.S. and Israel and of Central Asia.
15. The subcommittee notes that the Freedom Support Act contains criteria that
shall be taken into account in providing assistance to independent states of the former
Soviet Union, including cooperation with U.S. government efforts to uncover evidence
regarding Americans listed as prisoners of war, who were detained in the former Soviet
Union during the cold war.
The need for greater cooperation of the Russian government in this area was
evident in the recent discovery in Russian archives of potential critical evidence bearing
on possible American P0\\7\ilAs from the Viet Nam War. The U.S. government should
not have to be dependent merely upon historians locating such critical evidence, but it
should be forthcoming voluntarily from the Russian government itself. The recent report
of the Select Committee on POW/MIA Affairs of the U.S. Senate in January 1993. noted
that: "Unfortunately, the level of cooperation from within the Russian military and
intelligence bureaucracy has been less extensive and has. at times, seemed intentionally
obstructive."
10
The subcommittee notes that the language in the Freedom Support Act has not
produced the full and complete cooperation that the U.S. government requires and needs
to fully account for all these American prisoners of war. who may have been held in the
former Soviet Union, or which the former Soviet Union has evidence on such prisoners'
possible fate from the Viet Nam conflict and others, the Russian government must be
more forthcoming. The Russian Federation, particularly the military and intelligence
bureaucracies, must completely cooperate with all U.S. goverrunent efforts to help
provide a full accounting of all U.S. POW/MIAs.
The subcommittee strongly believes that at all levels of the Russian government, the
total cooperation of the Russian Federation must be forthcoming to provide the full
accounting of all these American POW/MIAs that the Congress, the American people and
the members of the families of the POW/MIAs deserve and expect in this new and
developing cooperative relationship between our two governments.
11
EASTERN EUROPE REGIONAL
(In millions of dollars)
Fiscal Year
Subcommittee
Recommendation
1991
1992
1993
1994
Request
1994
ShN) Programs
Development Assistance
(Grant)
ESF-G
Special Assistance
Initiative
P.L. 480-Tiae I
P.L. 480-Title II
Peace Corps
7.0
11.0
369.7
.0
.5
5.0
13.5
.0
363.7
57.5
2.5
7.6
15.5
.0
398.2
80.0
.0
8.7
.0
.0
409.0
•
55.9
12.1
.0
.0
409.0
55.9
12.1
TOTAL
393.2
444.8
502.4
476.0
476.0
Military Assistance:
FMF-G (Poland. Hungary)
IMET
IMET (Yugoslavia)
.1
1.0
.1
.0
2.7
.0
.0
2.37
.0
.0
2.8
.0
.0
2.8
.0
TOTAL
LI
2.7
Z87
2.8
Z8
• Figure for P.L. 480-TitIe I
currently
not available.
1. The subcommittee recommends that $409 million be provided in fiscal year 1994
for programs of the type authorized under the Supfx)rt for East European Democracy Act
(SEED). This is the same amount contained in the Administration's request and is
approximately the same amount appropriated in FY 93. The subcommittee has not yet
received FY 1994 request for P. L. 480-Title 1 funding for countries in Eastern and
Central Europe. The subcommittee looks forward to receiving this figure in the near
future.
FY 94 will be the fifth year of the SEED program and total amounts for the region
appear to have stabilized. The subcommittee notes that while the number of countries
eligible for assistance under SEED has multiplied since 1989. the funding available has
not. The subcommittee expects that U.S. assistance to the region will concentrate limited
available resources on key sectors where U.S. assistance can be most helpful. The
subcommittee notes that the U.S. program of energizing assistance to Russia and the NIS
states must not come at the e.xpense of Central and Eastern Europe.
12
2. The subcommittee notes that it has not yet received a Congressional Presentation
Document on the breakdown of the overall authorization request for SEED funds in FY
1994. The subcommittee expects that, while overall outlays for the region have stabilized,
the country-by-country differences will change in keeping with individual country
progress on reform. The subcommittee expects that Poland, as the largest country in the
region, will continue to receive significant amounts of assistance. But as Poland, together
with the Czech Republic and Hungary, continue to make progress in their transition to
democracy and free-markets, other countries in the region, at an earlier stage in their
transition and hence with greater basic needs should begin to receive larger shares of
assistance. For example, the subcommittee notes that assistance to Albania in FY 93 will
decrease from FY 92 levels despite enormous developmental needs. The subcommittee
recommends that FY 94 funding levels for Albania adequately reflect the country's
pressing needs in democracy-buUding and economic reform.
The subcommittee views with concern the reduction in overall funding levels for
Albania from FY 1992 to FY 1993. Albania's emerging democracy is confronting critical
problems in a variety of areas. The subcommittee believes that greater support for the
current democratic Albanian government will assist in deef)ening Albanian democratic
practices, stabilizing a turbulent region, and enforcing the goodwill towards the United
States currently prevalent in Albania.
Because of the poverty in Albania, relatively small amounts of assistance can be
very effective in achieving these goals. The subcommittee is concerned that the
downward trend in aid levels will be detrimental not only to the stability of Albania but
to U.S. interests as well. The subcommittee urges the Administration to make aid to
Albania a higher priority in its allotment of United States foreign aid resources.
3. The subcommittee continues to believe that original expectations of a short-term
U.S. and western assistance program for Central and Eastern Europe were excessively
optimistic. Substantial assistance to the region will be required for several more years
and likely well into the 21st century. Certain countries in the region, notably Albania, are
true developing countries and will require a long-term commitment of assistance.
Likewise, the war in the Balkans has created such destruction, dislocation and human
misery that dealing with the humanitarian dimension of the war. as well as providing
traditional development assistance for reconstruction and rebuilding, will require
substantial and sustained commitments of assistance in future years.
4. The subcommittee welcomes the report of AID that U.S. programs in the region
are increasingly de-emphasizing high visibility operations conducted by U.S.-based groups
in favor of democratic and economic institution-building and the creation of indigenous
PVOs in these countries. The subcommittee expects that increased attention will be
devoted to key sections including financial sector reform, privatization and housing.
5. The subcommittee welcomes the statement of Assistant Secretary Oxman, in
hearings before the subcommittee on .May 11, 1993. that U.S. management of the SEED
program is shifting to a more field-based rather than Washington-based focus. Currently,
about half of the AID personnel working on implementation are now field-based. The
subcommittee expects that this trend should continue as the SEED program addresses the
specific needs of each country. The subcommittee also welcomes Secretary Oxman's
statement that the regional focus of the SEED program is now being adjusted to include
greater emphasis on country-specific programs. The regional focus to the U.S. assistance
effort has provided necessary flexibility and ability to address key regional issues,
particularly the environment. .Nevertheless, over the last three years countries in the
region have progressed at very different paces toward greater democracy and free marke'
systems and their specific needs have diverged more. Each country in the region has its
13
own specific and unique requirements. The subcommittee believes that a more
country-specific approach to assistance in this region is now merited. This approach would
significantly enhance the effectiveness of the SEED program at this stage.
6. The subcommittee notes that the focal point of U.S. assistance efforts in Central
and Eastern Europe has been the Enterprise Funds. These Funds account for nearly 36%
of all U.S. economic restructuring assistance to the region. The subcommittee has teen
supportive of the Enterprise Funds and has viewed them as generally positive and
successful experiments m how to provide foreign assistance for developing the private
sector.
The first Enterprise Funds established in Poland and Hungary are nearing the end
of their three-year capitalization period. Basic questions about the future nature and
continuity of the Funds must be addressed. These include the issue of the public
accountability of the Funds and the lack of U.S. government control over ultimate
liquidation of the Funds. The Subcommittee supports the need for independence of the
Enterprise Funds, and the importance of not havmg them hamstrung by government
bureaucracy, but underscores the importance of full accountability of the Enterprise
Funds to the Administration and to the Congress for public funds.
Recently, several problems with the functioning of certain of the Enterprise Funds,
particularly the Hungarian-American Enterprise Fund, have emerged. The subcommittee
expects that these problems will be satisfactorily resolved in the shortest possible time, in
order for the remaining U.S. government funding to proceed without delay. Concerns
persist in the following areas:
o excessively high salaries for Fund executives:
o the establishment of wide-ranging subsidiary entities beyond the
control of the Administration and Congressional oversight:
o inadequate book-keeping: and
o the hasty reappointment of members of the Boards of Directors for
new, three-year terms immediately prior to the new .Administration
taking office.
The subcommittee regrets deeply that these problems have emerged and expresses its
concern that they will be addressed expeditiously and not be permitted to jeopardize
otherwise meritorious programs in Eastern Europe.
7. The subcommittee also has some concerns with the functioning of the European
Bank for Reconstruction and Development (ERBD). The United States is the single largest
contributor to the Bank, having contributed $70 million in FY 91 and $68 million in FY 92.
As such, the U.S. has a strong interest in the efficiency and direction of this Bank which is
supposed to play a major role in multilateral efforts to assist private enterprise in the
region. The subcommittee's concerns arise from confirmed reports that, in the first 20
months of the Bank's existence, it has engaged in an excessive level of spending on the
physical infrastructure of the Bank itself as well as on administrative and operating
expenses. These expenses have exceeded $300 million, which is twice the rate of the Bank's
investment in Central and Eastern Europe during that time.
The subcommittee expects that the United States will take a firm stand in support ot
budgetary prudence and accountability in the ERBD's future operations. The
subcommittee e.xpects that the First Vice President of the Bank, a position which
14
institutionally is occupied by a U.S. official, will in the future take active steps to help cut
administrative and operating expenses and in informing the relevant bodies of Congress
about developments m this area.
The subcommittee considers that increased assistance and lending to Central and
Eastern Europe and the former Soviet Union through multilateral institutions such as the
EBRD will be difficult to sustain in the Congress in the absence of concrete assurances that
the expenditure of funds is properly scrutinized and fuUy justified.
8. The subcommittee expects that international assistance to Central and Eastern
Europe will continue to be coordinated through the Group of 24 (G-24) which is comprised
of all members of the Organization for Economic Cooperation and Development (OECD).
The subcommittee is concerned that EC coordination of this western assistance has not been
fully effective. There is no indication that western assistance efforts have been effectively
coordinated and no real division of labor appears to exist.
The subcommittee recommends that the U.S. and EC should adopt a timely
cooperative approach in their assistance to the region. Collaborative programs hnking U.S.
and EC efforts should be highlighted, particularly in the areas of development of local
government, public administration and rule of law. The subcommittee believes that AID
should give serious consideration to the funding of such joint US-EC projects with SEED
authorizations.
9. The subcommittee notes that Poland has recently embarked on a large scale bank
reform program which draws on $400 million in World Bank loans and $657 million from
the $1 billion Currency Stabilization Fund established by the major western donors for
Poland in 1989. The subcommittee also notes that the $199.1 million U.S. grant contribution
to the Stabilization Fund has been shifted to the newly created "Polish Bank Privatization
Fund."
The subcommittee welcomes this important new bank reform initiative in Poland and
fully endorses the transfer of U.S. grant funds to the Polish Bank Privatization Fund.
10. The subcommittee believes that assistance to Estonia. Latvia and Lithuania shoulc
be a priority of future SEED assistance. The subcommittee considers the withdrawal of
Russian troops from the Baltic States as critical to the democratic and economic reform of
those countries. The subcommittee supports the model for the Freedom Support Act which
makes Russia ineligible for U.S. assistance unless there is significant progress on troop
withdrawals, but without imposing absolute and unachieveable conditions on Russia. The
subcommittee expects that the envisaged Enterprise Fund for the Baltic States will be
established expeditiously and in a manner that addresses the need to guard against the
repetition of abuses such as those recently identified in the Hungarian-American Enterprisi
Fund.
11. The subcommittee expects that humanitarian assistance to refugees and other
victims of the wars in the former Yugoslavia will be a continuing and growing obligation
for the U.S. and the international community. The subcommittee supports ongoing
humanitarian assistance projects to the area and is prepared to support additional funding
for humanitarian relief as needs develop and to the extent it can be supported in the
budget.
The subcommittee recommends that sufficient resources be provided for helping the
victims of torture, including rape and other war crimes, in the former Yugoslavia and for
the families of such victims, especially children, with a particular focus on victims of the
war in Bosnia-Hercegovina. Such assistance should include provision of medical.
«
15
psychological and psychiatric care and crisis counseling for victims of war crimes and
training of individuals in the former Yugoslavia to provide medical, psychological and
psychiatric care and crisis counseling.
The subcommittee notes that, according to the UN. nearly 3.5 million of Yugoslavia's
pre-war population of 24 million are refugees. The subcommittee emphasizes that the full
rights of refugees in the former Yugoslavia must be upheld in accordance with the
principles of the Helsinki Final Act and other international agreements.
The subcommittee supports the UN's decision to establish an international tribunal to
prosecute war crimes in the former Yugoslavia. The subcommittee expects that every
effort will be made to bring the perpetrators of war crimes in the former Yugoslavia and
their patrons to justice.
12. The subcommittee supports the provision of another $5 million in FY 94 in
humanitarian assistance for Kosovo. While the $5 million appropriated for FY 93 has not
yet been completely dispersed, needs in Kosovo are great, particularly for medicines and
medical supplies.
The subcommittee supports in principle the establishment of a permanent USIA
mission in Pristina. the capital of the autonomous province of Kosovo. The subcommittee
notes that such a mission can be established only when the Secretary of State determines
that U.S. employees will not be at physical risk. The subcommittee notes that three State
Department employees are presently assigned to Kosovo as representatives of the CSCE.
The danger of physical risk for USIA mission employees should be viewed within the
context of State Department employees already present in Pristina.
The subcommittee recognizes that the situation in Kosovo is extremely tense and
volatile. Ethnic Albanians who constitute 90% of the population have been deprived of
most of their basic human rights and freedoms by the repressive actions of the Serbian
authorities. Kosovo has been stripped of its autonomous status as guaranteed in the 1974
constitution. There is imminent danger of the spread of the violence and killing witnessed
in Bosnia to Kosovo. Urgent, preventative measures are needed to head-off the threat of
violence. The subcommittee notes the warning to the government of Serbia contained in a
letter sent by President Clinton that aggressive actions against Kosovo will be met with
force by the United States.
The subcommittee supports strong, unequivocal action by the United States
government and its European allies in the case of an escalation of ethnic cleansing in
Kosovo by the government of Belgrade. Such an escalation should be viewed by the
United States government as a direct threat to our allies in the region of the former
Yugoslavia and thus a direct threat to the strategic mterests of the United States.
13. The subcommittee remains concerned about ethnic tensions in Eastern Europe,
including the situation of the Hungarians in the Transylvania region of Romania. The
subcommittee believes that the U.S. Embassy in Bucharest should work to broaden and
deepen contacts with the Hungarian community in Transylvania, especially in the city of
Cluj.
14. The subcommittee notes the intention of the Administration to reorganize and
restructure U.S.-funded radio programming abroad, in particular RFE-RL. The
subcommittee strongly recommends, regardless of the outcome of this planned
reorganization, that the U.S. maintain a full program of radio broadcasting to the states oi
the region, concentrating on developments within the target country.
16
The subcommittee believes that the continuation of objective and extensive
broadcasting to the region remains essential at a time when political and ethnic relations
are unstable. The subcommittee notes that several, well-respected political leaders in the
region have strongly urged the continuation of such U.S.-f unded broadcasting. The
subcommittee also notes the urgent and particular need for objective broadcasting to the
states of the former Yugoslavia, where continuing state-control of the media has
exacerbated ethnic and mter-state relations.
17
ISRAFI,
(In millions of dollars)
Fiscal Year
Subcommittee
Recommendation
1991
1992
1993
1994
Request
1994
Economic assistance:
ESF
Military assistance:
FMF (Grant)
1.850
1.800
1.200
1.800
1.200
1.800
1.200
1.800
1.200
1.800
Total
3.650
3.000
3.000
3.000
3.000
1. A fundamental element of United States foreign policy has been support for a
strong and secure Israel. Since 1948. the United States has made a major contribution to
Israel's security and development. Israel remains a key strategic ally of the United States
in the Middle East, and a critical partner in the U.S. pursuit for a just and lasting peace
in the Middle East. The subcommittee recommends the authorization of the
administration's request of $1.2 billion in ESF assistance and $1.8 billion in FMF grant
assistance for Israel in fiscal year 1994.
2. The subcommittee strongly supports the Middle East p>eace process and
commends the efforts of the Bush and Clinton Administrations to initiate and pursue
direct Arab-Israeli p)eace talks. The subcommittee supports the policy of pursuing
Israeli-Palestinian peace as well as peace between Israel and the neighboring Arab
states. The subcommittee believes that neither the United States nor any other third
party can impose peace in the Middle East, but it does believe the United States can
serve as a critical catalyst in the peace process.
The subcommittee welcomes the Administration's decision to increase its
involvement in the role of "full partner" in the peace process. The subcommittee
hopes that this role will be further clarified in the next session of the talks. Progress
can only take place in peace talks if the U.S. plays a vigorous and active role as a
catalyst in talks. The subcommittee believes that a U.S. role in these talks is an
important element for progress in bridging existing differences between the parties in
the on-going peace process. Time is growing short, and the subcommittee believes
that all parties must now focus on substantive progress in the next round of talks.
Seeking to avert controversies over attendance at each renewed round of
negotiations, the subcommittee supports the Administration's proposal for continuous
negotiations.
3. The sutKommittee recommends authorization of the fiscal year 1994 request
for not less than $1.8 billion in FMF grant assistance for Israel. The subcommittee
also recommends disbursal of this FMF assistance within 30 days after the beginning
of the fiscal year or the date of enactment of the Act appropriating such funds
whichever is later. The assistance is designed to promote American strategic interests
in the region by allowing Israel to maintain its qualitative superiority in military
technology over p»otential belligerents in the region and to allow Israel to pursue the
peace process confident that its security interests are protected.
18
\
The subcommittee recognizes the many benefits to the U.S. resulting from our
strategic and mutually beneficial relationship with the State of Israel. The
subcommittee supports the administration's commitment to maintaining Israel's
qualitative techmcal edge over any possible combination of adversaries. The
subcommittee supports the administration's desire to enhance U.S.-Israel military and
technical cooperation, particularly in the areas of missile defenses and
counterproliferation. Further the subcommittee notes the establishment of the
U.S.-Israel Science and Technology Commission, the binational Senior Planning
Groups, and the Technology Transfer Working Group. The subcommittee believes
these bodies should work to strengthen existing cooperation mechanisms and break
down barriers to further cooperation.
4. The subcommittee supports allowing Israel to use $475 million of the FMF
grant assistance in fiscal year 1994 for offshore procurement expenditures in Israel as
an economic boost to employment, research and development, and production. The
subcommittee also notes that such offshore procurement is an important factor in
maintaining Israel's qualitative superiority in military technology. The subcommittee
recommends that $150 million in fiscal year 1994 be available for research and
development in the United States of weapons systems Israel may wish to procure.
The balance of the FMF recommended authorization for fiscal year 1994 will be
spent in the United States.
5. The subcommittee supports the provision in the 1991 Foreign Operations
Appropriations Act that provides for the drawdown for Israel of defense articles
from the stocks of the Department of Defense, and military education and training,
having an aggregate value of up to $700 million. The subcommittee recommends that
this drawdown authority be extended and remain available for Israel through the
end of fiscal year 1994.
The subcommittee also supports the extension of military stockpiles in Israel
and supports the administrations plans for an additional $200 million for fiscal years
1993 and 1994, which shall be available only for stockpiles in Israel.
6. The subcommittee supports the efforts of the Joint Political Military Group,
formed in November 1983. to enhance strategic cooperation between Israel and the
United States. The 19th meeting of the JPMG took place in May 1993 in Annapolis.
Maryland. Although the JPMG only meets twice a year, joint subcommittees meet
more frequently, and their members maintain regular channels of communication.
JPMG initiatives include combined planning, review of fX)ssible procedures for
pre-positioning U.S. supplies in Israel, as well as other types of contingency planning,
and joint exercises. The subcommittee believes this cooperation is important in
maintaining the U.S. military posture in the region.
7. The subcommittee supports Israel's continued eligibility under Section 516 of
the Foreign Assistance Act of 1961. as amended, as a major non-NATO ally for the
transfer of United States excess defense articles. The subcommittee believes excess
defense articles have been an important supplement to Israel's defense needs at a
time of growing pressure on the security assistance budget. The subcommittee
believes that Israel should be the highest priority recipient of U.S. military
equipment declared excess and made available for transfer to the Middle East.
8. The subcommittee recommends the authorization of not less than $1.2 billion
in ESF grant assistance for fiscal year 1994. This assistance is used to repay prior
loans to the U.S. and to help maintain economic stability in Israel by financing some
of the foreign exchange costs of economic growth and development. The
subcommittee believes U.S. ESF assistance to Israel has been important in supporting
structural economic reform.
19
The subcommittee supports the provision of the ESF cash transfer for Israel on
an expedited basis as in previous years. The provision of these funds in the first 30
days of the fiscal year, as opposed to its provision in four regular disbursements
during the fiscal year, maxmiizes the value of this assistance. Estimates are that this
program adds more than $30 million to the value of this assistance for Israel. This
value fluctuates according to prevailing interest rates.
9. The subcommittee notes that gains have been made in Israel's efforts to
confront its structural economic problems. The inflation rate has declined to under
10% for the first time in over twenty years. Real GDP growth has averaged roughly
5% per annum over the past three years (4.5% in 1992). Much of this growth was
fueled by a construction sector responding to a now slowing immigration boom. The
central government have made some progress in reducing its role in the economy
through restraint in defense spending, cuts in subsidies, and the sale of three
government owned companies. There has also been some progress in loosening
restrictions on foreign trade.
Nevertheless, difficult economic problems remain. Sluggish export growth and
a strong increase in imports is contributing to a growing balance-of -payments
problem. Progress on privatization has also been uneven. The subcommittee hopes
that the intra-ministerial committee formed by the Rabin government to sell off
government-owned companies will provide new impetus to the privatization effort.
Because of Congressional interest in the health of the Israeli economy, the
subcommittee supports the re-energization of the Joint Economic Development Group
(JEDG) as an active advisory board on Israeli reform. The JEEXJ proved its value in
the inid-1980s when it played a key role in making suggestions that were incorporated
into the largely successful Israeli stabilization plan. Unfortunately, the JEEXJ was
neglected during the last few years. The JEDG should be institutionalized and
staffed so that it functions on a permanent, ongoing basis to provide a forum for the
discussion of Israeli economic reform programs. These changes would also help to
assure the sort of continuity in JEDG sessions that has been lacking in the recent
past. The subcommittee recommends that the U.S. members of the JEDG file a brief
written report twice yearly on the progress in Israeli economic reform.
10. The subcommittee supports the provision of $2 billion in U.S. loan
guarantees for Israel in fiscal year 1994, according to the terms of the agreement
established between the U.S. Government and the Government of Israel, to assist the
Israeli economy in the absorption of Jewish immigrants from the former Soviet
Union. This is part of a five year program, pursuant to the Foreign operations
legislation for Fiscal Year 1992 signed into law on October 6, 1992. under which the
United States is providing Israel $10 billion in loan guarantees, at $2 billion per year.
Israel withdrew the first $1 billion in loans against this guarantee in March 1993.
Much of the loan is likely to be used to capitalize the private banking system to
finance infrastructure projects.
After peaking in 1990. immigration to Israel from the states of the former
Soviet Union has tapered off although it was higher in the 1990"$ than in the 1980's.
In 1989. 12.122 immigrants from the then-Soviet Union arrived in Israel: in 1990.
181.759; in 1991. 143.851: and in 1992. 64.057. Some 60-70.000 are expected again in
1993. There is no consensus on the reasons for this decline.
Prime Minister Rabin and President Bush last year reached agreement on the
conditions for the loan guarantees. According to their understanding, the amount of
any non-security funds e.\f)cndcd by Israel in the West Bank and Gaza may be
deducted from the total amount of guaranteed loan funds available to Israel. Prime
20
Minister Rabin has said that 11,000 previously constructed housing units in Jewish
settlements in the West Bank and Gaza will be completed after which no new
housing construction will be initiated by the government in these settlements.
The subcommittee also supports the Administration's stated plan to use the
JEEXj to monitor Israeli use of funds borrowed under the loan guarantee program.
11. The subcommittee recommended the start of a scholarship program in the
United States for Israeli Arabs eight years ago. Although the authorization
legislation was never enacted, the Department of State moved to use reprogrammed
funds to start a scholarship program and in 1990, close to $5 million was appropriated
and made available for this purpose. A USIA endowment was established with these
funds to carry out this initiative.
The intent of this program is to fund educational training in the United States
and prepare Israeli Arabs for careers in Israel. The subcommittee recognizes there
may be instances in which education should be acquired in Israel or a third country
instead of the United States. While most of the scholarships provided would be for
mid-level degrees, the subcommittee believes some doctorate degrees should be
supported. The subcommittee continues to support the implementation of this
program.
12. The subcommittee recommends the authorization of not less than $10
million for the U.S.-Israel Cooperation Development Program (CDP) and the
U.S.-Israel Coopjerative Development Research (CDR) Program. It notes that these
programs comprise a significant proportion of Israel's entire official development
assistance program.
For several decades, Israel, a small country with few natural resources, has
sought rapid progress through technological innovation. The remarkable success of
this effort suggests that Israeli e.xperience and expertise can be used effectively to
help solve similar problems confronting less-developed countries (LDC's). Scientists
from LEXT's often want to obtain Israeli technology and to collaborate with Israeli
researchers. The U.S.-Israel CDP has become a valued part of the international
interchange between the development communities of Israel and developing
countries.
The U.S.-Israel CDR Program focuses on specific obstacles to development in
developing countries. It provides funding for Israeli and LDC scientists to cooperate
in joint research and for israel to bring valued agricultural, environmental, and
energy technology and expertise to these important countries. It seeks to strengthen
the ability of LDC scientists to do innovative research themselves. CDP and CDR are
an integral part of the U.S. program of development assistance to these LDC's.
13. The subcommittee recognizes that the United States Consulate in Jerusalem
operates in a special environment, and that in the past the coordination of activities
between the Consulate and the Embassy in Tel Aviv was difficult and often
inadequate. The subcommittee believes this process of coordination is now taking
place more smoothly. It recommends that the United States Embassy in Tel Aviv
and the United States Consulate in Jerusalem work to increase cooperation further.
14. The subcommittee notes two meritorious institutions in the Middle East
continue to receive ASH.A funding as evidence ot their contmued e.xcellence. They
are the Hadassah Medical Center and the Feinberg Graduate School of the
Weizmann Institute of Science in Israel. Hadassah provides health care of the very
21
highest quality to all who need it regardless of their ethnic origin, religious or
political beliefs, or ability to pay. The FGS is the academic center of Israel's world
renowned scientific research institution.
Hadassah's open door policy of health care at the Medical Center has been of
significant benefit to many, especially in the Palestinian community. Hadassah is
performing important outreach and training in parts of Africa and Latin America.
Hadassah deserves praise for its ongoing outreach efforts, including an eye camp
currently restoring sight to hundreds in Kenya.
The Feinberg Graduate School of the Weizmann Institute of Science is
recognized throughout the world for maintaining the very highest standards of
scientific and educational excellence. The FGS trains students from Asia. Afriau
Latin America and Eastern Europe, as well as the former Soviet Union, in disciplines
critical to sustainable development. Additionally, the FGS engages in cutting edge
medical, environmental and conservation related research which enables its students
to return to their native countries possessed with new knowledge and research
techniques.
15. The subcommittee notes that America's links with Israel are broad and deep,
based on shared values, common interests and a commitment to democracy, rule of
law and freedom. Nevertheless, the subcommittee is troubled by the continuing cycle
of violence between Israelis and Palestinians. Palestinian attacks against Israelis, and
evidence of on-going human rights violations in the West Bank and Gaza. Killings of
Palestinians by Israeli Defense Forces in the West Bank and Gaza in 1992 increased
over 1991. from 98 to 158. This trend appears to be continuing in 1993. The
subcommittee views the current peace talks as providing the test opportunity to end
this cycle of violence.
The subcommittee understands and appreciates the serious security threat
facing Israel and notes the State Departments Country Reports on Human Rights
Practices for 1992 lists continuing instances of Israeli mistreatment of Palestinians
during arrest and interrogation, bans on travel and movement, restrictions on family
reunification, administrative detention, house demolitions, and discriminatory policies
in land and resources use and trade. The March 1993 "closure" of the West Bank and
Gaza has prevented most Palestinians from traveling to East Jerusalem and across
the Green Line to Israel and prevented some internal West Bank travel. On
December 17. Israel deported to Lebanon 415 Palestinians associated with the Islamic
extremist organizations Hamas and Palestinian Islamic Jihad. That number was
subsequently reduced to 396. still the largest such deportation in the 26-year history
of the Israeli occupation. In recent months. Israel has announced that 131 of the
deportees are eligible to return ~ they have declined - and that the length of the
deportations has been reduced form two years to one year. The Administration has
expressed its approval of these measures taken by the Israeli Government to mitigate
the deportations.
16. The subcommittee notes that there has been an alarming increase in
Palestinian extremism and Palestinian attacks against Israelis, which have escalated
from rock-throwing in Gaza and the West Bank to random knife attacks against
innocent civilians throughout Israel and which have resulted in numerous deaths and
serious injuries. The State Department's Country Reports on Human Rights Practices
for 1992 notes that at least 15 Israelis were killed during 1992 by Palestinians. During
the first half of 1993 acts of violence by Palestinians have led to the deaths of 16
Israeli civilians and 10 Israeli security personnel.
22
The subcommittee is also concerned about continuing Palestinian attacks on
other Palestinians, which have increased over the past year. In 1992, 182 Palestinians
were killed by other Palestinians, compared with 140 in 1991. and during the first six
months of 1993 there were 60 such deaths. While many of these murders were for
alleged cooperation with Israeli authorities, they also reflect inter-factional fighting.
The subcommittee condemns in the strongest terms the death threats made by
Palestinian extremists against Palestinian peace negotiators.
The subcommittee views the current peace talks as the best way out of this
cycle of violence. The subcommittee notes with satisfaction that during the ninth
round of bilateral negotiations, the Israeli and Palestinian negotiating teams
established working groups — including one on human rights, which has the objective
of improving the livmg conditions and minimizing human suffering prior to reaching
a {>eace agreement.
17. The subcommittee believes that a decision by Arab states to lift their boycott
of Israel is overdue. The subcommittee expects that Arab states will now move
expeditiously to end the boycott, which is an obstacle to fair trade and a practice that
hurts U.S. businesses. The subcommittee commends the administration for its
commitment to seek an end to the boycott as soon as possible — particularly in its
secondary and tertiary forms.
23
EGYPT
(In millions of dollars)
Fi.scal Year
Si
ibcommittee
ecommendation
1991
1992
1993 1994
Request
1994
Economic assistance:
ESF
Public Law 480
815.0
165.0
815.0
150.0
815.0
50.0
815.0
.0
815.0
.0
Total economic:
980.0
965.0
%5.0
815.0
815.0
Military assistance:
FMF
IMET
1.300.0
1.5
1.300.0
1.8
1.300.0
1.8
1.300.0
1.8
1.300.0
L8
Total military
1.301.5
1,301.8
1.301.8
1.301.8
1.301.8
Total
2.28L5
2^66.8
2.266.8
1,916.8
t916.8
1. The subcommittee recommends an authorization for Egypt of $815 million in
Economic Support Fund (ESF) grants, $1.3 billion in FMF grant fmancing. and $1.8 million
in IMET for fiscal year 1994. Egypt remains critical to the success of United States
regional political and strategic policies and these requests support United States policy.
The United States and Egypt continue to share a strategic interest in the stability of the
Middle East and surrounding areas, especially in Persian Gulf and Africa, and a
commitment to the search for peace in the Middle East.
2. The subcommittee notes the continued strength and durability of United
States-Egyptian relations. The subcommittee believes that our relations with Egypt will
continue to be crucial and that Egypt will continue to be a key partner both in securing
stability and order in the Persian Gulf and in pursuing the search for a broader p>eace in
the Middle East. The subcommittee sees a continuing dialogue with Egyptian leaders
essential both on bilateral issues and on regional issues of mutual interest in and beyond
the Persian Gulf, including developments in Sudan. Iran. Libya, and Chad.
3. The U.S. relationship with Egypt is an important part of efforts to maintain the
regional balance of forces and to further the peace process in the Middle East. Since
becoming the first Arab state to sign a peace treaty with Israel a dozen vears ago. Egypt
has played a key role in promoting regional stability by working with the moderate states
to find acceptable solutions to the region's problems. Nevertheless, on-going instability in
the Sudan, growing Iranian assertiveness. as well as religious extremism in Arab world
fueled by a number of internal and e.xternal factors, promote a climate of insecurity for
and in Egypt. It is in the U.S. interest to ensure that Egypt remains stable, strong and
capable of playing the political and military role that its geographic position, population,
and prestige in the Middle East demands.
4. The subcommittee is pleased by the apparent stability in Egyptian-Israeli
relations and dialogue. Improved and expandmg relations between the two Camp David
partners is an important American interest. The subcommittee welcomes the increased
24
contact between senior Israeli and Egyptian officials. Particularly noteworthy are the
two summit meetings between Prime Minister Rabin and President Mubarak in Egypt
during the past year.
5. The subcommittee supports the continuation of the U.S. long-term military
supply relationship with Egypt. This relationship, supported by our large FMF grant
program in Egypt, is designed to allow the Egyptians to modernize their forces by
replacing obsolete and agmg equipment with new and excess U.S. hardware. Operation
and maintenance of these sophisticated systems requires technical training which is also
funded by FMF grant assistance.
6. The subcommittee supports the request for IMET funds of $1.8 million for fiscal
year 1994. The subcommittee believes the IMET program is an investment of
considerable value to U.S.-Egyptian relations.
7. The subcommittee hopes that Egypt will take a strong leadership role in seeking
to limit the acquisition and production of ballistic missiles and weapons of mass
destruction in the Middle East. Egypt has endorsed general plans calling for the
elimination of weapons of mass destruction in the Middle East. The sulKommittee hopes
that Egypt, a pivotal regional country with good relations with Israel as well as Syria and
the Gulf states, will help initiate direct discussions on these arms control issues. Egypt
has the most to gain from progress on arms control in the Middle East because its
impoverished population has the most to gain from a redirection of resources to domestic
economic and social needs.
8. The subcommittee is concerned by continuing reports of instances of the denial
of basic human rights in Egypt. Egyptians enjoy more freedoms than in almost all other
states in the Middle East and North Africa, and Egypt is perhaps the only state in the
region to allow an independent human rights organization to exist. However, there are
reported instances of detention and torture for political activities that do not involve
violence or incitement to violence. There is also a of lack of action by Egyptian
authorities against those who violate basic human rights. The subcommittee believes that
the United States must continue to work with Egypt on these cases and that the further
deepening of U.S.-Egyptian ties will be advanced if basic political and religious rights are
more strictly observed.
The subcommittee is concerned about ongoing reports of attacks bv Muslim
militants on Egypt's Christian Orthodox Coptic community, particularly in southern
Egypt. In 1992. Islamic extremists killed 27 Copts, burned down several churches, and
robbed and harassed many Christian storeowners. Christians also suffer discrimination in
the public sector, police, armed forces, government agencies, and in admissions to state
medical schools. The subcommittee urges that the Egyptian government act forthrighlly
to end official discrimination against Copts and that it strengthen its measures to prevent
intimidation and acts of assault and murder against Copts by Islamic extremists.
9. The economic picture in Egypt is mixed. Egypt has achieved a balance of
payments surplus the past two years thanks in large part to U.S. forgiveness of $6.7
billion in military debt and a significant debt reduction by the Paris Club. According to
AID. however, "privatization has lagged and reductions in the import ban list have been at
least partly offset by tariff increases and new non-tariff barriers. Liberalization of
investment approvals is not yet complete, and local content requirements have not yet
been eliminated." The subcommittee hopes that Egypt will take steps to liberalize the
operating environment for the private sector including full foreign exchange access,
reductions m preferential pricing on imports for public concerns, and an end to the policy
of differential access to capital.
25
WEST BANK/GA7A
AND
MIDDI F EAST REGIONAL PROGRAMS
(In millions of dollars)
Fiscal Year
Subcommittee
Recommendation
1991
1992 1993
1994
Request
1994
Economic assistance:
West BatikJCuTH 14.3
M.E. Regional Coopjeration
Program 7.5
10.1 26.6
5.5 7.0
25.0
7.0
32.5
10.0
TOTAL 2L8
15.6 33.6
3Z0
A2J5
I. West Bank and Gaza
1. The subcommittee recommends an increase in funding for the development
program in the West Bank and Gaza. For Fiscal Year 1994, the subcommittee
recommends an authorization of up to $32.5 million for the West Bank and Gaza, an
increase of up to $7.5 million above the administration's request.
2. The subcommittee recommendation for up to $7.5 million in additional
funds for the West Bank and Gaza reflects support for three objectives: encouraging
support for the peace process: establishing programs to assist the Palestinians to
assume control of an interim self-governmg authority; assisting the local population
to overcome current economic dislocations.
The subcommittee supports the May 4 administration announcement of U.S.
plans to make up to $14 million available for job creation and possibly other urgent
needs available for Palestinians in the West Bank and Gaza. The subcommittee
understands that these funds will come from unobligated fiscal year 1993 funds for
the West Bank and Gaza. The subcommittee commends the administration's
announced goal to begin to alleviate current economic problems and to create
infrastructure on which the long-term economic future of the West Bank and Gaza
can be built.
3. The subcommittee commends the" Palestinian peace team for its perseverance
in the peace process. The subcommittee e.xpects to see substantive progress in the
peace process in the weeks ahead. The subcommittee commends the steps taken by
the Rabin Government to insure Palestinian participation in the peace talks, which
have been an important clement in improving the outlook for success. The
subcommittee believes that participation in the peace process will be rewarded with
the realization of a just and lasting peace, one which includes secure and recognized
border for Israel and legitimate rights for tlie Palestinians.
26
4. The subcommittee believes that high priority must be placed on helping the
Palestinians prepare for assuming control of an interim self-governing authority. In
that regard, the subcommittee commends the Administration for having already
begun an OPM-administered training program to teach the Palestinians bureaucratic
management techniques. The subcommittee believes the U.S. can make an important
contribution to peace by assisting the Palestinians in progressing to manage their own
affairs. These skills will be critical to the success of any interim self-governing
authority agreed upon in the context on the on-going p)eace talks.
5. Since the escalation of violence at end of March, the Israeli Government has
limited the access of Palestinians in the West Bank and Gaza to East Jerusalem, to
areas within the pre-1%7 borders of Israel, and between the northern and southern
parts of the West Bank. There has been a substantial reduction of the 120.000
Palestinians previously working in Israel. As a result of the closure, the economy of
the West Bank and Gaza has suffered accute economic problems. The subcommittee
recognizes the serious security imperatives that led to the decision to effect this
closure, but nevertheless expresses concern about the economic losses it is causing and
the potential implications for the West Bank and Gaza.
6. The subcommittee endorses the economic development assistance programs
for the West Bank and Gaza that are administered by American private voluntary
organizations (PVOs) and one indigenous Palestinian organization. The subcommittee
believes that this program demonstrates an important United States commitment to
improve the quality of life for the over 1.7 million Palestinians living in the West
Bank and Gaza and helps to establish a foundation for economic growth, jobs and
stability essential to any future peace settlement. Inadequate infrastructure in the
West Bank and Gaza impedes economic progress: unemployment and
underemployment cause hardships and contribute to instability and violence. It is
the subcommittee's view that economic development, job generation and self-reliance
can give Palestinians a larger stake in a peace settlement and encourage moderate
forces in the Palestinian community.
7. The subcommittee notes that, despite difficult conditions, these development
programs have been able to proceed without extensive delays or disruptions. These
projects operate in a unique political environment, involving interaction of the
United States. Israeli authorities. West Bank and Gazan Palestinian organizations and
leaders. American PVOs and some Jordanian officials. It is testimony to the
importance attached by all parties to these development activities that project
approval and project implementation have proceeded under unique and difficult
circumstances.
8. The subcommittee strongly recommends that of the funds available for the
West Bank and Gaza. $2 million should be available for the education and training of
West Bank and Gaza Palestinians. The subcommittee attaches importance to
providing good educational opportunities for Palestinians, both in institutions in the
West Bank and Gaza and abroad. The subcommittee believes that past commitments
to the use of this program's funds for education should be strengthened. The
reopening of universities and institutions of higher education in the West Bank and
Gaza is an important step, and the subcommittee hopes this process will continue, and
that educational institutions not be used to foment violence.
The subcommittee further recommends that not less than $2 million be
provided annually to support educational, cultural and humanitarian activities
financed through the Palestinian-Israeli Cooperation Project. The subcommittee
notes that in response to this program, the Administration received 95 proposals for
Israeli-Palestinian cooperative activities since January 1993 and that the vast majority
of these proposals could not go forward due to lack of funds.
27
9. The subcommittee is interested in encouraging international contributions to
development activities in the West Bank and Gaza. In the past. Saudi Arabia and
Kuwait provided substantial assistance which apparently equaled the total of all
non-UNRWA bilateral and multilateral assistance annually, but since the Gulf crisis,
these funds have not been forthcoming. This cut-off of funds was initially related to
Palestinian support for Iraq during the Persian Gulf war. The subcommittee hopes
that the United States will continue to work with its friends in the Gulf and others to
maximize financial assistance to the West Bank and Gaza.
10. The subcommittee notes that the United States has now assigned two
representatives of the Agency for International Development to the region to work
on and to coordinate the assistance program. The subcommittee believes that this
move is long overdue. AID officials in the field can help improve the accountability
and oversight of U.S. programs in both the West Bank and Gaza and help to guide
PVOs admmistering the funds in ways that will enhance the effectiveness of the
program.
The subcommittee continues to be disturbed by the bureaucratic infighting
between AID and the State Department on the issue of AID representation to cover
the West Bank and Gaza programs. The subcommittee hojses that this issue will be
resolved by the new admmistration so that the important U.S. programs being
implemented in the West Bank and Gaza can proceed without delay and be
expanded.
M'fldle Fast Regional Cooperation Program
1. The subcommittee recommends not less than $7 million for the Middle East
Regional Cooperation program in fiscal year 1994.
2. The subcommittee supports the regional cooperation projects which bring
together Israeli. Arab and American universities, government ministries and other
institutions and individuals in joint activities promoting scientific and technological
cooperation. These projects promote direct Israeli-Arab contacts on development
problems of mutual concern, help foster important personal ties, and represent a
long-term investment in peace. The subcommittee strongly endorses activities which
increase direct Arab-Israeli dealings and is encouraged that such contacts are
expanding. The strong hope is that these activities will continue to grow and that the
number of countries, mstitutions and pjeoples in the region involved will be increased.
The success of this program can be seen in the increased demand for the funds
available and in the growing number of applications.
3. The subcommittee is pleased to note that recently this program has been
expanded to involve more and different Isjaelis and Arabs, including states in North
Africa, and other countries.
28
JORDAN
(In millions of dollars)
1
Fi.scal Year
Subcommittee
Recommendation
1991
1992
1993
1994
Request
1994
Economic assistance:
ESF
P.L. 480-TiUe II
35.0
12.4
65.0
20.0
15.0
30.0
10.0
.0
10.0
.0
Total economic.
47.4
85.0
45.0
10.0
10.0
Military assistance:
FMF-G
IMET
20.0
1.2
20.0
.6
9.0
2.0
9.0
L8
9.0
1.8
Total military:
21.2
20.6
11.0
10.8
10.8
Total
68.6
105.6
56.0
20.8
20.8
1. The subcommittee authorizes $10 million in economic support funds. $9 million in
military assistance and $1.8 million in IMET for Jordan in fiscal year 1994. This is the
administration's request. It represents a decrease in ESF for Jordan of $3 million below
fiscal year 1993 levels. The subcommittee regrets that budgetary considerations resulted
in this reduction in the administration's fiscal year 1994 request for Jordan. The
subcommittee notes that this is the latest step m a multi-year trend of significantly lower
levels of U.S. assistance to Jordan. This downward trend stands in contrast to
administration statements to the Committee regarding the "courageous" progress made by
Jordan in recent years in the area of democratization and human rights. The
subcommittee believes that Jordan's progress in this area merits U.S. assistance at
increased levels over fiscal year 1993 funding and fiscal year 1994 requests.
2. The subcommittee notes that it has not yet received country-by-country figures
for P.L. 480 for Jordan and other countries and looks forward to receiving these figures
from the administration in the near future.
3. The subcommittee continues to believe that close ties between the United States
and the Hashemite Kingdom of Jordan remain in the U.S. interest. The subcommittee
believes that Jordan can continue to play an important role in the search for greater
peace and stability in this volatile region. Due to its geography and close ties to the
Palestinians, a politically stable and economically sound Jordan remains a significant U.S.
interest in the Middle East. For this reason, the sutKommittee suppwrts full funding of
the request for Jordan and working toward an improvement of relations and the early
disbursal of the fiscal year 1992 assistance to Jordan.
The subcommittee notes that in recent years, levels of American military assistance
to Jordan have failed to meet the Kingdom's minimum requirements in terms of
maintenance of previously supplied U.S. military equipment. At current funding, the
military assistance program to Jordan is largely symbolic. It nevertheless is an important
indication of the U.S. desire to build a mutually constructive relationship with Jordan.
29
3. The subcommittee welcomes Jordan's significant steps toward democratization.
These steps signify one of the most promising political reform programs in the Middle
East. In November. Jordan is scheduled to hold its second national legislative elections
since 1989 and its first multi-party parliamentary election since 1956. These reforms are
of enormous significance, not only for Jordan, but for the region as a whole. The
subcommittee believes that the U.S. should work together with the Government of Jordan
to assist further progress in this area.
4. The subcommittee commends Jordan for its positive role in the peace process.
Israel and Jordzm have moved with dispatch in approaching agreement on a far-reaching
agenda for their negotiations. The subcommittee looks forward to the rapid completion
of the agenda agreement.
5. The subcommittee has had a long-standing concern about Jordan's enforcement of
U.N. sanctions against Iraq instituted during the Persian Gulf crisis. The subcommittee is
pleased to note recent testmaony by Assistant Secretary of State Djerejian that Jordan is
fully cooperating with efforts to enforce the sanctions-related UN resolutions. The
subcommittee understands that these efforts include measures such as increasing border
inspection facilities, reinforcing inspection procedures to involve both military and
customs personnel, issuing guidelines to the business community on proper procedures for
UN-approved shipments, mvestigating companies involved in illicit trade with Iraq, and
appointing a so-called sanctions czar m the Jordanian government to oversee all aspects of
enforcement. These developments are encouraging. The U.S. must continue to monitor
Jordan's sanctions performance closely to ensure that the Jordanian Government is
meeting its pledges of best efforts in this area.
6. The Jordanian economy continues to suffer from the effects of the Gulf War
sanctions against Iraq, which represented 70% of Jordan's export market prior to August
1990. However, Jordan has coped well with this problem, plus the need to assimilate
250,000-300,000 Jordanian and Palestinian expellees from Gulf states, particularly
Kuwait, after Desert Storm. The subcommittee notes that continued Jordanian
cooperation with international financial institutions is key to medium- and long-term
growth. The subcommittee believes the administration should energize its diplomacy with
oil-producing Gulf states to sell oil to Jordan, and open their markets to Jordanian oil.
Lacking alternatives, Jordan continues to import Iraq oil.
30
IP.BANON
(In millions of dollars)
Fiscal Year
Subcommittee
Recommendation
1991
1992
1993
1994
Request
1994
Economic assistance:
ESF
D.A
P.L. 480-Title II
Total economic:
Military assistance:
IMET
3.4
5.8
9.9
19.1
.0
3.8
3.8
9.0
16.6
.0
4.0
6.0
7.4
17.4
.4
4.0
5.0
8.8
17.8
.4
4.0
5.0
8.8
17.8
.4
Total
19J
16.6
17.8
18^
182
1. The subcommittee authorizes $4 million in economic support funds and $400,000
in IMET for Lebanon in Fiscal Year 1994. This is the administration's request. The
subcommittee considers these requests for small amounts of ESF and IMET funding for
Lebanon for fiscal year 1994 agamst a background of on-going efforts to reduce tensions
in Lebanon and to bring national unity and national reconciliation to a country torn apart
by 17 years of civil war and fragmentation.
2. The subciommittee welcomes recent economic and political reconstruction efforts
in Lebanon, including parliamentary elections held in 1992. the first in twenty years. The
subcommittee shares the concern of many observers that these elections were not fully
fair and free, that they were marked by a high abstention rate of possibly over half of
eligible voters, and that one of the largest demographic groups, the Maronite Christians,
overwhelmingly boycotted the vote. The subcommittee is hopeful that the Government of
Lebanon will make special efforts to reach out to groups that did not participate in the
1992 elections and that these groups will be brought more fully into the political process
in Lebanon at an early date.
The subcommittee is encouraged by the important progress that has been made since
the elections in bringing other factions into the political dialogue in Lebanon. These are
hopeful signs of progress toward reconciliation in Lebanon. The subcommittee welcomes
these signs and hojjes that this trend will continue.
The subcommittee also commends Lebanon's tradition of a free press and hopes that
recent government efforts calling that tradition into question will be short-lived and
transitory.
3. The subcommittee welcomes the decline of inter-ethnic and inter-factional
fighting and overall improvements in the security environment, which made possible a
visit by the U.S. Secretary of State in February 1993. the highest-level U.S. visitor in ten
years. The subcommittee is also pleased to note that an atmosphere of normality is
beginning to return to Beirut, symbolized by the unobstructed passage of cars and
pedestrians between East and West Beirut. A World Cup qualifying round tournament
was also hosted recently in Beirut. .Nevertheless, much tension and unease remain in
31
Lebanon. The subcommittee concurs with the Administration's position that Lebanon is
still particularly unsafe for Americans, who would be uniquely liable to targeting by
terrorists.
4. The subcommittee shares the administration's commitment to a unified, sovereign
and independent Lebanon, free of non-Lebanese forces and militias. The subcommittee
favors prompt implementation of the Taif accords, including now overdue discussions on
Syrian withdrawal to the western Bekaa Valley.
The subcommittee would like to see an immediate pullback of Syrian forces as a
first step toward the withdrawal of all Syrian, as well as other foreign, troops from
Lebanon. Another aspect of the Taif accord which remains unfulfilled is the disarming of
all militias. Much progress has been made in the northern two-thirds of the country in
removing heavy arms from militias. This effort should be extended to the major groups
that have not cooperated with the disarmament campaign, including Hizballah and
Palestinian groups in the south of Lebanon.
5. The subcommittee supports the continuation of the practice of using portions of
ESF assistance to support American institutions in Lebanon that merit further U.S. and
Lebanese support, such as the American University in Beirut and Beirut University
College. The education provided by institutions such as these has been a formative force
in the lives of thousands of the region's most dynamic leaders. The demand for men and
women with the open, inquisitive minds which a liberal American education produces is
still great. American University of Beirut, now 127 years old. remains an important asset
for the United States in Lebanon and the Middle East. The University has long worked
to foster the rationalism, tolerance and open dialogue which are essential to a democratic
society. The subcommittee believes that educational institutions such as AUB and others
in Lebanon remain one of the single best resources for assisting this war-torn country in
the difficult task of rehabilitation and reconciliation in the months and years ahead.
6. The subcommittee is pleased to note that earlier this year the congressional hold
on Fiscal Year 1993 IMET funds for Lebanon was lifted and that these funds have now
been disbursed. The subcommittee support the administration's request for continuation
of the IMET program in fiscal year 1994. The main purpose of this program is to provide
some logistic and maintenance advice to the forces and to manage the IMET program for
Lebanese students receiving training in the United States. In past years, this program has
funded the training of over 50 Lebanese students annually.
The subcommittee believes that this small IMET program can play a useful and
supportive role in assisting the efforts of the Lebanese government in rebuilding an
independent and non-sectarian Lebanese Armed Forces, the national army, that is
responsive to civilian control and respectful of human rights. Despite the situation which
has existed in Lebanon, the IMET program has over the last several years continued to
provide essential help to an important national institution, the army, which will play a
critical role in the reconstruction of the country. Over the last two years, the central
government and the Lebanese Armed Forces have been able to expand their authority,
gradually displacing and disarming competing militias. In areas now under direct
government control, the level of violence has declined significantly.
7. Last year, the Bush Administration approved the sale of $500,000 in non-lethal
excess defense articles (EDA) - vehicles, spare parts and uniforms — to the Lebanese
Armed Forces. The subcommittee urges the Administration to assure full accountability
by the Lebanese government for all defense material received from the U.S. The
subcommittee recommends that the .Administration proceed only cautiously and with
careful consideration and consultation with Congress should it contemplate any change in
the policy of approving only non-lethal equipment for Lebanon.
32
8. The subcommittee supports the continued presence of UNIFIL in southern
Lebanon. UNIFIL continues to carry out several essential functions, including inhibiting
the niovement of armed groups in the area of its operations, and providing protection,
security and humanitarian assistance to the local population. UNIFIL cannot be a
substitute for what the Lebanese must do themselves and must work out with Israel, but
it provides a modicum of stability in a volatile area. The subcommittee supports full
funding by the United States of its assessed share of UNIFIL expenses and believes that
the withdrawal of UNIFIL would be destabilizing and would heighten tensions
throughout the region. The subcommittee notes that Israeli officials have said in the past
that UNIFIL plays a useful role in limiting violence and that Israel has not expressed
opposition to the six month extensions of the UNIFIL mandate.
33
YEMFN
(In millions of dollars)
Fiscal Year
Subcommittee
Recommendation
1991
1992 1993
1994
Request
1994
Economic assistance:
D.A.
P.L. 480
Peace Corps
Total economic:
Military assistance:
IMET
2.9
5.0
.4
8.3
.1
3.0
3.0
1.0
7.0
.0
3.0
5.0
1.5
9.5
.0
4.0
5.0
1.7
10.7
.0
4.0
5.0
L7
10.7
.0
Total
8.4
7.0
9.5
10.7
10.7
1. The subcommittee strongly supports continued U.S. assistance to Yemen in fiscal
year 1994. The subcommittee notes that Yemen received $3 million in development
assistance in fiscal year 1993, $5 million in P.L. 480 support and $1.5 million for the Peace
Corps in FY 1993. The subcommittee believes that this level of funding, at a minimum, is
merited for Yemen for fiscal year 1994. Moreover, the subcommittee believes that
Yemen's progress toward democracy as seen in the successful conclusion of national
elections on April 27, 1993 warrants the provision of assistance over levels requested and
provided in recent years.
2. The United States criticized Yemen for its 1990 votes in the Security Council
prior to the Gulf War and preceded to sharply cut assistance levels. The Subcommittee
believes this period of penalizing Yemen should end. Yemen and Kuwait are the only
countries in the Arabian Peninsula that have conducted elections. Yemen is the only
country in the Arabian Peninsula with a universal franchise where all men and women
have been made eligible to vote.
3. The subcommittee strongly believes that the United States should encourage
further the process of democratization in Yemen by providing assistance directed at
strengthening democratic political parties, non-governmental civic organizations,
developing an independent media, and assisting Parliamentary development.
4. The subcommittee commends the U.S. Peace Corps for its work in Yemen and its
important contribution to economic development and to improved U.S. -Yemeni relations.
5. The subcommittee believes that in the context of improving the U.S.-Yemeni
relations the U.S. should consider the resumption of an IMET program in Yemen.
6. The subcommittee believes that the United States should encourage both Yemen
and Saudi Arabia to resolve their border disputes expeditiously and refrain from steps
that detract from a quick and peaceful resolution of such disputes.
34
OMAN
(In millions of dollars)
Fiscal Year
Subcommittee
Recommendation
1991
1992
1993
1994
Request
1994
Economic assistance:
ESF
Military assistance:
FMF-G
IMET
Total military:
15.0
3.0
.2
3.2
15.0
.5
.1
.6
5.0
1.0
.1
1.1
2.0
.0
.1
.1
2.0
.0
1
.1
Total
18.2
15.6
6J
2.2
22
1. The subcommittee recommends authorization of the request for $2 million in ESF
and $110,000 in IMET for Oman in fiscal year 1994. The subcommittee understands that
these funds will be used for scholarships and training of Omani citizens, primarily at
colleges and universities in the United States.
The subcommittee notes the downward trend in U.S. assistance to Oman since 1992.
In FY 92. Oman received $15 million ESF. For FY 93. Congress appropriated only $5
million of the administration's FY 93 request of $15 million.
2. The subcommittee supjwrts the continuation of a small, largely symbolic. U.S.
assistance program for Oman. The subcommittee believes that this program and the
continuation of U.S.-Omani cooperation are in the clear mutual interest of our two
countries. Although Oman enjoys a relatively high per capita income of $5,000. this figure
masks a low level of economic and human resource development. Obstacles to
development include a high population growth rate, a high infant mortality rate, scarce
potable water, and low literacy rates among women.
3. The subcommittee notes the existence of proposals to lift Oman's eligibility for
General System of Preferences (GSP) trade status. The subcommittee notes that Omani
expxjrts to the U.S. covered by GSP amount to less than $1 million and that the loss of
GSP eligibility also would require an automatic shut-off of Oman's OPIC credits. The
subcommittee has been informed that faulty information in the 1991 State Department
Human Rights Report formed the original basis for this effort to change Oman's GSP
status. The subcommittee expresses its concern that whatever decision is made it be based
on accurate information.
4. The subcommittee is concerned that the AID pipeline for Oman entering calendar
year 1993 is $50 million. The subcommittee continues to believe th^t there should be
speedier implementation of projects and expenditures of funds in this program which is
now over a decade old.
5. The subcommittee notes that the U.S.-Omani access agreement - our military
access positioning agreement with Oman, first signed in 1980 and renewed in 1990 ~ is up
for a mid-term review in 1995. The subcommittee understands that, in the context of the
access agreement, the Department of Defense commits some $30 million annually for the
35
purpose of pre-positioning and use of Omani facilities and for operations and maintenance
costs of those facilities. Mid-term review negotiations are not scheduled to start for some
time yet.
6. The subcommittee welcomes Oman's participation in the Middle East peace talks
multilaterals.
7. The subcommittee urges the administration to continue its dialogue with Oman
and other friends in the Arabian Peninsula regarding GCC collective security. We have a
shared interest with our friends in the Gulf to see progress made toward more effective
regional defense cooperation in the Gulf.
36
GRFFCK
(In millions of dollars)
1
Fiscal Year
Subcommittee
Recommendation
1991
1992 1993
1994
Request
1994
Military assistance:
FMF-C
FMF-G
IMET
320.0
30.0
.6
320.0 315.0
30.0 .0
.3 .3
315.0
.0
.2
315.0
.0
.2
TOTAL
350.6
350J 315J
3152
3152
1. The subcommittee recommends the authorization of $315 million in security
assistance on a concessional loan basis for Greece in fiscal year 1994. This request
represents a straightlining of FMF for Greece from fiscal year 1993 levels. The
subcommittee further recommends $200,000 in IMET for Greece in fiscal year 1994. This
is the administration's request. It represents a reduction of $25,000 from the fiscal year
1993 level.
2. In making its recommendation for security assistance for Greece, the
subcommittee recognizes the continued impwriant of close mutually beneficial security
cooperation between the United States and Greece. Greece is a member of NATO and
shares a long, historic relationship with the United States. The subcommittee notes that
the dramatic changes in Eastern Europe and the former Soviet Union have fundamentally
altered the nature of the security threat in this part of the world. Nevertheless, increased
ethnic and nationalist tensions in Eastern and Central Europe and the former Soviet
Union and the violent conflict now raging in the former Yugoslavia have contributed to a
new climate of insecurity and instability m the Balkans. Greece's geographic proximity to
this volatile area and its long history of security cooperation with the United States give it
a unique role to play in this time of change and uncertainty.
3. The subcommittee notes U.S. plans to close the U.S. military facility at Iraklion,
on the island of Crete, by the end of 1993. With this development the naval facility at
Souda Bay. Crete, will become the last remaining U.S. base facility in Greece. The
subcommittee supports these changes in US-Greek bilateral security cooperation to reflect
the new priorities of the U.S. military in the p)ost-Cold War world. The subcommittee
continues to support the objective that the US-Greek relationship more forward along the
lines of the "Spanish model" - where the linkage between base access and U.S. assistance
is eliminated. The subcommittee believes that a relationship based on this model best
serves the interests of both our countries by establishing a mutually constructive
relationship between two equal partners.
4. The subcommittee supports the continued eligibility of Greece for United States
transfers of excess military equipment. The subcommittee notes that assistance to Greece
and Turkey under this program should be provided in a manner consistent with
longstanding Congressional concerns about maintaining the existing military balance in
the region.
37
5. The subcommittee is pleased to note the progress Greece has made in eliminating
the previous backlog in unexpended FMF assistance. In fiscal year 1991, Greece had a
pipeline of over $9(X) million in unspent and uncommitted FMF financing. At the
beginning of fiscal year 1993 that pipeline has been reduced to $300 million. The
subcommittee understands that with the completion of Greece's planned purchase of 40
F-16s, currently being finalized, this pipeline will be entirely eliminated.
6. The subcommittee believes that the U.S. has an important role to play in
facilitating the reduction of tensions between Greece and Turkey. Our close relations
with both countries, including our role as a major supplier of military assistance to each,
place us in a special position to encourage improvements in Greek-Turkish relations. The
subconmiittee notes the recent discussion of the risks that the current crisis in
Bosnia-Hercegovina will spillover southward into Kosovo and Macedonia and eventually
involve Greece and Turkey. It is the subcommittee's assessment that heightened tensions
in the B^^ikan region at the current time justify a more active U.S. role in reducing
tensions between Greece and Turkey. The subcommittee believes that the administration
should place higher priority in this area and on efforts to work with our allies in the
region to contam the current crisis in former Yugoslavia.
The subcommittee further notes the importance of reaching a pjeaceful resolution to
the Cyprus problem, not only for humanitarian reasons, but as a vital component of the
full improvement of relations between Greece and Turkey.
7. The subcommittee welcomes the process recently put in place under the auspices
of the United Nations to resolve the complicated issue of the final name of the former
Yugoslav Republic of Macedonia (FYRM) in a manner that is acceptable to both Greece
and the FYRM. The subcommittee expresses its desire to see this matter resolved at the
earliest possible occasion.
The subcommittee further notes acceptance in principle of both Greece and FYRM
to participate in a process of confidence-building measures between the two countries.
The subcommittee understands that the Government of Greece continues to have concerns
in four primary areas and is seeking confidence-building steps with the FYRM in these
areas. They are as follows;
That the former Yugoslav Republic of Macedonia:
o change its flag and not use symbols that are a domestic heritage of the
other country;
o agree together with Greece to guarantee the existing borders between
the two countries;
o change Constitutional reference to the existence of Slav Macedonian
minority in Greece; and,
o cease any propaganda on the issue of Slav Macedonian claims to
Greece.
The subcommittee expresses its hope that Greece and the FYRM will work
together in good faith to resolve the remaining issues between them and to establish
more constructive and stable bilateral relations. The subcommittee expects that the
significant progress toward resolving these issues will open the way for U.S.
recognition of the FYRM and the establishment of diplomatic relations.
38
8. The subcommittee expresses its deep concern regarding the arrest on April
30. 1993 of a U.S. employee of the American Embassy in Athens on charges of spying
for the Government of Greece. The subcommittee considers this a serious and
regrettable incident in U.S.-Greek relations. It calls upon the Government of Greece
to cooperate fully with the U.S. in investigating and addressing this incident and the
implications for U.S.-Greek cooperation in a number of areas.
9. The subcommittee notes the high cost to the Greek economy of
implementing these un-mandated sanctions directed at the Federal Republic of
Yugoslavia. The subcommittee commends Greece for taking steps to implement these
economic and diplomatic sanctions and expresses its desire that Greek cooperation in
this area continue and be expanded. More rigorous implementation measues are
required by all countries in the immediate region to stem continued violations of
these sanctions.
39
TURKEY
(In millions of dollars)
Fiscal Year
Subcommittee
Recommendation
1991
1992 1993
1994
Request
1994
Economic assistance:
ESF
International Narcotics
Control Program
50.0
.3
75.0
.4
125.0
.4
143.0
.4
125.0
.4
Total economic:
50.3
75.4
125.4
143.4
125.4
Military assistance:
FMF-C
FMF-G
IMET
50.0
500.0
3.4
25.0
475.0
3.5
450.0
.0
3.6
450.0
.0
2.8
450.0
.0
2.8
Total military:
553.4
503.5
453.6
452.8
452.8
Total
603.7
578.9
579.0
5962
5962
1. The subcommittee recommends the authorization of $450 million in concessional
military assistance and $125 million in economic assistance for Turkey in fiscal year 1994.
This represents a straightlining of fiscal year 1993 assistance levels for Turkey and a
reduction of $18 million in ESF from the administration fiscal year 1994 request. The
subcommittee also recommends the authorization of $2.8 million in IMET for Turkey in
fiscal year 1994. This is the request.
The subcommittee also recommends this level of assistance for Turkey in order to
maintain a rough balance in military assistance between Turkey and Greece. The
subcommittee continues to attach importance to the principle of balance in military
assistance allocations to Greece and Turkey. This prmciple has been recognized over
several years by the Congress as an important factor in maintaining a stable political and
military situation in the Eastern Mediterranean. The subcommittee welcomes the efforts
of the administration in submitting their fiscal year 1994 request to take into account this
principle and traditional congressional concerns in this regard.
2. The subcommittee recognizes the impKDrtance of continuing U.S. security
cooperation with Turkey. The subcommittee appreciates Turkey's strategic importance at
the confluence of the Eastern Mediterranean, the Middle East, and the Persian Gulf.
Turkey is a member of NATO and a key partner for the U.S. in the .Middle East and
Central Asia. Turkey shares ethnic and hnguistic ties with several of the .Newly
Independent States of the former Soviet Union and provides a potential model of secular,
free market and democratic development for the countries in this region.
In making its recommendations for security and economic assistance for Turkev. the
subcommittee notes that the dramatic changes in' Eastern Europe and the former Soviet
Union have fundamentally altered the nature of the security threat in this part of the
world. Nevertheless, Turkey continues to live in a difficult neighborhood. Turkey has
played an important role in the 1990-1991 Persian Gulf crisis and continues to play a
40
critical supporting role for U.S. policy toward Iraq through its support for Operation
Provide Comfort, its continued implementation of UN sanctions against Iraq, and its
improved relations with the Iraqi Kurds.
Turkey's geographic position has also made it a critical access point for the newly
independent Republic of Armenia, currently engaged in a violent conflict with the
Republic of Azerbaijan, a country that shares ethnic and historic ties to Turkey. The
subcommittee recognizes the difficulties presented for Turkey by the Armenian-Azeri
conflict over the province of Nagorno-Karabakh. Nevertheless, the subcommittee urges
Turkey to maintam a policy that does not prohibit the provision of humanitarian supplies
to any needy populations in the region.
3. The subcommittee commends Turkey's support for. cooperation with, and
participation in Operation Provide Comfort (OPC). which enforces Iraqi compliance with
the no-fly zone above the thirty-sixth parallel and protects the predommantly Kurdish
population of northern Iraq. Without Turkey's full support. Operation Provide Comfort
would be very difficult, if not impossible, to stage. Turkish support for Provide Comfort
also makes possible critical international humanitarian efforts to assist the Kurdish
population m northern Iraq to meet their most basic needs.
The subcommittee would welcome a decision by the Turkish government to
regularize the presence of Operation Provide Comfort by assuring that it could continue
to stage from Incirlik Air Force Base as long as the situation in Iraq so requires, or.
alternatively, by extending the term of its renewals of OPC beyond the current six-month
periods. This would facilitate planning for the U.S. and among the OPC coalition
partners. France, the U.K., and Turkey itself: it would also send a strong message of
coalition determination to Saddam Hussein and remove a source of anxiety for the
population of northern Iraq.
Operational-level cooperation among all four OPC coalition allies has been very
high. The subcommittee is nevertheless concerned that the Turkish government has not
agreed to apply the NATO SOFA to U.S.. U.K.. and French forces, NATO allies albeit
participating in a non-NATO operation. NATO allies have traditionally extended SOFA
coverage to allied forces on their soil, even when not on a NATO mission. The
subcommittee does note that U.S. forces in OPC have not suffered any disability on this
account thus far.
4. The subcommittee understands that Turkey recently announced its desire to
renegotiate the 1990 U.S. -Turkish Defense and Economic Cooperation Agreement (DECA).
which comes up for renewal in September 1993. This represents the first time since 19S7
that Turkey has chosen not to simply renew the DECA without negotiations. The
subcommittee notes the importance of moving the U.S.-Turkish relationship forward
along the lines of the "Spanish model " - where the linkage between base access and U.S.
assistance is completely broken. The subcommittee believes that a relationship based on
this model is in the best interests of both our countries by establishing ties based fully on
the mutual interests of equal partners. It commends the administration for the progress
it has made in moving the U.S.-Turkish relationship toward this goal and expresses its
desire to see this trend continue.
5. The subcommittee recognizes the importance of the provision of U.S. excess
equipment to Turkey for purposes of maintaining Turkey's conventional capabilities and
supplementing its military modernization program. The subcommittee supports the
continued eligibility of Turkey under Section 516 of the Foreign .'\ssistance .Act of 1961. as
amended, for transfers of United States excess military equipment.
41
6. The subcommittee congratulates Turkey on the progress that it has made in
addressing its economic problems in recent years and encourages it to continue efforts to
address remaining problems including: high inflation, privatization of state-owned
enterprises, balance of payments performance and expansionary fiscal policy.
7. The subcommittee wishes to underscore the importance of reaching a resolution
of the Cyprus problem. It notes that Turkey has a special role to play in the final
resolution of the Cyprus problem due to its close economic and political links to the
Turkish-Cypriot community and to the presence of Turkish troops and Turkish mainland
settlers on the island. The subcommittee continues to feel that a reduction of Turkish
forces on the island would make a major contribution to the settlement of the Cyprus
problem.
8. The subcommittee supports the resumption of a high level dialogue between
Greece and Turkey. It believes that the U.S. has an impxjrtant role to play in facilitating
the reduction of tensions between Greece and Turkey. It urges the administration to
make this objective a high priority in its contacts with the governments of both countries.
9. The subcommittee notes that Turkey has been facing armed attacks by Kurdish
insurgents and terrorists (PKK) for the past several years. Some 6.000 people have died
since 1984. most of them in the past two years, as a result of the violent conflict being
waged in the southeast. The subcommittee regrets the recent breakdown of the ceasefire
announced in March 1993. The subcommittee hopes that all possibilities for a permanent
ceasefire in this region will be explored.
10. The subcommittee remains deeply disappointed about ongoing human rights
violations in Turkey. Despite acknowledgments by recent Turkish governments that
human rights problems exist and despite repeated promises of improvements - the
coalition government of former Prime Minister Demirel came to office with a
particularly ambitious human rights program - most of the long-standing human rights
problems continue, and several new ones have arisen. The subcommittee takes note of the
most recent State Department Human Rights Report, which says Turkey's primary human
rights problems include: torture: political killings; disappearances, mainly of Kurdish
political activists: so-called "mystery killings." in which murders of Kurdish activists have
not been investigated and leads suggesting possible involvement by Turkish security forces
have been ignored; and limits on freedom of expression and association.
The subcommittee remains concerned with the issues of the rights of the ethnic
Kurdish citizens of Turkey, treatment of prisoners, freedom of the press, and other
human rights issues in Turkey. The subcommittee takes note of some important, but
limited, efforts by the Turkish government to improve the human rights situation. In
particular, it notes that the Criminal Trials Procedure Law, passed in November, gives
most suspects the right to immediate access to legal counsel and shortens permissible
pre-arraignment detention periods to between 24 and 96 hours. Nevertheless, this law
does not apply to those accused of terrorism, political crimes, or offenses that take place
in areas of so-called "emergency rule." a quasi-martial-law status that applies throughout
Turkey's overwhelmingly Kurdish southeast.
The subcommittee similarly welcomes Turkeys loosening of restrictions on use of
the Kurdish language, oral and written, over the past two years, as well as the
near-unbridled discussion of "the Kurdish problem" in the daily Turkish press. The legal
status of Kurdish-related reforms has not been clarified in many cases, however, leaving
citizens subject to seemingly whimsical prosecution. For e.xample. those exercising
Constitutionally-guaranteed freedom of the press have sometimes been prosecuted and
sentenced under a highly subjective "Anti-Terror Law ' that outlaws "written and oral
propaganda. ..aimed at damaging the indivisible unity of the State. ..regardless of the
42
method, intention, and ideas behind it." Employees of Kurdish and pro-Kurdish
publications in Turkey are frequently subject to harassment and the publications
themselves are often confiscated from the newsstands.
The subcommittee hopes that ethnic Kurds will soon enjoy the full range of human
rights, including freedom of cultural and political expression. The emergence of a
pro-Kurdish political party, the People's Labor Party (HEP), is a positive development
and a sign of Kurdish willingness to work for reform within the framework of a
democratic Turkey. The subcommittee urges an end to harassment of HEP and its
members. At the same time, the subcommittee oppxjses Kurdish separatism and strongly
condemns the use of violence by Turkish Kurds in their effort to achieve rights or other
?3litical aims. The subcommittee urges the Administration to deepen its dialogue with
urkey on human rights issues and to raise these issues regularly at senior levels.
The subcommittee sees Turkey as an important friend and ally and favors, over the
long term. Turkey's full integration into the West and Western institutions. Progress
toward this objective will be enhanced once Turkey achieves full Western standards in its
human rights performance. The subcommittee expects the Turkish government to follow
through on its pledges and to undertake meaningful human rights reforms at the soonest
possible time. It is in the interest of the U.S.. Turkey, and particularly U.S.-Turkish
relations that serious human rights violations cease to occur in Turkey.
43
CYPRUS
(In millions of dollars)
1
Fi.scal Year
Subconrniittee
Recommendation
1991 1992 1993
1994
Request
1994
Economic assistance:
ESF
15.0 15.0 15.0
15.0
15.0
L The subcommittee recommends the authorization of a $15 million ESF
program for fiscal year 1994 for Cyprus. This amount is the same as the
administration's request and the same as that appropriated for the last several years.
The subconunittee welcomes the administration's decision to request fiscal year 1994
funding for this program that reflects the traditional congressional concern for the
Cypriot people and a demonstration of support for a p)eacef ul reunification of the
island.
2. Since fiscal year 1975. the United States has provided some $325 million in
ESF assistance to Cyprus. This long-term commitment of suppwrt in which the
Congress has played and continues to play a crucial role is a cornerstone of United
States involvement on Cyprus. Most of these funds have been administered through
the United Nations High Commissioner for Refugees (UNHCR) which maintains an
office on Cyprus.
3. The subcommittee strongly supports the efforts of the United Nations
Secretary General to pursue negotiations to end the division of Cyprus. The United
States has a profound interest in assisting the people of Cyprus in their search for a
permanent and just settlement of their long-standing conflict. The subcommittee
notes that the newly-elected President of Cyprus. Glavcos Clerides. and
Turkish-Cypriot leader. Rauf Denktash. met in New York on May 24. 1993 to discuss
the terms of a Cyprus settlement. The subcommittee is hopeful that the decades-old
relationship of these two men will facilitate their work and help produce agreement
on a final settlement.
The subcommittee urges the parties to build on the progress achieved during
the term of the former Cypriot President George Vassiliou and further narrow their
differences. The subcommittee notes the assessment of the UN Secretary General
and UN Security Council 7S9. which implicitly blamed the Turkish Cypriots for the
impasse in the talks in the fall of 1992. The -subcommittee would like to see a more
cooperative approach from the Turkish Cypriots and urges the Turkish government
to begin to bring the full weight of its influence to bear on the Turkish Cypriots in
this regard.
4. The subcommittee believes that progress toward a peaceful settlement on
Cyprus is only possible with an active, high level U.S. involvement. The
subcommittee urges the Administration to give priority to working with the parties
on Cyprus and with the UN to promote a peaceful settlement in Cyprus. The
subcommittee would like to see the Administration underscore this priority by
assuring that the State Department Special Cyprus Coordinator be able to devote
sufficient time to his assigned Cyprus-related tasks. The subcommittee notes that the
incumbent Special Coordinator, while a highly qualified foreign service officer, is
44
assigned to other significant negotiations work unrelated to Cyprus. The
subconunittee is concerned that these other responsibilities will hamper the
Coordinator's ability to devote necessary and sufficient time and energy to promoting
a peaceful settlement in Cyprus.
5. The subcommittee is concerned about the future of the UN Forces in Cyprus
(UNFICYP). For over 29 years, these forces have played an important stabilizing
role on the island. UNFICYP troops man some 140 observer posts along the green
line between the two parts of the island. This role could expand if and when a
settlement is reached. UN proposals envision the placement of UNFICYP troops in
the sensitive area of Varosha/Famagusta to enable the resettlement and opening of
this area to Greek Cypriots.
The subcommittee welcomes UN Security Council Resolution 831 (UNSCR 831)
of May 27 which moves the funding of UNFICYP away from voluntary
contributions and toward assessed contributions. This resolution requires that all
costs not met by voluntary contributions should be assessed to members under Article
17(2) of the UN Charter beginning with the next six-month extension of UNFICYP
on or before June 15. 1993.
The new funding arrangement promises a more certain future for UNFICYP's
important work. Since its creation. UNFICYP has been funded strictly by voluntary
contributions and is currently the only UN peacekeeping operation funded in that
manner. The subcommittee notes that the voluntary contribution system has proven
insufficient over a number of years to meeting the costs of troopncontributing states.
The subcommittee understands UNFICYP is approximately ten years behind in
payments to troop-contributing states. This funding gap prompted a number of
countries to withdraw their troops and others to threaten to do so. Sweden. Finland,
Canada and the United Kingdom have announced plans to withdraw some or all of
their troops from UNFICYP in 1993.
UNSCR 831 establishs a sound financial basis for UNFICYP, cutting the budget
from $95 million to $47 million to sustain a force of roughly 1.200 to 1.400 troops.
The U.S. assessment under the new system will be less than $9 million, its annual
voluntary contribution for the past several years. The subcommittee also commends
Cyprus and Greece for their willingness to supplement the assessed payments with
voluntary contributions of $18.5 million and $6.5 million, respectively.
With UNSCR 831. the Security Council also determines that it will undertake a
reassessment of all aspects of UNFICYP in December 1993. Because of cost-induced
withdrawals by troop-contributing countries, the size of UNFICYP has declined from
2.141 in May 1992 to 1.513 in March 1993. Recognizing the increasing demands for
UN peacekeeping forces around the world, the subcommittee nevertheless urges that
the UN Security Council ensure that the size and composition of UNFICYP remain
fully equal to its peacekeeping task.
6. The subcommittee continues to believe that bicommunal contacts between
individuals from both the Greek- and Turkish-Cypriot communities are vital and
central to increasing understanding and reducmg tensions on the island. The
subcommittee believes that it is important that U.S. programs on Cyprus focus on
bicommunal projects that help facilitate increased contacts and cooperative efforts
between members of the two communities. The subcommittee has been frustrated
over a number of years in the slowness with which meritorious projects in this area
have been identified and support has been obtained from the parties to fund
bicommunal projects. We continue to believe that the U.S. funds available for
Cvprus in each fiscal vear should be made available solely for scholarships and
bicommunal projects.
45
7. In Public Law 99-83. Congress authorized, pursuant to a 1984 Presidential
initiative, a special Cyprus peace and reconstruction fund of up to $250 million.
President Reagan said at that time that this fund "would be requested at such time as
a fair and equitable solution acceptable to both parties on Cyprus is reached, or
substantial progress is made toward that end." TTie subcommittee reiterates its
support for that initiative as another demonstration of what the United States might
be able to do with other countries to help implement a Cyprus agreement in the
future.
8. The subcommittee is pleased to note the instructions to all banks issued by
the Central Bank of Cyprus on April 26 implementing the terms of UN Security
Council Resolution 820. These instructions led to the freezing of some $450-5500
million in Serbian assets in three Serbian-controlled banks and 56 Serbian-controlled
companies. The subcommittee urges Cyprus to continue to take expeditious and
effective measures to implement provisions of UN Security Council Resolution No.
820 of April 17. 1993 to freeze all assets of the Federal Republic of Yugoslavia in
Cyprus.
46
PORTUGAL
(In millions of dollars)
Fiscal Year
Subcommittee
Recommendation
1991
1992
1993
1994
Request
1994
Economic assistance:
ESF
Military assistance:
FMF-C
FMF-<}
IMET
Total military:
42.0
.0
100.0
1.0
101.0
40.0
22.0
100.0
2.2
124.2
.0
90.0
.0
1.0
91.0
.0
90.0
.0
1.0
91.0
.0
90.0
.0
1.0
91.0
Total
143.0
164.2
91.0
91.0
9L0
1. The subcommittee recommends the authorization of $90 million in concessional
military assistance and $1 million in IMET for Portugal in fiscal year 1994. This is the
administrations request. This represents a straightlinmg of aid levels for Portugal from
FY 1993.
2. The subcommittee notes the imp)ortance of continuing security cooperation
between the U.S. and Portugal. Portugal is a loyal NATO ally and a long-time friend of
the United States. The 1983 U.S.-Portugal base agreement expired in February, 1991.
Negotiations between the United States and Portugal on renewal of this agreement have
been taking place since January 1991. These negotiations were on hold for much of 1992
during the election period in both countries. The subcommittee expresses its desire to see
these negotiations resolved to the mutual satisfaction of the United States and Portugal at
the earliest possible occasion.
The subcommittee strongly supports the negotiation of a new base agreement that
will take into account the significant changes in the US-Portuguese relationship that have
taken place since the first accord was concluded in 1951. The subcommittee hopes a new
agreement will lay the foundation for a broader relationship between our two countries.
The subcommittee urges the administration to work with the Government of Portugal to
move U.S.-Portuguese relations away from the traditional bases-for-rent formula and on
to a more equal footing along the lines of the model set by Spain. The subcommittee
recognizes that significant progress has already been made in this direction in recent years
and hop>es that this trend will continue and be reflected in the final base agreement
between our two countries.
The subcommittee expresses its expectation that in the context cf a new base
agreement the U.S. and Portugal will negotiate a series of bilateral agreements to cover
continued cooperation in areas such as science and technology, narcotics, anti-terrorism
efforts, and cultural cooperation.
47
3. The Subcommittee strongly supports the work of the Luso-American
Development Foundation (LADF5. but believes several important changes are necessary to
further streamline and tighten its operations. First, the LADF should conduct thorough
program reviews of grants awarded, to determine whether such grants have achieved their
purpose. Second, the LADF should have outside consultants conduct a thorough review of
management practices, to determine whether LADF overhead and personnel expenditures
have been excessive. The LADF should implement the recommendations of such a review.
Third, the LADF should place far greater emphasis in its work on transatlantic
educational exchanges. Fourth, the LADF should focus exclusively on building
U.S.-Portuguese ties, and not have its resources and attention diverted to third countries
or purposes. Fifth, the LADF should not engage in private sector development or business
activities, since such activities are far better carried out by the private sector, or via the
substantial financial support provided to Portugal since 1986 by the European
Community.
4. The subcommittee continues to support the eligibility of Portugal for U.S. excess
defense equipment under Section 516 of the Foreign Asisistance Act of 1961. as amended.
This equipment represents an important increment to Portuguese military forces.
48
IRELAND AND NORTHERN IRELAND
(In millions of dollars)
1
Fiscal Year
Subcommittee
Recommendation
1991
1992
1993
1994
Request
1994
D.A.
IMET
40.0
.01
19.7
.0
19.7
.03
20.0
.0
20.0
.0
TOTAL
40.01
19.7
19.73
20.0
20.0
1. The subcommittee recommends an authorization of $20 million for the
International Fund for Ireland and Northern Ireland (IFI) for fiscal year 1994. The
subcommittee notes that in recent years there has been no administration request for IFI.
The subcommittee welcomes the administration's request for IFI funding for fiscal year
1994. The subcommittee continues to believe that a continued U.S. contribution to the
Fund is merited and remains an important tangible demonstration of U.S. support for a
reconciliation in Northern Ireland.
2. Since fiscal year 1986, the United States has provided $210 million to the Fund. It
is the subcommittee's understanding that the original U.S. commitment to the Fund was
for a five-year $250 million program. At this time, the subcommittee continues to supfx)rt
this multi-year commitment. This support remains contingent on continued progress on
the part of the Fund in advancing the objectives laid out in the original Congressional
authorization legislation regarding the IFI.
3. The subcommittee is pleased to note that since its inception the IFI has reportedly
created 18.770 direct jobs in Northern Ireland and Ireland. The subcommittee also
welcomes the progress that the Fund has made in addressing the needs of the most
disadvantaged areas. As a result of the Disadvantaged Areas Initiative, in excess of 70
percent of all the Fund's commitments to date - including over 80 percent in 1992 - have
been devoted to the most disadvantaged areas in Northern Ireland and Ireland. The
subcommittee is very suppxjrtive of this initiative and hopes to see this trend continue in
the future. The objective of this initiative is consistent with the goals of the Anglo-Irish
agreement as stated in Article 10 of the agreement which provides that the Fund is meant
to "promote those areas of txsth parts of Ireland which have suffered most severely from
the consequences of the instability of recent years."
4. In its support for the International Fund, the subcommittee also expresses the
continuing concern of many Americans about the status of the Catholic minority in
Northern Ireland. While more Catholics are in public sector jobs, on local councils and in
the legal profession today than ever before, more progress is needed, particularly in the
private sector, to eliminate job discrimination in Northern Ireland. Traditional
employment practices have reinforced the effects of discrimination and. in some cases,
individuals from the Catholic community have been reluctant to apply to companies
which they see to be dominated by the other. In smaller companies, there has been little
progress in overcoming the tendency to employ people on the basis of relationship to the
owner, senior staff or other employees. These factors have consistently worked to the
disadvantage of the Catholic community.
49
The subcommittee notes that a wide-ranging review of employment equality in
Northern Ireland - which would include a review of the effectiveness of the Fair --
Employment Legislation — is to be carried out in 1995. Work on this has already
commenced with the publication in October, 1992 of the review strategy. The
subcommittee looks forward to receiving the published outcome of this review which is
meant to recommend further action necessary to accelerate progress towards achieving
fair employment.
The subcommittee places high priority on the need to make further progress in
eliminating the disparity in Catholic and Protestant unemployment in Northern Ireland.
UNITED STATES FOREIGN ASSISTANCE TO
THE MIDDLE EAST
WEDNESDAY, APRIL 28, 1993
House of REPRESE^^^ATIVES,
Committee on Foreign Affairs,
Subcommittee on Europe and the Middle East,
Washington, DC.
The subcommittee met, pursuant to call, at 9:38 a.m., in room
2172, Rayburn House Office Building, Hon. Lee H. Hamilton
(chairman) presiding.
Mr. Hamilton. The subcommittee will come to order. The Sub-
committee on Europe and the Middle East meets today in open ses-
sion to review the administration's fiscal year 1994 foreign assist-
ance request. This is the first hearing that the subcommittee will
hold on U.S. assistance to countries in the subcommittee's jurisdic-
tion.
We will focus today on Israel, Egypt, the West Bank and Gaza,
Jordan, Lebanon, and some of the smaller programs in Oman,
Yemen, and Middle East Regional Cooperation.
The administration's request for the Middle East for fiscal year
1994 is $5,172 billion. That includes $3 billion in economic and
military assistance for Israel, $2.1 billion in economic and military
assistance for Egypt, $25 million for U.S. programs in the West
Bank and Gaza, $24 million in economic and military assistance for
Jordan, $4 million in economic assistance for Lebanon, $5 million
for a new multilateral peace process fiind, and $7 million for Mid-
dle East regional programs.
Our witnesses today are the Honorable Edward P. Djerejian, As-
sistant Secretary of State for Near East Affairs. I understand he
will be a little late because of other appointments. We expect him
around 10 o'clock; the Honorable Dennis M. Chandler, Acting As-
sistant Administrator for the Near East Bureau of the Agency for
International Development; and the Honorable Fred Smith, Acting
Deputy Assistant Secretary of Defense for Near East and South
Asian Affairs.
We are very pleased, of course, to have our witnesses with us
this morning. Their prepared statements, if they have one, will be
entered into the record in full. We have a lot of ground to cover,
so we will ask you to make very brief opening statements before
we turn to questions.
We will proceed with your testimony first, Mr. Chandler, and
then Mr. Smith.
Do any of my colleagues here have any comments? If not, Mr.
Chandler, you may proceed.
(51)
52
STATEMENT OF DENNIS M. CHANDLER, ACTING ASSISTANT
ADMINISTRATOR FOR THE NEAR EAST BUREAU, AGENCY
FOR INTERNATIONAL DEVELOPMENT
Mr. Chantdler. Thank you, Mr. Chairman, members of the sub-
committee. I am pleased to be here this morning. This is my first
opportunity to testify before this committee.
I would like to have a longer statement submitted for the record.
Copies have been made available to your subcommittee staff. I
would like to touch upon a few points, and then I would certainly
be agreeable to answer any and all questions.
The U.S. Agency for International Development provides assist-
ance to the countries of the Near East. The Near East, as we define
it, are the countries of Israel, Egypt, Jordan, Lebanon, Oman, West
Bank and Gaza, Yemen, and certain re^onal activities. We also
provide assistance to Morocco and Tunisia, but I understand that
is the responsibility of another subcommittee.
We operate obviously within a certain political framework. Much
of the assistance is tnerefore related to helping to facilitate the
Middle East peace process, as well as to stimulate economic growth
and development in the region. There is a very definite political
framework to the assistance that we provide.
While all the countries in the region are certainly very different
and very distinct, there is a common thread, a similarity of devel-
opment problems in the region related to the generally statist
economies and movement toward market-oriented economies, lack
of an abundance of natural resources, a full range of health prob-
lems, and excessive population growth, to which our economic as-
sistance is directed.
We have organized our assistance around five major themes as
a way to focus and concentrate our assistance for maximum im-
pact.
First, we are trying to expand and to help m£ike more efficient
private sector activity in each and all of the countries of the region.
Second, we are trying to work with the nations of that area on
more efficient and more accountable governance, so there is more
popular participation in political and economic decisionmaking so
that the governments are more responsible to the will of the peo-
ple.
Thirdly, because of the very high population growth rates in
many of the countries, we are assisting those countries through the
increased use of contraceptive family planning methods.
Fourth, because there are so many health problems, health prob-
lems which in this country we tend to forget about because they
have been eradicated, but which are prevalent in the region, we
work with many of the countries on the increased use of effective
maternal and child health care services.
And fifth, in the environmental area, the key environmental
problem in a dry-land area like the Near East is the limitation on
the quantity ana quality of water resources.
With that as the major themes of our assistance, let me touch
briefly upon what we have been doing and what we propose to do
with the fiscal year 1994 appropriation in the specific countries.
The largest program in the region, of course, is Israel. We have
been providing cash transfer assistance to Israel to facilitate the
53
Middle East peace process and to address some of the balance of
payments, budgetary, and debt-related issues for Israel. This year,
as I believe you are aware, we also initiated special loan guaran-
tees for Israel, taking note of the humanitarian efforts that Israel
has been providing in receiving refugees from the Soviet Union,
Ethiopia and other areas.
The next-largest program is Egypt, where assistance is provided
in the form of programs and projects to promote economic growth,
improve the productivity and quality of life of Egypt's people, and
strengthen democratic participation in Egyptian institutions and
society. There have been successes in recent years in terms of the
liberalization of Egyptian economic policies in the form of trade lib-
eralization, the beginnings of privatization, price liberalization —
eliminating price controls — generally reducing the role of govern-
ment.
In health, we estimate for example, the lives of 80,000 children
are saved each year through oral rehydration therapy and inocula-
tion programs. Egypt has done well in providing women and fami-
lies a choice in terms of the numbers and spacing of children they
have.
Infrastructure, using gpreat U.S. technology, has been provided in
terms of water, sewage treatment, telephone systems and other
physical infrastructure. We propose with the fiscal year 1994 ap-
propriation to continue economic policy reform assistance, releasing
such assistance based upon actual perform£ince, coordinating our
assistance with the World Bank, with the IMF and with the other
donors.
We also propose to continue the very successful programs in fam-
ily planning and child survival, new funding programs in urban
water, waste water, energy and telecommunications.
In Jordan we have been providing assistance in a variety of
areas, specifically private-sector growth, water and health and fam-
ily planning. Assistance has resumed following the Gulf crisis, and
many economic liberalization programs are under way. We are
working in concert with the World Bank and other donors in that
regard.
Lebanon, after 16 years of terrible civil strife, appears to be
achieving political stability. The economy still has many difficul-
ties. We nave been providing assistance through private voluntary
org£inizations and other nongovernmental groups, to provide relief
and rehabilitation to the people of Lebanon. We would continue
that assistance in Lebanon with the fiscal year 1994 appropriation.
In Oman, where we have a special security relationship linked
to the use of the military bases in the region, we have been provid-
ing, and propose to continue providing assistance for water treat-
ment in Muscat, the capital, and another major city. We will also
fund public sector training to improve the quality of the services
provided by the government and begin some family planning activi-
ties in the area.
The West Bank and Gaza program has been going on for a num-
ber of years, showing American concern for the plight of the Pal-
estinian people. We have been providing assistance through Amer-
ican private voluntary organizations in such areas as training, ag-
riculture, health care and construction of municipal infrastructure.
54
We propose for the fiscal year 1994 appropriation to continue such
activities.
In order to improve upon management, we are focusing efforts in
three areas: agricultural and industrial productivity, selected
health care, and on working with some of the institutions which
are needed in the public sector, training the people, as well as pro-
viding technical assistance in the public sector for services that are
provided.
In addition to focusing our efforts, we now have AID staff on the
ground to address some of the management concerns.
Yemen is, perhaps, the poorest country in the Near East region.
The program there has been greatly reduced because of political is-
sues related to the Gulf crisis. We are providing humanitarian as-
sistance in the areas of health and family planning, women in de-
velopment and training, and we propose to continue with that as-
sistance.
A special area of activity in Yemen is democratization. Yemen
yesterday had its first multiparty elections. We do not yet have the
election returns, but AID did provide assistance to a number of
American nongovernmental organizations helping on the election
process itself.
In addition to these country programs, AID funds are a number
of regional activities in the Near East to address problems across
the region. They will continue to concentrate on the environment,
governance and democracy and family planning activities. There
are special regional programs related to assisting Israel and its
Arab neighbors. There is the Middle East regional cooperation pro-
gram which has been active since the years following the Camp
David Accords. Up until 1992, the program exclusively involved the
United States, Israel and Egypt. In 1992, we involved another
country of the region, Morocco. I am particularly pleased with that
since I was the AID Director in Morocco at the time. We are look-
ing for other opportunities to involve more Arab states with Israel
on joint activities of research and development progprams.
Finally, Mr. Chairman, I would be remiss if I did not mention
that, as we do administer these programs, we are, of course, very
conscious of the fact that we are dealing with scarce budgetary re-
sources, which seem to be getting scarcer by the day. We are mak-
ing efforts not only on an agency-wide basis, but also in the Near
East Bureau, to try to improve focus and concentration and a sys-
tem to measure impact through verifiable indicators of perform-
ance. Whether it is the very large, very labor-intensive program in
Egypt, or whether it is the new programs that have just started in
the West Bank and the Gaza, where we now have staff on the
ground, we are trying to improve upon the quality of the services
provided. To do that, of course, staff and operating expense funding
is required.
That, in brief, Mr. Chairman, is an overview. And I would be
pleased now or whenever to respond to questions.
[The prepared statement of Mr. Chandler appears in the appen-
dix.]
Mr. Hamilton. Thank you, Mr. Chandler. Mr. Smith, do you
have any comments?
55
Mr. Smith. Mr. Chairman, I do not have a prepared statement
this morning. I certainly do not want to imply that we do not have
important security interests in the region, but I was told that most
of the issues you wanted to discuss this morning were political in
nature, so I am here primarily as a back-up to my State Depart-
ment colleagues.
GENERAL AID REQUESTS
Mr. Hamilton. OK Very good. Let's begin with some of the aid
requests. If you look at the nscal year 1994 requests for programs
in the Middle East, I think what strikes you most forcefully is that
almost everything has been straight-lined from fiscal year 1993 to
1994.
There are a few exceptions to that, but that seems to be the rule.
Is that right?
Mr. Chandler. Certainly for the larger programs, Israel and
Egypt, yes, it is a straight-lining. For the smaller progprams there
have been some reductions.
AMERICAN schools AND HOSPITALS ABROAD
Mr. Hamilton. All right. Now, among the areas where you have
had a reduction and departed rather dramatically from the past is
the American Schools and Hospitals Abroad (ASHA) progpram. That
was funded at $30 million last fiscal year, and you are stopping it
altogether. Why do you stop that altogether?
Mr. Chandler. The administration has decided that, given the
budgetary shortages, the difficulty of trying to find resources to
maintain certain key programs such as Israel and E^rpt, and the
search for additional resources for aid to the former Soviet Union
and other areas, we simply have to establish priorities. We cannot
continue to fund everything. The proposal at this time is to elimi-
nate funding for ASHA in fiscal year 1994.
Mr. Hamilton. Is it your view, then, that the support for these
American institutions in the Middle East no longer advances U.S.
interests in the region? Or is there some reason less important
today than it has been in the past?
Mr. Chandler. I think the assistance that has been provided
through the ASHA program to such fine institutions as the Amer-
ican University of Beirut (AUB), Beirut University College, and the
American University of Cairo, has been very helpful in assisting
those individual institutions.
Again, it gets back to a question of a budgetary problem. We sim-
ply cannot do all things. There has not been any systematic evalua-
tion as to the impact of the assistance to those institutions on the
population of the regions in which they are located. We have, for
that reason, encouraged a number of those institutions to submit
proposals to us so that, in addition to the benefit going to the insti-
tution itself, there could also be more of a program reaching out
to the local population in health or training or whatever the area
is.
In the case of AUB, we are considering a proposal for doing just
that.
Mr. Hamilton. How are you going to fund it?
56
Mr. Chandler, We would fund that from monies appropriated
for Lebanon which would benefit the Lebanese people mrough the
expertise and the capacity that has been built up over the years
at AUB.
Mr. Hamilton. Well, this has been an extraordinary rec-
ommendation. I mean, you just cut them out altogether. I must say
it has been my impression, and I think many of my colleagues
share it, that some of these institutions have been remarkable in
presenting the American point of view in an area that we want to
advance U.S. interests. And to come in and just cut the whole pro-
gram out with one swoop is quite extraordinary.
Did you do any consulting with these institutions before you did
this?
Mr. Chandler. We have talked to a number of them.
Mr. Hamilton. How did they react?
Mr. Chandler. Well, they were obviously upset because, in the
case of AUB, we have been providing assistance to them for a num-
ber of years.
Mr. Hamilton. You are not playing games with us here, are vou?
Just striking something out and then expecting us to put it back
in? And then claiming tnat we are busting the budget?
Mr. Chandler. No, I am not. And I am not looking to in any way
duck the question on this. But I can only address it
Mr. Lantos. Mr. Chairman.
Mr. Hamilton. Yes.
Mr. Lantos. Is the witness under oath?
Mr. Chandler. I will be, if you wish.
Mr. Hamilton. OK, I will go on.
Mr. Chandler. It is an agency-wide question. I am familiar with
it, because many of the recipients of the ASHA program are in the
Near East region. I have lived and worked with this question. But
that I believe is the agency position at the moment.
MULTILATERAL PEACE NEGOTIATIONS
Mr, Hamilton. All right. Then there is a new program here for
multilateral peace negotiations, which is $5 million. How are you
going to spend the money?
Mr. Chandler. The peace talks occur through bilateral and mul-
tilateral means. There are five technical working g^roups: water, en-
vironment, regional economic development, refugees and arms and
security. AID, thus far, has been participating in three of those
committees: water, environment, and regional economic develop-
ment.
There are a number of activities that flow out of these working
groups which bring Arab and Israeli participants together to talk
about mutual economic or development problems.
Mr, Hamilton, We are not picking up the bill, are we, for all
these delegations around town?
Mr, Chandler, No, not those. But we do fund those who go oflF
on technical activities. For example, we had a hazardous materials
workshop out in California in case there are oil spills in the region,
AID did fiind the participation
Mr, Hamilton, This money is being used for technical studies,
is that right?
r \
1
57
Mr. Chandler. Technical assistance, training.
Mr. Hamilton. It is not being used just to host the delegations?
Mr. Chandler. No. No, it is studies such as the Gulf of
Aqaba
Mr. Hamilton. Is it likely that we are going to see a big expan-
sion of this program?
Mr. Chandler. The proposal to $5 million is an expansion.
Mr. Hamilton. Is it a new program?
Mr. Chandler. It is an expansion of the current progpram. We
funded activities in fiscal year 1993 to the tune of about
Mr. Hamilton. What was done in 1993?
Mr. Chandler. We would estimate about $1 million worth of ac-
tivities were done in 1993. As the talks continue, we think there
will be an expansion. We have proposed a budgetary increase to
allow for that.
Mr. Hamilton. And do you expect a growth in this item above
the $5 million?
Mr. Chandler. I do not think so at this time, but I cannot really
see that far ahead. I think we have to see what happens on the
talks.
Mr. Hamilton. Mrs. Meyers.
Mrs. Meyers. I have no questions at this time.
Mr. Hamilton. Mr. Lantos.
JORDAN
Mr. Lantos. Thsmk you, Mr. Chairman. I would like to ask some
questions about Jordan, if I may.
Following the Gulf War, aid to Jordan was put on hold due to
concerns about Jordanian enforcement of U.N. sanctions against
Iraq. I would like to know what your current assessment is with
respect to Jordanian compliance with U.N. sanctions against Iraq.
Mr. Chandler. The current assessment of the Department of
State is that Jordan is complying with the U.N. sanctions against
Iraq. This is something whicn the Department of State, and Mr.
Djerejian when he arrives, can confirm — ^has been monitoring very
carefully — and, of course, out in Jordan. With that in mind, the De-
partment of State has proposed that we proceed with the fiscal
year 1992 carryover assistance which was put on hold.
We obligated $35 million of assistance for water projects and
other technical activities. We hope to proceed with a second
tranche that was put on hold, as well, in consultation with the
Congress.
Mr. Lantos. It is your testimony, Mr. Chandler, that Jordan is
not purchasing any oil from Iraq at the present time?
Mr. Chandler. I do not have the answer to that question, sir.
Mr. Lantos. The man who does just walked in, so we will let
him sit down.
Mr. Chandler. Good timing.
Mr. Lantos. Good timing.
Mr. Secretary, you came at the right moment.
Mr. Djerejian. Grood morning.
Mr. Lantos. The question is, is Jordan in full compliance with
U.N. sanctions vis-a-vis Iraq?
58
Mr, Djerejian. Congressman Lantos, as you know, we have been
following Jordan's compliance with the sanctions very closely. And
I would like to add that we have also been keeping tnis committee
fully informed on this issue on a, if I can say on a real-time basis.
And we are assured, Congressman, that Jordan is complying fully
with the sanctions regime against Iraq.
We had some information recently, as we briefed the committee
in private, that raised some Questions. And we immediately en-
gaged with the Jordanians, wno quite frankly gave us an early
warning that there might be a problem which involved the falsifica-
tion of U.N. documents. And to their credit, they alerted us to it.
We immediately engaged in New York, and we are taking meas-
ures in the U.N. context to assure that such fraudulent documents
no longer can be processed to allow Iraq to get goods that are em-
bargoed. So we are cooperating very closely with the Jordanian
Government. And I think I can say very clearly, without any ambi-
g^ty today, that Jordan is in full compliance.
RUSSIAN AID IMPACT ON MIDDLE EAST
Mr. Lantos. I would like to ask a question concerning any im-
pact that the administration's proposed aid package to Russia
might have on aid recipients in the Middle East. As you undoubt-
edly know, I am a very strong and very enthusiastic supporter of
President Clinton's aid package for Russia, as this is very, very
limited cost insurance against potentially catastrophic develop-
ments in that huge country.
There have been some indications that, and perhaps I misread
them, that some individuals in the administration would like to
fund a portion of this aid by transfers from Middle East assistant
accounts. And I would like you to clarify that issue for us.
Mr. Djerejian. Well, Congressman, obviously the structural im-
portance of assistance to Russia is one of the highest priorities of
the administration, and I know of your support for that, in order
to support democratization and private market economy structur-
ing in the former Soviet Union and Russia. Therefore, that cer-
tainly has the highest priority of the administration.
In terms of the impact of tnat program on the Middle East, I can
tell you that, whereas we are in a position of various conflicting de-
mands at a time when budget restraints are becoming greater and
greater, we, however, feel very strongly that our assistance pro-
grams in the Middle East serve such important foreign policy objec-
tives and interests of the U.S. Government that they should be
given the priority that they have had in the past.
Our assistance to the Near East region supports important for-
eign policy goals, including seeking a just, lasting, and comprehen-
sive peace between Israel and all of its Arab neighbors, and with
the Palestinians.
Secondly, helping our traditional friends in the region meet secu-
rity and stability requirements by deterring aggression and pro-
moting respect for market forces, human rights, and the environ-
ment. And I would like to say here, promoting social justice wher-
ever we can in these societies. Because one of the threats we see
is the threat of Islamic extremism, which is really exploiting what
we call the basic issue of social justice, or lack or social justice, in
59
these societies, which extremists can exploit. And certain countries
outside the region can exploit, like Iran.
And a third major goal is promoting security arrangements
which will assure tne stability of unimpeded commercial access to
the vast oil reserves of the Arabian peninsula and the Persian
Gulf.
So we have important earmarked funds to Israel and to Egypt.
And the importance of those assistance programs are, I believe,
well documented. But we believe these policies are sound, and we
remain committed to supporting them.
Mr. Lantos. I am very pleased with your response, because I
think it is extremely important that we learn to place high impor-
tance on two very aangerous and critical parts of the world. And
not at the expense of one or the other. So as I understand youi^ tes-
timony, the administration's request for Russian aid stands on its
own, and not in terms of any encroachment on other assistance
programs.
Mr. Djerejian. I can speak for the Middle East region. And I
think the viability and the importance of our assistance programs
in the Middle East stand on their own merits.
VISA FOR SHEIK ABDUL-RAHMAN
Mr. Lantos. I only have one more question that relates to a dis-
cussion you and I had during your visit with us relating to the ter-
rorist attack on the World Trade Center. We discussed cases where
various Middle East citizens were g^ven visas in error, as you indi-
cated. As you know, Mr. Secretary, since that time I requested a
full investigation by the Inspector General of how the blind cleric,
sheik Rahman, obtained visas, even though he is on the look-out
list, which would preclude his obtaining a visa.
My most recent information is that just within the past few
weeks, he visited Canada, preached in Canada, and again, contrary
to our laws, was allowed to return to the United States. So I seem
to see a pattern of an individual who, according to our own look-
out list should be excluded from entering the United States, gain-
ing repeated entry into this country, and continuing a pattern of
inciting to violence and terrorism, both here and in Egypt, with
great results.
The World Trade Center was successfully bombed. Tourists in
Egypt are being assassinated on a regular basis. I know you share
with me the concern that President Mubarak has expressed. This
is a tremendous blow to the Egyptian tourist industry. I would be
very grateful for an update, Mr. Secretary.
Mr. Djerejian. Well, Congressman, I am very well aware of your
interest and your hearings on this subject in detail. They do fall
into the purview of agencies and bureaus that are not my own.
On the Sheik Omar Abdu Rahman, the decision on whether to
hold deportable aliens in custody pending deportation is one made
by the INS. And I must refer you to them for the considerations
and judgments that they are making on this case.
Mr. Lantos. Let me just say that my most recent information
concerning the issuance of the visa in Khartoum, the Sudan, to this
individual was done by a Sudanese national working for our con-
sulate service. Is that correct?
60
Mr. Djerejian. I am not aware of that detail, Congressman. I
can certainly verify that and get back to you. But, if vou have been
informed of that officially from our consular oflficials, that is one
thing. I am personally not aware of that. Is this information that
you have obtained independently, or has it been briefed to you by
the administration?
[The following was subsequently submitted for the record:]
The Khaitoum visa was issued by an American oflicer, althou^ some processing
work was done by a Sudanese nationad employee of our consular section working
under the American officer's supervision.
Mr. Lantos. I have been briefed on this by the administration,
that is correct.
Mr. Djerejian. I see.
Mr. Lantos. Well, would it be possible at our next visit, perhaps,
that you will be able to give us a full report on how this individual
repeatedly obtained visas to enter the United States?
Mr. Djerejian. Yes, I think we can give you a basic chronology
of exactly how it happened. And I would be glad to submit that to
you.
[The information was subsequently submitted for the record and
appears in the appendix.]
Mr. Lantos. Thank you, Mr. Chairman. Thank you, Mr. Sec-
retary.
Mr. Hamilton. Now, Mr. Secretary, you arrived late. Did you
want to make an opening statement? A brief opening statement?
Your statement, of course, will be entered into the record in full,
and you may make whatever comments you like about it.
Mr, Djerejian. You always put me at a distinct disadvantage,
Mr. Chairman.
Mr. Hamilton. Yes, that is my purpose. [Laughter.]
Mr. Djerejian. Because I would like to read the statement in
full, but I know that we have time restraints. If I could maybe
Mr. Hamilton. We do not have time for that. You highlight it
for us, or submit it.
Mr. Djerejian. If I may highlight it.
Mr. Hamilton. Yes, would you please? Thank you.
Mr. Djerejian. Fine. I will be pleased to do that.
STATEMENT OF THE HONORABLE EDWARD P. DJEREJIAN, AS-
SISTANT SECRETARY OF STATE, BUREAU OF NEAR EASTERN
AFFAIRS
Mr. Djerejian. First, I would like to say that it is a pleasure for
me and my colleagues to be here before this distinguished commit-
tee today to discuss the assistance programs in the Middle East re-
gion. I would like to stress that a major portion of that assistance
goes to support our long-term efforts to bring peace, security, and
social justice to the peoples and countries of this volatile region.
With negotiations having just resumed between Israel, their
Arab neighbors, and the Palestinians, if you would allow me just
a very brief — I would like to brief you on the status of those talks,
I am pleased to report that the Middle East peace negotiations
have resumed. The parties got down to work yesterday. We are in
61
very close touch with them, and all of them have told us their de-
termination to make substantive progress.
Secretary Christopher met with allthe delegations yesterday and
pledged our best efforts to assist the parties to overcome differences
and to play the role of full partner.
As you know, we worked very hard over the past 3 months to
bring about the resumption of negotiations. The Secretary worked
closely with Prime Minister Rabin and with the Palestinians to re-
solve differences and to find answers to the pressing issues that
they raised.
In this respect, we commend all the parties for taking the right
decision to return to the talks. Each party, Mr. Chairman, faces po-
litical restraints at home. The Palestinians in particular are under
great pressure. They want and need to demonstrate that negotia-
tions work and produce results.
Negotiations can help all parties address the basic needs of the
peoples in the region. This applies across the board.
In the Israeli-Palestinian negotiations, serious and meaningful
Palestinian self-government is possible as an interim stage toward
a negotiated final status. Indeed, through these negotiations Pal-
estinians can see occupation give way to self-government and the
emergence of a new relationship between Israelis and Palestinians.
This outcome must provide for a peaceful and orderly transfer of
authority to Palestinians.
The Syrians and the Israelis have been addressing the core is-
sues of territory, security, and peace. This is the right track. But
continued commitment and hard work are needed from both parties
to narrow the substantive gaps in their positions, and to move for-
ward in negotiations leading to a peaceful settlement.
The talks between Israel and Lebanon must continue to focus on
elaborating a political framework involving land, peace, and secu-
rity so that the security situation on the ground, especially in
southern Lebanon, can be addressed in a timely manner.
And in the Jordanian-Israeli talks, we are encouraged to see the
sides working on a negotiating agenda that addresses key issues
and deals with specific areas of potential cooperation, such as
water, energy, and environment.
President Clinton has expressed his personal commitment to
broaden the circle of peace in the Middle East. This process has al-
ways benefited from strong bipartisan support, and I know we can
count on the House and Senate to help sustain this cooperative en-
deavor.
President Clinton and Secretary Christopher are determined to
help make 1993 a year of real accomplishment in the Arab-Israeli
negotiations. We believe that with sufficient creativity and political
will by the parties, this objective can be achieved.
I would like to now highlight the administration's proposed secu-
rity assistance programs for the Middle East, beginning with our
two largest programs, Israel and Egypt, which represent 77 percent
of the administration's fiscal year 1994 securitv assistance request.
As you know, during Prime Minister Rabin s recent visit, Presi-
dent Clinton reaffirmed the special relationship based on shared
democratic values and common interests that exists between Israel
and the United States.
62
The President is determined to make the ties binding our two
countries even stronger and more resiHent, and he has reaffirmed
the U.S.'s unalterable commitment to Israel's security and its mili-
tary edge, a commitment based on our recognition of continuing
challenges to Israel's security. The President's discussions with
Prime Minister Rabin in Marcn deepened our strategic partnership
with Israel.
In our view, Mr. Chairman, U.S. assistance to Israel remains
vital, not only to Israel's security and economic well-being, but also
to regional stability and progress in the peace talks.
Israel's security concerns must be fiilly addressed if the ongoing
peace talks, cosponsored by us and the Russians, are to succeed.
Prime Minister Rabin has told the President that he is prepared
to take the risks for peace. President Clinton has made clear that,
for our part, we will do all we can to minimize these risk. So one
important pillar of this pledge is our security assistance program.
The President's fiscal year 1994 budget maintains current aid
levels to Israel, and the administration will make its best effort to
maintain those levels in subsequent years. I have the details of
what this assistance does in the program.
I would like to mention that on loan guarantees, as you know,
we will provide up to $10 billion in loan guarantees over the next
5 years to assist Israel's efforts to absorb immigprants from the
former Soviet Union, Ethiopia, and other countries. And Israel re-
cently syndicated the first $1 billion in financial markets.
The Government of Israel has told us and is committed to de-
creased government expenditures for nonsecurity activity in the oc-
cupied territories. The Israeli Government is also committed to
U.S. businesses sharing the benefits of the economic growth sup-
ported by the guaranteed loans. To this end, we expect to see a
substantial increase in Israel's purchases of U.S. goods and services
in the coming years. And we taike these commitments seriously.
We will review progress in these areas through our bilateral eco-
nomic dialogue. And we will also review the economic and financial
measures Israel will take to accommodate the increased debt bur-
den that will result firom the guaranteed loans. We attach much
importance to resuming the dialogue on economic reform we began
with Israel in the mid-1980's. So our assistance to Israel also aims
to give the government the financial backing to undertake difficult
reforms.
I have details in the presentation on the economic reform subject.
Our security assistance investment in Egypt over the past decade
has paid off handsomely. Egypt has used our assistance to
strengthen its military and its economy, enhancing its important
role in contributing to stability in the Middle East and furthering
U.S. objectives in Uie region. We expect that future assistance will
pay off, as well.
The President's fiscal year 1994 budget maintains current aid
levels to Egypt, and the administration will make its best effort to
maintain those levels in subseauent years.
Egypt has provided essential support for the U.S. military pres-
ence in the Middle East. The importance and strength of the bilat-
eral military relationship with Egypt was demonstrated throughout
the Gulf crisis. Strong Egyptian leadership paved the way for ac-
63
tive Arab participation in the coalition, and over 35,000 Egyptian
troops constituted the next-largest foreign force to our own.
Egypt is also our key Arab partner, Mr. Chairman, in efforts to
achieve an Arab-Israeli peace, and bolster moderate forces in the
volatile Middle East. Egypt was the first Arab state to sign a peace
treaty with Israel, which is the cornerstone of the Arab-Israeli
peace process. And Egypt has been very helpful in the current ne-
gotiations between Israel and its other Arab neighbors.
On foreign military financing, prior to 1979 Egypt's primary sup-
plier of military equipment was the Soviet bloc. Our FMF program
has allowed the Egyptian military to move fi-om reliance on out-
dated Soviet equipment to a more efficient deterrent force built
around high-tech U.S. weapon systems, Egypt is in the middle of
a long-term military modernization program which emphasizes
quality over quantity. Its primary emphasis at present focuses on
several major programs: coproduction of the Ml-Al tank, and pro-
curement of F-16's and Apache helicopters.
In addition to improving the overall quality of the Egyptian mili-
tary, Egypt is also improving its ability to work in close cooperation
with U.S. forces.
Our economic assistance to Egypt has made a tremendous dif-
ference in that country, and is an important source of support for
the current Egyptian comprehensive economic reform program. Our
programs have also developed Egypt as a major market for U.S.
products, especially agricultural products. Egypt has become our
third-largest foreign market for wheat.
The many accomplishments of our ESF progn*am over the last
decade include helping Egypt to substantially increase agricultural
productivity, decrease infant mortality by 43 percent, bring down
the population growth rate from about 3 percent to 2.3 percent,
provide schools in which some 925,000 students are being edu-
cated, provide sanitary sewage and potable water facilities for the
people of Cairo and other major cities, and provide electricity and
telecommunications services for Egypt's population.
Even more important than these direct results, we have used our
assistance to promote the difficult reforms which will make the
Egyptian economy capable of sustained growth. And I know your
interest in the reform program in Egypt, Mr. Chairman.
Sectoral programs have been conditioned on specific reforms. And
more recently, we have begun to provide cash transfers in support
of agreed reforms.
In 1991, Egypt, working with the IMF and World Bank, laimched
a major initiative to promote private- sector growth. Over the past
2 years, the Egyptian Government has freed exchange and interest
rates, made deep cuts in consumer subsidies, and reduced the gov-
ernment budget deficit. Although these reforms have been success-
ful, private investors are not yet convinced of the government com-
mitment to the completion of the reform process, and have yet to
make the investments needed for job growth.
Despite progress on economic reform, Egypt continues to face
daunting economic challenges, which I have outlined in some detail
in the presentation. Egypt is now entering negotiations with the
IMF on the next phase of its reform program.
64
Over the past few weeks, Mr, Chairman, it has put 24 public en-
terprises up for sale. So our economic assistance helps the Egyp-
tian Government implement the extensive economic reform pro-
gram which is needed to establish a base for economic growth and
political stability.
Another important aspect of our assistance programs is support
for the peace process. These funds help the countries meet legiti-
mate security needs, encourage economic reform and growth, and
promote democratic values, social justice, and respect for human
rights. Besides Israel and Egypt, we request funds for Jordan, Leb-
anon, West Bank and Graza residents, and cooperative programs in-
volving Arabs and Israelis.
On Jordan, Mr. Chairman, I would like to underscore that Jor-
dan has taken very significant steps toward democracy over the
past 4 years. This is one of the least appreciated success stories in
the Middle East. Thus, maintaining stability in Jordan as part of
our overall support for democratization is more important than
ever before.
Our assistance also helps sustain Jordan's very positive role in
the Arab-Israeli peace process, and its commitment to guaranteeing
the security of its border with Israel. And as I mentioned, since our
last security assistance submission. King Hussein has also signifi-
cantly improved enforcement of U.N. sanctions against Iraq.
The strict enforcement of sanctions burdens the Jordanian econ-
omy, which was strained even before the Gulf crisis. Jordan still
has a staggering debt and needs help from external creditors over
the medium term. So our support is crucial.
We expect to begin consultation soon on the release of $50 mil-
lion in fiscal year 1992 security assistance. Fiscal year 1993 funds
remain frozen, as we continue to monitor Jordan's performance on
democratization, the peace process, and sanctions enforcement.
On Lebanon, the United States, as you well know, Mr. Chair-
man, is committed to a unified, sovereigfn, and independent Leb-
anon, free from non-Lebanese forces and armed militias. Our sup-
port assists efforts to rebuild the independent nonsectarian Leba-
nese armed forces, responsive to civilian control and respectful of
human rights.
Humanitarian aid, channeled through private voluntary organi-
zations, and aid to educational institutions demonstrates U.S. con-
cern about the fate of Lebanon and its people.
The government of Prime Minister Hariri has undertaken the
difficult task of economic development and reconstruction. There is
no doubt that our assistance of his government has a significant
and positive impact on his ability to extend the authority of the
central government throughout Lebanon. Thus, our assistance to
the Lebanese armed forces is an important contribution to the Leb-
anese reestablishing greater control over their country.
Our program on Sie West Bank and Gaza Strip demonstrate U.S.
concern for the economic and social well-being of the 1.7 million
Palestinians in the Israeli-occupied West Bank and Gaza Strip. It
helps Palestinians cope with the severely depressed economy re-
sulting from long-standing conflict in the region. The focus is on ef-
forts to promote self-sustaining economic growth, expand employ-
65
ment and the private sector, and improve selected health and wel-
fare services.
To support the peace process, we have also requested a specific
fund for the five multilateral working groups: economic develop-
ment, water, refugees, environment, and arms control and regional
security. This will help fund activities agreed upon in the groups
and augment progress in the bilateral peace negotiations.
Further, the Middle East Regional Cooperation program pro-
motes mutually beneficial cooperation between Israel ana neighbor-
ing Arab states. Scientific and technical exchanges aimed to
strengthen ties by demonstrating the peaceful cooperation can yield
tangible benefits to all involved.
In pursuit of the broader U.S. goal of strengthening security rela-
tions with allies and friends in strategic regions, it is important
that we provide support, albeit modest, to Oman and Bahrain.
Bahrain has been a friend of the United States for over 20 years.
And through its security assistance pro-am to Bahrain, the Unit-
ed States enhances its ability to maintam access for the U.S. Navy
to the Bahraini port and on-shore facilities, helps to ensure free-
dom of navigation in the Persian Gulf, and bolsters the security
and stability of friendly countries in the region.
The signing of a U.S. -Bahrain defense cooperation agreement in
1991 opens the way to prepositioning needed materiel, and facili-
tates military exercises.
Oman's strategic location on the Strait of Hormuz makes it criti-
cal to U.S. interests in the Persian Gulf U.S. operational access to
Omani military facilities was essential to support our operations in
the Gulf, notably during Operation Desert Storm and Operation
Restore Hope. So the 1980 access agreement with Oman, renewed
in 1990 for 10 years, grants the U.S. limited peacetime and contin-
gency wartime use of these facilities.
This concludes my remarks, Mr. Chairman. I will be happy to
answer the committee's questions, with my colleagues.
[The prepared statement of Mr. Djerejian appears in the appen-
dix.]
Mr. Hamilton. We will begin with Mr. Oilman.
Mr. Oilman. Thank you, Mr. Chairman. I want to welcome our
good Secretary before us once again, as well as the other panelist.
U.S. ROLE IN PEACE TALKS
The President has announced that the United States was going
to take a more significant role in the peace talks. Can you tell us
what that means? Will U.S. officials be sitting at the table in these
talks? Just what will our enlarged role signify?
Mr. Djerejl\n. Congressman Oilman, the thrust of the Presi-
dent's and the Secretary's determination to have the United States
play the role of full partner is based on a very important assess-
ment that we have made, that it is essential that the parties make
tangible progress in these ongoing negotiations.
Much time, unfortunately, has been lost in the last 4 to 5
months. There has been a hiatus in the peace talks. And those of
us who follow the Middle East know that hiatuses can be very dan-
gerous. They are a formula for instability and violence and going
backwards.
66
The parties have now had sufficient time, from the beginning of
the Madrid peace process, to overcome all of their procedural prob-
lems, and to really get down to narrowing the substantive gaps
that exist between them, in all the tracks. Therefore, the President
and the Secretary have determined that the United States, as a co-
sponsor along with our Russian cosponsor, must play a more active
role — ^as an intermediary, as a facilitator, as an honest broker, as
a catalyst — to help the parties narrow the substantive differences
in each negotiating track.
This means that we will be very active with both sides in giving
our assessment, giving our ideas. And when the time is appro-
priate, and that is based on the parties narrowing their difiTerences
whereby bridging proposals can then be introduced, we would be
prepared to entertain our ideas on what proposals could bridge the
gaps between the parties.
So this is a very active role that we have been directed by the
President and the Secretary of State to play in the pursuit of the
peace talks.
Mr. Oilman. Have we not been doing that in the last eight
rounds, since the Madrid Conference? Have we not been doing pret-
ty much
Mr. Djerejian. We have been playing a very important role. But
the actual engagement of the United States and the Russians has
not been at this level that we are introducing now. And the reason
for that, Congressman, is that we felt it was — these negotiations
have been and will remain direct negotiations between the parties.
And Secretary Christopher has made very clear that we are not
going to play the role of an arbiter or a mediator. In other words,
we are not going to sit in judgment of the parties and render judg-
ments. That is not the role.
The role is as I have described it. But in the beginning of this
process, and since Madrid, until now we felt it was very important
for the parties to engage directly. Because that is one of the great
breakthroughs of Madrid, was for the first time in 44 years to get
Arabs and Israelis and Palestinians sitting face to face m direct ne-
gotiations. And we literally did everything possible to ensure that
that mechanism worked. Tnat has worked.
Now that they have all been engaged in addressing the sub-
stantive issues, we feel that we must adopt a more active role of
being with them, and introducing ideas, giving our views on a daily
basis, if necessary, on how the gaps can be narrowed.
Mr. Oilman. So then you will be sitting at the table, I assume?
Mr. Djerejian. That has — according to the Madrid rules, we can
sit at the table, the actual negotiating table, only when invited by
both sides. We would be happy to do that when invited by botn
sides. But we are prepared, and are doing everything short of that.
Congressman Oilman.
ARAB BOYCOTT OF PEACE TALKS
Mr. Oilman. Have we undertaken any recent steps to try to end
the Arab boycott?
Mr. Djerejl\n. Yes. As you know. Secretary Christopher, during
his trip to the Middle East, raised the Arab boycott in all of his
stops.
67
Mr. Oilman. Have we had any success with that?
Mr. Djerejian. We are having — we have certainly sensitized the
parties to the issue. And we are naving some success.
Mr. Oilman. Does the Arab League not still maintain its boycott
office in Damascus?
Mr. Djerejian. Yes, the Arab League boycott still remains. One
of the basic thrusts of our efforts has been, one, to get countries
to, in the first instance, eliminate the secondary and tertiary boy-
cott that affects American companies. The Secretanr made very
clear during his trip, especially in the Oulf, that he found it abso-
lutely inexplicable that American companies are discriminated
against, especially after recent history of U.S. involvement and
leading the coalition to maintain the territorial integrity of Kuwait
and the countries in the Oulf
And therefore, we are making a major effort with the countries
that continue the boycott to, in the first instance, eliminate the sec-
ondary and tertiary boycott. And those efforts are ongoing. And we
have had some success in terms of certain countries taking specific
measures to either drop companies, American companies, that are
on the boycott list; not add companies onto that list; and other
measures, including the process of applications. There is a lot of
paperwork that is a concomitant of the Arab boycott.
Mr. Oilman. Are you recommending any conditionality in foreign
assistance to those countries that still maintain the Arab boycott?
Mr. Djerejian. Well, Congressman, we are certainly making it
very clear that we find that the pursuit of the secondary and ter-
tiary boycott is something that we find intolerable, and that affects
our relationship with those countries.
Mr. Oilman. I see my time has run. Thank you, Mr. Secretary.
Thank you, Mr. Chairman.
Mr. Hamilton. Mr. Hastings.
Mr. Hastings. Thank you very much, Mr. Chairman.
Mr. Djerejian. May I add a couple more points, if you allow me?
We are urging, as I said, Arab states to take further steps to end
the boycott. We are urging Kuwait and Saudi Arabia to fulfill their
pledges not to enforce the boycott against U.S. firms. The OCC
states have agreed to remove companies from their domestic black-
lists, and not to add companies. And the Saudis have dropped at
least 30 companies since the Oulf War. And other Arab countries
are increasingly responsive to our request to allow entry to prod-
ucts of blacklisted firms, and to remove companies from the black-
list.
Equally important. Congressman Oilman, we are coordinating
our antiboycott efforts with our major trading partners, building on
antiboycott demarches, by EC countries in Arab capitols in the fall.
Oerman^s announcement that it will implement antiboycott regu-
lations on May 1 of this year. And Japan's public call in December
for an end to the secondary and tertiary aspects of the boycott.
And I would like to repeat that, and I informed this committee
Previously that, we have stopped unilaterally, the United States
as stopped issuing Israel-only passports since April, 1992, and re-
quired official and diplomatic travel to the region on a single pass-
port. We have imposed civil penalties totaling over $2 million on
companies in the United States in fiscal year 1992 as a result of
68
investigations of Department of Commerce's Office of Anti-Boycott
Compliance. And in March of 1993, we fined a major U.S. company,
Baxter International, over $6 million in civil and criminal pen-
alties, and prohibited it from exporting to SyHa and Saudi Arabia
for 2 years because of violations of U.S. antiboycott laws.
So I think we are working hard on it.
Mr. Hamilton. Thank you, Mr. Secretary. Mr. Hastings.
CASH-FLOW FINANCING
Mr. Hastings. Thank you very much, Mr. Chairman. Mr. Sec-
retary, for informational purposes, would you have your good of-
fices assist me in understanding better the cash flow financing of
U.S. military assistance programs to Egypt and Israel? That is just
a request. I do not need a response.
I have two questions. One, I read recently that Jordan is adher-
ing to a formal policy of barring entry to anyone with an Israeli
stamp in their passport. And I recognize that there has been
marked progress between Israel and Jordan- — reference their own
negotiations, coupled with our efforts.
Mr. Djerejian. That is correct.
Mr. Hastings. But are we doing anything, or should we be doing
anything, about this policy and its incongruity? Or is it, in your
opinion, incongruous?
Mr. Djerejian. I think that in our experience with these boycott
measures, often there is a mixed performance. We know that in
general we have no basic problem with the Jordanian Government
on the issue that I have just described.
At times there are problems that occur, especially when a func-
tionary is presented with a passport and there is a problem. And
we are quick off the mark to assure that our policy is not only un-
derstood, but that we expect our friends really not to pose problems
in terms of respecting U.S. passports. And to allow the travel of our
citizens.
So it is something we are on top of. But I do not think there is
a basic incongpruity, Congressman. And I do, in terms of your com-
ment, Jordan has played a very, very positive role in these peace
talks. And King Hussein's commitment to these peace talks and the
instructions that he has given to the delegation are felt throughout
the whole history of these negotiations. And I think the Israeli and
Jordanian heads of delegation got off to a very good start yesterday
on the talks.
Mr. Hastings. My final question is
Mr. Hamilton. Excuse me. My colleague, Mr. Smith, would like
to
Mr. Hastings. I am sorry.
Mr. Smith. On the cash flow financing, Mr. Congpressman, there
is an annual report that is submitted to the Congress each year.
And the latest one was submitted on January 29. I can make sure
that you get a copy of this.
Mr. Hastings. Thank you so very much. I would appreciate it.
[The information was subsequently submitted for the record and
appears in the appendix.]
69
AID TO ISRAEL
My final question, Mr. Chairman and Mr. Secretary. All of us,
or at least most of us, applaud the commitment made by numerous
administration officials, including yourself, to maintain aid to Is-
rael at its, the chairman referred to it as straight line, or $3 billion
for fiscal year 1994 level. And I share your view that maintaining
the current aid package to the Camp David covmtries is critical for
a successful peace process.
During the past week, however, two administration officials have
made comments that at least lefl me with some concern as to how
serious the commitment is to maintaining Israel's current aid level.
Last week, Ambassador-at-Large Strobe Talbott testified before
this committee. And when asked whether the administration was
considering reducing aid to Israel in order to assist Russia, his re-
sponse, in my view, was vague. He said it was the administration's
intention to maintain — and I underscore — significant levels of as-
sistance to Israel and Egypt.
Would you please, Mr. Ambassador, comment on what is meant
by "significant?" Or is that your view? Or does this mean that some
cuts are being considered? Does this mean that aid to the Camp
David countries will be preserved without cuts during the fiscal
year? And among the many statements made by former colleague
Leon Panetta, a former colleague of many of the persons here,
there also were some tortuous remarks where he said little of the
money can be taken away from Israel and Egypt. And I really just
want a specific.
Is it going to be $3 billion, or what?
Mr. Djerejian. Well, Congressman, I appreciate the easy ques-
tion you have just asked. First of all, the commitment of the ad-
ministration to maintain the current aid levels to both Israel and
E©T)t in fiscal year 1994 is absolutely firm.
Secondly, the overall importance and priority for U.S. foreign pol-
icy interests vis-a-vis Israel and Egypt, regional stability, and the
Arab-Israeli peace process is evident.
Therefore, it is our intention that we will be maintaining, when
the word is used, significant aid levels to both Israel and Egj^t,
the intent there is that we are maintaining the basic thrust of the
programs that we are supporting this fiscal year, 1994. And that
is our intent.
Now, I cannot sit here and prophetize what is going to happen
next vear, years forward. But I can tell you that the importance we
attacn to the aid programs to both Israel and Egypt is so para-
mount, that I do not anticipate any basic changes.
Mr. Hastings. Thank you, Mr. Chairman.
Mr. Hamilton. Mrs. Meyers.
Mrs. Meyers. I have got to say that I admire your optimism and
your lack of frustration. Sometimes it seems to me — and I have
been a supporter of foreign aid always — but it seems to me as if
our aid is accomplishing nothing.
population control program in EGYPT
It does look to me as if the peace process is going nowhere. It
looks to me as if our population control efforts have not really ac-
70
complished a great deal. Egjrpt, you say, still has a population
CTowth rate of 2.3 percent. And this means that its population will
double in about 30 years.
And in a country that is struggling as hard as Egjrpt is, I do not
see how they can tolerate that. I appreciate your empnasis on fam-
ily planning efforts, but it looks to me as if we are not accomplish-
ing anything.
And it also seems as if we just resolve one problem, and another
one begins. Do we need to (firect more of our aid, for instance in
Egypt, to internal security? Can we do that under existing law? Or
do we need some kind of a waiver to accomplish that?
The threats seem now to come from within, rather than without,
in Egypt. Would you respond to that, please?
Mr. Djerejian. Congresswoman Meyers, first I will ask Dennis
Chandler, my good colleague, to respond to the specific question
you raised on population and whether or not our aid programs can
be redirected in a certain way.
Let me just say that a major thrust of our assistance programs
to Egypt is on internal economic reforms. And that gets to the very
heart of the very important issue that you have raised.
You are very right to state that many of the challenges to gov-
ernments in tne Middle East, and in this case Egypt, come from
the absolute need to respond more positively to the growing needs
of their populations, especially in terms of economic and social is-
sues, and jobs. That is why we have stressed so much in our pro-
gram, our ESF program, the absolute need for viable and long-term
structural economic reforms, which Egypt has embarked upon.
TERRORIST ATTACKS IN EGYPT
Mrs. Meyers. Is it economic pressures that are bringing about
the attacks on the tourists? Or are these terrorist attacks, or fun-
damentalist religious attacks? What is the genesis of those?
Mr. Djerejian. Well, it is our judgment that those attacks are
very clinically planned by Islamic extremists inside of Egypt who
have very deliberately targeted foreign tourist operations, because
they know that the impact will be an immediate decline in hard
currency earnings for Egypt. They know that will make the govern-
ment, put the government in a position that it is more difficult to
pursue economic reform programs.
So we have no doubt, we have no doubt what the purpose of
those attacks are, and the motives behind the perpetrators. Some
of these groups obviously exploit the internal situation where peo-
ple do not have jobs and are frustrated because of a lack of edu-
cational opportunities and the population pressures.
Mrs. Meyers, Can our aid be used to assist Egypt with internal
security to fight those internal terrorist attacks from the Islamic
extremists?
Mr. Djerejian. Well, by basically addressing the need for eco-
nomic reforms and progress, they can. Yes, in that respect they
can, and they are directed at that. And let me ask Dennis to com-
ment further on that.
Mr. Chandler. Congp^ess woman Meyers, the concerns you ex-
pressed we all have. Development is a very slow, very tedious proc-
ess; there are a lot of factors involved. I recall you visited Morocco
71
while I was there, and we had provided some briefings, met with
government officials and discussed many of these same subjects.
We believe we can see some impact in the area of basic human
needs. We do put a high priority on child survival and family plan-
ning. As I mentioned before, starting from a very, very low level,
about 90 percent of the preschool-age children now are vaccinated.
And of the coverage in place, there are systems we are now assist-
ing and some the Egyptians are assisting. We have worked with
them in the past to put these systems in place.
Mrs. Meyers. Where is their family planning most successful? Is
it in cities? Is there any success at all in rural areas? Is there ac-
tive resistance to anything in the improvement in the status of
women from Islamic extremists? Are we having any success at all
in rural areas?
Mr. Chandler. Yes. We tend to have more success in the urban
areas where the people tend to be a bit more well-informed and
they live in smaller apartments. The women tend to have jobs and
so on. In the rural areas, it comes a little bit more slowly. About
50 percent of the couples in Egypt now practice contraceptive fam-
ily planning. The number of children per woman has dropped dra-
matically. The population growth rate has, in fact, come down. And
so
Mrs. Meyers. But let's not make it sound like it has come down
very much.
Mr. Chandler. No, but it is
Mrs. Meyers. It has come down from three to two and a half.
Mr. Chandler. But you have seen the profiles of the population
bulge, and you have about half of the population that is less than
age 16 or so. It is going to take a long time to have a very dramatic
impact, but it is, in fact, occurring in Egypt.
Mrs. Meyers. I do not mean to seem to be indicating that this
is our fault or the State Department's fault in any way. I am say-
ing that I do not think we should make it sound as if we are mak-
ing very much improvement in Egypt, as far as the status of
women or as far as the birth rate is concerned. When that country
is going to double its population in 30 years, that we still have an
enormous problem there.
And I do not see — the problem is that I do not see that there is
any real hope of our aid being able to accomplish any economic im-
provement there at all, as long as they have a population rate that
is going to double in 30 years. We would not be able to keep up
with that kind of a population growth rate in this country. And if
we could not, certainly Egypt cannot.
Mr. Chandler. Well, we agree with you on the importance of the
issue and the priority that is given to it. We are putting a lot of
resources, financial and staff into it, working with the government,
working with private voluntary organizations, in trying to get them
to address that issue, in addition to other issues. They are all inter-
woven. But, again, I would still say we are making progress, but
it is going to take a lot of time. But they are making progress.
72
THREATS TO EGYPT FROM LTOYA AND SUDAN
Mrs. Meyers. One final question, Mr. Chairman. Is our assist-
ance being used to protect Egypt from threats from Libya and
Sudan?
Mr. Djerejian. Well, I think the basic thrust of our FMF pro-
gram is geared toward assuring that Egypt has a modernized de-
fense force structure that will enable Egypt to effectively deter
threats from Libya and Sudan. And I mink Egypt is well-posi-
tioned, and will be even more well-positioned to address any poten-
tial threats from those two countries in the ftiture. I defer to Mr.
Smith on that.
Mr. Smith. Congress woman, I was going to actually answer a
previous question you had. I believe, when you were asking about
security assistance and could it be used for internal security. Gren-
erally the answer to that is no.
Foreign military financing can only be used or provided to de-
fense agencies. Grenerally, the internal security forces fall under
other ministries, so it would require a special provision.
Mrs. Meyers. Yes, I understand. I was sure that it would require
some kind of waiver in order for us to be able to do that. And I
guess what I was asking you to comment on is that kind of a waiv-
er justified in Egypt at this time. Should we be asking for a waiver
to assist Egypt against attacks from witiiin?
Mr. Smith. My personal opinion at this point is no, we should
not. I believe the Eg^tian authorities are approaching the problem
properly, and I think that Mr. Djerejian's comments about the root
causes of the problem were right on the mark.
Mrs. Meyers. Thank you.
Mr. Hamilton. Mr. Deutsch.
Mr. Deutsch. Thank you, Mr. Chairman. In a sense, this is real-
ly, I guess, a folio wup question on what Congressman Hastings
was asking. Actually prior to that, I think what Congressman Lan-
tos answered. And I guess I will try a third time.
commitment to aid to ISRAEL
You reiterated the commitment of the $3 billion to Israel and the
commitment to Egypt, as well. But you specifically said basic
thrust. And I guess the concern that I have, even a small cut in
our aid package for Israel really could undermine the Rabin gov-
ernment and send the wrong message to those involved in the
peace process. I mean, would you agree with that statement? And
because of that, just the message of a basic thrust I just do not
think is strong enough, to say that the peace process is ongoing.
We need to really be — the administration, I think in particular,
needs to be very strong, and not be ambiguous in any way about
that commitment.
Mr. Djerejian. Congressman, I do not know how stronger I can
be in saying that the administration is committed to maintaining
the current aid levels for Israel and Egjrpt at the fiscal year 1994
level. That is a declarative, unambiguous statement.
Again, in the out years, when we are looking ahead, it seems to
me that the overarching importance of Arab-Israeli peace and our
key role in that would dictate that aid levels to the countries that
73
have made peace and are playing such a vital role in the peace
process are levels that will oe most likely sustained. But I cannot
sit here and say what is going to happen a few years hence. All
I can tell you is today, that there is no ambiguity in terms of our
strong support for maintaining these aid levels, both to Israel and
to Egypt.
And I support fully what you said, in terms both of Prime Min-
ister Rabin and President Mubarak are two of the staunchest sup-
porters of the Arab-Israeli peace process. They deserve our support,
they have our support, and they will have our support. And as I
said. Prime Minister Rabin has made very clear to us that he is
prepared to take the risks for peace. And both President Clinton
ana Prime Minister Rabin have had an extensive discussion of this.
And therefore, we are supporting him fully.
So I hope that my statements are not construed to be ambiguous,
because they are not.
Mr. Deutsch. Let me ask one other question. In a speech last
Friday at the American Anti-Discrimination Committee, Secretary
Christopher stated — and I am quoting now — ^"I am concerned that
we not only seem even-handed, but that we act even-handedly."
Could you define what the Secretary meant when he said "even-
handed," and what priority or actions would the administration
carryout as part of a pledge to act "even-handed?"
Mr. Djerejian. Well, in the context of the Secretary's presen-
tation to the Arab-American Anti-Discrimination Committee, he
was talking about the key role the United States is playing in the
Arab-Israeh peace process. It was in the context, he used the word
"even-handed" in the context that the United States, in plajang the
role of a full partner, is going to be an honest broker, and is going
to do everything it can to be the facilitator, and to be the catalyst
to try to achieve tangible progress in the peace process. This is the
context in which he was speaking, and that is what he meant. And
I would not attach any other significance to it.
Mr. Hamilton. Mr. Andrews.
AID PROGRAM TO WEST BANK AND GAZA
Mr. Andrews. Thank you, Mr. Chairman. Mr, Chandler, on page
10 of your testimony, your written testimony, in making reference
to the aid program to the West Bank and Gaza, you talk about that
program and you say, "The management of this program is difficult
because of the highly sensitive and large unpredictable security en-
vironment, and the limited AID staffing in the field." And then you
make reference to efforts to improve, monitor program activities,
and to improve management controls.
There have been reports in the Israeli press in recent months of
some of this $25 million perhaps winding up eventually in the
hands of Hamas and its sympathizers. Is that true? And how do
we evaluate the truth of that kind of report? What kind of system
do we have in place to know if it is true or not?
Mr. Chandler. I have not seen the report. I heard about it this
morning.
None of the $25 million, which would be the fiscal year 1993
money, has yet been provided, so that money is safe and secure.
The money that is provided is largely through American private
74
voluntary organizations headed up by American representatives to
work on various private sector, job creation, health, agricultural ac-
tivities. They work with many Palestinian groups in the West Bank
and Gaza.
We rely very much on the knowledge of the PVO representatives
in the field as to the uses of the money, the impact of the money,
and the recipients. We coordinate and consult with the U.S. Em-
bassy in Tel Aviv and with the U.S. Consulate in Jerusalem in
terms of who are the recipients. Now that we have AID staff out
there, the monitoring will be better. And we will have people who
are able to get out and visit the projects, assuming the security sit-
uation allows for that.
So I do not know what the basis of the report is. I have heard
about it, and we will try to get some more information on it. But
that would be my answer now.
[The information was subsequently submitted for the record and
appears in the appendix.!
Mr. Andrews. Many members of this committee pushed in the
1993 appropriations bill for language requiring that two officers be
placed on site for this purpose. Are those two officers there? And
what are they doing?
Mr. Chandler. They are there. There is an officer in Jerusalem
working out of the offices of the Consul General, who concentrates
on the AID activities in the West Bank. And there is a recently ar-
rived officer in Tel Aviv working out of the Embassy who works on
the activities in Graza. They provide normal project monitoring,
project management and supervision regarding the use of the AID
money.
Because it is a difficult situation in terms of security and because
of the concerns about tJie appearance of the numbers of Americans
in the field, we have retained some of the management control here
in Washington. We do the authorization of the activities and much
of the contracting back here. So it is not typical of a normal AID
field post. We are pleased with the fact that the AID people are
there. They are busily engaged in assisting in the planning and the
implementation of these programs.
Mr. Andrews. I would just conclude with a request that as the
fiscal year 1993 money is in fact expended, it would be helpful if
copies of the contracts, or at least a list of who would receive the
contracts at what amount, could be provided to the committee.
Mr. Chandler. We can provide that, certainly.
[The following was subsequently submitted for the record:]
WEST BANK AND GAZA— FY 1993 OBUGATIONS/CONTRACTORS
The following is a summaiy of fiscal year 1993 money that has been obligated and
(indicated by an asterisk) what we anticipate will be obligated. The figures have
been rounded up.
Americao-MJdeast Educational and Training Services, Inc $1,200,000
Private Sector Support Project 4,000,000
Society for the care of the Handicapped 3,500,000
Evaluations of PVO's - 320.000
*America-Mideast Educational and Training Services, Inc 2,300,000
*Jobs Program (being designed) _ 14.000,000
ToUl „ _ $25,320,000
75
Mr. Andrews. Thank you.
STRAIGHT-LINING OF FIGURES
Mr. Hamilton. Mr. Secretaiy, let me come at this question of aid
from a little different angle. Vour statement indicates that 77 per-
cent of the administration's 1994 security assistance is for Israel
and Egypt. And I am not sure just what the difference is. Our fig-
ures snow an even higher percentage, 82, 87 percent. But the dis-
crepancy does not bother me at this point.
Thirty -five percent all of U.S. aid in the 150 account goes to
Egypt and Israel.
Now, if you look at U.S. assistance to the former Soviet Union
in 1994, it represents about 4 percent of our overall U.S. assist-
ance. That figure will probably go up if the President's proposals
are adopted. So you have a distribution of assistance that is very
heavy to the Middle East, obviously. And you spoke a moment ago,
and the President has spoken frequently, about the paramount im-
portance of Russia.
I said, I think before you came in, that what marks this budget
more than anything else is you are just straight-lining figures from
the past, with some fairly modest exceptions, at least in amounts.
If you look back over the past several years, you have been
straight-lining Middle East figures I think since around the middle
of the 1980's. And if you look back over the changes in the world,
they have been startling since the cold war.
And so the question naturally arises, with all of the changes in
the world, whv do we keep the same figures in the Middle East?
Why is it in tne American national interest to continue things as
they have always been? Do all these changes in the world not re-
quire some change in fiinding levels? How do you respond to that?
Mr. Djerejian. Well, Mr. Chairman, I think the fact that we
have a diversity of national priorities — quite frankly, the most im-
portant, amongst the most important being the promotion of de-
mocracy and privatization and establishing a market economy in
Russia, and helping the newly independent states of the former So-
viet Union; and I would put way up there the pursuit of a viable
and comprehensive and just Arab-Israeli peace settlement — means
that we have to be putting our financial resources behind these pri-
orities.
And I do not see a necessary conflict. I see certainly the intense
competition for increasingly scarce funds. There is no question
about that. But I do not see where we should pull back on support-
ing foreign policy interests of the United States that are so essen-
tial.
Mr. Hamilton. Let me ask you this. Just speculate with me a
little bit. If there were, in fact, a redu^ion — say we cut in half the
amount of Middle East money — what happens? Does that under-
mine the peace process, in your view? Does that mean that the
chances of getting peace in the Middle East are sharply reduced?
Mr. Djerejian. I would think that if we cut our financial assist-
ance as drastically as you have suggested, that it would definitely
undermine the Arab-Israeli peace process, and would interject a
new element of insecurity and instability into the region that could
have very negative effects on what we are trying to accomplish.
76
Mr, Hamilton. OK, spell that out for me a little bit. I am not
opposing your idea here, obviously. I am just trying to get you to
articulate it.
I find myself, in my constituency, being pressed harder and hard-
er on the question of foreign aid in general, and the Middle East
more specifically. So I am asking you to give me a little help here,
in effect. You say it would have a negative impact on us. What is
the negative impact if that process breaks down?
Mr. Djerejian. Well, first, if the basic aid that we have been
providing to the countries of the Middle East, and the largest re-
cipients, Egypt and Israel, is based on the fact that these two coun-
tries have made peace with one another and have established the
cornerstone for a comprehensive Arab-Israeli peace settlement.
Therefore, we must continue to support the role of both Egypt and
Israel, which is essential.
Secondly, the Israeli position in the Middle East has to be sup-
Eorted in terms of the geopolitical environment it finds itself in. I
elieve strongly that Israel must be strong in order to make peace.
In order for Israel to negotiate with confidence, and as creatively
as possible in achieving peace agreements with its neighbors, it
must have the assurance that it is not weak at home, in terms of
its national security requirements and its basic economic security.
And quite frankly, that is one of the reasons why we maintain very
strongly that Israel have a military qualitative edge, so that it is
not subject to military aggression, or at least that military aggres-
sion can be deterred because of Israel's clear military qualitative
edge.
Also, that is the reason we stress in our aid programs at ESF in
our economic reform efforts with Israel. That Israel attack much
more directly the absolute necessity for reforming its economy, so
that Israel can have a more self-sustaining economy in the future
in creating the necessary jobs it needs for, for example, the immi-
gration of Jews from the former Soviet Union, Ethiopia, and else-
where.
The same is true for Egypt. Egypt, in order to play the role that
it has played as a source of strength and stability and support of
our objectives in the Middle East, which are to deter aggression —
that was manifested by Iraq's invasion of Kuwait, and a point I
made in my testimony on the high number of Egyptian soldiers
that were part of Desert Storm. Egypt's role in regional cooperative
efforts that coincide with our interests in terms of stability, in the
Gulf, in terms of promoting the peace process, in terms of combat-
ing terrorism and extremism. All of these are complementary to
U.S. obiectives. So Israel and Egypt must remain strong.
In addition, our aid progframs allow these countries to play this
very active role that they are playing in these ongoing Arab-Israeli
peace talks. Mr. Chairman, we have just come through a very dif-
ficult period, where the administration has played a very active
role in getting the parties back to the table. Because of the
Mr. Hamilton, Mr, Secretary, I will interrupt you because Mr,
Oilman has a question.
Mr. Djerejian. Yes, right.
Mr, Hamilton. I will pursue that with you in just a moment. Mr.
Oilman has to leave.
77
MULTILATERAL PEACE AGREEMENTS
Mr. Oilman. I thank you for yielding, Mr. Chairman. And I re-
gret I have to leave, Mr. Secretary. But I did want to ask one ques-
tion about the $5 million that you are asking for to fund the new
program in support of the multilateral peace agreement.
I understand you are proposing a million for each of the five mul-
tilateral negotiations: economic development, water, environment,
refugees, arms control and regional stability. Is that correct?
Mr. Djerejian. Yes, that is correct, Congressman.
Mr. Oilman. What will that money specifically be used for in the
peace negotiations? Has there been enough progress made to merit
putting that money aside at this stage?
Mr. Djerejl^n. Well, on the — ^first of all, the multilateral discus-
sions. Congressman Oilman, are making, I think, very important
progress. Again, we have to get back to basics. We have sitting
around the table in these working groups, in these five working
groups, we have Israelis sitting down with their Arab negotiating
partners. And not only their negotiating partners, but with Arab
countries outside of the negotiating framework. For example, from
the Oulf and from the Maghreb. And they are sitting down and
talking about what the finits of peace can be. In the economic field,
in arms control, regional security, in environment, in refugees. This
is very, very significant.
And therefore, this multilateral phase of the peace process is
complementary to the bilateral negotiations. And what it is doing,
it is, first of all, establishing the data base for projects that can
kick in as soon as we make progress on the bilateral peace talks.
So
Mr. Oilman. So this is pretty much a carrot that you hold out
for each of these
Mr. Djerejian. Absolutely. But also what is very important is
the interaction. We have 35 countries participating in various of
these fora. And it is one of the breakthroughs of this process where
you have Arabs and Israelis sitting down around a table and talk-
ing about cooperative ventures.
Mr. Oilman. So would you categorize that as seed money, really,
for the
Mr. Djerejian. Absolutely. It is important seed money.
Mr. Oilman. All right. Thank you for clarifying.
Mr. Chandler. If I may add to that, I can give you a few exam-
ples of what has been done. There have been a number — it is a lot
of technical assistance and training by the Arabs and Israelis in
the region.
Mr. Oilman. Could you put that mike a little closer to you,
please, Mr. Chandler?
Mr. Chandler. I am sorry. Yes, there is a lot of technical assist-
ance and training in the region. They have done a comprehensive
environmental study of the Oulf of Aqaba, which is of major con-
cern. It looked at water resources in the region. I mentioned earlier
there has been a conference on hazardous materials problems. And
we used the example off the coast of California. There is going to
be some public administration training for Palestinians.
78
A lot of technical advice and training has been provided. It has
some political impact, as well. It is estimated that there be more
of those required later.
Mr. Oilman. Thank you. Thank you, Mr. Chairman.
POINTS ON PEACE PROCESS
Mr. Hamilton. Mr. Secretary, you expressed in your statement
a couple of points on the peace process, which I want to raise with
you. One is, you say the Palestinians are under great pressure. Do
you want to elaborate on that a little bit for us? Do you have ques-
tions about the ability of the Palestinians, if they agree to some-
thing, to be able to implement it?
Mr. Djerejian. Well, one of the difficulties that the Palestinians
face are the conditions on the ground. The deportee issue, the
Hamas deportee issue, unfortunately raised the profile of Hamas,
which as you well know, Mr. Chairman, is opposed to the Arab-Is-
raeli peace process. And we saw a deliberate attempt on the part
of Hamas and other extremist groups opposed to the peace process
to outbid the Palestinians who are engaged in negotiations to es-
tablish peace with Israel.
And this made the, put a great deal of pressure on the delegates
in these talks. In addition to that, with the upsurge of violence in
the occupied territories and in Israel, with a lot of people being
killed on both sides, the situation on the ground in the last few
months has deteriorated rather sharply.
Mr. Hamilton. Do you have a strong sense of urgency about
these talks, that progress must be made in 1993, for example?
Mr. Djerejian. ^solutely, Mr. Chairman. The President and
the Secretary of State feel this. We have been in touch with the
other leaders in the Arab world and with Prime Minister Rabin.
And we all have this sense of urgency.
Mr. Hamilton. How much support does the Palestinian delega-
tion have in the occupied territories for the peace talks and for par-
ticipation in them?
Mr. Djerejian. Well, at the outset of the Madrid process, they
had overwhelming support. We have seen some of that support di-
minish as a result of no tangible progress at the negotiating table.
And this is one of the. reasons why we think progress now is abso-
lutely essential.
Mr. Hamilton. As of today, would they have majority support?
Mr. Djerejian. Yes, today they have majority support. Ajid I
think, despite all of the attention that is given to the extremists
and the opponents of peace, that there is still a bedrock of support
that allows them to come to the table. But this can be fleeting.
Mr. Hamilton. But they have to make progress, or they are in
trouble. Is that it?
Mr. Djerejian. Absolutely. I agree, Mr. Chairman. This can be
fleeting. That is why we feel so strongly that progress has to be
made now, on a very timely basis. And that is why we have acti-
vated our role. That is one of the reasons that the United States
is prepared to play this role of full partner now.
79
ROLE OF U.S. IN PEACE PROCESS
Mr. Hamilton. Do you see the role of the United States any dif-
ferent from what it was during the Bush administration?
Mr. Djerejian. I do see it different in terms of our more direct
engagement with the parties, in doing everything but being at the
negotiating table, and we are ready to do that if both parties, if
both sides invite us to do that.
Mr. Hamilton. Well, they used to use the words catalyst and
honest broker, and so forth. And you are talking about best efforts
to assist the parties to overcome their differences and to play the
role of a full partner. I mean, is that just rhetoric?
Mr. Djerejian. No. We are beyond rhetoric, Mr. Chairman. The
President and the Secretary are absolutely determined that we be
present during these negotiations in a manner in which we can ma-
terially push these negotiations forward in terms of narrowing the
substantive differences between the sides, introducing ideas where
appropriate.
Mr. Hamilton. Are you going to be in the room?
Mr. Djerejian. If invited, we will be in the room. But quite
frankly, again, without
Mr. Hamilton. Most of the time, an American is not in the room,
is that right?
Mr. Djerejian. That is correct. According to the rules of Madrid,
only when both sides invite the cosponsors in can they come in. But
we have done everything short of them.
Mr. Hamilton. OK. They are going to get stuck a lot, we are
sure of that. And so they are going to call you in, is that right?
Mr. Djerejian. They may.
Mr. Hamilton. Are you going to be putting proposals on the
table for them?
Mr. Djerejian. As appropriate, we may.
Mr. Hamilton. You certainly do not exclude
Mr. Djerejian. Again, we will be consulting closely with the-
Mr. Hamilton. You do not exclude that. You made very clear you
are not going to be an arbitrator or a judge.
Mr. Djerejian. That is correct. .
Mr. Hamilton. But are you developing proposals now in the
areas where you think there may be sticking points?
Mr. Djerejian. Well, what we are doing is that we are in very
close discussions and contact with all the parties. And we have our
own assessment that we have been sharing with the negotiating
parties. I chaired our consultations with our peace team with all
of the Arab and Israeli delegations before this round began. And
we gave them our very frank and candid assessment of where their
negotiations are, where the sticking points are. And we discussed
possible ways of overcoming them. So we are already engaged in
that process, Mr. Chairman.
Mr. Hamilton. What brought the Arab parties back to the nego-
tiating table? A few weeks ago they were saying they were not
going to come back. What happened?
Mr. Djerejian. I think one of the things that
80
ROLE OF SAUDI ARABIA IN PEACE PROCESS
Mr, Hamilton. And part of that question is, were there budg-
etary considerations? The report was that the Saudis paid or
pledged a lot of money to the PLO. Resume payment, perhaps.
Mr. Djerejian. I would not attach much importance to the lat-
ter, in terms of that being a critical factor. The Saudis were very
helpful in urging the Arab negotiating parties and the Palestinians
back to the table. They also were in touch with Faisal Husseini and
the Palestinian peace team in terms of how
Mr. Hamilton. We get an idea of who the Arabs are there. The
Egyptians obviously played a very important role. President Muba-
rak had a number of talks with the Palestinians, did he not? The
Saudi role is a little less clear to me. What did the Saudis do?
Mr. Djerejian. Well, the Saudis, first of all, King Fahd had his
foreign minister engaged directly with the Arab negotiating parties
in Cairo. They were in touch with Faisal Husseini in order to see
where they could assist in meeting the needs of the Palestinians
in the occupied territories. So they played a very helpful role.
Mr. Hamilton. Now, you indicated that money was not a big
part of it. But the King announced the other day that he is going
to contribute to this Jerusalem fund. That represents a change,
does it not, in the Saudi position since the Gulf crisis? And it is
direct financial support to the PLO, is it not?
Mr. Djerejian. No, I do not think it is direct financial support
to the PLO. When I say it was not a big part of it, let me put that
in context, ^yhat I am saying, the major thrust, in response to your
basic question that why did the parties come back to the table, is
simply because the commitment of the Arab and Palestinian lead-
ership to pursue these negotiations remains very strong.
Mr. Hamilton. The Saudis increased or resumed payments to
help the Palestinians in the territories
Mr. Djerejl\n. That is correct.
Mr. Hamilton [continuing]. As part of this deal, is that right?
Mr. Djerejian. They have been in touch with Faisal Husseini to
help the Palestinians inside the territories.
Mr. Hamilton. And you say that was not a significant factor?
Mr. Djerejian. No, no. I say that was an important factor. But
what I am trying to get to is your major question.
Mr. Hamilton. Yes, OK.
Mr. Djerejl\n. Why did they come back to the table? And the
Saudi role was a very positive and a very important one. But the
basic reason the parties have come back to the table is, one, their
commitment to this peace process is the only way out of this con-
flict. And number two, the fact that the Secretary of State played
a very active role with Prime Minister Rabin and Faisal Husseini
in demsing the deportee issue. These are the two major factors.
And a third I would put is the strong support we got from the
Saudis, from the Egyptians, and from the other Arab states, includ-
ing Syria, Lebanon, and Jordan. We also got support from the Tu-
nisian Government, the Moroccan Government. And therefore, it
was a collective eflTort.
Mr. Hamilton. Do you know the amount of money the Saudis
are going to give to the West Bank and Gaza?
81
Mr. Djerejian. I do not know the specific. I know that they have
been in touch with one another.
Mr. Hamilton. Do you know about how much it is going to be?
Mr. Djerejian. Excuse me?
Mr. Hamilton. Do you know about how much it is going to be?
Mr. Djerejian. I know that it is sort of in the milHons of dollars,
but I would not want to speculate how much because I do not know
exactly what is going to be
Mr. Hamilton. You have not been told how much it is?
Mr. Djerejian. I know of a figure that has been discussed of $10
million. But I cannot confirm that that is the amount of money.
Mr. Hamilton. OK, let me ask you about some of this cash flow
financing.
Mr. Deutsch. Mr. Chairman.
Mr. Hamilton. Yes, Mr. Deutsch.
Mr. Deutsch. If I could just followup on that.
Mr. Hamilton. Surely.
WEST BANK
Mr. Deutsch. When we say $10 million is going to the West
Bank, who is it going to in the West Bank? And the concern, to fol-
lowup on Congressman Andrews' question, I think there is a real
concern of, is any of that money going directly to Hamas? Because
I guess there are reports that the league of tne Arab world, which
is I guess a quasi-Saudi governmental entity, is in fact funding
West Bank and Gaza activity that is going directly to Hamas. So
if you can respond to that part of that question, I would appreciate
it.
Mr. Djerejian. In my extensive discussions with the Saudis, I
can assure you that I detect absolutely no intent on the part of the
Saudi Government to have any money go to Hamas. And these
monies are intended to help the Palestinian insiders, the Palestin-
ians who are at the negotiating table with Israel, in order to help
their people inside the occupied territories.
It is not money that in any way is being directed, to our knowl-
edge, to Hamas.
PALESTINIAN AUTONOMY
Mr. Hamilton. Before I get to the cash flow financing, I wanted
to ask, you probably saw Mr. Haass' article in the New York Times
yesterday about the need for economic autonomy for the Palestin-
ians. How did you react to that? He specifically called for Palestin-
ian access to foreign capital and markets, and less Israeli licensing
and regulation in the territories.
Mr. Djerejian. My reaction to that, Mr. Chairman, is that obvi-
ouslv in terms of structuring the peace that we are working so
hard to elaborate, that in the first instance, the interim self-gov-
ernment arrangements that will be set up will have to have as an
important concomitant economic support, and building the eco-
nomic structure of the Palestinians under the interim self-govern-
ment arrangements.
Now, I can say that these are issues that are being discussed at
the negotiating table. And we hope that the Israeli-Palestinian
track will evolve as we speak now to the point whereby they can
82
get into the details of how the Palestinians can, in interim self-gov- /
ernment arrangements, take more control over their own economic '
future. And indeed, it is our hope that, in the next few days and
weeks, that these are issues that will be addressed at the negotiat-
ing table in order to buildup a viable economic base for interim
self-government arrangements.
Mr. Hamilton. Greater economic opportunity in the territories
ought to weaken the appeal of radicalism, should it not?
Mr. Djerejian. Absolutely, Mr. Chairman. Absolutely.
Mr. Hamilton. Now, Dennis Ross has suggested that Israel and
the Palestinians consider interim measures, as he puts it, before a
comprehensive agreement is reached. You are familiar with that
proposal, aren't you?
Mr. Djerejian. No.
Mr. Hamilton. Well, it is that when Israeli and Palestinian ne-
gotiators reach an agreement in any area in which Israeli authority
in the occupied territories could be transferred to the Palestinians,
that they implement it immediately, do it quickly before they get
to an all-encompassing agreement of some kind. In other words, it
is an effort to kind of speed up the autonomy matter.
Mr. Djerejian. Well, these are issues, Mr. Chairman, that are
being addressed now at the table. And it is really up to the Israelis
and the Palestinians to determine exactly the specific measures
that are to be taken.
Mr. Hamilton. Hold on. Mr. Leach, do you have any questions?
Yes, Mr. Leach.
Mr. Leach. Thank you. I first certainly would like to join what
I think is a chorus of everyone who has been involved, even periph-
erally, in Middle Eastern affairs, in congratulation, sir, that you
have been redesignated as the principal Secretary in this area. We
think it is for good reason.
TERRORISM AND U.S. FOREIGN POLICY
I would just like to make one modest comment relating to poli-
tics. We are in a situation where concerned citizens are looking at
American domestic politics, as well as international politics. And
some of the issues in the Middle East have been driven home to
America this spring. I mean, most particularly with the bombing
in New York.
It just strikes me that we all ought to recognize that, to the de-
gree that any outside force attempts to bring terrorism into the
United States to change American foreign poncy, we have to em-
phasize that that policy has to be rebolstered rather than changed.
Otherwise we are in the position of being coerced. The only reason
I raise this is that to the degree that there are indications that a
degpree of terrorism has been brought to the United States, it
makes us that much closer, rather than further apart, fi*om the
parties to which this terrorism is implicitly directed.
I just think it means that fi*om a congressional perspective, when
the subject then becomes assistance to the Middle East, unless we
want to be labeled as coercible, we have to be very clear about
maintaining a continuity in our policy. I think that is an emphasis
from a financial perspective, as well as a policy perspective, that
is very important.
83
Now here one of the very positive implications, again coming
back to your likely foreign assistance requests, is that it implies
continuity. I think that you will see very little difference of opinion
on these issues expressed between the parties and between the
branches of the government at this time. And I would only like to
suggest that, in terms of common values and common interests,
acts of terrorism bind relations together, rather than weaken them.
And in a sense, we all become Israelis if an act of terrorism against
the United States becomes based upon America's tie, whatever it
has been, with Israel.
I have no particular questions at this time. But I just wanted to
express that modest perspective. Thank you.
Mr. Djerejian. Thank you for your remarks. Congressman
Leach. I think the basic thrust of our policies are, in the most com-
prehensive sense, addressed to not only combat terrorism on its
own merits, which is obviously very important, but to attack the
root causes that allow for terrorism to be spawned, especially in the
Middle East. And that is why, in terms of our security assistance
programs, in terms of our economic assistance — pegged in many
cases to economic reforms and privatization, attacking the issues of
social injustice in these societies, and pursuing regional stability
policies, say in the Persian Gulf, and pursuing the Arab-Israeli
peace process — that these are basic policies that if we succeed, es-
pecially in the peace process, will do much to deter the growth of
extremism, be it of a religious or secular cloak, and to decrease ter-
rorism.
Mr. Leach. Thank you.
CASH-FLOW FINANCING
Mr. Hamilton. OK. I wanted to bring up this question of cash
flow financing.
Mr. Leach. Excuse me, Mr. Chairman, if I could.
Mr. Hamilton. Yes, go right ahead.
Mr. Leach. I just want to say how impressed and appreciative
I am of the new judgment on esthetics by the chairman of the com-
mittee.
Mr. Hamilton. Thank you, sir.
Mr. Leach. The room has been much enhanced by your good
judgment.
Mr. Hamilton. Well, that is nice of you to say. Thank you.
OK On cash flow financing, Mr. Secretary, the two cases of
Egypt and Israel are really 100 percent cash flow financing, are
they not? You are shaking your head, Mr. Chandler?
Mr. Chandler. No, no. I was looking to my colleague.
Mr. Smith. No. Israel is a cash transfer. Egypt is partially a cash
transfer related to policy performance, and then there are commod-
ity import programs, and then there is a whole range of projects,
capital projects as well as technical-assistance projects.
Mr. Hamilton. I am focusing this on the military side of it.
Mr. Djerejian. That is what I thought you were focusing on.
Mr. Hamilton. I am sony, I do not think I made that clear. But
that is cash flow financing K)r those two countries, correct?
Mr. Smith. Yes, sir.
84
Mr. Hamilton. Now, your view, I think, is that cash flow financ-
ing does not legally commit the U.S. Government to provide certain
levels of aid in future years. And I am sure technically that is cor-
rect.
Mr. Smith. Yes, sir.
Mr. Hamilton. But what happens if the United States does not
provide enough assistance to cover cash flow financing require-
ments in these countries?
Mr. Smith. Then the country is obligated to pay from its national
funds any outstanding balances.
Mr. Hamilton. Do they know that?
Mr. Smith. Yes, sir. ITiey sign a letter of agreement for the en-
tire amount, and they know that they have these out-year obliga-
tions.
Mr. Hamilton. Is it not a fact, though, that this cash flow fi-
nancing creates a kind of rising expectation on the part of the re-
cipient government? They just think
Mr. Smith. I think you would have to ask the countries them-
selves.
Mr. Hamilton. I mean, do they not get the expectation that it
is going to cover their financing? Let me just take an Egyptian ex-
ample; I have got the figures in front of me.
Their existing cash flow financing requirements are $4.1 billion
for fiscal years 1993 to 1997. And I am told that Egypt has addi-
tional pending letters of agreement for $360 million, and has plans
to contract for another $750 million for fiscal years 1994, 1995, and
1996.
So we have got ourselves in a situation here where they already
have $4.1 billion cash-flow financing requirements, and they are
going to add over $1 billion to it. We kind of get caught in this.
And it just seems to me it becomes almost impossible to cut back
assistance levels to these people because of these requirements and
their expectations. Even if we decided we wanted to cut their aid,
we would not be able to do it.
Mr. Djerejian. But we certainly do not raise their expectations.
Far fi'om it. And as my colleague expressed, they know very clearly
that if they do not pay, they are unable to pay, you know, it does
have to come out of their national funds.
Mr. Hamilton. I hope that is made very clear to them.
Mr. Djerejian. It is. It is, Mr. Chairman.
Mr. Smith. Mr. Chairman, I would say that your basic informa-
tion is correct, and there is this danger of their overmortgaging
themselves. But as Mr. Djerejian just said, we have made this ex-
plicitly clear to them.
And I also would refer you to some of the controls that were list-
ed in the last report on cash flow financing that was submitted to
the Congress. Controls where we try to limit the approval of
Mr. Hamilton. Why do we not say to a country, like Egypt, when
they are taking on these extra obligations, enough is enough? Do
not buy any more stuff? Stop buying it.
Mr. Smith. We are saying exactly that in a number of cases
where they have tried to start new progprams before their existing
programs have been completed, or before those existing programs
are supported.
85
Mr. Hamilton, They are adding an awful lot for fiscal years
1994, 1995, and 1996. Well, you get the point.
Mr. Smith. Yes, sir.
Mr. Hamilton. I know you are very conscious of the problem. I
just wanted to raise it with you because of our increasing concern
about it here on Capitol Hill, Congressman Obey and the Appro-
priations Committee I know has raised it on a number of occasions.
Mr, Secretary
Mr. Djerejian. I can provide a more detailed response, orally
now, or if you wish, in writing.
Mr. Hamilton. OK, let's do that. We will accept that, of course,
and it will be made part of the record,
[The following was subsequently submitted for the record:]
Our aid programs to Egypt and Israel target economic growth and stability while
helping them meet their legitimate defense needs. Obviously, the best solution is for
economic reforms that will strengthen their economies so that they can meet their
own security needs. Just as obviously, we hope the peace process will result in
changes in the security environment that will require less for defense in the years
ahead.
Cash-flow financing does not legally commit the USG to provide given levels of
aid in future years. The Department of Defense reserves funding for only the first
year's payment. We intend to make our best efforts to provide necessary levels of
aid until the program's completion. The buyer agrees to provide full funding of the
program should U.S. funding not be available.
In any case, DOD attempts to minimize the potential impact of decreases in aid
levels by: (1) holding in escrow "termination liability" funds to protect against the
costs of an unexpected contract termination (except in the case of Israel); and (2)
finding an alternate buyer to take over the contract and payments if necessary.
Israel's outstanding contracts total roughly $1.7 billion through fiscal year 97.
Effl'pt's outstanding contracts consume its entire fiscal year FMF allocation of $1.3
biUion for each year through fiscal year 95. Virtually all these fiinds are used for
purchasing military systems in the United States.
Mr. Hamilton. I wanted to talk to you about Jordan, too. You
have some nice things to say here about Jordan. They have taken
significant steps toward democracy, one of the least-appreciated
success stories. And then we cut them. Why do you cut them if they
are doing so well? They have been cut on their ESF from $15 mil-
lion to $12 million. Are you trying to make up rhetorically for tak-
ing money away from them? Is that it? Is that the strategy here?
Mr. Djerejian. Mr. Chairman, no. And indeed, we want to main-
tain our assistance levels to Jordan. And we want to reward, obvi-
ously, Jordan for its very courageous efforts on democratization.
As I said, we plan very soon to recommend to the Secretary that
the remainder of fiscal year 1992 funds be released. And we will
be discussing that with Congress. And we are reviewing our fiscal
year 1993 funding.
But the point here is that, again, we are working within the pa-
rameters of reduced budgets and reduced assistance levels.
Mr. Hamilton. Well, you are really socking it to Jordan. I mean,
if you look at fiscal year 1990 request, the total request was $85.2
million. That is for economic support funds, military assistance,
and military training. Now you are requesting, in 1994, $21 mil-
lion. Giving you again the total figure, you are dropping down from
$84 million to $21 million. That is in 4 years' time, 3 or 4 years'
time. That is a very sharp reduction. Why are we hitting Jordan
so hard?
86
Mr. Djerejian. Well, we are not deliberately hitting Jordan so
hard. It is just a question of the very diflficult decisions that have
to be made in dividing an increasingly smaller pie.
Mr. Hamilton. Is this country hit harder with reductions than
any other in the Middle East?
Mr. Djerejian. No.
Mr. Hamilton. Others have experienced
Mr. Djerejian. Not to my knowledge. I will have to check that.
I will have to check that, but I do not think so.
Mr. Hamilton. Just looking at it from a percentage of cuts, I
would be interested in that at a time, as you say in your statement,
when it is one of the success stories.
Mr. Djerejian. There is no question about it.
Mr. Hamilton. This cut is not because we did not like their posi-
tion in the war?
Mr. Djerejian. No. No, Mr. Chairman. In fact, we would like to
support Jordan to the best extent of our abilities. As I said, the
problem is an increasingly smaller pie to divide amongst assistance
recipients. But in no way should the aid levels that we have pro-
posed for Jordan be seen as a negative. What we are trving to do
is to maintain our assistance programs, both FMF and ESF, to Jor-
dan as high as we can, but in the context of an increasingly shrink-
ing pie.
ISLAMIC fundamentalism
Mr. Hamilton. OK, let me go to another topic. We will try to
cover a lot of topics pretty quickly.
How, Mr. Secretary, do you view Islamic fundamentalism in the
Middle East in general? And you may want to particularize it with
regard to countries. Do we have a policy as a country on Islamic
fundamentalism?
Mr. Djerejian. Yes. That policy was enunciated in a speech that
I gave at Meridian House in June of last year on Islam and the
West. And it has been enunciated, the basic themes, by Secretary
of State Christopher.
Basically, our policy is predicated on certain basic themes. First,
that Islam is certainly not the enemy of the West, as some coun-
tries such as Iran like to portray our position. That our difference
are not with one of the world's great religions, Islam, but it is with
extremism. And either of a religious or secular cloak. And in this
respect, we are opposed to Islamic extremist groups who are op-
posed to the Arab-Israeli peace process.
Mr. Hamilton. Are we
Mr. Djerejian. Who are engaged in terrorist acts.
Mr. Hamilton. OK, Are we in touch with the Islamic fundamen-
talist groups who are not involved in terrorism, or opposed to the
peace process?
Mr. Djerejian. Yes,
Mr. Hamilton. We are in touch with them as a matter of course?
Mr. Djerejl\n, Yes.
u.s.-israeli relations
Mr. Hamilton. OK. On Israel, President Clinton said that the
administration intends to raise U.S. -Israeli relations to a "new
87
level of strategic partnership." What is the content of that? What
does he mean by that?
Mr. Djerejian. Well, basically, in terms of our relationship with
Israel, during Prime Minister Rabin's visit here, the decision was
made to determine in which ways we could enhance our dialogue,
our strategic dialogue, with Israel. And we are now working with
the Israeli Grovemment to see exactly how that can be done.
As you know, we have very excellent institutional channels with
which we conduct our relationship with Israel. For example, the
JPMG, in terms of the military side of the equation, the Joint Secu-
rity, JSAP, in terms of security assistance.
Mr. Hamilton. Is the JEDG established
Mr. Djerejian. And the JEDG.
Mr. Hamilton. That is functioning now, is it?
Mr. Djerejian. That is functioning.
[The following was subsequently submitted for the record:]
We expect to have a meeting of the U.S.-Israel Joint Economic Development
Group (JEDG) in September. In the interim, we plan to hold working-level economic
consultations with the GOI in June to lay the groundwork for the September meet-
ing. The Group is chaired on the U.S. side by the Under Secretary of State for Eco-
nomic Affairs, Joan Spero, and on the Israeli side by the Director General of the
Ministry of Finance, Aharon Fogel. The Group will include other representatives of
the two governments and may seek advice from outside economists.
The agenda of the September meeting will be worked out in consultation with the
GOI. We expect that the issues to be covered wUl include economic reform, imple-
mentation of the loan guarantee agreement, and Israel purchases of U.S. goods and
services.
Mr. Hamilton. What is its agenda?
Mr. Djerejian. Its agenda is largely the economic relationship
between the United States and Israel, and the economic reform
program.
Mr. Hamilton. In Israel?
Mr. Djerejian. Yes, sir. And what we are doing now is looking
at ways in which we can enhance this dialogue to incorporate some
of the wider issues in the relationship.
Mr. Hamilton. Are there any public documents available telling
us about the JEDG and the status of progress on Israeli economic
reform?
Mr. Djerejian. I think there are documents that — we certainly
can brief you on those, either in written form or orally.
Mr. Hamilton. Well, could you provide us with the documents
first, if there are such? And we may want you to give us a briefing
of some kind on it.
Mr. Chandler. There is a special report to the Congress submit-
ted on the Israeli economy each year, Israel and Egypt. So there
is an annual report that comes up.
[The reports on Israel and Egypt appear in the appendix.]
Mr. Hamilton. All right, now, is the administration, as part of
this new level of strategic partnership, considering exemptions for
Israel or a redefinition of Israel's status regarding the Missile
Technology Control Regime?
Mr. Djerejian. Well, part of our dialogue with Israel involves
the MTCR. But I am not aware of any redefinition of Israel's
Mr. Hamilton. Are we trying to facilitate technology transfer
with the Israelis as part of this strategic partnership?
88
Mr. Djerejian. That is an important element, of course, is tech-
nology transfer, yes.
Mr. Hamilton. The President and Prime Minister announced the
establishment of a U.S.-Israel Science and Technology Commission.
Mr. Djerejian. That is correct.
Mr. Hamilton. That is chaired, I think, by Secretary Brown.
Mr. Djerejl\n. That is correct.
Mr. Hamilton. Is that meeting? Is that commission meeting
now? Has it met?
Mr. Djerejian. The U.S. side has, but we have to get a joint
meeting of that.
[The following was subsequently submitted for the record:]
A U.S. interagency team has met regularly over the past months to begin the or-
ganizational woric required to establish the Commission. The U.S. team has pre-
pared and given to the GOI a draft memorandum of agreement to create the Com-
mission. We hope to have the memorandum of agreement ready to sign as soon as
we have comnleted discussions with the Israelis on the text. The Commission will
encourage ennanoed science and technology cooperation between the two countries.
It will also make recommendations on how to promote closer private sector coopera-
tion.
Mr. Hamilton. No joint meetings have occurred yet.
Mr. Djerejian. I am not aware of any joint meetings that have
occurred.
Mr. Hamilton. Is that an advisory commission?
Mr. Djerejian. It is basically an advisory commission, yes, sir.
Mr. Hamilton. It is going to recommend projects, is that it?
Mr, Djerejian. That is correct, sir.
Mr. Hamilton. All right. What is the status of the U.S.-Israeli
Free Trade Agreement?
Mr. Djerejian. There are discussions ongoing on that, sir. I do
not have the latest status, but I will submit that to you and give
you the information on that.
[The following was subsequently submitted for the record:]
The U.S.-Israel Free Trade Area (FTA) Agreement has been highly successfiil in
promoting trade between the two countries.
According to the agreement, duties on sensitive products — the so-called "List C" —
will be eliminated by 1995. TTie agreement stipulated that the two countries many
agree to accelerate these duty eliminations. However, after considerable discussion,
the two sides have agreed to allow the duty elimination to proceed along the original
schedule with full duty elimination to take effect in 1995. Thus, no negotiations on
List C are contemplated at this time. A few duties of List C products may be re-
duced ahead of schedule as part of other agreements. The lack of an accelerated re-
duction of List C duties will not affect in any way the agreed reductions in List A
and List B items.
Mr. Hamilton. All right. I am particularly interested in the ben-
efits that flow to Israel and the benefits that flow to the United
States.
Mr. Djerejian. All right.
Mr. Hamilton. What is the status now of the housing guarantee?
Can you bring us up to date there? That is now functioning? The
Israeli Government is in the market borrowing on the basis of
those loan guarantees, is it not?
Mr. Djerejian. Yes. As you know, Mr. Chairman, in January,
1993, the U.S. Agency for International Development and the Gov-
ernment of Israel signed a bilateral agreement to implement the
89
loan guarantee progfram. AID has subsequently authorized the is-
suance of the first $2 billion tranche of these loan g^^iarantees.
Now, over a 5-year period, the significant majority of the funds
will be used to make additional foreign exchange available to the
commercial banking system to support increased business-sector
activity. The Government of Israel will use some of the funds to
support infrastructure projects that will support economic growth
and job development in the business sector.
The Israeli Government is committed to decreasing the level of
government expenditures for nonsecurity activity in the occupied
territories. And information from the Israeli Government on the
annual level of nonsecurity government expenditures in these areas
will be taken into account by our Government in determining the
amount, if any, to be reduced from the guarantees after the first
year of activities.
OCCUPIED TERRITORIES
Mr. Hamilton. Now, your statement says the Government of Is-
rael is committed to decrease government expenditures for
nonsecurity activity in the occupied territories.
Mr. Djerejian. That is correct.
Mr. Hamilton. That is correct?
Mr. Djerejian. That is correct. And we are looking for informa-
tion from the Israeli Government on the annual level of
nonsecurity government expenditures in these areas, which will be
taken into account by us in determining the amount, if any, to be
reduced from the guarantees after the first year for activities incon-
sistent with section 226 of the Act in understandings between our-
selves and the Israelis.
Mr. Hamilton. If you look at the occupied territories today, what
is happening to the population? Is it increasing or decreasing? The
settlers.
Mr. Djerejian. The population of the occupied territories?
Mr. Hamilton. Well, the settlers coming in. Are they moving in
or moving out?
Mr. Djerejl\n. Well, we see a definite decrease in activities.
First of all, the Israeli Government has reduced all sorts of incen-
tives, including tax incentives and
Mr. Hamilton. They are not building any new settlements?
Mr. Djerejian. To our knowledge, there are no new settlements
being built.
Mr. Hamilton. They are completing those 9,000 new housing
units that were contracted under the Shamir government, is that
right?
Mr. Djerejian. That is correct. That is correct.
Mr. Hamilton. And when will they be completed?
Mr. Djerejian. I do not have a time line on when they will be
completed. But they, as you know, our understanding is that those
construction sites that were actually commenced will be completed.
But again. Prime Minster Rabin's government canceled, when they
came into office, approximated 5,000-plus building contracts that
were not started, ^d the whole thrust of the Prime Minister's pol-
icy is to shift priorities away from the occupied territories, and into
Israel proper, with the basic objective of improving the Israeli econ-
90
omy, with one of the most important results being the ability to at-
tract further immigration and create the necessary jobs for those
new immigrants.
Mr. Hamilton. One of the estimates is that the population will
increase by 50 percent if these 9,000 units are completed. Is
that
Mr. Djerejian. I have seen that figure, and I do not know what
that is based on. But there very well may be an increase in the
tens of thousands, but I cannot predict exactly how many.
Mr. Hamilton. You might, if you have any estimate on that, give
it to us, would you please?
Mr. Djerejian. Right, sir.
[The following was subsequently submitted for the record:]
If 9,000 additional units were completed and occupied, we would expect that 35-
40,000 more settlers would be housed in them. However, there already exists suffi-
cient unoccupied units in the occupied territories to house an additional 70,000 set-
tlers.
Mr. Hamilton. How about the immigration from the former So-
viet Union now? Do we have recent figures on that?
Mr. Djerejian. I can provide recent figures. I do not have them
with me.
[The following was subsequently submitted for the record:]
After a sli^t rise to 6,120 in March, immigration to Israel from the former Soviet
Union was back down to 4,060 in April. It has tapered off over the last year because
of the improving human rights situation in the former Soviet Union and the high
unemployment rate among new immigrants in Israel. The level of immigration could
change (framatically at any time, depending on conditions in the states of the former
Soviet Union and in Israel.
Mr. Hamilton. Is it down in 1993?
Mr. Djerejian. It has been down. And I think one of the reasons
it has been down is because of the factor that there are not enough
jobs for the new immigrants. In terms of the categories, the profes-
sional and occupational categories, that these people have. And
that has been a factor in what we have seen as lower rates of im-
migration.
Mr. Hamilton. Do we have under consideration building a home
porting facility in Haifa?
Mr. Djerejian. That is an idea that has been surfaced. But I am
not aware of any U.S. decision to proceed on that.
Mr. Smith. No.
Mr. Djerejian. No.
Mr. Smith. We have no plans for that.
Mr. Hamilton. You have no plans for that now?
Mr. Djerejian. We have no plans for that.
EGYPT
Mr. Hamilton. OK, let me go to Egypt for just a minute here.
Now, the Egyptian level has been the same for FMF since 1986.
Why is it always the same?
Mr. Djerejl\n. Well, since 1979, Mr. Chairman, we have pro-
vided the Egyptians with about $16 billion in FMF funds. And they
have used the money primarily to support air armor and air de-
91
fense requirements that are integfral elements of a long-term mili-
tary modernization effort, which I mentioned earlier.
The $7 billion in the air force programs, including F— 4 and F-
16 fighter aircraft, Apache helicopters, C-130 transports, and E2C
early warning aircraft, are an important component of that mod-
ernization program. And there is $6.7 billion for army programs in-
cluding the Ml-Al tank, and
Mr. Hamilton. Is that program on schedule?
Mr. Djerejian. The Ml-Al?
Mr. Hamilton. Yes. Are there cost overruns?
Mr. Djerejian. Yes. Well, it is on schedule. On cost overruns, let
me be quick not to answer in the affirmative on that. Do we have
cost overruns?
Mr. Smith. Yes, there are some overruns.
Mr. Hamilton. How serious?
Mr. Smith. $56 million.
Mr. Hamilton. How serious is that?
Mr. Smith. Out of a $2.3-billion program, it is a $56-million over-
rim.
Mr. Hamilton. Are they actually at the point now of rolling
tanks off the line there?
Mr. Smith. Yes, sir. Seventy-four tanks have been completed.
Mr. Hamilton. I see. Is part of this 1994 FMF budget request
for Egypt going to be allocated to the cost overruns?
Mr. Smith. The answer to that is yes. The payment schedule is
spread out through fiscal year 1998, and so it is part of a whole
package.
Mr. Hamilton. Now, is this plant just going to be producing
tanks forever?
Mr. Smith. No, not forever, sir.
Mr. Hamilton. How long does it go?
Mr. Smith. The program is to be completed in 1998.
Mr. Hamilton. Nineteen-ninety-eight. And then what happens to
it?
Mr. Smith. It is scheduled to produce 499 tanks. After that, that
is a good question, Mr. Chairmgin. I think the Egyptians are look-
ing hard at some conversion possibilities.
Mr. Hamilton. All my questions are good questions. [Laughter.]
Mr. Djerejian. We have noticed.
Mr. Hamilton. By definition. I do not ask bad questions up here.
OK, go ahead. Four hundred ninety-nine tanks, and at the end of
that it goes out of business? Is that it?
Mr. Smith. Yes.
Mr. Hamilton. Is there any
Mr. Smith. I believe you would have to — I mean, really, the
Egyptians are going to make the decision on that.
Mr. Hamilton. OK, I imderstand. Mr. Secretary, are you gen-
erally pleased with the economic reform program in Egypt?
Mr. Djerejian. Well, I think if you take me achievements of the
economic reform program over the last few years, the Egyptians
have accomplished quite a deal. And in the last 2 years, we have
seen more profound change in Egypt's economy than any time in
the previous decade.
92
Mr. Hamilton. Are they meeting their IMF and World Bank tar-
gets?
Mr. Djerejian. Egypt has met its IMF target, though with some
delay. Negotiations on a successor program are underway, and the
pace of reform is a primary issue in the discussions.
Now, there is a problem in terms of Egypt's slowness in restruc-
turing and privatizing public sector enterprises. And this has been
a cause for serious concern by the United States and the inter-
national lending institutions. However, the recent announcement of
22 public sector entities to be sold, which I mentioned earlier, may
foreshadow acceleration of the privatization program. So there is a
second of three tranches also of the Paris Cluh debt forgiveness,
amounting to some $6 billion, is conditioned on negotiation of a
new IMF program.
Mr. Hamilton. Do you have a sense that the problem with Is-
lamic radicals. Islamic fundamentalism in Egypt, is that slowing
political and economic reform in Egypt!
Mr. Djerejian. Well, I believe, Mr. Chairman, that the Islamic
extremists, for example in targeting foreign tourists, are basically
trying to impede the reform effort, and trying to force a deteriora-
tion in economic conditions in Egypt in order to destabilize the re-
gime. I think this is part of their calculation. And that is why it
is even more important that we support Egypt in achieving its eco-
nomic reforms, and in facing down the threat from Islamic extrem-
ists.
Mr. Hamilton. But is the fundamentalist problem causing them
to slow down on economic reform? Or slow down on political re-
form, political liberalization?
Mr. Djerejian. Well, we have not seen any major slow-down of
either. But it could become a real problem, if the terrorists increase
their activities and pose a greater threat.
Mr. Hamilton. Well, I will ask you to give us in writing a run-
down on the key economic reform measures that Egypt has taken.
Mr. Djerejian. I can give you — it will not take but 2 minutes.
Mr. Hamilton. Go ahead.
Mr. Djerejian. One, they have unified and they have freed —
they are unifying and freeing exchange rates. They are opening a
treasury bill market and freeing domestic interest rates. They are
reducing the government budget deficit from over 20 percent of
GDP to under 4 percent. They are passing basic legislation and
regulations leading to eventual privatization of public sector indus-
tries. They are liberalizing import and export regulations. They are
reducing subsidies on a wide variety of goods. And they are remov-
ing investment barriers. So I think that
Mr. Hamilton. Subsidies are coming down on oil and electricity
and that sort of thing?
Mr, Djerejian. I will have to check if it is on oil and electricity.
Mr. Chandler. They are, basically. Some of this is related to the
assistance that we provide for power projects and the like.
Mr. Hamilton. Yes, your general sense is that Egyptian eco-
nomic reform is moving ahead reasonably well, is that correct?
Mr. Djerejian. Is proceeding, with some delays.
93
ECONOMIC SITUATION IN WEST BANK AND GAZA
Mr. Hamilton. OK. Now, the economic situation in West Bank
and Gaza apparently is deteriorating very rapidly. And the Com-
missioner Greneral of the U.N. Relief and Works Agency for Pal-
estinian Refugees described the situation as "economic asphyxia-
tion." Is that your view? Is it that serious?
Mr. Djerejian. Well, the economic situation has deteriorated
rather sharply. And I think one of the major reasons in the recent
turn-down in economic activity is the increase of violence on both
sides of the equation. In Israel, a higher number of Israelis have
been killed, and a large number of Palestinians have been killed
and injured in recent weeks and months. And this has obviously
had a very negative impact on the economic situation.
Plus, the sealing off of the territories from Israel has denied Pal-
estinian workers a large number, tens of thousands of workers
Mr. Hamilton. That is right.
Mr. Djerejian [continuing], from wages, that is right.
Mr. Hamilton. Is that going to fuel Hamas and radicalism?
Mr. Djerejian. Well, it can. It certainly can be exploited by the
extremists from within.
Mr. Hamilton. Have the Israelis indicated how long that closure
of the territories is going to continue?
Mr. Djerejian. Well, the reason for the closure was the very
sharp increase in killings. And since the closure, the security, that
security situation has stabilized. But we have no specific informa-
tion on when the closure will be lifted.
But I do think, Mr. Chairman, that as negotiations have re-
sumed, and as the situation begins to pick up in the occupied terri-
tories, we hope to see a lifting of the closure, so that the economic
activities in the occupied territories can be resumed at a more nor-
mal pace.
YEMEN
Mr. Hamilton. I wanted to just ask you, Yemen had an election
yesterday, did it not? Was that the first democratic multiparty elec-
tion ever in the Gulf?
Mr. Djerejian. I believe it is, Mr. Chairman. And I know your
interest in democratization, especially in the Gulf. We have gotten
reports from our Embassy in Sana, as well as reports from inter-
national and Yemeni election observer teams, that the balloting in
the April 27 Yemeni parliamentary elections went very smoothly.
For example, we know of no serious incidents associated with the
elections, with no reports of deaths or violence. Voter turn-out was
apparently very high. There have been no reports of efforts by the
authorities to influence or intimidate voters in their choice of can-
didates.
As you know, women have been given the right to vote, and that
there were some women candidates for the Parliament. We did
have some reports that some women had difficulties in attempting
to vote.
The results of the elections probably will not be known until to-
morrow evening. And the ballot-counting is proceeding slowly, re-
94
fleeting concerns to assure its accuracy, according to election ob-
servers.
We think that with the preliminary indications we have, Mr.
Chairman — we have to await the final results to make a final as-
sessment— ^is that the elections are another important step toward
achieving a multiparty democracy in Yemen. And what is fiirther
encouraging is that the debate among individuals and within die
press in Yemen leading up to the elections was very vigorous and
open. So I think this is a step in the right direction.
WEST BANK AND GAZA PROGRAMS
Mr. Hamilton. Mr. Secretary, I have the impression that in
some instances, at least, AID has not been willing to be flexible
enough on West Bank and Gaza programs. And I have specifically
in mmd a proposal that was designed to help Palestinians export
produce into Western Europe, but it was rejected by AID because
of a lack of up-front money to cover the cost of performance bonds.
They were unwilling to consider some short-term financing debt to
help that program go forward.
Mr. Djerejian. Let me try to answer that in a more generic
sense, Mr. Chairman. Because it is an important issue, especially
in the light of what is happening there now.
The U.S. assistance program in the occupied territories began
way back in 1975. Anci it is implemented largely by private vol-
untary organizations. In addition, we have funded projects by the
UNDP, and operate a small grant program through the embassy in
Tel Aviv and the Consul General in Jerusalem, which my colleague
referred to earlier.
The PVO's provide training and assistance primarily in the areas
of health, education, agriculture, cooperative development, and
rural and urban infrastructure development. In fiscal year 1991,
we began a small program to support Israeli-Palestinian coopera-
tion.
AID has recently adopted a new strategy for the program in view
of the many changes in the territories over the past few years.
Now, the strategy identifies three primary program objectives. In-
creased market production of agriculture and manufactured goods.
Increased use of improved health care services and improved plan-
ning and management of development activities by selected Pal-
estinian institutions. Our overall aim is to improve the economic
and social well-being of Palestinians living in the occupied terri-
tories.
I defer to Mr. Chandler for any further comments on that.
Mr. Chandler. If I may add, I think the chairman is referring
to a specific case with which I am quite familiar. We have worked
with this individual and this firm on encouraging some private sec-
tor activity, exports of produce, conceivably, particularly from the
Gaza Strip area.
We had worked out a contractual arrangement with some very
specific targets and are waiting for performance on those targets.
We had some concerns of an audit nature and also of a reporting
nature, as well as an accountability issue. I do not really want to
go into all the details. But I think there was justification for our
holding back on providing cash up front.
95
Mr. Hamilton. Give us a report on that, would you please, Mr.
Chandler?
Mr. Chandler. Yes, I certjiinly will.
ALL-SPIGOTS LIST
Mr. Hamilton. OK As part of the record, I want vou to submit
to me the outlay fig^es for fiscal year 1994 for all or the countries
involved in this region. And I also want to know, as I have asked
in previous years, a table listine all forms of assistance for Israel
ana Egypt from appropriated and unappropriated accounts in fiscal
year 1993.
I am interested in a kind of an all-spigots list, if you would, of
our assistance to these countries, both direct and indirect.
Mr. Smith, we have had a lot of trouble from the Defense Depart-
ment. It is like pulling eye teeth to get it from you folks. You make
sure you get it for us, would you please?
Mr. Smith. Yes, sir.
Mr. Hamilton. Promptly, right?
Mr. Djerejian. This is for fiscal year 1993, Mr. Chairman?
COMMERCIAL DISPUTES WITH SAUDI ARABIA
Mr. Hamilton. Yes. I want to know the outlay figfures for 1994,
and the appropriations for 1993.
[The information was subsequently submitted for the record and
appears in the appendix.]
OK, the last question. I have got to go, and I am sure you do,
too, onto other appointments. We had a report from the Secretary
of Defense in March of this year on the status of the process for
resolution of commercial disputes with Saudi Arabia. We have an
interest in that, as you know.
Secretary Aspin indicated the Saudi Ambassador had set a dead-
line of not later than April 30, 1993 for substantial progress toward
the resolution of outstanding commercial disputes on a mutually
fair basis. Specifically, claims involving the largest dollar amounts
in controversy.
We are 2 days away now from the April 30 target. And I want
to know what progress has been made at this point.
Mr. Djerejian. Well, let me respond to this. Several of these dis-
putes have been resolved, and claims have been paid in recent
weeks, Mr. Chairman, including some of the largest in dollar
amounts. And the Saudi Embassy is in contact with the other
claimants, and the embassy believes most disputes are near resolu-
tion. So I think we have made some major progress in resolving
those disputes, and we are in close touch with Ambassador Bandar,
Prince Bandar, on a continuing basis as we go along.
Mr. Hamilton. How many unresolved disputes are there at this
point?
Mr. Smith. I think it is going to boil down to two that will re-
main unresolved after the next report is submitted.
Mr. Hamilton. When is that report coming in?
Mr. Smith. Well, we are waiting until Friday, which is the 30th.
And then as soon as possible after that, we will have Secretary
Aspin followup as he promised.
Mr. Hamilton. So most of the disputes have been resolved.
96
Mr. Smith. Yes, sir. And as a matter of fact, I am meeting with
one of the companies tomorrow morning.
Mr. Hamilton. Is Harbor one of them that is unresolved?
Mr. Smith. That is with whom I am meeting.
Mr. Hamilton. That is one you think might still be unresolved?
Mr. Smith. Yes. And you know, I think, some of the history be-
hind that one. And the Saudis did offer an amount, and there is
a disa^eement over what is the total amoimt.
Mr. Hamilton. OK. Keep us fiilly informed on those, would you
please?
Mr. Smith. Yes, sir.
[The following was subsequently submitted for the record:]
As \qf June 23, 1993, 3 of the original 16 cases re{»rted by the Department of
Commerce in its letter of May 23, 1992, remained unsettled: Leo A Dalv versus mul-
tiple ministries; National Medical Entenprises versus the Ministries of the Interior,
Defense and Aviation, and Health; and Herbert-Howard Cos. versus the Ministrjr of
Agriculture and Water. The latter case was considered settled by the Saudi Arabian
Government, a position not accepted by the claimant. The Saudi Arabian Govern-
ment has as^reea to give the case a second look.
The Saucu Arabian Ambassador, HRH Prince Bandar bin Sultan states that his
government will proceed with determination and diligence to negotiate satisfactory
conclusions to the remaining cases. The Department of Defense, together with the
Departments of State and Commerce, will continue to follow the situation closely.
Mr. Hamilton. What is the other one of the two?
Mr. Smith. Porter and Sanderson.
Mr. Hamilton. Porter-Sanderson, all right.
Mr. Smith. And Congpressman Emerson is in constant contact
with us about that one, as well.
Mr. Djerejian. We understand on that that Prince Bandar is
going to be in contact with Congressman Emerson. On that case.
Mr. Hamilton. An unusual relationship between my hearings
and those visits. Have you ever figured that out?
Mr. Djerejian. I notice it is sort of like a barometer, Mr. Chair-
man.
Mr. Hamilton. Mr. Secretary, thank you very much. On the
f>eace talks, of course you know of our interest in that. And I will
eave it up to your judgment, but we would like for you to come
up in a private session and give us a briefing on that from time
to time.
Mr. Djerejian. Be glad to do so, Mr. Chairman.
Mr. Hamilton. We will have some questions to submit to you.
The subcommittee stands adjourned. Thank you very much.
[Whereupon at 12:12 p.m., the subcommittee was adjourned.]
APPENDIX
PREPARED STATEMENT OF DENNIS M. CHANDLER, ACTING ASSISTANT
ADMINISTRATOR FOR THE NEAR EAST BUREAU, AGENCY FOR
INTERNATIONAL DEVELOPMENT
Introduction
Good morning, Mr. Chairman and Members of the Subcommittee.
I am very pleased to be with you today. I am appearing before you
in my capacity as Acting Assistant Administrator for the Near East
Bureau of the U.S. Agency for International Development (A.I.D.)
pending the nomination and confirmation of a new Assistant
Administrator for that position.
Overview
A.I.D. provides economic assistance to Egypt, Israel, Jordan,
Lebanon, Oman, West Bank and Gaza, and Yemen, and also carries out
regional development activities. These programs support U.S.
foreign policy objectives for the area: a just, lasting and
comprehensive peace between Israel and its neighbors; regional
security and stability; and support for political pluralism,
moderation, tolerance, and popular participation. All A.I.D.
programs in the region, to a greater or lesser extent, are shaped
by these foreign policy concerns. The fact that over ninety
percent of the economic assistance to the Near East is provided to
Egypt and Israel reflects the importance the United States places
on Israeli-Arab peace.
These Near East countries share a number of serious
constraints to continued stability and growth. Most have
inefficient, state-led economies and underdeveloped political and
legal institutions which have not sustained economic growth or
created adequate employment. High population growth and human
capital constraints have put future economic and social progress at
98
quantity are increasingly serious problems.
A.I.D. organizes its activities in the Near East around five
overall objectives that address the major problems of the region,
many of which are also global concerns.
~ First, expanded and more efficient private sector activit^y.
Like the economies of Eastern Europe and the former Soviet Union,
Near East economies must complete the transition from government
control to market orientation if they are to achieve sustainable
development. Past A.I.D. programs have financed technical and
policy improvements that have led to impressive increases in
agricultural production, improved the regulatory regime affecting
private investment, and helped initiate fledgling efforts at
privatization of government industries. A.I.D. programs will
continue to promote improvements in the regulatory and policy
environment, diversification and increases in private sector
production (particularly for export markets) , and improvements in
marketing capability and privatization. A.I.D. programs will also
continue to promote improvements in agriculture production to
ensure sustainability and sound use of water and other resources.
These programs are being carefully monitored within the
requirements of legislation restricting the uses of foreign
assistance to foster competition with U.S. products
(Bumpers/Lautenberg) or to induce U.S. firms to invest overseas at
the cost of U.S. jobs.
— Second, more efficient and accountable governance. Making
highly centralized executive bureaucracies more internally
99
accountable and more accountable to the legal system and to the
public can greatly improve conditions for economic and social
development and for securing basic human rights. At the same time,
most Near East countries face a serious challenge in pressing
forward simultaneously on economic and political reform fronts
without strengthening opposition challenges in the process. A.I.D.
will continue to sharpen its efforts to achieve both growth and
stability objectives through careful targeting of assistance to lay
the institutional groundwork for broader political participation,
more effective rule of law, and a more honest and impartial
regulatory bureaucracy. Parliamentary elections took place in
Yemen yesterday and are planned in Jordan in the near future.
A.I.D. will provide technical assistance for election processes
like these, when appropriate, to make them as transparent as
possible.
— Third, increased use of effective contraceptive methods.
The largest Near East countries have already made significant
progress, with A.I.D. 's help, in increasing family planning use and
reducing population growth rates. Yet much remains to be done.
A.I.D. will provide assistance for increased access to a broad
range of high quality family planning services and to improve cost
recovery by service providers.
— Fourth, increased use of effective maternal and child
health services. Near East countries are making great strides in
improving maternal and child health care. Egypt has been a pioneer
in promoting oral rehydration, with dramatic declines in child
100
mortality. Furthermore, Egypt has achieved nearly nationwide
coverage for child immunizations. A.I.D. is. proud to have brought
U.S. expertise and technology to bear in these important child
survival advances. We will provide continued support for increased
availability of health care services and the greater involvement of
the private sector in furnishing such services. Because diarrheal
and respiratory diseases remain significant killers of children
within the region, A.I.D. will also continue to assist in efforts
to improve the quality of health services for both disease
prevention and disease control measures.
— Fifth, more efficient use and improved quality of water
resources. Water is the most critical environmental concern in the
Near East region. Without assured access to clean water, neither
industrial and agricultural growth nor health improvements can be
sustained. Within the context of A.I.D. 's Environmental Strategy,
the Near East Bureau has developed a Water Resources Action Plan
which targets assistance for improvement in management and pricing
of water; increased wastewater treatment and reuse; increased use
of pollution prevention and minimization techniques; and promotion
of inter-country dialocfue on water sharing issues.
Problems such as water and improved trade within the region
are transnational in nature and A.I.D. seeks resolutions through
regional cooperation. Regional approaches include scientific and
technical cooperation between Israel and its neighbors in
agricultural research, vector-borne disease prevention, pollution
control and wastewater reuse and fish production. A.I.D. provides
101
technical expertise and training for the working groups of the
multilateral peace talks on economic development, water resources
and the environment. A.I.D. also implements regional projects in
the areas of population, governance and democracy, and water and
environment, which support both region-wide and country activities.
Country Programs
Egypt. The A.I.D. program in Egypt promotes economic growth,
improves the productivity and quality of life of Egypt's people and
strengthens democratic participation in Egyptian institutions and
society. Economic policy reform is the centerpiece of the program,
emphasizing sectoral reform measures that support movement towards
a free market economy led by the private sector.
A.I.D. has had many successes in Egypt. Assistance for
agricultural technologies, credit, and improved policies have
resulted in increased yields of major crops. A. l.D. -assisted
agricultural policy reform has helped reverse governmental controls
which inhibited improvement in this sector. For example, in the
past decade, as a result of these programs, yields of wheat have
grown by 62 percent, rice by 25 percent and corn by 43 percent.
Assistance in preventing childhood diseases has led to
dramatic declines in childhood deaths from respiratory and
diarrheal diseases, with over 80,000 children's lives saved each
year. In the past four years alone infant mortality has declined
a remarkable 37 percent. Another important factor in reducing
infant death rates has been the take off in the national family
planning program supported by A.I.D. This program has contributed
102
to the doubling of the contraceptive prevalence among married women
and a decline in the fertility rate from 5.2- children per married
woman in 1980 to 4.2 in 1992.
A.I.D. has been a major donor in improving Egypt's
infrastructure in power generation, telephone service, clean water
and improved sewage disposal. Credit through two A.I.D.-
established private foundations to small and micro entrepreneurs
has resulted in over 13,000 loans with a total value of almost $10
million over a two year period. Defaults have been minimal which
will lead to sustainability of these small business operations
without continued A.I.D. support. The Commodity Import Program has
financed the export of over $5 billion of essential U.S. materials
and equipment to Egypt over the past decade and has established
commercial relationships between Egyptian buyers and over 1,400
American suppliers from 46 states.
As a result of A.I.D. 's policy reform efforts, considerable
progress has been made. For example, the Government of Egypt has
eliminated price controls of ten major food crops, has reduced
electricity subsidies, and is developing cost recovery programs in
the health, population, water, wastewater, telecommunication and
power sectors. The U.S., through A.I.D., is working with Egypt on
over twenty economic policy reform benchmarks which include passage
of a new banking law covering foreign banks, reduction of import
bans, and passage of policies that promote private sector imports
and exports. A.I.D. also supports macro-economic policy reform in
coordination with the International Monetary Fund (IMF) and World
103
Bank (IBRD) .
In FY 1994, A.I.D. plans to continue technical assistance and
resource transfers to support Egypt ' s program of reforms in the
financial sector, trade and investment and privatization. The
Private Sector Commodity Import Program and projects providing
technical assistance and services for private sector development
will reinforce the reform program in stimulating the growth of the
economy and employment creation. Successful programs in family
planning and child survival will also continue. A.I.D. will use
significant new funding for programs in urban water and wastewater,
energy and telecommunications to support government efforts to
reform administration and pricing while expanding services in these
areas. A new program in governance and democracy will strengthen
the capacities of the democratically-elected legislature.
Israel. The cash transfer helps support Israel's economy and
helps to advance the Middle East peace process. In recognition of
Israel's humanitarian effort to resettle and absorb immigrants from
the former Soviet Union and other countries, the Congress in FY
1993 approved a loan guarantee program of up to $10 billion . The
first tranche of $1 billion was publicly offered on March 24, 1993.
These programs will continue in FY 1994.
Jordan. The Administration plans to continue assistance to
Jordan in FY 1994, subject to Jordan ' s continued adherence to
sanctions against Iraq and support for the Middle East peace
process. Economic assistance contributes to a stable and moderate
government in Jordan committed to peaceful solutions for the
104
region's problems. Because of Jordan's stance during the Gulf
Crisis, the U.S. restricted new obligations during the period FY
1990-1992. Sone of the prior year resources have since been
obligated in FY 1993 for development projects. A.I.D. is assisting
Jordan to revitalize its private sector to stimulate growth and
employment, to manage its water resources more efficiently, and to
reduce population growth. Past commodity import programs have
provided Jordan with balance of payments support and have resulted
in valuable trade links between the U.S. and Jordan's private
sector. Assistance for agriculture has helped Jordan develop trade
with the Gulf States of some 300,000 tons of fresh produce as well
as production for growing market niches in Europe. To further
support privatization efforts as a means of improving the economy
and providing employment, A.I.D. plans to fund technical
assistance, training and equipment. The FY 1994 program will also
support ongoing programs for water resources and environmental
protection, family planning and assistance to private voluntary
agencies.
Lebanon. After 16 years of civil strife, Lebanon has achieved
relative stability. The economy remains in a shambles, however,
and there has been little repatriation of flight capital or
managerial manpower. Because of the security situation, no U.S.
direct hire A.I.D. staff are in-country, the program is managed
from Washington, and it is implemented primarily by private
voluntary organizations. Assistance has included humanitarian
relief activities, a P.L. 480 Title II targeted food aid program.
105
and support to the American University in Beirut and the Beirut
University College. As stability continues, A.I.D.'s program will
increasingly focus on providing support for redevelopment programs
and for improved public administration and governance. A.I.D. will
also encourage the private sector to take the lead in the
redevelopment of Lebanon.
Oman. In 1990, the U.S. and Oman signed a second, ten-year
agreement which allows the U.S. access to certain military
facilities. This was most helpful during the Gulf Crisis and in
Operation Restore Hope. Aid is administered through the Omani-
American Joint Commission for Economic and Technical Cooperation
(OAJC) . A.I.D. assistance has focussed on developing a more
professional, more efficient public sector and improving water
management. A wastewater master plan has been prepared for Oman's
second largest city and A.I.D. will fund a portion of the
construction. Assistance is also used to help the Omanis improve
the conservation and management of the fisheries industry. This
year a regional program will provide training for Ministry of
Health family care providers to heighten their awareness of the
need for family planning and to provide contraceptive technologies
for the first time ever on a nationwide basis.
West Bank and Gaza. The West Bank and Gaza program was
initiated in 1975 to demonstrate American concern for the needs of
Palestinians in the Occupied Territories and to support efforts to
resolve the Arab-Israeli conflict. The assistance level increased
from $12 million in FY 1992 to $25 million in FY 1993. Most of
106
A.I.D.'s assistance is directed toward training, agriculture,
health care, and construction of municipal infrastructure delivered
through private voluntary organizations. The program will expand
to include a growing focus on private sector development and
strengthening Palestinian institutions. Thus far, A.I.D.
assistance has been significant in developing the faculty of
Palestinian universities; improving management capabilities and
expanding the equipment and infrastructure assets of agricultural
cooperatives and municipalities; training health care workers;
building roads, extending electricity, increasing and diversifying
crop production; and improving the status of handicapped children
in Gaza. The management of this program is difficult because of
the highly sensitive and largely unpredictable security environment
and the limited A.I.D. staffing in the field. However, A.I.D. is
making progress in focussing our assistance and improving
management controls. A.I.D. Affairs Officers are now in residence
at Jerusalem and Tel Aviv to monitor program activities in the West
Bank and Gaza, respectively; a new strategy is in place and various
grants and contracts to implement the program liave been revised to
reflect the strategy's emphases on increased industrial and
agricultural production, improved health services and improved
capabilities of Palestinian development institutions.
Yemen. In 1990, North and South Yemen united as the Republic
of Yemen. The difficulties in combining the two countries have
been exacerbated by staggering losses in trade, employment and
economic assistance as a consequence of the failure of the
107
government to back U.N. efforts to liberate Kuwait during the Gulf
crisis. As a result of Yemen's ties to Iraq during and after the
Gulf crisis, A.I.D. program funding and staffing were reduced and
its program scope narrowed to child survival, family planning and
governance, and encouraging democracy. This limited economic
assistance program recognizes that, while the Government of Yemen's
ties to Iraq necessarily constrict U.S. -Yemeni relations, the
Yemeni people have important humanitarian needs. A.I.D. 's past
efforts have contributed to a successful joint A.I.D.-UNICEF child
immunization campaign in 1990 which achieved over 85 percent
coverage; to the development of Yemen's first population policy in
1992; to Yemen's adoption of a progressive private investment law
and to degree training in the U.S. for over 300 students. We have
also welcomed Yemeni steps toward a more open, more democratic
system — culminating in yesterday's parliamentary elections — the
first polling since unification. While it is too early to reach
any conclusions about the quality of the polling, the U.S.
Government was committed to assisting efforts to enhance the
integrity of the electoral process. A.I.D. funded U.S. NGOs
trained poll workers, procured election materials and enhanced the
use of mass media. A.I.D. will continue to support programs for
improved governance and democracy in Yemen. A.I.D. will also
support child survival, family planning, women's small enterprise
programs, and limited management training.
Near East Regional. This portfolio supports private sector
activity, governance and democracy, water resources, population and
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environmental management throughout the Near East region.
Assistance has helped Egypt and Jordan formulate environmental laws
dealing with sustained use of natural resources, has injected U.S.
business know-how into the private sectors of Near East countries,
planned a first-ever child-spacing program in Oman, and supported
labor union development in several countries. Other environment
and water studies have furthered multilateral discussions in the
Middle East peace talks. FY 1994 regional activities will support
service delivery, operations research and training in family
planning in several countries; will provide an expanded focus on
pollution prevention as part of overall environmental planning and
management; will further integrate the concept of accountable
governance into development programs; will promote increased trade
and development by following up policy reforms with improvements of
technology including business alliances with U.S. firms; and will
conduct research and planning on water issues confronting the
region.
To help foster regional cooperation, since FY 1979 funds have
been used to support collaborative technical and research projects
between Israel and Arab countries. Until FY 1992, Egypt was the
only Arab country to participate. In that year, however, an
agricultural program between Morocco and Israel was approved.
Other projects are now being developed for joint cooperation with
more Arab countries. An A. I. D. -Israel cooperative development
program, initiated in FY 1988, also supports cooperation among
Israel and other countries throughout the world by transferring to
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them Israeli expertise and experience in development.
Administrative. The need to assure the proper management and
control of programs and resources has often been cited by 0MB and
the Congress in relation to A.I.D. programs. In order for A.I.D.
to do the job properly, it is necessary to have the staff and
operating expense resources. One particular example of this has
been the recently concluded agreement to place two U.S. direct
hires to oversee the programs in West Bank and Gaza. Another
example is the major program we oversee in Egypt which works with
the government on economic reforms and which is a staff intensive
endeavor. We raise these cases to highlight the need for adequate
administrative resources.
Conclusion. I wish to thank you for the opportunity to appear
before the Subcommittee today. I would be pleased to respond to
any questions, either now or at a later time, about the U.S.
economic assistance programs in the Near East region.
110
PREPARED STATEMENT OF EDWARD P. DJEREJIAN, ASSISTANT
SECRETARY OF STATE, BUREAU OF NEAR EASTERN AFFAIRS
Good morning Mr. Chairman and distinguished members of the
Committee. I am pleased to be with you again to discuss our
aid and assistance to countries of the Middle East. Of course,
a major portion of that assistance goes to support our
long-term efforts to bring peace, security and social justice
to the peoples and countries of this volatile region. With
negotiations having just resumed between Israel, her Arab
neighbors and the Palestinians, I would like first to brief you
on the status of those talks.
PEACE PROCESS
I am pleased to report that the Middle East peace
negotiations have resumed. The parties got down to work
yesterday, and all of them have told us of their determination
to make substantive progress. Secretary Christopher met with
all the delegations yesterday and pledged our best efforts to
assist the parties to overcome differences and to play the role
of full partner.
As you know, we worked very hard over the past three months
to bring about the resumption of negotiations. The Secretary
worked closely with Prime Minister Rabin and with Palestinians
to resolve differences and to find answers to the pressing
issues they raised. In this respect, we commend all the
parties for taking the right decision to return to the talks.
Each party faces political constraints at home. The
Palestinians are under great pressures. They want and need to
demonstrate that negotiations work and produce results.
Negotiations can help all parties address the basic needs of
the peoples in the region. This applies across the board.
In the Israeli-Palestinian negotiations, serious and
meaningful Palestinian self-government is possible as an
interim stage toward a negotiated final status. Indeed,
through these negotiations Palestinians can see occupation give
way to self-government and the emergence of a new relationship
between Israelis and Palestinians. This outcome must provide
for a peaceful and orderly transfer of authority to
Palestinians .
The Syrians and Israelis have been addressing the core
issues of territory, security and peace. This is the right
track. But continued commitment and hard work are needed from
both parties to narrow the substantive gaps in their positions
and to move forward in negotiations leading to a peaceful
settlement .
The talks between Israel and Lebanon must continue to focus
on elaborating a political framework involving land, peace and
security so that the security situation on the ground,
especially in southern Lebanon, can be addressed in a timely
manner .
Ill
And in the Jordanian-Israeli talks, we are encouraged to
see the sides working on a negotiating agenda that addresses
key issues and deals with specific areas of potential
cooperation such as water, energy and the environment.
President Clinton has expressed his personal commitment to
"broaden the circle of peace" in the Middle East. This process
has always benefitted from strong bipartisan support and I know
we can count on the House and Senate to help sustain this
cooperative endeavor. President Clinton and Secretary
Christopher are determined to help make 1993 a year of real
accomplishment in the Arab/Israeli negotiations. We believe
that, with sufficient creativity and political will by the
parties, this objective can be achieved.
ASSISTANCE PROGRAMS
With your permission, Mr. Chairman, I would like now to
discuss in some detail the Administration's proposed security
assistance programs for the Middle East. I'll begin with our
two largest programs — those for Israel and Egypt — which
represent 77% of the Administration's FY94 security assistance
request .
Israel
During Prime Minister Rabin's recent visit. President
Clinton reaffirmed the special relationship, based on shared
democratic values and common interests, that exists between
Israel and the United States. President Clinton is determined
to make the ties binding our two countries "even stronger and
more resilient," and he has reaffirmed the United States'
unalterable commitment to Israel's security and its qualitative
military edge, a commitment based on our recognition of
continuing challenges to Israel's security. The President's
discussions with Prime Minister Rabin in March deepened our
strategic partnership with Israel.
U.S. assistance to Israel remains vital, not only to
Israel's security and economic well-being, but also to regional
stability and progress in the peace process. Israel's security
concerns must be fully addressed if the ongoing peace talks,
co-sponsored by the U.S. and Russia, are to succeed. Prime
Minister Rabin has told the President he is prepared to take
risks for peace. President Cl^^nton has made clear that, for
our part, we will do all we can to minimize those risks. One
important pillar of this pledge is our security assistance
program .
The President's FY 1994 budget maintains current aid levels
to Israel, and the Administration will make its best effort to
maintain those levels in subsequent years.
Our security assistance program aims to strengthen a free
and democratic Israel that shares many of our own social and
political values. The FMF program helps Israel maintain its
capability to defend itself against any likely combination of
aggressors. It helps fund Israel's purchase of such major
112
weapons systems as F-15 and F-16 aircraft, important to
maintaining regional air superiority, and SAAR class missile
boats, ensuring an effective Israeli navy. .
The ESF program helps Israel reduce inflation, sustain its
market economy's growth, and maintain an acceptable standard of
living for its people in the face of heavy domestic demands,
high levels of immigration, and high defense expenditures. The
ESF program currently helps Israel finance imports of goods and
services from the U.S., service debt owed to the U.S., and
ameliorate the balance of payments gap. Together with the
recently implemented $10 billion loan guarantee program, it
helps Israel implement its economic reform program.
Loan Guarantees: We will provide up to $10 billion in loan
guarantees over the next five years to assist Israel's efforts
to absorb immigrants from the former Soviet Union, Ethiopia and
other countries. Israel recently syndicated the first $1
billion in financial markets.
Over the five year period, most of the funds will be made
available as foreign exchange to the commercial banking system
to support increased business sector activity. The GOI will
also use some of the funds to support specific infrastructure
projects to promote long-term economic growth and job
development in the private sector.
The Government of Israel is committed to decrease
government expenditures for non-security activity in the
occupied territories. The GOI is also committed to U.S.
businesses sharing the benefits of the economic growth
supported by the guaranteed loans. To this end, we expect to
see a substantial increase in Israel's purchases of U.S. goods
and services in the coming years. We take these commitments
seriously. We will review progress in these areas through our
bilateral economic dialogue.
We also will review the economic and financial measures
Israel will take to accommodate the increased debt burden that
will result from the guaranteed loans. We attach much
importance to resuming the dialogue on economic reform we began
with Israel in the mid-1980s.
Economic Reform: Our assistance to Israel also aims to give
the government the financial backing to undertake difficult
reforms. Prime Minister Rabin came into office committed to
reducing government involvement in the economy and stimulating
private sector growth. The government has taken a number of
steps in this direction, but political and institutional
obstacles continue to slow the pace of economic reform.
The Israeli government has made the most progress in the
area of financial and capital market reform. The 1993 budget
anticipates a deficit of about 4.5 percent of GDP, roughly half
the level of recent years. In 1992, for the first time in 23
years, inflation dropped to single digits. Progress on reforms
113
has been slowest in the areas of labor markets, competition
policy and privatization. Such reforms are slowed by Israel's
difficulty in breaking from its past record of heavy state
involvement in the economy, and opposition from groups which
have a vested interest in maintaining the status quo.
We are encouraged by the Rabin government's commitment to
implement serious economic reforms. But as Israeli's
themselves acknowledge, much remains to be done. In our
high-level contacts with the GOI , we will continue to make
clear our support for further progress in this area.
Egypt
Our security assistance investment in Egypt over the past
decade has paid off handsomely. Egypt has used our assistance
to strengthen its military and economy, enhancing its important
role in contributing to stability in the Middle East and
furthering U.S. objectives in the region. We expect that
future assistance will pay off as well. The President's FY
1994 budget maintains current aid levels to Egypt, and the
Administration will make its best effort to maintain those
levels in subsequent years.
Egypt has provided essential support for the U.S. military
presence in the Middle East. The importance and strength of
the bilateral military relationship with Egypt was demonstrated
throughout the Gulf crisis. Strong Egyptian leadership paved
the way for active Arab participation in the coalition, and
over 35,000 Egyptian troops constituted the next largest
foreign force to our own.
Egypt is our key Arab partner in efforts to achieve an
Arab-Israeli peace and bolster moderate forces in the volatile
Middle East. Egypt was the first Arab state to sign a peace
treaty with Israel which is the cornerstone of the Arab-Israeli
peace process. Egypt has also been extremely helpful in the
current negotiations between Israel and its other Arab
neighbors. The Egyptians have used their good relations with .
all the parties to facilitate progress in the negotiations.
Foreign Military Financing: Prior to 1979, Egypt's primary
supplier of military equipment was the Soviet bloc. Our FMF
program has allowed the Egyptian military to move from reliance
on outdated Soviet equipment to a more efficient deterrent
force built around high-tech, U.S. weapon systems.
Egypt is in the middle of a long-term military
modernization program which emphasizes quality over quantity.
Its primary emphasis at present focuses on several major
programs: coproduction of the MlAl tank and procurement of
F-16s and Apache Helicopters.
In addition to improving the over-all quality of the
Egyptian military, Egypt is also improving its ability to work
in close cooperation with U.S. forces. The value of this
114
interoperability was demonstrated during the Gulf War.
Moreover, Egypt plays an important part in U.N. peacemaking and
peacekeeping operations in Somalia, Bosnia, Western Sahara and
Angola. Our military assistance helps make it possible for
Egypt to undertake these important efforts.
Econoniic Support Funds: Our economic assistance to Egypt has
made a tremendous difference in that country and is an
important source of support for the current Egyptian
comprehensive economic reform program. Our programs have also
developed Egypt as a major market for U.S. products, especially
agricultural products. Egypt has become our third largest
foreign market for wheat.
The many accomplishments of our ESF over the last decade
include helping Egypt to substantially increase agricultural
productivity, decrease infant mortality by 43%, bring down the
population growth rate from about 3% to about 2.3%, provide
schools in which some 925,000 students are being educated,
provide sanitary sewage and potable water facilities for the
people of Cairo and other major cities, and provide electricity
and telecommunications services for Egypt's increasing
population.
Even more important than these direct results, we have used
our assistance to promote the difficult reforms which will make
the Egyptian economy capable of sustained growth. Sectoral
programs have been conditioned on specific reforms and, more
recently, we have begun to provide cash transfers in support of
agreed reforms. In FY 92 the sector grant program tied
disbursement of $200 million to implementation of more than
twenty specific reforms including, for example, allowing
foreign banks to participate fully in the domestic banking
system and bringing five public sector enterprises to the point
of sale.
In 1991, Egypt, working with the IMF and World Bank,
launched a major initiative to promote private sector growth.
Over the past two years, the GOE has freed exchange and
interest rates, made deep cuts in consumer subsidies, and
reduced the government budget deficit. Although these reforms
have been successful, private investors are not yet convinced
of government commitment to the completion of the reform
process and have yet to make the investments needed for job
growth .
Despite progress on economic reform, Egypt continues to
face daunting economic challenges: unemployment is about 20
percent, up from single digits in the early eighties, economic
growth is slow, population growth, although declining, is still
too rapid, and the Egyptian people have seen their standard of
living deteriorate significantly over the past five years. The
stagnant economy is also a factor contributing to the recent
increase in extremism, and extremist terrorism has exacerbated
economic problems by striking against tourism and threatening
foreign investors.
115
Egypt is now entering negotiations with the IMF on the next
phase of its reform program. Over the past few weeks it has
put 24 public enterprises up for sale. Our economic assistance
helps the GOE implement the extensive economic reform program
which is needed to establish a base for economic growth and
political stability.
Support for the Peace Process
As I mentioned, security assistance programs are an
important part of the United States long-standing support for
the Middle East peace process. These funds help the countries
meet legitimate security needs, encourage economic reform and
growth, and promote democratic values, social justice and
respect for human rights. Besides Israel and Egypt, we request
funds for Jordan, Lebanon, West Bank & Gaza residents, and
cooperative programs involving Arabs and Israelis.
Jordan: Jordan has taken very significant steps towards
democracy over the past four years. This is one of the least
appreciated success stories in the Middle East. Thus,
maintaining stability in Jordan as part of our overall support
for democratization is more important than ever.
Our assistance also helps sustain Jordan's very positive
role in the Arab-Israeli peace process and its commitment to
guaranteeing the security of its border with Israel. Since our
last security assistance submission. King Hussein has also
significantly improved enforcement of UN sanctions against
Iraq. In our close contacts with Jordanian officials, we
continue to emphasize the importance we attach to their good
faith efforts in maintaining the UN sanctions regime.
A country with limited natural resources, Jordan has a
mixed economy heavily dependent on regional trade. The strict
enforcement of sanctions burdens the economy, which was
strained even before the Gulf crisis. Jordan still has a
staggering debt and needs help from external creditors over the
medium-term. Our support is crucial. We expect to begin
consultations soon on the release of $50 million in FY92
security assistance. FY93 funds remain frozen as we continue
to monitor Jordan's performance on democratization, the peace
process and sanctions enforcement.
Lebanon: The U.S. is committed to a unified, sovereign and
independent Lebanon, free from non-Lebanese forces and armed
militias. Our support assists efforts to rebuild the
independent, non-sectarian Lebanese Armed Forces (LAF)
responsive to civilian control and respectful of human rights.
Humanitarian aid, channeled through private voluntary
organizations, and aid to educational institutions demonstrates
U.S. concern about the fate of Lebanon and its people.
The government of Prime Minister Hariri has undertaken the
difficult task of economic development and reconstruction.
There is no doubt that our assistance of his government has a
significant and positive impact on his ability to extend the
116
authority of the central government throughout Lebanon. Thus,
our assistance to the Lebanese Armed Forces is an important
contribution to the Lebanese re-establishing greater control
over their country.
West Bank and Gaza Strip: This program demonstrates U.S.
concern for the economic and social well-being of the 1.7
million Palestinians in the Israeli-occupied West Bank and Gaza
Strip. It helps Palestinians cope with the severely depressed
economy resulting from long-standing conflict in the region.
The focus is on efforts to promote self-sustaining economic
growth, expand employment and the private sector, and improve
selected health and welfare services.
Middle East Multilaterals: To support the peace process, we
have requested a specific fund for the five multilateral
working groups: economic development, water, refugees,
environment, and arms control and regional security. This will
help fund activities agreed upon in the groups and augment
progress in the bilateral peace negotiations.
Middle East Regional Cooperation (MERC) : The MERC program
promotes mutually beneficial cooperation between Israel and
neighboring Arab states. Scientific and technical exchanges
aim to strengthen ties by demonstrating that peaceful
cooperation can yield tangible benefits to all involved.
Regional Security
In pursuit of the broader U.S. goal of strengthening
security relations with allies and friends in strategic
regions, it is important that we provide support, albeit
modest, to Oman and Bahrain.
Bahrain: Bahrain has been a friend of the United States for
over twenty years. Through its security assistance program to
Bahrain, the U.S. enhances its ability to maintain access for
the U.S. Navy to Bahraini port and onshore facilities, helps
ensure freedom of navigation in the Persian Gulf, and bolsters
the security and stability of friendly countries in the
region. The signing of a U.S. -Bahrain defense cooperation
agreement in 1991 opens the way to preposi t ioning needed
materiel and facilitates military exercises.
Oman: Oman's strategic location on the Strait of Hormuz makes
it critical to U.S. interests in the Persian Gulf. U.S.
operational access to Omani military facilities was essential
to support our operations in the Gulf, notably during Operation
Desert Storm and Operation Restore Hope. The 1980 Access
Agreement with Oman, renewed in 1990 for ten years, grants the
U.S. limited peacetime and contingency wartime use of these
f aci lities .
That concludes my opening statement, Mr. Chairman. I will
be happy to answer the Committee's questions.
117
THRONQLOGY OF EVENTS
1981: After President Sadat's assassination, Abdurrahman is
held either in detention or under house arrest by the
Egyptians. For reasons still unclear, no consular lookout is
posted despite his possible implication in the crime.
1984: Abdurrahman is acquitted oC involvement in the Sadat
murder but remains under house arrest.
1986: Abdurraihman is given permission by the GOE to travel
abroad. According to those serving in Cairo at the time,
Abdurrahman is first issued a U.S. visa sometime in 1986.
April 26, 1987: Omar Abdurrahmam is issued a single-entry,
nonimmigrant visa valid for three months by AmEmbassy Cairo.
July 1987: Abdurrahman apparently attempts to renew his visa
at Embassy London. London queries Cairo for information.
According to an officer present in Cairo at the time, this is
the first indication to those who were following Abdurrahman's
activities that his nsune was not entered in State's lookout
system.
August 7, 1987: Upon receipt of query. Embassy Cairo enters
information regarding Abdurrahman into AVLOS, requiring posts
to solicit a security advisory opinion from the Department
prior to visa issuamce.
Spring, 1990: Abdurrahman travels to Sudan to attend an
Islamic Conference.
May 2, 1990: Cairo CeQsles Washington, Khartoum et al of
Abdurrahman's departure from Egypt and asks Khartoum to report
on his activities.
May 10, 1990: Abdurrahman applies for and receives a
multiple-entry, B-2 visitor's visa valid for one year from
Embassy Khartoum to attend an Islaunic Conference in New York.
May 13, 1990: Unbeknownst to Embassy, Abdurrahman leaves
Sudan for Pakistan.
May 24, 1990: Recognizing its error, Embassy Khartoum,
advises the Department that it intends to cancel the visa and
notify British Airways of the cancellation. However,
Abdurrahman has already left Khartoum.
118
July 18, 1990: Omar Abdurrauhman arrives at Kennedy Airporc
and is admitted by the Immigration 2uid Naturalization Service
to the U.S. as a visitor.
August 23, 1990: The Department receives reports that subject
may be In the U.S. Embassy Cairo informs Department that, if
visa was ever revoked, Cairo was never informed of that fact.
September 14, 1990: Department verifies through the INS that
subject is in U.S. and is associated with a mosque in Brooklyn.
October 27, 1990; Abdurrahman leaves the U.S. for London
where he arrives on October 28.
October 29 « 1990: Embassy Cairo requests Department
coordinate %d.th FBI.
November 5, 1990: Rabbi Melr Kahane is murdered In the U.S.
In the aftermath of the murder, Abdurrahman's name is linked
to the suspect arrested.
November 7, 1990: <, Embassy Cairo urgently requests information
on Abdurrahman Ccise.
November 8, 1990: A printout from INS NIIS system reflects
admission of stibject on July 18, 1990 as B-2 nonimmigrant with
stay authorized to Jeuiuaxy 1, 1991.
November 10, 1990: Article in Los Angeles Times on axibject
includes statement that subject wcis issued visa by Khartoum in
error due to failure to check records.
November IS, 1990: Abdurrahman reenters the U.S. as a visitor
under the name Omajr Ahmed Rahman.
November 26, 1990: The Department issues a certificate of
revocation ajid asks INS to refuse entry to Abdurrahman should
he come to their attention.
December 7, 1990: Abdurrahmaji leaves the U.S. cind travels to
Copenhagen, where he arrives on December 8.
December 10, 1990: Based on the visa revocation of November
26, INS enters information on AbdurrcLhman into the Treasury
Enforcement Communications System (TECS) under the naime Omar
Abdel Rahman.
December 16, 1990: Abdurrahmain returns to the U.S. and is
erroneously readmitted.
January 31, 1991: Omar Abdurraiiman applies to the INS office
in Newark, N.J. for adjustment of status to permanent resident
as a minister of religion under the name Omar Ahmed Ali. His
application is supported by documents filed on his behalf by
Masj id-al-Salaam mosque in Jersey City, N.J.
119
April 9, 1991: INS Newark approves adjustment of status for
Abdurrahman under the name of Omar Ahmed All as a minister of
religion.
Summer. 1991: Abdurrahman travels to Saudi Arabia for
religious purposes.
July 9, 1991: INS provided with an expanded list of possible
permutations of Abdurrahman's name and enters them into NAILS.
July 31, 1991: Abdurrahman returns and INS intercepts him.
He is placed in deferred inspection to consider further his
eligibility for admission to the U.S.
January 6, 1992: INS issues a notice of intent to rescind
Abdurrahman's status as a lawful permanent resident.
March 6, 1992: INS rescinds Abdurrahman's permanent residence
status owing to material errors in his original application.
April 30, 1992: An Iinmigration Court holds an exclusion
hearing on Abdurrahman. Abdurrahman concedes that he is
excludable, but announces that he wishes to apply for asylum.
June 11, 1992: INS receives a completed asylum application
for Omar Abdurrahman.
October 27, 1992: The first hearing on his request for asylum
is held before aua Immigration Judge in Newark, N.J. The
hearing is recessed until January 20, 1993.
January 20, 1993: A second hearing is held on Abdurrahman's
application for asylum.
March 10, 1993: Abdurrahman remains in the U.S. at this time.
120
REPORT ON CASH FLOW FINAMCING
FOREIGN MILITARY SALES PROGRAM
Section 2S(a)(5)(B) of the Anna Export Control Act (AECA)
requires a report that provides the following infonnation on those
FMS countries with approved cash flow financing in excess of
$100,000,000 as of October 1, 1992, for whom Security Assistance
financing is requested in FY 1994:
a. The amount of such approved cash flow financing,
b. a description of the administrative ceilings and controls
applied, and
c. a description of the financial resources otherwise
available to pay such approved cash flow financing.
Section 2S(d) of the AECA states that "... the term 'cash flow
financing' means the dollar amount of the difference between the
total estimated price of Letter of Offer and Acceptance (LOA) or
other purchase agreement that has been approved for financing. The
term 'U.S. financing,* as used in this report, includes Foreign
Military Financing (FMF) grants and loans and Military Assistance
Program (MAP) grants.
In actual practice, there are four ways to finance FMS purchase
agreements. These aret
a. Cash financing. The country agrees to finance an FMS case
from national funds, either through a dependable undertaking for
sales from procurement, or by cash prior to delivery for sales from
DoO invsntorics.
b. Full commitment financing. U.S. financing is committed for
the full value of a purchase agreement during the fiscal year that
Che purchase agreement is accepted. Actual payment may be spread
over several years.
c. Mixed cash and commitment financing. The country agrees to
finance a portion of the case with budgeted national funds, and U.S.
financing is committed for the balance of the case to supplement the
amount of national funds available. No requirement to apply
additional U.S. financing in future years is anticipated for such
■plit-f inancAd purchase agreements.
d. Casn flow financing. U.S. financing is not Initially
reserved (or the full value of the purchaao agrwumunt. Rathor, it is
Anticipated to bu reuwrvud during the yoar in which payinentu becumu
due.
121
Only th« Egyptian and Iiraali programs ar« fully financed by
cash flow procedures as defined in d. above. In the past, DoD has
selectively approved cash flow financing for major sales to other
countries. Although countries maJce planning, programming, and
budgeting assumptions regarding U.S. financing, as should be
expected, each LOA contains agreement that the country will make
payme.nts in case O.S. financing is not available.
The following countries had approved cash flow financing in
excess of $100 million as of October 1, 1992. For the purposes of
this report, the cash flow balances shown below represent the
difference between the value of purchase agreements and the amount of
U.S. financing applied, less the amount of payments in the country's
national funds that had been received toward these purchase
agreements as of October 1, 1992. We have also deducted uncommitted
U.S. financing balances available for application to these purchase
agreements. Zf these funds were not considered, the true amount of
cash flow financing would be overstated.
Egypt. Virtually all of Egypt's FKS program is financed on a
cash flow basis. Egypt's cash flow balance of $4.2 billion is
related primarily to sales of F-16 and E2C aircraft, air defense
system integration, missiles, and radars, Apache. helicopters,
follow-on support, and HlAl tank coproduction with payments due
through 1998. Egypt will continue to depend upon Congressional
appropriation to meet cash flow payment requirements in future years.
Israel. The Israeli program is fully financed by cash flow
procedures. As of October I, 1992, Israel's cash flow balance
exceeds $1.7 billion, with payments due extending through 1998.
Israel has full expectation of receiving grants in amounts sufficient
to pay for all of its military purchases from United States sources.
Portugal. Cash flow financing has been approved for Portugal's
purchase of F-16 aircraft. The cash flow balance, as of October 1,
1992, is $206 million, with payments extending through 1994.
Turkey. Cash flow financing of $920 million by the Government
of Turkey (GOT) is related to the purchase of F-16 Peace Onyx I
aircraft. Turkey has pledged a total of $1 billion in national funds
toward this purchase, of which $718.7 million was collected as of
October 1, 1992. GOT has agreed to commit $250 million of each
/ear's U.S. financing toward this sale, a total of $2.3 billion in
U.S. financing had been formally committed as of October 1, 1992.
Payments due on chis program extend through 1996.
Cash flow financing of an additional $375 million by GOT ia
rolated zo t.hu pucuhaoo o£ F-16 Peace Onyx TI aircr«tt.. Various
countriwu have pledged a r.oc/t1 oi. $2.5 billion in nattonAl fundu
122
toward this program, and GOT hai pladgsd a total of $500 million of
national funds. The program entaila the purchase of 40 aircraft with
the expected purchase of a total 80 aircraft under Peace Onyx II; a
total of $523 million of national funds had been collected as of
October 1, 1992. Payments due on this program extend through 1996.
The Department of Defense has instituted a number of controls to
limit the approval o£ cash flow financing and to manage approved cash
flow programs. These include:
a. Review and approve the financial terms of all FHS cases,
regarding the type of financing arrangements, and all FKF financed
commercial contracts. This is accomplished centrally by the Defense
Security Assistance Agency-
fa. Continually review the financial status of each country's
program to insure that adequate funds are available to pay supplies
and to cover termination liability.
c. Determine the financial arrangements for each new major
multi-year program before the sale is made.
d. Earmark U.S. financing to meet payments due on existing
programs during each fiscal year, prior to committing funds for new
cases, where national funding Is not assured.
e. Require full commitment financing and limit the issuance of
cash offers to countries chat have encountered shortfalls in national
funding.
f. Maintain strict accountability for the financial status of
each country's program, including the utilization of U.S. financing
and the application of national funds to FMS purchases,
g. Develop financial projections to assist countries in
managing available FMF balances and in budgeting for adequate levels
of national funds.
h. Schedule periodic meetings with responsible financial
personnel from each country to review the overall program and develop
plans for utilization of existing and anticipated resources.
123
That report is not true for several reasons, including the
fact that none of the $25 million in FY 1993 assistance has yet
been provided. This issue may have arisen because of a grant
made to a zakat committee earlier this year under the Small
Projects program managed by the U.S. Consulate General in
Jerusalem. Zakat committees are religiously affiliated
charitable organizations which have been in existence in the Arab
world for generations. They are not extremist organizations.
The Consulate does not believe the committee in question has an
affiliation with any extremist groups and has confirmed that the
assistance provided went for the stated purposes of the grant.
A.I.D. economic and social development assistance in the
West Bank and Gaza is delivered through one Palestinian and six
American PVOs. The Palestinian PVO is the Society for the Care
of the Handicapped which is registered both with the A.I.D.
Office for Private and
Voluntary Cooperation and with the Government of Israel.
Most donor assistance as well as A.I.D. assistance to the West
Bank and Gaza is channelled through Palestinian non- government
organizations (NGOs) such as agricultural cooperatives, health
clinics, hospitals, universities, and charitable societies such
as the Red Crescent Society (the equivalent of the U.S. Red
Cross) . These institutions are registered with the Israeli Civil
Administration Authority (CIVAD) , which administers the Occupied
Territories and which would not register any extremist groups.
In addition, several American PVOs provide training for and
support for infrastructure development to municipalities.
A. I .D. -funded American PVOs work with a large number of
Palestinian organizations which in turn implement a large number
of activities. For example, at any given time an A. I .D. - funded
PVO may be supporting 25 - 50 different activities implemented by
as many Palestinian NGOs. The PVOs are fully sensitized to West
Bank and Gaza political and security issues, and their assistance
is provided on the basis of merit to worthy organizations
implementing development and humanitarian activities. Each of
the PVOs has a process through which activities are identified,
designed, reviewed, and negotiated jointly with the Palestinian
NGO requesting assistance. The activities must be consistent
with the purposes of the A.I.D. grant and they are subject to
A.I.D. review and audit.
124
The work of the A. I. D. -funded PVOs is now monitored by two
recently-assigned American A.I.D. Affairs Officers who are posted
to Jerusalem and Tel Aviv. The A.I.D. Affairs Officers and
their staff meet with the PVOs on a regular basis and conduct
site visits to monitor the implementation of NGO activities. In
addition, PVO work is coordinated with the American Embassy in
Tel Aviv and with the American Consulate General in Jerusalem.
A.I.D has developed and employs an "Activity Monitoring
System" that is based on detailed activity data transmitted to
A.I.D. by the PVOs on a quarterly basis and on the results of the
monitoring visits of the A.I.D. Affairs Officers to activity
sites.
While we are confident that our monitoring system is sound
and our procedures responsible, it is impossible for A.I.D. to
guarantee that no funds will reach the hands of an individual who
is a member of a Hamas. Hamas works with a large number of
religious charitc±>le organizations that are engaged in
development work. As mentioned aiaove, many of these are "zakat
committees" which have been in existence in the Arab world for
generations, and they are not extremist organizations. However,
there may be members of Hamas among them. Were there any
information or evidence that U.S. Government assistance was being
improperly used or targeted, A.I.D. would instruct the PVOs to
halt such assistance.
125
Report on Economic Conditions in
Egypt
1991-1992
USAID/Cairo/EAS
December 1, 1992
Revised, AID/W
January 25, 1993
126
Table of Contents
I. Summary and Conclusions 1
n. Update on Economic Developments 2
m. Economic Reform Actions 7
Tables of Economic Indicators 14
127
Annual Raport on Eeenenic COBdltlona in EgTpt
Z. 8uBBax7 and ceneluaiona
In the aftermath of the Gulf War, Egypt's financial position has
greatly improved. For the three years prior to the War, Egypt's
external current account deficit had ranged between S2 and S3
billion annually, with no improvement in sight. The GOE was
accumulating large, unsustainable debt service arrears. The
budget deficit was about 20 percent of GOP. Both inflation and
unemployment were serious problems. In 1989, total external debt
reached about $52 billion (representing 165 percent of GDP with a
debt service/exports ratio of 28.5 percent). After the War
external financial resources poured into Egypt. The United
States took the lead in a program of debt reduction, writing off
military debt of approximately $7.0 (actually $6.7) billion,
pursuant to Congressional authorization. In May 1991, following
IMF approval of a stand-by arrangement, other Paris Clxib
creditors agreed to reduce Egypt's remaining eligible official
external debt by 50 percent. The debt relief was trenched, with
later stages conditioned on continued adherence to IMF
stabilization targets. Following debt reduction, Egypt's
outstanding debt amounted to about $40.6 billion at the end of
1991 and will be reduced further assuming that Paris Club
conditions are met. Egypt's debt service ratio fell from 28.5
percent in 1989 to 17 percent in 1991.
Under the stabilization program undertaken pursuant to its IMF
Stand-By Arrangement, Egypt's short-term external financial
position has improved significantly. Exchange restrictions were
liberalized. The currency was floated and the various exchange
markets were unified. Interest rates were freed and rose to
about 18 percent per annum on short term deposits and short term
treasury bills. In response, Egyptian-owned foreign currency,
most of it counted as workers' remittances, flowed into the
country. Remittances have recovered from a wartime slump and
tourism was hitting record levels prior to a recent spate of
violence. Reduced annual debt service obligations and weak
demand for imports have reduced the demand for foreign exchange,
leading to a substantial buildup in reserves and a stable
exchange rata despite continuing inflation. The balance of
payments position is currently very strong. Egypt's overall
balance of payments sprang from a $213 million deficit in 1989/90
to surpluses of $2.6 billion in 1990/91 and an estimated $7
billion in 1991/92.
Egypt's economy has begun to stabilize, and the government has
embarked upon a wide-ranging program of economic reform under the
auspices of a World Bank Structural Adjustment Loan. An expected
drop in real GDP for FY 1992 did not materialize. Various
revenue measures and greater control of expenditures have cut the
128
budget deficit in half, to less than 10 percent of GDP, and .
inflation has slowed. Growth reaained slow in 1992, however,
with real GDP rising by an estiaated 2.8 percent. There has been
some delay in meeting IMF and IBRD performance targets and
renewed catch-up efforts will be necessary. Public sector
restructuring and market liberalization under the World Bank
program will, if fully implemented, result in improved private
sector-led growth performance, although significant economic
dislocations are inevitable in the short-to medium rxin.
High-level GOE attention will be required if Egypt is to keep its
economic policy reform program on track and at the same time
adopt measiires to provide a safety net for the poor.
While economic conditions are relatively stable due to the influx
of foreiqrn aid, it is important to keep in mind the deteriorating
social conditions in Egypt. Structural economic reforms are
badly needed, yet the government of Egypt feels that it must move
cautiously. Recent unrest due to dissatisfaction by Islamic
extremists has led to violence directed against the GOE and
tourists. The tourist incidents will put a damper on Egypt's
most important (in 1992) source of foreign exchange. The unrest
is potentially destabilizing zmd therefore bears careful
watching.
Debt relief and capital inflows have given Egypt an unprecedented
opportunity to restructure its economy with generous donor
support. It is critical that Egypt persist, within the
constraints of a delicate political climate, with the reform
program that it has undertaken if it is to attain its long-term
economic objectives. This is especially true of introducing
competitive market forces and private enterprise into the
productive sectors and capital markets as soon as possible in
order to increase productivity, exports, and domestic and foreign
investment.
IZ. Update on Economic Developments
A. Balaaoe of Payments
The balance of payments recovery, which started in 1990/91 with
the inflow of aid from donor countries after the Gulf crisis,
persisted in 1991/92. For the first time in ten years the
current account, excluding official transfers, shows a surplus
(estimated at about $2.2 billion). The surplus including
official transfers is expected to have increased from $2.25
billion in 1990/91 to $3.74 billion in 1991/92. The prime
factors behind such an improvement are the recovery of tourism
revenues and the surge in workers remittances. The overall
surplus in the balance of payments also witnessed a sharp
increase, from $2.6 billion in 1990/91 to an estimated $7.04
billion in 1991/92, due to new capital inflows.
If violence against tourists ceases, the improvement in the
services account of the balance of payments is expected to
129
continue in the short r\in because of growth in tourism and Suez
Canal receipts and decline in interest obligations attributable
to further debt relief stemming from the 1991 Paris Club
agreement. With the increase in workers • remittances following
the Gulf war, the current account surplus is likely to be
maintained despite the continued trade deficit. According to the
IMF, the debt service relief provided by the Paris Club will
also sustain a surplus in the capital account. This surplus,
together with the high level of official transfers expected over
the next few years, should support a positive overall balance of
payments and a net increase in international reserves. The
annual increase in international reserves is, however, expected
to decline from $4.8 billion in 1991/92 to a projected $2.1
billion in 1992/93.
B. OovenmeBt rlnaBoes
In 1991/92, revenues were estimated to have increased by LE 11.6
billion to LE 42 billion, or 35 percent of GDP. Tax revenues
account for about 58 percent of total revenues, whereas non-tax
revenues account for 28 percent. The balance is accounted for by
local government revenues and investment self financing.
The implementation of a number of revenue-generating measures has
helped to increase tax revenues. These measures included the
extension of the sales tax (originally implemented in FY 1991) to
cover telecommunications and tourism services; the inclusion of
customs duties in the sales tax base for imports; the increase in
development fees on stamp taxes; and higher government fees and
charges. The sale of public enterprise assets and the
requirement that public enterprises remit higher profits based on
assessed capital investment are among the revenue generating
measures.
Between 1990/91 and 1991/92, expenditures remained at the sane LE
50 billion level. However, this translates into a significant
fall in expenditures as a percent of GDP from approximately 51 to
43 percent. Current expenditures increased slightly from 30 to
31 percent of GDP. Current expenditures are estimated to have
increased by 27 percent to LE 37.2 billion. Interest payments on
domestic debt have significantly contributed to this increase.
They increased by 50 percent to LE 10.3 billion, accounting for
25 percent of current expenditures. Wages and subsidies and
transfers accounted for about 22 and 21 percent of current
expenditures, respectively.
In nominal terms, capital expenditures fell significantly from 21
to 11 percent of GDP, a decline of 37 percent to LE 13.1 billion.
In part, this is because in the short term it is easier to cut
capital spending than current spending but also because some
anticipated outlays related to economic restructuring were
postponed.
130
The overall budget deficit is estimated to have fallen from .
nearly LE 20 billion in 1990/91, or about 20 percent of GDP, to
LE 8.4 billion in 1991/92, or about 7.5 percent of GDP. The
reduction in the budget deficit results from the significant
increase in govexmment revenues while holding expenditures at
their 1990/91 levels. Under its IMF stand-by arrangement, the
GOE must reduce the 1992/93 deficit to 3.5 percent of GDP.
Net external financing of the deficit dropped significantly from
73 to 49 percent of the deficit. Domestic non-bank finance has
increased significantly from 17 to 80 percent of the deficit.
While this may ease the inflationary impact of the deficit, if it
persists, it could threaten to crowd out domestic private
investment. This change is further reflected in the fact that
domestic bank finance was negative, as the government repaid
banks an equivalent of about 29 percent of the budget deficit.
C. PopulatioB* EmploymeBtr and output
Egypt has the largest population in the Middle East with about 58
million people in 1992. Population growth has been rapid, almost
tripling since the early 1950s. Much of the economic growth in
Ecpypt has been offset by rapid population increase so that per
capita income and living standards have stagnated over much of
the post revolution period. Rapid population growth has caused
increased pressure for additional jobs, social services,
education, and health services. In recent years the labor force
has grown by about 450,000 to 500,000 annually, or at an average
rate of about 3 percent. This rate reflects increasing numbers
of women and children joining the labor force. The results of
intensive family planning activities are finally beginning to
appear. There has been a significant reduction in the population
growth rate from about 2.8 percent in the early 1980s, to less
than 2.5 percent in 1991 (the population figures include
Egyptians working abroad) .
The Ministry of Planning estimated that Egypt had a total of
13.97 million persons working in 1991/92, not including child
labor, particularly in agriculture.' The 4.57 million employees
in agriculture comprise 33 percent of total employment. A steady
decline in agricultxiral employment over the years has been
accompanied by a shift in employment from rural to urban areas.
This has exacerbated both urban and employment problems in Egypt.
Despite the recent tendencies towards the expansion of the
private sector, the public sector remains the major employer in
the urban labor market. Based on the 1990 Fergany report, 57
percent of all urban wage earners are employed in the public
sector, with 37 percent in the government and 20 percent in the
1 NMiHlB>kcrEorp(.efiSB9HLaiU9a.Ttbk 2^.1990.
131
public enterprise sector.' This is not solely an urban
phenomenon. Forty percent of all wage earners in rural areas are
employed in the public sector. In addition the public sector is
the dominant employer of educated labor. In urban areas 74
percent of persons holding an intermediate or higher degree are
employed in the public sector. In rural areas more than 80
percent of the educated labor are in the public sector. Because
many people in the informal sector are self-employed and thus not
wage earners, the public sector accoxints for about 27 percent of
total employment and 53 percent of nonagricultural employment.
Unfortunately, we do not yet adequately understand the full
extent of the unemployment problem in Egypt. While the
statistics that follow are broadly consistent, unemployment
estimates vary greatly among soxirces and must be interpreted with
great caution. For example, one source reports open unemployment
rising significantly in the mid 1980s, from 5.4 percent in 1981
to 10.0 percent in 1987.' The official GOE labor sample for
September 1991 showed a 10.0 unemployment rate while the Middle
East News cited a 12 percent rate for August 1991; there are
other higher estimates (e.g. 14 percent).* The GOE statistics
reported in the Table show the unemployment rate increasing in
recent years from 8.55 percent in 1988 to 10.04 percent in 1991,
and an estimated 12 percent in 1992.
Over the next decade Egypt will have to generate 4.5 million new
jobs to provide work for the new entrants to the labor force,
assuming no change in today's unemployment rate or female labor
participation rate.* Estimates of the number of new jobs
necessary in order to cause unemployment to drop significantly
range from 6 to 10 million. Continuation of structural economic
reforms will be key to any attempt to achieve growth rates
sufficient to accomplish the objective of lowering unemployment.
From 1987 to 1991 Egypt's real growth (in GDP) averaged about
2.86 percent per year, or about the same as population growth.
In 1991 it had tapered off to 2.3 percent per year. While in the
past Egypt has had periods of significant growth, performance was
uneven. While the services and petroleum sectors grew at high
annual rates during the period 197489 (17 percent for
transportation, 10 percent for utilities, 10 percent for commerce
and finance, and 18 percent for petroleum) , the traditional
productive sectors of agriculture and industry lagged behind.
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132
This structxiral imbalance impeded efforts to achieve sustained
overall growth. Market distortions such as price controls and
subsidies, as well as the domination of industry by inefficient
public enterprises, have been major factors behind the weak
performance of the productive sectors.
D. Meaey/ Prieea, and Exchange Rate Oevelopmeats
Prior to the initiation of the reform program, the divergence
between the rate of monetary expansion and the real growth rate
of the economy led to a persistently high rate of inflation.
Official statistics reveal that inflation averaged 15 percent a
annually in the first half of the 1980s and 21 percent per year
in the second half With economic policy reform taking place in
the early 19908, liberalizing the prices of many items
(agricultural, industrial, energy, and others), the inflation
rate was in the 17-20 percent range between 1990 and 1991.
Inflation in 1992 has been declining and probably is now
(December 1992) at an annual rate below 15 percent. The growth
of the broad money supply reached its peak in 1991. H^ grew by 29
percent compared to 10 percent in 1990. This increase reflects
in part the revaluation of foreign currency deposits, which
accounted for about 51 percent of M], following the devaluation
of the exchange rate in 1991. Monetary expansion was caused
mainly by an increase in net domestic assets of the banking
system by approximately 25 percent annually during the second
half of the 1980s and reaching 35 percent at the turn of the
1990s. Most of the increase in net domestic assets represented
the government's debt (fiscal deficit finance) and credit to
public sector agencies, authorities and enterprises. While there
is some progress in reducing this monetization of government
deficits through bank finance, as noted above, there may still be
reason for some concern about crowding out as public sector
Treasury bills compete with the private sector for scarce
investable funds. Despite recent accomplishments, more remains
to be done in controlling the government deficit.
In one of the most notable achievements of the economic reform
program to date, a new foreign exchange system was introduced in
February 1991, replacing the multiple-rate system that prevailed
during the 1980s. This new system consisted of only two rates:
the secondary rata affecting most private sector transactions;
and the Central Bank ("primary") rate which reflected a 5 percent
discount from the average secondary rate. This Central Bank rate
was eliminated in October 1991, and a single exchange rate is now
in operation — the free market rate. Banks and licensed money
changers operate on the basis of a daily rate determined
according to supply and demand. This rate has remained at about
LE 3.3 to the dollar. The stability of the exchange rate,
tighter credit, higher interest rates, deficit reduction and the
reduction in monetary expansion have restrained the acceleration
of inflation and should, if maintained, lead to lower rates of
133
inflation in the short to medium-term.
I. Bzteraal Debt ead Debt serriee Cepeeit7
Egypt's external debt grew dramatically over the two decades
preceding its reform prograun, as it borrowed from abroad to
finance the fiscal and balance of payments deficits. External
indebtedness which was $8.3 billion (about 62 percent of GNP,
with a 15-20 percent debt service ratio) in 1976, increased to
$52 billion (about 162 percent of GNP and 547 percent of exports)
in 1987. A Paris Cl\ib debt rescheduling provided some temporary
debt relief in May 1987. In 1989, total external debt amounted
to $51 billion, representing about 165 percent of GNP and 435
percent of exports. Debt service absorbed about 28 percent of
foreign earnings from exports of goods and services.
This situation changed dramatically in the aftermath of the Iraqi
invasion of Kuwait. In December 1990, the President of the
United States made a determination that reduction of Egypt's
outstanding Foreign Military Sales debt to zero, pursuant to the
authority of Section 592 of the Foreign Operations, Export
Financing, and Related Programs Act of 1991, was essential to the
national security interests of the United States and to enhance
the chances for peace and stability in the Middle East. Egypt's
leadership in the Gulf crisis, its contribution of troops to
Desert Shield/Storm and the unique role it played in supporting
the international effort against Iraqi aggression merited this
debt relief. In addition, Egypt's extremely heavy debt burden
threatened its economy, even with a rigorous adjustment program.
As a prerequisite to forgiving nearly $7.0 billion of Egypt's
military debt, the statute required the President to seek
comparable debt relief from Egypt's other official bilateral
creditors. The Administration was successful in this regard, and
on May 24, 1991, the Paris Club agreed to grant Egypt debt
reduction of 50 percent on a net present value basis, to be
implemented in tranches over a three-year period. The remaining
stock of debt was rescheduled. In recognition of its previous
military debt relief, the USG undertook no further debt reduction
at the Paris Club, but participated in the stock of debt
rescheduling.
As a result of this exceptional debt reduction, by the end of
1991 Egypt's outstanding debt had been reduced to about $40.6
billion (approximately 280 percent of exports, with a debt
service ratio of 17 percent) . Further tranches of the Paris Club
reduction will be implemented depending on Egypt's performance
under its IMF programs.
ZII. Economio Reform Actions
The GOE began discussions in 1990 with the IMF and the World Bank
over the major elements of economic reform and signed a Stand-By
Arrangement with the IMF in the spring of 1991 and a Structural
134
8
Adjustment Loan Progran with tha World Bank in tha fall. IMF
staff assisted the Egyptian authorities to design monetary,
financial and fiscal policy reforms (including exchange reforms),
while the Bank's activities concentrated on the areas where
structural adjustments were needed — mainly pricing decontrol,
reform of public enterprises and trade liberalization.
A. zxr Schedule of Raforaa
An 18-month IMF Stand-By Arrangement was scheduled to expire on
November 30, 1992, (though the IMF Board has approved extension
of the program) . Its main objective is the creation of a
decentralized, outward-oriented economy that will induce non-
inflationary gro%rth over the medium term and thus foster stable,
long term economic growth. The actions that were completed by
the GOE prior to the signing of the Stand-By were the
implementation of the General Sales Tax, the restoration of
customs duty rates to the levels that were in effect in early
1989, and increases in energy and domestic petroleum product
prices towards world market levels. Performance criteria were
set for monitoring the program. The targets for the first phase
(before December 1991) were: (1) specific ceilings on net
domestic assets; (2) floors on net international reserves of the
Central Bank of Egypt; (3) elimination of all arrears and any new
arrears incurred after June 1990; (4) specific constraints on the
stock of public sector borrowing; and (5) the unification of the
exchange system. Subsequent review of this stage by the IMF
indicated that most of these criteria were met. Public sector
borrowing remained above target, however.
The main targets for the period after December 1991 were
different. The overall fiscal deficit was to be reduced to no
more than 9.5 percent of GDP for 1991/92, subsequently adjusted
to 6.4 percent to allow for the lower debt service burden
resulting from debt forgiveness, with further reductions in
subsequent years to be negotiated. As for monetary and credit
policies, the government is to limit the growth of total net
domestic assets of the banking sector to a specified level. The
continuation of a competitive exchange rate policy i» required in
order to maintain an external balance.
Reviews held in 1992 indicate that there was some early slippage
in pursuing these targets. However, by December 1992 fiscal
performanc* was deemed satisfactory and agreement was reached on
a 1992/93 fiscal deficit target. Public sector borrowing was a
bit over target, but deemed satisfactory in light of lower than
projected inflation. Overall monetary targets have been met.
Monetary expansion has moderated, increasing by 13 percent over
the period June 1991 to April 1992 against almost 30 percent
during 1990/91. Net credit to public sector companies expanded
by over 40 percent since June 1991, while credit to the private
sector contracted, partly because increased nominal interest
rates dampened borrowing. The balance of payments witnessed an
estimated overall surplus of $7 billion in 1991/92, as opposed to
135
a deficit in recent years due to the decline in interest
obligations after the Paris Club debt relief and increased
capital inflows to Egypt. The stability of the nominal exchange
rate against the dollar and the expected continuation of this
stability enhanced private capital inflows. The favorable
balance of payments flows caused Egypt to exceed its net foreign
asset target by a wide margin.
B. World Bank Sehedulc of RaforBs
The World Bank Structural Adjustment Loan (in two tranches)
supports the Government's Economic Reform and Structural
Adjustment Program (ERSAP) in the areas of public sector
deregulation, privatization, price liberalization, foreign trade
liberalization, and private sector development.
Privatization is a main theme of public sector reform together
with the reform of the organizational and management structure of
public enterprises. The new Public Investment Law 203 and its
executive regulations were issued in 1991, allowing greater
autonomy to public sector companies. These companies were
organized under Holding Companies, which have started valuing,
leasing, or selling some of their affiliated companies.
According to the ERSAP, the GOE has started price liberalization
for most industrial goods, energy, cotton and agricultural inputs
by reducing subsidies and thus allowing prices to rise, in the
case of cotton to 60 percent of market levels even before the
decision was made to liberalize the cotton market. The GOE has
promoted the development of the private sector by liberalizing
the procedure for obtaining approvals of investment projects, and
by eliminating the distribution monopolies for fertilizer and
cement.
The GOE has begun the process of liberalizing foreign trade.
Import and export restrictions have been reduced. On the import
side, the GOE has reduced the coverage of bans and facilitated
import procedures, particularly for the private sector. Several
steps have been taken to reform the tariff system by reducing top
rates and narrowing the range between the top and the bottom. On
the export side, the government has taken initial steps to
improve the tariff rebate or exemption schemes that exporters
utilize when importing their inputs and intermediate goods.
By the end of 1992, Egypt continued to progress with its reforms.
Economic growth exceeded program projections. Inflation was
lower than expected. Price liberalization was proceeding; the
list of banned imports had been reduced; electricity prices were
on target toward eventual equality with long run marginal cost of
production; petroleum prices exceeded the target level (82
percent of world prices versus a target of 69 percent) . On the
other hand, privatization has lagged and reductions in the import
ban list have been at least partly offset by tariff increases and
new non-tariff barriers. Liberalization of investment approvals
is not yet complete, and local content requirements have not yet
136
10
been eliminated. Further GOE actions in tariff reform and -
privatization will need to be completed before the World Bank can
complete its second review under the SAL.
Since the refora packages will entail social adjustment costs,
the GOE established, with the support of the World Bank and
bilateral donors, a special Social Development Fvind. This Fund
basically intends to alleviate severe economic pressures on the
poor by providing retraining programs, as well by developing and
implementing job mobility proqrraas.
e. n.8.-8uppert«4 RefexBS
USAID/Cairo's Cash Transfer for Sector Policy Reform (SPR)
attempts to promote macroeconomic stability and market pricing,
and encoxirage private investment and trade. The SPR is designed
to support Egypt's economic reform by complementing the World
Bank and IMF programs currently underway. It does this by
identifying intermediate policy measures which the GOE should
implement if it is to achieve the goals of the overall reform
program agreed to with the Bank and Fund.
The sector policy program requires policy reform in four sectors:
(1) Financial; (2) Fiscal; (3) Trade; and (4) Enterprise. The
policy measures for this program fall into these four sectors and
are divided between calendar years 1992 and 1993.
o The financial sector program is directed towards
strengthening Egypt's financial system so that it can more
effectively mobilize the resources needed to support the
privatization of Egypt's economy: strengthening the banking
system by requiring higher capital/asset ratios and by
permitting a greater role for foreign and private banks;
deepening the securities market by requiring a sounder legal
framework and more equal treatment of debt and equity and by
permitting a greater role for foreign and private securities
firms; and libaralizing interest rates.
o The fiscal sector program concentrates on establishing
specific tax policy and expenditure measures— the attainment
of which will assist the GOE in meeting its broad fiscal
sector commitments: broadening the general sales tax,
adopting a global income tax, and improving the availability
of GOE revenue and expenditure data.
o The trade sector program promotes policy measures which
help open Egypt's economy to international competition— thus
encouraging domestic producers to become more efficient and
hence more competitive in world markets: lowering of
non-tariff trade barriers, reduction of GOE control over
export and import industries, and reform of customs duties
and procedures.
o The enterprise sector program is aimed at the
137
11
privatization of public enterprises, the reduction of public
sector impediments to private sector growth, and the
introduction of new business laws.
The agreement for this initiative was signed on August 24, 1992.
The first tranche of funding was disbursed in September, based on
fulfillment of specific reform conditions, including: reform of
banking laws and procedures to allow foreign banks to operate in
the domestic banking system; removal of interest rate ceilings on
corporate bonds; extending coverage of the sales tax to travel
and telecommunications; reducing import bans; and revising the
temporary admission provisions for duties on certain imports.
USAID/Cairo also continues its agricultural policy reform
efforts. To date, reforms in this area have resulted in the end
of all government control (planting, procurement, and pricing
controls) on ten of the thirteen principal field crops.
Subsidies for most agricultural inputs have ended and credit
subsidies are reduced. The elimination of mandatory delivery of
rice to the GOE, and preferential exchange rates applied to
public sector imports of fertilizer were other recent
accomplishments of the agricultxiral reforms, as were permission
for private dealers to export rice. The agricultural subsidies
still remaining are for fertilizer, cotton pest control, and
credit. USAID is working with the GOE to phase out these
subsidies. So far they have succeeded in phasing out about three
fourths of the subsidies on fertilizer that prevailed in 1989/90
and in reducing subsidies on credit and cotton pest control
compared to the 1988/89 level. By 1993/94, fertilizer subsidies
are targeted for elimination. By that date, the cotton pest
control subsidy is to be reduced by 50 percent and the credit
subsidy is not to exceed a target LE level (for example, LE 100
million) that will represent only a small percentage of all of
the loans to be negotiated in that year.
A major part of the reform program has been to raise the
government cotton procurement price for the farmers. This
benchmark was not met in 1990 and 1991. For 1992 the cotton
pricing benchmark was removed in favor of steps directly to
liberalize the cotton market. This will eliminate compulsory
delivery of cotton and price controls, allow free and equal
access to all markets by any trader, allow public trading
companies and cotton gins to compete among themselves and with
private traders, and allow free marketing of cotton by-products.
In other areas, reforms supported by U.S. sector assistance have
increased the authority of local governments to raise revenue.
USAID-funded consultants assisted in a tariff study that formed
the basis of electricity price adjustments in July 1992. The GOE
has set a goal of raising electricity prices to 100 percent of
long run marginal cost by June 1995.
138
u
D. OOB Raferm Obj«otiT«s
Most major economic reforms by the GOE are undertaken in
conjunction with performance-based benchmarks of donor countries
and organizations. It intends to continue these measures over
the next 3 to 5 years.
The GOE's objectives by 1993/94 are to reduce the inflation rate
to about 8-9 percent, and to continue to maintain the positive
external current account balance (net of interest payments) .
This would be achieved by reducing the budget deficit, through:
(1) the implementation of ths sales tax on a considerably wider
range; (2) the adjustment of energy prices; and (3) the
restoration of import duty rates, on the revenue side, and the
reduction in siibsidies and public investment outlays on the
expenditxires sids. The balance of payments deficit has been
reduced through the unification of the exchange rate system
(October 1991) , the liberalization of interest rates (January
1991), and by the adoption of non-inflationary monetary policies.
The government is determined to restructure the banking and
financial sectors together with strengthening the Central Bank's
supervisory capacity.
As for structural adjustment measures, the government's intention
is to create over the medium-term a market-based,
outward-oriented economy with a rapidly growing private sector.
By mid-1993, foreign trade is to be almost fully liberalized —
non-tariff barriers will be removed as well as all import and
export quantitative restrictions (except for limited special
cases). In the next few years, the government also plans to
remove input subsidies and free up all prices of agricultural and
manufactured products. Prices for electricity, petroleum
products and rail services will be raised to their economic
levels. The stated intention of the GOE is that by mid-1995 the
domestic pricing system will be completely decontrolled.
B. Prospects for X993
In the months ahead Egypt can take advantage of its relatively
strong balance of payments position by deepening its
macroeconomic and structural reforms and lay the basis for
sustaining improvement by meeting conditions for further debt
forgiveness. To qualify for the second stage of Paris Club debt
forgiveness offered in May 1991, Egypt must pass the second
review of its IMF stand-by and agree with the Fund on a successor
program.
Although the GOE met its IMF performance targets for 1992, the
second review could not be concluded as scheduled that year
because of delays in gaining GOE-IMF agreement on a 1992/93
fiscal deficit target and on structural measures needed to meet a
lower target. As a result, progress toward a follow-on Fund
program was also held up. However, encouraged by progress in
staff -level negotiations, the IMF Board in November 1992 approved
139
13
extension of the <nirrent stand-by until March 1, 1993. Paris
Club creditors took parallel action by extending the deadline for
meeting debt forgiveness conditions from December 31, 1992 to
March 1, 1993.
If Egypt continues progress on structural reform, the following
scenario could unfold in early 1993. A successful second review
of the World Bank's SAL would set the stage for the IMF Board to
conclude the second review under the stand-by. This would then
allow intensive GOE-IMF negotiations on a follow-on IMF program
leading, if successful, to the second stage of Paris Club debt
relief. Egypt may also seek a follow-on IBRD SAL and may ask the
Bank to host a Consultative Group meeting where bilateral donors
could pledge assistance in support of the ongoing program.
The next year will be a critical one for the reform program,
however, and this positive scenario is not assured. While many
macroeconomic stabilization and structural adjustment targets
have been met since the reform program began, the politically
most difficult reforms still lie ahead, i.e. increasing the
competitiveness and efficiency of the productive sector and
privatizing pviblic companies. As the public sector has begun to
withdraw from the field, pxiblic investment has fallen. Yet,
private investment has not yet increased sufficiently to offset
this drop.
There will be an \inderstandable reaction by some in Egypt to want
to reverse coiirse and return to the departed shore— to have the
government "do something" by reinserting itself into the
productive sectors. Such a reaction would unfortunately confirm
the worst fears of the private sector and deter precisely that
investment which is critical to the coxintry's long-term economic
viability. In this critical period, it will be important for the
government to press its market-oriented reforms as quickly as the
domestic political climate will permit, and thereby release the
energies of private sector investment as soon as possible. The
more rapidly the private sector is given rein to carry the
economy forward, the smaller will be the pains of adjustment.
140
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141
BOYPTt ECOMOXZC XNPXCATOllS (Contlaued)
I I. Capital Aecouac
Long-r«r« «pil«l. Mt
Lang-TtrM Lean*
Dl*bur*aa«Btt
oih*r fiaplttl
Error* uid e«t**lon* Unci.
dir*et iav«»t*«Btt
Ovarall MlasM
Cfeang* IB Hatarv** (•/»
Maae tcaai
eenvartlOB Factor (Aaaual A«v.)
1 I9IT
19tl
1910
1990 1991
1992*
(MlUlont of Mnaot US MUn). ^r aadin« jhm 10
C7«7)
osa)
(«1«)
(t.iai) (1*0)
l.too
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(>3»>
(}11)
(I. no (tooi
seo
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a. 1(1
i.aii
x.iaa
. •
(a.iiit
(a. 1141
(a.s7t>
(a. oil)
iiiti
lit
(•))
(70) (llOt
aieo
aai
4Ta
i.ita
a.t7i i,«oe
tee
(710) (i.iM) ((M) (ai)) a,tat 7,o«a
(•aa) (i.SM) («e<) (i.iei) (i.eooi (i.too)
1.370
(Eurycla* fomd* f*f US Mlir)
1.7(0 1.I40 a. Ill 3.110
1.110
H0(M.
' n a.
' aMlmaua
Sounm ImtmitOMalFhtamM SuOttiet, IMF
Euononk lunllltinm Vatt Mtport aa Bcv
World DiH TMe*
CAPMAS (OOE UMMJoJ uitM)
USAID/CAJKO
Novaeibar 10, Iftl
142
KOTPT: XCONOXZC ZHSICAT0X5
roruLXT:oii (TioutJun«>
1917
1911
1919
1990
1991
1992 •
ll,«3» II. 127 I4.1(t fl.t-71 »«,>ii li.eeo
0tl Airs ORIOZV OF UtOUICBt
or«it Uatienal Vretfuct (CTV>
vet r*eter iseea* (rem Abroad
OPF At MarKsi meat (eurraat prtett)
(1*I7 .Tie**)
081 »••) oreweb Mac* (pareaat)
MNlfTXe PlICtB/OinATOkF
Ovarall lOCF)
eeaauBar Frlca laaaa
MOnTJUtT MOLBZlOa
Menay Supply. Proadly Daflnad
Men ay
Curraney Oucaida Baaka
Danand Oapoait*
Ouaaj-Hoaay
OOVSMMBrr OPtllATZONd
Total Ravanua
e/w, Taa Havanua
■en-tas Havanua
Tntal Sspandicura
Cjrrant
eapical
Ovarall oafieit
titamal rinaneir.o (aat)
Jienbank Financing
DOBattie tank riaaneino (aac)
(MUUoM af l(n«laa Peaoda), ymt aadla| i«M W
40.712
«*,7il
SI. ill
47.244
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• •
a a
«i.ai»
tl.llJ
41.177
70.007
•0.444
117.111
«l.2«t
17.022
40.421
40.410
60.700
62.231
x.%
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2.0
3.6
3.2
2.6
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100. 0
111.0
12t.4
161.0
1S4.2
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100.0
117.7
142.7
164.0
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344.1
(MUlloM oT mmtmt SijrpUM Pomb4
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02.600
00.444
a •
10.241
30.171
22.471
24.30S
30.127
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10,414
13.410
12.624
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• .701
10.171
11.017
11.706
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41.632
66.101
70.127
a •
(MUlloM of COTtiaa Peaada). rw aadlnt Jbm 20
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10,200
31.000
20.100
41.000
I.IOO
0.100
• ,100
11,700
ll.SOO
34,100
2.700
2.200
2.700
1,100
0.10C>
11.000
21.200
24.010
20.200
34,200
60,000
60.100
13.300
IS. 400
10.400
23.400
31,100
17.330
0,000
11.010
11.400
12. too
20.700
11.100
(7,7tB) (10.»10) (11.600) (14.400) (10.700) (6,400)
1.600 3.S00 1.000 1,200 14.400 4.2C3
2.400 2.700 2. •00 1.400 2.400 4,700
2.100 4.100 6.000 7.700 2.000 (2.800)
BALAIICI OF FAYNtrrS
X.Curraai Aceeunc
rxpsrta of Osoda a sarvtcoa
Marenandlaa, fob
FatrelauB
othar
ifenfaetor Oarvicaa
tuax Canal
Teurian
Faecer Sarvicaa
(MUUoaa of aumai U3 doiUn). yaar a^iai jaaa 20
7,060
3.66$
133S
1140
4.331
1146
1300
1.043
0.661
1,0(0
1106
1712
4.446
1341
1400
0*0
1,220
3.020
1140
1672
6,411
1107
3031
1.0S7
10,167
2.274
136*
1677
1.762
1472
2047
1,166
11.277
2,667
1671
1616
6.072
1662
1240
1.117
11.100
1.6C0
1644
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ISOO
iKpsrea of oeoda 4 Oarvlcaa
Marehandiaa. elf
loBfactera Carvieaa
Factor sarvieaa
Veckara Baaittaaooa
Curr. A/e pal batera Off Traaaf.
Mat. Official Tranafara
Curr. A/e »al Aftar Off. Traaaf.
12.020
7. 662
3.007
3.041
1.013
(1.166)
• 74
(104)
14,014
• .010
1.761
3.437
1.104
(1.071)
4(0
(1.372)
16.070
10.141
3.176
3.641
2.623
(3.317)
764
(1.441)
16,646
11,441
3.344
3,640
2.742
(2.706)
1,110
(1.606)
17.437
11,436
3.464
1.716
2.776
(3.676)
4.600
t.226
14,700
10103
2390
1700
6042
3.241
1.600
2.743
143
Report on Economic Conditions
In Israel
1991-92
NE/DP
January 4, 1993
144
Table of Contents
I. Executive Summary
n. Immigration, Output and Employment Trends
m. Fiscal Trends and Policies, Inflation and Privatization
rv. Balance of Payments Trends, Trade Liberalization
and Exchange Rate Policies
V. External Debt and Debt Service Capacity 9
Table of Economic Indicators 1 1
145
I. ExeCUtj'«y» HiimmarY
Israel's economy has been expanding at an annual rate of about 5
percent during the last three years, driven principally by the
construction sector. This growth appears to reflect a cyclical
rebound and the one-time effects of expanded immigration. During
the period 1990-92, some 450,000 persons immigrated and
investment spending jumped more than 10-fold compared to the
previous four years. Even so, the unemployment rate rose to
about 11 percent from 6 percent in 1988.
The central government made some progress in reducing its role in
the economy through restraint in defense spending and through
cuts in subsidies, but the surge in immigration has reversed this
progress, at least temporarily. Previous commitments, pressures
from affected groups, and continuing steps taken to reduce the
tax burden have impeded efforts to make progress in reducing the
budget deficit. Progress in economic reform was uneven. For
example, strong progress was made during 1992 in curbing
inflation, but progress on privatization is still slow.
Inflation was brought down from an 18 percent average during
1986-91 to about 10 percent during 1992 due to wage moderation;
monetary restraint; the end of the housing boom in late 1992;
increased import competition; and business confidence in a new
flexible exchange rate policy have brought. The fiscal deficit,
excluding foreign grants, was brought down to about 10 percent of
GDP during the late 1980s, but rose to 13 percent or 14 percent
during 1991 and 1992. Housing finance commitments and the large
size of remaining transfer payments and subsidies explain the
increase. Major recent accomplishments in privatization include
the sale of some GOI equity holdings in the communications
monopoly and in Israel Discount Bank. The pace of privatization,
however, has been slow due to opposition by some vested interests
and by accounting and regulatory difficulties. Substantial
progress has recently been made in opening up the financial
markets, but continued progress in removing other distortions and
controls and in eschewing governmental interventions would make
the supply side of the economy more efficient.
On the external front, the balance of payments situation
deteriorated as the result of a strong rise in imports and
sluggish export performance. There has been recent substantial
movement in trade liberalization, while exchange rate management
has become more flexible, thereby improving the competitiveness
of Israel's exports. Imports have been rising at an annual
average rate of 14.7 percent since 1989, while exports grew by
only 4.4 percent. The sluggishness in exports has been
attributed to a slowdown in Israel's principal export markets,
notably the United States, U.K., and some other EC countries.
Non-tariff barriers on certain imports have been replaced by high
tariffs, scheduled to be reduced gradually to low levels over the
next five to seven years. An exchange rate insurance scheme for
exporters is being gradually phased out with the introduction of
the new flexible exchange rate policy initiated in December 1991.
146
The annual devaluation trend, against which the daily
devaluations are set, was reduced in November' 1992 from 9 percent
to 8 percent. The new exchange-rate system has bred greater
business confidence.
Israel's total stock of external debt has grown in recent years,
but with the growth of the economy, its debt repayment capacity
has strengthened. Net external liabilities have accordingly
declined from 80 percent of GNP in 1985 to 26 percent in 1991,
and gross debt service has declined from 33 percent to 27 percent
of GNP.
Government debt levels will likely increase in the coming years
if the government exercises its option to borrow up to $2 billion
annually over the next five years to assist immigrant absorption
under the U.S. loan guarantee program in addition to planned
increases in borrowing from Europe. If the funds are used to
finance productive projects and if additional vigorous economic
reforms are implemented to assure substantial investments and
strong economic growth, Israel will be in a reasonably good
position to assume the projected additional debt. Prudence by
Israel's government officials in assuming additional debt will be
particularly necessary if future growth proves to be less robust
than currently anticipated.
II. Immigration. Output, and Employment Trends
The economy has been expanding at an annual rate of about 5
percent during 1990-92, driven principally by the construction
sector. This growth appears to reflect a cyclical rebound and
the one-time effects of expanded immigration. The GDI's 1993
budget forecasts GDP growth of 3.6 percent as the construction
boom cools.
Immigration averaged about 18,000 annually during the 1978-89
period and then shot up to 199,520 during 1990. The peak was
reached during the first half of 1991, when 110,640 people
immigrated. The trend has been downward since, with 65,460
immigrants during the second half of 1991 and 54,000 during the
first nine months of 1992. Israel's annual population growth
rate accordingly shot up from the usual 1.7 percent to an average
of 5 percent during 1990 and 1991.
The recent growth acceleration has fallen behind this population
growth. Real GDP growth had averaged about 3 percent during the
period 1985-89, meaning that per capita income was growing by a
little more than 1 percent. Per capita income did not increase
at all in real terms during 1990 and 1991. Additions to supply
through the recent surge in investment spending may now be
catching up with the early rise in demand associated with the
large-scale immigration. As a result, when combined with the
147
downward trend in immigration since the summer of 1991, real per
capita income may have started to rise again during 1992.
Investment spending surged by 25 percent during 1990 and by 28
perecent during 1991, after rising by an average of less than 2
percent annually during 1986-89. Housing investments rose by 17
percent during 1990 and then skyrocketed by 72 percent during
1991 as part of the former Minister of Housing's efforts to build
housing. In addition to direct construction, the Government also
provided incentives to private developers in the form of purchase
guarantees, bonuses for early completion and increased lending.
Investment levels were dowrt in most sectors during the early part
of 1992.
Job growth has not kept up with immigration, with the result that
some 40 percent of recent immigrants are unemployed. The overall
unemployment rate had already jumped to 9 percent during 1989,
before the start of the immigration surge. The rate then climbed
to 10.6 percent during 1991 and to 11 percent in 1992.
III. Fiscal Trends and Policies. Inflation and Privatization
The central government had been making some progress in reducing
its role in the economy, but expenditures related to the surge in
immigration reversed this improvement, at least temporarily.
Encouraging progress has been made during the last few months in
curbing inflation. Progress on privatization is still slow.
Fiscal Trends and Policies
The budget deficit before grants had peaked at 31 percent of GNP
in 1984/85. Success in the stabilization program, begun in 1985,
brought a reduction in the central government's deficit to 10 or
11 percent of GNP during the 1986/87-1990/91 period. A sharp
climb in immigration absorption expenditure caused this deficit
to rise to 13 or 14 percent of GNP during 1991 and 1992.
Similarly, the central government's expenditures declined from 68
percent of GNP in 1984/85 to 59 percent in 1986/87 and to 53
percent in 1987/88. This percentage was in the range of 48 to 50
percent during 1988/89-1990/91 and then rose again to 55 percent
during 1991 and 1992. Immigration-absorption expenditures alone
were estimated at 10 percent of GNP for 1991. Taking account of
foreign grants sharply reduces the size of the budget deficit and
illustrates the importance of aid to the Israeli economy (See
Table) .
Half of the earlier expenditure containment was due to restraint
in defense spending, especially on imported equipment. Other
positive factors were a reduction in interest subsidies and
interest payments and a cut in food subsidies. A continuation of
these favorable trends into 1991 and 1992 has prevented the
148
budgetary situation from getting more out of hand. An additional
budgetary burden, however, was the government's assumption of 2
percentage points of the employers' social security
contributions. Also, preventing further progress in reducing the
budgetary deficit was the stagnant or declining trend in
revenues, which averaged 43 percent of GNP from 1984/85 through
1987/88 and then about 38 percent from 1988/89 through 1990/91
before rising to about 41 percent of GNP in 1991. The revenue
slack resulted from a reduction in income tax rates, the
elimination of taxes on service imports, and the lowering or
elimination of customs duties on imports from the United States
and the EC following the signing of free trade agreements with
them.
Previous commitments and pressures from affected groups and a
desire to reduce the tax burden are limiting the pace of likely
progress in reducing the budget deficit. The 1992 budget had cut
back government financing of housing construction to an estimated
45 percent of total housing construction, compared to 75 percent
in 1991, 45 percent in 1990 and to only 15% in 1989. The 1993
budget eliminates all governmental financing for beginning new
construction and the incentives for rapid completion, but prior
commitments for completing construction remain and there is the
heavy cost of honoring the buyback guarantees on unsold housing.
These houses are owned by private contractors, but the previous
government, in a program to accelerate housing construction, had
extended purchase guarantees in the event of failure to complete
private sales. Many of the unsold houses are removed from major
urban centers, so that lack of nearby employment opportunities
impede private purchases. Some $1.5 billion during each of 1992
and 1993 may be necessary to finance the buybacks as well as
litigation on uncompleted units.
Transfer payments and subsidies are still high in some areas. In
early December 1991, a Knesset water committee had approved a
package of water price increases, but the Cabinet had scaled back
part of the increases affecting individuals and municipalities.
Water subsidies are to be terminated within the next several
years, but political opposition may intervene. Subsidies on
public transport also have not been reduced as quickly as
planned. Political pressure may also prevent the scaling back of
various transfer payments such as the recent governmental
assumption of social security payments.
Recent measures to reduce the tax burden include (1) a one
percentage point reduction of the corporate income tax rate at
the beginning of 1991, 1992, and 1993 (further such reductions
are planned during the following three years until the rate of 36
percent is reached); (2) a reduction in the employer's tax from 4
to 3 percent in 1991; (3) the value added tax will be reduced to
17 percent in 1993 after having been increased from 16 percent to
149
18 percent in 1991; and (4) there will be a 50 percent increase
over the current depreciation rate during 1993 and 1994 for
manufacturers, hoteliers, builders, and farmers. On the other
side was the three-year measure imposed in 1991 for a 5
percentage point surcharge on personal income taxes.
The 1993 budget contains a shift in eacpenditure priorities away
from housing and towards more productive areas, such as health
and education and infrastructure. The major planned increases in
infrastructure spending are in roads, electric power, water and
sewage, industry, and tourism.
Ipflatjgn
Inflation had declined from triple digit levels in 1984 and 1985
to the 16-20 percent range during 1986-91. This consistently
high rate of inflation has been due to high deficits in the
government budget, rapid money supply growth, the existence of
extensive indexation in the capital and labor markets and of many
other regulations, controls, and institutional rigidities. A
major example of an institutional rigidity is the lack of wage
flexibility in the governmental sector despite the high
unemployment rate. Whereas rising unemployment had contributed
to a 5 percent decline in real wages in the business sector
during 1991, real wages in the public sector rose by some 3
percent.
Government-union negotiations during the spring of 1992 resulted
in a 7.8 percent real wage hike for school teachers, while the
increases accorded then to other public sector workers were more
moderate at a nominal 4 percent to 6 percent, making them
negative in real terms. The former torrid pace of increases in
housing prices has slackened notably. Other favorable
developments were the increased import competition resulting from
the import liberalization program launched in September 1991 and
progressive elimination of taxes on imported services during the
last several years. The new more stable exchange rate system has
bred greater business confidence and may also have finally
contributed to the lowering of inflationary expectations.
Moderation in the growth of the money supply, reflecting a
significant tightening in the authorities' monetary policies, was
also a positive factor. This growth moderated from 31 percent in
1990 to 14 percent in 1991, before increasing again to an
annualized 26 percent in January-May 1992.
Price trends have turned remarkably favorable in recent months so
that the predicted inflation rate for all of 1992 is now about 10
percent, a distinct improvement over the 18 percent average in
recent years.
150
Privatization
The extensive government role in the Israeli economy is
exemplified by the facts that the industrial enterprises it
controls account for 20 percent of the total industrial output
and that the bulk of bank shares are owned by the government
through its bailout after the 1983 crash in bank shares.
Privatization has been conceived as a way of reducing this
governmental role, but has yet to be pursued aggressively.
The privatization program pursued by the government since the
late 1980s mainly involved the floating of shares in public
companies on the Tel Aviv stock exchange. In addition, five
companies were privatized by direct sales of a portion of the
government equity to large foreign and domestic investors.
Recent sales have mainly comprised a 16 percent holding in Bezeq
(communications) ; a 25% share in Israel Chemical Industries; and
its holdings in Israel Discount Bank, including the non-banking
subsidiaries; Maman Cargo and Israel General Bank. Additional
companies have been provisionally listed for sale, but
implementation progress has been slow because of opposition by
unions and other groups; the difficulty in establishing
appropriate sales prices; the lack of powers held by the
privatization authority; and the need for other administrative
and regulatory changes, notably in the pricing mechanisms for the
goods and services produced by the public enterprises concerned.
Over the last three years, several measures have been enacted to
open up the financial markets in the areas of reserves, bank
service charges, directed credit, mortgages, tradable bonds,
shekel convertibility, investing abroad, the use of foreign
currency accounts, and liquidity requirements. As one result,
the proportion of directed credit declined from 55 percent of the
total in 1987 to 27 percent by the end of 1991. A further
reduction of this proportion is no longer likely in view of the
passage a year ago of the Land Mortgages Law, providing both for
more directed credit in that field and a partial indexation of
mortgages.
The monopoly of the government employment service was lifted in
April 1991, and the 1993 budget includes measures to break
governmental monopolies in transport and communications. A major
way being considered by some Israeli officials to open up
competition in communications is to split off mobile phones and
long-distance calls from the Bezeq communications monopoly.
However, the Israeli Government still applies price controls to
25 percent of all consumer goods and, in agriculture outside
citrus, there are also extensive subsidies, import controls, and
production quotas. Many manufacturers receive substantial
subsidies and the government still owns 93 percent of Israel's
151
land. Continued progress in removing other distortions and
controls on pricing, production, imports, and investments, and in
eschewing ad hoc governmental interventions would make the
economy more efficient and promote future growth.
IV. Balance Of Pavaenta Trend* Trade Liberaligation and Exchange
Rate Policiea
The balance of payments situation has deteriorated since 1989 as
the result of a strong rise in imports and sluggishness in
exports. Except in the textiles area, there has been substantial
recent movement in trade liberalization. Exchange rate
management has become more flexible in order to improve the
competitiveness of Israel's exports.
Balance Of Payments Trends
Israel's balance of payments position on current account has
deteriorated since 1989, with exports rising by an annual average
of only 4.4 percent through 1991 and imports by an annual average
of 14.7 percent. Exports grew by some 10% in the first eight
months of 1992 and imports by 12 percent. Tourism declined
slightly during both 1990 and 1991, while substantial 16% growth
occurred during the first half of 1992. The current account
surplus of $1.1 billion in 1989 has turned into deficits of about
$800 million each during 1991 and 1992.
The major part of the increase in imports has been due to a surge
in the value of imported investment goods, which rose by 37
percent during 1991'. Much of this increase has been in the form
of housing components and construction equipment associated with
immigrant absorption. The latter, in turn, has recently placed
upward pressures on GOI expenditures and its budget deficit (see
Section III) . The sluggishness in exports has been attributable
to an over-valued shekel, as Israel's exchange rate remained
fixed during much of the 1986-88 period while annual inflation
averaged 17 percent. More recently, with the shekel devalued
more competitively, the other explanation for the export
sluggishness is the slowdown in Israel's principal export
markets.
Israel enjoys sizable transfers from the United States
government, Germany and private sources. Foreign exchange
reserves have risen from the low point of $1.9 billion in June
1 . Put <rf dK rue bu tlM bccD MUibMed la nadM iacn—e m npnu of mibuiy cquipmeM. tUfaoucb dme are Mill ti lev<U titniriciiMjy bekw those
reached ■ 19(7 ad I9U.
152
1985 to $4.7 billion at the end of 1986 and to $7.2 billion
during early 1991. They have since fallen slightly to $6.5
billion at the end of June 1992.
Trade Liberalization
Israel's free trade agreements with the European Community and
the United States, concluded in 1977 and 1985 respectively,
eliminated customs duties on most trade with those countries by
1990. However, "luxury goods" — both imported and domestic—are
subject to a purchase tax, ranging from 25 percent to 100
percent. In September 1991, Israel replaced all non-tariff
barriers on non-agricultural goods with high transitional tariffs
on the goods imported from other countries. These tariffs are
mostly in the range of 20-50 percent, but are up to 75 percent on
textiles, clothing, leather, and wood products. The tariffs are
to be gradually reduced over five to seven years to maximum rates
of 8 percent on raw materials and 12 percent on finished
products. There may be a slow-down in the pace of tariff
reductions on textile imports as the Israeli Cabinet has
reportedly called for studies on any adverse impact on employment
for reviewing future reductions in duties on textile imports from
the other countries.
The tax on imported services was narrowed to tourist services
only in June 1990 and the rate reduced to 4 percent in December
1990 from 7.5 percent and 15 percent earlier. This tax, as well
as a travel tax, were abolished on December 1, 1992.
Exchange Rate Policies
Exporter competitiveness had weakened during 1987 and 1988, when
the average exchange rate was frozen around $1 = i.60 shekels
(compared to about 2.45 in 1992). Greater exchange rate
flexibility was then introduced from December 1988 thur January
1989 when the Bank of Israel was granted more authority to change
the exchange rate "on the basis of market conditions," Between
then and July 1989, the shekel was devalued by 13.5 percent
against the dollar. Further devaluations occurred in March 1990,
September 1990, and March 1991, totalling some 27 percent against
the currency basket of main trading countries. This more
flexible exchange rate policy will assist export expansion in the
long run, but export growth has been sluggish through 1991.
The introduction of a new foreign exchange system in December
1991 ended the previous practice of periodic, suddenly announced
shekel devaluations. The exchange rate is now devalued by minute
amounts daily against a basket of foreign currencies in response
to a predetermined annual devaluation trend, which is supposed to
reflect the difference in inflation rates between Israel and its
153
main trading partners. On December 17, 1991, at the outset of
the new system, the shekel was devalued by 3 percent and the
devaluation trend through the end of 1992 was set at another 9
percent. On November 8, 1992, the shekel was devalued by an
immediate 3 percent, in connection with a separate program for
the further phase out of the exchange rate insurance scheme, and
the new annual devaluation trend was reduced from 9 percent to 8
percent. This reduction reflected dramatic progress achieved en
the inflation front.
The exchange rate insurance scheme for exporters is being
gradually phased out in connection with the introduction of the
new flexible exchange rate policy. The scheme compensates
exporters for that part of the accrued inflation differential
between Israel and partner countries that is not fully offset by
a depreciation of the shekel between the time the order is
received and the final payment. The ceiling on the subsidy
payment declined from 7 percent of the FOB value of exported
merchandise to 6 percent on January 1, 1992 and to 5 percent on
July 1, 1992 and is now set to decline gradually by a further
three percentage points.
The new exchange rate system has successfully forestalled large
speculative currency movements and their attendant swings in
reserves and interest rates. The new system is also more durable
and by being more flexible downward, assures exporter
competitiveness when the demand for shekels decreases. Overall
business confidence has been enhanced by the liberalization in
the foreign exchange system.
V. External Debt and Debt Service Capacity
The shift in U.S. assistance to Israel from loan to grant in 1985
and the refinancing of $4.5 billion in FMS debt in 1988/89 have
contributed to a reduction in Israel's foreign debt burden. In
addition, U.S. housing loan guarantees of $400 million extended
in 1991 enabled Israel to borrow in the U.S. long-term capital
market at favorable terms. Debt owed directly to the United
States government accordingly declined from $10.3 billion at the
end of 1987 to $5.6 billion at the end of 1988 and to $4.6
billion in the middle of 1989. There have been further gradual
reductions to $4.0 billion at the end of June 1992.
Israel's external debt has grown in recent years, but with the
growth of the economy, its debt repayment capacity has
strengthened. Gross external liabilities have risen gradually
from $29.3 billion at the end of 1985 to $36.7 billion at the end
of 1992. In relation to GNP, this debt declined from 127 percent
in 1985 to 62 percent in 1992. With net external liabilities
declining during the same period from $18.4 billion to $15.3
billion, this GNP ratio fell even more dramatically from 79.6
154
10
percent to 26.4 percent. With export growth sluggish, progress
in reducing the ratio of gross debt service payments to the
exports of goods and services has been relatively slow from 3 3
percent in 1986 to 30 percent in 1988 and to 27 percent in 1992.
Government debt levels will likely increase in the coming years
if the government exercises its option to borrow up to $2 billion
annually for the next five years to assist immigrant absorption
under the U.S. loan guarantee program. The Government plans to
borrow only to the extent needed and to finance projects that
would support the repayment of the debt incurred. There may also
be additional commercial borrowing.
There appears to be a growing political consensus in Israel that
continued vigorous economic reform, accompanied by sound economic
policies which will promote substantial investments, are the keys
to ensure long-term economic growth and the more productive use
of available talents. If these principles are followed, Israel
should be able to service modest increases in its external debt
over the next several years. A prudent policy on the assumption
of additional debt will be particularly necessary if future
growth proves to be less robust than currently anticipated.
155
11
ISRAEL: ECONOMIC INDICATORS
1988 1989 1990 12^1 Ii22.
Real GDP Grovrth 2.7 1.6 5.1 5.2 4.5
Retail Inflation 16 21 18 18 10
Unemployment Rate 6.4 8.9 9.6 10.6 11
Exchange Rate (Shekel Per $) 1.60 1.92 2.02 2.28 2.45
GOI Expenditures As % Of GNP* 50 48 49 55 55
Budget Deficit (Before Grants)
As % Of GNP* 10 11 10 13 14
Budget Deficit (After Grants)
As % Of GNP* 3.2 4.6 5.1 7.8
Exports ($ Billion) 10.4 11.2 12.3 12.2 13.5
Imports (C.I.F., $ Billion) 13.4 12.9 15.1 16.9 19.0
Current Account Balance ($ Billion) -0.7 1.1 0.6 -0.8 -0.8
Gross External Liabilities
($ Billion) 31.3 31.2 33.2 33.8 36.7
As % Of GNP 74 72 65 60 62
As % Of Exports Of Goods & Services 155 144 137 139 140
Debt Owed To The United States**
($ Billion) 5.55 4.57 4.45 4.27 4.01
Debt Service As % Of Exports
Of Goods And Services 30 28 23 27 27
* Years before 1991 are fiscal years beginning April 1.
** For years ending June 30.
NE/DP: DW Carr: 12/7/92
156
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158
TESTIMONY OF
THOMAS A. DINE, EXECUTIVE DIRECTOR
AMERICAN ISRAEL PUBUC AFFAIRS COMMITTEE (AIPAC)
BEFORE THE
HOUSE FOREIGN AFFAIRS
SUBCOMMITTEE ON EUROPE AND THE MIDDLE EAST
JUNE 4, 1993
Thank you. Chauman Hamilton and members (tf this distinguished Subcommittee, for the opportunity to
submit written testimony to you. AIPAC believes in the critical importance of U.S. relations with Israel, and
recognizes the prominent role that foreign aid plays in accomplishing America's foreign policy objectives not only
in Israel but around the world. In that regard, I want lo e:q>ress AIPAC's strong support for a viable foreign
assistance program.
AIPAC. a domestic membership organization of American citizens, works on a daily basis with its
members to foster a close aixl consistently strong partnership between our country and Israel. On our Executive
Committee sit the presidents of the 50 major American Jewish organizations, representing more than four-and-
a-half million active members throughout the United States, as well as leaders of the country's pro-Israel
community from all SO stales.
Since I last testified before this distinguished Subcommittee, the Aiab-Israeli peace process has moved
forward and Israel's representative democracy has changed the country's political outlook. The new Israeli
government, set up following last year's Labor Party victory in the June 23rd elections, immediately embarked
on a new course. Prime Minister Yitzhak Rabin's highest priority is to invigorate the peace process. Among
other far-reaching steps, Rabin froze new settlement construction in the territories; offered general elections with
international observers to the Palestinians for an interim self-governing authority: offered, for the fu^t time,
legislative powers to that authority: proposed, also for the first time, a territorial dimension for the interim period:
and committed Israel to a withdrawal on the Golan in return for peace with Syria. ConsequenUy, the U.S.-
brokered bilateral talks between Israel and its neighbors moved from discussing procedural issues to negotiating
substance. I believe in 1993 we will see real progress toward resolving the Arab-Israeli conflict.
Another positive development since I last testified has been the dramatic improvement in the U.S .-Israel
relationship. Although the underpinning of those vital relations remained intact, serious strains developed between
the Bush Administration and the Likud government. Within weeks after Rabin's assumption of the prime
ministership, the two heads of government met in Kennebunkport; a spectacular amelioration in the relationship
took place. Among the most important manifestations of the change was Congressional approval, with the
Administration °s blessing, of U.S. loan guarantees for the absorption of immigrants in Israel. The passage of this
program was one of Congress' most stirring humanitarian acts in recent memory. I want lo convey special thanks
to you, Mr. Chairman, and the members of this Subcommittee fw your support for the loan guarantee legislation.
It is already starting to have a positive impact on the level and condition of Jewish immigration to Israel from
the former Soviet Union, the former Yugoslavia, and Ethiopia. As attested by Seaetary of Slate Warren
Christopher's skillful handling - in close coordination with Israel -- of the Hamas miUiants' removal to Lebanon,
it is already clear that the Clinton Administration is determined to improve the U.S.-lsrael relationship even
further. The more the Arab negotiating parties are convinced that the United States cannot be decoupled from
Israel, the more likely they are to negotiate with Israel seriously rather than wait for Washington to "deliver"
Israel through pressure for unilateral concessions.
These positive changes, which have turned the Middle East into a safer place than it was just three years
ago, were made possible largely through America's leadership. The destruction of Iraq's offensive military
capability as a result of the Gulf war has bolstered the security of the region, and the subsequent peace process
has reduced regional tensions. But Israel cannot afford to relax its defenses. Not only does Iraq, which is certain
lo replenish its arsenal over the next few years, remain a long-term threat, bul Iran has embarked on a massive
rearmament program, including the development of nuclear weapons, and the Syrian military has emerged as an
159
even more dangerous foe than it was prior to the Gulf crisis. Simultaneously with its engagement in the peace
process, Damascus is investing its S3 billion Gulf windfall in massive aims purchases from Russia and other
eastern European countries, and has taken delivery of sophisticated Scud-C missiles from North Korea which can
reach any point in Israel. To counter these threats, Israel will need continued U.S. aid.
Israel, which acceded to U.S. requests not to respond to the 39 Iraqi Scud missiles fired at its main
civilian population centers in 1991, suffered heavy psychological and economic losses during the Gulf crisis. The
government and people of Israel were deeply appreciative of the immediate dispatch by the United States of
Patriot missiles in response to the Iraqi Scud attacks. We in the American pro-Israel community also deeply
appreciate the important role that members of this Subcommittee took in March 1991 helping Israel secure $650
million in supplemental emergency assistance to help meet the costs of the Gulf crisis. Whereas Israel's direct
military costs were largely restored by the supplemental aid package, another $2 billion in economic costs
continued to weigh down its already strained economy. These costs came on top of Israel's overwhelming
economic burden resulting from the absorption of hundreds of thousands of Jewish immigrants from the former
Soviet Union, Ethiopia, and elsewhere. The loan guarantees will be immensely helpful - but Israel clearly needs
our economic and military assistaiKe to help it cope with the colossal task of immigrant absorption, and to
maintain its deterrent strength among slates that still refuse to recognize its existence.
Mr. Chairman, today I submit this testimony before this Subcommiaee in strong support of President
Clinton's request for S3 billion in economic and military aid to Israel - that nation's lifeline -- of which more
than 80 percent is spent in the United Stales.
Indeed, the absolute amount of our aid to Israel is substantial. But it is comparatively one of the most
cost-effective investments that the United States makes in support of its international interests. U.S. expenditures
in support of our European allies in NATO, for example, are more than 40 times the size of our aid to Israel,
which is doubtless the most visibly pro-U.S. country in the world. And we get a good return on our money to
Israel. As President Clinton stated last November just prior to his election, "1 support the current levels of military
and economic assistance to Israel... This vital aid encourages long-term stability in the region." The relationship
has been cooperative in the truest sense of the word: In response to a question submitted for the record for his
Senate confumation hearings. Secretary of Defense Les Aspin wrote: "I feel confident that this Administration
will continue to value the impoitant strategic relationship between the United States and Israel and look for ways
to strengthen this relationship in the future." Just after the Gulf war, then-Secretary of Defense Cheney said tliat
the crisis "has been a demonstration of the value of maintaining Israel's strength, and her ability to defend herself,
and also the value of the strategic cooperation between our two countries."
Mr. Chairman, the deep, broad-based partnership between the United States and Israel continues to
flourish. The democratic elections in Israel which led to the peaceful transfer of power from the governing party
to its most bitter rival - an occurrence unknown in the Arab world - have served to remind us of the extent
to which the Israelis share our most fundamental values. A new era is dawning that holds great promise for both
countries and bodes well for the future of U.S.-Israel relations. For the fu^t time in over four decades, there is
real promise in a negotiating process which could bring an end to the state of war that has existed between Israel
and its Arab neighbors. The United Slates was instrumental in creating the process and will be instrumental in
its ultimate success. As Israel lakes risks inherent in any such negotiation, it is imperative that the United Slates
remain steadfast in its support for the Jewish slate. And this Subcommittee, by voting for S3 billion in military
and economic assistance to Israel in FY 1994, will be helping to ensure that sleadfasmess and strength which have
always worked lo the benefit of both countries.
My testimony is divided into two parts: First I will share our views on Israel's importance to the United
States as an ally, and then I will discuss Israel's need for U.S. assistance. Of course, Israels importance and
needs are closely intertwined.
I. ISRAEL'S IMPORTANCE TO THE UNITED STATES
Israel is one of America's most important international partners. It is a fellow democracy in a region
populated by authoriiarian regimes; our most powerful and reliable strategic ally in a vital but unstable region;
160
an essential pany in the Middle East pace process: and a significant economic panner. helping to increase our
worldwide competitiveness. Israel's friendship toward the United States is paiticiilarly visible in the United
Nations: In 1992, Israel voted with the United States on 923 peicent of the General Assembly resolutions
introduced in the 47ih session, the highest rate of any country in the world. This contrasts with 26.8 percent for
Kuwait. 2S.7 percent for Saudi Arabia, and even lower rates for the other Arab countries.
Similarly, most Americans have consistently favored a strong U.S. -Israeli relationship. In recent polls
on the bilaieial relationship, 85 percent of Americans said the United States should maintain or further strengthen
its ties with Israel, and 88 percent viewed Israel either as a "close ally" or as "friendly" - the highest ranking
of any Middle Eastern nation.
Shartd Values
Israel shares with America a fundamental commitment to democracy and human rights. That is
panjcularly remarkable because unlike the United States. Israel lives in a dangerous neighbortKxxl: It faces
enemies on three of its four borders, and it is daily subjected to the combined threats of Islamic radicalism and
Arab extremism which ate sweq>ing through the region. No other Western democracy has been farced to contend
with such grievous and persistent threats, at such close range, and on such a large scale for so long - and
maintain its democratic institutions. Since the radical threats confront the conservative Arab regimes as well, it
is instructive to compare and contrast just how Israel and Arab states meet the challenge.
There is a striking contrast between Israel and the Arab states in this regard, highlighted in the "Freedom
Atouixl the World" survey for 1992 which was issued Freedom House, the respected national wganization
dedicated to strengthening democratic institutions. Whereas Israel is rated "free," no Arab country is included
in that category. Among the 20 members of the Arab League, twelve, including Saudi Arabia. Iraq, Libya, and
Syria, are rated "not free" and all the others ate in the lower rankings of "partly free." The fuidings are based
on extensive research into all aspects of political rights and civil liberties in the countries surveyed. Similarly,
Israel is ranked 18th in the world on the "human development" scale of the United Nations Development Program
(UNDP), which includes such factors as education, health care, life expectancy, employment and other
demographic information, according to the organization's 1992 report; that too is unmatched elsewhere in the
region.
Civil Liberties:
Israel's democratic institutions guarantee by law fundamental civil liberties for all citizens, Arab and Jew
alike.
Israel is the only country in the Middle East with meaningful free elections, a free press, checks and
balances to prevent and correct abuses of authority, extensive protection for the rights of individuals and
minorities, freedom of religion, basic equality for women and other safeguards and rights that are typical of a
free society. To be sure. Israel has its flaws, as Israeli critics themselves freely acknowledge. But its human
lights and civil liberties recwd lemains far and away the best of any country under siege for over four decades.
Freedom of the Press:
Israel is the only country in the Middle East with a genuinely free press.
* In addition to a vigorously contentious and critical Hebrew press expressing every conceivable shade
of Israeli public opinion, Israel has the freest Arabic-language press of any Middle Eastern nation.
In Arab countries, freedom of the press is systematically suppressed:
♦ In Iraq, Syria. Libya, and Sudan the entire press is a mouthpiece for the brutal regimes ruling those
countries.
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♦ In Algeria. Tunisia, Morocco, Yemen, and Bahrain the press is either under the government's control
or severely restricted and censored.
♦ In Saudi Arabia, Kuwait, Oman and Qatar, criticism of the King or Emir, any criticism of the royal
family, the government, or Islam is prohibited.
♦ In Jordan, the press is partly controlled by the government and is "counselled" by the government
not to criticize its policies. Amman this year is liberalizing its policies regarding the press but the government
still maintains significant control.
Rights of Assembly and Association:
Israel is the only country in the Middle East to consistently uphold unfettered freedom of assembly as
a vehicle for promoting change.
♦ Israel guarantees freedom of assembly, a fundamental democratic right that the Israeli people often
exercise to demand a change of government policies. For example, in 1982, 400,000 people -- nearly 10 percent
of the country's population -- demonstrated in Tel Aviv to protest their own government's behavior in Lebanon.
The notions of freedom of assembly and association are foreign to most Arab regimes. For example.
♦ In Iraq, only pro-government rallies are permitted, and even public funerals have been outlawed.
♦ In Syria, public meetings, assemblies or demonstrations can only be held if they are initiated by the
government or the ruling Ba'aih party. Private groups may only meet to discuss nonpolitical activities.
♦ In Saudi Arabia, public demonstrations as a means of political expression are prohibited.
Democratic Participation:
Israel, the only democracy, stands in sharp contrast to other countries of the region, which include feudal
monarchies and dictatorships.
♦ The Knesset, Israel's parliament, is a legislative body elected by universal franchise on the basis of
proportional representation. By law, a general election is required at least once every four years. All adult
citizens have the right to participate in the political process, and Israelis exercise their right to vote with a relish.
For example, in the November 1988 elections, voter turnout by the citizens of Israel. Jewish and Arab, was
approximately 80%, among the highest rates in the democratic world. Fifteen parties are represented in the
Twelfth Knesset, including several Arab parties.
♦ In contrast, no Arab government has ever been changed through elections. For the first time, truly
free elections were held last April in an Arab country -- Yemen -- but thai country's human rights record remains
abysmal. King Fahd of Saudi Arabia declared on March 28, 1992, "The democratic system prevalent in the
world is not appropriate for us in this region... The election system has no place in the Islamic creed... This
system of free elections is not appropriate for us in the Kingdom of Saudi Arabia."
♦ Whereas conservative Arab regimes such as Saudi Arabia or Morocco have never been changed,
radical Arab nations such as Iraq, Syria, and Sudan have undergone violent coups in which thousands of people
have been killed. National leaders have been assassinated in Iraq, Syria, Lebanon, Jordan. Saudi Arabia, Yemen,
and Egypt.
Freedom of Religion:
Like the United States, Israel guarantees religious freedom for adherents of all faiths.
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♦ Israel has no state religion. It guarantees and safeguards freedom of religion to all The rights of
religious minorities in Israel are strictly protected by law, and minorities conduct their own religious and civil
affairs such as mairiage. divorce, and conversion.
No Arab state comes close to matching IsraeFs record for religious tolerance; in almost all Arab
countries, Islam is the religion of the state and non-Muslims are severely discriminated against.
♦ Saudi Arabia forbids the practice of any faith other than Islam. Being Moslem is a prerequisite for
citizenship, and conversion to another religion is punishable by death. The muttawin (religious police) use haish
measures to force citizens to observe religious practices, such as "modesty" standards for women. The odious
Protocols of the Elders c^ Zion remains a widely distributed best-seller in the Kingdom.
♦ In Sudan, the military government is controlled by Islamic fundamentalists who are determined to turn
the country into an Islamic repubbc. Since 40 percent of the Sudanese are non-Muslims, this can be done only
through brutal tyranny and stale terrorism. Recendy, 400,000 Christian and animist squatters have been pushed
into the desen to almost certain death from the shanty towns they had built near the capital, Khanoum.
♦ In Jordan today, it is a capital crime to sell land to a Jew, and violators have been executed.
♦ To wipe out Moslem fundamentalism, Assad's forces killed 20,000 people in Syria's city of Hama
in 1982, demonstrating the vulnerability of religious groups under Baathist tyranny.
♦ Until recently, Syria's 4,000 Jews were treated as hostages of the government The community was
subjected to constant surveillance and is denied full religious, educational, business, and marriage opportunities.
Syrian Defense Minister Mustafa Tlas continued to stir and-Semitism by propagating the Jewish blood libel (i.e.,
that Jews allegedly drink the blood of Christian children). Only last year did the Syrian authorities allow Jews
to leave - and more than half the community has done so. In recent months. Damascus has halted the departure
of Syrian Jews.
Women's Rights:
Women's rights in Israel are protected by law as well as by governmental and private organizations.
♦ Israel's Equal Opportunity Law forbids discrimination on account of sex or marital or parental status,
and employers are legally required to pay female and male workers equally for equivalent tasks. Israel is one
of the few states in the world, and the only country in the Middle East, to have ever nad a woman head of
government.
The conservative Arab states enforce severe restrictions upon women:
♦ In Saudi Arabia, women cannot vote, drive, or look men in the eye. Women must walk behind their
husbands, and be covered from head to toe. Unmarried women must live with their famibcs. regardless of their
age, and must obtain their father's permission before obtaining a passport or boarding a plane. Unmamed women
cannot go out alone, meet men. travel alone, stay in a hotel, go out to eat, or do anything else alone thai might
allow them somehow to encounter a man on their own.
♦ In Jordan and most other Arab countries, physical abuse of women by their husbands is considered
peimissible "discipline" under the Koran and is not dealt with by the police or the judiciary.
Due Process and the Rights of the Accused:
Israel's judicial system, based on the British legal tradition, protects the rights of the accused.
♦ In Israel, the right to a hearing by an impartial uibunal with representation by counsel is provided
for by law and carried out in practice. The judiciary system is independent and effectively insulated from
political interference. The Supreme Coun of Israel functions with independence similar to the U.S. Supreme
Court. The Supreme Court has the power to review all of the Government's decisions.
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In most Arab states, the judiciary is appointed and controlled by the political establishment. Some of
them carry out wholesale massacres of political opponents as state policy ~ with no consideration of due process.
Individuals accused of violations have few protections in Arab countries:
♦ In most Arab countries, being accused of a crime by the police is viitually tantamount to a conviction.
Monitoring of Human Rigbts:
There is a sharp contrast between Israel and the Arab states regarding access to human rights
monitoring organizations.
♦ In Israel, there is an extensive array of domestic human rights groups dedicated to the protection of
individual liberties and women's rights. These groups freely criticize the Israeli government without interference.
Both Israeli and Palestinian groups monitor human rights in the West Bank and Gaza.
♦ In contrast, many Arab states bar human rights OTganizations. Neither Iraq nor Syria allow internal
monitoring groups, and there are no such groups in Saudi Arabia.
Promoting Democracy Around the World:
Israel is involved in numerous international programs designed to help foreign countries develop their
human and material resources in a manner that fosters the growth of democratic concepts and institutions.
♦ Israel is providing aid in various fields to 114 nations, including countries that do not have full
diplomatic relations with Israel. In the past year alone, over 25 countries have been added to the list of those
receiving Israeli aid, among them China, India, some African and east European nations, and several CIS
republics. Since the establishment of Israel's Foreign Ministry's Division for International Cooperation (Mashav)
in 1957, over 65,000 people have taken Mashav training courses in Israel and abroad in agriculture, medicine,
education and other fields. In 1992, 2364 specialists from 90 countries went through training courses in Israel,
an increase of nearly a third from 1991.
♦ Israel is working actively to promote democracy in the former Soviet Union. Israel now has
diplomatic relations with Russia, Ukraine, Belarus, and Moldova: Latvia, Lithuania, and Estonia; Armenia and
Georgia: and the Islamic republics of Kirghizia. Uzbekistan, Kazakhstan, Azerbayzhan, and Tadzhikistan - the
only Muslim states other than Turkey and Egypt to have established diplomatic ties with Israel. Israeli expertise
is being sought by virtually all of the republics of the former Soviet Union in areas such as agricultural research
and farming, public health, and environmental protection. The U.S. AID and Mashav have joined in a pilot
program to aid Georgia and the Central Asian republics of Kazakhstan, Uzbekistan, Kyrgyzstan. Tajikistan, and
Turkmenistan. The goal of the program is to use Israeli expertise to assist these countries in areas such as
agriculture, water policy, and public health. In recent months, Israeli ministers have visited most of the CIS
coiuitries and signed a variety of trade, economic, and cuhural agreements. In recent months, Israeli ministers
have visited most of the CIS countries and signed a variety of trade, cultural, and technical assistance agreements.
Israeli efforts in the Islamic republics are also designed to counter Iran's cultivation of radical Islam among their
inhabitants.
♦ Last November, UN Secretary General BouHos Boutros-Ghali asked Israel to provide experts to leach
various countries about the democratic process and to organize and supervise democratic elections. Israel's
Ambassador to the United Nations Gad Yaacobi told Ghali that Israel would willingly provide such experts.
Israel has extensive experience in fostering democracy among large numbers of immigrants from non-democratic
countries, and has shared this experience with other countries.
♦ In December, the Israeli Foreign Minisffy sent a team of experts to help El Salvador's victims of the
12-year civil war. The Foreign Ministry will be bringing over to Israel injured Salvadorans for surgerv' and the
fitting of artificial limbs. Israeli physicians are working with Salvadoran doctors to improve rehabiliiaiion
facilities in El Salvador.
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♦ In February. Israel took in 84 Bosnian Muslims escaping from the horrors of their native land until
the end of the fighting.
♦ In March, a group of 30 Lebanese fanners visited Israel to patticqjate in an agricultural training
course.
♦ Also in March, Israel hosted the thirteenth Conference of Mayors, welcoming to Jerusalem two-
dozen mayors from five countries.
♦ In April. Foreign Minister Shimon Peres met with African Ambassadors to Israel, offering to assist
Africa with additional specialists, technical courses, and desert-reclamation expertise.
♦ Israel will paiticipate in UN peacekeeping forces for the first time, sending eight civilians to serve
in administrative posts, the Israeli Foreign Ministry announced in November. Tbe decision came after the 1975
General Assembly resolution equating Zionism with Racism was rescinded. The Secretary General asked Israel
to provide personnel after Israel agreed to involve the UN in regional peace talks.
♦ Israel has organized a delegation of experts from universities and government ofTices to assist in
United Nations Development Program development projects in Third World counuies. especially in the areas of
regional development and agricultural improvements.
Summing up last September the significance to the United States of shared values with Israel. then-
Presidential candidate Bill Clinton stated: "Our relationship would never vary from its allegiance to the shared
values, the shared religious heritage, the shared democratic politics which have made the relationship between the
United States and Israel a special, even on occasion a wonderfiil. relationship. Our support of Israel would be
part of all those shared things, plus our commitment to a stable and peacefid Middle East, a commitment that
can never have been fulfilled in the absence of Israeli help."
Earlier that month, Mr. Clinton said: "America and Israel share a special bond. Our relationship is
unique among all nations. Like America. Israel is a strong democracy, a symbol of freedom, an oasis of liberty,
a home to the oppressed and persecuted."
And in his book Putting People First. Mr. Clinton wrote: "Among all the countries in the Middle East,
only Israel has experienced the peaceful transfer of power by ballot - not bullet. We will never let Israel down."
Contribution to Regional Peace and Stability
While Israel serves America's strategic interests in the Middle East through its democratic stability and
its military capability, it also serves U.S. interests through its efforts toward Middle East peace and stability. As
I said in my introduction. Israel's work in the current peace process could lead to historic breakthroughs, making
the Middle East much friendlier to U.S. economic and strategic interests.
The benefits to the United States of Israel's peace treaty with Egypt - including the suengthening of
pro-U.S. forces for stability in the Middle East — should leave no doubt that further peace accords between Israel
and its other Arab neighbors participating in the peace process will serve U.S. interests. Although Iraq's
occupation of Kuwait reminded Americans that the Middle East is plagued by violent disputes that are unrelated
to the Arab-Israeli conflict, there is no question that alleviation of this conflict beyond the Israeli-Egyptian peace
treaty would enhance regional stability and contribute to world security. Cooperation between Israel and its Arab
neighbors would isolate Islamic extremists and other anti-U.S. forces in the region: bolster U.S. efforts to bring
Israel and its Arab neighbors into a more cooperative security environment: and facilitate regional economic
development which would serve U.S. economic interests.
Prime Minister Rabin is working very closely with President Clinton and Secretar>' of State Christopher
to capitalize on the remarkable opportunity presented by the Madrid peace process. President Clinton has
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appropriately praised Prime Minister Rabin for "breathing new life into the negotiations" immediately upon
assuming leadership in Israel last July. Secretary Christopher said after meeting with Mr. Rabin in Jerusalem in
February that he knows the Israeli Government is doing "all it can" to achieve the just and lasting peace with
security which, he said, "the people of Israel yearn for."
As I said in my introduction. Prime Minister Rabin has taken a number of far-reaching steps to promote
the cause of peace and regional stability. In its negotiations with the Palestinians on the West Bank and Gaza,
the Rabin Government has not ruled out any option regarding the permanent status of the territories - not even
an independent Palestinian state -- and has put forth an interim self-government proposal that would give the
Palestinians in the territories more control over their affairs than they had even under Jordanian administration
between 1949 and 1967. The Rabin Government's self-government proposal would transfer control to the
Palestinians in the territories over vinually every political, economic and social decision affecting their lives during
the course of the five-year transitional period.
In line with the Camp David accords, the Rabin Government's proposal calls for Palestinian elections
for a Palestinian Executive Council through which the Palestinians would run their affairs. The Israeli proposal
envisions "&ee, general and direct ela:tions." The Council's members would be accountable to the Palestinian
electorate, and would have control over the full range of day-to-day policy issues falling into 15 categories:
1) Administration of Justice
2) Administration of Personnel Matters
3) Agriculture
4) Ecology
5) Education and Culture
6) Finance, Budget and Taxation
7) Health
8) Industry and Commerce
9)
Labor
10)
Local Police
11)
Transportation & Communications
12)
Municipal Affairs
13)
Religious Affairs
14)
Social Welfare
15)
Tourism
In addition. Prime Minister Rabin has gone beyond past Israeli governments by proposing Palestinian or
joint Israeli-Palestinian administration of over 90% of the West Bank and Gaza during the interim period. This
would give the Palestinians effective veto power over Jewish setUement activity in almost all of the West Bank
and Gaza.
During the latest round of the peace talks in late April and early May. the Rabin Government built on
its self-government offer. Most of the new proposals were included in an eight-article, two-and-a-half-page draft
declaration of principles handed to the Palestinian delegation. Below is a summary of the proposals as reported
in the Israeli press and essentially confirmed by an official in Washington.
♦ Primary Legislation: Israel has withdrawn its objection to Palestinian primary legislation -- the
adoption by the Palestinian self-governing authority of laws defining its own basic powers - during the interim
period. In the past. Israel agreed only to Palestinian secondary legislation -- the adoption of rules and regulations
or other legislation not touching upon the authority's powers.
The Israeli proposal calls for a joint committee of Israeli and Palestinian jurists to verify that any law
legislated by the self-governing council is not in violation of the general agreement between the two panics on
the nature of the Palestinian self-government. This procedure is termed mutual connrmation, and is meant to
make sure that the self-governing council does not, for example, pass a law declaring Palestinian sovereignty
over the territories during the interim period.
166
« "Single Territorial Unit": The Israelis now agree that the teiriiorics should be treated during the
interim period as a "single territorial unit,' and have clarified that granting a special status to the settlements
during that period does ikn mean that Israel is tagging in advance certain areas (such as "security settlements")
as necessarily belonging pennanently to Israel.
By accepting the term "single territorial unit" Israel seemed to wish to reassure the Palestinians that
Israeli proposals apportioning Israeli-, Palestinian-, and join dy -administered lands during the interim period was
not meant to indicate a permanent division of the terriioies between Israel and the Palestinians.
♦ Interim-Permanent Linkage: Whereas in the past Israel consistendy sought to de-link the interim
agreement bom the permanent settlement, it has now accepted a degree of such linkage. According to the new
Israeli proposal, the two stages are linked in the framework of a single comprehensive process, which will lead
to a permanent settlement based on Resolution 242. The Israeli proposal adds that "the fust stage of the process
is liiUced to the second stage, while it is understood that the options for a permanent settlement remain open."
♦ Internationally-Observed Palestinian Electrans: Unlike Israel's previous rejection of international
observation of Palestinian elections to the self-governing authority, the Israelis are now proposing that the elections
be held under mutually-agreed international observation - as long as that observation does not include the UN.
Prime Minister Rabin has complemented his self-government proposal with a series of confidence-
building measures hailed by President Clinton and Secretary of Slate Christopher, including:
♦ A decision to cancel deportation orders issued against 30 Palestinians from the territories.
♦ Tripling expenditures in the territories, to help the Palestinian economy and create jobs.
♦ Agreement to the inclusion of Faisal Husseini, a Jerusalem resident, in the Israeli-Palestinian
negotiations.
♦ Agreement to allow 24 Palestinians to go to Jordan to train for a proposed Palestinian police force
in the territories.
♦ Agreement to a Palestinian demand for joint monitoring of human rights in the territories.
♦ At its first meeting after the June elections last year. Rabin's new Cabinet ordered a halt to new
housing contracts and announced a constniction freeze in the territories. Over 7,000 housing units contracts were
canceled, and incentives, tax breaks, subsidies, and discounts have been reduced or removed entirely. Also. Rabin
has ended government subsidies for the purchase of Arab homes by Jewish groups in east Jerusalem.
♦ Last August, Mr. Rabin announced four security-related measures: the pardon of 800 convicted Arab
prisoners who had served out part of their sentence: lowering from 60 to 50 the age of Arabs in the lenitones
eligible for exemptions from entry permits into Israel; reopening of streets and alleys in the territones that had
been sealed in the past to curb riots; and reopening of homes that had been sealed over five years previously.
Just last month Israel released another 280 Palestinian prisoners.
♦ The Israeli government has made historic changes in the treatment of Israel's Arab population. Last
September. Rabin abolished the post of Adviser to the Prime Minister on Arab Affairs, choosing so deal directly
with Israeli Arabs and work for full equality, thus making the liaison position anachronistic. Rabin has taken
steps to incorporate Israeli Arabs into the Israeli government, and has named two Israeli Arabs Cabinet Deputy
Ministers. Labor's Nawaf Massallia and Meretz's Walid Tzadik as deputy ministers of health and agricultures,
respectively. Foreign Minister Shimon Peres has promised to appoint an Israeli Arab as ambassador to a foreign
capital in the near future.
♦ Last October, Israel withdrew its previous objection to the participation of Palestinians from outside
the territories in discussions on regional issues, signaling a more flexible approach.
167
♦ In January of this year, the Israeli government voted to decriminalize private contacts with the PLO.
which is still labeled a "terrorist organization" under Israeli law.
♦ Israeli officials indicated in February their desire to aid Secretary Christopher's efforts to resume
Mideast peace talks, by announcing their willingness to speed review of Palestinian banishment cases. In addition,
Israel offered public assurances that banishing Palestinians is not government policy. Subsequently. Israel
announced its willingness to return immediately 25 deportees.
♦ The Israeli security establishment in the territories prepared new proposals in advance of Secretary
Christopher's visit, including plans to abolish most of the taxes on Palestinians crossing into Jordan via the
Allenby bridge.
♦ Also in February, Israeli officials announced their willingness to cooperate with the newly-forming
Palestinian councils on health, industry, commerce, education, and housing. Civil Administration officials have
already met with council members to work on transferring responsibility to the Palestinian councils even before
the transition phase.
♦ Israel has encouraged the establishment of Palestinian industries in the territories. During the past
year, over 170 new factories have opened (90 in Gaza and 83 in the West Bank). More Arab financial
instimuons and the first non-Israeli insurance firms are being authorized, aided by three-year tax breaks. In
December, Rabin met with European leaders to discuss ways in which the European Community could help
stimulate the economy of the territories.
♦ Israel's Civil Administration has encouraged the establishment of new banks in the territories. In
September, two Cairo-Amman bank branches opened in Jericho and Qalqilyah, and there are plans to open seven
branches of the Jordan Bank.
Prime Minister Rabin has been forthcoming toward the Palestinians at the negotiating table and on the
ground despite continued Palestinian violence against Israel, matcKwJ by much of the familiar hateful rhetoric from
Palestinian extremists. Last year, calls from Palestinian terrorist leaders to escalate the intifada were met by 3,629
recorded Palestinian terrorist attacks on Israelis, as well as an increase in Palestinian militants" use of firearms
against Israeli civilians and soldiers. 344 shooting incidents against Israelis were recorded in the territories last
year, compared with 262 in 1991 and 158 in 1990.
Some of the most deadly Palestinian attacks in recent months have been carried out by Islamic extremist
organizations such as Hamas and Islamic Jihad, which have mounted a relentiess campaign of intimidation and
bloodshed against the peace talks with the dual objective of killing Israelis and others and extinguishing the peace
process. It was a series of terrorist attacks by Hamas late last year ~ culminating in die kidnapping and murder
of Israeli border policeman Nissim Toledano in December - that led the Rabin Government to temporanly banish
over 400 Hamas activists to Lebanon.
Hamas is an militant offshoot of the Palestinian Moslem Brotherhood. It has evolved from its origins
as a social welfare organization into one of the deadliest foes of peace in the Middle East. Violently opposed
to any peace negotiation or peaceful setUement with Israel, Hamas has called for Israel's total destruction and
its replacement by an Islamic Palestinian state. The organization's funding comes primarily from Iran and until
recently from Saudi citizens as well, with Iran providing Hamas with $15 million a year and playing an increasing
role in sponsoring, arming, and training the organization.
The levels of violence Israel faces are staggering. In March alone, 15 Israelis were murdered and two-
dozen injured in a savage wave of Palestinian terrorism. The bniial attacks included a slabbing spree by a knife-
wielding terrorist against students in a Jerusalem schoolyard..
During the previous year, Hamas carried out over 30 terrorist attacks against Israelis, leaving eleven
people dead. Recognizing Hamas' record of terror, the State Department for the first time officially labeled
Hamas a terrorist group in its annual terrorism report issued in April. The Islamic Jihad also has an extensive
record of terrorist attacks against Israeli soldiers and botii Israeli and Palestinian civilians. The icrrorisls'
intentions are clear. An Islamic Jihad leaflet issued December 18, 1991, called for "Death to the Zionist
invaders... We'll continue our jihad... and will make our land quiver under the usurper occupiers feet until he
168
is defeated. Our holy Palestinian land will be a battleground to fight him until he leaves unconditionally." A
Hamas leaflet issued Febniaiy 2 called on its supponers to 'continue to wage a merciless war until the total
liberation of all of the land of Palestine." Hamas declared its opposition to the notion of a Mideast peace
conference and called for 'a serious and effective move at all levels to foil the capitulation conference," and
stated: "All the Arab and Islamic peoples and movements must proceed immediately to perform their desired
and expected role in the decisive fateful battle against Jews, the enemies of God and humanity."
Hamas and Islamic Jihad are not the only "rejectionist" Palestinian OTganizations. Ten major terrorist
groups met in Damascus last September to plan to disrupt the ongoing peace negotiations. In addition to Hamas
and Islamic Jihad, other membos included the PLO's Democratic Front for the Liberation of Palestine (DFLP),
Popular Front for the Liberation of Palestine (PFLP), Ahmad Jifaril's group I¥LP-General Command, the Abu
Abbas group Palestine Liberation Front (PLF), and other PLO constituents.
In December, the ten rejectionist groups issued a political statement in response to the Hamas banishment,
stating that while "highly valuing anyone who has hurled a stone, used a knife, fired a bullet at the enemy,"
Palestinians are urged to "continue our snuggle until the liberation of Palestine, the whole of Palestine, from the
filth of the Zionist occupation" and to "escalate and entrench the blessed intifada so that it will spread to every
city, village, camp, and suburb in Palestine."
Prime Minister Rabin, suppoited by left-wing members of his Government, explained after the Hamas
banishment that his Government would confront terror as aggressively as it would pursue peace. 'These are not
easy days for Israel," the Prime Minister told the Israeli Knesset after the expulsion. "But we are strong enough
to fight on two fronts: the battle for peace and the war against teiror." Israeli leaders made the point that in fact,
Israeli victories against tenor would aid in the drive for peace.
Prime Minister Rabin expressed hope, for example, that the Hamas banishment would strengthen the hand
of Palestinian peace negotiators in the Palestinian world. The peace delegates are accused by Hamas leaders and
other radical I^estinians in the territories of selling out and. consequently, are in almost constant danger at home.
The continued high levels of intra-Palestinian violence in the territories illustrate the explosiveness of the
Palestinian street. According to the State Department, the number of Palestinians murdered by other Palestinians
in the territories increased from 13 in 1988 to 128 in 1989. to 16S in 1990, 140 in 1991, and 182 in 1992 -
since 1990 more than the number of Palestinians killed in clashes with Israeli security forces. The total number
is today well over 680 killed since the beginning of the intifada. The claim that all those murdered are
"collaborators" with Israel and therefore deserve to die is baseless. Not only is such "collaboration" insufficient
grounds for brutal assassination without trial, but many murders were no more than private acts of settling
personal accounts. Indeed, last year Palestinian leaders for the fust time began publicly denouncing the killings.
The chief Palestinian negotiator, Haidar Abdel-Shafi. said the murders were crimes for which "we don't see any
justification." Tragically, within days after Abdel-Shafi's statement the PFLP murdered a fellow Palestinian in
Gaza. In March alone, IS Palestinians were slain by fellow Palestinians.
Despite Prime Minister Rabin's aggressive pro-peace and anti-teiror approach toward the Palestinians.
the Palestinian delegation may be too fractious at this point to make the tough decisions required for a substantive
agreement Prime Minister Rabin and the Clinton Administration have therefore considered the idea that Israel
should focus on striking a deal with Syria first Eager for an agreement with Syria by the end of 1993. Prime
Minister Rabin has taken the bold step of publicly commiaing Israel to a withdrawal on the Golan in return for
peace with Syria. Fuitheimore, senior Israeli officials have hinted that Rabin is considering a major Golan
withdrawal if Syria offers a full peace.
Mr. Rabin has offered a number of confidence-building measures to Damascus. In September, for
example, as a show of good will toward Syria. Israel allowed a group of 18S Druze clerics from the Golan to
travel into Syria for a pilgrimage, the largest crossing by Diuze since 1967. In the past, both Syria and Israel
have confmed crossings to very small groups.
Pleased with some Syrian statements and actions that indicate Hafez Assad might now be serious about
negotiating peace. Prime Minister Rabin has been restrained in responding to Syrian moves that are reminders
169
Damascus is sdll ai this point in a stale of war with Israel. Though the Syrians have spoken publicly and
privately on a number of occasions about their readiness for peace, they have yet to clearly and publicly say that
in exchange for Israeli withdrawal on the Golan they are ready for a full, normal peace with Israel that is not
dependent on Israel's relations with her other Arab neighbors. Meanwhile Syria continues its military buildup;
sponsors several of the Palestinian terrorist groups opposed to the peace talks; refused last year to receive U.S.
counienerrorism delegations; continues its occupation of Lebanon despite the Taif accords; refuses to provide
information about Israeli MIA's; and allows Hezbollah terrorists, sponsored by Syrian ally Iran, a safe haven in
Lebanon to launch att^ks against Israel. Furthermore. Syria has held Lebanon back from accepting an Israeli
proposal for joint military consultations on the situation in southern Lebanon.
Nonetheless, there is some hope for progress not only on the Israeli-Syrian track but also in the Israeli-
Jordanian talks. Last fall, the Rabin Government's acknowledgment of Jordanian territorial claims led to a major
breakthrough when the two delegations agreed in a detailed draft agenda that the negotiations "will ultimately.
. .culminate in a peace treaty." While thus becoming the first Arab country since Egypt to accept - albeit
tentatively - a peace treaty with Israel as the formally stated goal of negotiations, Jordan has yet to ratify the
agreement It appears Palestinian pressure has played a large role in Amman's reluctance to flnalize the draft
before Israeli-Palestinian agreement on interim self-govenmient arrangements. Given Syrian influence over
Lebanon, an Israeli-Syrian agreement is expected to include agreement on an Israeli-Lebanese pact providing for
withdrawal of both Syrian and Israeli forces from Lebanon.
While Israel's Arab neighbors rule out formal regional cooperation agreements with Israel in the
multilateral negotiations until the Jewish state cedes additional territory, the Rabin Government has to its credit
developed practical ideas for Middle East economic and political cooperation that could help transform the region
and contribute to American interests in democracy and tt3de. Israeli Foreign Minister Peres is leading the Jewish
state's efforts to develop this framework for cooperation.
In February, Israeli Ambassador to the United Nations Gad Yaacobi reported that Israel estimates peace
between Israel and her Arab neighbors could free up over $30 billion in defense spending annually throughout
the region for economic development, and will pave the way for at least six regional cooperation initiatives on
the basis of agreements reached in the multilateral negotiations:
♦ the establishment of a Middle Eastern Common Market
♦ the creation of joint ventures, based upon integrated knowledge, capital, and mineral resources from
both inside and outside the Middle East
plants
♦ the establishment of an integrated network of infrastructure for ports, airports, railways, and energy
♦ the opening of borders for tourism
♦ the promotion of cooperation in the fields of health, professional training, knowledge, technology, and
agriculture
♦ the removal of all sorts of boycotts, aiding U.S. companies eager to do business in the Middle East
One particularly important policy area of the multilateral negotiations is arms control and regional
security, the third session of which was held last month here in Washington. The Israeli Government has been
forward-leaning on arms control. As early as 1987, it proposed to the United Nations negoiiaiions to exclude
unconventional weapons from the Middle East, including a nuclear-free zone. In Etecember 1990, Israel's then-
Prime Minister Shamir proposed that the major arms producers limit the volume of conventional weapons they
deliver to the Middle East -- including Israel - so that the" region not become the arena for another cycle of the
arms race. Key members of Congress have proposed ways to encourage such a limitation of sales of conventional
weapons to the Middle East by the major arms suppliers. Israel was a founding signatory of the Chemical
Weapons Convention in Paris this January, where Foreign Minister Shimon Peres proposed eventual Arab-Israeli
mutual inspections to verify future arms control agreements. Sadly, this landmark agreement was boyconed by
most of the Arab world. Israel also adheres to the Missile Technology Control Regime.
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President Clinton has made Middle East anns control a central foreign policy priority for his
Administration. In a November 1992 interview the President said. *I will act more vigorously to stop the spread
of dangerous missiles in the Mideast, and insist on a strong international effort to keep weapons of mass
destruction out of the hands of nations like Iran. Iraq, Syria, and Libya. Our policy must include not only an
effort to reduce this spread, but a reaffirmation of our strong commitment to maintaining Israel's qualitative
military edge over its potential adversaries."
It is the objective of this organization to try to end the unrestrained arms race in the Middle East Two
years ago. it was hoped that the new conditions created by Desert Storm would make possible a drastic cut in
arms sales to the Middle East Sadly, the reverse has occutied, as Syria. Iran, and Saudi Arabia continue large-
scale arms purchases. The United States continues to set a poor example by leading the worid in arms sales to
the region.
We hope that the 'Permanent-S' arms control discussions among suppliers that began in 1991, but have
since faltered, can be quickly restarted and peitiaps expanded, as they hold promise fcv establishing verifiable arms
sales reductions in the Middle East
Regional arms control proposals nevertheless entail signlflcant risks for Israel because, historically, Israel
has had not only fewer resources but far fewer suppliers than the Arabs and is therefore more vulnerable in the
event that the Arabs evade an agreement. While an arms supplier restraint regime will slow the influx of new
weapons into the Middle East, arms control negotiations among the recipient states are even more crucial. It is
hoped that the regional multilateral talks may serve to eventually establish curbs on the regional arms race and
confidence-building measures among the parties involved. Such CBM's might include an agreement to provide
advance notification of military exercises and troop movements in locations that are near the frontiers. Such
measures have proved successful in Europe, and might play a useful role in the Middle East without sacrificing
any of the essential interests of each state.
Prime Minister Rabin's work with the United States to promote progress in the Madrid peace process
has its costs. Some of the landmark steps the Prime Minister has taken - his commitment to cede lo Syria
territory on the Golan, for example ~ clearly email a national security risk, and a political risk as well. The
Prime Minister has come under strong criticism from various groups in Israel. itKluding leaders of the opposition
Likud party, demonstrators, and journalists. A recent poll conducted by Tel Aviv University's Jaffee Instituie
for Strategic Studies found that six out of ten Israelis believe the Rabin Government's peace-process policy is
too forthcoming. The same survey found that only 6% of Israelis suppon a full Israeli withdrawal from the
Golan. Prime Minister Rabin's Labor Party has lost a substantial amount of support to Benjamin Netanyahu's
Likud Party in Israeli public opinion polls. Given the narrow election margin by which Prime Minister Rabin's
coalition took office, these poll results reflect the boldness of the Prime Minister's moves to promote the peace
process and demonstrate real leadership.
Strategic Partnership
While threats to America's interests have diminished in other parts of the world following the demise
of the Soviet Union and the end of the Cold War, the Middle East remains a high-threat area according to the
Pentagon's most recent Defense Planning Guidance. Although the Cold War is over, rogue states like Iraq. Iran,
Libya, and Syria are now so heavily armed and are rapidly acquiring weapons of mass destruction that they pose
a greater threat today than they did a decade ago. Thus, Saddam Hussein proved to be a greater threat in 1990.
without Soviet backing, then he was in 1980 when he had Soviet patronage. The rapid deterioration in the former
Yugoslavia and the possibility of U.S. involvement should the conflict widen also has implications for Amencan
regional interests and military forces.
As the military potential of radical Middle East states grows at a time when American forces based
overseas are reduced due to cuts in U.S. armed forces, our ability to deal effectively with regional crises will
continue to diminish. Reliance on our most reliable and capable ally in the region, Israel, will therefore become
increasingly important. Israel has the most competent armed forces and the best-located facilities lor a "swing
force ' that might have to operate in the eastern Mediterranean, the Arabian Peninsula, North Africa, southern
Europe, or the Suez Canal.
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In an era of scarce resources, it makes sense to deploy and preposition American assets at such a key
juncture between potential theaters of operatioo. The circumstances which allowed a six-month buildup of forces
in Saudi Arabia during Desert Shield may not be repeated in a fiiture Gulf crisis. As the commander of the U.S.
Central Command indicated last year. 'We know it will be very unlikely that we could replicate Operations Desert
Storm and Desert Shield in the future., [and we] learned during the last conflict that prepositioning is key to our
ability to respond." The Saudis have continued to reject prepositioning of U.S. hardware on their soil, while
Israel has welcomed it. Clearly, Israel is the logical choice to be a key U.S. ally in the Middle East
President Clinton appears to concur with this view. He argued during his campaign last year that Israel
is America's most dependable ally in the Middle EasL And Secretary of State Christopher declared at his
confirmation hearing in January in discussing the Middle East, "Our democracy-centered policy underscores our
special relationship with Israel, the legkn's only democracy, with whom we are committed to maintain a strong
and vibrant strategic reladonship."
The Regional T\in»t Has Not Diminished:
♦ An "arc of crisis* extends from Mococco to Pakistan, and includes all of the world's still-existing
regimes that have committed acts of violence against U.S. citizens in recent years: Libya, Syria. Iraq, and Iran.
All these predator states - even post-Desen Stonn Iraq - continue to threaten U.S. interests: other nations in the
region may follow suit.
♦ The predator states have amassed vast quantities of powerfiil conventional and unconventional
weapons, sufficient to pose a greater threat to U.S. interests today vnthout Soviet suppon than they did in earlier
years when they enjoyed Soviet backing but lacked the capability to pose an independent threaL Several possess
ballistic missiles, chemical and biological weapons, and are frantically pursuing nuclear weapons capabilities.
♦ Iran has publicly announced its intention to acquire nuclear weapons. Vice President Mohadjerani
staled on Nov. 16, 1991, "Yes, we are acting to attain a nuclear bomb... The Moslems must get ready to attain
nuclear power which will make them strong."
♦ Neariy three-quarters of the world's proven oil reserves are located within the "arc of crisis." The
rapidly growing U.S. dependence on Arab oil imports (currently $60 billion) is already responsible for a far larger
share of the U.S. trade deficit than is the trade imbalance with Japan (S40 billion). Should more Islamic states
be radicalized at a time of growing Western dep»endence on their petroleum, the "oil weapon" could be unsheathed
once again with a potentially devastating impact on the U.S. economy.
♦ Although many Islamic regimes arc currently moderate and friendly to the United States, no Islamic
nation is immune to radicalization. Sudan has already joined Iran as a radical Islamic state harboring terrorist
groups, and Algeria's march toward radical Islam, temporarily halted by last-minute army intervention, is by no
means over. All the Arab countries are threatened by powerful radical Islamic forces. Fearing these forces,
Egyptian President Hosni Mubarak has imposed the death penalty on radical militants.
♦ Radical Islam harbors implacable hostility toward the West and toward democracy and other basic
Western values. It profoundly resents the Western "infidels'" military and material success, which it views as
contrary to Islam's teachings. It regards the West as the underlying cause of the islamic world's weakness and
misfortunes, and as the main obstacle to Islamic reunification and return to medieval Islam's "Golden Age." As
the West's undisputed military and political leader, the United States is regarded by Islamic radicals as the "Great
Satan," their most hateful and dangerous enemy on earth.
♦ Militant Arab nationalism, embodied by Qaddafi's Libya and Saddam Hussein's Iraq, shares radical
Islam's hostility toward the U.S.-dominated West It regards Western "imperialism" as the root cause of the
breakup of the Arab world, and as the chief impediment lo Arab power and reunification. Although the appeal
of Arab nationalism has waned, its anti-Western message remains a potent force throughout the Arab world and
can be mobilized even in currendy pro-Western Arab countries.
♦ Iran and Syria's present posture of accommodating the West is the result of economic need coupled
with fear of the U.S. military might as displayed in Desert Storm. Should circumstances change, ihey could
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quickly revert to the pursuit of economic advantage through intimidation and aggression, much as Saddam Hussein
surprised the West by dropping his facade of moderation and invading Kuwait in August 1990.
Israel Can Help Contain the New Strategic Threat:
As U.S. defense budgets and armed forces continue to shrink, making use of our allies' military
capabilities becomes an increasingly important element of our national defense. As a solid Western democracy
located in the midst of the unstable and dangerous "arc of crisis," Israel is ideally positioned to help the U.S. face
(he new strategic threat:
♦ By taking out Iraq's nuclear reactor, rescuing the Western hostages in Entebbe, and destroying the
PLO headquarters in Tunis, Israel has demonstrated that it can act effectively to advance Israeli — and Western -
- interests. It serves U.S. strategic interests further to enhance this capability through military aid and strategic
cooperation programs with Israel.
♦ Israel is the only nation in the region permanently immune to Arab nationalist or radical Islamic
takeover.
♦ As a Western democracy steeped in Western values, Israel is not only friendly to the West but an
integral part of it. U.S. strategic agreements with authoritarian Arab regimes often do not have popular support
in Arab countries, and are therefore effective only as long as a particular ruling elite remains in power and
considers the U.S. to serve its interests. In contrast, the four-decade-old U.S.-lsrael alliance is supported by the
people of Israel and all its major political parties. Such depth of support is a prerequisite for a reliable and
durable alliance, and is the reason (hat alliances with democracies are more deeply rooted than alliances with
autocracies and tyrannies.
♦ Building alliances with conservative Arab regimes is a temporary and uncertain solution. The
staunchly pro-Westem monarchies of Iraq, Libya, and Iran were all toppled (in 1958, 1969, and 1979 respectively)
and replaced by virulently anti-Western regimes. All the surviving pro-Westem Arab governments, as well as
Turkey and Pakistan, are vulnerable to radical Islamic pressures, and most could be overthrown: the U.S. can only
help these fragile governments deal with external aggression, not with internal threats.
« Israel has been a primary target of Arab military action. It has therefore traditionally focused its
renowned intelligence apparatus on the radical states of the Middle East, toward which U.S. intelligence has only
recently begun to direct its attention. Israel's experience and knowledge can fiU gaps left by our high-tech
intelligence-gathering systems. \
♦ Israel's knowledge of Islamic cultures, societies, language and behavior will continue to beneFit the
U.S. in dealing with the "arc of crisis." This was proven in 1978, when Israeli intelligence provided the CIA
Willi assessments predicting upheaval in Iran as well as just before the Gulf War, when the U.S. came to Israel
for intelligence on Iraq. Daily telephone conversations between Secretary of Defense Cheney and Defense
Minister Arens during Desert Storm were a well-known Washington secret
♦ Israel is a leader in developing cost-effective intelligence gathering technology. Israeli technology
in intelligence gathering systems, for which Israel assumed the development costs, has been shared with several
U.S. companies, including Boeing, Sylvania, RCA, Beechcraft, and 21st Century Robotics.
♦ Intelligence cooperation with Israel played an important role during the Gulf War. In addition to raw
Israeli intelligence on Iraq provided to the United Slates, Israeli intelligence-gathering technology was also used.
Israeli-developed remote controlled. Unmanned Aerial Vehicles (UAVs) which have the ability to gather "real war-
time" information were used extensively by U.S. forces in the Gulf War. This not only helped the Allied forces
in gathering intelligence, but also helpeid to save the lives of American air crews who would have otherwise had
to expose themselves to risks to do the same job as the UAVs.
♦ U.S. -Israeli cooperation against terrorism can help reduce the mumal threat. In April, the United
States, Egypt, and Israel initiated cooperation in fighting Islamic extremism through private consultations and
visits.
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♦ Israel's successful action against Iraq's nuclear reactor has been enonnously beneficial to the United
States. President Ointon said in his Middle East Insight magazine interview last November, "If Israel had not
conducted a surgical strike on Iraq's nuclear reactor, our forces might well have confronted a Saddam with
nuclear weapons ten years later.' U.S.-Israeli cooperation on this issue is critical for halting the dangerous
proliferation of nuclear weapons to tbe region's radical regimes.
♦ The quality of Israeli facilities and military manpower is unsurpassed fw propositioning U.S. materiel.
maintenaiKe assistance, realistic training, and joint exercises with U.S. armed forces. These programs, whose
further expansion has recently been announced, are vital for a direct U.S. role if required in any future conflict.
Given the uiKertain prospects of their vulnerable regimes. Islamic countries can only serve as short-term
substitutes.
♦ The U.S. could, in the fiitare. find itself in conflict with Iraq, Iran, or Libya. In many of these
scenarios, military coordination with Israel, possibly even including the use of facilities or equipment in Israel,
could conuibute to the success of the U.S. armed forces, while reducing U.S. casualties and other costs of war.
♦ Israel has the most powerfiil air force and navy in its theater. Its own military technology and
qualitative advances can contribute imponanily to American capabilities in this region and beyond.
♦ Israel and the U.S. are the worid leaders in developing defenses against new weapons systems, such
as ballistic missiles. Current joint U.S.-Israeli efforts in this area can enhance deterrent capabilities and persuade
countries in the region to cease relying on military force in their foreign relations.
♦ Israel, which has been actively seeking contact with the former Soviet Islamic republics, and has
already concluded technological cooperation agreements with Kazakhstan and Azerbayjan. can play an important
role in helping the United States and other interested parties counter Iran's efforts to draw those republics into
its orbit
Israel offers five special advantages to help meet U.S. needs:
First, while the United States enjoys overall technological superiority, Israeli firms have specialized in
gap-nUing innovations that often begin where operation experience indicates that American designs leave off.
Second. Israel has developed, of necessity, a quick reaction capability to meet new technological threats
on short lead-times, and Israeli innovations are often available off-the-shelf years before corresponding products
from other producers come on line.
Third, Israeli products are heavily influenced by actual combat experience, and tend to be more realistic
and practical than designs from other producers who are more often guided by studies and analyses than by
combat experience. Indeed, the very scientists and engineers who produce Israeli weapons often have had recent
battlefield experience.
Fourth. Israeli innovations are designed to counter both Soviet and Western weapon systems, while those
of other Western {x^oducers generally are not designed to meet the threats from Western systems that are
increasingly faced by the U.S. armed forces outside Europe.
Finally, Israeli maintenaiKe and repair facilities are located closer to the theaters where U.S. forces are
deployed than many of the facilities on which we now rely. Their increased use could help improve U.S.
readiness rates and reduce costs.
Israeli military technologies were used during tbe Gulf War:
Conffary to widespread notions. Israel played a significant role in helping our troops conduct the war
against Saddam Hussein in the Gulf.
♦ Israel recommended software changes which unproved the effectiveness of the Patriot missile system.
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♦ U.S. forces had available Israelinjeveloped HAVE NAP air-to-ground missiles, which could be
launched from B-S2 bombers.
♦ Mobile towed-assault bridges provided by Israel Military Industries were deployed by the U.S. Army
and Marine Corps.
♦ The Clear Lane Marking System (CLAMS), developed by IMI, was used by USMC tank crews to
mark open paths in the Iraqi mine belt, saving the lives of many troops.
♦ Israeli Aircraft Industries developed confonnal fuel tanks for the F- IS fighter that were used widely
in long-range missions.
♦ General Dynamics has implemented a variety of Israeli modifications to the F-16 aircraft fleet,
including structural enhancements, software changes, landing gear, radio improvements and avionic modifications.
♦ An Israeli-produced helicopter night-targeting system, the CLNAS, was used to increase the U.S.
Cobra attack helicopter's night-fighting capabilities.
♦ Israel produced significant components of the highly successful Tomahawk cruise missile.
♦ Night vision goggles used by U.S. forces were supplied by Israel
Continuing Military Technology Transfers to the VS^
♦ The U.S. Armed Forces continue to widely test and procure Israeli defense systems. As the
Pentagon's R&D budget continues to shrink in coming years, buying proven high-tech Israeli systems "off the
shelf' is likely to become increasingly attractive. Indeed, a recent Pentagon study argued thai a strong and stable
research and development posture is vital as cuts are made in the U.S. defense budget "Combining resources
with those of our sillies through effective cooperation will not only enhance our ability to achieve technological
advancements, but should do so at a reduced cost," the snidy said. It identified 21 technologies critical to the
U.S. defense base, and identified Israel as having specific capabilities in 13 of them.
Procurement contracts with Israeli defense technology firms can save the United Slates millions of dollars
in development costs, with some projects emerging as multi-billion dollar programs for U.S. and Israeli industry.
While much of the military technological cooperation between the U.S. and Israel is classified, many
areas of cooperation on crucial future defense systems are public.
♦ The United States and Israel are working together to develop the Arrow, the world's most advanced
Anti-Tactical Ballistic Missile (ATBM) system, to shoot down ballistic missiles (a highly advanced aliemative
to the Patriot missile). The two allies have embarked on the second phase of the Arrow program. A completely
successful test launch of the missile was conducted in September of 1992, and the first interception demonstration
was perfonned this February 28. The acting director of the Strategic Defense Initiative Organization, now
BMDO, entliusiastically endorsed the Arrow program in recent testimony, outUning the areas in which it is
assisting U.S. ballistic missile defense projects.
♦ The United Stales and Israel have agreed to conduct a joint study of "boost-phase intercept"
technology. This concept envisions the early detection and destruction of hostile ballistic missiles short]> after
launch, when they are most vuberable and still over enemy territory.
♦ The Defense Department recenUy announced plans to procure reconnaissance drones produced by Israel
Aircraft Industries for use by the Army and U.S. Marine Corps. lAI's reconnaissance drones proved themselves
in the Gulf war and are considered a vital component of future defense systems. lAI is teamed with a U.S.
defense contractor, TRW's Avionics and Surveillance Group, which will lest the drones. The program, worth
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several hundred million doUan. wiO create some ISO jobs in Arizona. lAI and TRW are worldng together to
develop the most advanced version of reconnaissance drones in the workL
♦ Israel's HAVE NAP missile Gong range, highly accurate attack weapon) is now being used by the
U.S. Air Force to enhance the United States' aging fleet of B-S2 bombers for conventional missions.
Other areas of technological military cooperation include: ship-to-ship missiles, electronic naval decoys,
and submarine technology.
Israel's Value as a Port of Call and Training Ground for VS. Forces:
Utilizing local poa and training facilities of our capable allies — such as Israel - becomes essential as
the U.S. defense budget continues to shrink, the number of U.S. naval vessels declines, and regional force
projection requirements increase.
Edward Gnehm. then Deputy Assistant Secretary of Defense, stated in March 1989 before a Congressional
conuniaee that the United States and Israel now cooperate "on the practical hands-on. day to day waking level..."
He later added that the biannual U.S.-Israeli Joint Political Military Group (JPMG) meetings have "led to deeper
personal relations" between U.S. and Israeli high ranking officials.
Some 300 U.S. DoD personnel a month visit laael.
Israel provides facilities for the storage and maintenance of U.S. military materiel for American or Israeli
use in a crisis situation. Following an agreement on prepositioning reached in September of last year, S300
million worth of dual-use military supplies will be prepositioned in Israel.
Israel's Capability as a Maintenance and Repair Facility for U.S. Navy Vessels and Weapons
Systems:
Because Israel and the United States use common weapon systems, and because Israel's repair facilities
have a proven record of competitive performance, Israel is well suited to repair U.S. systems, either regularly or
on an emergency basis.
♦ U.S. Air Force F-15 fighters based in Europe are now routinely serviced and repaired in Israel because
of the cost savings and outstanding facilities there. Israel Aircraft Industries also signed an agreement in
December with USAF and other NATO air forces for the upgrading and modernization of F-16s based in Europe.
U.S. Navy ship surveyor Larry Feltrup wrote a letter in 1987 to the General Manager of Israel's Shipyard
to say it "excelled in performance over any ship repair facility I have contracted in the Mediterranean area for
the past four years."
♦ Israel's Haifa harbor continues to be the favorite port of call for the U.S. Navy's Sixth Fleet. In
addition to the superior repairs, American sailors are warmly welcomed and do not encounter the land of hostility
with which they are frequently received in other countries. A Haifa port improvement program is now complete,
and the U.S. Navy has just Hnished preparing a study evaluating the cost of upgrading the pon further in order
to possibly home-port an aircraft carrier.
Israel as a Training Ground for VJS. Forces:
Israel is the only U.S. ally in the Middle East that can regularly provide target ranges and training centers
as well as expertise in fighting in exveme heat and desert conditions. The U.S. armed forces and the IDF have
conducted joint training maneuvers for many years.
Joint military maneuvers were conducted by the IDF and U.S. Army in 1992, and the U.S. Marine Corps
made extensive use of Israeli facilities during two exercises in January. The Israeli Navy participates in joint
naval exercises with the Sixth Reet designed to strengthen U.S. anti-submarine warfare capabilities in the
Mediterranean. Israel has staged joint training with American special anti-terrorist forces. The U.S. Marine Corps
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has conducted extensive exercises in Israel in recent years. While intended primarily to protect the Jewish state
from air attack and suppon the ground forces, the IDF could in particular circumstances join a coalition with the
U.S. armed forces against a mutual threat
American air crews have difficulty getting weapons training in Europe, because of the poor weather and
range restrictions, so they are better able to deliver weapons and practice realistic combat missions on Israeli
ranges where the climate lends itself to meeting U.S. training requirements.
♦ Israel proved to be a useful training ground for operations used in Desen Storm. For example. U.S.
Army and Marine Corps helicopters and fighters trained ai the Negev range in Israel during Desert Shield.
Helicopter and heavy mechanized training could also be conducted using IDF facilities.
♦ Israel is also an important testing ground for U.S. equipment in Middle East conditions. Israel has
provided the United Stales with improvements on air intake valves for helicopters. This improvement will help
prevent such problems as those that led to the failed U.S. rescue attempt in Iran in 1979.
♦ Israeli pilots continue to share their combat experiences with their American counterparts, both in
Israel and the U.S.
The Value of Israeli Technology in Assisting America's War on Drugs:
Israel's advancements in interdiction technology, a major component in the war on drugs, have been
highly successful.
Israel's coast has been successfully sealed both against terrorist penetration and against the inflow of
contraband.
Israel has achieved advancements in the following areas that can be of great benefit to the U.S. war on
drugs: reconnaissance drones; x-ray and detection machines: fast patrol boats; radar systems; integrated command
and control; and advanced land interdiction systems.
Strategic Cooperation has also expanded to encompass a wide range of cooperative ventures in science
and technology. In March. President Clinton announced the creation of the joint Science and Technology
Commission. In the area of space research, an Israeli-designed experiment was carried aboard the space shuttle
Endeavor last October, in the most recent example of cooperation between NASA and the Israel Space Agency.
The United Stales and Israel are also conducting joint research in satellite-ground staiion laser ranging (SLR) for
geological and geographic study.
President Clinton has stressed his desire to build upon the strategic cooperation of the past ten years, and
that it is fundamentally linked to Israel's qualitative edge. He stated, at the time of the Bush Administration's
agreement with Israel on the release of drawdown equipment prepositioning equipment last fall, that "[we] need
a strong su^egic relationship, and 1 suppon the recent White House statement about U.S. readiness to strengthen
it Unfortunately, however, excessive arms sales to certain Arab states have weakened Israel's overall security.
Such sales force Israel to divert more resources to its defensive needs." Following his election, he reiterated that
the United States must "maintain our special commitment to our democratic partner. Israel, and its overall
security. ..as well as stress the need to preserve Israel's qualitative military edge."
The President's commitment to enhancing the strategic relationship was underscored during his summit
with Prime Minister Rabin in March. A new Senior Planning Group will oversee this expansion of strategic
cooperation.
The current vitality of America's strategic relationship with Israel was underscored in last Octobers
testimony of Carl W. Ford, Jr., then Principal Deputy Assistant Secretary of Defense for International Security
Affairs ~ someone with daily involvement in the issue, before the Senate Caucus on U.S. -Israel Security
Cooperation. Some of his most telling remarks included the following:
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The dialogue and the physical contact between the U.S. and Israeli military is quite substantial.
It is a very active paitnership...it's healthy and it's growing.
We are currently discussing on a regular basis...whert we want to go and how do we want to
modify...our strategic relationship. ...We are constantly exploring ways that we can make our
commiDnent real in terms of our strategic capabilities and ways in which both Israel and the U.S. can
work together to deal with common problems.
...There is continuity firom one administration to another, and from one party to another.
Elections have littie or no effect on the U.S.-Israeli security relationship. ...[At] tiie Defense Department,
our reiauonship is so institutionalized tiiaL..our election will [not] change...our support for a strong, secure
Israel.
In maintaining [Tsrael's] qualitative edge...what we have done is to try to make sure that the
technologies and/or weapons systems that Israel needs are available, and [that] Uiere is a steady supply
of assistance of various sorts to make sure that they can afford both quantity and quaUty for their forces.
We're never quite satisfied it's adequate, but the discussions never cease.
Last September, the United States and Israel issued a joint communique on new strategic cooperation
initiatives. It stated that the two sides would work to implement previously enacted legislation, and that they
"agreed that there will be closer ties between the two countries' armed forces, cooperation on technology upgrades
and the start of discussions on Israel's participation in the Global Protection System." Since then, the two
countries have established a joint techrtdogy working group to help ensure that Israel's qualitative edge is not
further eroded.
During the course of the past year, a wide variety of U.S. defense personnel visited Israel to develop
different aspects of the strategic relationship — including Secretary of the Army Stone, commander of Southern
NATO Forces, Admiral Boorda, former Director of the Stfategic Defense Initiative Organization, Ambassador
Cooper, and Commander of the Sixth Rect Vice Admiral Owens. Numerous high-level defense official from
Israel, including MoD Director-General Ivri and IDF CoS Barak, also travelled to the United States to strengthen
ties with both the old and new administrations and (he U.S. amied forces.
Strategic cooperation beneHls both parties. America's strategic position in the Middle East and the
Mediterranean has been greaUy enhanced by the relationship with Israel, serving to restrain and deter conflict in
the region. Israel's strategic value will increase in coming years, as defense ties continue to grow between our
two nations.
Economic Cooperation
The United States has a vital interest in Israel's economic well-being for several reasons. First, the
economic health of our major allies and fellow democracies is inherentiy important to the United Slates, because
in a very profound sense, the free nations stand or fall together. Second, the economy of Israel is the bedrock
of the nation's ability to sustain its own defense, and for this reason Israel's economic health is essential to the
stability of the region. Dr. Herbert Stein, former Chairman of the Council of Economic Advisors, put it best
when he said: "Hostile neighbors should be left in no doubt about the strength and stability of Israel's economy."
And third, it is important for the United States to ensure that Israel continue on the path of economic growth
and self-reliance. This is something we can do, and for our own interest, must do. Israel and the U.S. have
worked long and hard to establish one of the highest levels of economic cooperation.
American exports face protectionist trade barriers around the world. Even our closest allies refuse to
eliminate unfair trade practices, artd indeed are erecting new barriers to American products. In a report by the
Administfation. Japan was cited as the top offender in erecting barriers to trade. The European Community has
also been described as increasingly protectionist The General Agreement on Tariffs and Trade (GATT) are still
in jeopardy. In this negative environment, the U.S. can rely on its strong trade relations with Israel.
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The historic U.S.-Israel Free Trade Agreement continues its phased implementation. A major step was
taken in 1989, and more recently, earlier this year, when Israel eliminated a host of tariffs on American goods
including consumer electronics and heavy machinery. Tariffs on both sides continue to fall, following the
schedule of the FTA; in 199S. all tariffs between the United States and Israel will be eliminated.
Two-way trade has more than doubled since the inception of the Free Trade Agreement in 1985. The
success of this unprecedented accOTd paved the way for a similar agreement between the United Stales and
Canada.
The increase in trade between the United States and Israel means more sales, proflts, and jobs for
American business. In fact, when compared with the major trading partners of the United States, Israel is second
only to Canada in terms of per-capita imports of U.S. products. Among Middle Eastern countries, Israel is first
in per-capita imports and second only to Saudi Arabia in overall imports. Total trade between the United States
and Israel last year was more than $7.5 billion. Israel is one of the few countries with which the United States
maintains a trade surplus.
As a result of the immigration from the former Soviet Union, U.S. exports to Israel are expected to grow
substantially over the next several years as the new immigrants are absorbed. These new U.S. exports will
include heavy machinery, agricultural products, textiles, automobiles, ships, planes, plastics, and chemical products,
to name a few of the U.S. industries that stand to gain, further helping the U.S. economy.
Along with increases in trade over the years, there is much cooperation in research and development
between the United States and Israel. Many U.S. companies invest in Israel to take advantage of its high-tech
R&D. Motorola. Intel, IBM. Digital, National Semiconductor and many other U.S. companies maintain R&D
facilities in Israel, taking advantage of Israel's high-tech capabilities and helping the United States maintain its
competitive edge in the high-tech field. Two of the most important technologies used in the world today were
developed in Israel by U.S. companies which invest there. The fint is the computer chip (286. 386 and 486)
that is the heart of the most widely used personal computers today, and the second is major components of the
cellular telephone. While these products were developed in Israel, the manufacturing and marketing takes place
primarily in the United States. These are but two examples of many products developed in Israel and
manufactured in the United States, creating thousands of American jobs and billions of dollan in sales each year.
In 1977, the United States and Israel established the Bi-National Research and Development (BIRD)
Foundation. The total endowment established then for BIRD is $110 million (each country providing equal
resources). BIRD is completely self-sufficient, operating off the interest of the endowment and royalties paid
from successful projects. BIRD provides grants to joint U.S.-Israeli research teams in the high-tech field. Grants
are paid back, with intei'est not to exceed one-and-a-half times the original value of the grant, only if profits are
shown from the R&D project. Since its inception, BIRD has invested more than $90 million in over 320 high-
tech R&D projects, each proposed by a joint U.S.-Israel partnership. To date, these projects have led to sales
of nearly $3 billion - the majority from the United Slates, creating thousands of American jobs -- with
accumulated royalties to be used for reinvestment totaling more than $17 million. The tax revenue collected by
the United States to date, as a direct result of BIRD-funded projects, has been more than $200 million.
While BIRD has provided tremendous benefit to both the U.S. and Israeli economies, it could do more.
Each year. BIRD turns away many projects due to lack of resources. With an increase in the endowment. BIRD
could further help U.S. high-tech companies gain access to markets and technologies abroad.
In addition to BIRD, there is also the Bi-National Agricultural Research and Development (BARD)
Foundation, which operates similarly to BIRD but for joint agricultural programs. Since its creation in 1978,
BARD has funded hundreds of projects that have led to new technologies in the area of drip irrigation, pesticide,
fish farming, livestock, poultry, disease control, and advancements in farm equipment, to name but a few. Sales
of products developed under BARD have totaled more than $580 million to date. Israel's advancemenis in drip
irrigation have been of significant help to farmers in California. Texas, Arizona, and other areas in the United
States that have experienced severe drought
As is the case with BIRD, BARD turns away nearly 75% of the projects that the U.S. evaluaiors judge
as beneficial to the U.S. agricultural industry due to lack of resources.
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As the above examples illustrate, the economic benefits we receive firom our relationship with Israel are
increasing at a time when our economy can use it mosL
n. ISRAEL'S NEED FOR AID
While U.S. assistance to Israel provides, as we have seen, solid benefits to our own country. Israel needs
U.S. aid for its continued survival U.S. military and economic aid safeguards Israel's security; sustains the peace
process: bolsters the Israeli economy; and fosters immigrant absorption in Israel.
Safeguardin£ Israel's Security
The Arab Military Buildnp:
While Iraq's defeat in 1991 removed a horrifying threat fiom the region and should have reduced the
need for new arms sales to the Middle East, the opposite has occurred in the past two years. The Arab states,
joined by Iran, have resumed their previous pattern of large-scale arms procurement In February, the massive
IDEX arms show was held in the United Arab Emirates, a gathering at which arms merchants from around the
world displayed their wares to the Arab world. The Arab slates have placed orders for billions of dollars worth
of new weapons each year, and have tens of billions of dollars more still in the pipeline from past years. In the
last 20 years, since the Yom Kippur war, the leading Arab nations still in a state of war with Israel have spent
about $500 billion on their armed forces. U.S. arms sales in the region are increasing again. Even after the
destruction of much Iraqi hardware, the Arab world and Iran now oumumber Israel eight-to-one in manpower (see
Chart 1), seven-to-one in tanks and armored fighting vehicles (see Chart 2), and more than four-to-one in aircraft
(see Chart 3). Many of the largest arms-importing countries in the worid are nations actively hostile to Israel:
Iraq, Iran, Libya, Syria, and Saudi Arabia.
Until Operation Desert Storm, Iraq represented the largest single strategic threat to Israel. While Iraq
remains a long-term security concern for the Jewish Stale, its defeat in 1991 has allowed Israel to focus more
anention on the other radical states in the region.
Iran is rapidly becoming the most serious threat to stability in the Middle East and is swiftly developing
the means to strike Israel. The radical Islamic regime has embarked on a large-scale military modernization
program since the defeat of Iraq in Desert Storm, in a bid to become the dominant power in the Persian Gulf.
From Bosnia to Sudan to Tajikistan. Tehran is also taking advantage of regional instability to promote its concept
of radical islamic fundamentalism. Iranian rearmament and military expansion, which started at the beginning
of the 1990s and has gathered momentum ever since, represents the greatest single long-term threat to the region.
It has publicly announced its intention to acquire nuclear weapons, and according to some reports, may have
illegally obtained as many as four tactical nuclear warheads from Kazakhstan. Some reports indicate Iran may
have six to ten separate facilities for developing nuclear weapons-related technology, and it has concluded
agreements with Russia and China to obtain additional reactors. U.S. intelbgence sources have publicly described
Iran as also having active chemical and biological weapons programs. Until recently, however, Tehran has not
had the means of reaching Israel with these deadly weapons. Now it appears Iran is on the verge of acquiring
a new, accurate long-range missile from North Korea, known as the No-Dong 1. This system will be able to hit
Israel with unconventional weapons from a distance of 8(X) miles.
Without more stringent limitations on technology exports to Iran by the United States and Europe,
including pressure on Russia and China, the mistakes of the Iraq policy may be repeated and Tehran will become
a nuclear weapons state by the late 1990s.
As part of its $10 billion rearmament program, the Islamic Republic has been buying large quantities
of tanks, advanced fighters, submarines and missile systems from eastern Europe, the former Soviet republics.
China, and North Korea, in return for oil and gas. The Iranian Air Force has already integrated the best Iraqi
fighters which it acquired during the Gulf war. One of the most alarming developments in 1992 was the
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CHART 1
MnjTARY Threat to Israel
J
- Arab and Iranian Armed Forces
Oatnnmber Israel's by More than 8:1
(Table U)
1992 Figures
Millions
5
4
3
2
1
Egypt
Iran
i^^N^
5,183,550
4,169,550
3,291,550
Israel
607.500
Figures include reserve forces
Source: The Military Balance 1992-1993. The International Institute for Strategic Studies
181
I
MnjTART Threat to Israel
CHART 2
Arab and Iranian Tanks and
Armored Fighting l^iiicles
Outnumber IsraePs by More than 7:1
(Table 10)
Thousands
30
25
20
15
10
0
Egypt
1992 Figures
28,797
25,237
24.317
Israel
3.960
Source: The Military Balance 1992-1993, The International Institute for Strategic Studies
182
CHART 3
MnjTART Threat to Israel
Arab and Iranian Combat Aircraft
Outnumber IsraeFs hy Hlore tban 4:1
(Table 9)
1992 Figures
3,443
Source: The Military Balance 1992-1993. The International Institute for Strategic Studies
183
announcement of a Russian-Iranian deal to sell the Islamic Republic 24 To-22M3 strategic bombers, capable of
reaching targets throughout the Middle East, including Israel. Russian-made attack submarines have been
purchased and are being delivered. Tehran is also acquiring production facilities for many of these arms,
including assembly lines for T-72 tanks and perhaps MiG-29 fighters.
This buildup poses a long-term strategic threat to Israel, particularly if Iran obtains long-range ballistic
missiles and strategic bombers. Even without these weapons, it is not safe to assume that Iran's threat to Israel
is minimized by the distance between the to countries. Iran is playing an important role in Syria's military
growth and may serve as a future strategic reserve for Damascus in the post-Soviet era. Iran's support of
Hezbollah terrorism further increases the threat to Israel
Syria continues its quest for "strategic parity' with Israel, and now has more troops, tanks, aircraft, and
artillery than Israel. The Assad regime fields armed forces totalling over 400,000 men, with another 400.000
troops in reserve. Syria's arsenal includes over 4,000 modem tanks and some 600 sophisticated combat aircraft,
including MiG-29 interceptors and Su-24 fighter-bombers. Syrian Scud ballistic missiles can carry chemical
weapons, which the Syrians are manufacturing and stockpiling, while the accuracy of its SS-21 missiles increases
Syria's Tirst-stiike'' attack capabilities against key Israeli installations, including air bases and mobilization points.
Syria received a financial windfaU from the GCC stales as payment for its nominal contribution in the
Gulf crisis, totaling almost $3 billion. Much of this has been spent on modem weaponry. Already, Syria has
taken delivery, via Iran, of as many as 150 extended-range North Korean Scud-C missiles, and is reportedly
building new launching sites for these wej^ns. This has more than doubled the size of Syria's ballistic missile
arsenal and given it the ability to hit any point in Israel. Efforts to obtain even more advanced M-9 intermediate-
range missiles from China are still underway. This coincides with an ongoing effort by Syria to stockpile
chemical weapons. A major report in 1992 by expert Ken Timmerman indicated that at present, the Syrians can
manufacture several hundred tons of chemical warfare agents per year at four separate production facilities. These
can be deployed as warheads on Syria's ballistic missiles or bombs for its Su-24 strike bombers.
Additional tanks and combat aircraft are being obtained from the cash-starved fonner Soviet republics
and eastem European states. Hundreds of new T-72 tanks have begun to arrive from the fomier Czechoslovakia
and from Russia. Well over half of the Syrian tank corps now fields T-72s, and even more advanced ex-Soviet
models may be obtained. Russia and Ukraine may also provide the Syrian Air Force with additional MiG-29 and
Su-24 aircraft. SA-IO air-defense missiles, with similar capabilities to the Patriot's, are also being sought.
While the Assad regime can no longer look to Moscow as a strategic ally, this role is being partially
filled by Iran, with which ties have grown steadily in recent years. Iran could become a strategic reserve for
Syria in a new conflict with Israel.
Libya, despite its massive arsenal of Soviet-supplied weaponry, has until recently possessed only limited
capability to directly attack Israel. Qaddafi has now acquired the capacity for aerial refueling, giving Libyan
bombers the range to reach Israel. Libya, like Iran, has been dealing with North Korea to acquire its long-
range No-Dong 1 ballistic missile, now under development This will allow Qaddafi's regime to target Israel for
the fust time. Tripoli is also continuing to fund development of the shoner-range Otrag and Al-Fatah missiles.
According to recent reports a second Libyan chemical plant is being built underground, in addition to the Rabta
facility. Libya's current isolation makes it an even more unpredictable factor in the region.
In Iraq. Saddam Hussein's thirst for power and conquest engulfed the entire region in bloody warfare,
and Israel was one of his prime targets. While much of Iraq's remaining arsenal of unconventional weaponry
has already been destroyed, the regime has been playing a shell game with inspectors, using both evasion and
intimidation to prevent the United Nations from locating the remainder. Iraq still remains a long-term concem
for Israel's security. Saddam is still clearly bent on rearming Iraq. Unless sanctions are effectively maintained.
Iraq could rebuild its former power in several years' time. Iraq's standing anny is still one of the largest in the
Middle East, totaling several hundred thousand troops. The army still has almost 30 divisions and the Republican
Guards some half dozen divisions. Roughly 2.500 to 3.000 tanks and 400 combat aircraft remain m service.
184
Much of Iraq's chemical arsena], nuclear facilities, and hundreds of mobile ballistic missiles survived the
conflict intact and Saddam has continually resisted UN efforts to destroy them. Although Iraq was forced to
destroy many of its remaining Al-Husayn and Al-Abbas Scud missiles, it has still been able to keep many hidden.
Estimates on the number vary from 200 to 300 remaining missiles, with a limited number of launchers. The
United States is especially concerned that Iraq may be able to restart its biological warfare program because of
the difficulty in controlling the necessary manufacturing technology.
Saudi Arabia continues to order weapons on a massive scale, leading the Arab states in military
expenditures. New arms agreements since the Gulf crisis have totaled almost $25 billion, in spite of a short-
term cash shortage. Saudi Arabia has purchased roughly $50 billion in weapons and military construction from
the United States in the last ten years, including sophisticated AW ACS, advanced missile systems, and, most
recently, 72 new top-of-the-line F-15s, which will have a major effect on the aerial military balance with Israel.
This year the Saudis also finalized an agreement to purchase 48 Tornado strike bombers, even though these had
been cited as an alternative to the U.S. F-15. The Saudi Navy is also undergoing a major expansion, as it seeks
to acquire three new frigates from Fiance or Canada as part of its Sawari modernization program.
While Saudi Arabia has not traditionally been thought of as a major player in past Arab aggressions
against Israel, the massive expansion and modernization of its military during the past 15 years has given Riyadh
the potential to play an important supporting role in a fiiture conflict The very fact that this capability now
exists will bring pressure from other Arab states to join in a military coalition aimed at Israel. The Saudi armed
forces gained confidence and experience during Operation Desert Storm, possibly making them an even more
formidable potential threat fOT Israel.
The Arabs purchase these arms from dozens of different nations around the globe. The United States
has been a major supplier, selling in recent years billions of dollars of military goods and services to avowed
enemies of Israel. American sales of new wei^n systems to hostile Arab nations have had a particularly
profound impact on the military balance between Israel and those states because American technology is often
superior to that of competing nations. These sales have significandy raised the cost to Israel of maintaining its
own defenses, exacerbating the strain on Israel's economy; barring a change in American policy, they will
continue to do so in the future. The old cry that if the United Slates does not sell arms, someone else will, is
no longer valid. The previous Administration's Middle East arms control initiative produced few results; stronger
efforts must be made by the Clinton Administration to curb the regional arms race.
Israel's Defense Needs:
U.S. assistance to Israel has a critical impact on the security of the Jewish state as it continues to face
these military threats. While Israel will benefit in the short term from the reduction in Iraq's military capability.
its vital margin of security nevertheless continues to erode. This results largely from the severe financial and
budgetary shortfalls faced by the Government of Israel for a number of years. Indeed, the effects of recent years'
defense budget cuts will continue to be felt well into the 1990s. Defense expenditures in coming years will
continue to be limited and the Israel Defense Forces are facing the choice of canceling important projects or
stretching them out over extended periods, thus driving up their ultimate cost. Just two days ago. the commander
of Israel's tank corps stated that as a result of cuts in training and equipment, the capabilities of the IDF's reserve
forces have diminished.
Despite the overall defense downsizing Israel is facing, a number of important steps were taken within
the past year to offset the cutbacks. In the laner part of 1992. agreements were reached for Israel to receive U.S.
military equipment, including Apache and Blackhawk helicopters, through a drawdown of U.S. slocks. The United
States also agreed to preposition advanced munitions in Israel. The IDF also is buying additional Apaches and
MLRS artillery with its security assistance allotment. Further, in order to avoid the situation during the Gulf War
in which there was a delay of several minutes in transmitting warnings of an incoming Scud missile attacks from
U.S. satellites to Israel, the two allies have agreed that Israel will have a direct communications downlink from
U.S. early warning systems during future crises.
Still. Israel's ability to fund its defense requirements faces some daunting challenges. The austerity
measures have cut Israel's defense spending by about 20 percent in a two-year period. The Israeli defense budget
has shrunk from 10% of Israel's GNP in 1986 to 8.2% in 1992. National defense now represents roughly 17%
185
of the budget, and feces increasing competition because of the deniands of immigrant absorption. While Israeli
military planners have attempted to make the cuts without enxling Israel's narrow margin of safety, reductions
of this magnitude have, inevitably, added to the element of risk in many areas.
The IDF has revised its multi-year budget and procurement plans in light of the continuing financial
crunch, exacerbated by the costs associated with the Persian Gulf war. Among the options the Israeli military
is being forced to consider are a further reduction in the size of the IDF, including retiring professional soldiers
and dismissing civilian staff, cutting back on the number of annual days for reserve duty, reducing investment
in day-to-day security within Israel and the territmies, canceling R&D projects, and disbanding various commands
within the IDF. The IDF's Chief of Staff, Lieutenant General Ehud Barak, stated that the defense cutbacks are
leading to reductions in tanks, mechanized artillery, aircraft, and training of reserves.
In recent years, active combat units have been disbanded, reduced in size, ot converted into reserve
formations. Aircraft have been mothballed. This has decreased the number and size of army brigades and air
force squadrons available to meet a surprise attack. This means a serious decline in Israel's visible deterrent
capability as well as a decline in its war-fighting ability.
Thousands of active duty military personnel have been released from the IDF. Pay cuts and personnel
releases have produced an exodus of highly trained and motivated professionals. Three to four thousand military
and civilian personnel of the IDF will have to retire in the next few years. Ammunition and equipment stockpiles
have suffered deep cuts in order to lessen the impact of reductions in other areas.
As a result of this downsizing, the multi-year plan calls for funds to be diverted towards defense research
& development But as relayed in past years, expenditures on R&D have also been curtailed. This has
diminished Israel's ability to develop and produce the unique new weapons and countermeasures needed to
confront increasingly sophisticated weapons entering Arab arsenals. This in turn reduces Israel's qualitative
advantage over its opponents. Increasingly Israel will have to count on its own technologies to stay ahead of
its adversaries, as the West is more willing to sell Arab states weaponry matching that of Israel. Within the past
several years. Israeli defense industries were forced to reduce their staffs and plant facilities and thus are less able
to suppon Israel's military needs. Israel MiUtary Industries (TAAS), Rafeel. and Israel Aircraft Industries, the
country's leading defense manufacturers, have been especially hard-hit Increasing the level of joint U.S.-Israeli
R&D programs is one area that would thus be mutually advantageous.
These ongoing reductions in Israel's defense resources continue to make American Foreign Military
Financing (FMF) aid to Israel a vital component of that nation's ability to defend itself and thus maintain stability
in the region. In order for Israel's qualitative edge to be maintained, it is paramount that the United States
continue current levels of security assistance. The real value of this aid has declined due to inflation and rising
costs of U.S. weapon systems by over 30%. In particular, this assistance will help to further upgrade Israel's
air force ~ whose margin of superiority over its adversaries remains the cornerstone of Israel's security doctrine -
- particularly through the acquisition of additional fighter aircraft The IsraeU Air Force is expected to choose
between the U.S. F-16 and F/A-18 for its next fighter purchase this year.
One longstanding and vital feature of Israel's security assistance is the off-shore procurement (OSP)
component, which allows Israel to spend a small percentage of its military aid in Israel. This is important to
both nations, primarily because it helps preserve Israel's qualitative edge. Israel increasingly perceives its ability
to stay technologically ahead of its potential adversaries as primarily dependent upon its own resources and
capabilities. OSP increases Israel's defense self-sufficiency by maintaining the viability of its military industries.
One vital measure that would counter the erosion of Israel's deterrent capabilities would be the upgrading
of Israel's status to that of our NATO allies on issues of technology cooperation. President Clinton, in a March
31 lener of reply to Senator Connie Mack, indicated he had assured Prime Minister Rabin that technology
transfers to Israel would be evaluated according to the same criteria as NATO members. In addition, releasing
additional excess U.S. defense articles, such as F-16 fighters, to the lAF would help fulfill Americas commitment
to Israel's qualitative edge.
For the foreseeable future. Israel continues to face long-term reductions in the size of its military forces.
What IS lost in quantity must be made up in the qualitative enharKements provided through the development and
186
use of advanced technologies. Both domestic development and foreign acquisition of these technologies are
expensive, but vital if Israel is to maintain its military edge and thus remain a stable deterrent against potential
adversaries whose capabilities continue to grow.
Today. I come before you to ask that you take the very serious security risks facing Israel into account
when you consider the level of aid to Israel for FY 1994. What this Subcommittee does will have a direct
impact on Israel's security, in a situation where there is much less room for error than in the past Moreover,
any reduction in aid will send the wrong signal to Israel's enemies.
Sustaining the Peace Process
* A close relationship between the United States and Israel is critical to sustaining the Middle East peace
process because, experience shows, progress is achieved in negotiations only when there is close cooperation and
coordination between the two countries. Of course, U.S. military and economic assistance to Israel is a vital
component of the close bilateral relationship, and President Clinton and Secretary of State Christopher have both
appropriately spoken out in support of the current levels of assistance to Israel in the context of the peace process.
As I mentioned in my introduction. President Clinton has stated -- and Secretary Christopher concurred at his
confirmation hearings -- that "this vital aid encourages long-term stability in the region and demonstrates our
commitment to Israel's sovereignty and security." Conversely, tensions between the United States and Israel
undermine the foundations of the peace process and reduce the chances that progress will be achieved.
This basic principle -- that U.S.-Israeli cooperation advances peace while tensions undermine it -- is true
for three reasons:
(1) Israel must have confidence in the United Stales to take the risks for peace sought by American
officials. Long and bluer experience has convinced the Israeli public that it cannot rely on Arab goodwill and
sincerity, nor on support from other great powers. Only when the United Stales is seen as a reliable ally in the
process has it been possible to create an Israeli consensus for agreements that entail major elements of risk, like
the agreements Prime Minister Rabin is working to consummate with Israel's interlocutors in the Madrid bilateral
negotiations. General Colin Powell, Chairman of the Joint Chiefs of Staff, has said, "An Israel that is strong and
secure is an Israel that can participate in the peace process with confidence and security."
(2) Arab incentives to move forward in the peace process also depend on the perception that the U.S.-
Israel albance is an immutable bond that cannot be severed. Arab radicals are dissuaded from the alternative
of the war option only when they believe that American suppon for Israel makes military success too risky, and
Arab moderates are not attracted to direct negotiations with Israel if they think that the alternative path of
pressuring the United States to "deliver" Israel has any chance of success. An Arab rejectionist codified this
as the principle that. "The road to the liberation of Palestine runs through Washington." To combat such
reasoning. Secretary of Slate Christopher said in Jerusalem last week when asked about Palestinian demands
regarding Israel's handling of the Hamas removal issue, "I'm not in the business of pressuring the Israelis to do
anything. It's a Government that lakes action in its own interest" As I slated above. Christopher also told
reporters he believes the Rabin Government is doing "all it can" to achieve a just and lasting peace with security
and acceptance from Israel's neighbors.
(3) The United States' effectiveness as an intermediary -- and no past success in Arab-Israeli
peacemaking was achieved without the good offices of the United States -- depends on its close relationship with
Israel. This enables the Arabs to look to America as the one outside party that has influence in Jerusalem, and
it enables the Israelis to trust the United States in a world that is often hostile.
Long experience in the peace process has demonstrated the oniih of these principles, in each of the major
past successes of the peace process. Fot example:
(1) The 1979 peace treaty between Egypt and Israel following the Camp David accords was made
possible primarily because the Government of Israel decided to take the military risk of surrendering the Sinai's
critical Gidi and Mitla passes as well as the vital airbases, and the economic risk of sacrificing the Sinais oil
187
fields that had given Israel energy independence. Israel lode this decision knowing that this would have the efTect
of increasing Israel's economic and strategic dependence on the United States. Prime Minister Begin made the
decision on the basis of his confidence in U.S. assurances thai: (a) Washington would consult with Israel in case
of Egyptian violations; (b) would assure the security of Israel's access to oil for 15 years; (c) would provide a
supervisory force for Sinai in the event the UJ^. refused to cooperate with the treaty; and (d) would help to offset
the added economic cost of Israel's defense and its oil imports that would result from surrendering the Sinai.
Without this confidence in American assurances, Israel could not have taken the step that transformed the region
and laid the foundation for all subsequent progress.
(2) The September 1975 Sinai n agreement between Egypt and Israel, which laid the basis for what
became Camp David, also depended on Israeli confidence in the United States. Negotiating just two years after
Egypt and Syria launched a surprise attack that shook Israel's security and took many lives. Israelis had little faith
in Egyptian intentions. In the Spring of 1975, the Ford Administration had further eroded Israeli confidence by
ordering a "reassessment" of U.S.-Israeli relations because of differences on the peace process. But in May 1975,
76 members of the U.S. Senate put things back on track through a letter to President Ford taking the
Administration to task for undermining Israeli confidence, saying, "We urge you to make it clear... that the United
Slates, acting in its own interests, stands with Israel in the search for peace... Preserving the peace requires that
Israel obtain a level of military and economic suf^rt adequate to deter a renewal of war by Israel's neighbors."
Spurred by the Senate, the Administration shifted gears, and in September achieved a historic breakthrough by
offering Israel a list of assurances to offset the risks of the partial withdrawal in Sinai. The assurances included
being "fully responsive...to Israers...defense requirements," concluding a contingency plan for emergency military
supplies, guaranteeing access to energy supplies, consulting on possible U.S. remedial action in the event of
Egyptian violations, and commitments related to the subsequent diplomatic steps the United States would or would
not support This otse illustrates first the negative effect of undermining Israeli confidence in America, and later
the positive effect of restoring it. It also shows how close U.S.-Israel cooperation can partly offset the Israeli
public's lack of confidence in the sincerity of an Arab party's commitments in a peace negotiation, and how
Congress can advance peace by serving as the bedrock of the U.S.-Israel relationship and putting the
Administration back on track when it loses its compass.
(3) The 1974 Israel-Syria disengagement agreement ~ the only agreement ever concluded between
these two countries since 1949 — involved an Arab government in which Israel had no confidence. The decision
to withdraw from Kuneitra and other parts of the Golan Heights was facilitated by American assurances dealing
with the possibility of future Syrian violations of the ceasefire and Israel's right of self-defense in the event that
Syria permitted terrorist raids across the border. The agreement itself was achieved through cooperation between
the Government of Israel and Secretary of Slate Henry Kissinger, Kissinger first found out what Israel was
prepared to do, then "sold" it to the Syrians. Kissinger might not have succeeded had he not convinced President
Nixon to drop another approach Nixon was considering, an idea to condition U.S. aid on IsraeU concessions.
Conversely, American peace initiatives that are not built on the foundation of close cooperation with
Israel invariably founder. This was the case with the Rogers Plan in 1969, the Reagan Plan in 1982. and the
Shuliz initiative in 1988, all of which failed in spite of the great energy put behind them by the Administrations
of the time.
A historic example provides the clearest illustration of how tensions between the United Stales and Israel
undermine the peace process by eroding Israeli confidence and inflating Arab expectations that the United States
will "deliver" Israel. In October 1956, Britain, France, and Israel, responding to bellicose actions by Nasser,
launched operations against Egyptian targets, leading to Israel's fust capture of the Sinai. President Eisenhower
adamantly opposed the allies' actions, and used the threat of American sanctions against Israel to force Prime
Minister Ben-Gurion to return the Sinai to Nasser without a peace agreement. Eisenhowers diktat electrified the
Arab world, and immediately became the pnme example used by Arab statesmen and commentators to show that
the United States could "deliver" Israel if it wanted to. From that day forward, Eisenhowers diktat was cited
endlessly by Arab rejcctionists as their preferred model of how the diplomacy of the Middle East ought to work:
The United States should use the threat of U.S. sanctions to force Israel to accept Arab terms. But the Arab
fascination with this "model" may also have played an important role in the fact that, for almost twenty years
following Eisenhower's move-that is, from 1957 to 1977 -- no Arab state agreed to sit down with Israel for
direct bilateral negotiaiions. Until 1974, there was no real peace process, and no solid diplomatic agreements
were achieved. Almost two decades of barren diplomacy testify to the sterility of the "pressure" school and the
188
reality that close relations between the United States and Israel are a prerequisite for progress in the peace
process. Worse yet. Eisenhower's actions may have helped to plant the seeds that led Nasser to the war option
a decade later.
When American actions remind the Arabs of the "Eisenhower model," direct negotiations for peace are
undermined. When the United States proceeds on the proven principle that close coordination between the United
States and Israel - including U.S. military and economic assistance to Israel as needed -- is the foundation of
the peace process, real opportunities for progress emerge. In its first months the Clinton Administration has upheld
this principle, and I am hopeful that the Congress will do as well by accepting the President's FY 1994 Israel
aid request and by taking other steps to nurture the U.S.-Israel relationship.
Bolstering Israel's Economy
Israel and the United States cooperated in the bold and successfiil initiative to release Israel's economy
from the severe distress it was suffering in the mid-1980s.
Over the past several years, Israel has demonstrated how U.S. foreign assistance, in combination with
strong and well-conceived corrective measures in the economy, can turn economic difficulty into an opportunity
for recovery. Israel's recovery program has included some of the toughest austerity measures ever imposed by
a democracy. The Congress, the people, and the President of the United States were partnere in this process,
because a critical ingredient has been U.S. economic assistance. U.S. aid was the decisive safety net required
to undertake such a bold initiative.
Capital market reform is now progressing at an unprecedented pace and has led to a 60% increase in
the Tel Aviv Stock Exchange last year. Israel continues to move down the long road of privatizing government-
owned companies. Since last year, the Israeli government sold off more than $575 million in government-
controlled assets. This year, it has already sold more than $300 million and is preparing many more companies
to be put on the block as well including Israel Rail, the Postal Authority, Israel Shipyards and ZIM shipping
company. Also, Israel begun the process of liquidating government shares in the nation's major banks.
The Government of Israel has cut its budget deficit by more than 50% over the last two years to 3.2%
of the GDP. The FY93 Israeh budget cut spending in defense, housing, and consumer subsidies.
All of these measures are bold steps, as they entail some disruption in the economy at a time when it
is heavily strained by immigration. By addressing the economy's underlying problems rather than taking more
expedient, short-term steps, Israel has demonstrated its willingness to weather short-term discomfort for the sake
of long-term gain.
Tliere are clear signs thai these economic reforms arc paying off. The Israeli economy is at the start
of an era of accelerated growth. For the last three years, Israel's GDP has grown by 5% annually, higher than
any other nation in the industrialized world, while inflation has been kept to historic lows - 9.4% last year.
The recent implementation of loan guarantees has already had a significant impact on the Israeli economy.
These funds will help with the great need for foreign capital to help cover the temporary deficit in the balance
of payments as a result of increased imports. This increase in imports is due to the recent infiux of immigrants.
The greatest percentage of the imports comes from the United States.
In addition, the loan guarantees have had a significant effect on Israel's economy in three ways. First,
in 1991, when it appeared the United States would not provide guarantees, private banks virtually froze lending
levels to Israel. Upon passage of the guarantees, the private sector showed a level of interest in the Israeli
economy never seen before. Today, more banks are lending to Israel at higher levels than ever before. This
demonstrated how strongly the private sector values the U.S. commitment to Israel's economy.
The second major impact passage of the guarantees had was the signal it sent to other Western countries,
which have been waiting for the U.S. to extend loan guarantees lo Israel before they signed off on immigrant
absorption aid packages of their own.
189
The third, and perhaps most important effect of the guarantees was the message it sent to the Jews in
the Fonner Soviet Union. While the loan guarantees were stalled, Israel's ability to absorb the new immigrants
economically was strained, particularly in providing employment This caused concern among potential
immigrants and led to a temporary halt in immigration. Since the passage of the loan guarantees, immigrant
unemployment in Israel has been cut in half and the number of new immigrants has increased.
Israel has the ability to service large increases in foreign debt. Israel's current foreign debt situation is
very favorable. External d^t is 30% of GDP, down firom nearly 80% in 1985. With an estimated additional
$20 billion in foreign debt over the next 5 to 7 years, Israel's foreign debt will still be easily serviced. The
growth of exports and overall increases in the GDP will more than make up for the additional annual foreign-
debt payments. The U.S. General Accounting Office (GAO) stated in a report released in February, 1992: "We
believe that if Congress authorizes the S 10 billion in loan guarantees requested by the Israeli government, the
Israeli government will likely be able to fully service its external debt and to continue its past record of payment."
Dr. Stanley Fischer, fonner Chief Economist for the World Bank, stated last year before Congress: "Israel is an
excellent credit risk, with an unblemished record of servicing its debt in far more difficult conditions than it is
likely to face in the future... The single best predictor of the likelihood that a country will default is whether it
has done so before... A coimtry that has demonstrated the willingness and ability to implement the needed
measures when it experieiKes balance of payments problems ~ as Israel has — is that much more credible as a
good credit risk."
The challenge for the United States is to continue to support, reinfcrce, and accelerate growth in the
Israeli economy while encouraging continued economic reforms. Cunently, aid to Israel is primarily defense-
related, used either to purchase military equipment or to help service debt used to purchase military equipment
in the pasL This aid is vital to maintaining Israel's qualitative edge and to ease the extraordinary high economic
burden of defense. At the same time, the aid enables Israel to free other funds for the improvement of the
economy and the absorption of immigrants, a humanitarian venture in which Israel must not be allowed to fail.
Although the nominal level of aid to Israel has remained steady for seven years, the real value of that
aid has declined. There has been a constant erosion in the value of Economic Support Funds (ESF) and Foreign
Military Funds (FMF) credits to all aid recipients. Due to inflation, our aid package to Israel has eroded in value
by over $1 billion since 1986 (see Chan 4).
Fostering Immigrant Absorption
As a result of the successful efforts by the U.S. Congress and Administration in winning the freedom
of Jews throughout the world, Israel will be absorbing an estimated one million immigrants over the next 3-5
years -- a extraordinary population increase of more than 20 percent This is an unprecedented challenge,
equivalent to the United States absorbing 50 million new immigrants. Nearly 500,000 immigrants have arrived
in Israel since late 1989, boosting its population by 12 percent Israel took in 200,000 immigrants in 1990.
170,500 in 1991, and 76,500 in 1992. Immigration estimates for 1993 vary from 120.000 to 150,000.
The colossal immigration wave has presented Israel with a great blessing as well as an enormous
challenge. Socially, politically, and culnirally, the new immigrants will have little trouble adjusting to their new
home. The greatest challenge lies in their economic absorption. In the short run, the burden on the economy
is great. In the long run. this massive immigration will indeed be the most prominent factor accelerating
economic growth in Israel for many years to come.
The new immigrant who reached Israel last night may not yet be part of its productive economy, but
he quickly joins the consuming public. This immediately affects the market It has already stimulated a large
volume of expansion in the construction and vanous manufacturing industries. Building starts in 1990 were up
approximately 50% ahead of 1989. The demand in the housing sector is so strong that the Ministry of Housing
has imported thousands of pre-fabricaied, modular and mobile homes, mainly from the United States.
The cost of absorbing these new immigrants will be great Israel will have to expand its infrastructure
to accommodate the increase in size of the population. Large investments will be needed in housmg.
190
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transportation, education, job training, job creation, and many other areas to handle the population increase.
Israel's government spent 24% of its 1992 budget on absorption, compared to 7.6% in 1990. Over the next five
years, Israel will devote a staggering $60 to S70 billion toward the absorption of these new immigrants.
Most of the cost will be borne by domestic Israeli sources, and contributions from world Jewry. This
year alone, world Jewry will raise more than $3 billion to assist in immigrant absorption (Israel Bonds: $1.5
billion; United Jewish Appeal: $1 billion: Jewish Welfare Federation Guarantees: $750 million). However, at least
$20 billion will be required in foreign capital. Israel will raise one half of that amount in the United States
through the absorption loan guarantees.
If proper financing is forthcoming, the real power of Israel's economic potential will be realized and
inmiigrant absorption will be a success. Israel's economy has expanded with every wave of immigration, and
all indications are that the current inflow will be no exception. The United States, whose economy also expanded
dramatically after each wave of immigration, has never had an influx of this magnitude.
The levels of educational and technical skill of the immigrants far exceed those of the Israeli population,
which already are among the highest in the world. 40% of all Soviet immigrants hold at least one university
degree. More than 25% of those degrees are in engineering and architecture.
As a percentage of population, there are more than 13 times the number of engineers and architects
among the immigrants than there are in the existing Israeli population, twice as many technicians, and six times
as many physicians. This will lead to a significant increase in the productivity of the business sector, especially
in the high-tech, research and development, and other export-oriented industries, if the proper levels of investment
are made.
Israel's ability to acquire long-term financing is hampered by its credit rating in the private sector, which
is determined primarily by geopolitical rather than economic factors. While Israel's rating has recently been
upgraded by Standard and Poor's to a solid BBB investment grade, it would be much higher still if based on
economic factors alone rather than on the risks emanating from Israel's hostile neighborhood. The expected
further progress in the peace process should help alleviate the investment community's concerns.
Israel has an impeccable record of paying back its foreign debt. Thanks to this record, as well as the
present state of the Israeli economy and the effects immigration will have, there should be no doubt about Israel's
ability to repay additional loans. By conventional methods of financing, Israel will be forced to take high-
interest loans, with maturities of five to seven years. While such loan terms may be suitable for corporate
investment, they defy the very nature of immigrant absorption. The benefits to the Israeli economy will be
realized over a period of ten or more years -- after the immigrants have been fully integrated into the workforce
and society.
Amidst the arrival of tens of thousands of refugees on regular flights, behind-the-scenes rescue operations
in war-tom regions of Central Europe, the Caucasus, and the former Muslim republics have continued. These
airlifts are bringing refugees to Israel almost daily, while acute absorption difficulties, principally Israel's highest-
ever unemployment rate, continue to mount.
As the full scope of the atrocities in the former Yugoslavia unfolds. Israeli rescue missions in strife-
ridden Sarajevo have accelerated. To date, approximately 10% of former Yugoslavia's Jewish community,
including more than 600 adults and over 200 children from Croatia and Bosnia-Herzegovina, have been
transported to Israel in 8 rescue missions. These operations have also included the rescue of Bosnian Muslims.
Serbs, and Croatian refugees. In February. 84 Muslim Bosnian refugees were brought to Israel, where they will
remain until the fighting ends in their home country.
Israel's Ethiopian community has more than doubled to 51.000 following the heroic airlift (Operation
Solomon) of 14.000 Ethiopian Jews from Addis Ababa in May 1991. Some 8.0(X) were brought in after the
rescue operation. Only a few hundred remain, most in extremely remote locations accessible only by foot. The
arrival of 7,000-8.000 Falashmora ~ Jews who converted to Christianity - is expected to boost the 2.0(K) already
in Israel in the near future.
192
As the economic and political situation woisens in the former Soviet Union. Israel is bracing for the
possibility of new waves of refugees. Approximately 75% of the 1.6 million Jews officially registered in the
former Soviet Union have requested permission to emigrate.
Unofficial estimates of the Jews remaining in the IS former republics are as high as 3 million. Among
them, approximately 90% of 250.000 Jews living in the former Muslim republics have taken the first steps toward
immigration.
Periods of general upheaval in Russia have historically been accompanied by rising anti-Semitism. As
conditions in the successor states continue to deteriorate, the Jewish minority remains at risk. Ethnic violence
coupled with Islamic findamentalism in Central Asia and the Caucasus has serious implications for the 250.000
Jews who live in those areas. Anti-Semitic incidents have been reported in several regions, particularly in
Uzbekistan, Tajikistan, and Azerbaijan.
Nationalist groups such as Pamyat remain active and have grown in strength as instability persists. Anti-
Semitic publications are increasing in quantity and virulence while incidents of 'street" anti-Semitism are
consistently reported throughout all areas of the former Soviet Union. These portents of disaster make it
imperative that Israel possess the means to successfully absorb Jews who need to leave.
nL CONCLUSION
Let me sum up. Mr. Chairman, the conclusions of my testimony. U.S. aid to Israel has been a wise
investment, because Israel is our one denKxratic friend and most reliable ally in a critical region of the world.
But this year aid to Israel is paiticularly important for several reasons.
The fust is to advance the peace process, which the new Rabin government invigorated last summer and
which holds out unprecedented promise for Israeli-Arab peace agreements. Israel must feel confident of American
support and commitment as it takes risks for peace, the achievement of which will contribute to regional stability
and prosperity.
The second is to maintain Israel's security. U.S. aid is indispensable to prevent any funher erosion in
Israel's narrow margin of security in a situation where its forces have been cut while those of its adversaries -
- despite Desert Storm - continue their rapid growth. Moreover, in this era of concern over allied burden-
sharing, it is important to remember that while we devote roughly S170 billion to the defense of NATO, whose
members spend an average of only five percent of the GDP on defense, Israel spends 30 percent of its GDP on
defense.
The third reason aid is particularly important this year is to stay the coune on the economic recovery
and growth program on which Israel has embarked. This is no time to reduce our effort
Another reason aid is crucial this year is to help enable Israel to meet the challenge of continuing to
absorb hundreds of thousands of new immigrants, mostly from the former Soviet Union.
Mr. Chairman. 1 thank you for the strong friendship you, this Subcommittee, and the Congress, have
demonstrated toward Israel, and for the opportunity you have provided me to explain the imponance of FY 1994
aid to Israel and to America.
193
PREPARED STATEMENT OF HON. THOMAS A. NASSIF, CHAIRMAN,
AMERICAN TASK FORCE FOR LEBANON
I am Thomas A. Nassif, Chairman of the American Task Force for Lebanon (ATFL) and
former U.S. Ambassador to Morocco. I am Chairman of the Board of Gulf Interstate
Corporation and its subsidiaries Gulf Interstate International and Gulf Interstate Engineering
of Houston, Texas.
The Task Force is an organization whose goal is to heighten awareness of the American
public and United States government officials and policymakers to the plight of the Lebanese
people. Our members reflect most religious groups in Lebanon and a prominent roster of
American talent in business, law, medicine, the professions, and the arts, as well as public
officials, including two members of Congress.
We had wide-ranging discussions with the Bush Administration about the problems in the
Middle East and Lebanon. We have approached the Clinton Administration about Lebanon's
future and we are optimistic the Administration will respond.
Mr. Chairman, we were heartened by the visit to Beirut on February 22 of Secretary of
State Warren Christopher. Secretary Christopher said that the visit, "symbolizes our
commitment and support for the Lebanese government, for its effort to achieve independence
and territorial integrity, for the dissolution of the armed militias and for the withdrawal of all
non-Lebanese forces." The American Task Force applauds the Clinton Administration and
Secretary Christopher for the bold decision to visit Beirut. The Secretary's trip reinforces what
we interpret as the Administration's firm decision that Lebanon's vital interests will not be
compromised and that the United States policy is to guarantee Lebanon's security and
independence in the community of nations.
The people of Lebanon have suffered as few people have suffered in history. A tragic war
which lasted for 16 years defies both logic and morality and as always, it is the people who
suffer. Contemplate these figures on the tragic war released by Lebanese authorities for a
country that had a pre-war population estimated at 3.2 million: 144,240 dead, 197,506
injured, and 17,415 missing. A study conducted by St. Joseph University of Beirut and the
University of Laval in Canada puts the number of displaced persons at 568,000 or 1 8.5% of
the population.
Mr. Chairman, despite this tragedy, we want to speak of reconstruction. Security has
improved dramatically in Lebanon since late 1990, when the Lebanese government
reestablished the Council for Development and Reconstruction (CDR) to spearhead its
reconstruction. CDR commissioned a study, financed by Mr. Rafiq Hariri, the current prime
minister, and undertaken by Lebanon's largest engineering firm Dar al-Handasah, resulting in
a detailed recovery plan to reconstruct and redevelop Lebanon. Damage assessment for the
194
various sectors was partly financed by the European Economic Community. This plan formed
the basis for the World Bank-proposed rehabilitation project
This plan suggests how and where U.S. assistance to Lebanon would complement the
Lebanese government's reconstruction program. According to a World Bank report, Lebanon
will need an initial short-term public investment recovery program costing $2.3 billion to be
implemented over the next three years, with between $650 to $750 million a year needed to be
raised abroad to finance public sector investment and current operations. In addition, public
investment programs over the medium-long term will require a further $5 billion. The ATFL is
not proposing that the U.S. fund this amount, but we are suggesting that the U.S. foreign aid
package be sizable enough to show foreign donors and Lebanese expatriates that the U.S. has
confidence in Lebanon's future. Reinvestment has not taken place as expected awaiting a
sizable aid package fiiom the U.S., or at least a change in the restrictive policy that bans travel
on U.S. passports to Lebanon and hinders American business participation in Lebanon's
economy. These steps would show investors, foreign and domestic, that the U.S. encourages
private sector participation in Lebanon's reconstruction effort. It is essential to repatriate a
portion of Lebanon's resources, both human and financial, for Lebanon's redevelopment.
The U.S. business community can profit from participation in the public and private
investment program. Currently, funds for Lebanon are being pledged for infrastructure and
development projects. Steady annual increases in aid and a strong commitment from the
United States would help convert these pledges into disbursements and encourage other
donors to contribute. Notable among the pledges are the European Community/European
Investment Bank-$308 million; ltaly-$460 million; World Bank-$175 million; Kuwaiti Fund
for Arab Economic Development-$70 million; Arab Fund for Economic and Social
Development-$75 million; Saudi Arabia-$60 million; and other donors including OPEC Fund,
International Fund for Agricultural Development (IFAD), Islamic Development Bank, and
United Nations Development Programme (UNDP). Furthermore, rebuilding the Beirut
commercial district, to be undertaken by the private sector, will cost $3 billion.
Mr. Chairman, although the American Task Force for Lebanon would like to request
$150 million-which is reasonable in light of Lebanon's need for economic aid. Given the
current economic climate and budgetary restraints, the Task Force supports Hon. Nick
Rahall's very modest request for $15 million in foreign a.ssistance for Lebanon for FY 94.
In recent years, assistance to Lebanon has been distributed through PVO's. We would
like to request that $10 million continue to be distributed through PVO's. We also suggest that
$5 million be distributed through the Lebanese govemment to establish a department of
statistics, with the project being executed by the United Nations Development Programme, the
World Bank, and the International Monetary Fund. There seems to be a strong consensus
among those involved in international finance and economic development that the creation of a
department of statistics should be a number one priority. The estimate to construct the
building, acquire the computers, and employ the statisticians is $5 million. Lebanon currently
has no database and it is impossible to do any sort of planning without GNP indicators and
household surveys. In a speech entitled "Key Issues in the Reconstruction of Lebanon" given
on January 5, 1993 before the Allied Social Sciences Associations in Anaheim, California, Dr.
Louis Hobeika, a financial economist with the World Bank, said the following about
rebuilding the department of statistics:
This is necessary if we want to have any long term strategy. We have to rebuild
the files and bring back the experts who are working all over the world.
International Institutions, donors and economic partners require that the country
possess a full set of reliable statistics.
We would like to recommend that leverage funding and fund matching be used for AID
projects, with private sector participation. This process will mobilize capital, promote
cooperation among donor countries, reduce duplication, and increase the scale of projects
undertaken. The World Bank is well suited to coordinate these multilateral projects. We
understand AID welcomes the concept of leverage funding.
Two very important areas in which U.S. assistance could be used to foster Lebanese
reconstruction are the training of public administrators and vocational training. Public
administration was substantially weakened during the war and many of the ministries and
public agencies expected to oversee rehabilitation are woefully understaffed in the upper and
middle grades and this is currently a major bottleneck in the reconstruction process. The
American University of Beirut is currently undertaking, in cooperation with the Economic
Development Institute of the Worid Bank, an 1 8-month comprehensive program of training
and retraining civil servants in areas concerned with economic and financial management. This
program is financed by grants from the Arab Fund, Kuwait Fund, and OPEC Fund. The
Lebanese construction industry needs to be revitalized to undertake the anticipated mammoth
rebuilding and so we recommend that some U.S. assistance be appropriated for vocational
training and small-.scale development. There are tens of thousands of unemployed youth and
former militiamen and vocational training would help integrate them into the economy. Small-
scale development complements vocational training by helping those completing the programs
set up small businesses.
The American Task Force for Lebanon supports more foreign assistance being channeled
through indigenous Lebanese PVO's that have a history of sound accounting. We are vitally
concerned that the aid given to Lebanon reaches all those in need and reasonable amounts be
196
used for administration. There are Beirut-based auditing firms that have the ability to check the
fiscal responsibility of Lebanese PVO's.
Under the Small Value Procurement program, US-AID gave to indigenous Lebanese
PVO's $190,000 for FY 90. $300,000 for FY 91. and $400,000 for FY 92. The American
Task Force for Lebanon would like to see this trend continue. This is not to say that US-based
PVO's do not play a vital role for the Lebanese. Soine of them have extremely low overheads,
even comparable to the Lebanese PVO's. We wish to acknowledge and thank organizations
such as Save the Children, Catholic Relief Service. YMCA. UNICEF. World Rehabilitation
Fund, the Near East Foundation, and the American Red Cross for their exceptional
perfomiance in dispensing aid.
We further request a minimum provision of $400,000 in IMET funds for Lebanon. Our
organization is in full agreement with the Administration and State Department policy to
continue the tradition of training Lebanese soldiers in the United States "in order to foster
values consistent with the role of the armed forces in a democratic state".
A strong Lebanese Army is essential to the withdrawal of all non-Lebanese forces. An
army capable of securing Lebanon's borders and protecting its citizens is mandatory if
Lebanon is to exerci.se its sovereignty and safeguard its territorial integrity.
Mr. Chairman, we know that the subcommittee is concerned that foreign assistance
creates dependency among recipients. We want to draw attention to the Lebanese people's
character-their chief asset. Lebanon-a country with few natural resources but diligent people-
-was an economic success. Dependency is anathema to the Lebanese.
Mr. Chairman, we wish to thank the United States for being a leader in humanitarian
assistance for Lebanon. Our members are now looking beyond disaster relief this fall and
planning a two-day Conference on Lebanon's Reconstruction to be attended by United States
policymakers and agency representatives, Lebane.se decision-makers, the expatriate Lebanese
business community, multinational corporations, representatives of traditional donor
countries, and international financial institutions to address Lebanon's critical reconstruction
needs.
197
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AMERICANS FOR PEACE NOW
SUBMITTED TO THE SUBCOMMITTEE
ON EUROPE AND THE MIDDLE EAST OF
THE COMMITTEE ON FOREIGN AFFAIRS
OF THE UNITED STATES HOUSE OF REPRESENTATIVES
APRIL 28, 1993
Mr. Chairman, I want to take this opportunity to
thank you and other members of this subcommittee for the
opportunity to testify on the FY '94 budget. My name is
Linda Heller Kamm and I am testifying in my capacity as
a member of the Board of Directors of Americans for Peace
Now (APN) and as the co-chair of the Center for Israeli
Peace and Security, APN's Washington office. APN is a
national American Jewish membership organization with
strong ties to Israel's Peace Now movement as well as to
the organized Jewish community in the United States.
Mr. Chairman, APN strongly supports the state of
Israel and is concerned for its security. Americans for
Peace Now supports foreign assistance for Israel and
Egypt at least at the FY '93 budget level which provided
$3 billion for Israel and $2.2 billion for Egypt. APN
also supports 325 million in economic aid to Palestinians
living in the West Bank and Gaza Strip.
Israel needs U.S. assistance given the dangerous
neighborhood in which it lives. Since the end of the
Cold War, Israel's adversaries in the region have been
able to purchase an unprecedented amount of conventional
weapons from China, Europe, and the United States. Arms
control and disarmament initiatives are certainly in
order in the region. However, the U.S. assistance to
Israel must remain constant until such agreements are
negotiated and the flow of weapons reduced.
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198
Moreover, the Arab boycott of Israel denies Israel a valuable
market which would assist Israel's economy if it was accessible.
Israel needs U.S. aid to defend itself against very real threats.
Promising Middle East negotiations and opportunities for long
term solutions to regional problems are in the offing. We applaud
the initiative of President Clinton to send Secretary of State
Christopher to the Middle East to hear the aspirations of all
parties involved in the bilateral and multilateral peace
negotiations and to get the Middle East peace talks back on track.
The context for our endorsement of the President and Secretary's
initiative is two- fold: First, APN is strongly supportive of Prime
Minister Rabin's conviction that a comprehensive peace agreement,
with iron-clad security arrangements, is critical to Israel's
economic future and well being. Second, securing peace between
Israel and its Arab neighbors is a vital U.S. interest. It is one
important component in achieving security in an otherwise unstable
regional environment.
If the peace negotiations are to succeed Israel will be faced
with the need to make difficult choices with regard to the "land
for peace" formula. As it considers paramount security questions,
Israel must be assured that the United States will continue to be
a reliable ally. Israel can maintain its qualitative strategic
position only if the U.S. is committed to providing economic
security assistance. This is a vital assurance in the context of
the territorial compromise arrangements that are inevitable in any
comprehensive agreement between Israel and its neighbors.
Egypt continues to play a critical role in the search for
peace and regional stability. An indispensable supporter of, and
partner in, U.S. efforts in the peace process, Egypt is in obvious
need of economic assistance from the United States. It faces an
internal threat from extremist Islamic fundamentalists whose public
support grows, in part, from the hopelessness nurtured by
manifestations of extreme poverty. Therefore, it would be
extremely shortsighted for Congress to reduce American aid to
199
Egypt, Such an act would simply send a counterproductive signal.
This subcommittee will also consider a proposal to approve
funding for economic development in the West Bank and Gaza Strip.
Any resolution of the Palestinian aspect of the conflict will
require economic development as well as the ability of the
Palestinians to acquire their political rights in a manner that is
consistent with Israeli security requirements. The United States
has an interest in seeing this process through at both the
political and economic levels. Thus we support economic
development assistance for the West Bank and Gaza.
My colleagues at Americans for Peace Now share the concern of
most Americans about this country's deficit and an economy that has
been very slow to creep out of recession. We welcome the
partnership between Congress and the Clinton Administration in
asking all Americans to share in the sacrifices needed to get our
economy back on its feet.
We are concerned, however, when Americans question U.S.
expenditures for foreign aid as part of a remedy to strengthen the
this country's economy. Foreign aid represents no more than one
percent of our total budget. The costs of international
instability can be much higher indeed. Only through stable
international arrangements can we reduce defense expenditures.
Further, America's economy is part of an interdependent global
economy; isolationist policies will inevitably hurt us.
LOOKING TOWARD THE FUTURE
While the Middle East peace process holds great promise, it
is unlikely to succeed in the absence of a proactive vision on the
part of the United States, Israel and the Arab parties to the
conflict. Only if an economic investment is made and new economic
relationships are created that join Israel, the Arab countries, and
a new Palestinian entity is a resulting peace likely to be long
lasting. This will require not only a new arrangement between
Israel and the Arabs, but also the leadership of the United States
200
in organizing a strong coalition of nations to share the burden
and invest in this new regional framework. The United States
should therefore work with Israel, the Palestinians and the Arab
states to create a future in which the countries of the Middle East
can develop a Middle Eastern Conunon Market, unique to the
multiplicity of cultures in that part of the world. In the
meantime. Congress should support assistance to Israel, Egypt, and
the Palestinians in the West Bank and Gaza at at least last year's
levels.
201
National Association of Arab Americans
PREPARED STATEBAENT OP KHALIL E. JAHSHAN. EXECUTIVE
DIRECTOR OF THE NATIONAL ASSOCIATION
OF ARAB AMERICANS (NAAA). SUBMITTED TO THE
HOUSE FOREIGN AFFAIRS SUBCOMMITTEE ON EUROPE AND THE
MIDDLE EAST
June 4. 1993
The National Association of Arab Americans (NAAA) welcomes this
opportunity to present written testimony to this distinguished panel on
the Middle East portion of the Administration's expected Fiscal Year
1994 foreign aid request. As the principal lobbying organization of the
Arab-American community. NAAA believes that strong and mutually
beneficial relations between the United States and the Arab countries are
in the U.S. national interest. The foreign assistance programs that the
United States has implemented in the Arab world have done much to
strengthen and solidify such relations, and we offer our strong support, in
principle, for foreign aid as a means of enhancing U.S national interests
around the world.
We commend this Subcommittee for the serious and responsible efforts it
has made over the years — in the face of severe budgetary constraints and
political sensitivity — to authorize U.S. aid at levels which will promote
development and improve the well-being of the largest number of
recipient countries possible. At the same time, we believe that there is
substantial room for improvement in the manner in which aid is
allocated.
Mr. Chairman, the 1992 elections demonstrated that the American
people are ready for and demand change. Opposition to foreign aid
within the general public has become pervasive and widespread. We
applaud the Chairman and Ranking Member of the Foreign Affairs
Committee and this Subcommittee for their continuing efforts to effect
fundamental changes in the foreign aid process. We believe that it is time
to take a serious look at that process with an aim toward reforming,
improving and streamlining the system and ensuring an equitable
distribution of U.S. aid to a wide range of deserving nations. In so doing,
it is crucial that no aspect of the system should avoid scrutiny or escape
reform.
Such an overhaul should be based on the following considerations:
• No country, without exception, shotild be inunune from facing cuts in
foreign aid. It is important that, in the face of overwhelming
202
pressures to reduce the foreign aid budget, cuts be allocated fairly and
proportionally. We strongly disagree, for example, with Israeli Prime
Minister Yitzhak Rabin, who asserted on February 8 that "Israel has
the right, more than a right." to the full amount of U.S. assistance
which it has received for the past few years. No nation should view
U.S. aid as an entitlement.
The practice of earmarking the vast majority of aid dollars for certain
favored countries should end. Foreign aid earmarking has been used,
all too often, not to ensure that all recipients receive their fair share of
desperately needed assistance dollars, but rather to protect certain
favored nations from sharing in the burdens associated with a
shrinking foreign aid budget. As a result of this political practice,
many necessary but unprotected assistance programs worldwide have
been reduced or terminated as aggregate funding levels for U.S.
foreign aid have declined. A more equitable distribution of U.S. aid to
a wide range of deserving nations would be much more successful in
promoting U.S. interests worldwide.
Aid should be provided only for specific projects or programs which
demonstrably will have a beneficial impact on the development and
well-being of the recipient country. We oppose giving lump sums of
aid to any country without full accountability and close oversight.
Congress should review the impact that Individual aid programs have
had on recipient countries.
An optimal disbursal of aid dollars would increase the proportion of
economic aid in the total assistance package and decrease the
emphasis on military hardware. While the legitimate defense needs of
friends and allies can and should be addressed, the emphasis of the
foreign aid program must be on economic development.
There should also be an unmistakable and unavoidable linkage of U.S.
foreign assistance to the human rights policies of a recipient country.
Section 116 of the Foreign Assistance Act of 1961 specifically
proscribed U.S. assistance to countries which engage in "a consistent
pattern of gross violations of Internationally recognized human rights."
It should be enforced.
Relations with the Arab World
The foreign policy objectives and priorities of the Clinton Administration
with respect to the Middle East are yet to be fully outlined. We are
pleased, however, that Secretary of State Warren Christopher embarked
on an extensive trip to the Middle East early in his term of office, and we
203
hope that his initiative will contribute to the ongoing search for peace
and regional cooperation between Arabs and Israelis. Rightly or wrongly,
there has been a perception in much of the Arab world that the Clinton
Administration Is much more partial to Israel than its predecessor and
that this bias will be demonstrated in its approach to the peace process.
Secretary Christopher's visit and his subsequent efforts on behalf of the
peace process have begun to alleviate — though not dispel — that
perception.
NAAA enthusiastically supports the ongoing Middle East peace talks and
earnestly hopes that the Clinton Administration will succeed in leading
the parties to find a comprehensive. Just, and lasting solution to the Arab-
Israeli conflict. As Americans of Arab descent, our members yearn for an
era in which all peoples in the Middle East can live in a stable and
peaceful environment. Successful negotiations between the parties will
require a true measure of compromise on all sides. Conversely, any
formula that addresses the concerns of one side to the exclusion of the
other is doomed to fail.
The active and Impartial Involvement of the Clinton Administration in the
peace process is an indispensable ingredient for a successful conclusion
of negotiations. If the peace process is to continue and succeed, the
Clinton Administration must devote its full attention to promoting a viable
and comprehensive process that will equitably balance Israel's legitimate
security needs with Palestinian national rights.
Events in the past year have, in our view, substantially diminished the
prospects for peace in the Middle East. The expulsion by Israel of 415
Palestinians from the Occupied Territories in defiance of its obligations
under the Fourth Geneva Convention of 1949 dealt a severe blow to the
peace process. Israel's use of such expulsions, which are illegal under
international law for any reason, call into question its credibility and its
commitment to the peace process. Failure to find a satisfactory solution
to the problem of the expulsions by fully implementing U.N. Security
Council Resolution 799 undermines the legitimacy of the negotiations
themselves In the eyes of the Palestinians and much of the world.
The recrudescence of the intifada and the brutal crackdown against
Palestinians in the Occupied Territories by the government of Israeli
Prime Minister Rabin has led to a surge in Palestinian deaths at the hands
of occupation forces and a substantiaMncrease in human rights violations,
as documented by the Israeli human rights group B'Tselem. As a recent
BTselem report makes clear. Palestinian fatalities caused by gunfire by
Israeli occupation forces in the territories during the first six months of
the Rabin government have increased by 20 percent in comparison with
the last six months of the government of former Prime Minister Yitzhak
204
Shamir, and the rise in the deaths of children was over 180 percent. In
addition, two-thirds of the killings of Palestinians occurred in situations
that did not threaten the lives of the Israeli occupation forces. We
oppose violence on all sides, but we believe that the B'Tselem report
raises serious questions about the commitment of the Israeli government
to peace. [See appendix I: Report by BTselem. the Israeli Information
Center for Human Rights in the Occupied Territories)
Former President Bush's firm and forthright stand on the question of
Israeli settlements in the Occupied Territories in 1991-92 provided the
Impetus necessary for the initiation and continuation of the peace
process. The de facto linkage of U.S. loan guarantees and Israeli
settlement activities made it necessary for the Israeli government to
temporarily suspend policies that are in conflict with the U.S. national
interest, although this linkage was short lived.
Despite perceptions to the contrary, Israeli settlement activity continues
in the Occupied Territories. Some 13.000 publicly financed housing
units in the West Bank. Gaza Strip, and Golan Heights are still being
completed. That construction alone could increase the Israeli population
In the territories by nearly 50 percent. About 1,500 units are also being
constructed annually with private funds. Subsidized loans continue to
reduce the real cost of housing for settlers. According to a report by the
Settlement Watch Committee of Peace Now, settlement construction
surpasses the Rabin governments commitment to block construction in
the territories above the 11.000 It had decided to continue. [See
Appendix 11: Report by the Settlement Watch Committee of Peace Now)
We believe that Congress should press Israel to adhere to basic standards
of human rights and halt Illegal expulsions of Palestinians in the Occupied
Territories. Congress should also ensure that any loan guarantees
extended to Israel will not directly or indirectly subsidize Israeli
settlement activity in the territories.
Forei^ Aid in the Clinton Era
The collapse of the former Yugoslavia and the former Soviet Union, the
civil war in Somalia, and other developments have profoundly changed
political and economic equations in the Middle East and elsewhere and
place new demands on the foreign aid budget. Changing U.S. national
security interests, therefore, require Congress to reevaluate the
distribution of scarce foreign aid dollars. Perhaps more than at any
previous time. Congress needs to rise above political considerations and
allocate aid strictly on the basis of need and other long-term interests.
205
This year, with deficit reduction and the strengthening of the U.S.
economy the cornerstone of President Clintons legislative agenda. It is
almost certain that there will be additional pressures for reductions In
the U.S. foreign aid program. It is essential that any such cuts be
distributed equitably throughout the aid program, and that no favored
countries be exempted from cuts, or given o£Fsetting aid windfalls, for
political reasons.
The President's foreign aid requests for Fiscal Year 1994 have not yet
been formulated and made public. It is impossible in this testimony,
therefore, to support or oppose specific aid recommendations for
Individual countries. We urge this Subcommittee, however, when it
deliberates on the upcoming request by the Clinton Administration, to
look at the genuine needs of each individual country and authorize levels
of assistance which will truly meet those needs. We are concerned, based
on the foreign operations appropriations for Fiscal Year 1993. that aid
levels for some Arab countries, such as Jordan and Tunisia, will be
Inadequate.
There was a wide disparity in U.S. aid per capita for the various countries
of the Middle East and North Africa, according to FY 1993 foreign
assistance estimates. (See Table 1 ] As usual, Israel, with the highest per
capita GNP of all, also received the highest per capita amount in U.S.
foreign assistance — $670 for every Israeli, compared with $42 per
Egyptian, $13 per Jordanian, $5 for every Lebanese, and $4 for every
Moroccan. From the chart below, it can be seen that Israel receives more
than 15 times as much aid per capita as Egypt and over 40 times as much
per capita as any other aid recipient in the Middle East. We urge this
Subcommittee to determine that such an imbalance cannot be justified.
This disparity has. In fact, increased in the actual allocations in
comparison with the Bush Administration's request for Fiscal Year 1993.
Jordan's per capita allocation of U.S. aid shrank from the $23 of the
Administration's request to $13 and Lebanon from $6 to $5. Oman was
particularly hard-hit. dropping from $10 of U.S. aid per capita to $4.
U.S. economic aid to Arab countries has declined from approximately
$1.4 billion in FY 1989 to $1.2 million in the FY 1993 foreign aid
allocation. Inflation has caused the value of this aid in real dollars to
decline even more rapidly. Since 80 percent of U.S. economic aid to the
Arab world is provided to Egypt, the decline in such aid to Arab countries
is even more dramatic when Egypt's aid is excluded. Economic aid to
Arab countries excluding Egypt dropped from $325 million in FY 1989 to
the $243 million allocated in FY 1993. Nearly one-fifth of this $243
million is the necessary emergency relief aid for Somalia.
206
Table 1
TOTAL AND PER CAPITA ESTIMATED U.S. AID FOR BilDDLE EASTERN
AND NORTH AFRICAN COUNTRIES. FISCAL YfeAR 1993
NATION
POPULATION
PER CAPITA
US AID
US AID FY 1993
1991
GDP. 1991
FT 1993 10I'AL
PER CAPITA
(in thousands)
(dollars)
(millions)
(dollars)
EGYPl"
54.451
679
2.267
42
ISRAEL
4.477
10.381
3.000*
670
JORDAN
3.413
1.347
46
13
LEBANON
3.384
975 (est)
17
5
MAURITANIA
1.996
471
1
1
MOROCCO
26.182
970
98
4
OMAN
1.534
5.997
6
4
TUNISIA
8.276
1.208
13
2
WEST BANK/ GAZA
1.728
579
25
16
Source: A.I.D. Congressional Presentation Document. FY 1993, Main Volume and
Statistical Annex: the Department of State Congressional Presentation
for Security Assistance Programs. FY 1993: and AID and State documents.
1993. All aid is rounded to the nearest million: population figures are
rounded to the nearest thousand: and per capita aid figures are rounded to
the nearest doUair. Population and per capita GNP figures are from the
1991 CIA fact book (public document).
• Israel receives substantial additional U.S. funding each year; usually $700-800
million in additional project funds and Joint programs.
Aid to E^vpt
The United States and Egypt continue to maintain the close and
committed relationship that has been developing over the past two
decades. Egypt's contribution of more than 35.000 troops to the
multinational forces during the Gulf crisis strengthened this relationship
even further.
Egypt has consistently worked to nurture the Middle East peace process
and promote a Palestinian-Israeli dialogue. The readiness of Egyptian
207
officials to take risks for peace, even in the face of considerable economic
difficulties at home, attests to their dedication.
In recognition of the importance of Eg5rpt as a dependable ally and a
regional leader for peace, the United States has for many years provided
Egypt with substantial levels of economic and military assistance. We
have supported, and continue to support, aid to Egypt as a contribution to
peace and stability in the Middle E^st. Egypt truly needs the aid that has
been provided over the years.
The close bilateral relationship between Egypt and the United States has
been enhanced by the extensive economic and security ties that have
developed between the two countries over the past decade. The benefits
accruing from this relationship flow both ways. For example,
coproduction of the MlAl tank is an important component in the U.S.-
E©T)tian security relationship that promotes Egyptian military self-
sufficiency and helps sustain thousands of jobs for American workers.
Programs to enhance Egyptian defense capabilities have had the
additional effect of contributing to the interoperability of Egyptian and
U.S. forces.
U.S. assistance to Egypt also plays a pivotal role in the ability of Egypt to
institute much-needed, but unpopular economic reforms. There is no
doubt that further significant reforms are both necessary and desirable in
the long run. though the burdens of such reforms on the large and
growing Egyptian populace will be substantial and must be allocated
equitably.
Aid to Jordan
Jordan has proven itself to be an indispensable partner in the search for
peace in the Middle East. Secretary of State Christopher has said that no
other party had made as much progress with Israel in the bilateral and
multilateral talks. The preservation of political and economic stability in
Jordan, especially in its current movement toward democracy, is in the
U.S. national interest. Jordan's ability to function as a central actor in
this critical phase in the peace process depends in large part upon the
willingness of the United States to help it in meeting its pressing
economic problems, which were compounded by the Gulf crisis.
Relations between Jordan and the United States were deeply strained
during the Iraqi occupation of Kuwait. Some of the positions taken by the
Jordanian government during the crisis caused the U.S. government and
the American people serious concern. Nevertheless, moves in Congress
in the past to cut off aid to Jordan have been injudicious. However
208
satisfying they may have been emotionally, such actions are certain to be
counterproductive and detrimental to the peace process, which the
Jordanian government has supported. It should be noted that relations
between Jordan and Iraq have greatly deteriorated in recent months.
The Gulf crisis had disastrous economic and political repercussions in
Jordan. It has been estimated that losses to Jordan's economy resulting
from the Gulf crisis and its aftermath totaled more than one-half of its
annual GNP. The Jordanian economy was seriously undermined as
Jordan enforced U.N.-imposed economic sanctions on Iraq, which had
been a major trading partner before the war. Jordanian exports were
seriously reduced, while oil costs increased drastically. The economy was
further burdened when the Kingdom opened its borders to tens of
thousands of refiagees fleeing devastation in Kuwait and Iraq.
At the same time, large numbers of Jordanians and Palestinians working
in the Gulf were displaced during the crisis, increasing unemployment in
the Kingdom and drastically reducing remittances from abroad. While we
are glad to report that the economic situation In Jordan has improved
from Its low point one year ago. it is still far behind its position at the
start of the Gulf War. Jordan continues to need U.S. economic assistance
to maintain its recovery and military assistance to service U.S. -made
equipment presently in its inventory and improve the operational
readiness of its armed forces.
Aid to Lebanon
NAAA applauds the Clinton Administration for sending Secretary of State
Warren Christopher to Beirut on February 22. We believe that his visit,
the first by a U.S. Secretary of State to Beirut in nearly a decade, was a
significant gesture of U.S. support for the independence, sovereignty, and
territorial integrity of Lebanon. We urge the Administration and the U.S.
Congress to allocate levels of aid to Lebanon that will adequately meet its
needs and be a tangible contribution to Lebanon's economic
reconstruction.
The ability of the U.S. government to determine Lebanon's specific needs
and devise programs which will adequately address these needs has been
hampered by the lack of an "on-site" official of the Agency for
International Development In Lebanon. We recommend that as soon as
the security situation permits, an A.I.D. official be added to the American
diplomatic contingent already present at the U.S. embassy in Beirut. This
measure would enhance the effectiveness of our programs and materially
aid the reconstruction of Lebanon.
209
Immediate efforts should also be made to help Lebanon increase its
capacity to absorb additional aid. Given the current difficulty of
administering U.S. aid programs to Lebanon from outside that country, it
is vital that U.S. aid be devoted to encouraging the expansion, efficiency,
and effectiveness of indigenous private voluntary organizations (PVOs) in
Lebanon.
NAAA strongly supports the continuation of U.S. assistance, through the
ASHA program, for quallAed institutions in the Arab world, including the
American University of Beirut (AUB). We view with alarm the
Administration's proposals to end ASHA assistance altogether, and urge
this Stibcommittee to restore adequate ASHA funding.
U.S. aid to AUB has for many years been one of the best long-term
investments in U.S.-Arab relations and a tangible signal to the
commitment of the United States to academic excellence and freedom.
The American University of Beirut has for generations been a beacon of
western thought and education in the Arab world, and its alumni Include
many of the most prominent Arab leaders and Intellectuals. We urge this
Subcommittee to ensure that this vital assistance be continued at the
same levels that it has previously enjoyed.
Aid to the West Bank and Gaza
Congress approved approximately $25 million in ESF aid and $1.9 million
in PL 480 aid for the occupied West Bank and Gaza — a substantial
increase over the previous fiscal year. We applaud this recognition of the
importance of increasing aid to the Occupied Terrttories. and consider it
to be a wise investment for peace. At the same time, we believe this
amount to be the minimum necessary to achieve the quality of aid that is
needed and we urge that the FY 1994 allocation for the West Bank and
Gaza be double the amount extended in the current fiscal year.
U.S. assistance at this level provides an important political message to the
Palestinian people. At a time when the human rtghts situation In the
Terrttortes is deteriorating and negotiations are not progressing as they
should, it is imperative that the United States maintain an adequate level
of support for the Occupied Territories.
In recent years, the economy in the Occupied Territories has suffered
severe strains as a result of the influx of Soviet immigrants into Israel and
the Occupied Territories (who take jobs away from Palestinians), the
overall repercussions from the intifada, the dislocation of thousands of
Palestinians in the aftermath of the Gulf crisis, and the continued, though
less visible. Israeli suppression of resistance to its onerous military
210
occupation. The recent sealing off of the territories from Israel has cost
Palestinians tens of thousands of jobs. The desperate economic
circumstances prevailing in the West Bank and Gaza fully justify doubling
the level of U.S. aid approved last year, particularly in light of the
enormous sums being given to Israel annually.
Over the years, private economic development and the Palestinian
educational system have been major casualties of the military occupation.
Palestinians have been denied permission to dig new irrigation wells,
discouraged in their attempts to form cooperatives, limited in their
planting of trees and vegetables, constrained from selling their produce
in Israel and elsewhere, and turned down — or made to wait indefinitely
— when appljring for licenses to begin a business project or construct a
building. Palestinian education has been completely disrupted for the
past five yezirs. although Palestinian institutions of higher education had
been harassed over much of the nearly 25-year-old Israeli occupation.
The U.S. aid program to the West Bank and Gaza has assumed even
greater importance due to the staggering increases in unemployment
that have taken place with the influx of Soviet immigrants and the
displacement of Palestinians working in the Gulf. While the Israeli
government has increased the number of Palestinians from the Occupied
Territories who are allowed to work in Israel, mostly at menial jobs, the
numbers of Palestinians employed there when the territories are not
sealed off from Israel remains below the pre-Gulf war level. Because of
the economic constraints placed on Palestinian economic activity in the
Territories by the Israeli military government, these wages, exploitative
as they may be. are necessary for the economic survival of numerous
Palestinian families. Poverty is still endemic In the Occupied Territories
and the 1.73 million Palestinians living there are in great need of
assistance. Even before the recent closures, reliable estimates of
unemployment ranged from 30-40 percent. Even many of those
employed were only able to work intermittently.
The small aid program funding economic and social development in the
West Bank and Gaza has had perhaps the highest impact of any American
aid program anywhere in the world. It is designed to increase the
marketed production of industrial and agricultural products, to improve
delivery of health services, and establish lines of communication with
Palestinian institutions. Even under the current unsettled conditions on
the West Bank and Gaza, the grassroots projects successfully established
by the American and indigenous private voluntary organizations (PVOs)
are still operational and must continue to be encouraged.
The Administration's focus on aid to the Occupied Territories as a means
to provide the essential tools for economic development of the local
211
population has been enhanced by the appointment of a full-time
representative of the Agency for International Development (AID) to the
West Bank. We support very strongly the continued presence of this
representative and would consider any move to eliminate this position to
be a retrograde step.
NAAA applauds the humanitarian efforts of the U.S. military to bring
famine relief to Somalia. The most immediate objective, to prevent the
deaths of hundreds of thousands of innocent people, has been attained.
But the multinational effort — and U.S. involvement — must continue, and
we applaud the recent vote in the House to authorize for one year the
continued U.S. participation in a U.N. -led peacekeeping mission in
Somalia. The recent history of Somalia has demonstrated that the
provision of food and medical aid. while essential, will be inadequate and
ineffective without steps to ensure the permanent restoration of civil
order. A failure to sustain the multinational involvement will ensure that
all the international community's contributions to date will have been in
vain.
If Somalia is to overcome the destruction and devastation it has
undergone, the world community must mount a sustained effort to help
Somalia repair the devastation of its food production and distribution
system and other infrastructure. All of this can only be accomplished if
Somalia is able to form a central government that will be responsive to
the people's needs and strong enough to ensure order.
We urge this Subcommittee to look with favor on continuing the U.S.
commitment to humanitarian and reconstruction efforts in Somalia.
Conclusion
We believe that the closest possible relationships between the United
States and the countries of the Arab world are an essential component for
promoting U.S. national security interests in the Middle East. These
relationships, built on mutual trust and respect, will benefit all parties
concerned.
U.S. foreign aid to the Arab World, in particular, is a wise and prudent
investment in the stability of the region that strengthens already solid
friendships and underscores the U.S. commitment to its Arab allies. We
urge this Subcommittee to review the Clinton Administration's upcoming
212
foreign assistance requests for the Arab countries with sensitivity and
concern for their compelling individual needs.
We also ask this Subcommittee to hold Israel to the same standards of
accountability that are applied to all other countries. There should be an
unmistakable and unavoidable linkage between U.S. foreign assistance to
Israel and Israeli human rights policies. Section 116 of the Foreign
Assistance Act of 1961 specifically proscribed U.S. assistance to countries
which engage in "a consistent pattern of gross violations of internationally
recognized human rights." Yet the State Department's annual Country
Reports on Human Rights Practices have documented for many years a
widespread and continuing pattern of gross Israeli human rights
violations in the Occupied Territories.
213
D'pva
o*neM Oram nniait ^mwfi yron nnn
ITSCLM • Th« MTMti infomtMA Cmmt lor HuiMn Rlimt m M OMyoiM TamforlH
Mkt tllA ItrBAl 1
la]
iwrr¥'< mrrmrmi T^.T^rn r tm m .
ntlMI tA ttlA 1
In fatal 1
■FTTfU'l I ii,ji*'i:TirrTTM'<iirr
I'Tialwi «n«1ykli of dati on fiialltlti in tho oeeuplod
torrlterltt rtvoal* orovo flndlngi rt««rd1n« tho loeurlty
forcai' tdhoronet to opm firo rofulttloni. Caaotrlion of tho
fatalltiot fro* tho Utt ilx aentho undor tho ShMir
govcrnMnt. with thooo durlna tho firot olx BOfitht undor
labln*. thoM that dooplto tho forml itaneo that tho epon-
firo roouUtlent havo.net boon altorod at all. tho iltuitlen
hat In of fact dotorloratod. During tho Rabin «evornMnt:
a. Tho ovorall nufflbor of doathi roao froa 63 to 7f. a rlta of
ovar 20K.
b. TWo-thlrdi of tha k1111no« occurrod In nen llfo-
thraatanlnfl iltuatlent. at eppoaad to eno-half during tha
Shaair govammont.
e. Tho nui^r of children aaong tho fatal Itloa roao from 6 at
tha and of tho Shaair govomaont, to 17. a riao of ovar
IBOX.
It It our bollof that tho aocurlty foreoi havo boan less
■indful of tho Instruction 'to avoid aa wch ts pesHbla
■hooting at children undor afo 14'** that appoers In the
lulas of Engagement. Moreover, the Hnltatlon that appears in
tha taction on 'opening fire aa part of the procedure for
apprehension of tutpeett.' which penilts shooting only at
suspects who are coaaltting or attoaptlng to ceanit a
dangerous erine only at their leas, ia not strictly enforced.
The instructions do net permit. In any situation, shoot 1 no
alaod at the upper body. B'Tseloa't data show that nost of
those killed were hit In tho upper body.
• The conptrison refers to tho tionths of January 1992
through June 1992 under the Shaair aovemment, and te the
nenths of August 1992 through January 1993 under Rabin. July
199? was net included, as this was the transitional period
between government i.
** This wording appears in tho section on 'opening firs in a
situation of mortal danger." Regarding 'opening firt as part
of the procadura for apprehension of suspects,* the
prohibition Is sweeping, and the roaervatien *ts such tt
pottible' deal not appear: 'one iiutt avoid opening firt it
children under ige 14... .'
., . ».»%.■> ^J^ •• •>«*T«ty« . i^ «•'•♦ .«-» •»* «*^ <^ t>*
214
Wt with to tmphislzt that thtri It no eonntctlon bitwttn thi
markad ritt In tht numbar of ihooting attacitt by Paltstlnians
In rteant aenthi, and the 1nerfas»d IneldMct of llltoal
firing by ueurlty forcit at Ptititlnlans Mho did not
•ndangar thair llvai. Supporting thli ebttrvatlon 1i tho fact
that whili tha ovarall numbar of Palaitlnlan fatal Itlat has
riaan, tha nuiibtr of Palattlnlant klllad In eireuMtancat
whara leldlart llvas wara thraatanad hat daellnad.
Aftar 5 yaara of Intifada, tha ttcurlty fercas hivt such
axparlanea In daaling with ttona-throwlng and daionitrttlons,
and htva at thair ditpetal af faet1va» non-1 athal laans of
daaling with thata iltuatleni. I'Titlan malntalna that tha
taeurlty forcai mutt limit thamsalvat to thata maaturat
during tituations In which human llvat ara net In danger. We
nutt net allow the anger of the Itraall public following the
deatht of teeurlty force members from violent attacks to lead
to an additional eycle of bloodshed. I'Tielam reiterates its
demand that the Israeli aevemmant act iHsadiately to stop
the killing In the territories, by rewording the open-fire
regulations in the spirit of Israeli law and the reoulatlons
of the Israel police, and according to ruin stipulated in
the past by the High Court of Justice.
Moreover, the oral Instructions must be an exact duplicate of
the written ones, in order to avoid an Illegal 'oral
tradition."
Strict adherence to the existing laws» verbatim, will also
lead to a significant decline In the number of fatalities.
The security establishment must properly prepare soldiers for
the policing jobs assigned to them, and must ensure that
shooting be pimltting only bty those trained to aim
accurately. The military police and the Nllltiry Prosecutor's
Office must remove all uncertainties surrounding the open
fire reoulatlons. Experience demonstrates that the
preliminary Information received from units Involved in
killings li imprecise In many cases . The ZDF tpekeapersen ' t
Office must therefore formulate71ts announcements mere
carefully.
215
HlMtlnlant yjn*^ <w tn^ T>i.t.Uft»«M hv laeuHtv fareM
Uit fix Mnthi
undtr ShiBlr
First six Bonthi
unitP Rtbln
Ronth
Jan. '92 • Junt '92
■onth
Au«. '92 • Jin. '93
Gazt
W.Butk
Tottl
6txi
y. Itnn
Tottl
Jtn.
•
Aug.
I
Ftb.
a
Stpt.
2
Mtr.
12
16
Oct.
S
Apr.
12
Nov.
1
«iy
U
Otc.
17
Jun*
7
Jan.
•
TOTAL
tl
sr
IS
TOTAL
SI
Si
* During July 1992, 9 PaUttlnlani Mrt klllad In tha occupltd
tarrlterlaa by lacurlty forcaa.
During tha firit ilx mntht of tha Rabin govam»ant, tha numbar of
fatalUlai rosa by ovr 20X (11 rnora) than wora klllad during tha lait
Ilx Mntht of tha Shanir govarnmant.
216
hv Ueuritv fartMt
LMt ilx aonthf
undtr HiMlr
rirat ilx Mnthi
unior labln
■onth
Jan. 'It - Junt '12
■onth
AuQ. 'It - Jan. '13
undar
batMaan
13-16
Total
undai*
13
batwaan
13-16
Total
Jan.
0
AU9.
0
F«b.
1
Sapt.
0
Htr.
0
*.
Oct.
0
Apr.
0
Nov.
1
N«y
0
Dm.
t
Junt
0
Jan.
1
TOTAL
1
*
TOTAL
4
11
17
In July lilt, ona child aga 3 yrt. 11 nonthi. and anothar aga 15^.
During tha first six months of tha Rabin oevarnMnt thara mas a risa of
ovar IIOS In tha nunbar af chlldran klllad (11 Bora) than during tht
last six months of tha Shamir govamMnt.
During tha lut six nenths of tho thaalr fovamBont, iom 10% of thoaa
klllad \0»f chlldran. whlla durlna tho first six aonths of tho Rabin
govornrnoftt, chlldran coaprlsod ttx of theto klllod.
217
ahvr
02-t'iii* 0,70 3»'««o««« iioTu HOB' »»»wii. est Tn • mi im7 -• e-y^n.
Jinuaty 17. 1993
<;ettl«m«nt Watgh f ommji^g* - report on cnnatruction and houAJny
In a survey of th« Utt few days, the settlement watch ooaunittee found new
construction under pace Ln some settlements In the West Bank. The
corasiittce cbaxgea that this conatmctloa s«zpaaa«s the govemmenu
commitment to block huthcr conatmetioa in the tecxikorica, over the 11,000
nnJU that it decided to continue.
The committee found that in the settlements of Itamar (Tel'Haim) in the
Nablua area, 36 new units were constructed. This Is in addition to 40 units
that were constructed after the elections in June. The committee found large
scale preparations for construction near the settlements Naaie, in the
Rammailah dtstnet. as well as preparations for some tiO-100 uiUts ut Telcm,
tn the Hebron area. According to the scale of the worka, they are not done
with private financing.
Peace Now call* upon tha goveraaicnt to stop immediately all new
construction and to keep ita coofimitmenta. Peace New says that
contiaitatlon of eoastractien at this tine is an obstacle to the peace talks tn
Washington and it raiaca tension and violence in the Utritortcs. The
movement adds that the government at Israel will have to blame ittelf as
well, if a new wave of Palestinian violence cxupta In the ncax future.
The committee has also cheeked the status of sales in settlements and found
that prices go down and there are hardly any sales of houses that are ready.
In nearly 30 settlements in the West Bank and Gnu Strip, prices are low and
mortgages cover most of the required financing, and in some cases-all of it.
The price for a regular unit of 70 sq. meters (on land of SOO sq. meters) is
about S 30,000. There is much difflmlty in selling second hand apartments
in settlements such as Artel.
The committee travelled along some of the newly constructed roads for
settlers. \iy particular, on the road from Eli to Shilo, of nearly 8 Km., no
other vehicle could be detected tn a full hour at nud>4ay. The movement
accuses the government of wasting investmcnia for infrastructure, while
inside Israci the situarton of roads dateneratea.
218
SUPPLEMENTAL QUESTIONS SUBMITTED BY
THE SUBCOMMITTEE ON EUROPE AND THE MIDDLE EAST
TO THE DEPARTMENT OF STATE
AND RESPONSE THERETO
APRIL 28, 1993 HEARING ON U.S. FOREIGN ASSISTANCE
TO THE MIDDLE EAST
GECJEEAL
QUESTION 1:
What further information can you give us about reports that the Saudis
pledged to resume financial support for the Palestinians to encourage them to go
back to the table?
— How much have the Saudis pledged?
— What is the status of this money?
— Who will be the recipients of these funds in the occupied territories?
— Over what period of time will this money be provided?
ANSWER 1:
Palestinian leaders from the occupied territories have talked with Saudi
officials about emergency assistance for Palestinians.
We have seen press reports indicating that Saudi Arabia has pledged up to $20
million for the "Jerusalem Fund" of the Organization of Islamic Conferences (QIC)
but we cannot confirm these or other reports of Saudi contributions to Palestinians in
the territories.
Sevferal countries not directly involved in the bilaterals, including Saudi Arabia,
were helpful in getting the peace process started again.
QUESTION 2:
The President's Fiscal Year 1994 request for a Non-Proliferation and
Disarmament account establishes what has been described as a new worldwide
account of $50 million in support for U.S. non-proliferation pxilicies.
Will any of these funds be allocated for use in non-proliferation and
disarmament efforts in the Middle East, in general, and Iraq, specifically?
ANSWER 2:
219
Yes. the Non-Proliferation and Disarmament fund reflects the President's
belief that proliferation has moved to the forefront of the national security agenda.
The Department of State is part of an integrated, government-wide effort to
implement this approach.
State has proposed a $50 million budget for a four-part non-proliferation
assistance program of Education and Training, Destruction and Conversion,
Enforcement and Interdiction, and Safeguards and Verification focused on the
non-nuclear states of the Former Soviet Union, and the countries of Eastern Europe,
South Asia and South America.
One component of the Fund - Regional Non-Proliferation Initiatives -^ relates
to the Middle East. This will consist of a series of education/training activities,
technical assistance, and diplomatic consultations to support on-going U.S.
non-proliferation and arms control diplomacy in high-risk regions such as the Middle
East, South Asia and the Korean Peninsula.
- This includes the Arms Control and Regional Security (ACRS) process in
the Middle East. These talks are part of the Middle East Process to
promote face-to-face discussion of confidence-building measures. We
envision the Fund supporting workshops, demonstrations of
confidence-building exercises, and other efforts to address reuses of
proliferation.
- This Fund does not relate specifically, but will complement, the intensive
measures the United Nations directs to preventing Iraq from developing
weapons of mass destruction.
QUESTION 3:
According to the New York Times. Iraqi prisoners-of-war are being resettled in
the U.S. at taxpayer expense. 1 understand there could be almost 15,000 Iraqis
brought into the U.S. under this program.
- Is this report accurate?
- Why was this program undertaken?
- On what basis were participants selected?
- What were the respective roles of State and DOD in making this decision?
- What other agencies were involved?
- How common is this type of program?
- Were large numbers of enemy combatants and their families resettled here
after previous hostilities in which U.S. forces were involved?
ANSWER 3:
There is no plan to bring 15,000 Iraqi prisoners of war to the United States at
taxpayers' expense.
The Refugee Act of 1980 authorizes the U.S. Government to offer refugees
permanent resettlement in the United States. Refugee ceilings for all regions and
designation of nationalities of concern are determined annually in consultation with
the Committees on the Judiciary of the U.S. Senate and the House of
Representatives. No figure has yet been set for the number of any refugee group the
U.S. will admit in FY 1994 pending consultations with Congress.
220
Expenditure of government funds for the resettlement of refugees is
authorized under the Immigration and Nationality Act of 1992, Section 412. and funds
are appropriated annually by Congress. The majority of refugees admitted to the
United States become self-sufficient contributors to our society.
Refugees from the oppressive Iraqi regime have been resettled in the U.S. over
the last decade in varying numbers. From FY 1985 through FY 1991. a total of 1.833
Iraqi refugees were resettled in the U.S. These numbers mcreased after the Gulf
War. which produced nearly two million refugees from Iraq. In FY 1992. the U.S.
offered resettlement to 3,442 Iraqi refugees. An estimated 4,300 Iraqi refugees will
arrive in FY 1993.
Offering resettlement to Iraqi refugees is not a discrete program. It is part of
the Government's overall refugee admissions program. At the end of the GuLf War.
the Saudi Arabian government offered refuge to over 30.000 Iraqis who had fled Iraq
and could not return. The majority were civilians, some of whom had provided
valuable services to U.S. forces in the aftermath of the conflict. Some were former
POWs. subsequently determined by the International Committee for the Red Cross
to have civilian status and by the United Nations High Commissioner for Refugees
(UNHCR) to be refugees. For the Iraqis still remaining in the refugee camp in Saudi
Arabia two years after the end of the war. UNHCR has led a multi-country
resettlement effort. Both the Saudi government and UNHCR looked to the United
States to resettle those with ties to the U.S. or who for compelling humanitarian
reasons could not remain in camps. The Nordic countries and Iran have also
resettled sizeable numbers. It should be noted that there was considerable
Congressional support for our providing resettlement assistance to eligible members
of the group of Iraqis in refugee camps in Saudi Arabia. Of the 3,442 Iraqis resettled
in the U.S. in FY 1992, fewer than 300 refugees from camps in Saudi Arabia were
former prisoners of war. In FY 1993, approximately 640 Iraqi refugees will be
former prisoners of war.
Participants must be refugees as defined in the U.S. Immigration and
Nationality Act of 1992, Section 101(4): "The term "refugee" means (a) any person who
is outside any country of such person's nationality.. .and who is unable or unwilling to
return to, and is unable and unwilling to avail himself or herself of the protection
of. that country because of persecution or a well-founded fear of persecution on
account of race, religion, nationality, membership in a particular social group or
political opinion." The refugees are referred to the U.S. resettlement program by
UNHCR. Each individual over the age of 14 is personally interviewed by an officer
of the U.S. Immigration and Naturalization Service (INS; to determine his eligibility
for admission to the U.S. as a refugee.
The State Department manages the administrative processing of refugees. The
INS approves the refugees for admission. The Department of Health and Human
Services manages the program for resettlement assistance. At times, the Department
of Defense and other U.S. government agencies refer applicants to the U.S. refugee
program.
There is no program for resettlement of prisoners of war. There have not been
large numbers of enemy combatants and their families resettled here under the
refugee program.
II. ISRAEL
221
QUESTION 1:
Prime Minister Rabin came to office pledging economic reform. He also
promised to re-orient Israel's economy away from housing and toward infrastructure
programs, education, and loans to small companies, while increasing Israel's
privatization efforts. The Rabin government has been in office only little more than
a half-year.
- What progress toward economic reform have we seen during this period?
- What is your sense of the overall direction of the Israeli economy?
ANSWER!:
Prime Minister Rabin came into office last July with a strong commitment to
economic reform based on the two objectives of reducing government involvement in
the economy and stimulating private sector growth. The government has taken a
number of steps to accomplish this, but major political and institutional obstacles
continue to slow the pace of economic reform m Israel.
The Israeli government has made the most progress in the areas of financial
and capital market reform and trade liberalization. A new free trade agreement was
recently signed with EFTA countries to complement the existing ones with the U.S.
and the EC. In 1992, inflation was reduced to single digit levels for the first time in
two decades. The government has also sharply reduced the state budget deficit; the
1993 budget anticipates a deficit of about 4.5% of GDP, roughly half the level of
recent years. A number of steps have also been taken to simplify government
regulations governing economic activity. Progress on reforms has been slowest in the
areas of labor markets, competition policy and privatization. While the government
recently moved forward with sales of some companies and portions of two banks, it is
well behind the schedule it set for itself on privatizing the large number of
government-owned and controlled firms.
We are encouraged by the commitment of the government - including the
Prime Minister - to implement serious economic reforms. Nevertheless, much
remains to be done. We believe we will have a better sense of the prospects for
success after bilateral consultations with the Israelis on economic reform issues in the
U.S.-Israel Joint Economic Development Group (JEDG).
QUESTION 2:
In the mid-1980s, at the time of Israel's economic stabilization program under
Prime Minister Peres, the JEDG proved itself a very important instrument for
pressing Israeli economic reform. Unfortunately, it Avas not taken very seriously and
was not used to good advantage during the "Bush Administration.
- What is the status of the US-Israel Joint Economic Development Group
(JEDG)?
- What is its overall agenda?
- What is the composition of the group?
- Who will take the bureaucratic lead on the US side?
222
ANSWER 2:
We expect to have a meeting of the U.S.-Israel Joint Economic Development
Group (JEDG) in September. In the interim, we plan to hold working-level economic
consultations with the GOI in June to lay the groundwork for the September
meeting. The Group is chaired on the U.S. side by the Under-Secretary of State for
Economic Affairs. Joan Sjiero, and on the Israeli side by the Director General of the
Ministry of Finance, Aharon Fogel. The Group will include other representatives of
the two governments and may seek advice from outside economists.
The agenda of the September meeting will be worked out in consultation with
the GOI. We expect that the issues to be covered will include economic reform,
implementation of the loan guarantee agreement, and Israel purchases of U.S. goods
and services.
QUESTION 3:
During the controversy over the loan guarantees, there was considerable talk of
"re-invigorating" the Joint Economic Development Group and giving it an increased
role in the loan guarantee program.
— Is this under consideration?
— What type of responsibilities will the JEDG have in this area?
ANSWER 3:
The two governments have agreed that the JEEXJ will be the forum for
consultations on the implementation of the loan guarantee program. The issues to be
covered will include the economy, trade and general implementation of the
guarantees.
QUESTION 4:
What is the status of the U.S.-Israel Free Trade Agreement?
— How do you evaluate its implementation thus far?
— According to the terms of the agreement, the US and Israel are to reach
agreement on a final list of duty-free items-so-called. "List C"-by 1995.
Have negotiations on List C items begun yet?
— What is the status of negotiations?
— Do you expect the negotiations to be completed by 1995?
— Would failure to complete List C negotiations in any undermine or undo
the agreements already in place on List A and List B items?
ANSWER 4:
The U.S.-Israel Free Trade Area (FT A) Agreement has been highly successful in
promoting trade between the two countries.
223
According to the agreement, duties on sensitive products - the so-called "List C"
- will be eliminated by 1995. The agreement stipulated that the two countries rnay
agree to accelerate these duty eliminations. However, after considerable discussion,
the two sides have agreed to allow the duty elimination to proceed along the original
schedule with full duty elimination to take effect in 1995. Thus, no negotiations on
List C are contemplated at this time. A few duties of List C products may be
reduced ahead of schedule as part of other agreements. The lack of an accelerated
reduction of List C duties will not affect in any way the agreed reductions in List A
and List B items.
QUESTION 5:
You said on March 9 that the Rabin government has banned private
construction in settlements not having an approved development plan.
- Does that mean that there may be private construction in settlements that
do have an approved development plan?
- Will Israel face any potential penalty, in terms of the loan guarantees, if
such private construction does take place?
ANSWERS:
Settlements having an approved master development plan may engage in
private construction within the land set aside for their use without prior government
approval.
The understandings between the U.S. and Israel regarding the loan guarantees
provide for deductions from future loans based on government non-security related
expenditures, not expenditures on private construction. The Israeli government has
committed itself to decreasing the level of non-security activity in the territories.
QUESTION 6:
When is the Israeli government supposed to give us its first report on its
settlement activities, as required by our loan guarantees agreement?
- What is your estimate of the settler population in the occupied territories?
- Is that population increasing or decreasing?
- Is there a greater inflow or outflow of settlers - that is, are more people
moving in or moving out?
- Are housing values in the settlements rising or falling?
ANSWER 6:
The Israeli government will provide us with information on non-security
government exp>enditures by September 1, 1993.
The total settler population is about 260,000. The settler population is
increasing, although at a lower rate than before the June 1992 elections. There is a
greater inflow than outflow of settlers.
224
We are not certain whether housing values in the settlements are rising or
falling but, based on the large number of unoccupied houses, we assume they may be
falling.
QUESTION 7:
Could you provide a total for the Committee of all military assistance provided
to Israel in Fiscal Year 1993, from appropriated and non-appropriated accounts?
— Of the $1.8 billion in FMF funds, how much was allocated to Israel within
30 days of enactment of the President's budget request?
— What is the cash vaJue to Israel of the early provision of this FMF
assistance?
— How much of the $700 million in military eauipment drawdown authority
(granted to Israel as a result of the gulf war; has been utilized?
— What types of military equipment has Israel procured under this
authority?
— What are the savings to Israel in Fiscal Year 1994 from reductions in
weapons prices from fair pricing provisions?
— How much FMF grant military assistance is Israel dedicating to the
continued development of the ARROW anti-tactical ballistic missile in
Fiscal Year 1994? How much in U.S. Department of Defense funding?
— What is the estimated dollar value of U.S Defense Department
procurement from Israeli companies in Fiscal Year 1993? Fiscal Year
1994?,
— What all-spigots total do you get when you add all categories of military
assistance and other benefits to Israel for Fiscal Year 1994?
ANSWER 7: The full amount of $1.8 billion in FMF funds is allocated to Israel
within 30 days of the Fiscal Year 1993 Appropriations Act, and not at the time of the
President's budget request. The cash value to Israel from early disbursement is
estimated to be $30 million.
An estimated $538.1 million in defense articles have been identified for transfer
to Israel under the Special Drawdown authority. This authority allows for transfers
of defense articles and services on a grant basis and. as such, Israel does not
"procure" equipment under this authority. IX)D has already transferred ten F-15
aircraft, and has agreed to transfer APACHE and BLACKHAWK helicopters, and
other defense articles.
Israel's savings from fair pricing provisions in FY 1994 will depend on a
number of factors, including new procurement decisions and whether they decide to
use the Foreign Military Sales or direct commercial procurement channel. It is not
possible to estimate this amount at this time.
225
It is projected that Israel will dedicate $20 million in milestone payments from
FMF grant military assistance to the continued development of the ARROW
anti-tactical ballistic missile in FY 1994. assuming the program stays on schedule.
U.S. Department of Defense funding for the ARROW program is estimated to be
$57.77 million for FY 1993 and $56.43 for FY 1994.
The estimated value of U.S. Defense Department procurement from Israeli
companies in Fiscal Year 1992 was $360.8 million, including $303.9 million in prime
contracts and $56.9 million in subcontracts. The Defense Department does not have
projected figures for Fiscal Years 1993 or 1994.
At this time it is not possible to project total military assistance to Israel for
Fiscal Year 1994.
QUESTION 8:
What types of arms control regimes does Israel support for the Middle East?
— Nuclear Weapons free zones?
— Chemical Weapons free zones?
— Biological Weapons free zones?
— Adherence to the Missile Technology Control Regime?
— Does Israel support firm limits on weapons of mass destruction and their
associated delivery systems?
— What types of limits is Israel willing to support?
— How does the President's FMF request for Israel in Fiscal Year 1994 serve
to support U.S. non-proliferation policy efforts?
ANSWER 8: Israel has been an active participant in the multilateral Arms
Control and Regional Security (ACRS) talks. Israel has stated in the ACRS talks that
its goal is to remove the horrors of weapons of mass destruction and has called for
the states in the region to jointly construct a mutually verifiable zone free of
ground-to-ground missiles, chemical weapons, biological weapons and nuclear
weapons. The Israelis added, however, that these regimes could only prevail after
peace takes hold in the region. Israel is an original signatory to the Convention
against Chemical Weapons. Israel has not yet signed the Non-Proliferation Treaty
nor the Biological and Toxin Weapons Convention.
Israel does adhere to the Missile Technology Control Regime guidelines.
The President's FMF request for Israel is intended to maintain Israel's
qualitative edge against any combination of aggressors. A secure Israel will be better
able to support peace and arms control efforts in the region.
QUESTION 9:
Israel maintains active ballistic missile and anti-tactical ballistic missile
programs.
— Does the United States consider the Israeli Jericho I and II rocket projects
to be a violation of the Missile Technology Control Regime?
— Do other Missile Technology Control regime partners consider the Israeli
Jericho I and II rocket projects to be a violation of that regime?
226
ANSWER 9: The MTCR is an export control regime that seeks to control the
export of missiles capable of carrying a payload of 500 kilograms a distance of at
least 300 kilometers. The Jericho I and II are defined as Category I missiles because
they exceed these parameters, and MTCR partners would seek to control exports of
MTCR annex items to the Jericho projects. Israel has adhered to the MTCR
guidelines, and controls the experts of missiles and components which may be used to
develop urmicuined platforms capable of delivering a Category I payload. like the
Jericho.
The MTCR does not address the indigenous development of missile programs
other than through export controls. As long as there are no exports involved in the
Jericho projects, the MTCR partners would have no reason to consider them in
violation of the regime's Guidelines.
QUESTION 10:
What is the total amount of money the United States has spent to date on the
ARROW anti-tactical ballistic missile program?
— What has the ARROW program achieved to date?
— Is the ARROW superior, inferior or equal to the U.S. Patriot system?
— Do you believe the United States should continue in its support for the
development of the ARROW, or would we be better served by pursuing
improvements in the U.S. Patriot system, as well as exploring other
advances in mobile anti-tactical ballistic missile systems?
ANSWER 10: The United States spent $133 million for the Arrow Experiments
program from 1988 to 1992. The ARROW Continuation Experiments (ACES)
Program began in July 1991 and is scheduled to end in April 1995. To date, the U.S.
has spent approximately $108 million on ACES and has programmed approximately
$153 million for the remainder of the program for a total of approximately $261
million. These figures do not include any money which the Israelis may have used
from FMF funds. The Memorandum of Agreement for each program allows the
Government of Israel to use FMF funds to fund their cost-share.
The ARROW and ACES programs have demonstrated the capability to intercept
tactical ballistic missiles at critical low endo-atmosphere altitudes at hyjjersonic
speeds.
It is inappropriate to compare the Patriot and the ARROW systems. The two
systems were designed to address different threats. The ARROW is being
development as an anti-tactical ballistic missile system. The Patriot was designed as
an anti-aircraft missile. Upgrades give it an anti-tactical ballistic missile capability
but against a smaller threat envelope than planned for ARROW.
We support Israel's efforts to develop an ATBM system as part of our
long-standing commitment to Israel to maintain its qualitative edge over any
combination of likely foes. Future support for the ARROW will be based on the
availability of resources and the benefits of the program to the United States and
Israel. As noted previously, the ARROW is being designed to meet sp>ecific Israeli
requirements for an ATBM system which are not completely the same as those of the
227
United States. We are proceeding with improvements in the Patriot system as well
as pursuing other advances in mobile systems that are appropriate to U.S.
requirements.
III. EGYPT
QUESTION 1:
Does Egypt support arms control initiatives in the Middle East?
— What types, if any. arms control policies and regimes does Egypt support
for the Middle East region?
— Nuclear Weapons free zones?
- Chemical Weapons free zones?
— Biological Weapons free zones?
- Adherence to the Missile Technology Control Regime?
— Does Egypt support firm limits on weapons of mass destruction and their
associated delivery systems?
— What types of limits is Egypt willing to support?
— How does the President's FMF request for Egypt in Fiscal Year 1994 serve
to support U.S. non-proliferation policy efforts?
ANSWER 1; President Mubarak has publicly and consistently stressed his
support for the establishment of a comprehensive ban on the presence of weapons of
mass destruction in the Middle East. Egypt also reacted very favorably to President
Bush's 1991 initiative on controlling weapons proliferation in the Middle East which
called for a bJin on the development and production of all surface-to-surface missile
systems.
Egypt has been a party to the Nuclear Non-proliferation Treaty since 1981 with
the required IAEA safeguards agreement in force. Egypt has also signed, though not
ratified, the Biological and Toxin Weapons Convention. Egypt planed an active role
in drafting the Chemical Weapons Convention and has said it supix)rts the substance
of the CWC, but it has tied its signature on that document to progress by Israel
toward signing the Nuclear Non-proliferation Treaty.
Egypt is a strong player in the multilateral Arms Control and Regional Security
working group and has offered to host an inter-sessional workshop in Cairo. The
GOE is also an energetic support of arms control discussions throughout the region.
A strong, confident Egypt is a force for moderation and stability in the Middle
East. The President's FMF request for Egypt in Fiscal Year 1994 serves to support
U.S. non-proliferation policy efforts by helping Egypt maintain the stability
necessary to allow the GOE to project its moderate policies into the region.
QUESTION 2:
Could you provide for the Committee a description of ongoing clandestine
military procurement programs in Egypt? Do these programs include:
228
— The development of ballistic missile systems, both within and beyond the
limits of the Missile Technology Control Regime's?
— The development of chemical or biological weapons systems or warheads?
— Research into the development of nuclear weapons capabilities?
— Has the United States used its influence to try to turn off Egypt's interest
in such military progrzims?
ANSWER 2: Because of the nature of our information, I cannot discuss this
subject in an open session. You may, however, wish to read the Annual Report on
the Proliferation of Missiles and Essential Components of Nuclear, Biological and
Chemical Weapons.
I can say here, however, that arms control and non-proliferation issues are a
constant part of our dialogue with Egypt. Egypt has been a party to the Nuclear
Non-proliferation Treaty since 1981 and is a strong supporter of that Treaty. To the
extent of our knowledge, Egypt is in full compliance with its commitments under the
NPT. Egypt has also signed, though not ratified, the Biological and Toxin Weapons
Convention. We are strongly encouraging the GOE to sign the Chemical Weapons
Convention, despite its reservations, and have discussed with the GOE the possibility
of Cairo adhering to the guidelines of the Missile Technology Control Regime.
QUESTION 3:
Could you provide the Committee with information regarding Egyptian
military activities outside Egypt?
— Are Egyptian forces engaged in any military operations beyond Egypt's
borders?
— Are Egyptian forces in the Sudan?
ANSWER 3: During the Gulf War, Egypt provided the second largest foreign
military contingent after that of the United States. Since the war, those forces have
returned to Egypt. Egypt currently is providing peacekeeping forces to the United
Nations for service in Somalia, Bosnia. Angola and Western Sahara.
To our knowledge, Egypt does not have any troops in Sudanese territory,
although it does have forces in the disputed Hala'ib administrative area along the
border. President Mubarak has publicly pledged that he does not intend to engage in
military action against Sudan.
QUESTION 4:
Does Egypt receive grant military assistance from other countries besides the
United States?
— If so, identify those countries and please provide the levels of military
assistance that they provide in dollars?
229
ANSWER 4: We are not aware of any major grant assistance received by
Egypt from other countries. If such exists, it is likely nominal. However, it is
possible that other countries may have helped Egypt finance purchases of some
military equipment.
QUESTION 5:
Are other countries procuring military equipment and related technologies
from Egypt?
- What types of military equipment and related technologies does Egypt sell
other nations?
- Does Egypt have any on-going non-U.S. military cooperation agreements,
or coproduction agreements with other countries?
- If so. what are those countries and what is the nature of those agreements?
- Do any of those agreements affect the sale, or third party transfer, of U.S.
defense equipment?
- Are any of those agreements in violation of U.S. law?
ANSWER 5: Much of Egypt's defense industry is involved in the manufacture
of small arms and ammunition. Their purchase by the Gulf states reflects a need for
these particular items and the relative cost advantage Egypt has over extra-regional
suppliers because of lower transportation costs.
Egypt, however, has had limited success in generating an export market for
military equipment produced or assembled in Egypt. This includes armored cars, a
missile/gun anti-aircraft system and artillery rockets. Export sales have dwindled in
recent years.
Egypt does have licensed assembly and production agreements with sorne
European countries. However, Egyptian defense production is aimed primarily at
supporting domestic military requirements and does not directly affect the sale or
third party transfer of U.S. defense equipment. These sales are not in violation of
U.S. law.
QUESTION 6:
Your report on the Egyptian economy cites the following "Debt relief and
capital inflows have given Egypt an unprecedented opportunity to restructure its
economy with generous donor suppx)rt."
- What progress is Egypt making on structural reform?
- Is Egypt meeting IMF and World Bank targets?
- Where is Egypt falling short?
What is the next step with the IMF and World Bank?
ANSWER 6: Egypt has made substantial progress on its structural reform
program over the past two years. Nevertheless, much remains to be done. It has met
IMF and World Bank targets, though with some delays, and is now negotiating new
programs with both institutions.
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Important reforms which have been implemented by the Egyptian government
over the past two years have included:
— freeing exchange and interest rates;
— reducing the government budget deficit from over 20% of GDP to about
four percent:
— beginning privatization, including offering for sale 22 public sector entities
so far this year;
— liberalizing the import and export regimes;
— reducing subsidies on a wide variety of goods; and
— removal of investment barriers.
These reforms are already bearing fruit. Capital repatriation has brought back
funds which Egyptians had long held overseas, and economic growth, while slow, has
been greater than projected. However, we believe Egypt needs to move more
aggressively on privatization and tariff reduction.
Egypt is engaged in negotiations with the IMF and IBRD on new reform
programs. The pace of reform is a primary issue in the discussions.
We are pressing Egypt to move more rapidly on reform. However. Egypt will
continue to need U.S. assistance to undertake such socially disruptive reforms as
privatization. The U.S. has supported Egypt's reform program at the IMF and
World Bank, through our assistance program, and with debt relief.
QUESTION 7:
I want to get a run-down on key economic reform measures in Egypt.
— Is there now a unified exchange rate and a convertible currency?
— Where is Egypt on the liberalization of prices for electricity, oil and
cotton? When will Egypt reach world prices?
— You note: "privatization has lagged and reductions in the import ban list
have been at least partly offset by tariff increases and new non-tariff
barriers. Liberalization of investment approvals is not yet complete, and
local content requirements have not yet been eliminated."
— Why has progress in privatization been so disappointing?
— Does the lack of progress on this score mean that future World Bank
structural adjustment loans are in jeopardy?
ANSWER 7: Egypt has unified the exchange rate and the pound is now
floating against other currencies. It is fully convertible.
Liberalization of prices has moved forward according to, and sometimes in
advance of. World bank and IMF targets. Electricity prices have been raised to 69%
of long-run marginal cost, oil prices have come up to about 80% of international
prices, and cotton prices have reached 66% of international prices. Although there is
no fixed schedule for reaching world prices, further increases are under discussion.
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Progress in privatization has been slower than hoped for in many of the
countries undergoing transformations to market economies. In the case of Egypt, the
high level of unemployment, now about 20%, and government concern about the
disruption of employment which could result from rapid privatization has slowed
progress. Egypt has, however, begun to move forward in the past few months,
putting up for sale 22 public entities.
Disbursement of the final tranche of the World Bank's structural adjustment
loan was delayed in July 1992 due to lags in the implementation of the reform
program. The tranche was released early this year when Egypt met the necessary
conditions. The World Bank is now engaged in negotiations with Egypt to develop a
possible new facility.
QUESTION 8:
What is the extent of private American investment in Egypt at this time and
has there been any movement in the last two years?
- The bulk of U.S. investment in Egypt has traditionally been in the
petroleum sector. In what other areas do we see an expansion of U.S.
mvestment in Egypt?
ANSWER 8: U.S. direct investment in Egypt (historical cost basis) totaled $1,515
billion in 1991 (the latest figures available), up from $1,465 billion the year before.
Besides petroleum. U.S. firms are active in banking and in a wide range of
manufacturing industries, producing goods for both the domestic and export markets.
Increases in investment took place in both banking and manufacturing. Anecdotal
evidence indicates that there has been an increase in interest in Egypt among U.S.
investors since the economic reform program began in 1991.
IV. WEST BANK AND GAZA QUESTION
QUESTION:
I understand that the Israelis have loosened up some of their restrictions on
Palestinian businesses in recent weeks.
— Is that accurate?
- What other steps, if any, has Israel taken since Prime Minister Rabin was
elected to improve the economic situation in the territories and create jobs?
— How would you characterize Israeli economic policy toward the territories?
ANSWER; The economic situation in the occupied territories has been severely
disrupted in recent weeks by security measures imposed by the GOI. primarily the
restrictions on Palestinian entry into Israel as a result of increased attacks against
Israelis. These restrictions have deprived many Palestinians of access to their jobs in
Israel, a major source of income for the occupied territories.
232
In order to alleviate the economic problems caused by these restrictions, the
GO! allocated NIS 200 million (about $70 million) to create jobs in the occupied
territories to replace those lost in Israel. After Prime Minister Rabin was elected
last June, the GOI took a numl)er of other steps to improve the economic situation in
the occupied territories. These include income tax reforms, tax incentives for new
businesses, incentives for foreign investment, relaxation of rules on bringing funds
into the occupied territories, and approval of business permits.
In general, the GOI supports economic growth in the territories. However, the
economic cost of Israeli security measures, together with the already poor business
climate in the occupied territories following five years of Intifada, overshadows GOI
measures designed to promote economic growth.
V. IQEDAM
QUESTION 1:
Islamists are generally considered the leading grouping in the Jordanian
parliament, and many experts are predicting that the Islamist party, which includes
the Moslem Brotherhood, will win the most seats in November.
— Are we concerned about the strength of the Islamists in Jordan?
— Are they committed to democracy?
— Do they hold views inimical to U.S. interests?
— Do they oppose the peace process?
— From their position of strength in parliament, are they able to affect
Jordan's peace process policies?
— What are the Islamists' goals for Jordanian society?
— Are we concerned abut the prospect of Islamist political strength in
Jordan?
ANSWER 1: Within Jordan's increasingly democratic political system, the
Islamists, especially the Moslem Brotherhood, are the best organized political force.
They have formed a political party, the Islamic Action Front (lAF). to compete in
parliamentary elections later this year. More than a dozen other parties have also
been licensed.
As we have said many times in the past, Islam, one of the world's great
religions, is not an enemy of the U.S. and the U.S. is not opposed to Islam. We do
oppose, however, extremism and intolerance, either in a secular or religious guise,
and the use of violence as a political tool, and it is by our standards of respect for
human rights, democratization and rule of law that we judge the behavior of any
political group. To date, Jordanian Islamists have demonstrated a commitment to
work within a democratic system to bring about the changes they desire in Jordan.
Jordanian Islamists, including the Moslem Brotherhood, are not unanimous, however,
as to their goals for Jordanian society or on the issue of whether democracy is the
only way to achieve such goals. Some individuals have said, for example, that
233
democracy is a useful road to power, which might then be used to establish a state
rules in accordance with their mterpretation of Islamic law. implying that power
would be exclusively the prerogative of such a state, with no provision for a
democratic change in government and policies.
As organizations, the Moslem Brotherhood and the lAF oppose the peace
process and believe that an Islamic state should be established in all the territory
comprising the state of Israel. Islamists in parliament give voice to skepticism in
Jordan about the value of the peace process and its ability to bring about a just,
lasting and comprehensive peace to the region. This opposition to the peace process
could limit the Jordanian government's tactical flexibility. If there is progress in the
Palestinian negotiations, the Moslem Brothers' criticism of the process will lose force.
Other U.S. interests which Islamists oppose include continuing sanctions
enforcement against Iraq and possibly secular democracy as a form of government
rather than merely as a means to power, which would then be denied to others.
Islamist political strength in Jordan is due largely to economic problems. Local
aid programs for the poor and Islamist support for the Palestinians are important
causes of this popularity. If Jordan's economic situation improves and the prospects
for peace grow brighter, the development of secular political parties will also check
the strength of the Islamists, as will the continuing popularity and authority of King
Hussein. However, the Islamists are positioned to take full advantage of any
significant instability whether it is due to further economic decline or a breakdown in
the peace process.
QUESTION 2:
What is the overall state of the Jordanian economy today?
- How much is compliance with UN sanctions costing the Jordanian
economy?
- How is Jordan making up for this shortfall?
ANSWER 2: In 1992, economic performance was very strong: Jordan met all
targets of its IMF standby arrangement by wide margins, its $4.7 billion economy
grew an impressive 11% and its budget deficit fell from 18% to less than 6% of GDP.
Inflation was held to 6.8%. Largely as a result of dislocations of the Gulf War
unemployment still hovers near 20%. The government plans to create 6,000 jobs in
1993 to help alleviate this problem, and is investing to improve infrastructure and
social services which have been taxed severely as Jordan absorbed the Gulf War
returnees (close to 10% of its population).
Although much of 1992 growth resulted from non-recurring factors
(construction boom and customs receipts from returnees), activity in the first half of
1993 points to continued growth of 5-6%. A recently completed survey of social
effects of economic restructuring, however, showed that over 20% of Jordan's
population lives below the poverty line.
Estimates of gross annual losses from Iraqi sanctions range f rom $175-$200
million. These stem mainly from a drop-off in trade and increased shipping costs
resulting from inspection of ships bound for the port of Aquba. As an indirect
234
consequence of sanctions. Jordanian traders and individual speculators may have lost
approximately $70 million earlier this month, when Iraq withdrew pre-war 25 dinar
notes from circulation.
Despite this loss of income from sanctions (and other consequences of the Gulf
War). Jordan has received funds from the IMF, World Bank, G-7 countries, and
Arab regional funds. It has secured concessional prices for its oil imports from Iraq
(with tacit acknowledgment by the UN), it has made some progress in exploiting new
markets for its exports and it has taken steps recommended by the IMF to
supplement revenues and control consumption. The skills and capital brought by
Gulf War returnees also provided an important boost to the Jordanian economy.
QUESTION 3:
How has the sudden return of 300,000 Jordanian citizens from the Gulf two
years ago affected the Jordanian economy?
— How effective has Jordan been in absorbing this large influx?
ANSWER 3: As twice before in the past 40 years. Jordan has proved
remarkably resilient to the shock of absorbing a significant population displaced by
war. As a result of the Gulf crisis, Jordan's population (already one of the world's
fastest growing) increased by nearly 10%. Despite the burden on services (schools,
power generation, hospitals, health), food and water supply, and the labor market, in
1992. Jordan's $4.7 billion economy grew an impressive 11% and its budget deficit fell
from 18% to less than 6% of GDP. Inflation was held to 6.8%. Although
unemployment still hovers near 20%. and many of the returnees are chronically
underemployed, the government plans to create 6.000 jobs in 1993. and civil service
wage increases — delayed for a number of years - were finally approved this year.
In addition, the government plans ambitious upgrades in infrastructure and social
services.
Much of 1992"s GDP growth resulted from non-recurring factors directly
attributable to the returnees - construction boom, repatriation of savings from the
Gulf states, and customs receipts generated from imports of personal belongings.
While the returnees thus far have invested their money primarily in real
estate, it is expected they will increasingly turn to investments in the productive
sectors, and that their skills and capital will continue to provide an important boost
to the Jordanian economy.
QUESTION 4:
In January, at a meeting of the Paris Consultative Group, international donors
pledged $375 million to Jordan to bridge the gap needed for Jordan to receive an
IMF loan. How much of that total international pledge has been disbursed?
— What portion of this total represented U.S. pledges?
— WTiat did other donors pledge?
— What was the size of the IMF loan Jordan received?
235
ANSWER 4: The latest World Bank estimate of Jordan's 1993 funding gap is
$312 million. Donor pledges totaling $319 million at January's Consultative Group
included plarmed disbursements by the World Bank (of a $3O-$40 million energy
structural adjustment loan this year, as well as $45 million from the project pipeline),
the IMF (in the form of a possible $20 million under the terms of a follow-on to its
current standby arrangement), Canada. EC. UK. France. Germany. Italy, Japan and
Arab banks and development funds. The Arab Fund for Economic and Social
Development pledged an import credit of $14 million, and project assistance of $42
million. The U.S. share of the total CG pledge consisted of $79 million, which
includes a housing investment guarantee. P.L. 480, Title I loans, and FY 1992 ESF
grants for policy sector reform programs. Many of the donors' pledges were
conditional.
QUES-nONS:
What other outside assistance is Jordan receiving today?
- Is it receiving loans from the Islamic Development Bank?
- Are any Arab states providing assistance to Jordan?
- Do the Gulf states continue to resist aiding Jordan?
— If so. is that strictly because of bitterness over Jordan's stance during
the Gulf war. or are there other reasons as well?
— Has the U.S. attempted to intercede with the Gulf Arabs on behalf of
Jordan?
— Aren't the Gulf states capable of replacing the oil Jordan is now
purchasing from Iraq?
ANSWER 5: At the World Bank Consultative Group in January 1993. donor
pledges totaled $319 million. Arab regional banks and funds were among the
participants at the CG. The Arab Fund for Economic and Social Development
pledged $50 million, and the Islamic Development Bank pledged an import credit of
$14 million, and project assistance of $42 million.
Although Gulf states are members of some of the regional development funds
which participated, none of them has made any bilateral aid commitments since 1990.
The cutoff of aid and economic ties is directly attributable to the perception of the
Gulf States of Jordan's position during the Gulf War. We have suggested to both
sides the advantages of normalized relations, but so far with little effect. The Gulf
states have traditionally supplied much of Jordan's energy needs as a form of
bilateral assistance, but the current state of relations makes this impossible.
QUESTION 6:
Following the Gulf war. aid to Jordan was put on hold due to concerns about
Jordanian enforcement of UN sanctions against Iraq.
What is your current assessment of Jordanian compliance with UN
sanctions?
236
— Is Jordan still purchasing oil from Iraq?
— If so. how much?
— Has the UN sanctions committee approved the continued sale of Iraqi oil
to Jordan?
ANSWER 6: The government of Jordan has stated its adherence to the UNSC
resolutions on Iraq and is making a determined effort to enforce the UN sanctions
against Iraq. Jordan also continues to make a positive contribution to the Middle
l^st peace process and to democratize its political system. Thus, after consulting
with Congress, we released earlier this year $55.6 nullion in FY 1991 FMF and FY
1992 economic and I MET funds to Jordan. We believe that the GO J continues to
make good faith efforts to prevent the export of Iraq of non-UN approved goods.
We, therefore, see no grounds to call into question aid or other cooperative
programs. In fact, we expect to begin consultations very soon on release of $50
million in FY 1992 security assistance, and plan to move forward with the
certification required for FY 1993.
Despite the UN prohibition on Iraqi oil exports (pending Iraqi acceptance and
implementation of UNSCR 706/712), the Sanctions Committee in May 1991 "took
note" of Jordan's oil imports because of the lack of alternative suppliers. While Iraq
provides half of Jordan's 60.000 barrels per day free of charge, the remainder is
charged against Iraqi debt. The Sanctions Committee has acknowledged this
arrangement.
QUESTION 7:
When was the last time Jordanians participated in military exercises with the
United States?
1993.
ANSWER 7: The last U.S.-Jordanian joint exercise was conducted in April-May
QUESTION 8:
What is the total value of Jordan's FMS debt today?
- Is Jordan in arrears on this debt?
ANSWER 8: The total value of Jordan's FMS debt is $249.6 million. Jordan is
current on repayment of that debt.
VI. LEPANON
QUESTION 1:
What role is UNIFIL performing in southern Lebanon at this time?
- In your view, is UNIFIL an effective force and deterrent?
- What is the Israeli attitude toward UNIFIL?
- What funding do you seek for UNIFIL in FY 94?
- How does that compare with what was provided in FY 92 and FY 93?
237
— Is the U.S. still assessed one-third of UNIFIL's budget?
— On what basis was that assessment made?
— Two years ago, we were told that the U.S. would payoff its arrears to
UNIFIL by FY 95. Are we still on target to do that?
— How would you assess the current financial status of UNIFIL?
ANSWER L UNIFIL continues to prevent, with considerable success given its
limited size and the complex circumstances under which it operates, hostile activities
in its area of operations m southern Lebanon. Also, it continues to protect the
inhabitants in its area of operations.
It would be inappropriate for me to characterize the attitude of another
government toward UNIFIL.
The U.S. contribution for UNIFIL. as for other UN peacekeeping efforts
around the world, is provided to the United Nations peacekeeping budget. The UN
assesses member states for peacekeeping operations authorized by the Security
Council at set rates: the U.S. assessment has been 30.4%.
The U.S. has been paying off its arrears to the United Nations in yearly
installments and expects to be current in its payments in FY 1995.
Funding for UNIFIL continues to fall short of its requirements. In the latest
UN report on UNIFIL operations (January 1993), the Secretary General noted that
unpaid assessments amounted to $228 million. This represented money owed to
member states who contribute forces to UNIFIL.
QUESTION 2:
Please describe for us the current U.S. representation in Lebanon.
— How many U.S. officers are there in the embassy?
— Given the improved security situation, are there any plans to expand that
number?
— How many U.S. military personnel are now in Lebanon?
— How many Marines serve at the embassy?
— How many are in the DAO office?
— Are there any other military personnel in the country?
— Are there any plans to consider restoring our AID mission in Lebanon?
- At what point which this step be appropriate?
ANSWER 2: Due to the continuing security threat in Lebanon, we do not
discuss how many U.S. officers are serving at the Embassy in Beirut. I am prepared,
however, to give more specific information in a classified session.
238
Improvements in the security situation could encourage our consideration of
expanding the embassy staff in Beirut. However, the continued armed activity of
certain militias, such as Hizballah, warrant caution in considering such a move.
A Defense Attache is assigned to the Embassy in Beirut. There are no Marines
assigned to Beirut.
We have an on-going AID program in Lebanon which channels assistance
through non-governmental organizations, private voluntary organizations and
American-based educational institutions. There are no plans to expand the AID
staffing in Beirut at this time.
QUESTION 3:
I understand that, late last year. President Bush renewed Presidential
Determination 85-14. which bans U.S. commercial air carriers from landing in
Lebanon and bans Lebanese air carries from landing here. I understand that this
decision was made based on the conviction that the terrorist threat to U.S. citizens,
including the possibility of hostage-taking, remains unacceptably high.
— Does the Clinton Administration plan to review this decision?
— Is any thought being given to lifting this ban?
— When is Presidential Determination 85-14 up for further renewal?
Is the terrorist threat to U.S. citizens in Lebanon still "unacceptably high"?
ANSWER 3: This Presidential Decision and pursuant Department of
Transportation orders have been in effect since 1985, and do not require annual
renewal. The policy governing these restrictions is periodically reviewed, and was
amended in August 1992 to permit U.S. shippers to write through airway bills for
cargo destined to Beirut. We are currently reviewing some aspects of the policy
agam.
While Lebanon is demonstrably a safer place for its own citizens and many
visitors, American citizens remain a target for terrorism and other violence. Groups
responsible for holding American hostages remain armed, and are publicly opposed to
the peace process which we are sponsoring. The threat to American citizens remains
high.
Therefore, the Secretary recently extended the passpx)rt restrictions for travel
to Lebanon for an additional year. The notice appeared in the Federal Register
February 24. We strongly urge Americans to stay out of Lebanon for the present.
We continue to monitor evidence of targeting of Americans and American interests
in considering when it may be appropriate to lift or amend these restrictions
maintained to protect American lives.
QUESTION 4:
Lebanon recently reached agreement with the World Bank for a $175 million
loan to support the Lebanese government's reconstruction program.
239
— What are the terms of this loan?
— When will the funds be dispersed?
— What other assistance has Lebanon received from other donors in Europe.
Japan or other international financial institutions?
— Is It accurate that the Taif Accords included a pledge of Saudi assistance
for reconstruction of Lebanon?
— What is the status of this assistance?
— Does Saudi Arabia acknowledge that this was an element of the Taif
Accords?
— What, if anything, have we said to the Saudis on this issue?
ANSWER 4: The World Bank's $175 million loan was a contribution to help
finance Lebanon's 1993-96 emergency recovery program (ERP). Total ERP
requirements are estimated at J2J billion. This emergency loan will be fully
disbursed over a three-year period, with a 17-year maturity date. 4-year grace period,
at IBRD standard variable interest rates. In response, the Lebanese government has
taken initial actions to ensure effective loan implementation and pledged reforms in
infrastructure sectors. This money will finance repairs in basic areas such as water
supply, electricity, sewage treatment, education and housing for some of the
estimated 25% of Lebanon's population which was displaced by the war.
According to the Bank and our own informal estimates, other donors have
expressed support totalling approximately $800 million. These include pledges by the
EC ($38 million). Italy (a MOO million loan was ratified by parliament m November
1992). the UNDP, and Gulf Arab Funds.
The Taif Accords, while they did not contain a specific reference to the
International Fund for Assistance to Lebanon, may have led to a Saudi initiative
some months later (spring 1990) to organize a coordinating mechanism for assistance
to Lebanon. The U.S.. while supporting the efforts of others, noted its inability to
channel bilateral assistance through IFAL. Efforts to encourage other donors
faltered with the Iraqi invasion of Kuwait. IFAL remains inactive. Lebanon and the
World Bank may negotiate other loans as the ERP and economic reforms progress.
We are not aware of IMF plans for finamcijil support for Lebanon.
The Saudis. Gulf Arabs and other traditional donors generally support GOL
efforts to develop a framework for both official and private investors, and likely wiU
be among the significant contributors to Lebanon's rebuilding. We have actively
engaged other potential donors on this issue.
QUESTION 5:
What international assistance is Lebanon receiving, aside from U.S. aid?
— Is it receiving or negotiating for any other IMF or World Bank funds aside
from the World Bank loan mentioned above?
— What is the status of the International Fund for Assistance for Lebanon
(IFAL). which was announced at the time of the Taif agreement?
— Is it largely moribund?
— Which states are members of IFAL?
240
— Have any of these states contributed funds to Lebanon via IFAL or
through other channels?
— Was the U.S. expected to contribute to IFAL?
ANSWER 5: According to the World Bank and our own informal estimates,
other donors (aside from the World Bank and the U.S.) have expressed support
totalling approximately $800 million. These include pledges by the EC i$iS million).
Italy (a $400 million loan was ratified by parliament in November 1992), the UNDEP,
and the Gulf Arab Funds. Lebanon and the World Bank may negotiate other loans
as the ERP and economic reforms progress. We are not aware of IMF plans for
financial support for Lebanon.
The Taif Accords, while they did not contain a specific reference to the
International Fund for Assistance to Lebanon, may have led to a Saudi initiative
some months later (spring 1990) to organize a coordinating mechanism for assistance
to Lebanon. The U.S.. while supporting the efforts of others, noted its inability to
channel bilateral assistance through IFAL. Efforts to encourage other donors
faltered with the Iraqi invasion of Kuwait. IFAL remains inactive.
VII. OTHER PROGRAMS
QUESTION 1:
The previous Administration requested $15 million in ESF for Oman for Fiscal
Year 1993 and allocated just $5 million. Your current request is for $5 million in
ESF for Oman for FY 1994.
— Why was only $5 million in ESF allocated for Oman in FY 93?
— What is the reason for the decline in the Omani ESF program from $15
million in Fiscal Year 1991 and 1992 to $5 million in FY 1993 and in the FY
1994 request?
— Does this reduction reflect a change in U.S.-Omani relations since 1992 or
does it reflect the increased budgetary pressure on the 150 Account?
— At the time of Sultan Qaboos' 1983 visit to Washington, the U.S. pledged its
best efforts to keep the level of economic assistance at about $20 million.
We have not come close to that figure since Fiscal year 1985 and recent
assistance levels indicate that the $20 million figure is no longer relevant to
the U.S. assistance program in Oman.
— What have we told the Omani's, if anything, regarding future assistance
levels?
ANSWER 1: The decline in levels of ESF funding for the Oman program
reflects nothing except the current budgetary stringencies under which we are
implementing our aid commitments. Oman remains a valuable political and security
partner.
241
The period from FY 1991 to the current fiscal year witnessed no growth in the
level of total funding available for zissistance programs at a time of tremendous
growth in the number of demands on such funding. Of particular note is the effect
that the requirement to fund aid to Russia and the other republics formed from the
former Soviet Union has had on other important programs like Oman's.
We have discussed with the Omani's the situation as it exists for Fiscal Years
1993 and 1994. We have stressed to them that our inability to fund the ESF program
at levels equal to those of earlier years does not reflect any decline in our
commitment to support Oman's security or its economic development. We will
continue to discuss issues related to our ESF program with the Oman government
fully and frankly.
QUES'nON 2:
The 1980 U.S. Access Agreement with Oman was renewed in December 1990.
— What is the status of this agreement?
— When does it expire?
ANSWER 2: The Access Agreement remains in force. The 1990 renewal was
valid for a period of ten years, i.e. until 2000. The agreement provides for a
mid-term review in 1995.
QUESTION 3:
The MFO has been in the Sinai for 11 years now.
— How important is it to continue this force?
— When can this force be disbanded?
— What consultations are we having with Egypt and Israel on ending this
force?
ANSWER 3; The MFO continues to play an important role in the Middle East
peace process and in advancing peace and stability in the region. The
Egyptian-Israeli Peace Treaty and its security arrangements monitored by the MFO
are an anchor for any wider regional peace that may result from current Middle
East peace negotiations. The MFO also serves as a potential model for
confidence-building measures in discussions on security in both the bilateral and
multilateral tracks of the peace talks.
The MFO protocol states: "The two Parties may consider the possibility of
replacing the arrangements hereby established with alternative arrangements by
mutual agreement." The MFO is committed to carry out its mission until that
mission is amended or terminated by mutual agreement of the Parties.
Representatives of the U.S. Government meet annually with representatives of
Israel, Egypt and the MFO to discuss current MFO operations and plans for its
future. Over time, the size of the MFO force has been reduced by atwut 25% and, in
the near term, some further minor reductions are likely. However, the Parties
themselves must decide when the MFO has served its purpose. At some future point,
probably in the context of a comprehensive Middle Eastern peace agreement, Israel
242
and Egypt may wish to consider ending the MFO force, but for now they are
satisfied with it as it is and they are not considering any substantive changes in either
its structure or mission.
QUESTION 4:
The MFO request for FY 1994 is $18 million. The FY 93 allocation was $18,166
million.
— What steps can you take to reduce the cost burden on the U.S.
government, given the extraordinary large burdens for peacekeeping
expenditure elsewhere?
— What steps are you taking to secure large cost contributions from Japan.
Germany, and the Gulf states?
ANSWER 4: The MFO is unique among j)eacekeeping forces in that its
beneficiaries, Egypt and Israel, contmue to provide two-thirds of its approximately
$55 million annual operating budget. We have recently engaged the MFO in
financial discussions, which could result in significant savings to the U.S. Army. We
have also fully supported the MFO's managers in their efforts to streamline
operations, improve efficiency and lower costs.
Japan and Germany continue to provide financial assistance to the MFO.
However, competing demands on government resources last year forced Japan and
Germany to reduce MFO contributions to one million dollars and 970.000 Deutsche
Marks (about $594,000) respectively. The MFO has contacted other countries
soliciting interest in providing financial support. However, receiving no favorable
responses, it has suspended all further efforts for now. In any event, given the
present world environment, we believe the amounts the MFO could expect to receive
m this manner would be marginal.
QUESTION 5:
In FY 1990, the Congress appropriated $5 million to be available to set up an
endowment for a scholarship program for Israeli Arabs to study in the United States.
— What is the status of this program?
ANSWER 5: AID transferred $5 million for the endowment to USIA in the
fall of 1991. The funds have been placed in an account and the proceeds are used to
fund scholarships. In its first year of operation (the 1992-93 school year), two
students are currently studying in the U.S. and seven more have been placed in
graduate programs for the fall 1993 term. The students are selected by a Board,
including representatives from the American Embassy in Tel Aviv and academics
from the Israeli-Arab community. In coming years, the program expects to be able
to place 6-9 graduate students in the U.S. each year, def)ending on the amount of
money produced by the endowment.
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SUPPLEMENTAL QUESTIONS SUBMITTED BY
THE SUBCOMMITTEE ON EUROPE AND THE MIDDLE EAST
TO THE DEPARTMENT OF EXPENSE
AND RESPONSES THERETO
APRIL 28, 1993 HEARING ON U.S. FOREIGN ASSISTANCE
TO THE MIDDLE EAST IN FY 1994
I. J^AEL
QUESTION!:
When you look at the $L8 billion in the FMF request for Israel for Fiscal Year
1994. what major defense equipment do you see Israel purchasing?
ANSWER: A comprehensive listing of both on-going and new procurement
programs that Israel intends to finance with its Fiscal Year 1994 FMF program will
be made available to Congress in the near future as part of the Classified Annex to
the Congressional Presentation Document.
QUESTION:
- Will the request include advanced U.S. fixed wing aircraft?
ANSWER: Yes.
QUESTION:
— Is Israel currently conducting aircraft trials for the purposes of procuring
advanced U.S. fixed wing aircraft?
ANSWER: Yes.
QUESTION:
— Which advanced U.S. fixed wing aircraft is Israel considering at this time?
- Additional F-16's and F-15's?
- F-18"s?
ANSWER: The Government of Israel (GOD is conducting a competition
between the Lockheed F-16 and the McDonnell Douglas F-18. The procurement of
additional F-15 aircraft is not under active discussion at this time.
QUESTION:
- If the Israelis decided to procure additional U.S. F-15's. which F-15 variant
would they be permuted to receive?
- The F-15E variant, or some modification to it?
244
ANSWER: An appropriately modified variant of the F-15E would probably be
made available.
QUESTION:
— What, if any. upgrade programs does Israel intend to pursue with respect
to its Fiscal Year 1994 FMF funds?
ANSWER: The GOT will use Fiscal Year 1994 funds to continue upgrade
programs for its F-4 fighter aircraft (Phantom 2000) and SAAR missile Ix^t
programs. New upgrade programs being planned include CH-53 helicopters, VRC
radios, zmd the F-l5 multi-Stage Improvement Program (MSIP).
QUESTION:
— Do the Israelis have any interest in procuring additional U.S. rotary wing
aircraft with Fiscal Year 1994 FMF funds?
— If so, which U.S. rotary systems are we talking about?
ANSWER: The GOI hopes to begin procurement of two naval helicopters in
Fiscal Year 1994.
QUESTION:
— What weapons systems do we anticipate Israel procuring with these Fiscal
Year 1994 funds?
ANSWER: Possible new Israeli weapons systems procurements in Fiscal Year
1994 include the Multiple Launch Rocket System and additional HeUfire missiles.
QUESTION 2:
In December. 1987, Israel and the U.S. agreed to a Memorandum of
Understanding waiving buy-national laws in order to allow defense contractors the
opportunity to compete on equal footing for defense contracts.
ANSWER: EXDD contract awards with a place of performance in Israel during
FY 1992 are valued at approximately $360.8 million. DOD contract awards to Israeli
firms for FY 1993 as of May 1993 are valued at approximately $94.2 million.
QUESTION:
— Israeli defense contractors have done well under this MOU. What is the
dollar value for Israeli DOD contracts under this MOU in FY 1992. and
projected for FY 1993?
— What was the dollar value under this MOU for U.S. contractors?
ANSWER: Israeli purchases from the U.S. totaled $467.7 million during FY
1991. and $111.7 million during FY 1992. Estimated purchases for FY 1993 are $532.7
million.
245
QUESTION:
— Why is it in the U.S. interest to continue this arrangement?
ANSWER: The reciprocal procurement MOU with Israel mutually benefits
both countries by maintaining a qualitative edge on the battlefield and by promoting
regional stability in a highly unstable part of the world. The MOU provides the
infrastructure for cooperative programs which constitute an increasingly important
element of U.S./Israeli national security and defense acquisition strategy in the
post-cold War era. The U.S./Israeli MOU enables EXDD to achieve broader, more
effective and efficient use of a declining defense budget in the acquisition of defense
material by: facilitating cooperation research and development in addressing critical
warf ighting deficiencies: acquiring defense equipment already fielded as an
alternative to expensive U.S. development programs; and achieving the goal of
armaments cooperation by deploying and supporting common, or mteroperable.
defense equipment. One need only look at the success of Desert Storm and the
critical role played by Israeli defense contractors to get a further appreciation for
the mutual benefits of the MOU. Examples include El-Op's electro-optical subsystem
for the Apache helicopter, Elbit's multi-functional display unit for the F-16. and
IMI's vertical launch system for firing Tomahawk cruise missiles.
QUESTION:
— Does a recent Department of Defense decision to award Israeli Military
Industries (IMI) a contract for Energy Containers threaten the U.S.
defense industrial base for the production of these systems?
ANSWER: No. The contract would not have been awarded to a foreign firm
had the defense industrial base been at risk. The U.S. Navy awarded a contract to
IMI on March 31. 1993 for the production of 650-gallon external fuel tanks for the
CH-53 helicopter in compliance with the Competition in Contracting Act under full
and open competition. IMI was the lowest responsive, responsible bidder. Energy
Containers Corporation (ECC) was an unsuccessful bidder in the competition. ECC
maintained that providing specialized production tooling to IMI would place the
defense industrial base at risk. IMI was not provided tooling under the contract.
QUESTION:
— Is it correct say that IMI received subsidized support directly from the
Israeli Government, and indirectly from the U.S. Government in securing
this contract?
ANSWER: DOD does not subsidize foreign firms seeking competitively
awarded contracts. A pre-award survey was conducted prior to awarding the
contract to IMI which determined IMI had the requisite physical (plant, equipment,
personnel) and financial means to fulfill the terms and conditions of the contract in a
responsible manner.
QUESTION 3:
What is the total value of U.S. major defense equipment prepositioned in
Israel?
246
QUESTION:
— Is that equipment available to Israel for its use, or is it exclusively
available to the United States?
ANSWER; Under the War Reserve Stocks for Israel legislation. DOD is
authorized to preposition $300 million worth of defense articles in Israel. We have
already prepositioned $100 million in defense articles in Israel and are currently
implementing an additional $200 million. Under the terms of War Reserve Stocks
for Israel program, the equipment is owned by the United States and can be made
available to Israel in the event of a crisis. In addition to defense equipment
prepositioned under this program, the U.S. has prepositioned about $39 million in
other defense-related equipment designated for U.S. use only.
QUESTION 4:
What, if any. military assistance did Israel receive from non-U.S. sources in
Fiscal Year 1993?
QUESTION:
— What other countries are providing military assistance to Israel?
ANSWER: The primary non-U.S. supplier of military equipment to Israel is
Germany. Bonn is currently building two Dolphin Class submarines for Israel. The
submarines are in the initial stages of construction, with delivery currently scheduled
for 1997. In fiscal year 1993. there have been no significant non-U.S. military
deliveries to Israel.
QUESTION:
— What other countries are procuring military equipment and related
technologies from Israel?
ANSWER: Although proportionally Israel is not a major arms supplier, from
1988-1992 Tel Aviv exported military equipment valued over $1.5 billion to numerous
countries in the Third World and the West. Israel's primary military exports
include aircraft overhauls and upgrades, remotely piloted vehicles (RPVs). and
electronics.
QUESTION:
— What types of military equipment and related technologies does Israel sell
to other nations?
ANSWER: Israel is one of the primary suppliers in the aircraft
refurbishment/upgrade market, for both Western and former Eastern Bloc systems.
Israel offers and has sold B707 aircraft that have been converted into aerial refueling
aircraft and airborne early warning platforms equipped with the Phalcon early
warning system. Tel Aviv is expected to display upgrade packages for MiG-21 and
MiG-23 aircraft at the 1993 Pans Air Show. Israel is competing in four West
European countries for F-16 upgrade programs. Latin America has been Israel's
traditional arms market, but Israeli companies are aggressively pursuing the rapidly
247
growing Asian market, and have extensively participated in Asian arms shows. Israel
IS also looking at East Europe as a major new arms market. Tel Aviv is marketing
ammunition, subsystems for tanks, small arms, and components and spare parts for
military aircraft. India is also seen as a potential new market. New Delhi is
interested in co-producing combat aircraft and missiles, although India's financial
difficulties will likely limit cooperation and sales. Israel maintains military
cooperation ties with both South Africa and China.
QUESTION:
— Does Israel have any ongoing military cooperation agreements with other
countries?
— If so. what are those countries and what is the nature of those agreements?
ANSWER; Israel is continuing to negotiate with Romania for the upgrade of
100 MiG-21 aircraft. Russian aircraft firms approached Israeli producers to establish
joint ventures for both military and civilian aircraft, as well as related technologies.
In 1992. Israel attempted to sell its Kfir fighter to Taiwan, but the aircraft was
rejected based on insufficient performance at too great a price. Switzerland, in
cooperation with Israel, is producing the Ranger liPV.
QUESTION 5:
What is the total amount of money the United States has spent to date on the
ARROW anti-tactical ballistic missile program?
ANSWER: The United States sp>ent $133 million for the Arrow Experiments
Program from 1988 to 1992. The Arrow Continuation Experiments (ACES) Program
began in July 1991 and is scheduled to end in April 1995. To date, the U.S. has spent
approximately $108 million on ACES and has programmed approximately $153
million for the remainder of the program for a total of approximately $261 million.
These figures do not include any money which the Israelis may have used from FMF
funds. The Memorandum of Agreement for each program allows the Government of
Israel to use F^F funds to fund their cost-share.
QUESTION:
— What has the ARROW program achieved to date?
ANSWER: The Arrow and ACES programs have demonstrated the capability
to intercept tactical ballistic missiles at critical low endo-atmospheric altitudes at
hypersonic speeds.
QUESTION:
— Is the ARROW superior, inferior or equal to the U.S. Patriot system?
ANSWER: The Arrow and Patriot systems are designed to meet different
requirements. The Arrow missile has been optimized to meet Israeli architecture
requirements for area defense of population centers and military assets. The smaller
Patriot system is being designed to meet U.S. requirements for worldwide air defense
and TBM defense of critical assets through rapid strategic deployability. Therefore.
248
the larger, heavier Arrow has the required capability to intercept TBMs at longer
ranges and higher altitudes than the Patriot system, but does not have a requirement
for strategic deployability.
QUESTION:
— Do you believe the United States should continue in its support for the
development of the ARROW, or would we be better served by pursuing
improvements in the U.S. Patriot system, as well as exploring other
advances in mobile anti-tactical ballistic missile systems?
ANSWER: The ARROW system is an Israeli system designed to meet Israeli
ATBM requirements. Whether or not the U.S. becomes involved in further
development of the ARROW system will depend on the U.S. assessment of mutual
benefits to be gained by both nations from such a cooperative development program.
II. EGYPT
QUESTION 1:
When you look at the $1.3 billion request for Egypt for Fiscal Year 1994, what
major defense equipment do you fee Egypt procuring?
ANSWER: FY 1994 is really going to be paying for equipment already ordered
or on hand such as MlAl tank kits, F-16's, AH-64 Apache helicopters, E-2C aircraft,
TOW missiles and launchers, and HMMWV's.
QUESTION:
— What amount of the Fiscal Year 1994 FMF request for Egypt is already
allcK^ted to previously agreed to arms transfers and security assistance
programs?
ANSWER: All of it.
QUESTION:
— Does Egypt intend to procure any big ticket items with these requested
Fiscal Year 1994 FMF allocations?
ANSWER: No.
QUESTION:
— What advanced military equipment has Egypt expressed an interest in
procuring during Fiscal Year 1994?
ANSWER: Ground surveillance radar sets, GPS (Global Positioning Satellite)
units, night vision goggles.
QUESTION:
249
— What, if any, upgrade programs does Egypt intend to pursue with respect
to its Fiscal Year 1994 FMF funds?
ANSWER: Submarines, F-16's/18's, additional MlAl tank kits, IFF system, and
an internal airborne jamming system for F-16's. Possibly upgrading the M60A1 tanks
to M60A3 and helicopters from CH-47C to CH-47D.
QUESTION 2:
Has Egypt expressed any interest in procuring U.S. additional fixed winged
aircraft from the United States?
ANSWER; Peripherally. Nothing firm.
QUESTION:
— If so. what threat would these aircraft be intended to deter?
ANSWER: Iran, Iraq. Libya and Sudan.
QUESTION:
— Does the United States have any interest in selling additional fixed winged
aircraft to Egypt in the next year? the next two years? the next five
years?
— If so, what types of fixed wing aircraft would these be?
ANSWER: No. The United States is not pushing sales of aircraft to Egypt.
QUESTION 3:
Has Egypt expressed any interest in procuring U.S. additional rotary winged
aircraft from the United States?
— If so. what types of rotary winged aircraft would these be and what threat
would they be intended to deter?
ANSWER: No.
QUESTION:
— Does the United States have any interest in selling additional rotary
winged aircraft to Egypt in the next year? the next two years? the next
five years?
— If so. what types of rotary wing aircraft would these be?
ANSWER: No.
QUESTION 4:
250
What are the current levels of U.S. government-to-government sales and U.S.
commercial sales to Egypt?
ANSWER: Since 1979, government-to-government: $15.7 billion; direct
commercial: $4.5 bUlion.
QUESTION:
— Do we encourage government-to-government sales, or commercial sales?
ANSWER: It is their choice. Egyptians prefer government-to-
government.
QUESTION:
— Is the commercial side of U.S. arms exports to Egypt growing?
ANSWER: No.
QUESTION:
— Which weapons programs do these commercial sales agreements entail?
ANSWER: BMY 122 mm SP howitzer, coastal minehunters. Chaparral fire
units.
QUESTION:
— Is Egypt fiscally capable of meeting these increases in commercial sales?
ANSWER: The question is not clear. Egypt depends on U.S. funding; if that
funding is decreased, then Egypt would have the fiscal responsibility.
QUESTION 5:
Has Egypt continued to pursue its past request to obtain offshore procurement
similar to that which Israel is allowed?
ANSWER: Yes. but not aggressively.
QUESTION:
— What is the U.S. response to this Egyptian request?
ANSWER:
— Not favorable. Needs Congressional legislation.
QUESTION:
— What was the total vale of direct offsets and indirect offsets for Egypt in
Fiscal Year 1992?
ANSWER: $3.2 million.
251
QUESTION:
— The anticipated totals for Fiscal Year 1993?
ANSWER; Zero.
QUESTION 6:
In January. 1990. the Bush administration notified Congress of its intent to sell
24 AH-64 APACHE helicopters to Egypt.
— What is the current status of that program?
ANSWER: On schedule.
QUESTION:
— What is the current schedule for the delivery of these APACHE
helicopters and their integration into Egypt's armed forces?
ANSWER: April-August 1994.
QUESTION 7:
What is the size of the current U.S. military mission in Egypt?
ANSWER: 30 Mil, 10 GS. 18 FSN.
QUESTION:
— How does this compare to the size of the U.S. military mission in Egypt
two years ago? four years ago?
ANSWER: Same as 1993: 30 Mil, 9 GS, 18 FSN.
QUESTION:
— What projects is the U.S. military mission in Egypt involved?
ANSWER: All.
QUESTION:
— Do we have any indication that Egyptian fundamentalists are using the
presence of the U.S. military mission in Egypt as a issue against the
Egyptian Government?
ANSWER: No.
QUESTION 8:
r-
252
Does Egypt support arms control initiatives in the Middle East?
— What types, if any, arms control policies and regimes does Egypt support
for the Middle Ejist region?
— Nuclear Weapons free zones?
— Chemical Weapons free zones?
— Biological Weapons free zones?
— Adherence to the Missile Technology Control Regime?
— EXjes Egypt support firm limits on weapons of mass destruction and their
associated delivery systems?
— What types of limits is Egypt willing to support?
— How does the President's FMF request for Egypt in Fiscal Year 1994 serve
to support U.S. non-proliferation policy efforts?
ANSWERS:
Fundamentally. Egypt supports a Middle East region free of all weapons of
mass destruction and seeks this outcome as a cornerstone objective of the Middle East
Peace Process. Consequently, Egypt's policy on arms control is governed by a
perceived linkage between Israel's nuclear programs on the one hand, and the
existence of chemical weapons programs in other regional states on the other hand.
This linkage has caused Egypt to argue forcefully against ratification by Arab League
members of the Chemical Warfare Conference until such time as Israel is willing to
put its nuclear programs on the negotiating table.
Despite their principles opposition, Egypt has been forthcoming on their
chemical program. Egypt played an active role in formulating the Chemical
Weapons Convention and supports the substance of that protocol, despite its refusal
to sign. Egypt and the U.S. also maintain an on-going dialogue on the subject of
chemical proliferation. The subject was most recently raised by the Administration
when President Mubarak visited Washington in April 1993.
Egypt reacted favorably to President Bush's 1991 initiative banning the
development and production of all surface-to-surface missile systems. Still. Egypt is
known to possess ballistic missiles. Low tempo research activity in SCUD missile
technology reportedly continues, and occasional reports on the Argentine-built
CONDOR missile do arise from time to time. The Departments of State and Defense
keep a sharp lookout on these activities and are obligated to levy sanctions on the
Egyptian entities involved if MTCR guidelines are violated. Egypt has signed, though
not ratified, the Biological and Toxin Weapons Convention. Although an Egyptian
biological research program has been known to exist since the 1960s, there is no
evidence of an on-going Egyptian program to develop biological weapons.
We also have no evidence that Egypt is pursuing or developing nuclear
weapons. Egypt has been a party to the Nuclear Non-Proliferation Treaty (NPT)
since 1981 and has a full-scope IAEA safeguards in force. Egyptian support for
indefinite extension of the NPT is linked to Israeli forthcomingness on the NPT. The
253
President's FMF request for Egypt in 1994 has not yet been articulated, although
Egypt has been given good indications from the Administration that current levels of
FMF funding ($1.3 billion) would be preserved for FY 1994.
Non-proliferation is a key concern of the Administration. Egyptian eligibility
for FMF funding will continue to be measured against this, and a number of other
regional policy yardsticks. FMF funding of Egypt strengthens U.S. non-proliferation
policy by lending support to the moderate pobcies of Egypt in the region. Egyptian
and U.S. regional interests coincide on most important matters. Most notable is
Cairo's capacity for bridging differences between parties to the Peace Process. Israel
agreed to address long term arms control issues in September 1992 (i.e. conceded the
legitimacy of eventually addressing the nuclear issue), during the Arms Control
Regional Security (ACRS) Working Group of the Mideast Peace Process. In return.
Egypt agreed to discuss confidence building meeisures. Cairo will host an
intersessional workshop in July 1993 for ACRS multilateral participants.
QUESTION 9:
Could you provide for the Committee a description of ongoing clandestine
military procurement programs in Egypt? Do these programs include:
- The development of ballistic missile systems, both within and beyond the
limits of the Missile Technology Control Regime's?
- The development of chemical or biological weapons systems or warheads?
- Research into the development of nuclear weapons capabilities?
- Has the United States used its influence to try to turn off Egypt's interest
in such military programs?
ANSWER 9:
We are not aware of any clandestine military procurement programs with
Egypt. As stated in the response to Number 8 above, we are cognizant of Egypt's
low-tempo involvement in some WMD activities - all of which pre-date the current
U.S.-Egyptian military-to-military relationship - and we continue to curb Egyptian
interest in such capabilities and programs to the extent that we can. The Egyptian
government is cooperating with our efforts.
III. LEBANON
QUESTION 1:
The Congressional hold on Fiscal Year 1993 IMET training funds for Lebanon
was lifted earlier this year. What is the status of these FY 93 funds?
ANSWER: The FY 1993 allocation of $400K is fully committed.
QUESTION:
254
— How many Lebanese will be able to participate in U.S. training programs
with these funds?
ANSWER: Twenty-eight Lebanese students are scheduled fro training. The
first students began training on May 23, 1993 and the remainder will start their
courses before the end of September.
QUESTION:
— Who will be trained?
ANSWER: Commissioned officers in the Lebanese Armed Forces.
QUESTION:
— Is the IMET program limited only to training officers of the national
Lebanese army?
ANSWER: No. Officers from all branches of the Lebanese Armed Forces are
eligible for training and are selected on the basis of merit.
QUESTION:
— What type of training will we be providing with the FY 93 funds, and
whatever IMET funds you are requesting for FY 94?
ANSWER; The type of training being provided with FY 1993 funds is
professional military education. $400K was requested for FY 1994. The type of
training planned for FY 1994 is more professional military education with the
addition of professional military education and technical training courses for senior
non-commissioned officers.
QUESTION:
— Will this IMET training take place in the United States?
ANSWER: Yes.
QUESTION:
— How many officers have been trained in the last three fiscal years and
what happened to them when they returned to Lebanon?
ANSWER: None. The first officers to be trained in three years are those now
entering training in the FY 1993 IMET program.
QUESTION:
— What percentage of these officers training were Christian, Sunni, Shii and
Druze?
255
ANSWER: This question is not applicable for FY 1991 or PT 1992 since no
officers were trained during those fiscal years. Religious affiliations of officers in
the FY 1993 IMET program are: Maronite (9); Greek Catholic (3); Greek Orthodox
(5): Shii (4); Sunni (6): and Druze (1).
QUESTION 2:
I understand that DOD plans to sent two Pentagon teams on fact-finding
missions to Lebanon.
— Is that accurate?
ANSWER: Yes. These teams visited Lebanon in May 1993.
QUESTION:
— What are the purposes of these missions?
ANSWER; The first mission by the Defense Security Assistance Agency (DSAA)
team was to review the status of the security assistance program.
QUESTION:
— Was one team sent to assess the equipment requirements of the Lebanese
armed forces?
ANSWER: Yes, this was part of the DSAA team's mission.
QUESTION:
— What type of equipment are the Lebanese seeking and what have we told
them?
ANSWER: The immediate needs of the Lebanese Armed Forces are
transportation and this is what Lebanon wants. Lebanon is interested in more excess
defense articles such as trucks and spare parts to support them. They are also
interested in spare parts for their M-113 armored personnel carriers. Trucks are in
short supply and do not meet the troop transportation requirements of the Lebanese
Armed Forces. The M-113 provides essential troop transport to make up for the
shortage in trucks and provide soldiers with added protection. The APCs are in dire
need of spare parts. The DSAA team saw this first hand. Nearly half of the 464
M-113s in the Lebanese Armed Forces inventory are inoperable due to continuous use
and lack of spare parts. We have told the Lebanese that we will continue to provide
them with excess trucks and spare parts and will seek Congressional approval for the
M-113 spare parts.
QUESTION 3:
Last year, the Bush Administration approved the sale of $500,000 in non-lethal
excess defense articles (EDA) - vehicles, spare parts and uniforms - to the Lebanese
armed forces.
256
— Does the Administration have any plans to provide additional EDA to
Lebanon in FY 94?
ANSWER: Yes.
QUESTION:
— What assurances have we requested and received from the Lebanese
Government regarding accountability for defense material provided by the
J.S.?
ANSWER: We have requested and received from the Lebanese government
assurances that the defense material provided by the U.S. is and will l^ used only by
the Government of Lebanon for the purpose for which it was originally intended and
that strict accountability for this equipment will be maintained. As part of this
accountability, the Lebanese Armed Forces certified receipt and end-use of all
delivered excess U.S. equipment to the U.S. Mission in Beirut by providing a current
listing of all excess U.S. defense material received by type, quantity and unit to
which the equipment is assigned. This equipment is available for U.S. inspection at
any time.
QLHESTION:
— Does it continue to be U.S. policy to approve only "non-lethal" equipment
for Lebanon?
ANSWER: Yes.
QUESTION:
— Is the Administration considering any change in its arms sales policy at the
present time?
ANSWER: Yes. We are seeking Congressional approval to provide Lebanon
with M-113 spare parts.
QUESTION:
— Is provision of FMF to Lebanon under consideration by the
Administration?
ANSWER: No.
IV. OTHER PROGRAMS
QUESTION:
What excess defense equipment did Oman receive in FY 92 and. to date, in FY
93?
257
ANSWER:
FY 1992
Item
M416A1 Trailers Cargo. 1/4T
M1002 Trucks Wrecker. lOT
MlOOl Trucks Tractor. lOT
TOTALS:
M416A1 Trailors Cargo. 1/4T
M1002 Trucks Wrecker. lOT
MlOOl Trucks Tractor. lOT
TOTALS:
OTY
Grig Unit
Acquisition
Value
Original
Extended
Value
25
28
49
$ 3.067
$198,130
$175,898
$ 76.675
$ 5.547.640
$ 8.619.002
102
$14,243,317
Est. Unit Est. Ext.
Current Value Current Value
$ 153
$ 59.349
$ 52.770
$
$ 1.664.292
$ 2.585.730
$ 4.253.847
FY 1993
Item
MlOOl 5 Ton Truck
TOTALS:
MlOOl 5 Ton Truck
TOTALS:
OrigUnit
Acquisition
QIX Value
6 $175,898
Original
Extended
Value
$ 1.055,388
$ 1,055.388
Est. Unit Est. Ext.
Current Value Current Value
$ 52.770
$ 316,620
$ 316,620
258
SUPPLEMENTAL QUESTIONS SUBMITTED BY
THE SUBCOMMITTEE ON EUROPE AND THE MIDDLE EAST
TO THE AGENCY FOR INTERNATIONAL DEVELOPMENT
AND RESPONSES THERETO
APRIL 28, 1993 HEARING ON U.S. FOREIGN ASSISTANCE
TO THE MIDDLE EAST IN FY 1994
L GENERAL
QUESTION 1:
I would like to discuss with you the Near East Government and Democracy
program in AID. I understand that this program is meant to provide regional
coordination and support to AID's democracy initiative in the Middle E^t and North
Africa.
- What activities did you fund in this program in Fiscal Year 1993?
- Is it accurate that through this program AID has been involved in assessing
the needs of several Parliaments in the region, including Jordan, Egypt
and Yemen?
- What type of work has AID done or does it plan to do in supporting
democratic institutions in these and other countries in the region?
ANSWER 1:
In this fiscal year. AID will obligate funds for accountable democratic
governance in the following areas and amounts:
- Egypt: parliamentary capacity building ($2.3 million) and rule of law
program ($1.3 million);
- Lebanon: parliamentary capacity building and administrative oversight
agencies ($2.5 million);
- Yemen: parliamentary voting system ($790,000);
- Tunisia: municipal governance ($1.2 million);
- Jordan: parliamentary information systems ($300,000) and technical
assistance for integrating democratic governance into USAID pwrtfolio
($200,000) {assummg Presidential Certification allows for obligation of FY
1993 funds];
Morocco: improving state financial accountability ($96,000) and municipal
governance training ($65,000);
- Labor Union Development: Morocco. Tunisia, Jordan. Lebanon ($380,000);
259
- Elections Support: Yemen and Morocco in FY 1993 ($800,000) and
preparation for other elections in FY 1994 ($500,000).
Parliamentary needs assessments were completed for Yemen in FY 1992 and
for Jordan and Egypt in FY 1993. We are preparing to carry out a similar
assessment for the Lebanese parliament in FY 1994. These assessments provide the
background for appropriate targeting of follow-on AID institution-building efforts.
Equally important, however, they provide host country parliamentarians with useful
information that can be used as a starting point for defining their own institutional
requirements and for developing plans for meeting their needs.
AID'S Near East governance and democracy program is proceeding along two
"tracks" in line with the Agency's Democratic Institutions Policy. First, we are taking
advantage of opportunities to support direct democratic institution building by
supportmg elections, parliamentary development, legal/judicial development and
elected municipal governance. Most of the activities funded in FY 1993 involve
direct democratic institution building. Second, we are developing ways to integrate
democratic principles in the achievement of objectives across the full range of
development sectors - from agricultural sector reform to public sector privatization
efforts. This more sectoral approach includes strengthening civil society advocacy
organizations to increase accountability of decision-makers to those affected by
decisions, as well as establishing and strengthening the institutional fora in which
sustainable consensus on critical sectoral development issues can be achieved.
QUESTION 2:
How does the Near East Government and Democracy program differ from the
Near East Regional Human Rights Program?
— The Subcommittee has only received one Congressional notification to date
on this regional Human rights program. This notification was for $25
million in FY 1992 ESF funds for human rights related training and
exchanges in Tunisia.
What other projects has AID funded under this program?
- Is it accurate that all of the money expended in FY 1992 for this program
was allocated for Tunisia?
— Given the widespread need for such programs throughout the Middle East
region, what is the reason for limiting FY 92 activities to Tunisia?
ANSWER 2:
These two programs are closely interrelated but take slightly different
approaches. The Governance and Democracy Program supports the integration of
democratic reform efforts with the achievement of broader development objectives.
This effort covers many areas of human rights, such as elections, freedom of
expression, etc. As appropriate to conditions in the Near East, this usually involves
close cooperation with host country governments and local organizations.
Complementing these efforts, the Near East Human Rights Program is specifically
targeted on U.S. government concerns about the most serious human rights abuses by
governments, particularly abuses such as prolonged detention and torture. The
increase in incidence of such abuses in recent years in part reflects the security fears
260
of regimes facing worsening economic conditions and the rise of radical
fundamentalism. Through this program, we will support efforts to increase citizen
options for redress when rights have been abuses, broaden public and judicial
awareness of international human rights standards and strengthen human rights
advocacy organizations.
Only $300,000 in ESF funding was allocated for this program in FY 1992. The
1992 notification was for a pilot activity in Tunisia using $25,000 of these funds. The
Tunisia program will be expanded to a level of $300,000 in FY 1993. AID has created
a highly flexible project mechanism for funding one or more U.S.-based NGOs and
selected activities by USIA to address human rights abuse problems in individual
countries or on a multi-country basis across the Near East. ESF funds were not
available in FY 1993 for expanding the program to countries beyond Tunisia.
All regional FY 1992 funds ($300,000 ESF) for this program were allocated for
a human rights program in Tunisia.
Because the total FY 1992 funds available for specifically addressing human
rights abuse issues were limited to $300,000 and follow-on ESF funding for other
Near East countries for future years was expected, it was felt that the most effective
approach would be to concentrate on developing the program in Tunisia first. The
Tunisian government requested this assistance and has indicated a willingness to work
together on this sensitive area. Future funding for this program would be directed
toward other countries in the region.
II. EGYPT
QUESTION 1:
The AID economic report notes the following: "Net credit to public sector
companies expanded by over 40 percent since June 1991. while credit to the private
sector contracted, partly because increased nominal interest rates dampened
borrowing."
— How can it be argued that Egypt is making progress on privatization when
the private sector is starved for credit, and the public sector keeps getting
massive new credits?
Has there been any progress since 1990 in promoting the private sector and
cutting the public sector, when a report indicated that 57% of all urban
workers and 40% of all rural workers were in the public sector?
— What has been the impact of the U.S. emphasis on reform - on converting
public sector enterprises to joint stock companies and liberalizing the
operating environment for the private sector?
— What steps is Egypt taking to reduce constraints on the private sector
included limits on government licensing, foreign exchange access,
preferential pricing on inputs for public concerns, and differential access
to capital?
— Why does the Egyptian government continue to be reluctant to rely on the
private sector as the engine of growth?
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ANSWER 1:
The government of Egypt stopped providing funds to the public sector through
the government in 1991. However, because some of these firms are losing money and
would cease their operations without a continuing inflow of funds, it was necessary
to find a way to finance these losses. Additional credit from the banking sector is the
method that the government chose. As the reform process progresses, we expect
Egyptian government support to the public sector to decline.
Credit constraints are largely attributed to the liberalization of interest rates
for both deposits and loans. As a result, the private sector is faced with interest rates
that are market determined. Rates of 2(^-25% made many commercial activities
uneconomical and reduced the demand for loans by the private sector. In addition,
many individuals with liquid capital, including entrepreneurs, have purchased
Government of Egypt treasury bills that were yielding a risk free return of
approximately 20%. This resulted in a drop in the demand for loans. There is an
abundance of credit available for the private sector for sound projects, but it has
chosen not to use it.
There has not been a reliable survey of employment since the 1990 figures
quoted above. Since 1990, however, there has not been any growth in pubhc sector
employment, and, indeed, some reductions in certain sectors such as textiles took
place. The public sector share of total employment has declined because government
budgets for employment are more tightly controlled now and because total
employment has grown.
The U.S. has emphasized privatization by whatever means possible, i.e. outright
sale and sales of shares. There has not been a U.S. policy to convert public sector
enterprises to joint stock companies. The U.S. has been emphasizing the need to
liberalize the operating environment for the private sector, as has the World Bank.
A number of reforms have taken place in the financial, trade, fiscal and enterprise
sectors since the signing of AID's Sector Policy Reform Program in late August 1992,
but it is too early to quantify impacts. The U.S. is providing technical assistance to
the Egyptian government to evaluate public sector companies for sales. These
companies include Coke and Pepsi bottling companies, and other companies related to
hotels, boiler works, vineyards, cement and electrical appliances. Since 1992, the
Government of Egypt has brought to the point of sale 22 companies and assets,
including six whoUy state-owned companies, for a total value of LE1.37 billion (U.S.
$415 million).
Egypt has reduced the need for licensing by eliminating most of the restrictions
on specific industries. The licensing is automatic and takes place in less than 15 days.
The council for approving projects established under the Joint Venture Investment
Law now meets more often. The investment application form has been shortened
and simplified. Foreign exchange is readily available from banks and foreign
currency dealers. The Egyptian pound is essentially convertible. Preferential pricing
of imports is being eliminated. For example, public and private firms will pay the
same price for electricity and fuel as of July 1, 1993. The private and public weaving
sectors are to have the same access to domestic and foreign supplies of yarn in
1993/1994. Preferential transportation rates have been eliminated. Public and
private sector firms now face the same conditions for letters of guarantee needed to
import goods duty-free for the production of exports. Access to raw cotton will be
possible for the private sector with the harvest that begins in the fall of 1993. The
262
private sector has equal access to banks with the public sector and does not face any
credit ceilings as the public sector does. All loans to the public sector must be at
commercial rates of mterest.
The Government of Egypt is still overcoming the effects of 30 years of
socialism on the mentality of the bureaucracy and the citizenry. The private sector,
especially the foreign private sector, reminds people of what had been described as
exploitation. Thus, a great deal of suspicion remains. In addition, new private
investment could result in the failure of some public sector firms with attendant
heavy political and social costs. Privatization combines the risks of perceived
exploitation with po^bly heavy social costs as new managers attempt to make the
firms more competitive by laying off people, improving work practices and finding
new suppliers.
QUESTION 2:
How do you intend to spend the project assistance you will have after sectoral
grants and CIP authorities are used?
— How much money will be needed for funding ongoing projects?
- How miiny ongoing projects will you fund with this money?
— What will you spend on:
— infrastructure?
— technology transfer?
— increased productivity? and.
— improving quality of life?
ANSWER 2:
The cash transfer and CIP program will absorb $400 million of our proposed
FY 1994 obligations. The balance will be used to fund on-going and new projects in
the following areas:
- infrastructure:
- agriculture and irrigation:
— human resources, including health and population:
- private enterprises;
— environment;
— governance and democracy;
- other, namely, technical cooperation and feasibility studies.
Of this amount. $38 million will be needed to begin new project activities.
There are 20 on-going projects to be funded with this money.
USAID/Cairo intends to obligate for each category as follows:
- infrastructure ($201 million);
— technology transfer ($71 million):
- increased productivity ($121 million); and
— improving the quality of life ($29 million).
263
However, these categories are somewhat arbitrary as our program and projects
tend to cut across sectors. Very importantly, our infrastructure projects are
intended to enhance economic growth and improve quality of life.
QUESTION 3:
Egypt is requesting $175 million in private sector CIP and $25 million in public
sector CIP.
— What mix of public and private sector CIP do you plan to maintain in
your Fiscal Year 1994 program?
- What was the CIP pipeline entering Fiscal Year 1993?
ANSWER 3:
In FY 1993, $200 million was obligated for the private sector Commodity
Import Program (CIP); there was no public sector CIP this year. USAID/Cairo has
no plans for a public sector CIP in FY 1994, but plans to obligate $200 million for the
private sector CIP. The CIP pipeline entering FY 1993 was $321,838,000.
QUESTION 4:
4. What is your P.L. 480 allocation for Egypt for FY 1993, and your request
for FY 1994?
— Can you assure us that you will continue a downward trend in P.L. 480 for
Egypt, below the $150 million allocation for FY 1992?
— Do you agree with the long-standing view of this Committee that Egypt, a
middle-income country, ought not to be a recipient of large amounts of
P.L. 480 food assistance intended for the poorest of the poor?
ANSWER 4:
The Title I program is now managed by USDA. AID is not involved in
programming these resources nor the local currency generated by their sale. For the
past two years, the Title I program has declined from the $150 million level to $40.4
million in FY 1992 and may be further reduced in PHT 1993. There is a very small
Title II program of $1 million in FY 1993 with the World Food Program. Plans have
not bee finalized for Title II for FY 1994.
The Title I program is managed by USDA. This program is an appropriate
vehicle to support market development for U.S. agricultural commodities in countries
at Egypt's income level.
QUESTION 5:
5. How do you expect to spend the $815 million provided for Fiscal Year 1994?
- What do you intend to spend on public sector and on private sector CIP
programs?
- Will there be a cash transfer or just sectoral grants in Fiscal Year 1994?
264
— The sectoral grant program was increased to $200 million in Fiscal Year
1992. It was maintained at this level in Fiscal Year 1993.
Do you plan to continue this level of funding for the sectoral grant
program in Fiscal Year 1994?
ANSWERS:
The FY 1994 program will be similar to the one in FY 1993 with funds going
toward economic reform, the commodity import program, and on-going and new
projects. USAID/Cairo does not plan a pubhc sector CIP in FY 1994. but will
obligate $200 million for the private sector CIP.
If the evaluation of the impact of USAID/Cairo's Sector Policy Reform
Program, for which $400 million will be obligated over FT 1992 and FY 1993, is
positive, it is likely that USAID/Cairo will propose a similar program for FY 1994.
Sector grants in agriculture, power and telecommunications related to policy changes
are also proposed for FY 1994.
Given the progress of the Government of Egypt in meeting the policy measures
of the FY 1992 Sectoral Policy Reform (SPR) program, the status of negotiations of
the FY 1993 program, and pending a successful outcome of an evaluation.
USAID/Cairo proposes to continue at this level of funding for FY 1994. The same
four sectors will be the focus of a new SPR.
QUESTION 6:
What will be the focus of your sectoral policy grants for Egypt in Fiscal Year
— What reforms will release of these grants be tied to?
— What has been your experience with the two major sectoral grant projects
conducted thus far - the Agricultural Production and Credit project and
the Power Sector Support Project?
— Is it your assessment that these sectoral grant projects have been successful
in attaining the desired reforms in these two areas?
ANSWER 6:
The focus of the FY 1994 Agriculture. Power and Telecommunications Sector
Support will continue to be policy reform and institutional development. The key
elements or benchmarks of the agricultural FY 1994 sectoral program are:
— liberalization of the production, marketing, ginning and trade of cotton
produced in FY 1993;
— elimination of restrictions on cropping patterns;
— adjustments in marketing policies for farm inputs to reduce the quantities
of commercial farm inputs marketed by the public sector;
1994?
265
— adoption of measures by the Agricultural Bank to improve its financial
condition to include:
o following a phased plan to reduce redundancy of employees resulting
from its divestiture,
o establishing an incentive system based on performance, and
o allowing the private sector to rent warehouse space from the
Agricultural Bank as it implements a plan to sell, rent, dispose or
divest its warehouse space: and
- continuation by the Ministry of Agriculture to implement reform
measures in the agricultural seed processing and marketing sector including
adoption of new seed legislation which establishes a deed policy and plans
to reorganize and privatize seed processing plans according to a phased
plan.
Under Power Sector Support, the Mission is carrying out a complete assessment
of the sector to identify a policy reform agenda for the Egyptian Electricity
Authority (EEA) and the Holding Compames to undertake. The grants will continue
to fund capital equipment and technical assistance, but the release of the funds will
be tied to specific reforms geared at electricity pricing and improving the
sustainability of the power initiatives.
Telecommunications Sector Support (Telecommunications V) will also be based
on a specific policy reform agenda developed with the Arab Republic of Egypt
National Telecommunication Organization (ARENTO). Institutional capacity building
will focus on providing ARENTO with appropriate measures to become a viable
commercial institution and give it adequate autonomy. This project-based sector
support activity is still in the design stage. Specific policy measures will be
negotiated with ARENTO in the near future.
USAID/Cairo anticipates that it will continue the Sector Policy Reform (SPR)
program in similar policy areas as under the FY 1992-1993 program. The current
SPR program focuses on policy reform in four sectors: financial, fiscal, trade and
enterprise. The FY 1994 reform focus and conditionality will be determined based
on performance under the current SPR and the complementary IMF and World
Bank Structural Adjustment Loans and emerging policy reform needs.
The Agricultural Sector Policy Reform Program has been in place since the late
1980's and has been the AID Mission's model for other sector policy programs.
Important agricultural reforms have resulted in an agriculture sector which is
nearing a market economy. Key elements, of our program include: (a) liberalizing
government controls over cotton and rice (rice has recently been freed of controls);
(b) eliminating far input subsidies which now include only small budgetary subsidies
for select fertilizers and credit (all exchange rate subsidies have been removed); and
(c) the divestiture of a government agricultural input monopoly.
Sector policy changes in Agriculture have proceeded on schedule with excellent
results to date. Major accomplishments include the cancellation of mandatory
low-priced government procurement of ten crops, elimination of subsidies for
imported corn, and the virtual elimination of all subsidies for fertilizer, seeds,
pesticides and credit. Moreover, farmers have not complete access to needed inputs
266
through a multi-channel system (government, private sector, coops) - all competing
in a free market. Over 90 percent of the fertilizer is being sold by 1,700 private
fertilizer dealers on a free-market basis. There was no fertilizer sold on a
free-market basis prior to 1991. Success in large part is due to the support of the
Minister of Agriculture, who has been an active participant in the process.
With regard to the Power Sector Policy Reform Program, the Government of
Egypt has grown more aware during the past several years of the importance of
correcting the price structure of electricity and reducmg the distorting subsidies.
Artificially low energy prices send false cost signals to the consumer, which lead to
over-consumption and reduced efficiency of the capital plant. In 1989, the average
price of electricity was 10% of the economic price of electricity. Through USAID's
sectoral assistance and other donor interventions (primarily the World Bank), the
price of electricity is currently at 69% of the economic price and is expected to reach
80% by July 1993 and 100% by 1995. USAID support for the electricity price reform
is being programmed to the electricity sector rather than for general balance of
payments support.
The implementation of the Power Sector Support project is proceeding on
schedule. The project is continuing to support and promote Government of Egypt
progress in reducing electricity sector subsidies and in making other energy sector
policy changes by providing capital infrastructure incentives to the Government of
Egypt. The Mission believes that this sectoral assistance program is fully successful
and is achieving its intended objectives.
QUESTION 7:
What is the status of FY 1993 sectoral policy grants?
- How much of the FY 1993 fund appropriated for Egypt have been released
thus far as cash transfers and/or sectoral grants?
- When do you expect to be able to release the remainder of the FY 1993
sectoral grant funds?
ANSWER 7:
Fiscal Year 1993 funds for the Cash Transfer Sectoral Policy Reform Program,
and the telecommunications, power and agriculture sector policy programs, are
planned as obligations for the third and fourth quarter of this fiscal year. Therefore,
no FY 1993 funds have been released to date.
A third disbursement of FY 1992 funds for the Sector Policy Reform Program
will take place in July or August 1993, after a review of progress in early July. The
FY 1993 funds ($200 million) will be obligated in July or August 1993. Disbursements
will take place over the next year as pxjlicy measures are achieved.
QUESTION 8:
As of the end of Fiscal Year 1992, the size of the economic aid pipeline for
Egypt was $2,136 billion - up from $1,882 billion in the previous fiscal year.
- What is the reason for this increase?
267
— We had seen a decline in the size of the pipeline between Fiscal Year 1989
and Fiscal Year 1992. What happened in FY 1992?
— Do you expect the pipeline to be above or below $2 billion at the end of
Fiscal Year 1993?
— What was the level of non-P.L. 480 expenditures during Fiscal Year 1992
and what do you project for Fiscal Year 1993?
ANSWERS:
There are several reasons that account for this increase. First, the Mission
shifted from a quickly disbursing cash transfer of $115 million per year to one that is
based on sector policy reform, resulting in obligating $200 million in cash but
disbursing only after specific policy measures were met by the Goveriunent of Egypt.
This resulted m only $60 million being actually disbursed in FY 1992. Second, the
private sector CIP experienced a slow demand based on currency reforms which have
resulted in convertible currency, with disbursements dropping to only $105 million as
opposed to $239 million in FY 1991. Third, the Mission started four new projects for
which FY 1992 obligations totalled $32 million. The four projects are: Export
Enterprise Development ($2 million). Technical Assistance for Policy Reform ($10
million). Population III ($10 million), and Technical Cooperation and Feasibility
Studies ($10 million). However, the pipeline is now being drawn down faster than
new monies are being obligated, and significant policy reforms are taking place.
The Mission's pipeline is steadily being reduced, and we expect this trend to
continue. However, there was a sharp increase in 1992, and this is explained by (1)
the introduction of a cash transfer program which disburses funds based on sector
policy performance, (2) four new FY 1992 project starts, and (3) slow disbursement of
the private sector CIP.
The average pipeline over the last five years has been slightly over $2.1 billion.
The Mission expects the pipeline to be about $2 billion at the end of FY 1993.
Non-P.L. 480 expenditures during FY 1992 were about $613 million. The
Mission projects non-P.L. 480 expenditures of about $900 million in FY 1993. We
expect the Government of Egypt will perform under the policy reform program,
thereby increasing cash transfer disbursements, and expect the private sector CIP to
expend at a faster rate than it did in FY 1992.
III. WEST BANK AND GAZA OIJF^TIONS
QUESTION 1:
In November 1992, AID completed a review of the West Bank and Gaza
program and issued a five year program strategy for the program in 1993-1997. This
strategy paper identified three long-term strategic objectives for the program over
the next five years:
o increased marketed production of agricultural and manufactured
goods;
o increased use of selected, improved health care services; and
268
o improved planning and management of development activities by
selected Palestinian institutions.
— My question is: How will we see this program change from what it has
been in the past?
— Will there be a new emphasis to work through indigenous Palestinian
institutions, rather than American PVOs, to try to improve the
management and other activities of these institutions?
— Are you considering providing funds directly to municipalities?
— In what way will the major objectives of the program change from what
they have been in the past?
— To what extent is job generation now a priority for this program?
— Will there by greater emphasis placed on self-sufficiency and
institution-building?
ANSWER 1:
The five-year program strategy focuses AID's efforts more precisely than
previously and in areas that are AID's strengths. Within the three objectives. AID
will insure that implementors - whether U.S. private voluntary organizations (PVOs)
or contractors - place project emphasis on Palestinian institution and capacity
building. Over the past year, we have designed a system to assure meamngful
monitoring and evaluation of progress towards achieving project objectives, including
institution buUding.
AID currently has one direct grant with a Palestinian non-governmental
organization (NGO) - the Society for the Care of the Handicapped located in Gaza.
In general, however, AID grants to Palestinian NGOs will contmue to be delivered
through American PVOs and through an American contractor in the case of a new
project being designed. Project activities wUl be focused on improving Palestinian
management and planning capabilities.
For the foreseeable future, assistance to municipalities will be provided through
PVOs in the form of training and technical assistance related to urban infrastructure
projects (implemented by American Near East Refugee Aid - ANERA) and training
m planning and management (implemented by American-Mideast Educational and
Training Services - AMIDEAST). A new AMIDEAST grant, to be implemented in
early 1994, focuses on public administration training and will include mcreased
emphasis on strengthening the municipalities' planning and management capabilities.
In negotiating new grants with PVOs, AID has required grantees to focus
project activities within the three strategic objectives of the West Bank and Gaza
program. Three grants are currently under negotiation: AMERA. AMIDEAST and
Catholic Relief Services (CRS). In addition, AID has designed the following new
projects to enhance achievement of our West Bank and Gaza strategic objectives:
— Support Services to Palestinian NGOs. Save the Children will implement
this project which will focus on improving the management and planning
capabilities of local, regional and territory-wide Palestinian organizations;
269
- Health Services Support Project. A firm experienced in health care
administration, not yet selected, will provide health management and
planning assistance for selected Palestinian NGO health care services; and
- Private Sector Support Project. A firm experienced in private sector
development will provide training and technical assistance to Palestinian
private sector firms and private sector support NGOs such as the Chambers
of Conmierce and the Union of Industrialists.
Improving Palestinian economic and social well-being is the goal of the West
Bank/Gaza program. A new initiative, the Jobs Program, is currently under design
for rapid implementation in FY 1993. The program will allocate up to $14 million in
direct job-creating activities, such as construction, that will benefit Palestinian
workers unemployed as a result of the current restrictions imposed by the
Government of Israel.
The new strategy places heavy emphasis on self-sufficiency and
institution-building. AID is emphasizing training and technical assistance to
strengthen Palestinian management and planning capabilities in the design of all new
projects. New projects for Support Services to Palestinian NGOs and Health Services
Support are designed specifically to help these organizations improve their
management skills and self-sufficiency.
QUESTION 2:
The AID strategy paper states: "AID will continue to work with PVO grantees
for a substantial portion of its programs, but will expect grantees to concentrate their
activities on the new focus areas."
- What PVOs and PVO activities will be most affected by the shift in focus
of the program?
- What are the project implications of your decision to stop financing for
capital agribusiness projects such as cold storage facilities, slaughterhouses.
packing plants, nursery facilities and tractors?
ANSWER 2:
As their existing grants have neared completion. AID has worked closely with
PVOs. providing them with clear guidance on the types of activities we will support
and requiring that their proposals be consistent with and supportive of the West
Bank and Gaza strategic objectives. Three such grants are being negotiated: American
Near East Refugee Aid (ANERA). American-Mideast Educational and Training
Services (AMIDEAST). and the Catholic Relief Services Community Building Project.
We consulted with the PVOs in developing the strategy and we have asked
them to concentrate their activities on one or two sectors. We have advised them
that we are not interested in funding major infrastructure programs (except for the
emergency Jobs Program and selected water/wastewater activities in Gaza), in
education activities or in subsidized productive enterprise programs. Since the
strategy includes focus areas in which all the PVOs are interested and experienced.
we do not anticipate that the process of focusing the program will cause them severe
disruptions. The proposals that PVOs have submitted to date have been quite
responsive to the strategy.
270
The activities cited have been implemented under ANERA grants. AID
guidelines to ANERA encourages a focus on activities in support of strategic objective
number one - increased marketed production of agricultural and manufactured
goods. These activities must contribute to both institution-building and revenue
generation, working with municipalities and agricultural cooperatives. The activities
will include wholeMde produce markets and warehouses and light industrial zones.
Primary concerns relatmg to certain capital projects as well as grants of equipment
are the appropriateness of the equipment, the ability of recipient institutions to
manage the facility or equipment provided and to cover operations and maintenance
costs. In the future grant, ANERA will assist institutions m the management and
operation of facilities and may assist cooperatives in the acquisition of equipment but
will not itself provide the equipment. In addition. ANERA and AID jointly
determined to halt construction of slaughterhouses until there is satisfactory local
ability to address environmental concerns.
QUESTION 3:
I understand that recently, under the leadership of the UN Development
Program (UNDP), the Western bilateral and multilateral donors have begun to share
information on their assistance efforts in the West Bank and Gaza.
The AID strategy paper includes a summary of on-going projects in the West
Bank and Gaza funded by Canada, West European countries, the EC. the Arab Gulf
Program for UNDP, WHO, UNICEF and WFP. Of the $200.2 million in total grants.
$127.6 million — or 63 percent — is for funding for health and education activities.
- What does this $200 million figure represent?
- What was the level of total aid for the West Bank and Gaza in 1992. in
terms of aid received not. proposed or projected?
- Is the U.S. the largest donor today contributing to projects in the West
Bank and Gaza?
- What is the EC providing?
- What are EC member-states providing bilaterally?
- What is the UNDP program doing?
- What about Japan?
- What, if anything, are Gulf nations like Saudi Arabia providing and to
whom are their funds given?
- Is it accurate that the Europeans are channelling their assistance in the
West Bank and Gaza overwhelmingly through indigenous Palestinian
institutions?
ANSWER 3:
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The summary of projects in the West Bank and Gaza is drawn from the 1992
United National Development Program Compendium of On-Going and Planned
Projects. The information in the report is not precise and does not specify what the
$200 million figure represents. Our best information is this is a life-of -project
funds-committed figure.
The UNDP requested this information for its 1992 report; however, it does not
have accurate information. At best we can determine, there is no one document that
contains a complete and accurate list of actual funds committed for assistance to the
West Bank and Gaza. Donors use different accounting methods: some may be based
on obligations, others are projections. Our best estimate is that assistance to the West
Bank and Gaza totalled approximately $170 million in 1992. Of this amount. $100
million was contributed by UNRWA and $70 million came from all other sources.
Even excluding our contribution through multilateral sources such as the
UNDP and UNWRA. we believe it is accurate to state that the United States is the
largest bilateral donor to projects in the West Bank and Gaza. On a multilateral
basis, the European Commumty's (EC) assistance may be larger.
Based on a November 1992 paper entitled "EC Aid to Palestinians," EC
assistamce to the West Bank and Gaza for 1992 is divided as follows:
— Emergency aid (unspecified amount through UNRWA);
— Assistance through UNRWA (unspecified amount); and
— Development aid ($15.2 million (12 million ECUs).
Development assistance is composed of 25 "community aid" projects in the
fields of health (6), education (14), agriculture (4) and one study. In 1991. the EC
contributed $3.8 million (3 million ECUs) to "co-financing" a total of 17 projects with
NGOs. No NGO financing is furnished for 1992.
The most recent information available on bilateral assistance from European
member-states is contained in a UNDP report entitled: "Report on External
Assistance to the Occupied Palestinian Territories in 1992." published in 1993. The
following is a list of European countries and the amount of bilateral assistance (in
U.S. dollars) provided in calendar year 1992:
Austria
$ 1,686.729
Denmark
$ 245,000
Finland
$ 30,000
France
$ 1,959.232
Germany
$ 253.000
Italy
$ 5.556.356
Netherlands
$ 1.473.008
Norway
$ 2.945.479
Spain
$ 2.000.000
Sweden
$ 4.528.000
United Kingdom
$ 222.472
TOTAI .-
$20,899,276
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In calendar year 1992. the UNDP provided $5,249,583 (in U.S. dollar equivalent)
in assistance. The following describes assistance by sector and indicates the
approximate amount of money committed to the activity in calendar year 1992:
Natural Resources:
- Development of Water Resources. Ein Samia Well #4 = $221,690:
- El-Duyuk Drinking and Irrigation Water Development = $249,847;
- Improving Water Supply Systems in Rural Areas = $118,150.
Agriculture. Forestry and Fisheries:
- Vegetable Packing and Grading Facility in Gaza Strip = $181,596.
- Health Manpower Development = $142,812;
- Improving Sewage Network in Balata Refugee Camp. Nablus = $222,304;
- Maintenance of Sewage Systems in Gaza Strip = $151,871;
- Recycling of Gaza City Effluents = $13,356;
- Sewage Disposal and Recycling in North Gaza = $1,007,469.
Education:
- Strengthening of Educational Institutions = $577,790.
Employment:
- Upgrading of Vocational Training Centers = $130,151.
Humanitarian Assistance:
- Emergency Distribution of Agricultural Inputs = $204,459.
Social Development:
- Development of Women's Institutions = $47,693.
Multi-Sectoral:
- Project Formulation, Training and Support Services = $920,886.
Japan has contributed approximately $2.5 million annually through the UNDP
for the implementation of UNDP projects. Direct assistance is currently under
consideration as is discussion of earmarking Japanese assistance provided through the
UNDP. The 1992 contribution of $2.5 million plus $.5 million in 1991 carryover funds
were placed in an emergency fund. Above and beyond this $3 million total, the
Japanese also contributed $93,000 to small projects such as the purchase of equipment
for the Arab Studies Society. Japan's assistance in 1993 through the UNDP may
increase to $5 million.
273
The United Arab Emirates and Saudi Arabia reportedly provide assistance
through local Islamic development organizations. This assistance appears to be
modest and based on personal contacts and relations with individuals representing the
local groups. While the Saudis pledged $2 million in assistance during multilateral
talks, there is no information regardmg this assistance.
European assistance is both direct to Palestinian NGOs in sectors such as credit
and health and indirect through channels similar to those AID uses - through donor
country PVOs. Prior to 1990, indirect assistance was channeled through a welfare
association in Geneva.
QUESTION 4:
I understand that, as a result of decisions made in October at the Paris peace
process multilateral on economic development, the United States is about to begin
training programs for Palestinians. As I understand it, the purpose is to teach the
Palestinians how to administer an interim self-government.
- What is the nature of these training programs?
- How many Palestinians will participate in the programs?
- How were these Palestinians chosen?
- Who is sponsoring the training?
— That is, is the U.S. government actually conducting the training, or
will it be conducted by a contractor, such as a university?
- How are these training programs being funded?
- Are the funds coming from the $25 million in ESF appropriated in FY 1993
for the occupied territories?
- Are any other states sponsoring similar training programs, via the
multilaterals or through other mechanisms?
- Are the Israelis supportive of our current approach to the training issue?
ANSWER 4:
As the parties agreed at the Madrid Conference, a five-year interim
self-government arrangement is the goal of the bilateral talks between Israel and the
Palestinians. Training Palestinians to run their own affairs is important to
supporting this goal. The U.S.-sponsored training, financed by AID, is designed to
strengthen the mid-level management skills of Palestinians. The training program, a
five-day management course, was jointly designed with the Palestinian Technical
Committee for Training, part of the Palestinian peace process organization.
Following five U.S.-funded presentations of the course, it will be presented on an
on-going basis by Palestinian trainers. (NOTE: The first course was satisfactorily
completed on May 28 and is being evaluated and reviewed for possible modification).
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Approximately 125-150 mid-level managers will be trained in the five courses to
be offered between May 24 and mid-September 1993. The Palestinian Technical
Committee for Training, made up of prominent Palestinians resident in the Occupied
Territories, selected course participants. The students in the first course were
primarily those with some knowledge of training as well as management. The Office
of Personnel Management (OPM). under contract to AID. is conducting the five
training courses, lliree OPM trainers will present the first course in May 1993 and
will continue as trainers throughout the courses. The funds for the above training
activities have come from FY 1992 ESF carryover monies appropriated for the
Occupied Territories.
AID and the Etepartment of State have worked closely with the international
community on training issues in the multilateral Economic Development working
group. Several other participants have expressed their desire to offer training in this
context, as well as to continue bilateral and other training initiatives. AID and State
want training to be a multilateral effort and therefore have urged and welcomed
other donors involvement in offering training for Palestinians. Training programs
for Palestinians have received widespread supjwrt from the regional parties including
the Government of Israel.
QUESTION 5:
It is my impression that AID has not been willing to be bureaucratically
flexible to enable programs to succeed in the West Bank and Gaza.
For example. I understand that AID recently rejected a proposal designed to
help Palestinians export produce to Western Europe because of the lack of ufhfront
money to cover the cost of performance bonds. This money would have been repaid
once the produce was sold. AID was unwilling to consider options for short term
financing to eqable the program to proceed.
— Why isn't AID more sensitive to the need to provide bridge financing for
such projects?
— The West Bank and Gaza programs operate in a unique environment, with
a number of sf)ecial problems related to occupation.
Should we be open to create approaches for addressing this unusual
__ situation and ensuring the success of our program in the territories?
ANSWERS: ,
AID and all other U.S. Government agency grants are governed by the Federal
Grants and Cooperative .Agreement Act and by Office of Management and Budget
implementing regulations. Thus. AID "flexibility" is indeed constrained. However,
within our program strategy for the West Bank and Gaza, we are willing to consider
ad hoc requests for permissible modification of our standard provisions provided that
such action would neither compromise project objectives nor dilute principles of
accountability.
.AID currently is providing a $594,500 grant to assist in the export of 61 tons of
West Bank and Gaza agricultural produce. In addition, this grant is to provide
Palestinian exporters with a detailed road map on how to market produce through
275
the Israel bureaucracy and to the European Community. The grantee for this
export-promotion activity is a for-profit business entity that submitted an unsolicited
proposal which AID accepted along with the grantee's own financial plan.
Although AID has considered very sympathetically the grantee's various
requests dunng the past six months, including statements that it cannot accomplish
the goal of the project without a sizable amount of U.S. Government money in
advance, the grantee has been critical of what it considers to be AID inflexibility.
We have cooperated with the grantee in those areas where we could, and have
furnished explanations in those areas where we could not.
We have not acceded to the grantee's request for advances for the following
reasons:
- The company is a commercial for-profit entity which does not quality for
advances:
- The company has been audited twice by the Defense Contract Audit
Agency and its accounting procedures have been found lacking in internal
controls that could adequately account for the disbursement of AID funds;
and
- As approximately 80% of the grant is for direct salaries with the remainder
covermg travel and office expenses, an advance would be used principally
to pay salaries. An advance for salaries could not have been used to
procure and export agricultural products and the lack of an advance of
funds from AID could not have hindered the procurement process.
The grantee also has proposed a revolving loan fund for agricultural producers.
At this time, our judgment is that we cannot justify granting more money to this
for-profit commercial entity especially in light of its accounting shortcomings.
Moreover, AID did decide during the development, review and approval of its
strategy for the West Bank and Gaza to limit its participation in the credit sector
until such time as the environment in the Occupied Territories is more conducive to
sustainable credit operations.
IV. JORDAN
QUESTION 1:
Now. in addition to security assistance. Jordan has received agricultural
assistance from the U.S. In Fiscal Year 1990 this totalled $175.5 million ($38.5
million CCC grants and $D7 in CCC credits).
In Fiscal Year 1993, Jordan received $30 million in P.L. 480 Title I assistance
and $25 million in CCC credits.
- What is your Fiscal Year 1994 request for agricultural assistance to
Jordan?
ANSWER 1:
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P.L. 480 Title I and CCC programs are administered by USDA. AID has been
advised that the USDA FY 1994 P.L. 480 Title I planning level for Jordan is $20
million and that support under the Commodity Credit Corporation Export Guarantee
Program (GSM) is still to be determined.
QUESTION 2:
What is the focus of our economic assistance programs in Jordan today?
— What will the $35 million in FY 91 ESF funds that Jordan received at the
beginning of this year be spent on?
— What happened to on-going projects in Jordan during the effective aid
freeze between March 1991 and early this year?
— If and when FY 92 ESF funds are dispersed, what will they be spent on?
— To what extent does the primary focus of our ESF programi continue to be
on private sector activities in Jordan?
— Are you reviewing whether this focus is still relevant given the changes in
the Jordanian economic situation in recent years and Jordanian economic
priorities?
ANSWER 2:
Jordan's program is based on three strategic objectives: increased foreign
exchange earnings from light industry, agribusiness, tourism and other services; more
efficient management of water resources; and control of population growth.
Of the $35 million. $4 million supports two on-going projects in the agriculture
sector dealing with applied research and extension and private sector production and
export of high-value fruits and vegetables primarily for the European and Gulf
markets. A health sector project received $2.5 million to continue work improving a
range of family health services, including contraceptive services. On-going technical
studies and training projects received $4 million and a project helping private sector
manufacturers produce and market high quality products at competitive prices
received an increment of $1.2 million. Finally, $23.3 million was provided for a new
project to address water management needs through quality improvement and
conservative.
AID stopped making new commitments from the pipeline (i.e. new contracts
and other procurement actions) in October 1990 and continued this suspension, except
for those commitments necessary for an orderly phase-out of the program, to July
1991 when the President certified that the provision of assistance was m the U.S.
national interest. On-going project activity continued during this period, albeit at a
slower pace.
AID plans to use the $30 million to fund a new Sector Policy Reform Program
(278-K-646) to improve the policy environment for exporters and investors in order
to stimulate greater production and employment. The grant funds under the
program will be used as a cash transfer for servicing or amortizing non-military debt
owed to the U.S. Government. Policy areas covered by this program will include
business registration and licensing, import and export regulations, investment
277
[)romotion strategy, customs export incentive systems, encouragement of investment
aw, foreign investment law, procedures for underwriting of shares, tax treatment of
exporters, and protection of intellectual property.
The private sector is the focus of one of AID's three strategic objectives in
Jordan: the generation of increased exchange earnings from light industry,
agribusiness, tourism and other services. AID plans to use all of the remaining FY
1992 carryover (i.e. $30 million) to support this objective.
AID periodically reviews country strategies to ensure that economic assistance
objectives remain relevant. In the case of Jordan, the January 1992 World Bank-led
Consultative Group meeting affirmed the strategy for Jordan's broad economic
adjustment program which is to diversity both the economic structure and markets
based on an outward-oriented, private sector-led approach, creating a business
environment of undistorted incentives, and providmg the needed physical and social
infrastructure. The Government of Jordan recognizes that it must continue to
implement this comprehensive adjustment program to generate sustainable growth
and improve the country's living standards. AID's private sector-based strategic
objective directly supjxjrts these needs.
V. LEBANQM
QUES'nON 1:
In Fiscal Year 1993, the Administration allocated $4 million for Lebanon, $6
million in Development Assistance and $7.3 million in P.L. 480 funding. To date, the
Committee has been notified of the Administration's request for $4 million in
economic support funds for Lebanon for Fiscal Year 1994.
- What other funds will you be requesting for Lebanon for FY 1994?
- Specifically, what is your request for Development Assistance?
- What about P.L. 480 funding for FY 94?
- Is the Administration requesting IMET military training funds for
Lebanon for FY 1994? If so. what level of funding are you requesting?
ANSWER!:
In addition to the $4 million in Economic Support Funds being requested for
the FY 1994 Lebanon program, the Administration has requested $5 million in
Development Assistance and $8.8 million for P.L. 480 Title II funding. This request
was based on Lebanon's continuing economic needs as it tries to recover from 15
years of civil strife and political turmoil. The Economic Support Funds and
Development Assistance will be used largely for humanitarian relief and
redevelopment. Several private and voluntary organizations have expressed interest
in developmg new P.L. 480 Title II programs for similar purposes. Once the Title II
proposals have been reviewed, a decision will be made whether to suppxjrt new
programs in FY 1994. Military training funds are requested by the Department of
State. We understand the request level is $400,000.
QUESTION 2:
278
How do you plan to use the ESF funds you are requesting for Lebanon?
— WiU this money continue to be dispersed through PVOs or will the central
government be the recipient of some of these funds?
— Do the focus of our FY 1994 programs in Lebanon continue to be on
humanitarian relief and education?
ANSWER 2:
We expect that all of the ESF requested for the FY 1994 Lebanon program will
continue to be focused on humanitarian relief and redevelopment as well as support
for educational institutions such as American University of Beirut and Beirut
University College, which will continue to be disbursed through PVOs and NGOs.
Although the central government will benefit from a proposed activity to assist in
improvmg administration of the legislative body and selected regulatory agencies, the
funds for this activity will be channeled through U.S. organizations.
QUESTION 3:
In Fiscal Year 1992. the Administration requested $10.7 million in P.L. 480 Title
II assistance for Lebanon. Does there continue to be a need for this level of P.L. 480
assistance in Lebanon today?
— What is your FY 94 request for P.L. 480 for Lebanon?
— Who will distribute the P.L. 480 food?
— What portion of the Lebanese population continues to rely on this food
assistance?
ANSWER 3:
In FY 1994. the AID P.L. 480 Title II budget requests $8.8 million for Lebanon.
Since 1985. Save the Children (SCF) has been providing Title II food
commodities for up to 750,000 people per year in Lebanon, most affected by the civil
strife. With the gradual reduction in hostilities, in October 1991, AID received a
commissioned evaluation of the emergency feeding program. While it determined
that the program was largely reaching needy people, it also presented evidence that
the program was not fully targeting either appropriate foods or populations. Since
the study. SCF has been in the process of reducing the size of the program with the
intent of closing out by the end of FY 1993.
Several private and voluntary organizations have expressed interest in
developing new Title II programs for Lebanon in FY 1994. Once the proposals have
been reviewed against AID criteria, a decision will be made whether to support new
programs in FY 1994.
Lebanon is categorized by the World Bank as a lower-middle income country.
Therefore, AID would not project continuing to provide food to a large percentage of
the population as had been done during the fighting. In 1993. the Government of
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Lebanon began efforts to resettle the approximately 25% of the population which was
displaced by war. Any new program, if accepted, would focus on this most needy
segment of the population.
VI. OTHFR PROGRAMS
QUESTION 1:
You have requested $7 million funding for Middle East Regional Cooperation
Programs (MERC) in Fiscal Year 1994, a program which seeks to use U.S. funds and
U.S. expertise to promote cooperation between Israel and the Arab states.
- What will this money fund?
- How much of the $7 million will be used to sustain on-going programs?
- How much of the $7 million will be used to start new projects?
- Do you worry that this program is becoming an entitlement program for
some of the existing projects that get funded year after year/
- How do you get new projects involved?
ANSWER!:
The MERC program currently funds nine regional research projects: five in
agriculture, two in health, one in marine technology, and one in wastewater
treatment and usage. In addition, the program also funds one implementation
management contract and periodic project evaluations. The projects are not
restricted to specific sectors, but the proposed activities are expected to contribute
directly to achieving priority national development and social objectives in each
participating country. To the maximum extent possible, projects are also expected to
be consistent with AID's priority programs and management concerns in those
countries receiving AID assistance. In FY 1994, MERC funds will be used both to
continue on-going projects and to begin a limited number of new activities, based on
submission of proposals early in the fiscal year.
Approximately $6 million will be used to fund eight on-going projects in FY
1994. Approximately $1,000,000 will be available to fund new FY 1994 projects.
We are encouraging new proposals. In FY 1993. we plan to fund two new
proposals. The MERC program has been successful in bringing Israelis and Arabs
together to work on programs of mutual benefit. Coof)eration depended, initially, on
a core group of individuals and institutions in both Israel and Egypt. Today, the
program has expanded beyond the initial participants. The program review carried
out in 1990 noted the importance of providing continuity of suppwrt to individual
scientists and organizations who have assumed the political risk of involvement in this
program. In order to ensure that funds are available to finance activities with new
participants. AID has recently instituted limitations on the size and duration of
mdividual grants. In addition. AID has developed a rigorous set of guidelines for
preparation of proposals. All proposals submitted to AID for funding are
280
competitively reviewed based on their potential development impact. We believe
that this rigorous selection process eliminates weak proposals and ensures that only
sound projects are funded.
Proposals for new projects or new project ideas come from a variety of sources.
These include: (a) existing Grantees; (b) host country individuals or institutions: (c)
U.S. universities or institutions which have contacts in the Middle East; and (d)
individuals who have heard about the program from their U.S. Embassy or AID
contacts.
QUESTION 2:
In Fiscal Year 1993, MERC funds were used to suppwrt a trilateral project
between Israel, the U.S. and Morocco.
— Do you expect to start other new regional cooperation programs in Fiscal
Year 1994 with other Arab countries?
— If so, what countries are likely to get involved in MERC programs?
— Is it accurate that you are considering programs with Tunisia and Jordan?
— Are you discussing programs with any other countries in the region?
— How, if at all, will the expansion of this program beyond Egypt and Israel
effect the overall program?
ANSWER 2:
Proposals requesting funding for Fiscal Year 1994 have not yet been received
by AID. Thusv we are unable to say with any degree of certainty, at this time, what
new projects will be funded in Fiscal Year 1994 The program encourages proposals
that broaden participation, including new Arab countries.
As noted in the previous answer, AID has not yet received the Fiscal Year 1994
proposals and cannot determine what other countries may be involved in Fiscal Year
1994 projects.
In Fiscal Year 1993, AID reviewed and intends to fund, subject to review of the
final proposal, an activity which includes six countries: Egypt. Israel, Morocco,
Jordan. Tunisia and Lebanon.
Generally, it is the prospective grantee who initiates project discussions with
potential host country participants. AID's funding criteria give added weight to
proposals which include multiple countries and new country participants. Recently.
AID has had some inquiries from institutions interested in submitting proposals
which would include Yemen and Israel, and Israel and Turkey. However, formal
proposals have not yet been received.
The purpose of the MERC program is to promote coof>eration between Israel
and its Arab neighbors. Prior to Fiscal Year 1992, Egypt and Israel were the only
participants in the program. Since then, the program has expanded to include
Morocco and. as mentioned earlier. AID intends to fund a proposal which includes
281
Morocco. Jordan. Tunisia and Lebanon, in addition to Egypt and Israel. We believe
that the expansion of the program to include countries other than Egypt and Israel
strengthens the long-term impact and technical content of the program.
QUESTION 3:
Could you provide the Subcommittee with:
(a) a list of the projects supported by the MERC program over the last
four years;
(b) the projects you expect to support in Fiscal Year 1994;
(c) the amounts of funding for each; and.
(d) an indication for how many years funding is planned for each project?
ANSWER 3:
(a) The projects supported by MERC over the last four years are as follows:
- Cooperative Marine Technology Project Phase III (project number
398-0158.08);
- Cooperative Marine Technology Project Phase IV (project number
398-0158.26);
- Epidemiology/Control of Vector Borne Diseases II (project number
398-0158.13);
- Arid Lands Research Program Phase II (project number 298-0158.03);
- Technology Exchange and Cooperation in Agriculture Project (project
number 398-0158.05):
- Maryut I Project (project number 398-0158.24);
- Maryut II Project (project number 298-0158.27);
- Nubaseed Agricultural Development Project (project number 398-0158.17);
- Infectious Diseases Control Project (project number 398-0158.18);
- Animal Health Project (project number 398-0158.21);
- Wastewater Reuse/Irrigation Project (project number 398-0158.24): and
Moroccan Agricultural Development Project (project number 298-0158.28).
(b/c) The amount of funding for each project depends on an assessment of need
based on past allocations, current balances and expenditure rates. Funding tor Fiscal
Year 1994 projects is also subject to two other conditions: (a) the "MERC Guidelines
282
for Proposal Preparation" which limits funding to $3 million over a period not to
exceed 5 years: and (b) the availability of fundmg in Fiscal Year 1994. Following is
the estimated funding for each project in Fiscal Year 1994:
— Arid Lands Research Program. Phase II (estimated funding: $777,000):
— Maryut II Project (estimated funding: $500,000):
— Animal Health Project (estimated funding: $855,000):
— Cooperative Marine Technology Phase IV (estimated funding: $952.0(X)):
— Moroccan Agricultural Development Project (estimated funding:
$1,000,000):
— Project evaluations (estimated funding: $300.0(X)):
— Crop Devastation/Parasitic Weeds Project (estimated funding: $600,000):
and
— Basic Research in Tropical Diseases Project (estimated funding: $1,000,000):
(d) Projects are funded on an incremental basis each year. Following is the
planned life of the on-going projects:
— Arid Lands Research Program. Phase II (date begun: 5/90, completion date
3/95):
— Maryut II Project (date begun: 5/92, completion date 3/97);
— Animal Health Project (date begun: 7/90, completion date 6/95);
— Cooperative Marine Technology Phase IV (date begun: 10/92, completion
date 9/95);
— Moroccan Agricultural Development Project (date begun: 9/92. completion
date 6/97);
— Project evaluations (on-going);
— Crop Devastation/Parasitic Weeds Project (estimated start date: 6/93.
completion date 5/97);
— Basic Research in Tropical Diseases Project (estimated start date: 9/93.
completion date 8/97);
— Infectious Diseases Project (date begun: 9/89. completion date 8/94).
QUESTION 4:
How successful has the program been, from the political perspective, in
routinizing contacts between Israelis and Egyptians?
283
- Do you feel that the idea of regional coojjeration is now well established in
Egypt and Israel?
- What has been your initiiil experience in the Israeli-Moroccan project?
- Do you have plans to continue and/or extend trilateral projects with
Morocco?
ANSWER 4:
An external review of the MERC in December 1990 concluded that the program
had achieved "a remarkable record of success." It also noted that good professional
relationships had been established as well as cordial personal friendships. However,
it cautioned that despite the generally warm, relaxed associations that had evolved,
continuing sensitivity to certain key aspects of the relationships must be
acknowledged. In particular, it recommended that the program maintain a low
profile regarding publicity to minimize risk of media distortion. Although the
Egyptians and Israelis involved in the program continue to maintain a comfortable
professional relationship with each other, the program is still politically sensitive and
should be continued to be treated as such.
The initial reports from the Israeli-Moroccan project have been very favorable.
All of the project activities have started as scheduled and there has already been a
Project Steering Committee meeting in Jerusalem attended by both Moroccans and
Israelis.
AID recently reviewed and intends to fund a project which includes Morocco as
one of six participating countries. This project is expected to begin in Fiscal Year
1993.
QUESTION 5:
Have there been any spin-offs from trilateral cooperation projects?
- Are you aware of any private, bilateral (Egyptian-Israeli) projects that
have arisen out of contacts made under the Regional Cooperation program?
- Are proposals for bilateral projects being rejected in favor of existing
trilateral programs?
- All things being equal, which type of program with the U.S. is preferred ~
bilateral or trilateral?
- If so. have there projects received any government support form Egypt or
Israel?
ANSWER 5:
We are not aware of any spin-offs, private or otherwise, resulting from .MERC
activities. With the exception of one project recently recommended for funding
(which includes seven countries including the United States), all of the projects under
the MERC program are trilateral. Generally, each project includes a U.S. institution,
which serves as the coordinating entity, Israel and at least one other country. To
284
date, MERC has never received any proposals for bilateral funding. AID policy
encourages as wide a participation as possible in the program. However, bilateral
versus trilateral proposals is not an issue.
Generally, the projects in Egypt and Israel receive some "in kind" support from
both governments. However, the bulk of the funding under the program is provided
by the U.S. Government.
6. What is your view Fiscal Year 1994 request for the CDP/CDR programs?
— What portion of this funding do you plan to provide to CDP and what
portion CDR?
— In the past the breakdown has been $5 million for programs and $2.5
billion for research. Do you plan to keep roughly the same breakdown?
QUESTION 7:
How much money will go to coojierative programs between Israel and the
former Soviet Union?
— What countries in the NIS are these programs being done with?
— Are these exclusively Israeli programs with Central Asia?
— Could you please provide the Subcommittee with a listing of Israeli
cooperative programs in the NIS: their level of funding for Fiscal Year
1993; the planned level of funding for Fiscal Year 1994 and the nature and
duration of the projects?
ANSWER 7:
AID will fund these programs in FY 1994 at an appropriate level depending on
budget availabilities. AID will examine all programs as a first step to determining
how to improve our focus on obtaining effective results within our principal mission
of contributing to sustainable development.
Kazakhstan, Kyrgyzstan. Turkmenistan, Uzbekistan and Georgia are receiving
assistance under the combined FY 1992/FY 1993 support for these cooperative
projects with Israel.
The CDP/CDR programs for Central Asia were designed by joint U.S. -Israel
teams which focused on drawing on Israel's technological expertise and comparative
advantage to address specific priority development needs in Central Asia and which
are supportive of U.S. objectives in that region.
Israel cooperative programs in the NIS and FY 1993 and FY 1994 funding are
as follows:
(a) Coop)erative Development Program (CDP). The CDP program to Central
Asia provides training and technical assistance in agricultural farm
management and marketing to demonstrate in actual practice the
commercial viability of improved technology, farm management and
285
marketing systems so as to support the efforts of participating Central
Asian states to restructure their agricultural economies towards a free
market system.
Two CDP -assisted demonstration farms are planned for Kazakhstan.
Uzbekistan and Georgia, and one each in Kyrgyzstan and Turkmenistan.
CDP-supported Israeli experts will assist in the design and management of
demonstration farms and in farm marketing development. Farm managers
and px)licy level decision-makers from Kazakhstan, Kyrgyzstan,
Turkmemstan, Uzbekistan and Georgia will make study tours to Israel
focusing on intensive livestock production, soil and water management,
research and extension, and management of farm enterprises. Progressive
farmers and managers wiD receive training in Israel in soil and water
management, agricultural economies and farm management, irrigation
systems management and extension, intensive livestock husbandry,
vegetable production and irrigation, and managed farm development
enterprise. "In-Country" training courses are also planned.
CDP-supported Israel expert consultants will provide specific short-term
advisory services to conduct studies, assessments and evaluations.
FY 1993 funding: $4.5 million AID funds (matched by $1.5 million Israeli
funds). Total FY 1993 funds together with funds provided in FY 1992
support a three-year assistance program to participating Central Asian
states.
FY 1994 funding: amount to be determined.
(b) Cooperative Development Research Program (CDR). A CDR initiative to
Central Asia funds grants for collaborative research in agriculturally
related fields made to Israeli institutions, which subgrant to their Central
Asian Republic collaborators. Individual grants may be for three years
and up to $150,000. or two years and up to $100,000 with U.S. funds divided
roughly equally between the countries. Israeli institutions contribute
significant levels of research resources.
Over 150 proposals were received in response to the special Central Asian
Republics competition under the CDR program. All of the 21 proposals
identified to receive grants involve agriculture or agriculturally-related
research, and 7 of these have an environmental focus as well.
FY 1993 funding: $1.5 million AID FY 1993 funds together with FY 1992
funds of $1 million support 21 grants for a total value of $2.5 million.
FY 1994 funding: amount to be determined.
QUESTION 8:
In FY 1990. the Congress appropriated $5 million to be available to set up an
endowment for a scholarship program for Israeli Arabs to study in the United States.
- What is the status of this program?
ANSWER 8:
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The money appropriated for the Israeli Arab Scholarship Program was
transferred to the United States Information Agency (USIA) m September 1991. In
March 1992. USIA was authorized by AID to establish and endowment to support this
program. USIA has invested the funds in U.S. Treasury T-bills. The first two
students enrolled in two-year masters' degree programs arrived at American
universities in January 1993. Six additional students have been accepted for
enrollment in September 1993. and one student may be enrolled in January 1994.
Eight additional students are projected for enrollment in September 1994.
OPEN SESSION TO REVIEW THE ADMINISTRA-
TION'S FISCAL YEAR 1994 FOREIGN ASSIST-
ANCE REQUEST
TUESDAY, MAY 11, 1993
House of Representatives,
Committee on Foreign Affairs,
Subcommittee on Europe and the Middle East,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:06 a.m., in room
2172, Raybum House Office Building, Hon. Lee Hamilton (chair-
man) presiding.
Chairman Hamilton. The Subcommittee on Europe and the Mid-
dle East meets today in open session to review the administration's
fiscal year 1994 foreign assistance request.
This is the second hearing that the subcommittee will hold on
U.S. assistance to countries in the subcommittee's jurisdiction.
Today we will be looking at Central and Eastern Europe, Greece,
Turkey, Cyprus, Portugal, Ireland and a number of smaller pro-
grams in the Baltics and the former Yugoslavia.
The administration's request for these programs in fiscal year
1994 include $409 million in economic assistance for Eastern Eu-
rope; $450 million in military assistance; and $143 million in eco-
nomic assistance for Turkey; $315 million for military assistance
for Greece; $15 million in economic assistance for programs in Cy-
prus; $19 million in assistance for the International Fund for Ire-
land and Northern Ireland; and $90 million in military assistance
for Portugal.
Our witnesses today are the Honorable Stephen A. Oxman, As-
sistant Secretary of State for European Affairs; Mr. Hugh Hamil-
ton, Acting Special Advisor for East European Assistance, Depart-
ment of State; Mr. George Bader, Principal Director for European
and NATO Policy, Department of Defense; and Mr. David Merrill,
Acting Assistant Administrator, Bureau for Europe, Agency for
International Development.
Gentlemen, we welcome you before the subcommittee. Your pre-
pared statements, of course, will be entered into the record.
[The prepared statements of the above witnesses appears in the
appendix.]
How many of you have statements that you want to give? Mr.
Oxman, you have
Mr. Oxman. I think I will give the only oral statement and each
of the witnesses will submit a written statement.
(287)
288
Chairman Hamilton. Very good. All of the statements, of course,
will be entered into the record in full.
We have a lot of ground to cover this morning, so I will ask you,
if you would, to keep your statement relatively brief
I want to inform Members that Assistant Secretary Oxman has
requested that they hold their questions on the current situation
in Bosnia and the status of the consideration of more forceful meas-
ures by the United States and our allies.
The Secretary of State is testifying in the Senate this morning
and he is likely to be making some statements on Bosnia and his
recent trip to Europe to consult with our allies.
Secretary Christopher will be briefing Members of the House in
closed session at 4 p.m. today in this room. And Members will be
able to direct questions to the Secretary at that time.
Grentlemen, we are very pleased to nave you. Secretary Oxman,
you may begin with your statement.
STATEMENT OF HON. STEVEN A. OXMAN, ASSISTANT
SECRETARY OF STATE FOR EUROPEAN AFFAIRS
Mr. Oxman. Thank you, Mr. Chairman. It is a great pleasure to
meet today with you and your committee to discuss the administra-
tion's fiscal year 1994 request for assistance to countries in Europe.
I recognize the great interest and attention to our aid programs
that you and this committee have shown and I will value your com-
ments and guidance.
In this statement I would like to give a brief overview of our aid
programs and the policies that they support. I would like to dis-
cuss, principally, our funding request of approximately $409 million
for the Support for Eastern European Democracies Act, the SEED
Act or the SEED program.
While we are requesting SEED funding at approximately current
levels and while we expect the program to retain approximately the
same emphasis and structure that it now has, I do want to note
for you some of the directions we expect the program to take in the
future.
We are also requesting funding for the International Fund for
Ireland and security assistance for a number of countries, as you
mentioned, Mr. Chairman. And I will briefly address these subjects
as well.
First, with respect to SEED. I know that this committee shares
the administration's commitment to our continued support for the
democratic revolution in Central and Eastern Europe. The demo-
cratic states and free markets in this region advance the security,
political and economic interests of the United States and our allies
in several ways.
First, nothing will serve the cause of peace and stability in this
region so much as a meaningful transformation into thriving de-
mocracies. History teaches us that prosperous and truly free peo-
ples rarely, if ever, start wars.
Second, an Eastern Europe at peace with itself and with its
neighbors is key to ending the post-war division of Europe. Sound
and stable societies form strong economic and political ties to the
countries of the West.
289
Third, the democratic revolution in Eastern Europe can serve as
a model for reform efforts in Russia and the rest of the NIS.
Finally, and not least important, creation of market-oriented
economies in a regional of some 135 million people offers signifi-
cant commercial opportunities for American business — both in
Central and Eastern Europe itself and as a gateway to the vast po-
tential markets further east.
This, of course, is the reasoning behind the SEED Act, originally
passed in 1989. Through the SEED program we have provided, to
date, well over $1 billion of financial and technical assistance to
the transition to democracy and free markets.
Helped by the aid that we have provided under this program, the
countries of Central and Eastern Europe — with the bleak exception
of parts of former Yugoslavia — ^have made great strides.
Democratic institutions, although still fragile, are largely func-
tioning. In every coimtry in the region there has been at least one
constitutional transfer of power.
Generally accepted human rights are usually respected and inde-
pendent mass media have appeared throughout the region — results
that we could hardly have dreamed of 5 or 10 years ago.
In the economic sphere, the private sector accounts for an in-
creasing share of output and employment. Significant progress has
been made with currency stabilization, with freeing prices and with
liberalizing trade regimes.
Governments are beginning to erect the necessary legal and reg-
ulatory framework and infrastructure for a market-oriented econ-
omy. This is of particular importance with respect to attracting for-
eign investment.
Nevertheless, the development of democratic and free market in-
stitutions remains incomplete. Banking and financial sectors re-
main generally inadequate. We have committed $200 million to an
international effort to restructure and privatize banks in Poland.
Privatization of state enterprises has generally proceeded slowly
in most countries. The size of fiscal deficits remains worrisome.
And private foreign investment has been disappointing in many of
the countries in the region.
The transition has also been uneven in the different countries of
the region. The countries of the Northern tier — Poland, Hungary,
and the Czech Republic — are the most advanced.
There has been somewhat less progress in Slovakia and Bul-
garia. Albania has been making a valiant effort, considering its
past isolation and relative poverty.
In the rest of the Balkan's progress has been halting, in part due
to the turmoil in the former Yugoslavia and in part due to the
greater underljdng economic difficulties these countries face.
The Baltic States are also moving in the right direction, despite
problems arising from the disruption of their former economic rela-
tionships with Russia.
The transition to market economies has been very painful to
many East Europeans. I have seen this with my own eyes, both in
my private work and as a government official.
Replacing a command economy with one based on market forces,
closing inefficient enterprises and tightening fiscal and monetary
290
policies have led to sharp contractions in output, increased unem-
plojrment and a decline in living standards.
Popular discontent with the Durdens of reform is widespread. It
is thus essential that we continue to provide assistance to the coun-
tries of this region as we have done.
Thanks in large part to the leadership of the Congress our SEED
program has proven highly effective — as a highly effective means
of supporting Eastern Europe's transition. The program has three
major objectives: strengthening democratic institutions, developing
a market economy, and, in private sector, improving the basic qual-
ity of life.
Through the SEED program we have provided assistance to the
countries of Central and Eastern Europe in a wide variety of areas.
My prepared statement and that of David Merrill of AID give you
some examples of the types of projects that SEED has supported.
And I will not get into that detail at the present time.
The SEED program is highly regarded by the countries of
Central and Eastern Europe. It delivers assistance faster and
cheaper than aid programs elsewhere in the world, and faster £ind
cheaper than programs conducted by other donors.
And the assistance program has been particularly well-targeted
and effective because of the way it has been administered. The pro-
gram is Washington-based and this has allowed it to get started
quickly and to respond effectively to rapidly changing conditions in
Central and Eastern Europe.
The time between conception and contract in SEED funded aid
is some 8 to 9 months, as opposed to 20 months in other aid pro-
grams.
The costs have also been held down significantly. Administrative
costs are far lower for a program based in Washington, than for
one with a predominantly overseas staff.
The regional nature of the program also permits greater flexibil-
ity^ in delivering assistance where it is really needed without the
^--^long lead time associated with separate programs in each country.
At the same time, adaptations are being made to seek to insure
that each country's program is tailored to its particular needs.
Finally, the SEED program relies heavily upon nongovernmental
intermediaries to deliver aid. It makes use of private organizations
to provide know-how directly to those who need it. And the enter-
prise funds are a unique government-private enterprise partner-
ship providing capital directly to the private sector.
Today, with 3 years' experience, we recognize that some changes
can be made in tne way the SEED program has been administered.
With better organized host governments and more fully staffed
AID offices, we are developing a new balance between Washington
and the field. This will allow us to retain the necessary flexibility
while strengthening coordination with host governments.
We have also facilitated coordination of the SEED program with
our overall policy toward Central and Eastern Europe by placing
responsibility for the progpram in the Bureau of European and Ca-
nadian Affairs, which I head.
This structure does not reflect any change in the importance at-
tached to the program, but is intended to improve it.
291
The change is also consistent with Secretary Christopher's policy
of decentralization within the State Department and with the orga-
nization of our assistance and policy offices for the NIS.
What does the future hold for the SEED program? When the pro-
gram began in 1989, there were predictions that it would last only
3 to 5 years. These predictions have proven overly optimistic.
I would expect that in the Northern tier we can begin phasing
down in 2 to 3 years. The rest of the region, however, will require
increased levels of assistance for several years.
In particular, the situation in the Balkans has been aggravated
by the economic consequences of the war in former Yugoslavia and
the enforcement of sanctions against Serbia. It will, therefore, be
some years before overall assistance needs in this area diminish
substantially.
Indeed, we could spend several times the amount we have re-
quested and will have to continue to make difficult decisions among
competing priorities because there is not an unlimited amount of
funds.
This does, however, provide discipline and forces us to con-
centrate on those key sectors where U.S. assistance can be most
helpful.
For example, we would expect to devote an increasing share of
assistance to the Southern tier countries and the Baltics as they
continue to implement additional reform measures.
I would like to close my discussion of the SEED program with
one final plea. It is essential that our program of emergency assist-
ance to Russia not come at the expense of Central and Eastern Eu-
rope.
Both regions have pressing needs which must be met. We cannot
allow our need to meet the historic opportunities in Russia to de-
tract from our need to meet the equally historic opportunities in
Central and Eastern Europe.
The nations of Central and Eastern Europe have come a long
way since 1989. This progress has been brought about principally
by the aspirations, courage and hope of these people.
We can take pride in our support of their efforts. We should con-
tinue that support because their success is in our interest and be-
cause it is right to do so.
Let me comment, Mr. Chairman, on the other requests that we
are making — and those are also discussed in greater detail in my
prepared statement.
We are proposing a $20 million contribution to the International
Fund for Ireland in fiscal year 1994. The fund is a joint project of
the governments of Ireland and the United Kingdom, which sup-
ports projects in Northern Ireland and the six border counties of
the Republic, particularly in disadvantaged areas such as West
Belfast and remote border towns.
It concentrates on community regeneration projects, such as the
rehabilitation of derelict facilities, unemployment creation and
training, and on encouragement of community-based private enter-
prise.
U.S. support for the fund is a tangible expression of our policy
favoring peace and reconciliation through economic progress in
Northern Ireland and along the border in the Irish Republic.
292
We have also requested security assistance for 18 European
countries. This assistance is designed to enhance regional security
and defense cooperation. The largest recipients of this proposed aid
are Turkey, Greece, Portugal and Cyprus.
I would like to discuss briefly the reasons for these aid requests.
Turkey, Greece and Portugal are all important members of the
NATO alliance.
Turkey's importance for America's strategic interests in South-
western Asia and Southeastern Europe has increased in the post-
cold war era. A look at the map shows how important Turkey is
to our regional interests, bordering, as it does, the Balkans, the
Caucasus, Iran, Iraq and the Middle East.
Turkey can, in the next few years, play a critical role in support-
ing American interests in this region. Turkey has continued to be
a reliable ally — ^providing, for example, critical support during and
since the Gulf War — ^but economically it is among the poorest of the
countries that support our strategic goals.
Even though its economy has been growing rapidly, inflation, un-
employment and public sector debt remain serious problems and
were aggravated by Turkey's resolve in supporting the coalition
during the Gulf War.
Turkey continues to enforce the sanctions against Iraq at great
economic cost. The shutdown of a pipeline from Iraq and the loss
of Iraq as one of its principal trade partners have sharply reduced
Turkey's foreign revenues.
We have, therefore, requested aid to provide budget support for
Turkey and to enable it to continue to modernize its forces through
military purchases.
We recognize at the same time the importance of an improve-
ment in 'Turkey's human rights record. The Turkish Government
has publicly committed itself to strengthening parliamentary de-
mocracy and improving human rights protections.
We are working with the government to develop specific targets
and programs for meeting these commitments and will continue to
press them vigorously and ensure that they remain aware of the
high priority we attach to improvement in the area of human
rights.
With respect to Greece, I would note that with the end of the cold
war and the reduction of forces in Central Europe, our security as-
sistance programs help the United States and NATO respond to
threats to security in the more volatile areas of Southeastern Eu-
rope £ind the Middle East.
Since taking office in April of 1990, the government of Prime
Minister Mitsotakis has improved Greek military cooperation with
NATO and has concluded a new mutual defense cooperation agree-
ment. Prime Minister Mitsotakis has also taken steps to reduce the
tensions between Greece and Turkey.
Greece is one of the poorer members of the European community,
but its defense expenditures are relatively high because of its stra-
tegic importance. The United States has, therefore, committed it-
self to assisting Greece with its defense modernization program.
This program will enhance Greece's ability to operate with the
other forces of the NATO alliance.
293
With respect to Portugal, I would note that Portugal values its
ties with the United States and it has given strong public support
to our foreign poliQ^ initiatives. Portuguese willingness and ability
to pursue close military cooperation with us makes an important
contribution to our global strategic mobility. We are proposing con-
tinuation of our FMF program to enable Portugal to purchase 20
F-16 aircraft.
With respect to Cyprus, I would note that our aid request has a
different purpose than our request for these three NATO allies. It
is designed to assist the parties in reaching a settlement that will
be acceptable to both Cypriot communities.
To this end, we have a substantial program of assistance or, that
is, we are proposing a substantial program of assistance for bi-com-
munal activities. In this way we are trying to further the peace
process by promoting cooperation between the two communities
and providing opportunities for Greek and Turkish Cypriots to de-
velop mutual confidence through joint economic planning and de-
velopment activities.
The President's Special Cyprus Coordinator and Embassy offi-
cials in Nicosia are working with representatives of the two com-
munities to ensure that our assistance is, in fact, being used for
truly bi-communal projects to the greatest extent possible.
In conclusion, Mr. Chairman, I would like to tell you that I ap-
preciate the opportunity to explain to you the thinking behind our
aid requests for fiscal year 1994 and I would be happy to answer
your questions and would welcome any comments or suggestions
that you may have.
[The prepared statement of Assistant Secretary Oxman appears
in the appendix.]
GENERAL OBSERVATIONS
Mr. Lantos. Thank you, Mr. Secretary. We are covering an enor-
mous region in terms of complexity, variety and of importance to
U.S. national interest.
Let me begin with a general observation concerning much of the
region. In visiting the area year after year for many years, I find
a tremendous upsurge in class cleavages throughout the region.
There is a degree of differentiation in economic living standards
which had not existed over previous decades. There is growing un-
employment.
And because of the social and economic tensions, there is a pow-
erful resurgence of both previous Communist parties, sometimes
renamed and far-right.
I would like to ask you to indicate whether, in your view, there
is a danger to democracy itself in some of these countries and, if
so, to what extent and wnere?
Mr. Oxman. Thank you, Congressman. It is a very searching
question.
I would say that in the process of transition from state-controlled
economies, state-directed economies to free market economies and
the transition from a highly controlled political system to a more
democratic system, that these cleavages do develop.
I think I understand the point that you are making and I see
this development.
294
I guess in the way that I think about the problem, I think that
we are at the early stages of the transitional process. I would an-
ticipate that we may see these cleavages develop and heal and, per-
haps, develop a little bit more and then heal.
I would hope that the trend line is upward. I do not think that
we are in for a smooth glide path, but I would hope that the trend
line is upward, but there will be serious dislocations.
When you have the kind of economic inefficiencies that are built
into some of these large state enterprises — and I have seen this
with my own eyes — where they are vastly overmanned smd
overstaffed; and where, in the process of privatization and economic
rationalization, there are large numbers of people losing their jobs
and there are very seriously increased demands on the social struc-
ture and the social support systems in these countries, it causes a
great deal of angfuish and cleavages do result.
In terms of whether these are a threat to democracy, I would say
my view is that it is too soon to tell. I do not have the feeling that
they are.
From being in the region and working on issues affecting the re-
gfion, my instinct is that, while we cannot predict the future and
while there can be expected developments, I think the overall com-
mitment is there to keep on a very, very difficult track.
And that the notion of turning back is anathema to many, many
people; but the costs of going forward is high and people are paying
a very high price for it.
Mr. Laotos. Thank you.
Mr, OxMAN. I think Mr. Merrill wanted to just supplement my
answer,
Mr. Lantos. Go ahead,
Mr. Merrill. If you would like, sir, I will supplement that by
saying that we are increasingly turning in the program to empha-
size social safety net activities which will help alleviate the prob-
lem you referrea to.
For example, in Hungary one of our early grants was to help en-
ergy consumers with the higher costs of energy caused by energy
price increases with actual supplements for low income energy con-
sumers.
We have been taking a look at helping redundant workers obtain
alternative emplo)mient through the Baranya County Project. We
are starting a specific project in Hungary to help with alternative
employment for large numbers of unemployed. We are continuing
programs with the reform of the housing, pension and social secu-
rity programs in Himgary,
And in Poland, where this is also a very serious problem, we are
looking at reemployment activities, technical assistance in unem-
ployment services and other ways working with the World Bank to
strengthen the social safety net.
So, I think you will see this as an area of increasing emphasis
to respond to the issues that you raised, sir.
Mr. Lantos. May I ask a question about what, to some of us, ap-
pears to be a security vacuum in much of the region. The Warsaw
Pact has collapsed. Obvious differences are present among many of
the entities in the region.
295
SITUATION IN MACEDONIA
We shall honor your request not to ask any question concerning
the Bosnia crisis, but, for instance, with respect to Macedonia, it
is the view of some of us that it would be absolutely mandatory to
place a sizable international force under U.N. auspices into Mac-
edonia to act as a trip-wire to prevent the possible spread of hos-
tilities to that region.
What planning do we have with respect to dealing with this secu-
rity vacuum? Is there any thought being given to NATO guarantees
with respect to the territorial integrity of the various countries?
And are there any preventive steps — such as the placement of
forces in Macedonia — that would protect us from another Bosnia
erupting elsewhere in the Balkans?
Mr. OxMAN. The security situation is a dynamic and changing
one for the very reason you mentioned. The Warsaw Pact is no
more.
One of the, I think, very positive developments is the North At-
lantic Cooperation Council within NATO in which the Eastern Eu-
ropean nations and others are being brought into the security pic-
ture. They are part of the process of discussing a new security ar-
chitecture and structure.
I have seen this happening. I have seen the work of this group
and I think it is very positive. It is a longer term process and it
does not answer some of the very specific points that you have al-
luded to.
With respect to those — and, incidentally, I did not mean to say
that I would not take any questions on Bosnia at all, but I thought
it would be valuable to mention it since the Secretary will be here
this afternoon, it may
Mr. Lantos. We understand.
Mr. OxMAN [continuing]. May make sense — ^but we are very con-
scious of the spillover risk in respect of the Yugoslav situation and,
in particular, as it pertains to Kosovo and Macedonia.
And the question of what additional steps could be taken. As you
know, there is already a Nordic battalion in Macedonia; approxi-
mately 700 Nordic personnel under an UNPROFOR mandate.
There are a rather limited number of CSCE monitors in Kosovo,
I believe, at the present time, only 10, of whom 3 are Americans.
And we are looking very carefully at the very issue you have
raised. Congressman, as to whether this is adequate.
With respect to security guarantees, generally — the other part of
your question — this is a subject that comes up. Several of the Euro-
pean countries — especially those affected by the crisis in Yugo-
slavia— ^feel that the security situation is not stable as it pertams
to them and they are looking for additional assurance.
The question of whether there should be formal NATO guaran-
tees, I think that is down the road. I do not sense a consensus
emerging on the notion of extending formal NATO guarantees.
I do sense a very sensitive concern on the part of all of the af-
fected countries to the new security situation that countries such
as Hungary, for example, find themselves in. And I think that that
heightened awareness is very valuable in the circumstances. I do
not see it extending to the point of formal security guarantees.
296
PROBLEMS OF AMERICAN BUSINESSES
Mr. Lantos. Mr. Secretary, if you will allow one more specific
question which I think is symptomatic of the problems large num-
bers of American businesses face as they try to deal with this re-
gion.
A constituent brought to my attention the fact that he has a ship
in the port of Tallinn taking com to Belarus and although this was
arranged well in advance, it is an American gift to Belarus.
The ship arrived on May 4th and was advised that it will not be
unloaded until some time in mid-June. The cost of that would wipe
out the company. Literally wipe out the company.
Now, I have been dealing directly with the Government of Esto-
nia, Belarus, your office and the office of Strobe Talbott and while
I seem to be getting cooperation, nothing has yet been achieved.
May I suggest that it is very necessary in this chaotic situation
to set up a crisis command within the department which can deal
with these issues.
It is simply unacceptable that an American ship should be stand-
ing in port for 5 or 6 weeks at a cost of maybe $10,000, $15,000
a day just because the Government of Belarus was incompetent or
inefficient or incapable of making arrangements.
The port authorities in Tallinn were unable to deal with the
issue. And our Ambassadors, both in Belarus and Estonia, have
been unaware of the problem.
So, we have a very serious and, I think, general crisis in dealing
with facilitating the flow of aid to these regions.
And I would oe grateful if you would personally look into the sit-
uation. I will provide you with the details because it simply is
going to undermine whatever support there is for aid to Russia, the
other republics, the SEED program and whatever.
There has to be some capability created at the other end to ab-
sorb this aid. And with respect to this particular instance — and I
do not think that it is a unique example at all — there clearly is not.
And an American business is taking it on the chin.
Mr. Oxman. I would be happy to Took into that. It is the first that
I have heard of it. These types of bottlenecks can be completely ex-
asperating.
Mr. Lantos. Exactly.
Mr. Oxman. I know just what you are saying. I will look into it
and we will get back to you.
Mr. Lantos. I appreciate that, Mr. Secretary. Thank you, Mr.
Chairman.
Chairman Hamilton. Mr. Andrews.
PRIVATIZATION OF POLISH BANKS
Mr. Andrews. Thank you, Mr. Chairman. A question for Mr.
Oxman. On page — ^Well, in your statement you talk about "the de-
velopment of democratic and free market institutions remaining in-
complete."
And you talk about "a commitment of $200 million to an inter-
national effort to restructure and privatize banks in Poland."
Could you give me more specifics on the nature of that effort —
what it is intending to accomplish?
297
Mr. OxMAN. I would be happy to. In fact, we were just discussing
that particular program in the car on the way up.
Mr. Andrews. I was not listening in. I promise.
Mr. OxMAN. No, that is all right. Basically, the concept here —
and we have taken, as I understand it, the leadership in this effort
to put together this fund in Poland and I would like Gerry Hamil-
ton to give some of the details — but, in essence, the idea is to facili-
tate the privatization of banks in Poland and to do so through mak-
ing available these funds so that the obligations that these institu-
tions have to the Polish Government can be met with these funds
and the balance sheets, thereby, of these banks, can be cleaned up
and they can move forward in time as viable private financial insti-
tutions. I think that that is the general concept.
And the banking sector — not only in Poland, but in several of the
other countries — is one which is in very, very urgent need of im-
provement and attention, especially in respect to privatization.
Gerry, do you want to comment a little further on that?
Mr. Hamilton. Yes, sir. I think, actually, that what Assistant
Secretary Oxman has said regarding what the current fund is there
to do covers it fiilly.
I might point out how it got there because I think that is an im-
portant element. We did start out with the Stabilization Fund for
Poland which was an international effort which had about $1 bil-
lion in it from a number of different countries. The U.S. contribu-
tion to the Stabilization Fund was $200 million.
That fund, in its own right, was highly successful in that it pro-
vided the backing for the Polish currency to the point that it never
had to be drawn on.
And last year the decision was made, in fact, that that fund
could, therefore, be disestablished and our $200 million was con-
verted first to go into this structure to back the restructuring of the
private banking system in Poland.
And the Assistant Secretary is correct that we worked with a
number of other countries who were also contributors and the re-
sult is that somewhere — I believe it is about $.6 billion out of the
$1 million — are in that same effort now.
Mr. Andrews. Who owns the bank in Poland and how was the
ownership allocated?
Chairman Hamilton. David, do you want to take that?
Mr. Oxman. I am not sure of the answer. We can get you the de-
tail on that, but I think there is not one bank.
[The information was subsequently submitted for the record and
appears in the appendix.]
I think the concept behind the program is to turn a number of
different governmental financial institutions — government-owned —
into privately owned institutions and to clean up their balance
sheets, as I said. At which point they would be privately owned by
the Polish public, in essence. That is the concept.
Mr. Merrill. The only information that we have immediately
available that these are state-owned commercial banks.
Mr. Hamilton. But the money — ^the $200 million of ours and the
other contributions from other donors to the original Polish Sta-
bilization Fund — are not themselves a bank. This is money used to
back this transformation process.
298
FUND FOR IRELAND
Mr. Andrews. I have a question on the Fund for Ireland con-
tribution— ^the $20 milHon. And any of you could be free to answer
this.
What do you think has proven to be the most successful economic
development strategy out of the Fund for Ireland? Which industries
and which strategies appear to be the most promising?
Mr. OxMAN. I would like to ask David to comment on that, but
I would just point out, in learning about this fund and reading into
it, I was amazed to see that it has contributed to the creation of
18,000 jobs. That is a lot of jobs in a place like Northern Ireland.
David, do you want to
Mr. Merrill. It is not only the job creation that has been very
successful, but also the leveraging concept of the fund. Every dollar
that is invested is matched by about an almost $2 of additional
funds from the private sector or from governments in the area.
It focuses on disadvantaged areas — such as rehabilitation of der-
elict facilities, community-based private enterprise and tourism.
And, although it seemed a little odd to us at first, tourism has
been found to be a very, very good comparative advantage for these
communities to get some income and iobs stimulated.
I think it has been quite successful, and we do review this peri-
odically. We send people to look at the projects, particularly in the
bi-communal activities.
There was a place called Village of Coal Island that was a very
high imemployment area. They formed a district development asso-
ciation and converted things like mills to museums, boosted small
industries, got tourists coming in — a lot of private sector involve-
ment. That is one.
Another t>pical type of project was a bi-communal shopping cen-
ter set up in a disadvantaged West Belfast area, witn super-
markets, job placement services, stores, libraries — where people
come together, not just for shopping, but to get information on job
opportunities, training and so forth.
Again, a lot of private money went into that, not just our money.
There is a cross border cooperation project in canal restoration that
links two rivers, I g^ess that are in different areas. So, it is a bi-
communal activity as well — the Erne and Shannon Rivers.
It supports traae and business development across the boundary,
and interaction between the British and Irish Governments is stim-
ulated. A lot of people were employed and so on.
So, there are a number of these activities and I think the bi-com-
munal activities of the International Fund for Ireland are quite
noteworthy.
STATUS OF CYPRUS NEGOTIATIONS
Mr. Andrews. The final question that I have is for Secretary
Oxman. Could you give us a status report on the most recent sta-
tus of the negotiations on the Island of Cyprus?
Mr. Oxman. I would be happy to. As you may know, President
Clerides and Mr. Denktash met at the U.N. on March thirty and
it was agreed at that time that there would be a reconvening of the
discussions on May twenty-fourth at the U.N. to discuss the so-
299
called set of ideas which formed the basis for a possible negotiated
solution.
That is still entrained. We presently have our special Cjrprus ne-
gotiator, Ambassador Maresca, in Cyprus facilitating the pre-
paratory steps that are leading toward that meeting or engaged in
preparatory and facilitative discussions in Cyprus at this time.
We give the Cyprus issue a high priority. At the same time, we
recognize — I think very realistically — that at the end of the day,
the solution to this problem is a function of the will of the parties
who are involved, all of the parties involved.
Mr. Andrews. Has the administration given any thought to con-
nections between its policy with respect Bosnia and our relation-
ship with Turkey on this issue?
Mr. OXMAN. In fact, I was recently on the trip with the Secretary
last week to various European capitals and we had the pleasure of
meeting with the Turkish Foreign Minister, Mr. Cetin.
Turkey has a very strong interest in the situation in Bosnia.
There are a significant number of people who live in Turkey who
have relatives and families and traditions based or related to
Bosnia.
And we have stayed in close touch with Turkey on the Bosnia sit-
uation. Obviously, it is a highly complicated dynamic situation, but
we have tried to be very sensitive to their concerns.
They are participating in the no-fly zone enforcement activities,
as you know. And we are doing what we can to have a very open
channel of communication with them so that they understand how
we look at that situation and we understand how they look at it.
Mr. Andrews. Thank you very much. Thank you, Mr. Chairman.
Chairman Hamilton. Mr. Oilman.
Mr. Oilman. Thank you, Mr. Chairman. I certainly want to join
you in welcoming the panelists here today. I think it is important
that we have this early review of our foreign aid request for 1994
and a great opportunity to take a look at all of the Central and
Eastern European nations, as well as Portugal, Cyprus and the
International Fund for Ireland.
U.S. ASSISTANCE TO EASTERN EUROPE
I would like to ask our panelists if they would comment on the
criticisms that the OAO study of U.S. Assistance to Eastern Europe
made with regard to the progpram being improperly geared to sup-
port short-term transitional needs during a 5-year timeframe and
that the timeframe is unrealistic.
And, further, that our regional approach, which allocates funds
to Central and Eastern Europe on a regionwide basis, does not ade-
quately recognize the diflFering needs and stages of transition in the
different countries.
And, third, the decision by the Department of State to manage
the U.S. aid program from Washington rather than through in-
country, AID missions, which has limited the ability of our officials
to monitor host country conditions and the status of our programs.
Do you see these to be major problems still hindering our U.S.
efforts? I would welcome your comments.
300
Mr. OxMAN. Thank you, Congressman. I would like to comment
on the second and third parts of your question and then ask Mr.
Merrill to comment on the first part.
With respect to the regional focus, as I alluded to in my opening
statement, I think the regional concept was an excellent concept
when this program was established in 1989.
We were dealing with a region in tremendous flux with rapid
changes. There was a need to be able to be quite flexible.
As the program has developed and as I mentioned in my opening
statement, I think that it is possible to develop more of a country
focus. It is not exclusively a country-by-country focus. I think there
is still a need for the flexibility, but I think there is wisdom in de-
veloping more of a country focus.
That is related, as well, to the issue of Washington — whether it
is Washington-based or in-country-based. As I have become famil-
iar with the program, I have been impressed by the fact that, rel-
atively speaking, it is a low overhead operation. I think that is
good in government when that can happen.
I think that part of the reason it has happened here is because
it was Washington-based. There was not a replication of overheads
being created in a series of countries.
There was the ability to move flexibly, depending upon cir-
cumstances on the ground, but, again, I think there is room now
to develop more of an in-country presence now that fund have been
disbursed, programs are up-and-running and there may be more of
a need to have local eyes and ears on the situation.
David, do you want to amplify that?
Mr. Oilman. Well, Mr. Oxman, are we recommending then that
we switch to a country to country basis? Are we going to make per-
sonnel available?
Mr. Oxman. We are not recommending it in those stark terms.
I think that I would like to ask Mr. Merrill to elaborate on that,
but we are of the view that there is room for a greater in-country
presence in certain circumstances, but I would not say that it is
across-the-board.
Mr. Oilman. Well, by saying that there is room, what are we
doing about it? Are we going to make some definite recommenda-
tions to put people there?
Mr. Oxman. Yes, we are. I would like to ask Mr, Merrill to com-
ment on that.
Mr. Merrill. Just to take the last one first, sir. People are al-
ready in. We have 160 people in the field and 160 people in Wash-
ington. A traditional program would have more in the field than in
Washington; but having said that, to be perfectly fair, the bulk of
the people that we have in the field in that 160 are foreign service
nationals. And, obviously, the bulk of the people in Washington are
Amei^icans.
We have found in Eastern Europe — unlike, perhaps, many other
areas of the world — we can get very, very highly trained foreign na-
tionals at a very, very good price that can do a lot of the functions
thatTa more highly paid American — where you would have to get
housing allowances and all — would have to do.
Now, going back to your original series of questions on
301
Mr. Oilman. Mr. Merrill, if I might interrupt. What portion of
our overseas AID people are foreign service nationals?
Mr. Merrill. Our field people, we have 160 in the field of when
101 are foreign service nationals. And the remainder are Ameri-
cans; that is, direct-hire Americans or contractors who work di-
rectly for AID — personal services contractors.
Mr. Oilman. How long have we been using foreign service na-
tionals to do the oversight?
Mr. Merrill. We have been using them since the very begin-
ning. And we use them for oversight throughout the world.
It is just that in Eastern Europe, the level of skills available to
us is such that we can, many times, use a foreign service national
for the kind of oversight that a U.S. direct-hire would do.
I might also add that it was a risk and a concern at the begin-
ning whether we could do oversight adequately with this kind of
lean field staff.
And, by the way, there is a tradeoff there as well. If we had cho-
sen to focus on establishing a field staff at the very outset, the
tradeoff would have been that the projects would not have been
started as quickly.
But, at 3V2 years into the program, despite the speed — despite
the risk that we took — the results are rather surprising, actually,
for me as a career AID official: That so far our Inspector Oeneral,
despite nine audits, has found no major faults with the projects in
this program. There are five more audits in the process. I do not
think that he is going to find major faults.
And our record on oversight with the 10^ — ^who, as you know, is
a very tough 10 — is as good or better than in the more traditional
programs that I have managed.
Mr. Oilman. Well, are you now saving that we are managing it
from the field sufficiently, instead of from back here in Washing-
ton?
Mr. Merrill. I am saying that we are shifting more responsibil-
ity and staff to the field gradually. The 1993 Appropriations Act re-
quired— which we welcomed — required AID representatives to be
the in-country coordinators for all the assistance activities under
the guidance, as always, of the Ambassador. And, in this case,
under the guidance of the Washington-based State Department-lo-
cated coordinator. So, that has been done.
There has been much more done in the area of country strategies
that give individualization to the country programs.
The AID Reps are interacting with the government officials. In
addition, high level missions from Washington go out periodically
and sit down with the embassy officials and with the government
officials to go through a ranking of country activities.
And what we did in this program — and other parts of AID are
looking at this now for possible benefits of a more widespread na-
ture— we decided first to put contracts on the track.
It is as if we had decided to make ready-made suits, and get
them going, and then offer individual custom tailoring on the site,
rather than the traditional approach of a custom-tailored suit that
is going to take a much longer time to develop, even though it
might be or it might not be a better fit at the end of the day.
302
So, we gave the emphasis to speed rather than to tailoring. And
now we are coming back and giving more emphasis to the individ-
ual tailoring on the ready-made, as well as giving countries and
AID representatives the opportunity — if they want to take the time
and they think that it is worth it — to design a custom-made project
for that country alone.
Mr. Oilman. And they have the discretion to put that kind of a
program together?
Mr. Merrill. They have the discretion to recommend it.
Mr. Oilman. And it comes back to Washington
Mr. Merrill. It does come to Washington.
Mr. Oilman [continuing]. For final approval?
Mr. Merrill. Yes, sir, but in a traditional mission, also, all
projects come back to Washington, at least initially.
Mr. Oilman. How about the argument that the program is im-
properly geared to support short-term transitional needs during a
5-year timeframe?
Mr. Merrill. To support improperly for short-term?
Mr. Oilman. Yes. That is one of OAO's criticisms. That the pro-
fram is improperly geared to support short-term transitional needs
uring a 5-year timeframe.
Mr. Merrill. That must be a rather
Mr. Oilman. That the timeframe is unrealistic.
Mr. Merrill. Yes. That particular comment might be a dated
comment because the comment that we hear more frequently now
is that we need to gear more toward the long-term needs.
One of the things that the program did initially was that it was
very, very zippy — if I can say that — in responding to short-term
needs.
And then we decided that short-term advisors were not the an-
swer and we needed more long-term permanent advisors who could
build institutions.
We were wrong, however — as we have admitted — on the time-
frame which is another part of your question. Originally we
thought 3 to 5 years. We would be in and out and we would be able
to do this.
And, now, we find that the institutions need to be built; that
they were not just there and needed to be jump-started. Many of
them need to be built from scratch.
So, some of the institution building lessons from our more tradi-
tional AID programs are starting to be applied. And it is going to
take a lot longer than we thought for the Northern tier.
And it is going to take even longer than that in the Southern
tier — with the furthest-out example being Albania, which is more
or less a traditional AID developing country that happens to be lo-
cated in Europe, where I see us there for at least a decade, if not
two.
Mr. Oilman. So, you would up that timefi-ame from 5 years to
a much longer period?
Mr. Merrill. I would.
Mr. Oilman. What about the recommendations in the OAO re-
port to deal with these criticisms? They recommend:
"Restructuring the prog^'ams to recognize the long-term needs
303
Which, apparently, you just mentioned.
"... to allocate mnds on a country-specific basis, except for gen-
uine region wide progprams, such as an environmental program; and
to establish AID missions to manage country-specific assistance
programs."
(Jan you tell us what, if any, steps have been taken along those
lines and what changes have been made in the SEED program, if
any, to reflect the problems raised in the GAO report?
What is the reason for resisting any changes in the regional U.S.
country-specific focuses on these programs?
Mr. Merrill. It is a lot of questions.
Mr. GiLMAN. Yes.
Mr. Merrill. I vnW try to remember them all. For fiscal year
1993, 65 percent of our program, at least, will be country-specific
activities.
Actually, the number is going to be higher than that. The Appro-
priations Committee set a floor of 65 percent for country-specific
activities and we are going to do considerably better than that;
probably in the 80 percent range. That is for 1993.
Now, those country-specific activities can take place within bilat-
eral programs or within regional projects for 1993.
For 1994 the law requires that at least 50 percent of our $409
million be shown on a country-by-country allocation basis, the same
way it is for most other countries in the world. And we are going
to do that or, perhaps, do better than that.
Where that stands is that the new AID administrator — ^who was
just sworn in last night — expressed an interest in looking at those
country levels before they come up to the Hill.
So, those should be up very, very shortly. And when they are up,
countries will have a core minimum amount that they can plan on.
Now, on the regional, we want to make improvements in each of
the elements in the program. And we are trying to make those im-
provements.
We do not want to throw away, in doing so, some of the benefits
that we have found fi-om the regfional approach such as avoiding of
country entitlements which creates a lobbying sort of mentality and
means that if you take money away from a country they say: "You
do not like us anymore." And getting countries signatures, if we
have to reduce their AID level.
We have had a very flexible program here, where, unlike most
other AID programs, we do not have to sit down and sign every
agreement with the country as a legal document. That takes 12
months of time in a normal AID mission. And only when you are
finished with that can you go and do the contract.
We turn that around. We do the contracting first and then when
we sit down with the government, we use their valuable time to
talk about tailoring and how that contract can be used to meet
their needs — not schooling them in the Federal procurement regu-
lations.
So, it is a much more flexible approach and it lets us reward
good performers. We can move money around fi"om country to coun-
try much more easily.
I will give you another example of a project that has a lot of sup-
port around this town and that is the program that we just initi-
304
ated for the trauma victims in former Yugoslavia. We are putting
$5 million into that for counselling services and hospital partner-
ships to create trauma centers and so on.
If we had not had the regional projects to draw on, we could not
have done that in anything like the 1 or 2 months timeframe that
we are doing it now.
And besides, we would have to go to the countries that were los-
ing the money and get them to agree to lose the money.
And the other big reason why we keep to some of the benefits
of this model is the cost. It saves us $25 to $30 million a year of
operating expenses — that we do not have — ^to use the model that
we do.
So, if we went to a traditional AID mission model in Eastern Eu-
rope as some people advocate, we would have to close AID missions
down in the developing world. We may have to do that anyway, but
we would have to close even more down.
So, we are trying to demonstrate to you that we hear what you
are saying about the need to make changes to get greater country
involvement. We think we are on that track. If we need to do more
in that regard, we hope you will let us know, but without throwing
out some of the flexibility and management innovations from the
regional program.
Mr. Oilman. I just have a couple of more questions, Mr. Chair-
man.
THE EBRD
We have seen a number of serious criticisms in the European
Bank for Reconstruction and Development, including excessive lev-
els of spending on their physical infrastructure — the bank itself —
and on the administrative and operation expenses.
Could you comment on the bank and the problems it is having
and what reforms have we requested that EBRD undertake?
Mr. OXMAN. Yes. This was something of a very deep concern to
us — the reports concerning the expenses of their building and the
assertion that there was more spent on this than on actual dis-
bursements.
We are pushing for tighter budgetary oversight in connection
with this. The bank had its annual meeting last week in London,
or 2 weeks ago, at which time we called for a review of expendi-
tures including the use of outside auditors.
I believe that as a result, the Board of Directors will exercise
tighter control and the audit committee of the bank is reviewing
the costs of refurbishing the bank's headquarters.
Obviously, in any startup venture, the startup costs at any given
point in time might exceed the disbursements for a period of time,
but this situation certainly caught our attention very much and it
is a source of considerable concern and we intend to follow it very
carefully.
Mr. Oilman. Are we in any administrative capacity in that bank?
Do we have representatives there?
Mr. OxMAN. We have a representative on the Board of Directors
of the bank.
Mr. Oilman. And how much do we contribute to that bank?
305
Mr. OXMAN. We have contributed approximately $60 to $70 mil-
lion per year for the last 3 years.
Mr. Oilman. Has it been an effective program?
Mr. OxMAN. I think it has been. And the jury is still out in many
ways, but, in general, we believe the bank is doing a good job.
It has made cumulative commitments of about $2.5 billion. And
it has about another $2.5 billion in the pipeline.
It is assisting the private sector which is important. Much of this
is in the form of assisting joint ventures between foreign companies
and privatizing state enterprises.
The U.S. companies have done very well in winning procurement
contracts financed by tJie EBRD. And over 30 percent of their mer-
chant banking loans to the private sector have involved U.S. firms.
So, there is a lot of positives there. Unfortunately, there has been
this negative as well, which requires very close scrutinv.
Mr. Oilman. One of the criticisms we have heard is that the
EBRD has no exposure at all in Albania. Is there some reason for
that? Does Albania not qualify for any EBRD loans?
Mr. Merrill. Actually, they are starting to get involved in Alba-
nia. And — ^if I can find it — we have a very interesting project start-
ing up where our technical assistance under our privatization pro-
gram is helping to restructure and privatize the Albanian chrome
industiy.
The EBRD is putting the equity into that and we are giving the
technical assistance. It is a very good way to use our comparative
advantage in cooperation with the EBRD.
Mr. Oilman. Thank you. Thank you, Mr. Chairman. I thank the
panelists.
Chairman Hamilton. On the EBRD, are they not spending more
money on themselves than they are loaning?
Mr. Oxman. In terms of actual disbursements, I believe the an-
swer to that question is Yes.
On the other hand, as a startup entity, in certain situations it
is not unusual that a startup entity will spend more on its own
overhead and its initial costs than it will have disbursed.
I think what is also relevant here, while this is a source of con-
cern, I think it is also relevant to look at what are the commit-
ments they have made based upon project analysis, what loan com-
mitments nave they made.
And those are sizable, Mr. Chairman, with $2.5 billion in com-
mitments since 1991 and another $2.5 billion, as I understand it,
in the pipeline and coming toward the commitment phase.
Chairman HAMILTON. Why is it that we learn of these things
through the Financial Times of London — about the opulence of the
bank — rather than from our representative on the Board?
Mr. Oxman. I do not know the answer to that question.
Chairman Hamilton. And who is our representative on the
Board?
Mr. Merrill. It is William Curran, sir.
Chairman Hamilton. Well, what has he been doing?
Mr. Merrill. Well, he goes to the meetings, but we do not know
from here how
Chairman Hamilton. Does he listen to what happens in the
meetings?
306
Mr. Merrill. Yes, but we do not know what happens in the
meetings. In other words, we do not know the extent to which they
discuss the marble in the lobby, for example, at the meetings.
I suspect they probably do not discuss that very much at the
meetings.
Chairman Hamilton. Do you mean to say that he did not know
what was going on?
Mr. Merrill. I do not know at this point what he knew and
when he knew it, sir.
Chairman Hamilton. Well, you know, this just makes these
things very difficult to support. I mean, this kind of publicity on
the EBRD is devastating. Absolutely devastating.
First of all, it is not revealed by our own person on the Board.
Secondly, it comes out in the Financial Times and they rim several
articles in a row on it. And now everybody is on the defensive —
including yourselves — on the EBRD.
And I am very distressed about this. I think we have to let those
people know what they are in business for.
I understand that the president has a private jet flying him
around Europe. Very elaborate — exceedingly elaborate — surround-
ings.
So, you make it very tough for us — unless you convey to these
folks pretty strongly that we are unhappy with what they are doing
and they better start performing the function or
Just how much money have we contributed to that operation?
Mr. OXMAN. We have contributed about $60 to $70 million for the
last 3 years. And the request this year is, I think, at the $70 mil-
lion level.
It is a lot of money and I completely share your concern. I was
outrag:ed to read the report.
Chairman Hamilton. Well, I appreciate your reaction to it. I
hope that you will follow it up. And I will hope that you will give
us a report On it, if you would, please.
Mr. OxMAN. We will definitely follow that up, Mr. Chairman.
And I would repeat again that at the Board's meeting last week,
our representative did call for a review — an intensive review — of
this, including the use of outside auditors.
CHANGES IN FY 1994 REQUEST
Chairman Hamilton. Now, let me ask you. What changes have
you made in the foreign aid budget 1994 over 1993 for Europe?
I identify only a few. You have come in with a $20 million re-
quest for Ireland. In the past, administrations have come in with
zero. The $20 million is actually what we have spent, I think, last
year.
You have come in with $15 million for Cyprus. That is a similar
situation. That is exactly what we spent the previous year. Pre-
vious administrations have come in at zero. How much? At a mod-
est amount — $3 million, I am told.
And then Turkey. There is some increase in the ESF, but, by and
large, every other figure is straight lined. Is that correct?
Mr. OxMAN. I think that there are a couple of differences, Mr.
Chairman.
307
In the case of the security assistance for Turkey, the administra-
tion has requested an increase in the ESF, as you have pointed out.
And the loan amount — ^the FMF loan amount — would be at the
same level.
Although last year we did — or the year before last, I guess it
was — we did request that there be a grant portion. The fact that
there is not a gprant portion on the assistance to Turkey, has been
a significant development there.
Although, you are right, it is flat — ^it is straight lined from last
year in terms of the loan portion.
With respect to other differences. David, did you want to com-
ment on that?
Mr. Merrill. Yes. On the Eastern Europe, on the SEED account,
Mr. Chairman, the fact that the amount looks about the same as
last year conceals differences that are going on within that num-
ber.
For example, in 1994 there will be far less for the Enterprise
Fund — the flagship operation that used up a lot of the funding.
There will be relatively less for the Northern tier and more for
the Southern tier and the Baltics, as they get into that stage of
their transition.
So, there are internal shifts. When the country numbers get up
here, they will be easily revealed.
Chairman Hamilton. Well, let me tell you. We do not have the
country figures yet, but — ^and I am going to get into that in a
minute — but, you know, what really strikes you is that as you look
at this foreign aid program over a period of years, is how little it
changes.
The world can go through a revolution, or 3 or 4, and the aid fig-
ures remain the same. You can go from one administration to next
administration, and the aid figures are still the same basically.
And it just shows, it indicates to me, that we are not doing any
thinking. We are not making any adjustments to the changes that
are taking place in the world.
How can you justify straight lining these figures year after year
aft^er year after year? And I do not expect you to comment to all
of this, but I am just philosophizing with you a little bit about the
AID program.
The dominant feature of the AID program is inertia. We set a fig-
ure in and it just goes on and on and on and on.
Mr. Bader. May I comment? Mr. Congressman, I think that
there have been changes. Certainly in the case of grant aid for the
Southern region countries, that has been eliminated now.
And the programs that are envisaged for fiscal year 1994 were
started in previous years, and so we are winding down some pro-
grams.
F-16's for Portugal, F-16's for Greece and F-16's for Turkey are
the primary items that are being supported, but there is a need to
maintain the agreements that we have made earlier.
Chairman Hamilton. How long? Do we maintain these agree-
ments forever?
Mr. Bader. No, sir. I think that certainly imtil these programs
are fulfilled and as long as our security interests suggests that as-
308
sistance should be provided to these countries. And we have to de-
cide that on an annual basis.
Chairman Hamilton. Has the threat environment for Greece and
Turkey been the same ever since the end of the cold war?
Mr. Bader. No, sir, it has not been the same. It has moved into
much more of a regional security problem, as I believe you know.
Turkey lives in a very rough neighborhood. It has some of the
most undesirable neighbors that one could choose, if one could.
Greece in the Balkans has a serious security problem, irrespec-
tive of the lack of the threat from the former Soviet Union.
Chairman Hamilton. But the amounts that we provide are the
same.
Mr. Bader. That was what I just tried to explain; that is because
programs that have been undertaken have to be fulfilled.
CONGRESSIONAL PRESENTATION DOCUMENT
Chairman Hamilton. OK, let's see. We do not have any congres-
sional presentation document from you yet. When do we get that?
Mr. Merrill. The overall congn^essional presentation document,
I believe is up here. And it was up here a couple of weeks ago, I
am pretty sure; but the supplement that contains the country-by-
coimtry numbers for Eastern Europe is not up here.
And, as I say, Administrator Atwood wants to take a look at
that. And it should be up shortly.
Chairman Hamilton. What you sent up is preliminary? It is
marked "preliminary". Right?
Mr. Merrill. Right.
Chairman Hamilton. When are we going to get the country by
country?
Mr. Merrill. Administrator Atwood will have to make that deci-
sion, but I am confident that he will do that in the next week or
so.
Chairman Hamilton. Are you folks aware of our schedule up
here?
Mr. Merrill. Yes, sir, we are.
Chaimian Hamilton. Are you aware that the appropriation bills
come to the floor of the Congress in June? Are you aware that June
follows May? Well, when
Mr. Merrill. We have been making the point within the build-
ing that these numbers have to get up as early as possible. And
what I have explained is where it stands now.
Chairman Hamilton. It is going to get very, very difficult for me
to get a bill onto the floor of the House of Representatives in the
month of June because that month is given over to appropriation
bills.
Mr. Merrill. But we have that. For the Eastern Europe, we
have the numbers ready to go. Mr. Atwood was sworn in at 5
o'clock last night, so he probably has a couple of other things to do
this morning, but we will get to him this week to ask him to clear
off on sending those numbers up, sir.
Chairman Hamilton. I will tell you what I would like to have.
I really do need the country-by-country breakdowns, of course, but
we need to
309
Can you give me the tx)tal figure for all assistance being re-
quested for fiscal year 1994 for Eastern Europe? All assistance. All
spigots.
Mr. Merrill. Right. We can, but you would have to give us a
moment to add it up.
Chairman Hamilton. OK. Just furnish it for us as promptly as
possible. Now
Mr. Merrill. I will furnish it for you today.
Chairman Hamilton [continuing]. How about can you give me
the outlay figures for 1994 for all spigots?
Mr. Merrill. Yes.
Chairman Hamilton. You do not need to give these to me right
now. I just need them as promptly as possible.
Mr. Merrill. We have the outlay figures here for all spigots. So
far, it is $5.5 billion in outlays of U.S. assistance
Chairman Hamilton. For
Mr. Merrill [continuing]. For all spigots.
Chairman Hamilton. Are you giving me for 1994?
Mr. Merrill. I am giving it to you from the beginning of time
and up through the second quarter of fiscal year 1993.
Chairman Hamilton. Now, what I need are the 1994 figures.
Mr. Merrill. You need a prediction?
Chairman Hamilton. Yes. That is right.
Mr. Merrill. I will have to get that for you.
[The information was subsequently submitted for the record and
appears in the appendix.]
Chairman Hamilton. Can you give us the pipeline figures for
Eastern Europe?
Mr. Merrill. Yes.
Chairman Hamilton. Why not submit these for us?
Mr. Merrill. It is — ^yes, I have that right here. It was $352 mil-
lion as of the end of the second quarter of fiscal year 1993. We are
69 percent expended, which is one of the highest rates in AID.
Chairman Hamilton. OK. Now, we certainly would like for you
to furnish those for us, if you would, please. And to get us the
country-by-country figures as promptly as possible.
I understand that your breakdown is usually by these three
areas: quality of life, economic restructuring and democracy. Is that
right?
Mr. Merrill. That is right.
Chairman Hamilton. Can you break it down by country?
Mr. Merrill. We will break it down by country. At least 50 per-
cent of the amount will be broken down by country and possibly
higher than that. I would like to see it go somewhat higher.
Chairman Hamilton. OK Well, if you are able to do that, that
is a big improvement, I think.
[The information was subsequently submitted for the record and
appears in the appendix.]
SEED program
Mr. Secretary, your statement outlines a number of important
changes in the management of the SEED program. I want to go
over those with you briefly.
310
You say that you are developing a new balance between Wash-
ington and the field. Mr, Oilman was asking some questions about
that.
Tell us what you mean by this "new balance" phrase. Now, does
that mean that more people are going into the field?
Mr. OXMAN. I think I would like to ask Mr. Merrill to comment
on the details of that, Mr. Chairman, but, in general, I think it
does mean that there would be a shift in the balance.
As Mr. Merrill has pointed out, the program now has approxi-
mately 160 Washington-based personnel and approximately 160
based in the field.
And I would like to ask him to comment, but my understanding
is that the trend or the balance may be shifting to more of a field
focus.
Mr. Merrill. Yes, there will be more people going to the field,
but the numbers are not massive numbers.
Chairman Hamilton. Now, why are you making the decision to
send more to the field?
Mr. Merrill. Because our people in Washington who are saving
us all this money by being here are running themselves ragged
working the hours they are working and going to the field.
Some of them go to the field 120, 150 days a year. Now, being
in Washington helps, too; but we need what I call assistant project
managers in the field in the sectoral areas. And, so, we are going
to have 12
Chairman Hamilton. This is a judgment on your part that you
need more people in the field?
Mr. Merrill. Yes, sir. We plan to send at least 12 additional as-
sistant project managers to the field. We also plan to open an office
to help humanitarian conditions in Bosnia. We have no AID person
in the field worrying about humanitarian conditions in Bosnia.
That is, obviously, an office that needs to get opened up. And so
we have
Chairman Hamilton. When will you open that office?
Mr. Merrill. Just as soon as possible. We are waiting for some
necessary clearances within the State Department and the em-
bassy. There should be somebody there by early summer.
Chairman Hamilton. Is it correct to say that you are abandon-
ing or ending the Washington -based management system?
Mr. Merrill. No, sir, that would not be a correct statement.
Mr. Oxman. Mr. Chairman, if I might just add to that. There is
a logical evolution which includes this.
When the program began and the new programs were being set-
up, a g^eat deal of the work was, in fact, in creating the programs
themselves.
As the programs operate — even the regional programs which, I
think, get some sort of unfair hit as being sort of clones from one
country to another — but as these are applied in one country or an-
other, you then shift in the management from the original estab-
lishment of these to the alteration, to the modification of things to
contract modifications in the field which were not a part initially
when these were being created.
311
It is a logical shift, therefore, to put some of the people in the
field who, otherwise, do these things centrally right now here in
Washington. They are swamped, as Mr. Merrill has said.
Chairman Hamilton. OK Your statement, Mr. Secretary, also
mentions that the responsibility for the SEED program will reside
in the European bureau of the administration. Does that mean that
you are eliminating the post of SEED coordinator?
Mr. OxMAN. No, Mr. Chairman. The SEED coordinator will be
within the bureau.
Chairman Hamilton. Reporting to you?
Mr. OXMAN. Will report to me. That is right.
Chairman Hamilton. Who is that person?
Mr. Oxman. That person I have not designated yet. I am close
to doing so and will keep you posted on that development. I want
to get that resolved as promptly as possible.
Chairman Hamilton. Is that person going to have the respon-
sibility for coordination and coordinating with the other agencies of
government?
Mr. Oxman. Yes, Mr. Chairman.
Chairman Hamilton. Now, your statement mentions that you
are in the process of making adaptations to the SEED program to
ensure that each country's program is tailored to its particular
needs.
I guess that is what you have been explaining to me; putting
more people in the field. Is that correct? Is that the basic change
there?
Mr. Oxman. I think that that is part of it, Mr. Chairmsin, but I
think Mr. Merrill might want to amplify that just a bit.
Mr. Merrill. That, sir, and the development of country-specific
strategies.
Chairman Hamilton. Does that mean that you are changing
from the regional approach?
Mr. Merrill. It is an evolution of the regional approach. We use
regional contracts as funding mechanisms, but then those contracts
are like items on a menu.
We sit down with the countries and we tailor a specific approach
for that country with the country. It is a country-specific strategy
drawing on regional projects, primarily. So, it is both.
Mr. Oxman. I think, Mr. Chairman, if I could just comment here.
In a context where we have a limited amount of resources to deal
with a very large set of needs in the region and where we see this
possible trend of a shift in emphasis fi'om the Northern tier to the
Southern tier, there are advantages in maintaining the types of
flexibility that go with the regional approaches; while at the same
time, evolving to elements of a country-by-country approach.
It is a hybrid, but I think that it is an important hybrid so that
the flexibility can be maintained since we do not have unlimited
funds.
international fund for IRELAND
Chairman Hamilton. All right. I want to catch up on some
things that were mentioned a moment ago by some of my col-
leagues.
312
On the International Fund for Ireland, how much of that fund
has the United States provided and how much have other countries
provided?
Mr. Merrill. We are the largest donor. We have provided $210
million through fiscal year 1993. The E.G. is the second largest
donor — $120 million; that is a figure through 1994. Canada has
pledged $10 million. Only three
Chairman Hamilton. Now, wait a minute. The E.C. figfures are
for the future?
Mr. Merrill. No, no.
Chairman Hamilton. Nineteen ninety-four?
Mr. Merrill. No, no. It is from the beginning. That is a figure —
$120 million from the beginning through and including fiscal year
1994 from the E.C.
Our figure is $210 million through fiscal year 1993. And, it is
about $230 million.
Chairman Hamilton. Now, the E.C. contributes about $18 mil-
lion a year?
Mr. Merrill. I think that that is correct.
Mr. OxMAN. And we contribute how much a year?
Mr. Merrill, We contribute about $20 million a year.
Chairman Hamilton. Oh.
Mr. Merrill. So, actually, they are catching up to us in terms
of almost the same per year as we give.
Chairman Hamilton. OK
Mr. Merrill. And then the others are New Zealand and the
Irish and British Governments, for administrative costs.
CYPRUS
Chairman Hamilton. All right. I think Cyprus came up a little
earlier, too. I wanted to check on some of the things there.
Well, you said, Mr. Secretary, that we are giving Cyprus a high
priority. What does that mean/
Mr. OxMAN. That means that we are doing really all we can as
a nondirectly involved party to be helpful in achieving a negotiated
solution.
I think it is fair to say that of all of the countries in the world,
none has been as pro-active — or any more pro-active — than the
United States in trying to be helpful.
We have our special Cyprus coordinator. He is in Cyprus now,
as I mentioned before.
We are very much involved in the process, without driving the
process because it really is not our process to drive.
It is a process which is at the end of the day for the parties, but
I think tnrough these efforts and through staying in very close
touch with both Mr. Clerides and Mr. Denktash and their col-
leagues, in close touch with the Greek and the Turkish Govern-
ments on this issue, that we are doing what we can to help resolve
it £ind giving it a good deal of emphasis.
In addition to that, Mr, Chairman, the President has cor-
responded with President Clerides. The Secretary has corresponded
with Mr, Denktash,
We are not just letting this issue just sit there. We are trying
to be proactive within the constraints that I mentioned.
313
Chairman Hamilton. Do you have any basis for optimism at the
moment?
Mr. OxMAN. I hesitate to venture a guess on that because when
I left the State Department in 1979, we also had a Cyprus negotia-
tion going on and it was not, in many respects, all that different
from what we are looking at right now, but I would say that there
are some hopeful factors.
I think the fact that the parties have coalesced to some degree
around the so-called set of iaeas; the fact that the meeting in New
York between President Clerides and Mr. Denktash was a good
meeting and has led to a new meeting scheduled for May twenty-
fourth — ^these are all hopeful factors, but I hesitate a venture a
guess on this particular problem.
Chairman Hamilton. Now, Mr. Maresca is also the negotiator on
Nagorno-Karabakh?
Mr. OxMAN. Yes, he is.
Chairman Hamilton. Is that right? So, he is also a part-time Cy-
prus special coordinator?
Mr. Oxman. In certain respects I think you could say that. These
two problems are both very important. And Nagorno-Karabakh has
certainly
Chairman Hamilton. Well, we used to have a full time special
coordinator.
Mr. Oxman. Right.
Chairman Hamilton. And now we have got a part time coordina-
tor and you are saying that we are raising the priority?
Mr. Oxman. No, what I would like to say is that I have been
aware of this fact and I have asked this question myself — ^why do
we have a part time coordinator. And I intend to take some steps
with respect to that, which I would like to discuss with you once
my thinking is more focused, but the concept is just what you say.
I think we need to put a higher emphasis on it and I have some
ideas for doing that.
Chairman Hamilton. Well, I look forward to discussing that
with you. My own impression of it, frankly, is that you are not
going to move it off the dime unless you give it very high priority.
By which I mean that the President and the Secretary of State
have to get involved in it. It is not going to move otherwise.
I have been dealing with this Cyprus question a long, long time.
Every administration comes in here and says that we are going to
give nigh priority to it and nothing happens.
Now, that is not entirely the fault of this administration. There
are a lot of difficult problems there, but my own impression of it
is that if you really want to move it off the dime — off the stale-
mate— ^then we are, in fact, going to have to give it very high prior-
ity with the attention of our nighest level officials.
Now, I am a little worried about the future of the U.N. peace
keeping force there. It is dwindling down, as I understand it. And
are we doing anything about that — the dwindling down of that
force?
Mr. Oxman. There is discussion within the U.N. now on the
question of how the force is to be financed. And the issue is wheth-
er it should continue to be through voluntary contributions or
through assessed contributions. And we are
314
Chairman Hamilton. What is our position on that?
Mr. OxMAN. Our position is that it would make sense to go to as-
sessed contributions. We think that that is a good thing. It would
result in some small saving, but still a saving, in terms of our out-
lay.
More importantly, what is important is to keep the force there.
And just as you have suggested, if it dwindles then what has been
a relatively stabilizing influence in the context of these negotia-
tions would be jeopardized. And I do not think that that would be
helpful at all to the efforts.
Chairman Hamilton. Are the Russians holding up this new ar-
rangement that you have identified?
Mr. OxMAN. I think there are discussions going on within the
U.N. and there are different points of view.
Chairman Hamilton. Are they going to veto it?
Mr. OxMAN. I do not think they are, but I do not know the state-
of-play as of today on that, Mr. CJnairman.
GREECE
Chairman Hamilton. OK. Now, let's see. Our request for Greece
is $315 million in FMF concessional loans. Is that correct?
Mr. OXMAN. That is correct, Mr. Chairman.
Chairman Hamilton. What are the military requirements for
that?
Mr. Oxman. Could I ask Mr. Bader to comment on that, please?
Chairman Hamilton. Sure.
Mr. Bader. Most of that money, Mr. Chairman, will go to help
fund 40 F-16's for Greece.
Chairman Hamilton. All right. And are you requesting any
IMET for Greece?
Mr. Bader. Yes, we are, Mr, Chairman.
Chairman Hamilton. How much is that?
Mr. Bader. The IMET program will be about $200,000.
Chairman Hamilton. How does that relate to the previous year?
Mr. Bader. It is a slight reduction, but significant in some ways:
265 down to 200.
Chairman Hamilton. OK On the Greek Military Modernization
Program, are we going to be helping any on tank modernization for
the Greeks?
Mr. Bader. Tank modernization so far has been under SRA —
under the Southern Region Amendment.
Chairman Hamilton. All right.
Mr. Bader. We will be providing M-60 tanks.
Chairman Hamilton. That is the excess defense
Mr. Bader. That is correct.
Chairman Hamilton [continuing]. Program?
Mr. Bader. Yes, sir.
Chairman Hamilton. Now, I want to make sure that we have
got all of these — as I said a moment ago— all of these spigots and
I want to know if aid going to any of the countries in the region
through the SRA amenoment as well included, if you would.
Mr. Bader. Certainly.
Chairman Hamilton. Now, the total value of that F-16 sale,
that is from General Dynamics, is it?
315
Mr. Bader. Yes, it is.
Chairman Hamilton. And it is a value of $1.8 billion?
Mr. Bader. No, $1.4.
Chairman Hamilton. One point four?
Mr. Bader. Of which the Greeks will finance about $1 billion out
of their own pocket.
Chairman Hamilton. Is that a government sale?
Mr. Bader. I beheve it is; FMF.
Chairman Hamilton. Now, Greece had a pipeline of over $900
million in unspent and uncommitted FMF funding — ^financing. And
now I understand that that pipeline is down substantially. It is
down to what?
Mr. Bader. Well, actually in 1991, it was at $1.7 billion. And
now it is down to about last year's program.
Chairman Hamilton. About what?
Mr. Bader. About last year's program — $325 million.
Chairman Hamilton. I see. And part of that reflects a canceled
purchase?
Mr. Bader. Part of that reflects their purchase of previous F-
16's.
Chairman Hamilton. What did they purchase to draw it down
so sharply?
Mr. Bader. F-16 aircraft, F-16 ECM equipment, AH-64 heli-
copters and A-7 aircraft, as well as modernization of CH-47's and
Navy ships.
Chairman Hamilton. Are there any major items there?
Mr. Bader. Well, those are major items, Mr. Congressman. And
anMLRS
Chairman Hamilton. You are giving me the major items?
Mr. Bader. Yes, sir.
Chairman Hamilton. All right. Now, let's see. Greece will have
a $300 million cashflow financing over the next several years. Is
that correct?
Mr. Bader. Not quite — only for fiscal year 1994, at which time
the program will be complete.
Chairman Hamilton. And is that the only outstanding cashflow
financing requirement that Greece has?
Mr. Bader. To the best of my knowledge, yes. Certainly with us.
Chairman Hamilton. Are we planning to close the facility on the
island of Crete at the end of 1993?
Mr. Bader. Well, we had had four facilities, as you recall. Nea
Makru, the communications station, was closed 2 years ago.
Heleniron was closed last year. And now we have Iraklion, it will
close this summer.
That will leave Souda Bay. That is our only logistical support fa-
cility in the Eastern Mediterranean.
Chairman Hamilton. And, so, the Crete facility will be closed
down?
Mr. Bader. One of them, sir.
Chairman Hamilton. One of them will be closed down?
Mr. Bader. Souda Bay is on Crete also. It will remain, but
Iraklion will be closed down this summer.
316
TURKEY
Chairman Hamilton. OK. All right. With regard to Turkey, $450
million in military assistance for 1994. Now, that is all concessional
loans. Is that correct?
Mr. Bader. That is correct.
Chairman Hamilton. You do have a shift. This was one of the
shifts that I guess you were referring to earlier when the requests
were closer to $600 million; that was grant mostly?
Mr. Bader. Yes, it got as high as $1 billion 10 years ago.
Chairman Hamilton. All right.
Mr. Bader. So, it has been coming down gradually to reflect the
changing trend.
Chairman Hamilton. How much of that $450 million request is
going to be for payments on previous purchases?
Mr. Bader. approximately $325 million will be needed in fiscal
year 1994, 1995, and 1996 to complete their F-16 program.
Chairman HAMILTON. And you have come in with the 7 to 10
ratio for Greece and Turkey?
Mr. Bader. Mr. Congressman, you know our attitude to a 7 to
10 ratio, but as if by magic, it somehow always happens.
Chairman Hamilton. So, you have accepted that?
Mr. Bader. It is difficult for us to accept that as a basis for
Chairman Hamilton. No, but I mean in the budget figures, it is
accepted
Mr. Bader. Yes.
Chairman Hamilton [continuing]. Is it not?
Mr. Bader. Yes, it is.
Chairman Hamilton. The 7 to 10 figures. You may not agree
with it, perhaps, some of it, but
Mr. Bader. It is reflected.
Chairman Hamilton [continuing]. It is reflected in the budget
figures.
Mr. Bader. Yes, sir.
Chairman Hamilton. Correct?
Mr. Bader. Right.
Chairman Hamilton. OK. Turkey is coproducing some F-16's
aren't they?
Mr. Bader. Yes, sir.
Chairman Hamilton. What is the status of that plan?
Mr. Bader. Well, the production line goes forward and we have
another 40 F-16's that will start with this fiscal year and go on
until 1998, at least.
Chairman H^iilLTON. OK. How many planes are being co-pro-
duced?
Mr. Bader. Well, there are 160; originally, 40 more would make
that up to 200, but then there will also be an Egyptian buy in be-
tween.
Chairman Hamilton. Some of these planes are being coproduced
for Egypt. Is that correct?
Mr. Bader. That is correct, yes.
Chairman Hamilton. Forty of them?
Mr. Bader. Yes, sir.
317
Chairman Hamilton. When will those planes be completed and
delivered?
Mr. Bader. I do not have that date with me.
Chairman Hamilton, Soon?
Mr. Bader. In the next couple of years.
[The information was subsequently submitted for the record and
follows:]
Turkey will coassemble 46 F-16C/D aircraft for Egypt as the Peace Vector IV pro-
gram. The first aircraft will be delivered to Egypt in March 1994, with final deliv-
eries planned for July 1995.
PEACE ONYX 2
Chairman Hamilton. All right. Now, let's see. President Bush
had announced a follow-on to the original F-16 co-production pro-
gram with Turkey. He referred to that as Peace Onyx 2.
Mr. Bader. That is correct.
Chairman Hamilton. And 80 planes were notified to the Con-
gress under Peace Onyx 2 in the fall of 1991. The cost of those
planes is $3 billion. How are those planes being funded?
Mr. Bader. Well, partly through the Turkish funds; partly
through the funds tnat were provided by some of the Arab coun-
tries involved in the Persian Gulf conflict; and partly through U.S.
fund.
Chairman Hamilton. Are we going to provide full funding for 40
of the planes through cashflow financing?
Mr. Bader. No. sir. Our share is about $500 million; Turkish
funds are about $500 million; and the rest will come from Arab
countries.
Chairman Hamilton. And the status of the second half of Peace
Onyx 2 is-
Mr. Bader. Well, it really has not>-
Chairman Hamilton [continuing]. The other
Mr. Bader [continuing]. Started.
Chairman Hamilton. Pardon?
Mr. Bader. It really has not started.
Chairman Hamilton. OK.
Mr. Bader. The Egyptian buy is being produced now.
Chgiirman Hamilton. Now, what is the military rationale for
Peace Onyx 2? I mean, what is the threat here?
Mr. Bader. Well, the threat is the uncertainty of some very un-
stable neighbors. Certainly, Saddam Hussein and the difficult situ-
ation in Iraq, but also the military buildup in Iran; the uncertainty
in the ethnicity problems in the Caucasus; the uncertainty in the
Balkans; the uncertainty of Syria.
These are Ankara's perceptions, but I think we generally share
that it is a very unstable area and it is in the U.S. interest to see
Turkey as a sea of stability in a very unstable corner of the world.
seed program in former YUGOSLAVIA
Chairman Hamilton. OK. Now, let me shift your attention to the
SEED programs in the former Yugoslavia just tor a moment.
We have $10 million in 1993. We had $10 million for Macedonia;
$3 million for Slovenia; and $2 million for Croatia. Has that money
now been spent?
318
Mr. Merrill. The money has not all been spent. The money has
been authorized to be spent. It is with various contractors and it
is in the process of being spent.
Chairman Hamilton, OK. Do we have future SEED activities
planned for the states of the former Yugoslavia?
Mr. Merrill. Yes. We plan that for Macedonia, the planning fig-
ure for next year will probably be about the same as this year,
which is $10 million. And of that, $6.3 is firmly planned at the mo-
ment.
And for Slovenia, the figure for this year is $3 million and prob-
ably will be about the same next year, although not all those activi-
ties are planned.
Croatia is $2 million in 1993, plus we have added this $5 million
trauma victims progp'am in Croatia.
Chairman Hamilton. Most of this is just for humanitarian as-
sistance, I presume?
Mr. Merrill, Well, that is correct, with the exception that $5
million is for the humanitarian assistance and the $2 million is $1
million for democracy and $1 million is set aside for economic re-
structuring progframs in Croatia.
Chairman Hamilton. Well, this is a
Mr. Merrill. And that money has not yet moved. And we have
not
Chairman Hamilton. This money, of course, is just a pittance of
what is required.
Mr, Merrill. That is correct. It is a small amount.
Chairman Hamilton. I suppose that you will be reviewing this
as events develop in Yugoslavia?
Mr. Merrill, Yes, I suspect that if anything moves up in the
Croatian number, it would be more on the Humanitarian side,
technical assistance to MACEDONIA
Chairman HAMILTON, OK. Now, we have a $10 million program
of technical assistance to Macedonia. You referred to that.
That gives us, I think, the unprecedented situation where we are
providing aid to a country that we have not recognized. Is that
right?
Mr, OxMAN, We have not recognized Macedonia. That is correct.
Mr. Chairman. And whether there are others
Chairman Hamilton. Do you know of any other instances where
we have provided aid to a country that we have not recognized?
Mr, OxMAN, None is jumping to my mind.
Chairman Hamilton, All right. Why do we give assistance to a
country that we do not recognize?
Mr, OxMAN, I think that in this case — again, I was not involved
in the design of the program — ^but I think the concept is that the
needs were such that they were felt to be quite compelling, David,
do you want to comment on that?
Mr, Merrill. Yes, I think that is the right answer, I know, Mr,
Chairman, there was an extensive exchange of letters between ^ou
and Secretary Eagleburger on this point last fall. And there is a
slight difference of viewpoint on the subject of recognition.
And I think that where we came out was that we felt that it was
important that the program proceed and that we would try to
319
structure the program in such a way that it did not constitute rec-
ognition.
We have signed no agreements with them for the economic as-
sistance program. Even the normal AID bilateral agreement that
we would like to have, we do not have. Instead, we have a one way
letter from them to us and we did not write back.
RECOGNITION OF MACEDONIA
Chairman Hamilton. Let me just check on the status of this
Macedonian issue in New York.
Have the two sides now reached an agreement on the final name
for Macedonia?
Mr. Oxman. I think that they have made a lot of progress, Mr.
Chairman. I do not think that there has been any final announce-
ment. The events are moving quickly.
Chairman Hamilton. They are meeting tomorrow, I am told, in
New York?
Mr. Oxman. I believe that they are meeting this week and
whether it is tomorrow, I am not sure.
I think progress has been made. People are hopeful and more
should be known soon.
Chairman Hamilton. When do we plan to recognize Macedonia?
Mr. Oxman. We have no current fixed plan in regard to that. I
think that we have been — I know that we have been waiting to see
how this process unfolds before we make a final judgment on that.
And I think that if the process — that is, the Stoltenberg- Vance-
Owen process — in regard to Macedonia does have a positive result,
then that would be a time when we should focus carefully on this
issue of U.S. recognition and/or extensive of diplomatic relations.
Chairman Hamilton. Is Greece still preventing the shipment of
supplies to Macedonia?
Mr. Oxman. I do not have any facts on that, Mr. Chairman. I will
have to look into that.
Chairman Hamilton. Now, Greece is requesting several con-
fidence-building measures for Macedonia. They want to change the
flag and not use symbols that are a domestic heritage of the other
country.
They want to guarantee the existing borders between the two
countries. They want to change the constitutional reference to Mac-
edonia minority in Greece. They want to cease any propaganda on
the issue of Macedonia claims to Greece.
Those are the confidence-building steps that Greece is seeking.
Do we support the Greek position on those confidence-building
steps?
Mr. Oxman. Our position is that we are prepared to support
what the parties are able to agree to, among ourselves.
Chairman Hamilton. Are we involved in this process at all?
Mr. Oxman. We are not directly involved. We have been aware
of the process unfolding, but it really is not a process that we are
directly involved in.
Chairman Hamilton. OK And we plan to support the agreement
that the parties reach. Basically, is that our position?
Mr. Oxman. That is our plan.
320
Chairman Hamilton. And we will not recognize Macedonia until
they reach an agreement. Is that correct?
Mr. OxMAN. We have no plan at all to recognize Macedonia.
There is no fixed understanding in our minds of this.
We want to see how this process develops. What is the result of
this process. And then I do think that we need to address that
issue.
Chciirman Hamilton. Do you think Macedonia is a viable entity
in the long run?
Mr. OxMAN. From what I have seen in trying to understand the
situation, I think that it is.
Chairman Hamilton. OK. You think that it is?
Mr. OxMAN. I think it is.
ENTERPRISE FUNDS
Chairman Hamilton. All right. Now, I want to go back to the
Enterprise Funds. Let me get your overall assessment of these En-
terprise Funds.
I am talking now generally and broadly: Poland, Hungary, the
Czech Republics, Slovakia, Bulgaria, and the three Baltic States.
Can you give me a generalization there?
Mr. Oxman. Yes, I would be happy to. I looked carefully at these
funds when I came into this position. I had not been particularly
aware of their existence as a member of the private sector.
The more I learned about them, the more interesting I found
them and the more impressed I was, in general. There are excep-
tions to this; but, in general, the more impressed I was by their ac-
complishments.
Wliat I like about them is that, generally speaking, they are lean
and mean compared to other kinds of government-related pro-
grams.
They have managed to tap into very sophisticated expertise and
superb talent to help run them and to serve on their Boards of Di-
rectors.
They have been able to proceed without having to have govern-
mental approval on a case-by-case basis of each investment or each
loan, which I happen to think is one of the reasons they have been
reasonably efficient and effective.
Chairman Hamilton. You are pleased with the management of
each of these fimds, are you?
Mr. Oxman. In general, from what I have seen, I think the an-
swer to that is, Yes. I have not gotten into great detail in all cases
and there are certain aspects which are troubling in connection
with an investment by the Hungarian fund; but I think, by and
large, yes, I have been impressed by the way these funds are being
run.
Chairman Hamilton. Now, let's see. We provide the funding for
the initial capitalization of these Enterprise Funds.
And then we do not provide additional money or have not pro-
vided additional money. Is that correct?
Mr. Oxman. We provide initial capitalization, but I believe that
we have done that on a yearly basis. And Mr. Merrill can correct
me if I am wrong.
321
Chairman Hamilton. And the budget now, do we put additional
money into these funds under this budget?
Mr. Merrill. We do it on a year-by-year basis, sir. And it has
not all been provided yet.
From the first amounts that have been authorized, there still re-
mains some funds yet to be transferred to the Enterprise Funds.
And some of them need those funds more than others. For exam-
ple, the Polish fund has gone into a pro-am of lending, more than
equity investments. And they are startmg to get reflows on those
loans, so they do not need the next tranche as acutely as, say, a
fund that put all of its money into stocks and equity.
Chairman Hamilton. Now, these funds have a very close identi-
fication with the U.S. Government?
Mr. Merrill. Yes. Yes, thev do, although sometimes they charac-
terize themselves as private funds. A great deal of their funds come
from the U.S. Government and they also have started to raise
money in subsidiary ventures from private sources and from the
EBRD.
Chairman Hamilton. Do you have a close manner of monitoring
these fimds so that you are fullv informed of how they are operat-
ing? Do the Boards keep you fully informed?
Mr. Merrill. It varies from fund to fund.
Chairman HAMILTON. Are you satisfied, in general, with the
Mr. Merrill. I think that there need to be some improvements —
particularly, in some of the funds — in the degree of consultation
that those funds take before they go into certain types of invest-
ments.
Chairman Hamilton. Which funds give you the greatest concern
at the moment?
Mr. Merrill. At the moment, the Hungarian fund.
You have to remember the way that these were originated. We
had some very, very unusual language in the Appropriations Com-
mittee report to the effect that AID should limit its role to writing
a check and to stay out of the management of the funds entirely,
except for giving them their money.
So, from that point, there have been some changes made and
most of the funds will at least consult with us on investments that
could be controversial if disclosed publicly. And the investments
will all eventually be disclosed publicly.
So, I would like to see a little bit more consultation, even if not
Rrior approval. The trick is how to do that without turning these
mds into something that is smothered by the government. And
that is very difficult.
Chairman Hamilton. Is it your position that you ought to give
prior approval to any activity of these funds?
Mr. Merrill. In general, no. The only exception — which we are
working on now and that has not been resolved yet — is in the case
of certain spin-off operations and subsidiary funds that are charac-
terized as investments and by so characterizing them as invest-
ments, there is no government review.
Some of them have salary levels that are paid to Americans that
are considerably higher than the salary levels that have been
agreed to for the fund's direct staff. And in those cases, because
salary levels can be kind of sensitive around town, we believe that
322
there should be more prior consultation and, if necessary, a prior
approval on those only.
Chairman Hamilton. Criticisms have been made of the Hungar-
ian-American Enterprise Fund. Excessively high salaries is one of
those criticisms. And another is inadequate boolckeeping.
Other criticisms are of operations beyond the borders of the coun-
try itself and the establishment of a wide ranging related business
entity called EurAmerica, beyond the control of the administration
and beyond congressional oversight.
Well, I am pleased to hear that you are watching it carefully and
your basic plea is for a lot more coordination and consultation be-
tween yourselves and the managers of the Enterprise Fund.
Mr. Merrill. Yes, sir, but I would be remiss if I did not mention
a couple of things.
And that is that this week we are going to be looking into termi-
nation procedures for the funds which were not spelled out when
the funds were initially set up. So, we need to be a little more pre-
cise on termination.
Chairman Hamilton. Who terminates — the Board or the govern-
ment?
Mr. Merrill. Well, that is exactly the issue. When they were set
up, it was up to the funds themselves to decide when to be termi-
nated. And then we developed something called mutual agreement.
And now we are heading toward a situation where the U.S. Grov-
ernment will have more than a 50-50 say in how the funds are ul-
timately disposed of.
Chairman Hamilton. OK Now, we funded these Enterprise
Funds for several countries at very different levels.
Mr. Merrill. That is correct.
Chairman Hamilton. Poland has — according to my notes — $118
million roughly; Hungary, $47 million; the Czech-Slovak fund, $27
million; the Bulgarian fund, $10 million.
Mr. Merrill. Right.
Chairman Hamilton. What is reason for those big differences?
Population, I am sure, is part of it.
Mr. Merrill. Well, the $10 million for the Bulgarian fund is not
quite right. Let me go over the initial figures. It was Poland,
$250 — this is millions of dollars — Hungarian, $70; Czech-Slovak,
$65; and Bulgarian, $55.
Chairman Hamilton. I think the figures that I was reading were
the figures that we think that they have actually gotten. Actually
received.
Mr. Merrill. That is correct.
But in terms of how important the countries are, it might be bet-
ter to look at the original authorizations and those reflect roughly
the size of the countries and their economies.
Chairman Hamilton. I do want to say, Mr. Merrill, that we have
this book — SEED Act Implementation Report, Fiscal Year 1992 —
which we received, I think, in January or February of this month
yvhich is very, very well done and very helpful to us in giving us
information about the history of it.
Mr. Merrill. I really appreciate your saying that. A lot of people
from many different agencies put a lot of work into that.
323
And, as we all know, a lot of congressional reports are not read
at all. And I know that this is one of the reports that has been read
by a lot of people. Thank you.
Chairman HAMILTON. We are very pleased with that and think
that you have done a good job with it.
Mr. Merrill. Thank you.
BALTIC STATES
Chairman Hamilton. Well, OK Let's see. Let me just ask a few
questions with regard to the Baltic States. Are we making good
progress in getting the Russian troops out of the Baltic States?
Mr. OxMAN. Tne Russian troop withdrawals are continuing.
There are difficulties in the situation. The Russians have been in-
volved in their own negotiations and conferences.
Chairman Hamilton. What country is the most difficult one
right now?
Mr. OxMAN. I would say Latvia, probably, Mr. Chairman. There
was recently a breaking off of the discussions a couple of weeks ago
in connection with the Latvians' introduction of a new procedure
for temporary citizenship which the Russians had a strong objec-
tion to.
Chairman Hamilton. Do you expect all of the troops to be out
of Estonia and Lithuania soon — say, by the end of the year?
Mr. OxMAN. My personal view is that that is hard to predict. I
think that that is probably optimistic. We support the process. We
think that the troops should be withdrawn, but
Chairman Hamilton. And in those countries, at least, there is a
steady draw down?
Mr. Oxman. The draw down has continued, yes. The draw down
has continued so far as we can tell.
Chairman Hamilton. Is the major obstacle the problem of hous-
ing?
Mr. Oxman. I think the problem of housing is a significant issue.
We do not link that at all, in our view of the matter, to the with-
drawal. We think that the withdrawal should proceed independ-
ently.
I think the other issue in the discussions is the question of how
the Russian minorities are treated in the countries. This is an issue
of great concern to the Russians. They are dealing with it in their
discussions with the Baltic governments.
The Baltic governments have their own very strong point of view
on this. And this is the heart of the discussions that they are hav-
ing.
Nevertheless, I think that the positive feature is that the with-
drawals are continuing.
Chairman Hamilton. Do we offer any security guarantees to the
Baltic States?
Mr. Oxman. We do not offer any security guarantees, in any for-
mal sense at all, that I am aware of, Mr. Chairman.
Chairman Hamilton. OK Now, Latvia is where you have the
most problem on the Russian troop withdrawal. Is that correct?
Mr. Oxman. I think, at the moment, that is where the issue is
the most
324
Chairman Hamilton. And the Russians still have important
radar and submarine facilities there. Is that correct?
Mr. OxMAN. They have various important military facilities, yes.
Chairman Hamilton. All right. In the AID program, we had a
total
Well, let's see. As of last year, SEED assistance had totaled
about $28.6 million with an additional $54 million in food and feed
grains, according to my notes.
Mr. Merrill. Yes.
Chairman HAMILTON. Now, that is a regionally directed progpram.
Is that correct?
Mr. Merrill. That is correct, sir.
Chairman Hamilton. Are we breaking assistance roughly into
three equal parts?
Mr, Merrill. It is pretty equal. The cumulative totals for food
and SEED since the beginning and up until now is $25.5 in Esto-
nia; $26.8 in Latvia; $28.9 in Lithuania, which has a larger popu-
lation.
Chairman HAMILTON. And you are establishing a Baltic-Amer-
ican Enterprise Fund there, too, are you not?
Mr. Merrill. That was announced in the last administration
and thought is being given to it in the current administration.
Chairman Hamilton. It is not up-and-running?
Mr. Merrill. It is not up-and-running.
Chairman Hamilton. Is it going to happen or is it that you are
still reviewing it?
Mr. Oxman. We are reviewing it. I am hopeful that it will hap-
pen, Mr. Chairman.
Chairman Hamilton. All right.
Mr. Oxman. Myself, I think that it is a good idea.
Chairman Hamilton. OK.
Mr. Oxman. I think it is affected by the discussions that Mr.
Merrill referred to concerning resolving these issues as to termi-
nation procedures and to oversight on certain sensitive issues.
I think that once those matters are resolved, this process can
move forward.
Chairman Hamilton. And can you describe for me how the AID
money is being spent, in general, in the Baltic States? What is the
target or targets?
Mr. Merrill. In Lithuania, the targets are privatizing manufac-
turing, energy conservation and nuclear safety, financial sector re-
form and agriculture.
In Latvia it is, more or less, the same thing: energy efficiency,
privatization, particularly in agriculture, and private sector devel-
opment in general.
And in Estonia the same basic areas, energy and privatization
are the two biggest. There are some smaller activities in the de-
mocracy area.
Chairman Hamilton. All right.
Mr. Merrill. Those would be the biggest ones.
KOSOVO
Chairman Hamilton. I am jumping around quite a bit here. I
want to switch over now to Kosovo.
325
We have got $5 of the $20 million set aside for humanitarian as-
sistance to Bosnia, Croatia, Kosovo. In fiscal year 1993, was ear-
marked for Kosovo. Has that money been spent? And if it has been
spent, what has it been spent for?
Mr. Merrill. I just need one moment here. The money was
given to two private voluntary organizations. And there were a
number of difficulties in getting the money spent.
It was development assistance from an earmark provided by Con-
gress and they had to find an intermediary to accept the money.
The money, after all, had to go to a province of Serbia, so there
were some unique delivery mechanisms that had to be worked out.
Also, because the money was development assistance, it did not
carry the usual notwithstanding clause, and a number of waivers
had to be given.
So, we want to see if this mechanism works. We want the assist-
ance to get there and then see if it is needed next year, if the mech-
anism does work.
Chairman Hamilton. Are you planning to recommit another $5
million to Kosovo in 1994?
Mr. Merrill. Again, if the mechanism works and if the need is
still there in 1994, we will certainly try to do what is needed in
1994.
Chairman Hamilton. Are they getting the needed medicines and
medical equipment there?
Mr. Merrill. Some were there and most are on the way. Oh, I
am sorry. The medicine is not in the earmark. That was one of the
peculiarities of the earmark; we could only buy things that were
mentioned and medicines was not mentioned. They primarily fo-
cused, Mr. Chairman, on food, heating and that type of item.
PORTUGAL BASE AGREEMENT
Chairman Hamilton. All right. Let's see. On the Portugal base
agreement that is under negotiation. The next round of negotia-
tions are to take place here this month. Can you give us a report
on the status of those negotiations?
Mr. Bader. Well, they have just — If I may?
Mr. Oxman. Sure, go right ahead.
Mr. Bader. They have just been resumed, Mr. Chairman, so that
when the Portuguese come here, we will have a better flow of infor-
mation and we can provide that to you.
Chairman Hamilton. Why are they taking so long?
Mr. Bader. Well, they were broken off during Portugal's ascend-
ancy to the president of E.C. It is a small country with a small
MFA. It took all of their talents to focus on making a success —
which they did— out of their term as president of the E.C.
Once that was behind them, then they were ready to take on
again the question of the negotiations.
Chairman Hamilton. What are the main changes that we are
seeking?
Mr. Bader. We are not seeking any changes; they are.
Chairman Hamilton. We would be satisfied with just a renewal
of the agreement. Is that correct?
326
Mr. Bader. Yes, sir. They are concerned with the future security
assistance and with the F-16 program. That is one of their key is-
sues.
They are also concerned with drawbacks that we had made —
withdrawals from Logis and cutting down the local work force.
Chairman Hamilton. Let's see. You are requesting $90
million
Mr. Bader. That is correct.
Chairman Hamilton [continuing]. In concessional
Mr. Bader. Yes.
Chairman Hamilton [continuing]. Loans. Is that right?
Mr. Bader. That is correct.
Chairman Hamilton. And that is the same as last year?
Mr. Bader. That is the same as last year, but previously, as you
will recall, Mr. Chairman, it was all grant aid.
Chairman Hamilton. Right. And what proportion of that will go
toward financing the 20 F-16 Peace Atlantic Program?
Mr. Bader. Most of it.
Chairman Hamilton. Most all of it?
Mr. Bader. Yes.
Chairman Hamilton. Is it your expectation that the 1994 re-
quest will be the last request for U.S. military assistance to Por-
tugal as we move away firom kind of a basis for a relationship?
Mr, Bader. No, sir. We have never had that basis. I know that
you have just used that illustratively, but we do not
Chairman Hamilton. I know that you do not like that term. The
point is, is this the last request?
Mr. Bader. No, it shall not be the last request on that, Mr.
Chairman.
Chairman Hamilton. Do you anticipate future requests being at
about the same level?
Mr. Bader. Yes, for a year or two.
Chairman Hamilton. The negotiation is not considering the pos-
sibility that this would be the last FMF request?
Mr. Bader. No, sir, it is not.
life in POLAND
Chairman Hamilton. OK. I wanted to ask a general question
with regard to Poland.
We have heard a lot about the Polish economic miracle — indus-
trial output up, the privatization of manufacturing facilities, hard
currency exports and inflation down and all the rest of it.
Recently we had an article in the Washington Post which indi-
cated another side of things — deeply divided Polsmd between the
haves and have-nots, severely hurt the majority of the Polish popu-
lation, moralysis of the political process, undermining support for
democracy among the Polish people.
In other words, a criticism that ran very counter to the informa-
tion that we had been getting with regard to Poland. A very dif-
ferent picture. How do you accoimt for that, Mr. Secretary, these
two very different pictures of life in Poland?
Mr. OXMAN. Well, I think
Chairman Hamilton. You saw that article, did you not?
Mr. OxMAN. I did. I did see the article. I was very struck by it.
327
I think, in part, there is a question here of, is the glass half full
or half empty, to a certain degree. I do not think that anyone
should be under any illusion.
What Poland is going through is a very difficult economic transi-
tion period. If you Took at the key indicia, there are some tough fig-
ures in terms of the economic performance.
On the other hand, we think that Poland is on the right track.
There are signs that its economy may be levelling off; it may have
hit the bottom and will be levellmg on.
The Prime Minister is addressing key impediments to further re-
form; especially, increased involvement by labor in privatization
and privatization of large enterprises, which — I can tell you from
my own experience in the region — is one of the toughest nuts to
crack: to figure out how to privatize the large enterprises.
But, nevertheless, it is a difficult picture. And there was some
veiy troubling aspects highlighted in that article.
Chairman HAMILTON. Well, he emphasizes, of course, the deep
split in the society and a considerable alienation from democratic
institutions there.
Poland is an extremely homogeneous country, as compared to
other countries in the region. The combination of factors that he
has identified there might not be explosive in Poland, but could
very well be explosive in other countries.
Mr. OxMAN. It could very well be.
ECONOMIC OUTLOOK
Chairman Hamilton. Let me just get your generalization with
regard to the economic outlook for Central and Eastern Europe.
How would you sum up the progress or the lack thereof?
Mr. Oxman. I think, especially when you have the point of com-
parison of the NIS and Russia, it is an interesting foil for this par-
ticular question.
I would say that progress in the period since 1989, has had some
encouraging features. It is a tough transition. It is uneven.
Some countries are doing better than others, particularly if you
look at the pace and quality of privatization and the ability to at-
tract foreign investments.
There are some striking dissimilarities among these countries
and any generalization that I might make is suspect because the
distinctions between a Czechoslovakia on the one hand and, let's
say, a Rumania on the other are very, very significant in terms of
where each of them is in the process.
But if you step back from it and say, Where are we after this
amazing event of the end of the cold war, I would say that there
have been some hopeful developments.
The trend is bumpy, but in the right direction. It is not going to
be smooth. I just know that in my Dones. This is not going to be
a smooth process.
Chairman Hamilton. And very extended?
Mr. Oxman. Pardon me?
Chairman Hamilton. And very extended in terms of time?
Mr. Oxman. I would think so with the caveat that it would not
surprise me if the time line in Hungary, the Czech Republic and
Poland is less extensive than maybe that some thought and a good
328
deal less extensive than it will be in some of the other countries
in the region.
Chairman Hamilton. You may remember that a year ago Presi-
dent Walesa criticized the West very strongly. He ssda, among
other things:
"The ricn, wealthy part of Europe is closing its door to us. The
West is betraying Poland by deluging it with consumer goods, but
failing to ms^e m^or investments.
"Poland faces a time without friends. The West has largely con-
fined its efforts to draining our domestic markets. The fruits of vic-
tory have turned sour. Democracy is losing its supporters."
Very, very harsh criticism by Walesa of the West. Do you think
that he would make similar comments today?
Mr. OxMAN. Well, I had the pleasure of meeting him a couple of
weeks ago when he was here and he did not repeat that particular
series of comments, but I think that he is still very troubled on
many of those issues that he raised there.
Chairman Hamilton. Well, those are really extraordinarily
harsh criticisms.
Mr. OxMAN. Yes.
Chairman Hamilton. Do you think that he would have backed
off of that a little bit?
Mr. OxMAN. I hate to speak for him, but I think perhaps to some
degree. Perhaps to some degree, Mr. Chairman.
E.G. ASSOCIATION TREATIES
Chairman Hamilton. Now, what is the status of the E.C. asso-
ciation treaties with Central and Eastern Europe?
Mr. Oxman. The negotiations of association agreements are pro-
ceeding. There are some very contentious issues concerning market
access.
Chairman Hamilton. We are told that only four E.C. countries
have ratified Poland's association treaty, for example.
Mr. Oxman. That may be, Mr. Chairman. I do not have the facts
on that.
Chairman Hamilton. All right.
Mr. Oxman. I do not have the facts on that. We have, through
our diplomatic channels, made clear our view of the importance of
greater access for the Eastern European countries in Western Eu-
rope in connection with these agreements.
And I think that our point has been well taken. I think that
Chairman Hamilton. What is your impression of E.C. trade with
these countries?
Mr. Oxman. My impression of E.C. trade?
Chairman Hamilton. Yes.
Mr. Oxman. In general, my impression is that it is developing.
There are sensitive areas concerning textiles, chemicals and a cou-
ple of other sectors which will be difficult.
Chairmsm Hamilton. Are the countries in Western Europe put-
ting up barriers to trade with Eastern Europe and movement of
people:
Mr. Oxman. I think on the sensitive goods there are barriers that
remain.
Chairman Hamilton. What do you mean by "sensitive goods'?
329
Mr. OxMAN. Textiles, steel, chemicals and agricultural goods.
These are the hot points where further negotiation is needed. And
where the Eastern European countries have a strong interest in
gaining greater access.
And tne Western European countries, especially as they are —
many of them — in a recessionary phase, have expressed a strong
interest in not completely lowering the barriers.
Chairman Hamilton. How far away is the full integration of Po-
land, Hungary, Slovakia and the Czech Republic into tne E.C.?
Mr. OxMAN. In my judgment, it is very difficult to predict that.
If we are talking full membership, I think that that is a good deal
down the road.
Chairman Hamilton. Are we going to be looking at two Europes
for a long time?
Mr. OxMAN. I think that that issue is up in the air. We may be
looking at a situation where there is a sort of an inner club and
an outer club for a significant period of time. That could change.
That could change, depending upon the pace of economic develop-
ment in some of these places, but it is a very difficult issue.
The members of the E.C. 12 have differing points of view on it,
so I think that the issue is up for consideration and determination,
but it would not surprise me if it is a sort of a two track
Chairman Hamilton. Yes.
Mr. Oxman [continuing]. Approach.
environment
Chairman Hamilton. Now, let me ask you about the environ-
ment. You know that we heard a lot about the environmental dev-
astation which was caused by many years of neglect.
Do you see any improvement there in the environmental outlook
for Eastern Europe? Have we had any effective clean up operations
going?
Mr. Oxman. Some, Mr. Chairman. Some. I would like to ask
David Merrill to comment just briefly on that.
Chairman Hamilton. All right.
Mr. Merrill. Environment is a very, very big part of our pro-
gram in Eastern Europe and we have had some accomplishments
or started on the road to some accomplishments.
The first thing that comes to mind is in the Czech and Slovak
Federal Republic. We gave an environmental sector grant and used
the local currency to fund an environmental clean up fund to actu-
ally do something, rather than to iust
Chairman Hamilton. Are you beginning to see real clean up ef-
forts?
Mr. Merrill. Yes. Air pollution alert systems in Poland. Indus-
trial waste minimization programs are saving millions of dollars.
Environmental fees and user charges were raised that reduces
pollution. And new environmental taxes have been levied, such as
an auto fuel tax.
Environmental legislation has been passed covering the very im-
portant point of environmental liability which prevents a lot of
firms from investing
Chairman Hamilton. What countries are doing the best on envi-
ronmental clean up?
330
Mr. Merrill. That is a little bit hard to-
Chairman Hamilton. What countries-
Mr. Merrill [continuing], say, but I would say Czechoslovakia
is doing a very good job.
Chairman Hamilton. Both of them?
Mr. Merrill. More in the Czech Republic, at the moment.
Chairman Hamilton. What country's record is the poorest?
Mr. Merrill. I hesitate to target a country as the poorest with-
out more study on that.
Chairman Hamilton. All right.
Mr. Merrill. Certainly there is a good deal of room for work in
Romania, but I do not know if I would want to say that they were
the poorest.
Mr. Oxman. One thing that I would just comment, Mr. Chair-
man, is that perhaps one of the gn*eatest accomplishments in this
area is the tremendously heightened consciousness among the peo-
ple of the region about the environmental devastation that occurred
and which festered for decades.
And there is a new consciousness. Some of the programs that Mr.
Merrill has mentioned are helping to raise the consciousness and
to address some of the issues. It is a huge, huge set of problems.
We can be helpful with these types of programs. We are not going
to be determinative on that.
Chairman Hamilton. In technical assistance?
Mr. Merrill. That is right.
ROMANIAN ORPHANS
Chairman Hamilton. We have had a lot of interest on the Hill
here in recent days with regard to the 80,000 orphans in Romania.
What are we doing with respect to the problems of those children,
if anything?
Mr. Oxman. The conditions in Romanian institutions for aban-
doned or handicapped children — which we have been very con-
cerned about — have improved rather significantly with U.S. and
European help.
There are serious long term problems which remain, but the
focus of U.S. assistance is shifting from emergency humanitarian
intervention to the broader issues of building Romanian health and
social protection mechanisms.
Chairman Hamilton. Are you getting good cooperation from the
Romanian Government now on the efforts to help those children?
Mr. Oxman. We are. We are getting good cooperation. They are
expected to pass, this week, legislation clarifying which children
are legally abandoned and, thus, available for adoption.
We nave made our views known and I would say that the atti-
tude that we feel coming back on the other side is one of sincere
engagement and interest in trying to be helpful and to make
progress. Now, there are
Chairman Hamilton. But you are encouraged by
Mr. Oxman. In general, we are, yes.
Chairman Hamilton [continuing], the posture of Romanian Gov-
ernment?
Mr. Oxman. Yes.
331
FROST TASK FORCE
Chairman Hamilton. Let me ask. We have a task force headed
by Congressman Martin Frost to assist the parHaments of Eastern
Europe. And I think that they are working with the CRS over at
the Library.
They have developed programs for Poland, Hungary, the Czech
Republics, Slovakia and Bulgaria. They are starting a program in
Albania. I understand that they are considering starting a project
in Romania.
Are you familiar with their work, in general, at least?
Mr. OxMAN. I have a general familiarity with it, but I do not
know the particulars.
Chairman Hamilton. And is your assessment of it positive?
Mr. Merrill. Yes. Our assessment of it is positive, sir.
Chairman Hamilton. All right. I think that Cong^ressman FVost
and his colleagues have put a lot of effort into that and my general
impression is that they are making very constructive contributions.
ROMANIAN ORPHANS
Mr. OxMAN. With respect to the Romanian adoption
situation
Chairman Hamilton. Yes.
Mr. OxMAN [continuing]. I did want to go on to say that, while
in general my point of view is what I said, there are periodically
controversial aspects to it.
There is a current controversy concerning babies up for adoption
who were Romanian babies and are now in Hungary. We are con-
cerned about that situation.
We have tried to be helpful in resolving it and we know that the
feelings of the people involved in this situation are very strong and
we are trying to be responsive about that particular situation.
Chairman Hamilton. Let me just remind you of my request for
the outlay figures for 1994, which we would like as promptly as
possible. Can you get those to us fairly soon? Can you?
Mr. Merrill. Yes, sir.
Chairman Hamilton. And the all spigots figures so that we have
an idea of what total assistance is, and that includes the excess de-
fense equipment.
conclusion
I think that concludes our session. I have a large number of
other questions, but also other commitments, as I am sure you
have. And what we would like to do is to submit to you some addi-
tional questions for response in writing.
Mr. OxMAN. I would be happy to get them, Mr. Chairman.
Chairman Hamilton. Thank you very much
Mr. OxMAN. Thank you very much for your
Chairman Hamilton [continuing], for your testimony this morn-
ing. And the subcommittee stands adjourned.
Mr. OxMAN. Thank you very much, Mr. Chairman.
[Whereupon, at 12:26 p.m., the subcommittee was adjourned.]
APPENDIX
PREPARED STATEMENT OF STEPHEN A. OXMAN
Assistant Secretary of State
Bureau of European and Canadian Affairs
before the
Subcommittee on Europe and Near East
of the
Committee on Foreign Affairs
United States House of Representatives
May 11, 1993
Mr. Chairman, it is a pleasure to meet today with you and your
committee to discuss the Administration's FY 94 request for
assistance to countries in Europe. I recognize the great
interest in and attention to our aid programs that you and this
committee have shown, and I will value your comments and
guidance.
In this statement I would like to give an overview of our aid
programs and the policies they support. One of our largest
funding requests is for the Support for East European
Democracies Act (SEED). while we are requesting SEED funding
at approximately current levels, and while we expect the
program to retain approximately "the same emphasis and structure
that it now has, I do want to note for you some of the
directions we expect the program to take in the future. We are
also requesting funding for the International Fund for Ireland,
and security assistance for a number of countries.
Support for East European Democracies
I knew that this Committee shares the Administration's
commitment to our continued support of the democratic
(333)
334
revolution in Central and Eastern Europe. Democratic states
and free markets in this region advance the security, political
and economic interests of the United States and our allies in
several ways.
First, nothing will serve the cause of peace and stability in
this region so much as a meaningful transformation to thriving
democracies. History teaches us that prosperous and truly free
peoples generally do not start wars.
Second, an Eastern Europe at peace with itself and with its
neighbors is key to ending the post-war division of Europe.
Sound and stable societies will form strong economic and
political ties to the countries of the West. These
strengthened relationships will ease the legitimate security
concerns of Eastern and Western Europeans.
Third, the democratic revolution in Eastern Europe will serve
as a model for reform efforts in Russia and the rest of the
NIS. Success in establishing democratic, market economy
societies in Central and Eastern Europe will help mute
criticism by opponents of reform in the former Soviet Union,
and will give credibility to the efforts of reformers.
Finally, creation of market-oriented economies in a region of
some 135 million people offers significant commercial
opportunities for American business, both in Central and
Eastern Europe itself and as a gateway to the vast potential
markets further east.
335
This, of course, is the reasoning behind the SEED Act,
originally passed in 1989. Through the SEED program we have
provided to date over a billion dollars of financial and
technical assistance to the transition to democracy and free
markets.
Helped by the aid we have provided under this program, the
countries of Central and Eastern Europe — with the bleak
exception of parts of former Yugoslavia — have made great
strides. Democratic institutions, although still fragile, are
largely functioning. In every country in the region there has
been at least one constitutional transfer of power. Generally
accepted human rights are usually respected. Independent mass
media have appeared throughout the region.
In the economic sphere, the private sector accounts for an
increasing share of output and employment- Significant
progress has been made with currency stabilization, with
freeing prices and with liberalizing trade regimes.
Governments are beginning to erect the necessary legal and
regulatory framework for a market-oriented economy.
However, the development of democratic and free market
institutions remains incomplete. Banking and financial sectors
remain generally inadequate; we have committed $200 million to
an international effort to restructure and privatize banks in
Poland. Privatization of state enterprises has generally
336
proceeded slowly in most countries. The size of fiscal
deficits remains worrisome, and private foreign investment has
been disappointing in many countries of the region.
The transition has also been uneven in the countries of the
region. The countries of the Northern Tier — Poland, Hungary
and the Czech Republic — are the most advanced, with somewhat
less progress in Slovakia and Bulgaria. Albania has been
making a valiant effort considering its past isolation and
relative poverty. But in the rest of the Balkans, progress has
been halting, in part due to the turmoil in the former
Yugoslavia and in part due to the greater underlying economic
difficulties these countries face. The Baltic states are also
moving in the right direction, despite problems arising from
the disruption of their former economic relationships with
Russia.
Finally, the transition to market economies has been very
painful to many East Europeans. Replacing a command economy
with one based on market forces, closing inefficient
enterprises, and tightening fiscal and monetary policies have
led to sharp contractions in output (as much as 50% in
Albania), increased unemployment, and a decline in living
standards. Popular discontent with the burdens of reform is
widespread .
It is thus essential that we continue to provide assistance to
the countries of this region as we have done. Thanks in large
337
part to the leadership of the Congress, our SEED program has
proven a highly effective means of supporting Eastern Europe's
transition. The program has three major objectives:
o Strengthening democratic institutions;
o Developing a market economy and private sector; and
o Improving the basic quality of life.
Through the SEED program, we have provided assistance to the
countries of Central and Eastern Europe in a wide variety of
areas. I would like to give you just a few examples of the
type of projects that SEED has supported:
o The Frost Committee of this House has provided
computer equipment and training to parliaments in
several countries,
o The enterprise funds are providing urgently needed
capital to developing private sectors in five
, countries.
o We are providing technical assistance to privatization
in countries throughout the region,
o Our energy efficiency program has established proTects
in several countries demonstrating how to reduce
energy consumption and monitor energy use.
o we are providing technical assistance for significant
air and water quality projects in the "Black Triangle"
of Upper Silesia.
\
338
The SEED program is highly regarded by the countries of Central
and Eastern Europe. It delivers assistance faster and cheaper
than aid programs elsewhere in the world, and faster and
cheaper than programs conducted by other donors. And the
assistance program has been particularly well targeted and
effective because of the way it has been administered.
Our Washington-based organization allowed us to get started
quickly and to respond nimbly to rapidly changing conditions in
Central and Eastern Europe. The time between conception and
contract in SEED-funded aid is some 8 to 9 months, as opposed
to 20 months in other aid programs. Costs have also been held
down significantly: administrative costs are far lower for a
program based in Washington than for one with a predominantly
overseas staff.
The regional nature of the program also enables us to deliver
assistance where it is really needed, without the long lead
time associated with separate programs in each country. At the
same time we are making adaptations to seek to ensure that each
country's program is tailored to its particular needs.
Finally, the SEED program relies heavily upon nongovernmental
intermediaries to deliver aid. We make use of private
organizations such as the Citizens Democracy Corps, the
International Media Fund, the International Executive Service
Corps, and the MBA Enterprise Corps to provide know-how
339
directly to those who need it. And the Enterprise Funds are a
unique government-private enterprise partnership providing
capital directly to the private sector.
Today, with three years* experience, we recognize that some
changes can be made in the way we have administered the SEED
program. With better organized host governments and more fully
staffed AID offices, we are developing a new balance between
Washington and the field. This will allow us to retain the
necessary flexibility while strengthening coordination with
host governments.
We have also facilitated coordination of the SEED program with
our overall policy towards Central and Eastern Europe by
placing responsibility for the program in the Bureau for
European and Canadian Affairs. This structure does not reflect
any change in the importance attached to this program, but is
intended to improve it. The change is also consistent with
Secretary Christopher's policy of decentralization within the
State Department and with the organization of our assistance
and policy offices for the NIS.
What does the future hold for the SEED program? When the
program began in 1989, there were predictions that it would
last only three to five years. These predictions have proved
overly optimistic. I expect that in the Northern Tier we can
begin phasing down in two or three more years. The rest of the
region, however, will require increased levels of assistance
340
for several more years. In particular, the situation in the
Balkans has been aggravated by the economic consequences of the
war in former Yugoslavia and the enforcement of sanctions
against Serbia. It will, therefore, be some years before
overall assistance needs diminish substantially.
For FY 94, we are requesting SEED funding of $408,951,000,
essentially the same as the current year. Although the number
of countries eligible for assistance under SEED has doubled
since 1989, funding has not kept pace. We could easily spend
several times this figure, and will have to continue to make
difficult decisions among competing priorities. This does,
however, provide discipline and force us to concentrate on
those key sectors where U.S. assistance can be most helpful.
In particular, as the economies of the Northern Tier countries
advance towards free markets, and as democratic institutions
take firm root there, they will have a relatively lesser need
for the transitional SEED programs. We therefore expect to
devote an increasing share of assistance to the Southern Tier
countries and the Baltics as they continue to implement
additional reform measures.
I would like to close my discussion of the SEED program with a
final plea. It is essential that our program of emergency
assistance to Russia not come at the expense of Central and
Eastern Europe. Both regions have pressing needs which must be
met. Moreover, as I mentioned above, the success or failure of
341
the revolution in Central and Eastern Europe will have a great
influence on the success or failure of the similar revolution
in Russia and the other states of the NIS. We cannot,
therefore, allow our need to meet the historic opportunities in
Russia to detract from our need to meet the equally historic
opportunity in Central and Eastern Europe.
The nations of Central and Eastern Europe have come a long way
since 1989. This progress has been brought about principally
by the aspirations, courage and hope of these people. We can
take pride in our support of their efforts. We should continue
that support, because their success is in our interest and
because it is right to do so.
Ireland
Let me now turn to our request for Ireland. The Administration
is proposing a $20 million contribution to the International
Fund for Ireland for FY 1994. U.S. support for the Fund is a
tangible expression of our policy of favoring peace and
reconciliation through economic progress in Northern Ireland
and along the border in the Irish Republic.
The Fund is a joint project of the governments of Ireland and
the United Kingdom, which supports projects in Northern Ireland
and the six border counties of the Republic, particularly in
disadvantaged areas such as West Belfast and remote border
towns. It concentrates on community regeneration projects such
342
as the rehabilitation of derelict facilities, on employment
creation and training, and on the encouragement of community
based private enterprise.
The fund is highly regarded by both the Catholic and Protestant
communities in Ireland and Northern Ireland. U.S.
representatives on the ground and the U.S. observer to the
Fund's Board of Directors report that our contribution is being
used according to the intent of Congress.
Security Assistance
We have requested security assistance for 18 European
countries. This assistance is designed to enhance regional
security and defense cooperation. It comes in three forms:
o Economic Support Funds (ESF) provide budgetary support
to recipient countries. We are requesting $143
million in ESF for Turkey and $15 million for Cyprus.
o Foreign Military Funding (FMF) provides loans or
grants for the purchase of military equipment. We are
requesting $315 million in FMF for Greece. $450
million for Turkey, and $90 million for Portugal.
o International Military Education and Training (IMET)
promotes democracy and human rights by emphasizing
principles of civilian control of the military in a
343
SX££££
With the end of the Cold War and the reduction of forces in
central Europe, our security assistance programs for Greece
help the United States and NATO respond to threats to security
in the more volatile areas of Southeastern Europe and the
Middle East. Since taking office in April 1990, the government
of Prime Minister Mitsotakis has improved Greek military
cooperation with NATO and concluded a new Mutual Defense
Cooperation Agreement. Prime Minister Mitsotakis has also
taken steps to reduce tensions between Greece and Turkey.
Greece is one of the poorer members of the European Community,
but its defense expenditures are relatively high because of its
strategic importance. The United States has thus committed
itself to assisting Greece with its defense modernization
program. This program will enhance Greece's ability to operate
with the other forces of the NATO alliance.
Portugal
Portugal values its ties with the United States and has given
strong public support to our foreign policy initiatives.
Portuguese willingness and ability to pursue close military
cooperation with us makes an important contribution to our
global strategic mobility. We are proposing continuation of
our FMF program, as pledged in 1989, to enable Portugal to
purchase twenty F-16 aircraft.
344
Cyprus
The United States supports the U.N. Secretary General's efforts
to facilitate a settlement of the dispute, and actively
encourages all parties involved to do the same.
Our assistance to Cyprus is designed to assist the parties in
reaching a settlement that will be acceptable to both Cypriot
communities by promoting cooperation between the two
communities and providing opportunities for Greek and Turkish
Cypriots to develop mutual confidence through joint economic
planning and development activities. To this end, we have
tried to have our ESF funds expended for bicommunal activities
to the greatest extent practicable.
In the past, we have not been wholly successful. The
representatives of the two communities who determine which
projects will be funded have frequently chosen to interpret
"bicommunal" as "aid to both communities," and too often have
approved projects that do little or nothing to bring the
communities together. The President's Special Cyprus
Coordinator and Embassy officials in Nicosia are working with
representatives of the two communities to increase to the
maximum extent practicable the amount of ESF being used for
truly bicommunal projects.
345
democratic society. We have requested $15,000 each
for Austria and Finland, $65,000 for Malta, $100,000
for Romania, $150,000 each for Albania, Estonia,
Latvia and Lithuania, $200,000 each for Greece and
Spain, $300,000 for Bulgaria, $350,000 for Slovakia,
$500,000 for the Czech Republic, $700,000 each for
Poland and Hungary, $1 million for Portugal, and $2.8
million for Turkey.
I would like to comment briefly on some of these aid requests.
Turkey
Turkey's importance for America's strategic interests in
Southwestern Asia and Southeastern Europe has increased in the
post-Cold War era. A look at the map shows how important
Turkey is to our regional interests, bordering as it does the
Balkans, the Caucasus, Iran, Iraq and the Middle East.
Turkey has continued to be a reliable ally — providing, for
example, critical support during and since the Gulf War -- but
is among the poorest of the countries that support our
strategic goals. In the 1990s. -Turkey is continuing ihe policy
it began a decade ago of liberalizing its economy by
implementing free-market, export-oriented policies •-.hat have
sustained the highest growth rate of all the countries of the
OECD .
346
However, inflation and the enlarged public sector remain
serious problems, and were aggravated by Turkey's resolve in
supporting the coalition during the Gulf War. Turkey cdntin\
to enforce the sanctions against Iraq, at great economic cos*
The shut-down of a pipeline from Iraq and the loss of Iraq a:
one of its principal trade partners have sharply reduced
Turkey's foreign revenues.
We recognize the importance of an improvement in Turkey's hur
rights record. The Turkish government has publicly committee
itself to strengthening parliamentary democracy and improvinc
human rights protections. We are working with the government
to develop specific targets and programs for meeting these
commitments, and will continue to press them vigorously and
ensure that they remain aware of the high priority we attach
improvement, in the area of human rights.
The partnership through which the United States gives niateric
and political assistance to Turkey, and Turkey's role as a
democratic partner in regional affairs, strengthens the
prospects £or peace, stability and prosperity in an area
threatened -.Jith coliticai and economic 'I'jmoil. Our aid
request for Turkey will provide needed fcudcet support and ••■•il
provide security assistance to help Turkey leet its comr.itr.er
to the MATO alliance.
Conclusion
I appreciate -ihe opportunity to explain to you -rhe thinkir.o
behind our aid requests for FY ?4 . I would be happy to ^nswe
your questions, and would welcome any ccr"~ents or suggestions
t.hac vou have .
347
STATEMENT
GEORGE WBADER
ACTING DEPUTY ASSISTANT SECRETARY OF DEFENSE
SECURITY ASSISTANCE TO EUROPE
Mr. Chairman, members of this subcommittee. I am pleased to have this opportunity to
discuss with you our European security assistance program. In past years, this program focused
primarily on NATO's southern region. There is still an important need to protect our strategic
interests by helping NATO allies in this region. But, as one more indication of the amazing
changes evolving in this post-Cold War era. I would like to discuss with you also a new element
in our program - the assistance we are beginning to offer to the nations of Central and Eastern
Europe and the Baltic Republics.
The eclipse of the Cold War threat from the Soviet Union is one of the salikify^realities of
the last few years, and we need to weigh our requirement for security assistance in that context.
The assumption, however, that as a consequence our allies in the southern region now heed less
assistance needs close examination. The former Soviet Union is experiencing instability and
stubborn attempts to reverse the trends of liberalism that caused us to modify our views on the
nature of the threat This instability creates uncenainties among many of the nations in the area,
many with a long heritage of animosities of their own. One of the most effective ways to lessen
this instability is by reaching out to create a new security relationship with these countries and by
promoting development of non-political militaries accountable to civilian leadership.
Over time, there are also likely to be new threats to our interests that might require the
capability to project coalition forces from Europe into neighboring areas. Power projection has
traditionally meant the ability to project our forces against a Soviet threat. What we are seeing,
however, is that U.S. bases in Europe remain important to deter or to respond to possible threats
to our interests in Africa, the Middle East and the Balkans. If we are to have the capability to
respond to both immediate and future threats, we need allied support and participation, which
would be facilitated by access to an arc of bases beginning with Lajes in the Atlantic to Rota in
Spain. Sigonella in Italy. Souda Bay in Greece and Incirlik in Turkey.
Security assistance helps guard against instability in Southern and Eastern Europe and
could assist us to deploy forces to deal quickly and decisively with these new crisis areas if there
is a need to do so. Greece. Portugal and Turkey could play a role in either scenario. All are
valued members of the Alliance. All of them have supponed as in Desert Storm and the crises
since that contlict. As for the nations of Ea.stem Europe and the Baltics, they are emerging in the
first scenario, and our security assistance program reflects their particular needs. 1 would like to
discuss each of these countries in turn.
348
Greece is a longtime privileged partner and ally with whom we have fought side by side on
battlefields around the world when the very existence of freedom and democracy were at stake.
The U.S. remains fuUy committed to the security of its Greek ally and looks forward to the further
advancement of our bilateral relationship in all fields, as provided by the 1990 U.S.-Gteece
Mutual Defense Cooperation Agreement and other relevant agreements.
After coming to power in April of 1990. Prime Minister Mitsotakis' government moved
swiftly to conclude the Mutual Defense Cooperation Agreement that ensures continued U.S.
access to essential U.S. facilities on Greek territory through 1998. while the United States agreed
to seek appropriate levels of defense support to assist in the modernization of the Hellenic Armed
Forces. Provision of U.S. security assistance will continue to ftilfill that pledge, and will
encourage the Hellenic Republic to focus military procurement programs on U.S. equipment and
to join in cooperative programs with other NATO countries. It will also assist us as we make our
case in upcoming negotiations on a Comprehensive Technical Agreement for the Status of Forces
Agreement
The Gulf War dramatized, once again, the strategic importance of Greece, at the
crossroads of Europe, the Balkans, and the Middle East. One has only to look at today's
headlines to see that there is continuing potential for substantial instability in the latter two areas.
The crisis in the former Yugoslav Republic is particularly distressing. Greece as a NATO
member, adjoining the troubled region, has cultural and religious ties that can exacerbate or
defuse the situation on the ground. As a vibrant democracy, Greece can play an important role in
promoting democracy, market economics, and stability in the Balkans, and in facilitating military
access that furthers U.S. strategic policy goals in the region, e.g., protection of Persian Gulf
energy sources.
A 2,000% increase in U.S. ship visits over the previous Greek administration, coupled
with the Greek decision to become more active in NATO -- especially agreeing to open the
NATO land and air headquarters at Larissa -- are but two signs of the improved relationship we
share with this valuable ally. In other key areas, the Greek Government has worked hard to
improve its counter-terrorism capabilities, and has stepped up cooperation with the U.S. against
dnig trafficking. It has continued to pursue a painful self-imposed economic austerity program,
and has begun the difficult process of extensive privatization in an attempt to reverse Greece's
economic centralization and to deal with Greece's enormous debt burden.
As part of its defense modernization program, the Greeks have agreed to purchase an
additional 40 F- 16 aircraft Using only a small portion of Foreign Military Financing funding
toward this purchase - the rest coming from national funds - the contract is valued at
approximately $1.4 billion. Over the past year we have al.so moved forwaid on such important
projects as the Apache attack helicopter, the CH-47 helicopter upgrade, the KNOX and ADAMS
ship programs, the A-7 and F-4 fighter aircraft transfers and C- 130 transport aircraft.
349
Portugal continues to be a strong supporter of the Atlantic Alliance and other international
security institutions contributing to European stability. The CINCIBERLANT headquarters
outside Lisbon and other facilities on the mainland and island archipelagoes reflect Portugal's
commitment to NATO. Portuguese forces and personnel are active in the Adriatic sanctions
monitoring, and increased Danube sanctions efforts will include Portuguese monitors. With the
fwrmission of the Portuguese government, the airfield at Lajes in the Azores was utilized
extensively during Desert Shield / Desert Storm. Lajes is also being used to support U.S. aircraft
transiting to/from UN sponsored humanitarian actions in Somalia. While we no longer station
ASW patrol aircraft at the base at Lajes. it is an important facility for the U.S. It will retain that
value as U.S. presence in Europe is reduced and the emphasis on flexibility and rapid deployment
remains a concern for NATO, the UN, and the U.S.
Defense cooperation negotiations with Portugal, which began in 1991, resumed in 1993
after a one-year hiatus for the Portuguese EC Presidency and Troika participation, as well as
national elections in both countries. U.S. assistance to Portuguese military modernization efforts
continues, albeit at a reduced level. FMF for Portugal was reduced from $100M grant aid
requested by the Administration to $90M in concessional loans for FY 93. Portugal's defense
budget does not contain sufficient funds to absorb the entire cost of this modernization program.
In addition to the F-16, the primary programs affected are the longer term maintenance plans for
the new Meko frigates and CFE cascaded M-60 tanks and M- 1 13 armored vehicles.
Turkey
Turkey has been perhaps best known in security matters for its role as the southern anchor
of NATO and a strong bulwark against communism. While nothing fundamental has changed
Turkey's role in NATO, it is beginning to play an entirely new and critical role in our policy
toward Iraq, the newly independent states of Central Asia, and the Balkans. Turkey also plays a
supportive role in Somalia and the Middle East Peace Process. Moreover, it is a democratic,
secular, free-market oriented country that .serves as a role model for many Islamic countries in a
very turbulent region. A successful Turkey is a powerful lesson to many other countries
struggling to find their way in the aftermath of the breakup of the former Soviet Union and the
rising pressures of Islamic fundamentalism. Should Turkey begin to fail, that is an equally
powerful lesson in the opposite direction.
We have an enduring interest in maintaining Turkey as a strong and reliable NATO ally as
insurance against the near certainty of future contingencies which could threaten our national
interests. These include instability from the Balkans through the Caucasus to Central Asia, and
aggression by either Iraq or Iran in the Persian Gulf or against the Kurds of northern Iraq. For the
la.st two years. Turkey has opened its territory to receive the Provide Comfort Coalition Task
Force at Inciriik Air Ba.se. This task force conducts daily overflights of northern Iraq to deter the
Iraqi Army from punishing the Kurds. Without Turkish support, we would experience great
difficulty in supporting these beleaguered people. We also used Inciriik to deliver large quantities
of fotxl to the republics of the former Soviet Union during Operation Provide Hope in 1992. And
of course. Inciriik was critical to the pro.secution of the air war against Iraq during Desert Storm.
\
350
Turkey has demonstrated its willingness to support us in our interests. We want to
support Turkey in its interests in order to continue the close bilateral cooperation that has marked
our relations over the years. And we want Turkey to continue as an island of stability in a
turbulent region, where it becomes the role model for others to develop in a direction compatible
with our interests.
E^F for Turkey is falling sharply from its previous high levels of the last few years and the
U.S. no longer provides grant military assistance, only concessional loans. We are attempting to
continue our support by the transfer of excess defense equipment, but that too entails costs since
Turkey must pay for refurbishment as well as all operations and maintenance. The major sales
programs with Turkey include the coproduction of 240 F- 16 aircraft; the purchase of 95
Blackhawk helicopters as well as MLRS and Super Cobra helicopters; and the combat systems for
frigates. Major equipment transfers include F-4.T-38 and C- 130 aircraft, older age Cobra
helicopters, and Navy destroyers.
Eastern Europe and the Baltics
Broadly speaking, our defense and military relations with Eastern Europe and the Baltics
are designed to promote the development of non-political militaries accountable to democratic
civilian leadership and to encourage the development of defense postures that serve legitimate
self-defense needs while posing no threat or capacity for collective aggression. We have been
moving ahead rapidly with our relationships with many of the countries in this region through
programs of security assistance, military-to-military contacts and bilateral working groups on
defense matters.
Here are the specifics of our programs. All the countries except those of ex- Yugoslavia
have International and Military Education Training (IMET) programs, and we hope to begin a
small program with Slovenia in FY 94 if funding permits. IMET is easily the most popular and
important program in each of the.se countries. Consistent with available resources, we hope in the
future to increa-se the amount of IMET funding substantially as these countries increase their
ability to absorb training.
In addition, both Poland and Hungary are eligible for the Foreign Military Sales (FMSJ
program, following a Presidential Determination of December 1992. We hope to move quicidy to
include the Czech Republic and Slovakia in the FMS program once we are satisfied with their
export control regimes. So far. we have concluded only one FMS sale - the purchase by
Hungary of an Identification Friend or Foe (IFF) for its air defense system. In addition, the three
Baltic countries are eligible for non-lethal Excess Defen.se Articles under the Freedom Support
Act.
Our Military Contact Team Program (begun in all countries except Bulgaria and Slovakia.
which have xsked as to defer that program until later this year) is primarily designed to assist
Eastern defense establishments in their transition to demcK'racy and a free market economy by
emphasizing such topics xs defease resources management and budgeting. Because of Russian
sensitivities concerning the Baltics, our low profile military program there is conducted by the US
351
National Guard. Reserves and Coast Guard and focuses on peacetime activities such as border
control, counter-narcotic activities, disaster response and civil defense.
Finally, the Bilateral Working Groups (BWGs) on defense matters are senior steering
committees that establish a frameworic and priorities for defense and military cooperation. We
have already had BWG meetings with Hungary and Poland and hope to have our first BWG with
the Czech Republic and Slovakia sometime in September.
In conclusion, Mr. Chairman, let me stress the continuing importance that we believe
security assistance should have in helping to promote the security interests of the U.S. among our
traditional allies in the southern region of NATO and our new friends in Central and Eastern
Europe as they grapple with the problems of democratization and the uncertainties from
instabilities in the area.
352
STATEMENT OF DAVID N. MERRILL
ACTING ASSISTANT ADMINISTRATOR
BUREAU FOR EUROPE
AGENCY FOR
INTERNATIONAL DEVELOPMENT
before the
COMMITTEE ON FOREIGN AFFAIRS
SUBCOMMITTEE ON EUROPE AND NEAR EAST
U.S. HOUSE OF REPRESENTATIVES
May H, 1993
353
Mr. Chairman and Members of the Committee:
I am pleased to have the opportunity to appear before you
today on the U.S. progrzun to assist the transition to a market
economy and democratic development in Central and Eastern
Europe. Since we are at a time of political transition ourselves,
I particularly welcome your views on the program and whatever
adjustments you may suggest now as the new Administration is
reassessing A.I.D.'s mission and programs. A.I.D. values the
support the Committee has provided since the beginning of this
program 3 1/2 years ago. I personally very much welcome the new
opportunity now presented by the transition to continue in this new
Administration the constructive dialogue we have had with the
Committee.
<" -J-
The FY 1994 Request "^a-
For FY 1994 we are requesting $408,951,000 for programs of the
type authorized under the Support for Eastern Europe Democracy
(SEED) Act, approximately the same amount appropriated in FY 1993.
At this, the fifth year of the Central and Eastern Europe program,
the total amounts for the region have stabilized, but there are
country-by-country differences within the total, in keeping with
individual country progress on reform. Thus, it is expected that
the amounts will decline earlier for such countries as the Czech
Republic, Hungary, and Poland as they get the most difficult parts
of the transition to democracy and free markets behind them and as
major items such as the Enterprise Funds become fully funded. ->
However, countries in the middle stages of their transition sudh as
I
-^ !
-5% 1
354
Bulgaria, Romania, Slovakia, and the Baltics, will continue to be
substantial claimants on assistance for several years. At the
other end of the spectrum is Albania, a true developing country
claimant that justifies a different and much longer term approach
than the rest.
Finally, assistance reqfuirements for the former Yugoslavia are
changing week by week and could change dramatically in the
outyears. Our country projections will undoubtedly change in
response to that human tragedy. For example, this year we used
the SEED account and existing regional projects in it to start a
program for victims of atrocities and trauma in Bosnia, even though
it was not designed for this use, because we simply could not wait
for the right account to be created. The war in the former
Yugoslavia is also creating strains on neighboring country
economies that we may need to address.
For these reasons, and because our portfolio has grown from
two to over a dozen countries, it is difficult to predict the
direction of the outyear requests for the region beyond FY 1994.
SEED assistance for FY 1994 will continue to be allocated to
serve three broad functional purposes: the development of a market
economy and a strong private sector; the development and
strengthening of sustainable democratic institutions and public
administration (especially local government) ; and the improvement
of quality of life during the transition in selected sectoral areas
such as health, housing, labor retraining, energy, and the
environment.
Discussions and reviews of our program reveal surprisingly
355
few differences of opinion between the Administration and Congress
over these substantive areas of emphasis. The many substantive
areas of program activity are described fully in the SEED Act
implementation report submitted to Congress in January.
Today I would like to report at this 3 1/2 year mark of this
program on:
- the shift toward institution building,
- a few examples of program impact,
- some lessons learned,
- increased country specific tailoring of activities, and
- increased role of the field staff, while keeping overseas
staffing relatively restrained.
Shift to Institution Building
As the program has evolved, we are increasingly de-emphasizing
the high-visibility operations conducted by American groups
themselves in favor of building locally sustainable institutions to
help countries complete the transformation process on their own.
Instead of PVOs delivering services, we see increasingly the
creation of indigenous PVOs. Instead of election support and
monitoring, we see the building of local party and parliamentary
and civic awareness institutions that can help safeguard the
democratic process. Instead of shipping food to Albania, we will
provide fertilizer to produce food, help change policies to send
the right market signals, and provide technical assistance to small
farmers in production and marketing. After we demonstrated the
potential of energy efficiency through energy audits and sample
356
energy saving equipment, local private energy efficiency consulting
and sales firms sprang up, and we are now training them to do their
own energy audits and serve as local equipment representatives for
U.S. suppliers. U.S. bank advisers will be replaced by local
national advisers as we help train Eastern European bankers in
country and in the US. Eventually, there ought to be local
national advisers in asset valuation as well, rather than more
expensive foreign advisers.
Impact
Even though our formal sector-by-sector evaluation program is
just getting into stride, we have no doubt about the significant
positive impact this program has had. For example,
- Privatization, while difficult, is starting to show success:
In the Czech Republic, A.I.D. advisers helped the government
prepare, negotiate, and conclude contracts worth $700 million in
U.S. investment signed over the past year. The first five major
foreign investments in Lithuanian privatization were all assisted
by US- financed advisors. The first ten privatization transactions
in Bulgaria, now awaiting approval from the government, were
developed with US assistance. $550,000 of A.I.D. technical
assistance under SEED in coordination with $5 million in equity
from the EBRD is helping to privatize the important Albanian chrome
industry.
- Many complementary efforts are under way to help smaller
businesses. The International Executive Service Corps (lESC) ,
Peace Corps, MBA Enterprise Corps, Polish Business Advisory
357
Service, and the Citizen Democracy Corps have provided assistance
to over 1,000 private enterprises in Eastern Europe in marketing,
management, and production technology. lESC alone has arranged 21
joint ventures with U.S. companies.
- In Albania, we are seeing surprising impact considering that
the country was not only hard-line communist but hermetically
sealed from the outside world. Timely U.S. aid in macroeconomic
advice helped develop a package of reforms that got Albania
admitted to the IMF and IBRD quickly, and brought inflation down
from 300% a year 12% a month in calendar 1992 to less than
1% a month in March 1993. $9 million of fertilizer we shipped
raised yields by a value of $40 million, and created a new network
of private fertilizer dealers and auctions that became a model for
commodity import sales now used by the EC and the World Bank.
A.I.D. advisors worked with the local agricultural bank to provide
commercial loans for the first time in 40 years, with a 100%
repayment on all loans made to the private dealers. Rapid U.S. aid
to help released political prisoners with vocational skills has now
expanded to reopen the entire Tirana Vocational School originally
founded in 1921 by the American Red Cross.
- In Poland, the Polish American Fund's small loan "windows"
program has made over 1800 loans, totalling $33 million, to Polish
small business. According to Polish Minister Bielecki, the Polish
Enterprise Fund's small loan window was virtually the only
significant source of lending for small and medium sized businesses
over the critical two year period ending last October. A private
mortgage bank has also been started in Poland with the help of the
358
Fund. The Polish and Hungarian Funds have now invested directly
over $63 million and $25 million, respectively, in promising new
small and medium enterprises.
- In Croatia aad Bosnia, we are starting a program of over $5
million this year to help the victims of atrocities through
emergency grants for local PVO services in trauma care, emergency
medical supplies, training in trauma care for local health
professionals, and the creation of three new health partnerships
centered on physical and psychological trauma between U.S. health
and trauma institutions and Croatian counterparts. This quick
response is possible only through the use of our existing regional
PVO, emergency medicines, and hospital partnerships projects.
- In the Czech Republic, we are able to use regional grants to
respond to the Prime Minister's requests to bring out experts in
securities law in three days and bankruptcy law in six days. Their
timely presence and expertise made a significant input into the
laws passed soon thereafter.
- The Central and Eastern European assistance program's
concept of partnerships between US institutions, who put in their
own funds, and local European institutions, has proven
phenomenally useful. We have created a total of 38 partnerships
between US institutions and those in Central and Eastern Europe,
comprised of 10 hospital partnerships, 7 utility company
partnerships, and 11 management training partnerships. We will
have leveraged over $15 million from the committed 53 U.S. partner
institutions in 25 states, and have replicated this concept in the
NIS health partnerships with even higher leverage as we gained
359
experience. We have truly gone beyond the Beltway to tap the
skills of a new group of Americans contributing their talent,
resources, and enthusiasm to this program in the field. And, once
involved, they care: the University of Kansas Medical Center has
made a commitment to treat - in perpetuity - all children with
cancers that are not treatable in Hungary.
- The energy sector is an excellent example of what has been
accomplished on a sectoral basis. U.S. utilities have established
seven energy partnerships in the region on a cost-sharing basis.
In another project, in less than one year $1.5 million in energy
saving equipment financed under the SEED program resulted in cost
savings from increased energy efficiency valued at $16 million. We
mesh exceptionally well with the International Financial
Institutions in the energy sector, each playing to our comparative
strengths: In Romania, we designed a $370 million petroleum sector
rehabilitation loan for World Bank financing, which will promote
new private investment in petroleum exploration and production, and
help halt decreasing oil and gas output. For the Baltics, we
helped prepare three energy loans for financing by the EBRD
totalling $150 million. Together with the EC, US technical and
commodity assistance through DOE and NRC to Bulgaria's Kozludoy
nuclear reactor is helping improve the safety of this plant which
supplies 50% of Bulgaria's energy. The environmental control
technology we supplied to Poland will allow the Skawina coal plant
to be the first power facility to meet the new environmental
standards that go into effect in 1998.
- In Romania, where family planning was illegal only recently,
360
A.I.D. provided support for the organization of the first two
private family planning organizations. In less than two years,
eight private family planning clinics have been established,
staffed and now managed by Romanians. As a result of A.I.D.-
funded training, the Ministry of Health has certified Romanian
general practitioners — - 85% of Romanian physicians to
prescribe oral contraceptives and provide lUDs. Since the A.I.D.
program has started, the number of abortions per year is estimated
to have dropped by 300,000.
~ Our housing assistance has been pivotal in developing a
functioning system of market-oriented housing finance, assuring
af fordability of housing in high inflation economies where real
wages and family incomes are lagging behind price increases. For
example, the Polish government will shortly be introducing a new
<
dual indexed mortgage which will adjust mortgage payments to
changes in wages. The new system will provide mortgage credit for
new housing to be developed through a $200 million housing loan
program being financed by the IBRD, the EBRD and a $25 million
A.I.D. housing guaranty. In Bulgaria, we have designed a similar
but tailor-made mortgage credit system that will be introduced
through the private banking system. US assistance was instrumental
in the adoption of a new condominium law and a housing
privatization law in Albania, and the drafting of a new condominium
law, now before the Czech Parliament, that will permit sales of
individual apartments for the first time in 40 years.
- Finally, our work in the financial sector is a good example
of the inter-agency cooperation that has grown as this program has
361
matured, and initial turf rivalries give way to collaboration based
on mutually recognized professional expertise. A.I.D. and Treasury
are working together as a team on the development of the banking
infrastructure and bank privatization. In Poland a long term
Treasury advisor assists the Bank of Poland's bank supervision
department while A . I . D . -managed bank supervisors develop the on-
site inspection manual which is the backbone of any supervisory
department, and which is a condition for the World Bank's
structural adjustment loan. We have similar close operational
working relationships with EPA and Energy, among others.
Initial Lessons Learned
Despite these examples of successful impact, we have learned
that democratic and economic institution building will take more
time than we originally thought. For example:
- financial sector reform remains critical. Bank
privatization and the establishment of domestic capital markets is
moving slowly and constraining new enterprise start-up and non-bank
privatization. Inability to collect inter-enterprise debt remains
a major cause of bankruptcy with ensuing rise in the unemployment
rate that undermines political support for a fast-paced economic
adjustment process. In most countries, state banks still own
roughly 95 percent of bank loan portfolios. The process of
cleaning up bad debts, recapitalizing banks for privatization, and
establishing needed financial services will require a longer period
of assistance than we had originally thought. The US has taken a
lead role in supporting the recapitalization of Polish state banks
362
slated for privatization. He are evaluating the status of
financial reform in key countries in the region,. and the lessons
learned from initial assistance by A.I.D. and Treasury, with the
intent to strengthen our effort.
- Privatization assistance is extremely complex, with
assistance needs far out-stripping resources available to us,
requiring us to concentrate our efforts on problems that are ready
for near-term solutions to get the greatest impact, such as helping
the Czech Republic to finalize deals with identified foreign
investor interest. Where solutions are not ready to be
implemented, we draw back and use the money in other ways: for
example, our efforts to help restructure the complex vast Pilzen
Skoda conglomerate for privatization in the Czech Republic did not
bear fruit, as the government is still not ready to brook the
widespread political discontent of lay-offs on the required scale,
preferring to postpone this difficult step.
- Lack of choice in housing is having serious negative
consequences for the mobility of labor, since so much displacement
is taking place during the privatization of the commercial and
industrial sectors. Measures that rectify forty years of misguided
policies are not accepted easily. Even countries that have
willingly accepted A.I.D. assistance in the design of more
appropriate housing policies still have difficulty biting the
bullet and implementing them. However, given the major budget
impacts of the large subsidies which characterize this sector, many
of the countries cannot afford to continue past subsidy policies.
- Our support for developing independent print media and radio
363
stations in the region has been effective, but our efforts to help
privatize television have not worked out, seemingly due to both
political and financial constraints. To understand the constraints
obstructing progress in independent television, we commissioned an
expert team to evaluate this and other aspects of our democratic
institutions program.
- The Enterprise Funds: as part of its reviews and briefings
on all foreign assistance programs, the new Administration has
decided to review the experience of the Enterprise Funds. While we
believe that debt and equity funds managed by experienced equity or
venture capital fund professionals with limited government
involvement are exceptionally valuable tools and that impressive
overall results have been achieved, we have made and are continuing
to make refinements in the process. As part of the
Administration's current review, we have agreed that further
refinements are needed in the respective roles of the government
and the private sector on certain key issues without compromising
the beneficial private aspects of the funds. Subjects we are
seeking to define more precisely for existing and/or new funds
include compensation and reward at the funds themselves or fund-
created subsidiaries and investments; wind-up time-frames, uses,
and the roles of the Administration and Congress in wind-up; Board
membership and appointment; and the role of the Funds in technical
assistance.
Better defined roles and understandings on key issues do not
require the government's second-guessing individual investments or
making AID and State experts in venture capital; they require that
364
venture capitalists be sensitive to the additional factors that
must be borne in mind when using public funds. With good will on
all sides, I believe these interests can be reconciled and that the
public-private partnership nature of this unique mechanism can
actually become a stronger true partnership, one which preserves
the real successes of these funds to date while making necessary
adjustments based on experience.
Our Method of Administration and Hov it has Evolved
It is striking that so many discussions about the SEED program
center not on substance but on procedure. As the Committee is
aware. State and A.I.D. employed a totally new method of
administration for this program's start-up to ensure rapid
assistance delivery, flexibility, and low cost: we funded programs
through flexible regional projects with activities appropriate to
each country rather than through individual bilateral country
project agreements the traditional A.I.D. way. The USG's vital
interest lay in delivering assistance quickly even if it were not
an individually tailored response resulting from several years of
study and negotiation with the host countries, whose governments
and policies were in any case frequently changing. We signed
regional project contracts and grants up front in the United States
with the implementing grantees and contractors, either directly or
through the many other USG agencies in Washington participating in
this program. And we offered these services ready made to the
countries throughout the region, tailoring each work order to local
needs.
365
The traditional alternative requires, for each problem area,
designing 10-13 different projects — one for each country — and
signing each project agreement with a government, then negotiating
each with a separate contractor. While those projects would have
been custom made, they would have required years of design,
bilateral agreement negotiating, and contracting time, as well as
extra expense, before technical assistance reached the recipients,
who might well be different counterparts with new interests by the
time the assistance was delivered. In fact, we probably would just
be getting substantial services delivered about now, and we would
rightly have been asked: "What's taking so long?"
That model served its purposes well: we designed projects
twice as fast as the AID average, much faster than other donors
such as the EC, with the ability to shift money to where reform was
moving faster, and our assistance cost the taxpayer some $25 - $30
million less per year in operating expenses than if we had separate
traditional A.I.D. missions in each of our 13 countries. Despite
this speed in planning and implementing, and the risks we were
encouraged to take to meet the needs of those revolutionary times,
so far our Inspector General has found no major faults with the
projects in our program after nine completed IG audits and five
more in process. I consider our record with the IG thus far to be
as good as or better than it was in the traditional A.I.D. programs
I have managed with their long gestation periods and valuable but
very expensive permanent field oversight staff.
366
Ineraasad RoIa of riald Staff
Nevertheless, we consider it part of the program's natural
evolution, now that programs are up and running, to shift
increasing responsibility and some staff to the field, and to
strengthen the local sense of ownership of the program. We welcone
the new legislation making our A.I.D. Representatives the
coordinators of all in-country activity, under the general
direction of the President's Coordinator and under the guidance of
the Ambassador. A.I.D. Representatives are now the focal point for
on-the-ground coordination of field assistance by all U.S.
agencies. They have established relationships with key host
country officials, the private sector, and other donors' local
representatives, and they engage in frequent dialogue on the
effectiveness of our assistance, and on-going priorities, based on
the status of legal, political, and economic reform.
Tailoring of Activities to Country Circvimstances
We will have no problem satisfying the requirement in the
legislation that 65% of the FY 1993 program shall be made available
for country specific activities within bilateral, regional, or
multilateral programs. Well over 65% of the FY 93 program will be
for country-specific activities within those program categories.
By country-specific activities, we are very clear: we mean
activities either obligated with a country (Albania fertilizer) ,
obligated on a country by country basis (such as the Enterprise
Funds or the individual country partnerships) , or country specific
activities within regional projects that have country programs and
367
budgets agreed in advance, and shared with the AIDREPS. In each
case we have agreed on real country budgets that cannot be changed
by the recipient without our concurrence.
The 1994 Congressional Presentation will show country-by-
covintry planned funding allocation levels, after review by the new
A.I.D. Administrator and the SEED Act Coordinator, for at least 50%
of the program as required by the 1993 Appropriations Act. These
levels will be achieved through country specific activities which
enable AIDREP and country counterpart involvement to the maximum
extent practicable.
We have also increased country level programming through a
series of country program strategies based on consultations with
the assisted governments in Poland, the Czech Republic, Slovakia,
and Hungary. Similar program consultations for the Southern Tier
will take place soon.
Keeping Operating Costs Low
The program as it exists has the lowest operating cost in
A.I.D. per program dollar of any regional bureau, primarily because
we try to put American staff overseas only when needed to interact
with the host country or for direct monitoring. We try to keep
most of our American staff in Washington. We have about the same
number of staff overseas as in Washington, but the majority of our
overseas staff are highly qualified — but less expensive — local
nationals fortunately available in Eastern Europe. A great many of
our Washington people, in contrast to usual A.I.D. practice, are
actual impleroenters, some traveling 120 days a year. We do plan
368
to add to our field staff 12 more American PSCs in the sectors of
privatization, environment, and public administration. They will
be full time assistant project managers in the field to strengthen
supervision and oversight of their projects without distraction by
Washington duties. We also hope to open a field office to deal
with humanitarian aid to Bosnia, provided necessary approvals are
received.
Shifting more people overseas, especially Americans, is a
question of cost above all, though we do it where there is clear
need. Given present Operating Expense constraints, however, a
massive transfer overseas to open conventional A.I.D. Missions as
some advocate would require Mission closings elsewhere in the
world.
Mr. Chairman, we have sought to preserve the advantages of our
regional model, including speed, lower cost, flexibility, avoiding
entitlements, the efficient use of scarce technical experts, and
the greater sharing of experience horizontally between countries
facing somewhat similar problems as they emerge from Communism.
But this year we have made needed mid-course corrections,
strengthening both host country government and A.I.D. field office
involvement in project planning and selection, tailoring programs
to meet individual country needs, beginning country strategy
development, and giving countries a sense of the core minimum
program they can expect. We believe these measures are sensible
adjustments for this stage of our program.
As a final note, Mr. Chairman, last year you asked me if the
369
assistance delivexy mechanism we use is so great, why don't we use
it for A.I.D.'s other programs. I said the model was designed for
the unique circumstances of Central and Eastern Europe. In the
year since, not only has the model evolved, but as part of its
review of every bureau's experience for lessons learned, A.I.D. has
in fact started to look at how certain aspects of it such as
streamlining design, putting regional contracts in force early and
making locally tailored modifications later, limiting negotiations
of legally binding documents with governments to situations where
they are actually needed, and taking care that each field staff
position is occupied by people who must be in country might be
useful to consider in our more traditional field-intensive programs
to increase speed, flexibility, and efficiency, and contain costs.
Other aspects clearly remain Europe-specific. No decisions have
been made, but I am hopeful that the Europe experience, though
created for a particular set of circumstances, will contribute at
least a few generalizable management benefits for A.I.D. I was
pleased to see your recent suggestion that our SEED contracting
model was worth looking at for these purposes.
This concludes my remarks, and I look forward to your
questions.
370
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AGENCY FOR INTtRNATlONAL OtVCLOPMENT
The Honorable Robert E. Andrews
Subcommittee on Europe and the Middle East
Committee on Foreign Affairs
House of Representatives
Washington, D.C. 20515
Dear Congressman Andrews:
In response to a question you raised at the recent hearing
of the House Foreign Affairs Subcommittee on Europe and the
Middle East, the most recent information available to us on
private sector banks in Poland is summarized below.
Since 1991 the Ministry of Finance has been implementing a
phased program to put the state-owned commercial banks under
independent professional management, to resolve the problem of
bad loans to financially weak enterprises, and to prepare nine of
the most important state-owned banks for privatization.
Grouped by their respective shares of total assets in the
commercial banking system, as of February 1993, the main types of
banks in Poland were:
Twenty-one state-owned commercial banks that
will not be privatized until 1994 or later 78.4%
Two state-owned commercial banks that are being
privatized during 1993 (Wielkopolski Bank,
privatized in April; Slaski Bank, to be
privatized during the fall) 5.8%
Banks with majority private ownership (including
branches and subsidiaries of foreign banks) 9.3%
1,662 small cooperative banks (grass-roots member
organizations, that also serve as conduits for
government-subsidized credit to agriculture) 6.0%
Because of the government of Poland's highly successful
local flotation of the Wielkopolski Bank shares on the Warsaw
Stock Exchange in April 1993 (after the European Bank of
Reconstruction and Development had bought, and the Ministry of
Finance had retained, 57 percent of the shares, divided evenly),
the Ministry of Finance is planning to accelerate its schedule
373
Cor privatization of th« sevan larqa, roqional State-ownod
commercial banks that will raaaln aftar Slaslcl Bank la privatized
thia (all. In particular, tha Ministry of Finance is now
planning to privatize three state-owned commercial banks in 1994.
Privatization of the nine regional state-owned commercial
banks is one of the central elements of the $450 million World
Bank Enterprise and Financial Sector Adjustment loan approved
May 4 by the Executive Board of the International Bank for
Reconstruction and Development.
In addition. Western donors have established a Polish Bank
Privatization Fund to help finance the process of reform,
recapitalization, and privatization of the nine banks. In
particular, about $650 million (reprogramned from the
$1.0 billion Polish Stabilization Fund of 1990) will be made
available in installments to the Government of Poland, after each
bank has been privatized. These funds will be used to help pay
interest on the long-term Polish government securities issued to
recapitalize the state-owned commercial banks. (The purpose of
recapitalization is to raise each bank's equity to a prudent
level and, in turn, make the banks saleable to private
investors.)
I hope that this information fully answers your question.
If this office can be of any further assistance, please let us
know.
Sincerely,
Marianne O' Sullivan
Acting Assistant Administrator
for Legislative Affairs
cc: The Honorable Lee Hamilton
Chairman
Committee on Foreign Affairs
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COUNTRY BREAKDOWN FOR EASTERN EUROPE
The following table provides the FY 1994 Special Assistance
Initiative request level for Central and Eastern Europe with the
requested partial planned breakdown by country. Country
breakdowns of previously obligated funds were provided to
Congress in the SEED Act Implementation Report submitted in
January 1993.
SUPPLEMENTAL A.I.D. INFORMATION
FOR THE FY94 CONGRESSIONAL PRESENTATION
Legislativ* Requirement: Section (f)(3) under the Eastern Europe
heading of the FY 1993 Foreign Operations, Export Financing, and
Related appropriations Act, 1993 states that the A.I.D.
Congressional Presentation Document for fiscal year 1994 shall
include projected or estimated resources planned for Eastern Europe
and the Baltic States on a country-by-country and on a regional
basis, to the extent known at the time such document is prepared.
Furthermore, said section stipulates that amounts planned or
projected for regional programs should not exceed 50 percent of the
entire program for Eastern Europe and the Baltic States.
A.I.O. Plans: Based on the present knowledge of the planned use of
the $408,951 million in FY94 SAI funds requested for Eastern Europe
and the Baltics, A.I.D. can identify the intended country
beneficiaries of 57.7% of the funds as follows:
( $thousands )
ALBANIA
$18,530
BULGARIA
27,092
CROATIA
1,999
CZECH REP.
25,438
ESTONIA
6,135
HUNGARY
24,980
LATVIA
6,360
LITHUANIA
9,915
MACEDONIA
4,387
POLAND
67,028
ROMANIA
21,943
SLOVAKIA
21,163
SLOVENIA
1.125
subtotal allocated $236,095
unallocated by
country S172 .856
TOTAL FY94 REQUEST $408,951
Note: Most of the $172,095,000 not presently allocated in the FY94
country planning levels will be obligated for country-specific
activities. It is merely shown as unallocated at this point in
time to reflect the needed flexibility to respond to changing
country circumstances.
386
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SUBMITTED TO THE EUROPE & MIDDLE EAST SUBCOMMITTEE
BOARD OF DIRECTORS
AnttKKty Q AndnkopouNw
Mteh— < P AngMakn
PanayioM Angviopouto*
John C Ango*tw
Amtur C- Anton
Thonws A Alh*n«
Or. WHUwn A. AttMftS
Or Q«oro* P Bttno*
h.^I^'bccu. testimony of ANDREW E. MANATOS
SrTSlimS; ON BEHALF OF
mthmmt O CamorMa
John A C«tstmattdM
iSLS'S'^JCS THE UNITED HELLENIC AMERICAN CONGRESS
t^TSSi„ THE PANCYPRIAN ASSOCIATION OF AMERICA
SU^^cLSSH!* ""^ INTERNATIONAL COORDINATING COMMITTEE — JUSTICE FOR
Pr a»o«g» F Oalianta CYPRUS
S^ol^!::?:::^ the American Hellenic alliance
Stmoa C Olmaa
Pmt Dion
0>Ofp< T Oouns
BttWt C Fous«i«n*« _ _
^S^O'^SZ^'^*^ ^^ "^^ HOUSE FOREIGN AFFAIRS COMMITTEE
Atme K. QlAnaru
John S QUtu
OMroaOrMmu JUnC 4- 1993
Mlch«*< Haiikiaa
Dr 0*org* Haa«otis
Or Mannoa O HKjma
Etania K Huaxaon
Sir*;:^'?';^.™ The organizations I represent, the United Hellenic
STch^r.:;::^. American Congress, the Pancyprlan Association, the
Niko< K.i.i,<].> International Coordinating Committee — Justice for
sd.ns K Koukoifoni. Cyprus , the American Hellenic Alliance and the Pan-
cNno A Kn«ui<.i Macedonian Association, appreciate the opportunity to
c»iii«m Lic«i"N°KiiM««.. fulfill our American democratic role and present to you
y::'^^^"'" today suggestions for policies with regard to Greece and
T.„^"^n,T"' Cyprus which they feel would benefit significantly our
j«-«. L,.o.i... country's long-term Interests.
Paul G M«ncit« ■* ^
M FranM Mania
Crtaria* Marangouoakis _. j i .1 *. . , . ,
jonnLua.aa The dollar figures which we suqqest for vour
Th. Hon N.cnoiaa J uaiai authori zation bill are $15 million for Cyprus and the
equality of military and economic aid for Greece and
Turkey. I will confine my remarks today to some of the
^^... ..^.. rationale regarding policies toward Greece and Cyprus
p«a.j Pappa. whlch are behind these figures.
John PaYiaviaa ^
Jam** A Papon>9
TM Mon *N?cno1i c pa<n. With rcspect to the Cyprus settlement problem, the
?i,?'nan^s"°sr sub-committee should consider seriously what our country
j^n"p%rj?a". is asking of the people of Cyprus. Would we accept It ~
o, i^rDLWa'aoS:. guaranteeing an 18% American minority half the seats In
ch".TM'l!>*'ar.ga,.. ^^^ "•^- House of Reprcsentat Ives and the U.S. Supreme
cooa.ani.na sia.-opooio. Court , key Cabinet posts, as well as the vice presidency
Michaai L Stalanos ■j_i_ *_ «. • ^ • ^
M,».. Thaoocou with powers to send back to Capitol Hill any legislation
SpiroB Mitonaa
Louis W Mitcnaii
Jack Miiaahopouios
Df Miiioa Moscandraw
Virgtn.a Nick
Jamaa P Pamai
Coatas Trataros
Nick Vervan»oti»
Bill J vranai
N J Yianmas
Charatambot Za^akioiai
WASHilMGTON D C COUNSEL
MONORARV CHAIRMAN ViCE-CMAlRMEN
His Emin«nca ArcMHshoo 'akovos Gao^ga Chimplas Gaorga Paraskava-oas Ar>arm^ E Manaiaa
NATIONAL CHAtflMAN '*'""*' Christoph.r Angaio Tsakopou.os °*
Aoaraw A Ait>«ns
388
this vice president chooses? Our friends and allies, the Greek-
Cypriots, went along with us and the United Nations on this
proposal. As hard as it is for non-Washington Americans to
believe, the 18% Cypriot minority, the Turks, said to the U.S., in
effect, keep sending us hundreds of millions of your dollars each
year but keep your Cyprus settlement ideas to yourself, they don't
give us enough.
To understand the complex Macedonian issue on Greece's
northern border, the Committee should consider the factual parallel
drawn by the respected career diplomat who served as our Ambassador
to Greece, Robert Keeley. He said "Suppose the federal republic of
Mexico broke up into five or six pieces and the northernmost
provinces declared independence, adopted the name 'Texas, ' printed
new money with a picture of the Alamo on it, flew a flag closely
resembling that of our own 'Lone Star State,' and its compatriots
in the U.S. published maps showing Texas as part of the new Mexican
state, thus restoring Texas to its former Mexican owners." How
would Americans feel about those who would want to recognize them
or help them into the international community unchanged?
We cannot jeopardize our military bases in our strategically
important old ally, Greece, so that this small want-to-be entity
can both keep its threats on Greek territory and get international
acceptance. We allowed Croatia to keep its threats against the
Serbs and gave them international recognition, lets not make the
same mistake.
Finally, in this time of domestic sacrifice why would we
deprive Americans of the use of hundreds of millions of dollars to
help Turkey, which can afford scholarships for 10,000 central Asian
students at Turkish universities and $1 billion in foreign aid
credits. Why should we sacrifice so that the human rights
violating, Cyprus occupying, and Greek threatening bloated Turkish
military bloats yet larger? Listen to Turkey's distinctions in
1992:
1. The 1992 annual report of Human Rights Watch described the
human rights situation in Turkey as "worsening considerably in
1992."
2. The appalling practice of torturing children was detailed
in a January 1992 Helsinki Watch Report entitled "Nothing
Unusual — The Torture of Children in Turkey."
3. The government practice of killing journalists with whom
the government disagrees was denounced by the Turkish Press
Council and the International Committee to Protect
Journalists, which labeled Turkey as the country in which the
most journalists were assassinated in 1992.
389
4. Amnesty International reported the killings of "more than
a hundred Kurdish men" in Turkey in 1992.
Whatever amount and type of aid which goes to Turkey should go
in the same amount and type, grant or loans, to the non-human
rights violating, non-occupying, non-threatening, non-bloated Greek
military. They must be able to defend themselves against our arms
pointed at them from Turkey.
Mr. Chairman, the American people spoke quite loudly this last
year. They want a no-nonsense government. From the top level
posts I have held in the legislative and executive branches and
from watching government programs quite closely from the private
sector, I know of no more nonsense filled part of the government
than this area of military aid. I would like to offer you three
words of advice, cut, cut, cut.
Thank you.
390
Statement of
Eugene T. Rossides
on behalf of the American Hellenic Institute
Public Affairs Committee, Inc. and
the Cyprus Federation of America, Inc.
before the
House Foreign Affairs Subcommittee on Europe and the Middle East
June 4, 1993
Chairman Hamilton and Members of the Subcommittee:
I appreciate the opportunity to submit testimony to you on behalf of the American
Hellenic Institute Public Affairs Committee, Inc,. and the Cyprus Federation of America, Inc., on
the Administration's Fiscal Year 1994 foreign assistance request regarding Greece, Turkey and
Cyprus.
The Administration has proposed military aid to Greece in the amount of $3 1 5 million and
to Turkey in the amount of $450 million which is in accordance with the ratio of 7 10 initiated by
the Congress. These amounts are in the form of loans and the terms for both countries are the
same.
Unfortunately the Administration continues to propose economic grant assistance for
Turkey and actually proposed an increase from last year's $125 million to $143 million The $125
million for FY'93 was $50 million over the FY'92 amount of $75 million and was part of the
compromise with the Senate conferees when the House conferees insisted on converting $450
million in grant military aid for Turkey to loans.
Greece receives no economic aid.
The Administration has proposed $15 million in humanitarian aid for Cyprus
President Clinton has proposed $ 1 5 billion in cuts in the foreign aid program over the
next five years. Aid to Turkey should be the first such cut.
With our huge debt and annual deficit, our enormous domestic needs and the economic
package of spending cuts and tax increases proposed by President Clinton, including substantial
cuts in our defense budget, it is unreasonable to continue any military and economic aid to
Turkey
The end of the Cold War, the demise of the Warsaw Pact, the breakup of the Soviet
Union, the demise of communism there and in Eastern Europe, the reduction of armed forces in
391
the United States, NATO and the former USSR., the lack of any real threat to Turkey and
Turkey's horrendous human rights record, are further reasons not to authorize aid to Turkey.
In the interests of the United States:
1 We oppose all military and economic aid to Turkey for the twenty-two reasons which
are set forth below;
2. We support a reduction in military aid for Greece after Turkey removes its illegal
35,000 man army of occupation and its 80,000 illegal colonists/settlers from Cyprus and Turkey's
125,000 man Army of the Aegean aimed at Greece's Aegean islands is disbanded. Turkey is the
main security threat to Greece. For career officials in the State Department and Defense
Department to deny this is to deny reality. Turkey has been maneuvering in the Balkans, in
Albania and with Bosnia and Skopje.
3. We support the traditional amount of $15 million in humanitarian aid for Cyprus.
4. If the Subcommittee determines to authorize aid to Turkey, and we strongly urge it not
to, then the ratio of military aid between Greece and Turkey should be maintained at 7 to 10, if
not 1 to 1 , and the terms should be equal.
As a matter of law. Turkey is presently ineligible for foreign aid under Sections 1 1 6 and
502B of the Foreign Assistance Act of 1961, as amended, because of its continuing and
substantial human rights violations in Turkey and in Cyprus.
On December 29, 1992, Helsinki Watch released a 78 page report entitled Broken
Promises: Torture and Killings Continue in Turkey It is a devastating report of brutality and
barbarism, including killings by Turkish security forces on an organized scale and the assassination
of 165 Kurdish community leaders in Southeast Turkey I urge the Subcommittee members to
read the three-page press release accompanying the report which is attached to my testimony as
Exhibit 1
Helsinki Watch formally "recommends that the United States end all militan. and security
assistance to Turkey until such time as Turkey no longer manifests" the "consistent pattern of
gross human rights abuses" set forth in the report, "or state clearly, as required by Section 502B
of the Foreign Assistance Act, what extraordinary circumstances warrant the provisions of such
aid."
I also urge the Subcommittee members" to read the op-ed page anicie by Jack Healy.
executive director, and Maryam Elahi, program officer of Amnesty International, which appeared
in the Washington Post. January 5, 1993, page A15, which is attached to my testimony as Exhibit
2 It also is a grim report of brutalities by Turkish officials
Turkey is also ineligible for foreign aid because of its failure to negotiate in good faith a
Cyprus settlement as required by the amendment lifting the remaining partial embargo in 1978
392
Turkey and the Turkish Cypriots were responsible for the breakdown in November, 1992,
of the U.N -sponsored Cyprus talks. According to UN Secretary-General Boutros Boutros-Ghali,
the Greek Cypriots negotiated "in good faith and in conformity with international law" while the
Turkish Cypriots (backed by Turkey) refused to accept the UN's "set of ideas" as a framework for
a solution. The Turkish Cypriots diverged from the "set of ideas" in three fundamental areas: the
concept of a federation, displaced persons and territorial adjustments.
Once again the Turkish Cypriots (with Turkey's support) have blocked progress to a
settlement in the talks held in New York under U.N. auspices starting the week of May 24, 1993
Denktash blocked the return of Famagusta for the immediate resettlement of refugees with new
demands which fall outside the U.N. documents and procedure The current President of the
Security Council, the Russian representative, Yuliy Vorontsov, publicly blamed the Turkish
Cypriots for the lack of progress in the U.N -sponsored Cyprus peace talks. Cyprus' new
President, Glafcos Clerides, represented the government of Cyprus.
Further, Turkey is ineligible for United States aid because of its continuing violations of
the United Nations Charter and the North Atlantic Treaty by its invasion of Cyprus in 1974 and its
occupation of 37.3% of Cyprus for nineteen years with 35,000 illegal occupation troops and
80,000 illegal Turkish colonists/settlers..
Money is fungible. Our military and economic aid to Turkey covers Turkeys costs of its
occupation of Cyprus, its costs of the several foreign agents it has hired in the United States and
part of the costs of its 125,000 man Army of the Aegean aimed at Greece's Aegean islands.
Our massive aid to Turkey since the remaining partial embargo was lifted in 1978
has been a major obstacle to a settlement of the Cyprus problem.
Continuing to authorize military and economic aid to Turkey only encourages
Turkey's and the Turkish Cypriots' intransigence on Cyprus and Turkey's adventurism in
the Balkans.
The following twenty-two reasons why it is not in the interests of the United States to
give military and economic aid to Turkey include the facts and reasons why Greece is extremely
important to the national security interests of the United States and why Turkey is of questionable
value to those interests and is an unreliable ally
Turkey's foreign agents. Hill & Knowlton, International Advisors, Inc and others, have been
an integral part of Turkey's misinformation program aimed at covering up Turkey's horrendous
human rights violations and questionable value as a reliable ally.
Twenty-two Reasons Why It Is Not In The Interests Of The United States To Give
Military And Economic Aid To Turkey
Each of the following twenty-two reasons is enough to halt all military and economic aid to
Turkey, and several of them justify immediate economic sanctions against Turkey:
393
1. Our huge public debt and large annual budget deficit are reasons enough not to
give Turkey any of our tax dollars.
2. Our enormous domestic needs should obviously take precedence over a giveaway to
Turkey.
3. The end of the Cold War.
4. The demise of the Warsaw Pact.
5. The demise of communism in the former U.S.S.R.
6. The breakup of the U.S.S.R
7. The lack of any meaningful threat to Turkey.
What is the threat to Turkey that requires massive US military aid? It makes no sense for
the U.S. to continue to send huge amounts of military aid to Turkey with the end of the Cold
War, the demise of the Warsaw Pact, the reduction offerees in the United States, NATO and the
former USSR., and our huge budget deficit and enormous domestic needs Arms aid and
economic aid to Turkey should be ended now.
In fiscal 1991 Turkey received nearly a billion dollars in U.S. aid, not including excess
defense articles sent to Turkey. Desert Storm equipment and weapons left in Turkey by Germany
and surplus weapons sent since the war amounted to another billion and a half dollars
8. Turkey's abduction of five Americans at gun point in 1974 and its refijsal to release or
account for them. There is credible evidence that one of the five, Andrew Kassapis of Detroit,
Michigan, was killed by Turkish forces. Kassapis' kidnapping with another person at gun point by
the Turkish forces/Turkish Cypriot militia was witnessed by his parents and others Ambassador
Nelson Ledsky, the United States Special Coordinator for Cyprus, in his testimony on April 1 7,
1991, before the Senate Foreign Relations Subconmiittee on European Affairs stated that Rauf
Denktash, the Turkish Cypriot leader, told him "only yesterday at lunch" that he "has personally
looked into this situation and he could - he did assure the family that this boy was not alive and
died in the first few days of fighting in July 1974 " (Cyprus: International Law and the Prospects
for Settlement, Hearing before the Senate Foreign Relations Subcommittee on European Affairs,
102nd Cong, 1st Sess. 16(1991))
The evidence is clear The reasoning is obvious-the boy was in the custody of Turkish
forces and if he was killed in the first few days of fighting, he was killed by Turkish forces
We have called for an investigation of the matter and an investigation of the fate of the
other four Americans taken at gun point by the Turks in 1974
9 The taking of property owned by American citizens in the Turkish occupied territory by
Turkish forces and the illegal Turkish Cypnot regime, headed by Rauf Denktash, and the illegal
394
use of the property for illegal gains. I would estimate that there are several hundred Americans
whose property has been illegally taken.
10. Turkey's numerous violations of law stemming from its invasion of Cyprus in 1974,
which violations continue to date:
a. the United Nations Charter preamble "that armed force shall not be used, save in the
common interest" and article 2 paragraph 4 which states that "all members shall refrain in their
international relations from the threat or use of force against the territorial integrity or political
independence of any state, or in any other manner inconsistent with the purposes of the United
Nations." UN Charter article 2(4) is the provision Iraq violated by its invasion of Kuwait,
b. the North Atlantic Treaty article 1 which states that "the Parties undertake to refrain in
their international relations from the threat or use of force in any manner inconsistent with the
purpose of the United Nations,"
c. the human rights sections 116 and S02B of the Foreign Assistance Act of 1961, as
amended, by its actions in Cyprus, a number of which are continuing and substantial, and the arms
sections of that Act and the Foreign Military Sales Act;
d. the European Convention on Human Rights (1950);
The European Commission on Human Rights, in its report dated July 10, 1976, regarding
two complaints filed by the Cyprus Government, found Turkey guilty of violating the following
articles of the European Convention on Human Rights by its actions in Cyprus:
(1) Article 2-by killings of innocent civilians committed on a substantial
scale;
(2) Article 3 -by rapes of women of all ages from 12 to 71 ,
(3) Article 3-by inhuman treatment of prisoners and persons detained,
(4) Article 5-by deprivation of liberty with regard to detainees and missing
persons-a continuing violation. In addition to the 5 Americans taken
by the Turks, there are 1,614 missing Greek Cypriots out of a total of
570,000 Greek Cypriots.
(5) Article 8-by displacement of persons, creating more than 170,000
Greek Cypriot refugees, and by refusing to allow the refugees to
return to their homes-a continuing violation;
(6) Article 1 of the First Protocol to the Convention -by deprivation of
possessions, looting and robbery on an extensive scale.
The London Sunday Times published excerpts of the report and stated "It amounts to a
massive indictment of the Ankara government for the murder, rape and looting by its army in
Cyprus during and after the Turkish invasion of summer 1974 " (London Sunday Times. Jan 23,
1977)
395
Turkey, by its actions in Cyprus, is in violation of the human rights sections 1 16 and 502B
of the Foreign Assistance Act of 1961, which violations of internationally recognized human
rights continue to date.
In a second report dated 1983 regarding a third complaint which was released on April 3,
1992 after nine years of delaying tactics by Turkey, the European Commission on Human Rights
again found Turkey guilty of continuing violations of Articles 5 and 8 and Article 1 of Protocol
No. 1 ofthe European Convention.
e. the United Nations Universal Declaration of Human Rights (1948) Violations ofthe
European Declaration on Human Rights also constitute violations of the comparable articles of
the Universal Declaration of Human Rights;
f the fourth Geneva Convention of 1949 regarding protection of civilians states in section
III, article 49 that the occupying power shall not transfer or transport persons from their own
country to the occupied territory There are today an estimated 80,000 illegal colonists/settlers
from Turkey in the occupied part of Cyprus.
g. Protocol I to the fourth Geneva Convention of 1949, part V, article 85, also prohibits
the transfer of persons from the occupying powers country to the occupied territory,
h. Article IV ofthe Treaty of Guarantee under the London-Zurich Agreement of 1959-60
That Treaty did not authorize the use of force If the word "action" in Article IV is to be
interpreted as authorizing force, then that article is void ab initio under article 103 ofthe UN
Charter as contrary to the Charter (See David Hunt, "Cyprus: A Study in International Relations"
11 (1980), the Montague Burton Lecture in the University of Edinburgh Hunt was Britain's High
Commissioner in Cyprus from 1965 to 1966, see also Rossides, "Cyprus and the Rule of Law," 17
Syracuse Journal of International Law and Commerce 21, at pp 55-60 (1991), (hereinafter
"Cyprus and the Rule of Law")), and
i. numerous UN General Assembly and Security Council Resolutions on Cyprus
Turkey's violations of law are extensively discussed and documented in my article,
"Cyprus and the Rule of Law "
No one in the State and Defense Departments wants to talk of these violations of law
by Turkey which are more extensive than the violations of law by Iraq in its invasion of
Kuwait. The double standard for Turkey must end.
The Cyprus issue is one of aggression and land grab through brute force by Turkey in
violation of the UN Charter and international law It is not a question of minority rights The
substantive proposals made over the years by the Greek Cypriots encompass the language ofthe
Universal Declarations of Human Rights and the European Convention on Human Rights
Protection of minority rights can also be aided by allowing for appeal to outside institutions such
as the United Nations, the European Commission on Human Rights and the International Court of
/ i
396
Justice at the Hague. Turkey and Denktash have used this issue to create an excuse for their
apartheid and partition policies.
11. Turkey's human rights violations against its own citizens generally and in particular
against its 12 million Kurdish citizens who constitute a 20% minority. (See the recent 78 page
Helsinki Watch report, Broken Promises: Torture and Killings Continue in Turkey, released on
Dec. 29, 1992, the Freedom House Annual Survey for 1991, the Human Rights Watch Report
released in January, 1992, the Humanitarian Law Project Report, "The Current Conflict Between
Turkish Armed Forces and the Kurds of Southeast Anatolia," July 17, 1991, the Helsinki Watch
report, "Denying Human Rights and Ethnic Identity- The Greeks in Turkey," March 1992, the
Report of the Association of the Bar of the City of New York on "Torture in Turkey: The Legal
System's Response," 45 Record 6-131, 1990, the several Amnesty International reports on
Turkey, and the recent op.-ed. page article by Jack Healy, executive director, and Maryam Elahi,
program officer. Amnesty International, in the Wash. Post, Jan 5, 1993, A15 Also see "Cyprus
and the Rule of Law" footnote 122, page 62.) The three-page press release on the Dec. 29, 1992,
78 page Helsinki Watch report is attached as Exhibit 1 and the op-ed page article in the Wash.
Post, Jan. 5, 1993, by officials of Amnesty International is attached as Exhibit 2.
Helsinki Watch "recommends that the United States end all military and security assistance
to Turkey until" Turkey stops its "consistent pattern of gross human rights abuses " (See Helsinki
Watch report Broken Promises: Torture and Killings Continue in Turkey. Dec 29, 1992)
Turkey seeks an undemocratic 50% voting status and a rotating presidency for the 1 8%
Turkish Cypriot minority while denying basic human rights to its 20% Kurdish minority Turkey
is not willing to offer its Kurdish minority what it seeks for the Turkish Cypriot minority.
Germany halted for a period of time all military aid to Turkey because of Turkish armed
attacks including air strikes on the Kurds in Turkey and in Iraq utilizing in part German military
equipment The United States did not follow Germany's lead The State Department
spokesperson actually commended the Turks (See Spokesperson Margaret Tutwiler press
briefings, March 25 and 26, 1992 )
The New York Times in an editorial (April 1, 1992) stated that "Turkish Kurds have been
subject to systematic human rights violations, including torture " The editorial also stated that
"The international community is morally bound to demand that Ankara cease [its] ugly
repression of Kurdish civilians before its becomes genocide."
Turkey challenged basic United States policy toward Iraq, particularly Operation Provide
Comfort, on behalf of the Iraqi Kurds, when the foreign ministers of Turkey, Iran and Syria met in
Ankara on Nov 14, 1992 The foreign ministers issued a strong, blunt attack on the new
administration of Iraqi Kurdistan A month earlier they had rejected the Iraqi Kurdish parliament's
declaration envisioning a federalized government in a more democratic, pluralistic Iraq (Murphy
"Key States Warn US Over Kurds - Turkey, Iran, Syria Challenge US Role," Wash. Post.
Nov 15, 1992, page A33, col. 1)
397
12 Since money is fungible. United States aid subsidizes the cost to Turkey of (a)
Turkey's illegal occupation of almost 40% of Cyprus, (b) the several foreign agents Turkey
employs in the United States for over $3.4 million annually according to Department of Justice
records (including Hill and Knowlton at $1.1 million and International Advisors, Inc., at $.6
million), (c) and part of the costs of Turkey's 125,000 Army of the Aegean aimed at Greece's
Aegean Islands, and (d) part of the costs of the Turkish military which is used to suppress
Turkey's Kurdish minority.
Our massive aid to Turiwy since the remaining partial embargo was lifted in 1978
has been a major obstacle to a settlement of the Cyprus problem.
Continuing to authorize military and economic aid to Turkey only encourages
Turkey's and the Turkish Cypriots' intransigence in the Cyprus negotiations and Turkey's
adventurism in the Balkans.
13. Turkey and the Turkish Cypriots were responsible for the breakdown in Nov , 1992,
of the UN sponsored Cyprus talks. According to UN Secretary-General Boutros Boutros Ghali,
the Greek Cypriots negotiated "in good faith and in conformity with international law" while the
Turkish Cypriots (backed by Turkey) refused to accept the UN's "set of ideas" as a fi-amework for
a solution. The Turkish Cypriots diverged from the "set of ideas" in three fundamental areas: the
concept of a federation, displaced persons and territorial adjustments.
Once again the Turkish Cypriots (with Turkey's support) have blocked progress to a
settlement in the talks held in New York under U.N auspices during the week of May 24, 1993
Denktash blocked the return of Famagusta for the immediate resettlement of refugees with new
demands which fall outside the UN. documents and procedure The current President of the
U.N Security Council, the Russian representative, Yuliy Vorontsov, blamed the Turkish Cypriots
for the lack of progress in the UN -sponsored Cyprus peace talks
14 Turkey has failed to negotiate in good faith a Cyprus settlement as required by the
amendment lifting the remaining partial embargo in 1978 The provisions of the original embargo
should therefore be implemented against Turkey In 1974 Turkey violated Section 505(d) of the
Foreign Assistance Act of 1961, as amended, and Section 3(c) of the Foreign Military Sales Act,
by the misuse of United States-supplied arms for its aggression in Cyprus, see Comptroller
General's opinion letter of October 7, 1974, 120 Cong. Rec. 34,672 (1974) and the several
congressional debates from September through December, 1974; Lawrence Stem, The Wrong
Horse 149(1977)
Turkey and the Turkish Cypriots have failed to submit, as promised, negotiating proposals
regarding territory, constitutional arrangements and refugees since 1977 On September 11,
1 99 1 , in Paris the Turkish Prime Minister reneged on understandings that had been conveyed to
the UN Secretary General and the State Department and scuttled plans for an international
conference favored by the United States
398
15. United States intelligence facilities in Turkey are, and have been for many years,
unnecessary and duplicative of other superior listening posts and satellites. For many years we
have called for their closing. Several were closed last year and it was recently announced that five
more such facilities in Turkey would be closed. The remaining ones should also be closed and
the estimated 4,000 remaining American troops should be brought home. It is a waste of U.S.
taxpayer dollars to keep any listening facilities open in Turkey and American troops there. (See
"Cyprus and the Rule of Law," page 79 footnote 187.)
16. Turkey is an unreliable ally who aided the former U.S.S.R. militarily. Example's of
Turkey's unreliability are set forth in "Cyprus and the Rule of Law," page 79, footnote 187
Turkey also refused to cosponsor the United States initiative in the UN to revoke the infamous
resolution equating Zionism with racism and abstained on the vote.
17. The Persian Gulf War demonstrated that Greece, not Turkey, is the strategic key to
the projection of United States power in the Eastern Mediterranean and Persian Gulf The NATO
naval base in Suda Bay, Crete, is the key base for the projection of United States power in the
Eastern Mediterranean and the Persian Gulf through the Sixth Fleet. The NATO naval base at
Suda Bay is far more important to U.S. strategic interests than all the listening posts and bases in
Turkey put together. President Bush recognized the importance of Suda Bay by his historic visit
to the Suda Bay bases in July, 1991.
Turkey sat on the sidelines throughout Desert Shield, refusing to send any forces to the
U.S. -led Coalition, reflising to authorize a second land fi'ont from Turkey (see Wash. Post, Jan
16, 1991, at A6, col. 5), and refusing to allow the use of the NATO air base at Incirlik, Turkey
Desert Storm began on January 16, 1991 It was not until over 24 hours after the air war
had begun on January 16, 1991, and only after the Iraqi air force and air defenses had been
neutralized and the US had achieved air superiority, that Turkey allowed a limited number of
sorties out of the Incirlik NATO air base Only one out of twenty coalition sorties originated in
Turkey, and these were clearly unnecessary The Turkish military and Turkish public opinion
opposed the use of Incirlik NATO air base
Regarding the two oil pipelines from Iraq through Turkey to the Mediterranean coast.
Iraq, not Turkey, closed the first oil pipeline and reduced the flow of oil through the second by 75
percent for lack of customers Turkey refijsed to act to shut off the second pipeline until after the
UN Security Council passed resolution 661 on August 6, 1990 (Wash. Post, Aug 8, 1990, at
A12, col 4) Other countries acted right away
Further, we did not need Turkey to halt the remaining 25% of the second pipeline since
the naval blockage would have prevented any movement of Iraqi oil from Turkey's Mediterranean
port if there had been any customers Turkey's President Ozal admitted this in a news conference
on June 7, 1991 in Istanbul when he stated: "If Turkey had not imposed an embargo and shut the
pipeline it would have led to a blockade " (Associated Press, June 7, 1991 )
399
Turkey had no choice but to close the remaining pipeline once the Security Council acted.
Otherwise, she would have been in violation of Security Council Resolution 661 and Article 25 of
the United Nations Charter, which requires member states to comply with Security Council
resolutions. By failing to implement S.C Res 661, Turkey would have jeopardized her relations
with the rest of the nations who supported S.C Res 661, including the US., and the significant
economic relations and aid from the US., other countries, and international organizations
Turkey's proponents stress that Turkey closed its 206-mile border with Iraq In reality,
the border was never fully closed. There was large-scale, openly organized smuggling along the
Turkey-Iraq border. (See fVaU Si. Jour., Oct. 30, 1990, at 1, col 1, Turkish newspapers, Sabah,
Sept. 3, 1990, and Cumhunyet, Sept. 22, 1990. and the weekly magazine, Yuzil, Sept 9, 1990 )
Turkey's proponents also assert that Turkish troops "tied down" 100.000 Iraqi forces.
Again, the reality is otherwise The Iraqi troops were stationed along the Syrian and Turkish
borders in Northern Iraq before the invasion of Kuwait and Iraq had no plans to move them south
Those troops had to be kept there in order to control the Kurds and check the Syrians.
While Turkey delayed support for the U.S. initiated freeze on commercial dealings with
Iraq and negotiated for compensation, and sat on the sidelines throughout Desert Shield (Aug 2,
1990- Jan 16, 1991) the Mitsotakis government of Greece gave full support to Desert
Shield/Desert Storm Greece:
(1) immediately condemned Iraq's aggression;
(2) authorized from the first day of the crisis the use of the Suda Bay naval base
to provide operational, logistical and command support for the US Sixth Fleet
24 hours a day;
(3) authorized the use of the US air base at Suda bay to provide similar suppon
to the U S Air Force in the build up of US air power in Saudi Arabia and other
Persian Gulf countries,
(4) authorized military overflights and base access generally (the extraordinary
number of over thirty-two thousand (32,000) military overflights of Greece
occurred during Desert Shield/Desert Storm),
(5) joined the coalition forces and sent two naval frigates to the Persian Gulf,
and offered air combat patrols and medical facilities
The Greek merchant marine played a substantial role in the movement of cargo to the
Persian Gulf for the US and allied forces The Greek merchant marine is an imponant asset for
US and NATO interests that is often overiooked in considering the relative strategic and military
values of Greece and Turkey
18 Operation Desert Shield/Desert Storm demonstrated that Turkey is fundamentally
irrelevant for protecting the oil resources in the Persian Gulf and of little value for US national
security interests in the present post-Cold War, post-Persian Gulf era.
Gulf is:
400
The war proved that what is necessary for the protection of oil resources in the Persian
(1) the cooperation of the Gulf states with the U.S. by authorizing U.S air
and land bases in those countries, not in Turkey,
(2) the use of the NATO naval base at Suda Bay, Crete;
(3) the use of the British bases in Cyprus, and
(4) the use of the U.S. naval base and facilities in Diego Garcia in the Indian
Ocean.
David C Morrison, in a comprehensive article, discussed in detail the US base facilities
in the Persian Gulf countries. (See NationalJournal, March 23, 1991, at 675.)
19 Turkey's foreign agents now try to justify aid by saying Turkey can be influential
regarding the new southern republics of the former US S.R. That argument is irrelevant on the
question of aid to Turkey Turkey will pursue its interests regarding these new nations with or
without U.S. aid. Secondly, the U.S. does not need an intermediary with these new nations
Thirdly we do not need to create a new Ottoman Empire in that region or build up another
potential Khomeini or Hussein The Turkish government actually boasted in an ad in the April 29,
1992, Wall Street Journal that it could become a "regional superpower: the most influential
nation in a vast area stretching from the Dalmatian coast to the borders of China " (See Rossides.
"Turkish Deja-Vu", American Orthodoxy. Ethics and Public Policy Center, Winter, 1993, page 9 )
The idea that Turkey could serve as a model for the former Soviet Republics in Central
Asia is not shared by area specialists Bamett Rubin, Director of Columbia University's Center for
the Study of Central Asia, states that:
the main obstacle to intelligent policy making in Central .-^sia is the repetition of
the cold war pattern of looking for a threat and for a partner against that threat--
and then finding that the partner has a regional agenda that isn't yours At the
moment, the new threat perception is some kind of Iranian fundamentalism and our
partner is so-called secular Turkey I think that the Central Asian nations are not
going to be the passive recipients of somebody else's models (jV. K Times, Mav
31, 1992, page 16 col 2)
Another Columbia Center professor, Edward Allworth, said that making Turkey the model
was a "simple-minded solution to a very complex problem " (Ibid )
Senator Dennis DeConcini (D-AZ) praised Secretary Baker for opening embassies in the
Central Asian republics but "he is concerned that Washington is listening too closely to fears of
Islamic revivalism voiced for political reasons by old-guard communists still in power in several
states " He "is also critical of the Administration's decision to meet the threat of Islamic militancy
through a policy of encouraging Turkey as a model for Central Asia " Senator DeConcini stated
"Turkey has immense problems, including in human rights " (A'. Y Times, May 3 1 , 1992)
401
Actually, pan-Turkism is a regional threat. Shireen T Hunter, Deputy Director of Middle
East Studies at the Center for Strategic and International Studies, states that a major regional
"phenomenon is the reemergence of extreme and potentially irredentist and expansionist
nationalisms, most notably pan-Turkism" Hunter adds: "If continued unchecked, or worse, if
consciously or unconsciously encouraged by Western policies devised for the expediency of the
moment, such ideas could become sure recipes for regional conflicts " (15 Washington Quarterly,
at 58, 1992.)
Turkey's continuing human rights violations against its Kurdish and Greek minorities in
Turkey and its aggression in and occupation of almost 40% of Cyprus does not qualify it to be
promoted as a model for any new nation in Central Asia.
20. Cyprus, through the use of the British bases in the British Sovereign Base Areas in
Cyprus, the granting of overflight rights, base access and transit assistance, was more important to
the success of Desert Shield/Desert Storm than Turkey
Cyprus provided substantial support for Desert Shield/Desert Storm Cyprus gave
immediate and strong support for the US condemnation of Iraqi aggression and gave full and
strong support for all of the United Nations resolutions on Iraq
Cyprus authorized military overflight, transit assistance and base access United States
and allied planes used Cyprus airports for flights related to the war effort.
The British bases in the British Sovereign Base Areas provided operational, logistical,
communications, and command support for British and allied forces from August 2, 1990 on a 24-
hour-a-day basis, and were and are more useful than all of the bases in Turkey
Cyprus played an important role at a meeting of the foreign ministers of non-aligned
nations in Belgrade, Yugoslavia on February 12, 1991, in blocking a resolution that criticized the
manner in which the United States was conducting the Desert Storm war
The Cyprus merchant marine played a substantial role in the movement of cargo to the
Persian Gulf for the coalition forces
21 The Iraq/Kuwait precedent should be applied to Turkey/Cyprus There is no legal
diflerence between Iraq's aggression against Kuwait and Turkey's aggression against Cyprus and
the Tactual situation is remarkably similar The key factual difference is that Kuwait has oil
and Cyprus does not
As a matter of law, Iraq/Kuwait and Turkey/Cyprus are the same Both Iraq and Turkey
violated the United Nations Charter article 2(4) which prohibits the use of threat offeree to settle
differences Turkey's aggression has been compounded over a nineteen-year penod, a fact which
should weigh heavily against Turkey
Cyprus is the acid test of the New Worid Order Will we apply the rule of law to friend
and opponent alike or will we continue the double standard for and appeasement of Turkey''
402
Failure to apply the rule of law to Turkey as it was applied to Iraq would give credence to
the charge that the Persian Gulf War was solely for access to Persian Gulf oil
Enforcing the United Nations Charter provisions and General Assembly and Security
Council resolutions on Cyprus against Turkey would demonstrate that the era of a double
standard on the rule of law and aggression for an ally is over. It would add the important
ingredient of credibility to our efforts in the Persian Gulf and elsewhere for a New World Order
The precedent value for the rule of law in international fairs, added to the Iraq/Kuwait precedent,
would be highly significant.
22. The United States, through the actions of the then Secretary of State Henry Kissinger,
bears a major responsibility for the tragic events of 1974. The New York Times in 1974
characterized Kissinger's policy as having "encouraged Turkey to intervene on the island" and
"illegal appeasement of Turkish aggression." {jNew York Times, Sept. 14, at 28, col 1.)
Thank you Mr. Chairman and Members of the Subcommittee.
403
SUPPLEMENTAL QDE8TIOHS SUBMITTED BY
THE SUBCOMMITTEE OH EUROPE AMD THE MIDDLE EAST
TO THE DEPARTMENT OF STATE
AMD RESPONSE THERETO
MAY 11, 1993 HEARING ON U.S. FOREIGN ASSISTANCE TO EUROPE
FOR FY 1994
I. CENTRAL AND EASTERN EUROPE QUESTIONS
A. GENERAL QUESTIONS
QUESTION l:
What has been the record of U.S. and Western investment in
Eastern Europe?
— Which countries have attracted the most outside investment?
Which industries and/or sectors have attracted the greatest
investment?
Which Western countries have led the way in investing in
Eastern Europe?
Are German firms the most involved in these countries?
What has been the record of U.S. investment?
How do you account for the relative lack of interest among
U.S. investors in this part of the world?
ANSWER l: Central and Eastern Europe (CEE) has attracted
almost $7 billion in foreign investment. The Northern Tier
(Poland, Hungary, Czech Republic and Slovakia) accounts for about
80% of foreign investment in CEE. Hungary, with nearly $4
billion, has over 60% of the total. Czechoslovakia has about
$1.7 billion, with $1 billion of the total in the Czech Republic.
Poland has about $850 million. In the Southern Tier (Albania,
Bulgaria, Romania, former Yugoslavia), Romania has around $270
million and Bulgaria has $60 million.
Manufacturing accounts for roughly 50% of foreign
investment. The automobile industry is the primary focus for
Western investors and has received $1.4 billion, about 20% of
total foreign investment in the region. Services account for
about 22%, and construction for 10%. The major sources of
foreign investment in CEE are firms in Germany and the U.S., each
with about 23% of the total. Other significant sources of
capital are Austria, France, Italy and Switzerland.
U.S. firms are significant investors in CEE. U.S. firms
have the largest share of foreign invest.nent in Hungary and the
second-largest in Poland and the Czech Republic. Where U.S.
404
firms have been hesitant, it generally has been because of
political uncertainty, unclear investment or environmental
liability laws, or lack of implementation of key economic reform
measures.
QUESTION 2:
What has been the record in Eastern Europe of progress in
the area of privatization?
Is Poland, where the private sector now accounts for
nearly 50 percent of GDP, the largest success in this
area?
What has been the record in other countries: Hungary,
the Czech Republic, the Slovak Republic, Bulgaria,
Romania and the Baltic States?
ANSWER 2: In the CEE countries, the private sector accounts
for an increasing share of output and employment primarily due to
new business formation, privatization of small enterprises, and
the decline of the state sector. The private sector accounts for
about 50% of output in Poland, 35-40% in Hungary, 30% in
Bulgaria, and 25% in Romania, the Czech Republic and Slovakia.
After certificates from the first wave of voucher privatization
have been distributed, the share in the Czech Republic will
approach 50%, and will be slightly lower in Slovakia. The
private sector is concentrated in the retail and service sectors,
although there has been some increase in the private sector's
share of industrial output in the Northern Tier countries.
Czechoslovakia implemented an ambitious voucher plan
involving privatization of about 3,000 firms in two waves.
Shares for companies privatized in the first wave currently are
being distributed to the public. The Czech Republic intends to
continue with the program and implement the second wave this
summer. Slovakia, however, plans to emphasize individual sales
rather than voucher privatization in order to maximize revenue.
Hungary's privatization program has been proceeding slowly,
with about 20% of 1,600 state firms having been privatized. The
Hungarian Government is considering a voucher program to
accelerate privatization of the remaining firms.
Poland has privatized abut 12% of its large state-owned
enterprises. In May, Poland's parliament passed a mass
privatization bill. The bill will create 10-12 professionally
managed funds to privatize about 600 large firms.
Romania passed a privatization law in 1991. Under the law,
30% of the shares in firms to be privatized were transferred to
public ownership funds and 70% to a state ownership fund which
will divest 10% of its assets each year. Certificates of
405
ownership in the public ownership funds have been transferred to
the public. Less than 50 firms have been privatized, however.
Bulgaria established a privatization agency in 1992 and
plans to privatize 50% of industry by 1995. To date, only two
firms have been privatized. A voucher system is under
consideration.
The Baltic States have privatized a large share of farmland,
housing and small shops. Privatization of large enterprises has
proceeded more slowly. Estonia is implementing a privatization
program modeled on the German Treuhand system. Lithuania is
developing a system for large scale privatization but is still
addressing claims of former owners. Latvia's privatization
effort is delayed by political deadlock over the status of the
ethnic Russian minority.
B. COOMTRY QUESTIONS
Romania
QUESTIOH l:
The major issue in U.S. -Romanian relations is the
restoration of MFN status for Romania.
Does the Administration plan to ask for a waiver of MFN
restrictions on Romania this year?
Has demonstrable progress been made on the considerable
humanitarian problems remaining in Romania including
treatment of the large Hungarian minority, press freedom and
the plight of the tens of thousands of orphans?
Can U.S. -Romanian relations move forward without MFN status?
ANSWER l:
Romania complies fully with the freedom of emigration
requirements of the Jackson-Vanik amendment to the Trade Act of
1974. The Administration supports the extension of MFN status to
Romania as quickly as possible, and will present both a
recommendation to continue Romania's Jackson-Vanik waiver and the
pending U.S. -Romania trade agreement to Congress for its
consideration in the near future.^
Romania has made vast progress on human rights and
humanitarian issues since the fall of the Ceausescu regime,
particularly since late 1991 when the new democratic constitution
was approved. The problems that remain are those confronting
other Eastern European states: economic dislocation, weak
institutions and attempts to inflame and exploit nationalist
tensions for local political reasons.
406
Last September's parliamentary and presidential elections
met international norms. The Romanian press is free and
vigorous. New private radio and television stations have been
licenses.
Basic human rights are respected, including for ethnic
Hungarians. Ethnic Romanians, the majority population in
Transylvania, sometimes equate the ethnic Hungarians' desire for
separate, ethnically-based local administration and separate
schools with the call of a small number of radical Hungarian
nationalists for the return of Transylvania to Hungary. We
believe that the danger posed by rival nationalisms can be
reduced by regular dialogue, and welcome the initiative of the
Romanian government to establish a Consultative Council of
National Minorities.
Romanian orphanages have improved dramatically since 1990
with Western assistance. However, the economic hardships that
drove many parents to leave children, particularly the
handicapped, in such institutions continues.
A Congressional vote to reject MFN status would leave
Romania, now a functioning multi-party democracy, in the same
category as North Korea and Cuba and would be both unjust and
damaging to U.S. political and economic interests.
Rejection of MFN status would undermine the reform process,
strengthen extremists who oppose the Romanian Government's desire
for closer ties with the West, and seriously weaken U.S.
influence in Romania.
QUESTION 2:
In 1992, the IMF and the World Bank made grants of $440
million and $400 million respectively in furthering economic
reform and structural adjustment in Romania,
How does Romania plan to target the $500 million the IMF is
extending in 1993?
ANSWER 2:
Romania has been negotiating a 1993 program with the IMF.
Agreement is possible by June. Romania and the IMF terminated
both 1991 and 1992 stand-bys by mutual agreement due to the
failure of the Romanian government to meet the program targets,
although Romania was, in fact, close to meeting most IMF targets.
Inability to meet IMF targets is not uncommon in Central and
Eastern Europe.
Issues of contention in the current negotiations are the
size of the budget deficit, reform of the exchange rate
mechanism, price liberalization issues, and the pace of
407
structural reforms.
The Romanians are likely to utilize IMF resources to rebuild
seriously depleted foreign exchange reserves and for contingency
energy imports in the last quarter of 1993.
QUESTIOM 3:
What improvements have been made by the Romanian government
in the care and housing for the 80,000 orphans which are the
result of failed social engineering projects in the Ceausescu
era?
— Has the Romanian government been cooperative with U.S.
efforts to help these orphans?
ANSWER 3: After the 1989 revolution, it was discovered that
thousands of Romanian children, particularly the severely
mentally handicapped, were warehoused in medieval conditions,
without adequate beds, clothing, sanitation or medical treatment.
The post-revolution Romanian Government has cooperated fully with
the resultant international outpouring of assistance, both
private and governmental.
Conditions in hospitals, special schools and homes for
abandoned children have improved dramatically. Buildings have
been refurbished, institutions are heated, children are
adequately fed and clothed and, most importantly, a new culture
of care-giving has been created through training and assistance
by foreign volunteers. Though many of the resources are donated
from abroad, the Romanian Government has diverted its own scarce
resources and hired additional staff for these institutions.
Bulgaria
QUESTION:
What is the status of economic reform in Bulgaria?
Is privatization going ahead?
What reforms have been carried out to the agricultural
sector?
What areas are being targeted by U.S. assistance efforts?
ANSWER: Privatization is moving ahead slowly against a
backdrop of turmoil and personnel changes in the Bulgarian
Privatization Agency. Only a handful of state enterprises have
been privatized to date. The first large firm — a corn
processing enterprise — was privatized through an equity buy-in
by a Belgian firm, which had bid against an American company for
408
the deal. Approximately 100 enterprises had earlier been
targeted for privatization in 1993, but this goal currently seems
unrealistic. A voucher-oriented mass privatization scheme is
also under consideration. In contrast to the lumbering top-down
privatization program, grassroots private sector development is
proceeding briskly. The program for restitution of nationalized
private property, which started in 1992, provided the major
impetus to small scale private sector growth. Precise data are
unavailable, but by some estimates the private sector now
constitutes 30% of GDP, 50% of retail sales, and 20% of personal
income .
The agricultural Land Law of February 1991 established the
legal foundation for the return of agricultural land to private
hands. Significant progress is now visible — with most coming
since the beginning of 1993 — as over 22% of agricultural land
has been returned to private hands (through April) .
U.S. assistance to Bulgaria is targeted in seven priority
areas:
— completion of key legal reforms;
— privatization and restructuring of the financial
sector;
— privatization and restructuring of industry;
— support to private sector development;
— support to private agriculture;
— strengthening of municipal governance; and
held with institutionalizing two U.S. -sponsored
educational institutions.
Albania
QUESTION:
Upheaval in the former Yugoslavia has nationally had
profound impact in Albania which shares a common border with
three former entities off Yugoslavia. Albania is particularly
sensitive to the plight of the 90% Albanian majority in the
Serbian province of Kosovo,
If violence breaks out in Kosovo between Serbs and
Albanians, do you believe there is a realistic chance
that Albania would be drawn in?
— What military resources does Albania have that could
affect the situation?
To deter the Serbs, U.S. and NATO naval forces are now
operating at Albanian request in Albanian territorial
waters. How long do you expect these naval forces to
remain? What is their role?
409
ANSWER:
We are very concerned about the possible spillover of the
Bosnia crisis. We are also concerned that a violent outbreak in
Kosovo could involve other countries in the region. Given the
strong ties between Albanians in Albania and ethnic Albanians in
Kosovo, we consider that there is a danger that Albania could
become embroiled if violent upheaval were to begin in Kosovo.
Albania's military resources are modest in terms of
personnel, organization and equipment. We do not believe that
Albanian forces have, at this time, either an offensive posture
or offensive capabilities.
The NATO/WEU Multilateral Interdiction Force (MIF) is tasked
with tracking and interdicting possible violators of
international sanctions against the former Yugoslavia in the
central and southern parts of the Adriatic Sea. It operates in
international waters, and, with Albanian government cooperation,
in Albanian waters, to intercept shipping bound for Montenegrin
ports.
We anticipate that the MIF, which includes U.S. naval
assets, will remain on station to enforce sanctions as long as
those sanctions remain in place. The United States is committed
to being part of this important international effort.
C. U.S. ASSISTANCE
(1) The Fiscal Year 1994 Request
QUESTION 1:
Your request for Central and Eastern Europe is $409 million
— an increase of $11 million from Fiscal Year 1993
appropriations?
Is that the only request for Eastern Europe?
What I would like is a total figure for all assistance
being requested for Fiscal Year 1994 for Eastern
Europe?
Are there other requests beyond the $409 million
figure?
How much are you requesting for Eastern Europe through
USIA for FY 1994?
— How much for humanitarian assistance?
— How much for continuing efforts with neighboring states
or improved enforcement of UN sanctions against former
410
Yugoslavia?
— How much will you request, if any this year, for the
European Bank for Reconstruction and Development?
~ How much are you requesting for IMET training in these
countries?
Are there any other requests for this region?
ANSWER l: The request for $409 million in SEED funds for FY
1994 will be only one component of overall U.S. commitments to
central and Eastern Europe next year. Traditionally, OPIC,
Eximbank and TDA have been active in the region, and the U.S. has
also extended various food and feed grain assistance as well as
credit guarantees. Most of these programs, however, are not
earmarked in advance by country or region, so it is hard to
predict where the needs will be and what the levels to be spent
in FY 1994 in central and Eastern Europe will be. Preliminary
P.L. 480 country allocations are being developed and will be
provided to Congress. USIA requested $48 million in FY 1994
appropriations for programs in central and Eastern Europe.
Regarding humanitarian assistance, our preliminary estimate is
that we would spend $8 million of SAI (SEED) funds on selected
humanitarian assistance in central and Eastern Europe in FY 1994.
Other amounts, such as disaster assistance through OFDA and food
assistance, will be programmed according to need.
We should note that the FY 1993 SEED appropriation was $400
million, so the request is $9 million over last year's level.
A recent, programming of existing appropriations has met
immediate needs in this area, and no additional funds have been
requested for FY 1994.
In FY 1993, we reprogrammed $950,000 from the Peacekeeping
Operations Account for the purchase of river patrol boats, spare
parts and related training for Romania and Bulgaria. We have
also allocated $500,000 under the SEED program for sanctions-
related technical assistance to the front-line states of Romania,
Bulgaria, Macedonia and Hungary. Additional funding for
technical assistance to the front-line states and Sanctions
Assistance Monitor (SAM) support was obtained via transferring $5
million from the Foreign Military Financing (FMF) Account to the
Peacekeeping Operations Account.
We expect to meet anticipated needs in this area in FY 1994
with resources other than SEED funds, but obviously this depends
on how long the UN sanctions are left in place.
Treasury Secretary Bentsen has requested $70 million for the
EBRD in FY 1994, although discussions between Treasury and the
Congress on this figure continue.
411
For FY 1994, we are requesting IMET funding as follows:
$100,000 for Romania; $150,000 each for Albania, Estonia, Latvia
and Lithuania; $300,000 for Bulgaria; $350,000 for Slovakia;
$500,000 for the Czech Republic; and $700,000 each for Hungary
and Poland. For more details, see Question 3 which deals
specifically with IMET.
We have noted the major components of our assistance above.
In addition, the Administration has requested $4.5 million for
science and technology cooperation in central and Eastern Europe
for FY 1994. The Peace Corps is currently projecting a request
of $8.25 million for its programs in central and Eastern Europe
in FY 1994. In addition, other programs, such as the Non-
Proliferation Fund and refugee assistance carried out by the U.S.
contributions to international organizations, will likely have
activities in central and Eastern Europe. Budget requests for
these programs, however, are not broken down by country or
region.
QUESTION 2:
As you are aware, the Committee has not yet received a
Congressional Presentation Document (CDP) for the Fiscal Year
1994 foreign assistance request.
I wonder if you would comment for us then on your plans for
spending the $409 million requested for Central and Eastern
Europe.
— How much do you plan to spend for the development of
democratic institutions?
How much for improving the quality of life?
— How much to provide economic restructuring?
— How much for audits, evaluations and other program
support?
Do these continue to be the far categories by which
spending in Central and Eastern Europe is organized?
What, if any, funding outside of these four categories
do you plan for FiscaT Year 1994?
ANSWER 2: We have preliminary figures and will include
final numbers in the AID Congressional Presentation Document
(CPD) to be submitted shortly. For now, we anticipate committing
in FY 1994 $40.9 million to democratic institutions including
public administration, $286.2 million to economic restructuring
activities, and $75.8 million for improving the quality of life.
Approximately $6 million will be devoted to audits, evaluation
and other program support.
412
_ We believe that these categories remain appropriate for our
program in Eastern Europe and are broad and flexible enough to
take into account changing circumstances and priorities in each
recipient country.
QUE8TIOH 3:
In FY 1992, we funded small IMET programs in Poland, Hungary
and then-Czechoslovakia?
— What IMET funding did we provide to Eastern European
countries in FY 1993 and for which countries?
What are you requesting for FY 1994 and for which
countries?
Will we provide IMET to both the Czech Republic and the
Slovak Republic in FY 1994?
Did we provide IMET to Bulgaria in 1993?
What will these small IMET programs accomplish?
How many officers will you likely be able to bring here
with such small funding?
— What training would you seek to promote?
ANSWER 3: In FY 1993, we provided IMET funding for the
region as follows: Albania, $75,000; Bulgaria, $250,000; Czech
Republic, $3 60,000; Hungary, $600,000; Poland, $600,000; Romania,
$75,000; Slovakia, $180,000; and $75,000 each for Estonia, Latvia
and Lithuania.
For FY 1994, we are requesting funding for the same
countries. The levels are: $100,000 for Romania; $150,000 each
for Albania, Estonia, Latvia and Lithuania; $300,000 for
Bulgaria; $3 50,000 for Slovakia; $500,000 for the Czech Republic;
and $700,000 each for Hungary and Poland.
In FY 1993, the following number of students for the region
are participating in IMET: Albania, 5; Bulgaria, 15; Czech
Republic, 18; Hungary, 28; Poland, 39; Romania, 8;. Slovakia, 9;
Estonia, 12; Latvia, 13; and Lithuania, 5.
These IMET programs are designed to promote the reshaping of
these former Warsaw Pact countries' armed forces to better serve
their new roles in defense of democracy and the human rights of
their citizens. A particular focus of the programs will be
civilian control of the military.
Programs for each country emphasize English-language
instruction and English-language instructor training, as well as
413
professional military education training at the basic and
advanced levels. Through the Expanded IMET program, emphasis is
placed on training civilian and military personnel in pursuit of
the following objectives: (l) to contribute to responsible
defense resource management; (2) to foster greater respect for
and understanding of the principle of civilian control of the
military; and (3) to improve military justice systems and
procedures in accordance with internationally-recognized human
rights .
(2) iBplementation of U.S. Assistance
QUESTION l:
I understand that Poland has recently embarked on a
large-scale bank reform program which draws on $400 million in
World Bank loans and $657 billion from the $1 billion Currency
Stabilization Fund established by the major western donors for
Poland in 1989. The $199.1 million U.S. grant contribution to
the Stabilization Fund has been shifted to the "Polish Bank
Privatization Fund".
— How was the assessment made that Poland had graduated
from the need for a Stabilization Fund and that this
money could be shifted to other uses?
Could you explain to the Committee exactly how the
"Polish Bank Privatization Fund" operates?
— To what uses is the western and World Bank money put
and over what period of time?
— What, if any, other uses does Poland contemplate for
the remainder of the Stabilization Fund?
ANSWER 1: The decision that the money in the PSF could be
shifted to other uses was made by representatives of the 18
participant countries, the IMF and the IBRD. The decision was
based on Poland's progress in implementing macroeconomic reform.
In addition, in October 1991, Poland introduced a crawling-peg
devaluation of the zloty. This also obviated the need for a
currency stabilization fund.
The Polish Bank Privatization Fund (PBPF) was established
effective January 4, 1993 by separate bilateral agreements
between each of the participant countries and the GOP and a
multilateral memorandum of understanding. The fund operates
under direction of an operating committee composed of participant
government representatives. The U.S. is represented by our
Executive Director to the IMF.
The PBPF is designed to support a comprehensive plan of
restructuring banks and enterprises and recapitalizing and
414
privatizing banks. Recapitalization of banks will be through
issuance of long-term government securities. To be eligible for
recapitalization the banks must segregate bad loans; establish
work-out departments to manage those bad loans; and present an
acceptable action plan to the GOP to deal with the bad loan
portfolio.
There currently is $675 million committed to Poland's bank
reform program. $555 million has been or will be contributed to
the PBPF. $120 million ($100 million from France and $20 million
from Austria) has been given directly to the GOP to support bank
reform.
The GOP may draw upon the PBPF after a bank has been
privatized — subject to compliance with its IMF arrangement and
implementation of the IBRD's Finance Sector Adjustment Loan
(FSAL) , among other conditions — to service principal and
interest on the government securities issued to recapitalize the
banks. Prior to privatization, these costs will be met by the
GOP.
The PBPF will terminate at the earliest on January 20, 1995
if no funds have been drawn down, or when the funds are fully
drawn, or January 20, 2003.
In addition to the PBPF and GOP resources, the IBRD has
approved a $4 50 million loan to support bank reform in Poland.
The loan will be used to support strengthened bank supervision
and to deal with debt overhang of state-owned enterprises.
Funds from the PSF not committed to bank reform will be used
in accordance with the bilateral agreement between Poland and the
donor government.
QUESTION 2:
What progress has Poland made in banking reform?
— What are the key elements of its banking reform
package?
ANSWER 2: As part of a comprehensive enterprise and
financial sector restructuring program, the GOP is implementing
plan to recapitalize and privatize its banking sector. The
program will be supported by a $450 million IBRD loan, GOP
budgetary resources, and resources reallocated from the Poland
Stabilization Fund (PSF) . A principal objective of the program
is to resolve the problem of bad debts held by Poland's nine
"commercial" banks, which affect the viability and market-based
performance of the banks and debtors alike.
The key element of the program is a Chapter 11-like
operation during which banks and debtors attempt to restructure
415
the bad debt of enterprises which the banks perceive as viable.
This may include rescheduling of interest and/or repayment terms;
debt cancellation; debt/equity swaps; and recapitalization of the
banks through issuance of long-term government securities. To be
eligible for recapitalization the banks must segregate bad loans;
establish work-out departments to manage those bad loans; and
present an acceptable action plan to the GOP to deal with the bad
loan portfolio.
In addition, the GOP, in coordination with the IBRD and
bilateral donors, is implementing programs to strengthen bank
supervision and to develop skills needed in commercial banking.
Nine "commercial banks" have been split off froir. the
National Bank of Poland (NBP) and turned into joint stock
companies owned by the GOP. Most of the banks have twinning
relationships with foreign banks which provide technical
assistance in various areas to prepare the banks for
privatization. The foreign banks do not have a financial stake
in the Polish banks.
The goal is to have the banks privatized by the end of 1996.
Two are scheduled to be privatized in 1993. One has already been
privatized and the second is planned for September 1993. Two or
three banks are to be privatized in 1994 and the remainder by the
end of 1996.
The first privatization, Wielkopolski Kredytowy Bank, was a
resounding success. The EBRD bought 28% of the shares; 27.2% of
the share were sold to the public in two stages. On April 13-23,
large investors bid for 7.2% (460,000 shares) and on April 27
small investors could buy 1.28 million shares. Large investors,
including the Polish-American Enterprise Fund, placed orders for
13 times the number of shares available to them. Each bidder
received 9.2% of his bid. Shares available to small investors
sold out immediately.
(3) Enterprise Funds
QUESTION l:
When the initial Funds were started in 1989-90, they were to
be capitalized over a three-year period. For several of the
Funds this process is nearing completion.
— Has the Administration undertaken any formal or
informal review and evaluation of the several
Enterprise Funds?
— If so, what are your findings?
— Has the Administration decided whether further federal
funds beyond the initial capitalization is desirable?
416
How long should these Funds continue?
ANSWER 1: AID and the Enterprise Funds agreed that the
Funds would be fully evaluated in FY 1994, as part of AID's on-
going evaluation which commended in FY 1993 of different projects
in Eastern Europe. However, AID and State conduct six-month
reviews of all Enterprise Funds, which include a discussion of
their portfolios, use of technical assistance grants,
administrative costs and structure and likelihood of eventual
sustainability. The AID project officer also conducts periodic
site visits to the Funds' U.S. and European operations, including
trips to various Fund investments. The AID Inspector General
conducts quality control reviews of the non-federal audits of the
Funds carried out by CPA firms.
We believe the Funds are meeting expectations in terms of
assisting directly small and medium-sized new business formations
and providing much-needed loans and equity financing in central
and East European countries.
The Administration has not received any formal requests from
the Enterprise Funds for additional U.S. Government
capitalization. While we would consider any such requests, we do
not at this time anticipate additional capitalization for the
existing Funds. From the time of the initial grants, we have
urged the Funds to achieve sustainability as quickly as possible
through both wise investments of U.S. Government capital and the
attraction of outside capital — and we are pleased that all four
Funds are actively working toward that goal. We have also agreed
to provide (and notified Congress accordingly) all four Funds
with grants to be used for technical assistance activities on top
of their announced capitalization.
Although the U.S. Government capitalization of the existing
Funds is nearing completion, the Funds will continue to use their
capital on a revolving basis for private sector development. The
length of time the Funds will need to operate will vary,
depending on the circumstances in the particular host country and
the nature of the investment portfolio which each Fund develops.
Roughly, we anticipate cessation of new investment activities ten
to fifteen years from the date of the initial grant.
QUESTION 2:
Questions have been raised as to who — the boards of the
Enterprise Funds or the U.S. Government — should make the
determination of when and how the Enterprise Funds should be
liquidated?
Does the Administration have a position on this?
Given the close identification in Eastern Europe of the
Enterprise Funds with the U.S. Government, is it wise
417
to permit the Funds to continue to operate once U.S.
Government participation is over?
— At some point, does there not exist a real tension
between competing views of the Funds as both extensions
and vehicles of U.S. government assistance and
commercial, money-making operations in their own right?
ANSWER 2: The Administration has informed the Chairman of
the Enterprise Funds of, and they have agreed with, the need to
give the Administration (after consultation with Congress) sole
authority to set the date (the "termination date") to cease all
new commitments/ investments and commence orderly sale of assets
for each Fund. We have proposed that this take place within the
following parameters: the termination date will occur no earlier
than 10 years from incorporation and no later than 15 years from
incorporation, unless there is mutual agreement between the
particular Funds and the Administration (after consultation with
the Congress) .
The Administration will notify the Funds of the termination
date at least one year before that date, having consulted with
the Funds prior to such date of notification. This will allow
time for the Funds to proceed with new commitments/ investments
already in process. No new commitments or investments will be
made after the termination date, and orderly sale of assets will
begin by that date.
In extraordinary circumstances, the Administration reserves
the right to terminate the Funds for cause or foreign policy
reasons, using the language in AID'S grant agreement as guidance.
This would be invoked only under extreme conditions.
By the termination date, the Fund shall present for internal
Administration use and approval a termination plan and target
date by which time the orderly sale of assets should be
completed. The timeframe is subject to extension by the
Administration for portfolio or developmental considerations.
After notification by the Administration of the termination date,
the Funds will not transfer assets to subsidiaries or other
organizations to avoid liquidation.
Assets derived from sales will be distributed either to (a)
a non-profit entity or entities that assist the beneficiary
country, (b) the U.S. Government, or (c) some combination of (a)
and (b) . The Funds may propose the mix, but the Administration
will decide. Assets will be distributed as they become available
(rather than on a lumpsum basis when dissolution is complete) .
The Chairmen of the existing Funds will ask their Boards to
amend their articles of incorporation accordingly. This formula
will be included in the documents of any new Enterprise Funds
proposed.
418
Completing our funding commitment to the Enterprise Funds
does not mean the U.S. participation is over. As we believe that
the need for these Enterprise Funds will continue beyond our
funding commitment to them, we plan to continue our monitoring
and six-month reviews throughout the life of the Funds. The
Boards and managements of the Funds understand the need to
continue close cooperation and consultation with us. Although
the length of time the Enterprise Funds will operate will vary
depending on the circumstances in each country, we anticipate
that there will be a need for them for ten to fifteen years from
the dates of their incorporation. We hope that by the time the
domestic capital markets and banking sectors in each country will
be sufficiently developed to permit the mobilization of private
capital for private sector development. Currently, however, in
all five countries where we have Enterprise Funds there is still
a wide gap between the needs of the private sector and the amount
of capital available through the domestic financial markets, and
we expect that this gap will continue to exist for some time.
The Enterprise Funds can help fill that gap, both through direct
investments and as examples.
The Funds are organized as non-profit organizations, and any
"profits" they make are sued for more investments or loans to
promote private sector development in the countries in which they
operate. Their revenues, then, do no benefit shareholders but
rather the entrepreneurs in their recipient countries. Bringing
private sector enterprise to bear on private sector development
was, in fact, the concept of the Enterprise Funds envisioned in
the 1989 SEED Act. That said, once the domestic financial
markets are sufficiently able to mobilize capital for economic
development, we anticipate terminating the Enterprise Funds as a
U.S. Government assistance mechanism.
QUESTIOH 3:
Despite generally positive experiences with the Enterprise
Funds, in recent weeks criticism of the Hungarian-American
Enterprise Fund (HAEF) has been made public. Problems and
potential scandals exist in several areas:
o excessively high salaries for executives of the
Fund ;
o the establishment of a wide-ranging related
business entity, called EurAmerica, beyond the
control of the Administration and Congressional
oversight;
o inadequate book-keeping;
o the hasty reappointment of members of the Board of
Directors (the same with the Polish Fund) for new
three-year terms just prior to the Clinton
419
Administration taking office; and
o operations far beyond the borders of the target
country.
Could you tell us about this rather nebulous business
entity called EurAmerica and its exact relationship to
the HAEF?
Is it true that the HAEF provided EurAmerica with $4
million to get its operations started?
Why are its principle officers receiving such excessive
salaries?
— Since the Hungarian Fund is intended to operate only
within Hungary, how can EurAmerica legitimize its
planned activities way beyond Hungary to include
Tatarstan in Russia?
What are the problems with the inadequate book-keeping?
Is this a serious problem?
Why the haste in reappointing the Board of Directors of
the Hungarian and Polish Funds just prior to the
Clinton Administration taking office?
ANSWER 3: We are submitting for the record the April 2
letter and attachment from the President of the Hungarian-
American Enterprise Fund to the Subcommittee on Foreign
Operations of the Committee on Appropriations. Among other
details, this letter explains that EurAmerica is a $4 million
investment of the HAEF and provides the rationale and structure
of the compensation package of EurAmerica principles. (This
investment did not affect the salary levels of HAEF staff and
management) . The letter also argues that the role of EurAmerica
and HAEF remain distinct: EurAmerica does not make investment
decisions on behalf of HAEF and does not participate in such
decisions. It should also be noted that EurAmerica cannot invest
appropriations intended for Hungary (through the HAEF) outside of
Hungary. While EurAmerica has sought clients for its services
elsewhere, it claims that the vast majority of its services are
and will continue to be within Hungary. The HAEF, as noted in
the April 2 letter, believes "that Budapest has the potential to
become a major financial center ^or Eastern Europe, and this is
one small step in that direction."
As envisaged in the SEED Act and subsequent legislative
history, the Enterprise Fund made this investment without prior
review or consultation with the Administration. The HAEF
reported on this investment in materials for the six-month
reviews with State and AID and in the 1992 annual report, also
submitted to Congress. EurAmerica did not involve any
restructuring or reorganization of the HAEF and its staff. At
420
the same tine, however, EurAmerica is distinctly different from
typical HAEF investments in that it is 100% owned by the HAEF and
the management did not invest any of their own. capital in the
venture.
We share Congress' concern about some of the implications of
the HAEF investment in EurAmerica. While we do not want to place
bureaucratic restraints on the HAEF that would inhibit it from
carrying out its objectives, we believe that the Board and
management should not only exercise solid business judcpnent when
making investment decisions but should be attentive to the
broader implications of their actions. The HAEF Board and
management must recognize that the portfolio of a publicly funded
investment fund will be subject to a higher level of political
scrutiny than private capital. We are asking the Board of the
Fund to address the problems of EurAmerica but also asking for
closer consultation and coordination with the Administration and
Congress on highly visible and potentially controversial
investments .
Regarding bookkeeping, the AID/IG completed a compliance
review of HAEF accounting practices in January 1993 and found no
major problems. We are not aware of a problem of inadequate
bookkeeping at the HAEF or the other Funds.
The three-year terms of the Board members of both Funds
expired in January 1993, according to the certificates of
incorporation of the Funds. The Boards were re-elected during
the annual meetings scheduled in accordance with those
certificates of incorporation and the laws of Delaware, where the
Funds are incorporated. As required by the certificates of
incorporation (which were vetted at State, AID and the Congress
in early 1990) , the Chairman of each Fund advised the
Administration, through phone calls to Secretary Eagleburger. We
agree that the timing, while coincidental, was not the best and,
understandably, raised eyebrows. If there are concerns about
practical implications of this timing on responsible management
of the Funds, we are available to discuss them with your staff.
We believe that the Boards would be responsive to any
Administration request regarding whether their continued services
are needed.
(4) Coordination and International Organizations
QUESTION l:
The IMF currently has programs on-going in Albania,
Bulgaria, Czech and Slovak Republics, Estonia, Hungary, Latvia,
Lithuania, Poland and Romania.
— Is this accurate?
I understand that as of December 1992, the two largest
421
borrowers — Hungary and Poland — were frozen from
further IMF borrowing due to non-compliance with
program performance requirements.
What are the problems between the IMF and these two
countries, largest believed to be the "top students" in the
group?
— Through what mechanism do we try to coordinate our
assistance programs with these countries with that of
the IMF?
Is the IMF a participant in the G-24 coordination
process?
ANSWER 1: The IMF currently has on-going programs with
Albania, the Czech Republic, Estonia, Latvia, Lithuania and
Poland. Bulgaria, Hungary, Romania and Slovakia are continuing
their discussions with the IMF for a program. Slovakia is
discussing with the IMF its eligibility for the IMF's new
Systemic Transformation Facility created to help countries
overcome balance-of-payment differences as a result of moving
from a command to a market economy.
Poland fell out of compliance with the terms of its three-
year IMF program in August 1991. On March 8, 1993, the IMF
approved a 12-month stand-by program for Poland. Hungary, which
fell out of compliance with its three-year IMF program in March
1992, has reached tentative agreement with the IMF for a new
program, pending parliamentary approval of the budget deficit
target required by the program.
We coordinate bilaterally in capitols and in Washington with
the IMF to ensure our projects are mutually supporting, and
through the G-24 process, in which the IMF participates.
QUESTION 2:
In September 1992, the EBRD joined the Polish-American
Enterprise Fund and private investors in creating the Polish
Private Equity Fund (PPEF) , a $150 million pool of capital for
equity investments and loans in Poland.
What is the purpose of, this Equity Fund?
— I understand the PPEF is designed to provide small
loans under $5 billion. Why can't these loans we
provided directly by the Enterprise Fund?
— How does it differ from the loan activities of the
Enterprise Fund itself or the EBRD?
— What has been the experience of the PPEF to date?
422
— Has anything similar to this been done elsewhere in
Eastern Europe?
How is the demand for loans of this size being met
elsewhere in the region?
ANSWER 2: The Polish Private Equity Fund (PPEF) provides a
vehicle to attract private and ERBD capital into Poland. In
creating the PPEF, the Polish-American Enterprise Fund (PAEF) put
up $50 million of its o%m capital to attract $50 million from the
EBRD and $51 million from private investors, including seven
leading U.S. pension funds. This is consistent with the SEED
Act, which encourages the Funds to attract outside capital in
order to help achieve sustainability, and the desires of the
Government of Poland, which has asked for help in attracting
additional foreign investment to promote private sector
development. The willingness of the private sector and the EBRD
to put substantial resources into the PPEF is a dramatic
indicator of the reputation of the PAEF in promoting private
sector development in Poland.
As noted in the PAEF's 1992 annual report (also submitted to
Congress) , the "Polish Private Equity Fund is a closed-end
investment fund established by the Enterprise Fund in November
1992. It seeks to achieve a superior rate of capital growth
through investment primarily in small and medium-sized private
sector enterprises in Poland... In most cases, both Funds will
participate in the same investments, with their percentage shares
based on the amount of capital that each has available to
invest. "
The PAEF already works almost exclusively in activities of
under $5 million — the same sector where the PPEF will
concentrate. This is an area of critical importance to the
development of the Polish private sector but one where other
investors have had difficulty working. That, in fact, is one of
the real advantages of the PPEF: PAEF experience and expertise
are used in directing other sources of capital to opportunities
in small and medium-sized enterprises. Because of constraints on
staff time, for example, the EBRD has a "floor" of $5 million for
its direct investments, and using the PPEF as an intermediary
permits EBRD resources to go toward smaller activities, where
there is tremendous need for capital in Poland. (Using PAEF
expertise should also promote faster disbursal of EBRD resources
to the new entrepreneurs). It is also unlikely that U.S. pension
funds would also look for opportunities in this sector, without
an intermediary of recognized experience.
As noted during the Closed Governors Session at the April
1993 EBRD Annual Meeting, it is extremely difficult for donors
and private investors to find and develop opportunities in the
small and medium-sized enterprise sector. All four of our
Enterprise Funds have concentrated in this area, and we hope
their experience plus the example of the PPEF will help
423
illustrate ways to direct capital to these entrepreneurs.
QUESTION 3:
The SEED Act Implementation Report for Fiscal Year 1992
indicated that the OECD established a Center for Cooperation with
Eastern European Economies in Transition in 1989. The U.S.
initially contributed $1 million to the establishment of this
Center and was seeking $3.7 million for OECD work in Eastern
Europe in calendar year 1993.
What is the role of this OECD Center?
How does it fit in with the activities of the EC
Commission which administers the G-24 coordination
efforts for Eastern Europe?
How does it fit is with the activities of the IMF, the
World Bank and other international organizations and
institutions?
Is the Center facilitating the coordination work of the
G-24 with technical assistance?
What is the status of extending OECD membership to any
of the new democracies in Eastern Europe, in particular
Poland, Hungary and the Czech and Slovak Republics?
ANSWER 3: The OECD's Center, which was established at the
request of the U.S., provides technical assistance to Eastern
Europe in microeconomic areas (privatization, labor market
reform, public management, environment, education, energy,
telecommunications) where the OECD is the multilateral
institution with greatest expertise and longest experience.
Participating in Center-arranged workshops, seminars and training
programs affords East European nations opportunities to learn
sound market practices from an organization whose membership
presents the model of economic development we want new
democracies to follow. Eastern European involvement with the
OECD also furthers the Western goal of integrating new market
economics into long-standing institutional structures for
developed nations.
In addition to providing technical assistance to Eastern
states, the OECD's Center administers the Partners in Transition
program, begun at the request of the U.S. in 1990 to help the
three Eastern nations deemed most advanced (Poland, Hungary and
the then-CSFR) reach OECD membership benchmarks. Partners
nations observe most OECD committees, receive yearly economic
reviews along the lines of those performed for member states, and
take part in many OECD activities for members.
Increases in SEED funding for the Center are principally due
424
to a four-fold increase in the number of East European
participants in Center activities over the past three years.
Bulgaria, Romania, Albania, Slovenia, Croatia, Latvia, Lithuania,
Estonia and Macedonia have joined the original Center
participants (Poland, Hungary and the former CSFR) and now attend
Center programs on a regular basis. (The twelve NIS are involved
through separate funding) . Establishing the Partners in
Transition accounted for much of the increase in Center costs
between 1989 and 1991. The split between the Czech Republic and
Slovakia in January 1993 necessitated extra spending so both
states could continue to enjoy Partners benefits.
Partners status was conceived of as an up-or-out path on
which participants would need to show progress toward OECD
membership criteria or cease involvement with the OECD. The
Czechs and Hungarians say they hope to qualify for full OECD
membership in the near future. In the meantime, Bulgaria,
Romania, Slovenia and Croatia have indicated interest in the
Partners program. Thus, U.S. Government financial commitments to
the Partners may not decrease upon Czech and Hungarian
"graduation" to full OECD membership.
As a multilateral organization, the OECD is not deeply
involved with EC Commission efforts to coordinate bilateral
assistance provided by G-24 nations to Eastern Europe. OECD
representatives observe G-24 meetings to exchange information on
bilateral programs, and the OECD makes available to the EC
information on its own technical assistance work. Since 1990,
the OECD has maintained a database of technical assistance
projects carried out by member states in Eastern Europe; the EC
Commission is on line and can access information gathered by the
OECD.
The U.S. and other Western states have made an effort to see
that the OECD undertakes only technical assistance activities it
is uniquely qualified to provide, and that its work does not
duplicate assistance offered by the IMF, World Bank and EBRD.
The OECD has generally been charged with microeconomic and
structural reform programs, while raacroeconomic advice and direct
financial assistance are the purview of the IFIs. The OECD has
undertaken joint projects with the IFIs in areas such as tax
training that have both macro- and micro-economic aspects.
The State Department explored funding options other than
SEED in 1991, 1992 and 1993: the Center now receives some funding
from the International Organizations budget. In future years we
will continue to explore non-SEED sources of support.
D. THE BALTICS
QUE8TI0H l:
An important element of U.S. assistance to the regional is
425
the establishment late last year of a Baltic American Enterprise
Fund on the example of similar Funds in other East European
countries.
— What is the status of this Fund? Is it up and running?
— What is the structure of the Fund? Have separate Fund
boards or financial review committees been established
for each of the three countries?
— What has been the response to the Fund in each of the
states?
ANSWER Xi Although we have sent notification to Congress
announcing our intention to obligate FY 1993 appropriations for a
Baltic-American Enterprise Fund, the Fund is not yet operational.
We hope to consult with you soon on the progress toward getting
this Fund up and running. We believe that, as in the case of the
Czech and Slovak-American Enterprise Fund, it is important that
the Fund maintain a presence both in terms of representation and
investment activities in all three Baltic States. Our embassies
in the Baltic States have told us that the lack of capital is a
key impediment to economic reform and development of the private
sector. The Enterprise Fund, when it becomes operational, should
play a significant role in addressing this need.
QUESTION 2:
Each of the three Baltic States has expressed strong
interest in increasing U.S. trade and investment.
What steps have been taken to expand Trade and
Development Agency (TDA) and OPIC programs in the
Baltic States?
— Has the U.S. opened commercial attache offices and
Business Information Centers?
Does the Administration consider the Baltic States as
promising targets for U.S. exports and investment or as
a gateway to Russia and other former Soviet states?
What is the level of U.S. private investment in the
three states?
ANSWER 2: Each of the Baltic States is eligible for TDA and
OPIC programs. OPIC led an investment mission to the Baltics in
the summer of 1992.
We have not established commercial attache offices in the
Baltics. There is an economic/commercial officer in each post
who is responsible for commercial activities. The posts are also
supported through the Partnership Program by commercial officers
426
in Helsinki, Stockholm and Copenhagen. In addition, there is an
information specialist in each post who provides commercial
information to the Eastern Europe Business Information Center.
The Baltics are potential markets for U.S. exports and
investment. However, we expect the great majority of their trade
to be with Nordic countries and the EC. The Baltics also are
potential gateways to the NIS because of their transportation
facilities, especially their seaports.
Private investment in the Baltics is modest but growing.
The U.S. accounts for perhaps 10% of it. In Estonia, U.S. firms
have committed or invested approximately $10 million. In Latvia,
U.S. firms have committed about $40 million, but only invested
about $1 million. In Lithuania, U.S. firms have committed about
$30 million but only invested $1 million.
E. THE FORMER YUGOSLAVIA AND THE BALKANS
QUESTION:
The President dispatched a 20 member humanitarian assessment
team to Bosnia in February-March 1993 and the team returned with
a series of recommendations ranging from possible military
actions to create safe havens for refugees to basic actions such
as improved medical care, provision of seed grain for planting
and care for refugees.
— What has been the Administration's response?
— Which' recommendations are being considered and
implemented?
— Are there sufficient unexpended or non-earmarked funds
to cover these activities?
ANSWER: All recommendations from the team's report have
been or continue to be reviewed at appropriate levels of the
Administration. Except where decisions have yet to be taken,
action has already been initiated to implement them. The
following status report addresses the recommendations in the
report's executive summary:
o Political/Military Issues
Safe Havens — forms of this option for protecting
innocent civilians have been considered at the highest
levels of the Administration, with a full airing of the pros
and cons. The most recent international approach to saving
lives in Bosnia-Hercegovina — the Joint Action Program —
includes a version of this option. The formula for its
implementation is now being actively debated in the UN.
427
Serb /Bosnian Obstruction of Relief — the U.S. has
expressed, in no uncertain terms and on numerous occasions,
its rejection of such unacceptable behavior, but both
Serbian and Bosnian Serb leaders. In part in reaction to
this behavior, we have led the world community to impose the
severely tightened sanctions regime now in effect against
Serbia and Montenegro under UNSCR 820.
Bosnian Croat Obstruction of Relief — the
Administration is engaged in an active dialogue with senior
Croatian officials in an effort to gain their cooperation in
curbing HVO blockage of humanitarian aid to Muslim areas of
central Bosnia. We have made clear to them that they, too,
risk the imposition of sanctions if such behavior is not
stopped .
Beneficial Effort of UN Military Presence — the
situation on the ground and the international approach to
protecting threatened populations, especially in Eastern
Bosnia, have both evolved in ways which, in effect, include
the substance of this recommendation.
O Sarajevo Airlift and Eastern Bosnia Airdrop Operations
Continue Both Operations — both are being continued,
though with intermittent in interruptions for safety
reasons.
Assure Interagency Consultations Regarding Content of
Airlifts and Airdrops — interagency dialogue and
consultations aim at maximizing the effectiveness of U.S.
airlift and airdrop operations. Examples include the
selection of appropriate seeds for spring planting in
Bosnia; means of enhancing the contributions to airdrops of
other countries; reviewing airdrop sites following UNHCR's
lead; and some non-DOD funding of airdrop commodities.
o Tuzla Airport
Review Options for Supporting UN Actions to Open Tuzla
Airport — the Administration has reviewed carefully whether
there is a sufficiently compelling need to elect the option
of opening Tuzla airport, taking into account the changing
threats to various land delivery routes for relief goods,
and, if so, how best to support such an effort. The U.S.
has decided not to pursue this course of action with the UN
at this time.
Consider Using Tuzla Airport for Contingency Operations
— Tuzla airport has been used by the international
community for emergency operations.
O Medical and Public Health
428
Lead a Major Upgrading of Medical Care and Public
Health in Bosnia-Hercegovina — selective deliveries of
medical supplies have already taken place. Access problems
and changing local conditions have made it difficult to
fully deploy a larger integrated program. However, U.S.
government-funded non-governmental organizations such as the
Internationc.1 Rescue Committee (IRC) are giving top priority
to public health issues in Bosnia under warm weather
conditions. Review continues.
o Food and Nutrition
Identify and Help Delivery an Appropriate Seed Mix for
Spring Planting — as noted above, an interagency group
identified the appropriate seeds for spring planting and the
U.S. both provided seeds directly and galvanized private
donations. Seeds also were delivered by airdrop. This high
priority program is nearing completion, despite severe
problems in gaining access because of Muslim-Croat fighting
in central Bosnia. In addition, the U.S. has provided and
pushed others to contribute high-nutrient foods for use in
supplemental feeding programs.
Plan for Refugee Surges in Muslim-Controlled Areas —
there have been intensive interagency and international
consultations on meeting food and medicine pipeline needs as
the number of actual and potential beneficiaries soared,
especially in the Tuzla region. U.S. contributions have
increased sharply, although delivery remains impeded by
fighting in southern and central Bosnia.
o Logistics/Relieve Delivery Systems/Public Affairs
Help UNPROFOR and UNHCR Create, Equip and Staff
Multiple Linked Relief Logistics Coordination Centers — no
final decision has been made.
Identify Media Assets to Overcome Information Deficit
and Support International Relief Efforts — interagency
consultations have identified some possibilities for helping
relieve the information deficit of segments of the Bosnian
population. Work continues.
Provide Small Number of Trained U.S. Military Civil
Affairs Experts to Augment and Train UNPROFOR G~5 — no
final decision has been made.
0 Power Production
Establish Task Force on Energy Production — other
donor countries have been actively engaged in this effort
since the team's visit and it is not clear at this point
that there is a need for the U.S. also to take action.
429
II. EASTBRM MEDITERRANEAN QUESTIONS
A. GENERAL QUESTIONS
QUESTION l:
In recent weeks, the Administration has frequently raised
the prospect that Turkey and Greece may be drawn into a wider
Balkan war if an agreement is not reached soon between the
parties to the Bosnian conflict. On May 2, for example,
Vice-President Gore cited this possibility on Meet the Press.
Under what circumstances do you see this scenario
potentially unfolding?
How do you judge the likelihood of such an event?
Do you envision a direct Greek-Turkish conflict, or
Greek and Turkish support for proxies?
— Is there evidence that Greece and Turkey are actually
contemplating direct military involvement in a Balkan
war?
— Do we have an indication that troop movements suggest
this is the case?
What, if any, official statements have been made that
lead us to draw this conclusion?
— To what extent do Greece and Turkey view each other as
a military threat today?
ANSWER 1: The prospect of Greece and/or Turkey being drawn
into a Balkan war is obviously a troubling one. Such moves could
conceivably be triggered by a rapid spread of the current
conflict. For that reason, we are taking steps designed to
ensure that it does not spread, for example, into Kosovo and
Macedonia. Under present circumstances in Bosnia, with the UN
and others attempting to restore peace, we are hopeful that we
will succeed in that endeavor.
We have no evidence that either Greece or Turkey is actually
contemplating direct military involvement in a Balkan War.
Despite traditional animosities, -relations between Greece and
Turkey have stabilized in recent years and have improved under
the governments of Prime Minister Mitsotakis and the late
President Ozal. That improvement is expected to continue under
President Demirel. Prime Minister Mitsotakis has stated publicly
that Turkey is not a threat to Greece. The prevailing view in
the Greek military, however, is that the primary threat to Greece
continues to come from Turkey.
For historical and other reasons, Greece and Turkey
430
sympathize with differing sides in the present conflict in the
former Yugoslavia. Nevertheless, both governments have supported
UN resolutions imposing sanctions and other forms of pressure to
end the conflict, even when individual resolutions have been
unpopular with Greek or Turkish domestic constituencies. We
cannot, however, discount in our policymaking the possibility
that a spreading conflict could draw in these valued NATO allies.
QUESTION 2:
Turkey has recently signed new military cooperation
agreements with Albania, Bulgaria and Macedonia. Turkey and
Macedonia have exchanged several top-level visits. President
Tudjman of Croatia also visited Turkey recently.
What does Turkey see as its role in the Balkans?
Is Turkey giving military aid to Macedonia, Croatia, or
to any other Balkan states or groups?
What has Turkey's posture been toward ethnic Albanians
in Kosovo?
How would you characterize Turkish-Albanian relations?
Does Turkey see or seek a military role for itself in
the Balkans?
Does Turkey see itself as the principal guardian of
Muslims — former Ottomans — in this region?
To what extent is Turkish policy in the Balkans
consistent with and supportive of U.S. objectives in
the region and to what extent does it run contrary to
our objectives?
ANSWER 2: Turkey sees its role in the Balkans as shoring up
regional stability in order not to be drawn into an every-
widening conflict in the area. Despite serious concerns abut
Kosovo and Sandjak, Turkey has maintained a hands-off approach,
and has consistently supported multilateral approaches. Although
Turkey has promised $20 million in aid to Albania this year, we
see no evidence that Turkey is seeking a military role for itself
there or elsewhere in the Balkans.
Turkey, a member of the Organization of Islamic Conference,
sees itself as a, rather than the, principal guardian of Muslims
in this region. It also looks to the U.S. and the rest of Europe
to play a strong role, and has repeatedly made it clear that this
kind of cooperative approach is preferred, lest the conflict in
the Balkans be portrayed as a religious war. That said, Turkey
has stood with its Muslim brothers in seeking a solution to the
tragedy.
431
In its emphasis on a cooperative approach, present Turkish
polish in the Balkans complements that of the U.S. Turkey has,
however, publicly raised concerns that the Joint Action Program
for safe havens in Bosnia does not go far enough to counter
Serbian aggression, and has joined an OIC demarche urging the
lifting of the arms embargo against Bosnia.
QUESTION 3:
Greece and Turkey have made various efforts in recent years
to establish a more constructive relationship. Two years ago.
Prime Minister Nitsotakis proposed an agreement on withdrawal of
Greek and Turkish forces along their northern border. Last year,
Prime Ministers Mitsotakis and Demirel expressed their interest
in signing a treaty of friendship and cooperation between Greece
and Turkey.
What is the status of these efforts?
Does the U.S. take any position on these efforts?
— Are we encouraging them?
Has the U.S. been asked by either side to assist these
efforts?
In general, what is the state of Greek-Turkish
relations today?
Are they improving or getting worse?
ANSWER 3: Despite initial encouraging signs that there
would be negotiations on a bilateral friendship treaty, and
continuing Turkish eagerness to proceed, the Greek governinent
decided that negotiations on the treaty must await a solution to
the Cyprus problem. Consequently, there has been no movement on
the proposed treaty since it was proposed. The United States
strongly supports improved relations between our two allies, and
periodically expresses its views to the parties. However, we
have not been asked by either side to assist in negotiating an
agreement, and we believe that the details of a treaty are best
left to the parties involved. I am pleased to note that Greek-
Turkish relations have nevertheless improved under the
governments of Prime Minister Mit:sotakis and President Demirel,
as their periodic meetings and public statements attest. We are
working hard for a Cyprus settlement in the talks underway in New
York under the auspices of the UN Secretary General, which could
set the stage for progress on a whole range of Greek-Turkish
issues.
B. GREECE
432
(1) General Questions
QUESTION l:
A State Department communications officer was arrested April
30 on charges of spying for Greece. According to the press, he
is accused of passing more than 240 documents over a two-year
period in exchange for about $32,000. The documents reportedly
concern U.S. policy toward Macedonia, the Balkans, Cyprus, and
Turkey. The case has not yet been tried, but I understand the
individual involved has confessed to these accusations.
— What has the Greek Government said regarding this case?
— Do we believe the Mitsotakis government was aware of
the effort by some of his military or intelligence
officials to recruit a U.S. spy?
— Do we believe this effort was initiated by the highest
levels of the Greek government?
— What are the implications for U.S. -Greek relations?
In what manner are we pursuing this issue with the
Greek government?
— What, if any, actions is the Department considering in
response to this incident?
Will personnel from the Greek Embassy here be asked to
leave the country, as was the case in the incident
earlier this month involving French espionage against
U.S. commercial targets?
ANSWER 1: We have been in touch with the Greek government
on this matter. Despite the gravity of this case, we believe
that the historic ties between Greece and the United States
provide a solid foundation on which to continue a cooperative
relationship. There are no plans for the U.S. government to ask
Greek diplomats to leave the country because of the Lalas case.
Since the details of Mr. Lalas' case are still under
investigation by the FBI, we are unable to comment further.
QUESTION 2:
How serious is this spying incident — in terms of potential
U.S. secrets compromised by this action?
Are we concerned that sources and methods may have been
compromised?
— How much of a threat to national security is posed by
this action?
433
— How did the Greek government use the information
contained in the documents?
ANSWER 2: The FBI and the Bureau of Diplomatic Security are
still conducting investigations on the Lalas case, and we are
unable to comment further at this time. I refer you to the FBI
for its views.
(2) 0.8. Assistance
QOE8TIOM:
The Fiscal Year 1994 military request for Greece is $350
million in FHF concessional loans.
— How did you determine your military request for Greece?
What Greek military requirements will the $350 million
go to fulfill?
ANSWER: The Fiscal Year 1994 request of $315 million in FMF
concessional loans for Greece was based on a combination of the
following factors:
o obligation of the United States under the 1990
Mutual Defense Cooperation Agreement to assist
Greece in the modernization of its defense ;
o the requirements and priorities of the Greek
military modernization program, as stated by the
Hellenic National Defense Staff;
o the Department of Defense's assessment of Greece's
defense needs;
o the judgement that it is in the interest of the
United States to assist Greece, which, inter alia,
is located geostrategically between Europe and the
Middle East, and is a frontline state in the
current Balkan unrest;
0 Congress' 7:10 ratio of FMF for Greece and Turkey,
respectively; and
o available U.S. budgetary resources.
The requested $315 million in concessional loans for FY 1994
would be used for a multitude of programs aimed at the on-going
modernization of Greek defenses, particularly for new F-16s, MLRS
and helicopter assets, and sustaining existing programs of the
Greek Army, Navy and Air Force.
434
C. TURKEY
(1) General Questions
QUE8TIOH l:
Turkey recently announced that it wants to renegotiate the
U.S. -Turkish DECA. Had it so chosen, Ankara could simply have
chosen to renew the standing DECA, as it has done annually the
past several years.
Is it correct that the initiative for renegotiation
came from the Turkish side, not the U.S. side?
Has Turkey indicated wh^ it chose to renegotiate this
year?
What are Turkey's main goals in seeking a new DECA?
ANSWER 1: The Defense Economic Cooperation Agreement (DECA)
between the U.S. and Turkey has been rolled over twice since its
second five-year term ended in September 1990. However, the GOT
advised us at the last extension that it would seek changes to
reflect present conditions. The GOT has proposed changes to the
DECA, which, in our view, are substantive rather than technical.
The U.S. believes that minor amendments to the DECA are
appropriate to reflect reductions and adjustments of our military
presence in Turkey. Talks are now underway in Ankara between the
GOT and our Embassy.
QUESTION 2:
Turkey's human rights record remains a serious
disappointment. Despite repeated promises by the Turkish
government — most of the long-standing human rights problems
continue, and several new ones have arisen. The most recent State
[Jepartment Human Rights Report says Turkey's primary human rights
problems include:
o torture;
o limits on freedom of expression and association;
o political killings; disappearances, mainly of
Kurdish activists; and,
o "mystery killings," in which murders of Kurdish
activists have not been investigated and leads
suggesting possible involvement by Turkish
security forces have been ignored.
We have gone back and forth with your predecessors, Mr.
435
Oxman, on this issue. The fact is that there are always some
small steps the State Department can come up here and point to
say that there has been progress. But, the fundamental
situation has remained the same or deteriorated.
— What is your assessment of the problems we face in this
area in Turkey?
— How do you intend to approach this issue, given all the
other issues we also have on the plate with Turkey —
most importantly perhaps. Operation Provide Comfort?
Is it a fact of life that we must satisfy ourselves
that we are unable to change this situation, so long as
we have other important issues on our agenda with
Turkey?
ANSWER 2: While there is not doubt that progress in the
area of human rights in Turkey has not been as wide or deep as we
all would have preferred, I do not believe the GOT has made some
effort to improve its record on human rights, despite having to
deal with urban terrorism and an on-going separatist terrorist
campaign. When then-Prime Minister Demirel's government first
came to power over a year ago, there was great hope that
substantial improvements would occur in Turkey's human rights
problems. Unfortunately, this has not yet happened. We will
continue to work with Turkey to further the goal of encouraging
political reform and eliminating human rights abuses.
QUESTION 3;
Having identified Turkey's human rights problems, what sort
of dialogue has the U.S. established with Turkey to try to
eliminate these abuses?
I understand the State Department internally developed
a "strategy paper" for trying to improve the human
rights situation in Turkey.
Is this accurate?
What can you tell us about this paper?
Have you shared it yet with the Turks?
If so, what was there reaction?
What type of measures would this strategy involved?
Does it focus largely on training and judicial reform
assistance?
By what standards do we plan to assess Turkey's
436
progress in implementing this strategy?
ANSWER 3; We are in the process of finalizing a strategy
paper to address the human rights situation in Turkey, which we
will share with Turkey as soon as it is completed. The paper
pinpoints various areas where we would like to work with Turkey
towards improvement — for example, full implementation of the
judicial reform law, which outlines the rights of suspects in
various criminal procedures. We hope to be able to assist Turkey
by training relevant officials, and assisting in
institutionalizing judicial reform procedures. The strategy
paper will have benchmarks to allow us better to gauge progress
being made in this area.
QUESTION 4:
Since 1983, Turkey has been facing armed attacks by the
Kurdish terrorists and insurgents (PKK) for the past several
years. Over 5,000 people have died since 1984, most of them in
the past two years. Two months ago, the leader of the PKK
terrorists, Mr. Ocalan, announced a ceasefire in PKK activities
against Turkey.
What is the status of this PKK ceasefire?
What is our assessment of Mr. Ocalan' s sincerity in
offering a permanent ceasefire in return for a number
of Turkish steps, such as ending emergency rule in the
southeastern provinces and granting a general amnesty
to individual suspected of collaborating with the PKK?
— How has the Turkish government reacted to the PKK
announcement?
— Have Turkish security forces in the area changed
their activities at all since the ceasefire was
announced?
— What, if any, good will gestures has Turkey made
in response to the ceasefire?
What have we said to Turkey about this development?
Is it your assessment that they are taking it as a
serious opportunity to end the warfare in the
southeast?
How do you react to criticisms that the Western
Europeans have openly embraced this development as
a chance for peace and urged Turkey to do the
same, but the U.S. has been silent?
Is this the case? If so, why?
437
— Don't we have an interest in seeing this issue
diffused and the killing stopped?
ANSWER 4: More than 30 unarmed soldiers and civilians died
on May 24 in a PKK ambush. We strongly condemned this attack
which came just as Ankara had approved a limited amnesty for PKK
fighters. PKK leader Ocalan claimed the attack was a warning,
but he also claims the ceasefire is still in place. Turks, not
surprisingly, doubt his sincerity.
We understand that Turkish security forces continued to
carry out small-unit operations during the ceasefire to preclude
any PKK terrorist incidents.
Before the May 24 attack, we noted that the ceasefire
presented an opportunity to make progress in solving the problems
in Turkey's Southeast. Ankara had promised to consider lifting
the state-of-emergency regime over ten southeastern provinces
which have a majority Kurdish population.
QUE8TI0M 5:
I understand Turkey has not agreed to apply the NATO Status
of Forces Agreement, or SOFA, to U.S., U.K., and French troops on
Operation Provide Comfort.
Why has Turkey taken that position?
Are we discussing that matter with the Turks?
Have our troops been hindered or suffered in any way
because of the non-application of the SOFA?
Have our troops' training opportunities been limited
because of non-application of the SOFA?
— In general, how would you characterize cooperation
between the U.S. and Turkish militaries on Operation
Provide Comfort?
ANSWER 5: There is a difference in interpretation on the
applicability of the SOFA among the U.S., the UK, France and
Turkey. We believe that members of the armed forces of a NATO
country are covered by the SOFA when they are there for NATO
purposes or otherwise. We believe the negotiating history of the.
SOFA, which predates Turkey's entry into the alliance, supports
this conclusion. We have discussed this issue with the Turkish
Government, thus far without resolution. The disagreement on
this issue has not hindered Provide Comfort operations. An
earlier problem over training was not related to the SOFA, but
rather involved identifying and establishing operating
procedures. Cooperation between the U.S. and Turkish security
forces on Operation Provide Comfort has been excellent.
438
QUESTION 6:
Since 1991, Turkey and Bulgaria have signed three bilateral
agreements aimed at easing tension on the border. They have
pledged increased military contacts, early notification of
military exercises, and increased mutual inspection visits. In
March, 1993 they signed an agreement on cooperation in military
science and technology, in which they raise the possibility of
joint Turkish-Bulgarian cooperation in the "development and
manufacture" of defense equipment.
— How do we view these developments in Turkish-Bulgarian
relations?
— Is it positive, or does it in any way present a
regional threat?
— How does Greece view these developments?
The Turkish defense minister has said that
Turkish-Bulgarian cooperation could be expanded to
include third countries. Has Greece, which shares a
border with both states, shown any interest in joining
these arrangements?
ANSWER 6: The dramatic improvement in Bulgarian-Turkish
relations is one of the most constructive developments the
Balkans have seen in recent years. What made it possible was the
fall of Bulgaria's Communist dictatorship in late 1989, the
subsequent process of restoring civil and human rights to its
sizable ethnic Turkish minority, and the statesmanlike approach
of both countries to reconciliation and cooperation with one
another. We see it as validating one of the basic premises of
our Balkan policy: that democratic development internally can
promote cooperative regional relations, even among historic
adversaries.
The improvement in relations between Bulgaria and Turkey is
positive. First, it has been carried out in an open and
transparent manner. Second, both countries have taken pains to
show that their rapprochement is not directed against any third
party. Third, Bulgaria has pursued very similar policies of
military cooperation and confidence building with both Greece and
Romania. These steps, taken together, exert an effective
stabilizing effect on the region.
Greece is concerned about Turkish diplomatic moves in the
Balkans, and has countered them with Greek initiatives. On
December 4, 1992, Greece and Bulgaria concluded and agreement on
confidence-building measures and a military cooperation program
for 1993.
439
Greece declined to join in a Bulgarian initiative for a
Bulgarian-Turkish-Greek agreement on regional security issues, on
the grounds that such issues were not appropriate for trilateral
settlement.
D. CYPRUS
QUESTION:
UNFICYP is reportedly about ten years behind in payments to
troop-contributing states. Why is that?
— Have source states failed to pay their pledged
voluntary contributions?
Which ones?
How will UNFICYP make up that shortfall?
AKSWER: From its inception, UNFICYP has been supported
entirely by voluntary contributions of troops and funds.
Contributed funds are used by the UN to pay its expenses related
to UNFICYP, with any balance paid to troop contributors as
reimbursement for their costs. For the past decade, voluntary
financial contributions received by the UN have not been
sufficient to provide reimbursements to troop contributors.
Those countries which have pledged contributions have paid them.
Under UN Security Council Resolution 828 (passed May 27,
1993), beginning June 15, 1993, the UN will pay all of UNFICYP's
costs, including those of troop contributors, using funds raised
through a combination of voluntary contributions and levies on UN
members under the peacekeeping scale of assessments.
III. PORTUGAL QUESTIONS
QUESTION l:
What has been accomplished so far in these negotiations?
— What are the main changes in the agreement with
Portugal that we seek?
— Are we finally moving away from a "bases for rent" to a
era of genuine mutual security cooperation with
Portugal?
What difficulties has this transition caused for the
Portuguese government?
ANSWER 1: The U.S. and Portugal have agreed to work
together on a broad friendship, one that reflects our countries'
440
historically close relationship. The Portuguese have eschewed
the old "rent for bases" approach and signalled their desire to
conclude a new agreement expeditiously.
Base negotiations were resumed in April after a hiatus of
almost 15 months. At the April round and at a subsequent round
in May, the two sides put forward ideas on a new defense and
security cooperation agreement. Substantial progress was made in
drafting a chapeau agreement. Labor and technical annexes were
broadly reviewed with a view towards identifying problem areas.
QUESTION 2:
What issues do you plan to address in the upcoming round of
base negotiations with the Portuguese?
Are the major sticking points to labor and technical
issues?
Do you expect U.S. forces at Lajes to stay roughly at
their current level of 1,800 U.S. troops plus their
dependents and 1,100 local employees for the
foreseeable future?
ANSWER 2: While labor and technical annexes are long and
complicated documents, the two sides are determined to arrive at
a positive outcome consistent with their legislative requirements
pertaining to cost-sharing, salaries, hiring practices, etc. The
technical annex was reviewed by experts from both sides May 18-19
and these talks will resume in Lisbon the week of June 14. Labor
experts plan to begin their discussions in Lisbon June 2.
Under current plans, we do not anticipate any significant
change in U.S. troop levels and the number of local employees.
QUESTION 3:
Will the following be part of the Lajes Base Agreement the
U.S. planning to sign with Portugal:
o Narcotics Cooperation Agreement?
o Terrorism Cooperation Agreement?
o Political-Military consultative council?
o Cultural Cooperation Agreement?
o Scientific and Technical Cooperation Agreement?
What is the status of our discussions with the
Portuguese on these cooperation agreements?
441
What is the Portuguese attitude to this shift in our
relationship away from "bases for rent" and to a more
mature security cooperation relationship?
ANSWER 3: The Binational Commission to be established under
the proposed agreement would have a broad mandate to facilitate
the two governments' efforts to identify and promote cooperation
in a variety of areas. The Commission may well address itself to
areas suggested above. We work cooperatively with Portugal on a
broad range of issues and we look forward to further
strengthening this relationship.
The Portuguese Government has not explicitly accepted the
end of the "bases for rent" concept and the need to move to a
broad-based partnership and mutual security cooperation.
Both sides agree that the agreement should be updated to
reflect the post-Cold War realities. The U.S. has made clear
from the outset of the negotiations that the provision of
security assistance in return for access to bases had to end.
Portugal has not explicitly accepted that "bases for rent"
is no longer a valid concept. Both sides want to broaden the
bilateral relationship and encourage an arrangement that fosters
genuine mutual security cooperation.
The Portuguese Government has had to adjust to the end of
ESF in FY 1992 and the conversion of FMF grants into loans. The
end of ESF has most directly affected the regional government of
the Azores, which was the main beneficiary of the funds and had
used the money for general budgetary support. Similarly, the
Portuguese government now has to finance the acquisition of F-16
aircraft by using FMF loans instead of relying on a U.S. grant.
QUESTION 4;
As you may be aware, the Committee has had an interest for a
number of years now in the operations of the Luso-American
Foundation. There have been a number of concerns regarding the
use of the Foundation's funds and the practices of Fund managers.
— Could you please provide the Committee with an update
regarding the status of the Luso-American Foundation
and U.S. efforts to resolve these issues with the
Director and Board Members of the Foundation?
— Specifically, what progress has been made in
streamlining and tightening the Foundation's
operations?
What role does the U.S. Ambassador to Portugal play in
this process?
442
MISWER 4: Relations with the Embassy have improved both in
style and substance during the past year.
In the 1992 evaluation of the Luso-American Foundation
(FLAD) , the Embassy criticized the absence of an American
component in many of FLAD's programs. In 1993, a review of these
programs indicates that FLAD is now working much more closely
with American institutions in achieving its objectives.
Consistent pressure from the Embassy and from other sources
has been effective in pushing reforms within FLAD, although at a
slower pace than is desired. It is important that we persist
with efforts to continue to encourage FLAD to maintain its
altered course, while avoiding being heavy-handed (or overly
critical) about FLAD's failings, lest we give FLAD's apologists
an excuse to claim that Portuguese are victims of American
bullying.
FLAD has sought outside advice on organizational management
and accounting, and noteworthy efforts are underway to reduce
costs. The improvements are tangible and all signs are that the
organization will continue to move in the directions we
collectively desire.
The 1993 project list indicates a less scattershot approach
to programming with a clearer emphasis on science-related
projects which center on cooperation with American institutions.
Several conferences and studies were specifically designed to
capitalize on U.S. expertise. In the cultural field, exchanges
of artists and writers were highlighted in the FLAD newsletter.
The academic exchange programs with the U.S. universities are a
continuing mainstay at FLAD although selection criteria are not
clear.
The Ambassador and Embassy have put special efforts into
reinvigorating the consultative council, which had largely been
ignored by the FLAD management. (The Ambassador is a member of
the consultative council) . At the April 1993 meeting, the
consultative council presented FLAD management a strong consensus
for:
a review of FLAD's programs to set priorities;
— a strategy for the future; and
concentration on areas that make sense in terms of
Portugal's changed circumstances since FLAD was
created, e.g. EC membership and inflow of structural
funds from Brussels.
In addition, we have kept in close touch with the American
members of the Board of Directors to assure that the American
viewpoint is represented at their meetings.
443
SDPPLEMEiniAL QUESTIONS SUBMITTED BY
THE SUBCOMMITTEE ON EUROPE AMD THE MIDDLE EAST
TO THE DEPARTMENT OF DEFENSE
AND RESPONSES THERETO
MAY 11, 1993 HEARING ON U.S. FOREIGN ASSISTANCE TO EUROPE
FOR FY 1994
GREECE
QUESTION:
The Fiscal Year 1994 military request for Greece is $350
million in FMF concessional loans.
How did you determine your military request for Greece?
VJhat Greek military requirements will the $350 million go to
fulfill?
ANSWER: The actual request for FY 1994 for Greece is $315
million, down from the $350 million requested in FY 1993. In
determining this request, we took into consideration the guidance
provided by the 1990 Mutual Defense Cooperation Agreement, the
consolidated five year plan presented by the Greek requirement,
our best estimate of what it would take to continue to maintain
and support U.S. equipment previously obtained by Greece, our
stated commitment for funding toward the F-16 aircraft purchase,
and Congressional guidance vis-a-vis Turkey. The Greek military
requirements against which the $315 million will be applied
include F-16 aircraft, AH-64 helicopters, MLRS, F-4 and A-7 jet
fighter upgrades and P-3 maritime patrol aircraft lease.
TURKEY
QUESTION:
What is the military rationale for Peace Onyx II?
Why does Turkey need 240 new F-16s?
What threat are these planes required to offset?
Would you put this in the context of the regional air
threat to Turkey?
What air assets do Turkey's neighbors — Iraq and Iran
possess?
What about the potential air threat from the former
Soviet Union?
444
ANSWER: The Turkish Air Force (TUAF) , equipped with aging
F-104S, F-5s and F-4s, badly requires a new aircraft. In the
mid-1980s, TUAF calculated its full requirement" at 320 F-16s-, to
be co-produced with General Dynamics. Funding limitations
subsequently required the planes to be ordered in two increments
of 160 each. The first increment (Peace Onyx I) was launched in
1987 and is 75% complete as of May 1993. Turkey located
sufficient funding by March 1992 to undertake Peace Onyx II by
ordering an additional 40 F-16s and the long lead items for
another 40, for a total of 240 aircraft produced or on order. By
replacing the older and costly to support F-104s and F-5s with
the modern F-16, the TUAF can consolidate training, maintenance
and logistics and thus increase overall mission effectiveness.
Moreover, the additional 80 aircraft of Peace Onyx II are an
improved version from Peace Onyx I models.
The goal of 320 aircraft is driven by Turkey's perceived
threat from all sides of its territory. While Greece and Turkey
are both members of NATO, each country claims the other as a
potential antagonist over mutually exclusive claims in the
Aegean. Turkey is concerned with the ramifications of the
Armenia-Azerbaijan conflict and the possibility of larger powers
choosing sides to fight a proxy war. Further to the north and
east, Russia dominates the geo-political landscape as the only
great power in the Central Asian region. The pressure by
Stalinist Russia on Turkey in the aftermath of World War II
contributed significantly to the origins of the Cold War.
The greatest potential threat to Turkey comes from its three
abundantly equipped southern neighbors. Iraq, Iran and Syria
possess sizable, air forces, although only Iran has the ability
currently to project air power across its border, as it does
occasionally against Iraq. Iran relies mostly on older F-4/F-5
aircraft and a few Su-24s, flown by pilots with considerable
experience from the Iran-Iraq war.
Iraq, held down by the northern no-fly-zone and UN sanctions,
cannot project serious air power against Turkey, but its large
ground forces still threaten the Kurds close to Turkey. Once the
no-fly-zone is lifted a vengeful Iraq could deploy elements of
its 350 combat aircraft (including Mirage F-ls and MiG-23s) much
closer to Turkey, if severe logistics and maintenance problems
can be solved.
Syria, possessing one of the largest air forces in the Middle
East, is postured almost solely against Israel. Few assets are
positioned in the north since Turkey is not a primary threat for
Syria. If the Middle East peace process eventually yields fruit,
Syria may choose to revive its interest in regaining the Hatay
province lost to Turkey between the world wars, but that is at
best a speculative judgement.
As for Russia, its military build-up in the Caucuses places
more combat aircraft closer to Turkey. Nevertheless, Russian
efforts in the region are aimed more at deterring Iran, the
Ukraine and other regional states than Turkey. Ankara is clearly
aware that this larger presence gives Moscow options vis-a-vis
Turkey should the need arise as these two countries work toward
different ends in the Nagorno-Karabakh conflict.
445
SUPPLEMEMTMi QUESTIONS SUBMITTED BY
THE SUBCOMMITTEE ON EUROPE AMD THE MIDDLE EAST
TO THE AGENCY FOR INTERNATIONAL DEVELOPMENT
AND RESPONSES THERETO
MAY 11, 1993 HEARING ON U.S. FOREIGN ASSISTANCE TO EUROPE
FOR FY 1994
I. U.S. ASSISTANCE — GENERAL
QUESTION l:
How much of the FY 1992 program was expended entering FY
1993, that is, last October 1st?
— What is the size of the pipeline in aid for Eastern
Europe today?
How much of the funds provided in FY 1993 do you expect
to be outlays in FY 1993?
Over how many years do you expect the FY 1993 program to
be dispersed?
ANSWER 1: Approximately $61 million of FY 1992 funds were
expended in FY 1992 out of a total of $432.7 million obligated,
or 14%. A total off $220.5 million was spent in FY 1992 from FY
1992 and prior year funds, and by the end of FY 1992, we had
cumulative expenditures of $589 million, or 57% of funds
obligated through that date. As of March 31, 1993, $155 million,
or 38% of the funds obligated in FY 1992, were expended, and 66%
of all funds obligated in any year had been spent. By any
project assistance standards, this is relatively high expenditure
rate for the early period following obligation.
The pipeline (obligated, but unexpended funds) for the
Central and Eastern Europe program was $352,165 million as of
March 31, 1993. This represents 33% of total funds obligated for
the program, and less than one year's obligations. The Eastern
Europe program continues to expend funds more rapidly than the
AID average.
Approximately 10% of the funds obligated in FY 1993 will be
expended in FY 1993. The majority of funds are not obligated
until late in the fiscal year. Total outlays in FY 1993
(including prior year obligations) should approach $330 million.
The FY 1993 program will disburse over approximately 3 to 4
years with over half the FY 1993 funds disbursed by the end of FY
1994. We are beginning very few new activities, and most of the
contracts, grants and cooperative agreements which will be funded
are continuations rather than new procurements.
446
QUESTION 2:
As of September 30, 1992, you had spent $67.4 million in
bilateral programs for developing democratic institutions in
Eastern Europe. This represents 6.5% of overall spending in
Eastern and Central Europe.
— What do you expect to spend in this area in FY 1994?
On what type of activities will these funds be spent?
How have your programs in this area shifted since 1989 and
1990 — when the focus was largely on election monitoring?
How much do you intend to spend through the National
Endowment for Democracy?
ANSWER 2: We obligated $67.4 million for strengthening
democratic institutions through the end of FY 1992 , and expect to
obligate $40.9 million, or 10% of the FY 1994 program, for this
purpose. With funds available in FY 1993, we plan $41 million in
obligations in this area.
Public administration will receive approximately 50% of the
FY 1994 democracy strengthening funds. A particular focus is
assistance to help national governments decentralize and local
governments to govern responsibly. Funds also will be allocated
for legal reform; strengthening the independent media; developing
a civil society, i.e. civic education, educational reform, labor
union development, inter-ethnic communication, and parliamentary
training.
The focus has shifted more to institutionalizing democracy,
improving public administration and pursuing legal reform.
Emphasis has shifted from party building and one-time election
monitoring efforts to strengthening the institutions that
underpin a civil society and to the more difficult task of
developing the understanding of rights and obligations in a
democratic society. Increased resources are programmed for
educational reform, for example.
We do not intend to provide funds to the National Endowment
for Democracy in FY 1994. We have obligated a total of $13.6
million for the National Endowment for Democracy since FY 1990.
QUESTION 3:
Of the $802 million the U.S. had provided to countries in
Eastern and Central Europe to promote economic restructuring as
of the beginning off Fiscal Year 1993, $272 million — or 34% —
went to support four Enterprise Funds for Bulgaria,
Czechoslovakia, Hungary and Poland.
447
~ What percentage of your FY 1994 request do you expect to go
to the Enterprise Funds?
— What else will these economic restructuring funds be used
for?
What portion will be used for technical assistance and
training?
— What funds will be used for privatization of state-owned
industries and precisely how will these funds be used?
KKBWER 3t We expect about 21%, or $87 nillion, of FY 1994
funds to be obligated for the Enterprise Funds. Funding for the
Northern Tier Enterprise Funds will decrease, while funding for
the Southern Tier and Baltic Funds will increase.
The total amount planned for economic restructuring in FY
1994 is $286 million, or 70%, of the funding for Central and
Eastern Europe. The majority of these funds will provide
assistance for privatization and private sector development,
including agriculture and agribusiness, and energy. Other
activities not specifically included in the economic
restructuring part of our program, such as health and housing
finance, are also concerned with privatization and private sector
development.
All of the $199 million in FY 1994 Economic Restructuring
Funds that are not going to the Enterprise Funds will be used for
technical assistance, training and feasibility studies.
The privatization and enterprise restructuring project, which
will receive a projected $45 million in FY 1994, is providing
technical assistance to Central and Eastern European governments
for privatization of State-owned industries. Funds will finance
quick response teams of financial and legal experts under
fully-competed standing contracts known as "ICQs" (Indefinite
Quantity Contracts) .
QUESTIOM 4:
The third major category of support has been improving the
quality of life. As of the start of Fiscal Year 1993, $152.6
million or 14.8% of overall U.S. . assistance to Eastern Europe
went to fund projects in this category. These projects have
included:
o support for labor market transformation;
o housing sector assistance;
o partnership in health care; and
o environmental initiatives and training.
How much of the FY 1994 funds do you plan to spend for quality
448
of life projects?
— What are your priorities in this category — environment,
health, housing or some other area?
ANSWER 4:
We plan to obligate $75.8 million, or almost 19%, for quality
of life projects.
The breakdown for obligations is planned as follows:
environment ($24.7 million); health ($22.1 million); housing ($15
million) ; short-term emergency and humanitarian aid ($8 million) ;
and employment and the social safety net ($6 million) .
QUESTION 5:
How many projects do you have on-going in Eastern Europe in FY
1993?
By how much do you estimate your project portfolio will
increase in FY 1994 if the $409 million is approved?
ANSWER 5:
Thirty projects will be funded in FY 1993; another five
projects will continue to function with prior-year funds.
While we will have a few new or expanded initiatives under
on-going projects such as with public administration, we do not
plan to start any new projects in FY 1994, absent unforeseen
developments. We plan to add funding to on-going projects.
QUESTION 6:
Do you expect to spend roughly $5 million again for project
oversight and evaluation in Fiscal Year 1994?
What are these funds used for?
For a program this size ($1.03 billion since FY 1990), how
does this level of funding for Administration compare to other
programs of equal size?
How much, if at all, do you estimate you save each year due to
the regional organization of this program?
— How much more in time and money do you estimate a traditional
country-based program could cost you?
ANSWER 6:
449
We expect to obligate $6 million in FY 1994 for our Audit,
Evaluation and Program Support project. The funds are used for
evaluation, needs assessments, contract assistance to help
implement projects, short-term consultancies, non-federal audits,
and design of the assistance program in Central and Eastern
Europe .
This funding (the $6.0 million for evaluation, audit, etc.) is
not for AID administration. Operating expense funds are used for
administration of the program. The administrative costs for the
Central and Eastern European program remain among the lowest in
AID.
It would cost between $35 and $40 million more per year to run
conventional AID missions for this program. Conventional missions
in 13 or more countries would require over 200 U.S. direct hire
officers overseas and bureau of about 80 in Washington at a total
cost of some $68 million. The regional structure has 34 USDH
overseas and a Washington staff of 150 USDH, at a total cost of
$26 million. Some of the savings come from the regional character
or projects and some from Washington basing of staff. A regional
organization overseas would save less than the $35 to $40 million
presently saved.
As mentioned previously, to staff 13 or more bilateral
missions, AID'S budget office estimates the additional cost would
be between $35 and $40 million in Operating Expense Funds per
year.
QUESTIOH 7:
How many people does AID have in the field today administering
these programs and how mc-ny are you budgeting for in FY 1994?
Where do you currently have people, and how many in each
country?
ANSWER 7:
We currently have in the field 24 U.S. direct hire staff, 25
U.S. personal services contractors, and 101 foreign service
national employees for a total of 160. To implement the FY 1993
legislation directing greater involvement of AID representatives
in the field, preliminary estimates are that we would need
increases of 13 U.S. direct hires, 25 personal services
contractors and 40 foreign service nationals. It is uncertain at
this point how many additional field positions we can afford given
FY 1994 operating expense constraints.
Following is a list of numbers of employees in each country:
Country USDH U.S. PSC FSN
450
Poland
6
6
27
Hungary
5
7
13
Czech Republic
5
2
13
Slovakia
2
2
Romania
4
2
14
Bulgaria
4
0
Albania
2
1
Croatia
1
0
Lithuania
1
1
Estonia
1
1
Latvia
1
0
Regional Fin. Mgt.
Center-Hungary
2
3
5
TOTAL t 34 25 101
ZI. THS rOSMSR TUOOSLAyZA AM) THE BALKAM8
QUS8TIOV l:
The Adninistration is proceeding with a $10 million program of
technical assistance to Macedonia, a country which the U.S. has
not yet recognized. The package includes humanitarian assistance,
technical assistance for economic reform and building democratic
institutions.
— How much of the $10 million has been spent?
— On what specific projects is the money being spent?
— Are other Macedonia-specific projects being considered?
— Macedonia is now eligible for GSP benefits. For what other
preferential benefits is it eligible?
— Why are we giving assistance to a country we don't recognize?
AM8WSR l:
Program activities funded with FY 1993 money have only just
begun to be implemented. Of the $10 million in FY 1993 SEED
funds, approximately $1,350,000 in technical assistance activities
had been obligated as of May 1993, and very little of that had
been disbursed. Much of the humanitarian assistance provided in
Macedonia, however, was funded with FY 1992 money, the bulk of
which came from accounts other than SEED (OFDA, Food for Peace,
DOD) .
Approximately $10.1 million in humanitarian assistance has
been provided to date, all but $3.2 million of which was from FY
1992 money and only $1.2 million of which came from SEED FY 1992
money (to pay for emergency medical supplies delivered by Project
Hope) .
451
Humanitarian assistance provided has included bulk foodstuffs
(wheat, flour, vegetable oil, beams, corn/soy meal (CSM) , and
wheat/soy blend (WSB) ) ; Meals Ready to Eat (MRE) ; and emergency
medicines.
Under the heading of Democratic Initiatives, a legal advisor
from the American Bar Association's Central and East European Law
Initiative (ABA/CEELI) has been provided to assist reform of the
judicial system. Additionally, the International Media Fund
conducted a survey of the independent media's needs and has
provided equipment and technical assistance to radio and
television stations.
Activities to date to promote economic transformation of
Macedonia have included advisors and training in the areas of
finance, taxation, commercial banking, central banking, budget
matters, pension policy and management, privatization,
telecommunications and customs. Assistance to Macedonia's nascent
customs service includes some $200,000 of equipment (computers).
Other areas of contemplated assistance, in addition to
continued help in the fields already under way, are energy,
assistance to private farmers and agribusiness, assistance to
private firms, participant training and political process.
Other than GSP, Macedonia is not eligible for sny preferential
benefits.
We have designed and are executing a modest, carefully
targeted assistance program in Macedonia to help promote political
and economic reforms, while helping preserve its political and
social stability. Macedonia has played a constructive role in
trying to contain conflict in the region, including its
participation in UN sanctions against Serbia/Montenegro which,
together with the influx of refugees from Bosnia, has had a major
negative impact on Macedonia's economy. Our assistance is
designed to help alleviate the burden of these refugees and ease
the transition to democratic pluralism and a market economy
without prejudicing our position on recognition of Macedonia or
hindering resolution of differences between Greece and Macedonia.
QUESTION 2:
A program of economic assistance to Croatia, Slovenia and
Macedonia was approved for FY 1993: $10 million for Macedonia, $3
million for Slovenia for privatization, development of commercial
loans, energy and export assistance, and $2 million for Croatia
for development of an independent media, journalist training and
strengthening pluralism and the rule of law.
-- How much of this money has been spent?
Have the programs been successful?
452
What difficulties have been encountered?
Have efforts to develop pluralism in the media had any success
in Croatia where the press remain under firm control of the
government?
Does the Administration plan to expand the program in FY 1994?
ANSWER 2:
We have covered Macedonia in response to previous questions.
For Slovenia and Croatia, FY 1993 SEED funded assistance
activities are largely still being designed, so little money has
actually been spent thus far. In Slovenia, $1.5 million in
technical assistance will be provided beginning this fall, in
conjunction with World Bank assistance, to the Slovenian
Privatization Agency for industrial restructuring and
privatization. A commercial/anti-trust law advisory effort worth
$200,000 will also begin in the fall, provided by the American Bar
Association's Central and East European Law Initiative
(ABA/CEELI) . $600,000 has been programmed for telecommunications
assistance including help in transforming the legal/regulatory
framework to one appropriate for an open market and privatized
environment; a spectrum management seminar; telecommunications
procurement and privatization training; and feasibility studies
leveraging IBRD/EBRD funding for telecommunications projects.
Work in the telecommunications sector will begin in June. A
modest energy efficiency pilot program, worth $100,000, will be
implemented based upon an earlier energy audit of a pharmaceutical
plant.
In Croatia, ABA/CEELI has had an advisor at the University of
Zagreb Law Faculty since April working on legal education at the
university; support for the independent Croatian Bar Association;
criminal code reform; and helping write a new judicial code. This
program is currently funded at $200,000. The International Media
Fund has provided assistance to the Media Resource Center at the
University of Zagreb, as well as journalism curriculum assistance
to the University. It has also provided assistance to two
independent magazines of political comment and opinion. These
activities have been funded at $180,000. Additionally, we have
approached the International Democratic Institute, International
Republican Institute, and Free Trade Union Institute about
democratic initiatives programs in Croatia, but they have yet to
produce concrete proposals, so no activities have taken place. We
are in the midst of designing the $5.25 million War Victims
project which, while targeted largely at Bosnian victims of rape,
torture and other trauma, will at least initially be primarily
carried out in Croatia.
Only democracy and humanitarian activities are presently under
way in Croatia.
453
Inasmuch as these activities are either still in the
planning/design phase or just getting under way, it is premature
to determine whether they will be successful.
We have had some difficulties with staffing. A permanent AID
representative will not arrive in Macedonia until August or
September. The program there is being managed by persons on
temporary duty. Planning for an AID position in Bosnia has been
held up due to uncertainty about the best location for an AID
office. In addition, AID'S Washington technical staff is
over-stretched and unable to visit the field as often as we would
like.
While regime control of the media in Croatia remains
troubling, the International Media Fund's support for developing a
journalism curriculum and conducting workshops and seminars
through the University of Indiana and Zagreb University's
journalism school has made a productive contribution to moving
towards the eventual freer practice of journalism in Croatia
through shaping the attitudes of a new generation of future
journalists.
Circumstances could warrant an expansion of SEED funding for
humanitarian assistance. However, other sources of funding are
more appropriate for dealing with the large scale humanitarian
assistance needs of these countries.
III. CYPRUS
QUESTION l:
Your Fiscal Year 1994 request for Cyprus is $15 million in
economic support funds.
I want to note how pleased I am, for the record, that the
Administration has put an end to the game that we have played for
a number of years now with successive Administrations over aid to
Cyprus. Each year, the Administration would come in with a very
low request, with full knowledge and expectation that the Congress
would raise that number to $15 million.
How do you intend to use the $15 million for FY 1994?
Do you intend to spend roughly $5 million on scholarships for
Cypriots to study in the United States?
Will the remaining $10 million be spent on project assistance,
both bicommunal projects which bring Turkish and Greek
Cypriots together and on projects in the two communities?
ANSWER l:
Of these funds, $5 million will be used for the continuation
454
of the Cyprus-America Scholarship Program (CASP) , and $10 million
will be used to continue bicommunal development activities.
Yes, $5 million of the $15 million FY 1994 request will be
used for U.S. scholarships. Scholarships will include
undergraduate and graduate level programs. Length of scholarships
will vary from one to four years.
We expect to continue activities in such areas as health,
environment, and urban renewal with the goal of bringing the
Turkish and Greek Cypriot communities together to implement
sustainable activities. Since March 1990, persistent efforts have
been added to design and fund activities that are truly
bicommunal. We define a bicommunal project as one which involves
joint planning and participation, and is of mutual benefit to both
communities, with an objective that contributes to the long-term
economic development of Cyprus and to political reconciliation.
Physical barriers to mobility between the two sides of the island
make it difficult to implement some types of development
activities in a joint way. For this reason, some parallel
activities in the two communities which benefit the entire island
will continue for the short term, including reforestation, forest
firefighting and pest control
QUESTION 2:
As you may be aware, the Committee has had a long-standing
interest in promoting bicommunal projects on Cyprus. There has
been report language to this affect in the authorization bills
that have come out of the Committee since 1989.
How much of the FY 1992 program was spent on bicommunal
projects?
How much of the FY 1993 project to you intend to spend on
bicommunal projects?
What progress have you make in devoting more resources to
bicommunal projects on Cyprus?
What have we told the Greek- and Turkish- Cypriots about our
desire to fund such projects, instead of bilateral project
assistance on either side of the green line?
ANSWER 2:
The $15 million Cyprus program implemented in FY 1992
allocated $10 million for bicommunal development activities. We
expect to spend $10 million for new or continued bicommunal
development activities.
In 1989, guidance from the U.S. Embassy to the Office of the
UN High Commissioner for Refugees advised that at least 50% of the
455
$10 million of FY 1990 assistance should be used for bicoimnunal
activities. Since 1992, AID has required that all new funding
support activities are bicominunal in character. Health care
presents a particular target of opportunity for bicommunality,
based on shared needs and financial realities.
Our official definition of bicommunality was communicated to
the UNHCR in March 1990, and has been used as the standard for
decisions on the funding of bicommunal development proposals since
then. The subject of bicommunality if frequently discussed by the
Ambassador with Greek and Turkish Cypriot leaders and Red Cross
officials at both private Embassy conferences and public meetings.
QUESTION 3: I
/. .
What are the key bicommunal projects receiving US funding on
Cyprus today?
Have we added any new projects onto this list?
If so, could you please provide the Committee with a listing
of bicommunal projects receiving U.S. funding?
ANSWER 3:
The key projects are in the health, environment and urban
renewal sectors. Activities include construction and improvement
of health facilities, improvement of sewage treatment systems,
reforestation, pest control, and urban renewal in historic
neighborhoods in Nicosia.
For example, funding for the Cyprus Institute of Neurology and
Genetics and for rehabilitation of the handicapped have maintained
a high level of bicommunal cooperation between physicians from
both the Greek and Turkish Cypriot communities in the diagnosis of
diseases and physicians' training. Planning is underway to
construct and equip a multi-disciplinary medical services facility
that will provide cardiology, bone marrow transplant, and
psychiatric services on a single site that will serve both
communities. Joint activities in air and water pollution
monitoring and control have been supported, and a single set of
sewage treatment facilities has been constructed to serve all of
Nicosia, a city currently split by the buffer zone. Collaborative
pilot efforts to rehabilitate historic buildings in both parts of
the city have also been funded.
New projects developed include health, environment, urban
development and educational activities. The most important new
effort involves the expansion of Conflict Resolution skills
training, which AID tested on a pilot basis during a highly
successful May 1993 workshop for Greek and Cypriot scholarship
students in the United States. Next year, we are planning to
provide this type of negotiation and mediation training to
456
biconununal leaders, and alumni of the scholarship program and
their families in Cyprus, and this will become an annual part of
the scholarship program in the future. Management training will
also be offered in Cyprus by U.S. trainers, for the first time,
during the coming year.
Examples of activities are:
Health
construction of the Institute of Neurology and Genetics;
medical expert exchange and lecture series;
transplant technology (lecture series);
rehabilitation program (training and equipment) ;
multi-disciplinary medical services (lecture series,
architectural plans) ; and
Nicosia Master Plan, sanitary facilities and urban renewal.
Education
* Library Feasibility Study (Greek and Turkish Cypriot Experts,
to prepare basic concept; international experts to prepare the
study) ; and
management training (lectures and studies) .
Social Assistance
* Workshops of the cooperative Society for Deaf Persons
(bicommunal workshop for the deaf) ; and
* conflict resolution training.
Environaent ^
air/sea pollution measurement and equipment, pest control and
food safety.
Agriculture and Forestry
— soil analysis for farmers, veterinary services, crop seminars,
tree planting and forest f iref ighting.
(* = New Bicommunal Projects)
QUESTIOH 4:
How much money was in the pipeline for the scholarship program
entering Fiscal Year 1993?
— How far into the future will that pipeline provide
scholarships?
Is the scholarship program still sending close to 70 students
a year to the United States?
./
457
— Of the Cypriots who have received scholarship awards since the
program started in 1981, how many students have not returned
to Cyprus?
ANSWER 4:
At the start of FY 1993, $17 million was in the pipeline for
graduate and undergraduate scholarships and short-term training.
The current pipeline will fund scholarship training initiated from
1990 through 1993. These degree programs will end in the spring
of 1994 through 1997 respectively. Short-term training in 1993
and 1994 will also be funded by this pipeline.
At present, 65 graduate and undergraduate students are
studying in the United States under the program. Approximately 70
new students will begin training during 1993. In 1992, there were
approximately 43 short-term students; approximately the same
number are expected in 1993-94.
Due to the duration of the scholarship program (initiated in
1981) , it is difficult to identify the present location of all
alumni. Virtually 100% of the students return to Cyprus upon
completion of their program; some, however, may leave Cyprus at a
later date for more training and/or job opportunities.
QUESTION 5:
In the past, AID has a ceiling of $7500 a year on a tuition
grant for a Cypriot student studying in the U.S.
Does that ceiling still exist for this program on Cyprus?
ANSWER 5:
At present, the AID tuition grant ceiling for all
participants, worldwide, is $10,000 per year. We feel that amount
is sufficient for the Cyprus program.
IV. INTERNATIONAL FUND FOR IRELAND AND NORTHERN IRELAND
QUESTION l:
For a number of years now, the Committee has expressed
interest in having AID study the feasibility and practicality of
an endowment fund for Ireland to which the United States and other
donors would contribute which could allow the Fund to use annual
interest income for projects.
Is there any interest in the Administration in such a
proposal?
How do you envision the IFI?
458
Wouldn't such an endowment, similar to the Portuguese
Luso-American Foundation, for example, help insure long-term
funding and enable the United States to get out of the
business of making annual appropriations for this activity?
ANSWER l:
AID has not pursued the concept of an endowment for several
reasons. First, in order to maintain the International Fund for
Ireland's (IFI) current level of activity, a substantial up front
appropriation would have to be made, given current and projected
interest rates. With other pressing foreign assistance needs and
limitations on overall U.S. foreign assistance resources, such a
substantial up front appropriation would not be feasible. Second,
if the current level of appropriation was to be largely used to
create an endowment, there would be a sharp reduction in the
projects that the IFI could undertake now. With discussions among
the competing parties now in progress, we believe it is important
to maximize the use of current appropriations rather than to hold
their benefits in reserve until an endowment could generate
adequate income. Third, we view the IFI as a temporary facility
to catalyze and support other political and social initiatives
aimed at permanent reconciliation among the communities.
The IFI is a non-partisan, bicommunal venture to promote and
support grassroots efforts to reconcile the different communities
in Northern Ireland and the bordering counties in the Republic of
Ireland. The IFI's principal effort should be directed at
reducing the economic hardships of unemployment and community
environmental neglect, which abet differences and prejudices
exhibited along religious lines. The IFI appears to be quite
successful in helping to organize bicommunal community
organizations which, in partnership with the IFI, access and
obtain additional resources from government and private sources.
We do not envision the IFI as a permanent organization. Rather,
we hope indigenous private organizations emerge to continue this
type of activity if needed.
The IFI, as presently structured with an independent Board of
Directors, functions essentially as a foundation. It is important
to maximize the activities of the IFI, subject to the current
limitations on the U.S. foreign assistance budget. In addition,
we view the IFI as a temporary facility to catalyze and support
other political and social initiatives aimed at permanent
reconciliation among the communities.
QUESTION 2:
How many jobs have Fund projects created to date?
How many of these have been temporary jobs, and how many
permanent?
459
How many of the new jobs created to date have been in the
areas of highest unemployment?
ANSWER 2:
The Fund estimates that more than 26,257 jobs have been
created since the establishment of the Fund. There have been
17,963 permanent jobs created and approximately 8,294 person-years
of temporary employment. Approximately 2,157 permanent jobs have
been created in the areas of highest unemployment. In addition,
the Fund has created approximately 1,389 person-years of temporary
employment in these disadvantageous areas, mainly construction
jobs.
QUESTION 3:
What is the value of total funding provided to the Fund by all
contributors to date?
How much of this money has been expended?
What is the breakdown by project area?
Of the money not yet expended, how much has been committed
to projects?
What is the breakdown by project area?
Are you satisfied with the Fund's record to date?
ANSWER 3:
Contributions to date total approximately $271 million as
follows:
United States $170.0 million*
European Community $100.0 million
New Zealand $ .3 million
Canada $ .5 million
TOTAL : $270.8 million
* U.S. will contribute in 1993 another $39.4 million remaining
from FY 1992 and FY 1993 appropriations, following necessary
certifications.
The Fund has disbursed approximately $182 million for on-going
and completed projects, including $25 million given to two
investment companies to re-allocate. One hundred percent of the
remaining $102 million have been committed to projects.
The Fund directly undertakes projects in 10 different theme
areas, plus projects through intermediary investment companies,
460
and we have the following data on its performance through
September 30, 1992, the end of its last fiscal year.
Experimental community relations projects have received $2.5
million of the $3.5 million committed for this purpose. Under a
special initiative for disadvantaged areas affected by civil
unrest and urban decay, the Fund has disbursed $11 million of the
$42 million committed for activities. Other urban development
activities, principally commercial regeneration of town centers,
have received $19 million of the $41 million committed for
projects.
Of $10 million committed for innovative agriculture and
fisheries projects, $6 million has been disbursed. Science and
technology projects that stimulate research and product
development have received $12 million of the $17 million committed
for this purpose.
The Fund has disbursed all of the $21 million committed for
vocational training of youth, and $37 million has also been
disbursed against commitments of $48 million for small business
development. Dundalk and Belfast investment companies have
received $24 million of the $29 million committed for their
redisbursement as venture capital for enterprise start-up and
expansion.
There are two major "flagship" projects, one for the
Erne-Shannon navigation link, and one for archeology/tourism
development of the ancient capital of Ulster; the Fund has
disbursed $7 million of the $10 million committed for these
purposes. Other efforts to promote to promote tourism have
received $34 million of the $52 million in commitments. Other
special projects have received $8 million out of $10 million in
commitments.
The Administration is satisfied with the Fund's performance.
Since its establishment in 1986, the Fund has approved at least
2,800 projects totalling over $284 million for activities that are
being implemented by government agencies and the private sector.
QUESTION 4:
In recent years, the Fund has sought to shift its priorities
to the most under developed areas of Northern Ireland.
How successful has the Fund been in this area?
How much money was used in the most disadvantaged areas in
calendar year 1992?
How much does the Fund plan to target to such projects in 199 3
and 1994?
461
ANSWER 4:
The Fund has recently increased resources for the more
disadvantaged areas of Northern Ireland. This year, 70% to 80% of
the resources available are earmarked for program sectors in
disadvantaged areas.
According to the Fund's 1992 Annual Report, $83.3 million were
used in this sector.
The Fund plans to continue progress in reaching out to the
disadvantaged areas. Seventy to 80% of resources available are
earmarked for programs in these areas. Four additional program
schemes have been developed. The Community Economic Regeneration
focuses on community driven regeneration of economic activity in
urban areas. Community relations projects are designed to promote
reconciliation. Disadvantaged Areas Special projects target areas
of civil unrest and urban decay. The Community Regeneration and
Improvement Special Program (CRISP) designates disadvantaged areas
in Northern Ireland as a focus for the Fund's investments in
smaller towns and villages.
462
Honcarian-American Enterprise Fund
l«20 CvC Stmcct. N W
Wasmington. O C 2000e .
alCxanoch C tomcinSOn
'■CSlOCNT
AMO CMicr ciccuTivc o^riccM
April 2, 1993
The Honorable David R. Obey
Chainnan. Subcommittee on Foreign Operations
Committee on Approphaiions
2462 Raybum House Office Bldg.
Washington. D.C 20515
Dear Mr. Chainnan:
Having in mind that you are leaving today for an important trip to Poland and
the former Soviet Union, I would like to respond in a preliminary way to a brief
message received last night from AID. as your "messenger". 1 understand the
transcript of your remarks will not be available for another day or sa
I am enclosing a memorandum describing the purposes of the Fund in
financing the establishment of a financial and investment services firm to which it
could have access. Your staff previously received an earlier version. As it notes, the
intention of the Fund to establish "an investment/merchant banking operation" was
stated in the Ftmd's original Management Plan, submitted to your ofRce and to A.LD.
in 1990. In our consideration of the EurAmerica deal it was never seen as a
"restructurine" of the Fund, but oniv as an imix>nant investment made to provide seed
capital for much needed financial services. As you may know, the banking system in
Hungary is still not privatized and the lack of loan credit^vestment capital is limidng
the emerging private sector. We have never thought of the deal as hiring EurAmerica
to make our investment decisions, nor have its principals participated in any way in
doing so. Conversely, I have reviewed their client project list, and have found hardly
any that would be a logical undertaking for the Fund itself the two address qmie
different needs.
Furthermore, evasion of a perfectly understandable salary limitaiioa on our own
organization (about which we have never complained) was not a consideratioo. If it
had been so, I suppose I might have asked to stan with myself. In fact, 1 serve as
Chairman of EurAmerica without pay, my purpose being to assure acceptable ethical
and quality standards, proiea the Fund's invesmient and occasiooally assist in
obtaining business. Fund represenutives also serve on the Boards of many of the
other companies in which we invcsL The salancs paid by Eur.\merica are the market
ra:es for persons of their cxpcncnce and abilirv- in invcscmen: ba-iJong. In any case
±e salaries are pa:d not from the Funds capital LTvcstmcr.t but from crrunes
£er.sr3tcd. Lt that \^av i: is diffcrrn: froT. some of l^c othc.- cc~zir.::i ^f^c r.ive
463
invested in, where one or more senior executives make very substantial salaries (in the
EurAmerica case only two are anywhere near the reported range); our primary conceni
as hard-nosed investors is, as I believe it should be, whether the companies' actual or
andcipated earnings jusdfy the salaries and provide an adequate investment return.
EurAmerica was seen by the Fund's Board and management as an investment
which would give us access to skills not otherwise available to us in Budapest, where
the necessary compensadon levels involved would be earned by the principals through
their own effons. Our capital investment ($4 million, the least deemed necessary and
the most deemed appropriate for us) was intended to (1) give EurAmerica credibility
in the financial community it sought to enter, (2) cover temporarily the andcipated
inioal stan-up costs and (3), after achieving profitability, use its capital to purchase
companies being privadzed, restructure them and subsequendy market them to others
(possibly, but not necessarily, including the Fund), i.e. a merchant banking operaxioo,
something it would not be appropriate for the Fund to undertake in-house. Like our
other investments, the agreement includes an exit strategy, through the transfer of
ownership to the principals over time. EurAmerica will in due course require more
capital, and they will go to other sources than the Fund; the EBRD has already
expressed an interest in such an investment and will depend primarily on our
oversight In the meantime, die EBRD has shown its coofidence in the project by
offering EurAmerica SIO million to invest for EBRD in deals it works on, without
specific approval for each by EBRD.
I understand the quesdon has been raised as to whether there was a need for
such an organizanon as EurAmerica in Budapest This, of course, has to be a matter
of judgment; based on our experience in Hungary and knowledge of the then available
services, we believe diere was (and is) this need. The immediate success of the
organizadon after its establishment also is a measure of need. Recendy the ten
leading entrepreneurs in Hungary, who had joined together to try to purchase (widi
their own funds) a company being privadzed, retained EurAmerica to handle the entire
transaction for them - about their ISth client and surely the ultimate verificanon thai a
need in Hungary is being met I might add that the quoted badinage in the New
Republic arncle about woridwide acdvity should be understood as indicating that their
reputation, not their acrivitv. has extended already well beyond their assigned territory
because of the quality of their work. Ultimately, we believe that Budapen has the
potential to become a major financial center for Eastern Europe, and this is one smaD
step in that direction.
I hope the foregoing rr.ay clear up ihe e%icJer.t misi-dir^undijigs created by
this amcle. I care Ner\- much about the success of -jie Fu.nG. xj'ji in us contnbunon to
ihe r-insidon in H-j.-.2a-'%' a.".d as a nc* a.-:d \er\ ;:'f;crvc M'T:.i.i for U.S. foreign
464
assistance to countries attempting the transition to a market economy. If the
Enterprise Funds arc to be subjected to second guessing on steps seen by their Boards
of Dirccton and management to be within their mandate, as I firmly beUeve this one
to have been, then it may become impossible to evaluate the merits of the basic
concept of the Funds, i.e. if you want to help develop private enterprise in these
countries, use the private sector to do iu
I very much regret that a sensationalized magazine anick full of inaccuncks,
innuendos. and off-hand comments taken out of cooiext, could have led to a
misunderstanding of one of our investments. Needless to say. I also very much regret
the quotes uncomplimentary to A.IJ). amibuted to HAEF individuals, including (in the
fuller version published in Budapest) myself. Much of the work of A.LD. is excellent,
and I assume Congress agrees. I worked closely with A.LD., also very largely on a
personal pro bono basis, for about five yean prior to accepting my present poddoo,
and I believe there has been real muuai rcspea and cooperanoo during thai period
and indeed to this day. We have felt since the inceptioa of die Fund thai iMgimiim
openness to the press was imponant to assure the widest knowledge of the availability
of the resources of the Fund for the benefit of Hungary. This is the fim bad stocy we
have suffered in three years, but I have to note it is not without piecedent in the
experience of others.
I am also concerned that you feel you may have been somehow blind-sided
with regard to the EurAmerica matter. We try to keep all of our consotuencies
informal, and the press release announcing EurAmerica was seat widely, followed
closely by our Six Months Review whidi also covered the subjea and was mailed or
delivered in June, 1992. Addidonal treatment of the investment figured prominemly in
our Third Annual Repon published in January. 1993. [Because of the pioneering
nature of our work, we try to include in our aimual repons what we hope are useful
details as to what we are doing, and we have been told our lepons are models of
clarity.J None of the above-menooned coverage of EurAmerica gave rise to any
quesdons until reports of the New Republic article fim drculaied. I had hoped to
have the opportunity to review the year with you in person before now. Needless to
say, I would be happy to sit down widi you on your return to discuss further any
aspea of this matter or other developments.
It is important for you to know now that the Fund is ai a cridcal stage and
cannot be deprived of funding for very long without disastrous results. We are, I
believe, the only one of the four Enterprise Funds which andcipates exhaustion of this
year's allocated fu.nding (complecne our total S60 million u.ider '^.t SEED Ac: plus
S5 millior. :or technicii assistance: before our fiscal year tn± Members of cur staff
ire al-:a*v u.-.eisv about ±6 f-r.JT o: Lhej- 'obs. Cish i.-. \ir.i as I v^r.:; :s a^our
465
SI. 5 million. Our present focus is very strongly on various avenues toward obtaining
outside funds, however, and depending on how long they take until closing we may
squeak through:
■ We are about to offer a "side-by-side" mvestmem fund to banks and other
financial insniutions in Hungary, which will be sold on the basis that the Fund
will be around for five years (or more) to manage it Negodadons with the
Nadonal Bank of Hungary have obtained a number of agreements to implement
the plan, which will represent a number of firsts for Hungary, and contribute
significandy to the development of the capital maiitcL
■ We are in the midst of due diligence together widi EBRD lootdng to the
purchase by each of us of 2S% ownership interests in a small but strong
Hungarian bank, at a cost to each of about $4 J million which will effecnvely
result in the privatizadon of the bank. We are developing elaborate plans to
use it as a basis for obtaining preferred access to the $100 million credit by
The Expon-Impon Bank of Japan to the Hungarian Government to provide
medium term loans to small and medium-sized businesses through Hungarian
banks which lack any experience with such loans. This wiU put us back in the
business of loans to such enterprises, hopefuUy in a bigger way, now that the
SS million we allocated to it is fully loaned out Experience has shown that
significant technical assistance for training will have to be provided. We hope
the closing will be in May, since the need is urgent
■ We are initiating work on a major side-by-side fund to be offered to U.S.
pension funds and intemadonally, along lines similar to that sold by the Polish-
American Enterprise Fund, although hopefuUy without any cash contribudon by
the Fund. This was deferred while the Polish Fund completed its own, to
avoid compednon in the market; it is now urgeoL
I would be glad to discuss these particular projects wid> you at any time.
Very truly youn.
Alexander C. Tomlinson
::.-;;o?u.'es
466
HUNGARIAN-AMERICAN ENTERPRISE FUND
Purposes of the Fund in Financing Establishment of
EurAmerica Capital Coqwration
April 2, 1993 (Revised)
Background
The need for a financial and investment services organizadon to which the
Fund would have access was recognized at the time HAEF commenced operations.
Attached is the relevant section of the Fund's Management Plan, as ^jproved by the
Fund's Board of Directors and submitted to the Agency for Intemaiional Development
and to the Foreign Operadons Subcommittees of the Appropriations Committees
before release of initial fimding in 1990. It is understood the Polish-American
Enterprise's Fund Management Plan included a similar concept Because of HAEFs
public identificadon with the U.S. Government, we felt it was necessary to have initial
control of such an endty to assure that it would operate at the highest ethical and
quality standards.
Prior to the establishment of EurAmerica in May, 1992, we had considered and
rejected two proposals for the creadon of a financial services/merchant banking
operanon. In the far more attracnve EurAmerica proposal offered to us there were
three (now four) principals (including one Hungarian) who were all from one leading
U.S.-based intemadonal investment banking firm and had dcme a considerable amount
of business in Hungary and elsewhere in Eastern Europe. Only oac had already left
the firm; all expected compensation equal to what they were leaving behind and very
likely would not otherwise have left their previous posidons. This was pardculariy
understandable because they brought existing relaoonships (suggesting eariy revenues)
with a variety of clients. The risk we insisted they take was that if they did not
produce a profit for us in the first year their compensadon would be halved in the next
year (or similarly in the case of a loss in any subsequent year).
Management's Purposes
Following are the purposes for the establishment of EurAmerica, as seeti by
HAEF management at the time based on its first two years of experience. The need
for such an tKganizadon remained evident; additional benefits had become evident:
1. To obtain access to experienced persons with investment banking skills,
who would generate their own salaries.
2. To make an attractive investment return.
3. To help develop the Hur.ear.an capital markets. The Fund's abiiir>- to divest
>uccissri;l i.-AcsnTients depends in considerable measure on the development of
■r2j-.k:n2 ir.a. &.i r.xk exchaiiEe. is docs i^.c srowth of small busmess. We believe
467
that EurAmcrica will be able to contribute significantly to the development of the
nascent Budapest Stock Exchange.
4. To attract to Hungary highly professional investment banking skills not
otherwise available to the Fund or other potential Hungarian clients, and to
demonstrate the investment attractiveness of a high-quality Budapest- based financial
service company.
5. To raise equity capital for Hungarian companies in general and specifically
for companies in which the Fund wishes to invest
6. To train (and motivate) outstanding young people (including the Fund's own
personnel) in investment/financial type skills. It is to be expected thai EurAmcrica
will lose some promising people (jusi as HAEF fears (but expects) that it will lose
some of its own), but we hope they will stay in Hungary where there is so far
practically no one with more than two or three years of investment banking/financial
services exp>erience.
7. Finally, management believes Budapest has the potential to become a major .
financial center for Eastern Europe and the QS. To do so, it will need Budapest-
based financial institutions prepared to serve that aica knowledgeably. The Fund's
view is that this prospect, if encouraged, will in due course generate many attractive
opportunities for the development of small private enterprises to serve and feed on this
developing business. For this reason, the HAEF agreement with EurAmerica provided
that ii be headquartered in Hungary, but could operate also in C:zechoslovakia, Poland
and the former Soviet Union, but not elsewhere, except in the development of sources
of investment funds for its clients in those countries. It is expected diat the inier-
rclationships that it v^ill develop in the designated area will contribute to this end.
To achieve the above-mentioned potential (and to assure better support for
small and medium-sized private enterprises), privatization of the major Hungarian
banks is also essential. HAEF has expended approximately $210,(X)0 of its technical
assistance money in grants directed toward accelerating this process.
Progress to date
EurAmerica's progress to date confirms that it is fulfilling the expectations the
Fund had for it:
■ Of the approximately S4O-60 million of foreign investment that has followed
the Fund into invcstmcnis in its invcstee compamcs. close to half has come
from investors first identified by EurAmenca. This represents signincant
leverage already on our investment.
■ ELTAmenca is assisting -atJi out current project in seilL-.g to Hungariir.
r:-a.^c;aJ i.-snru-or.s a i:Ci-o\-<\ce mvestrr.eni fu-c :o be naragec by i-L-\£F.
468
EurAmerica's intunate knowledge of the local market strongly influenced our
decision to selea it as placement agent We expea this fund to be a
significant step in the development of the Hungarian equity maikets, and hope
this will lay the groundwork for a later public investment fund offering on the
Budapest Stock Exchange.
Cunent projections lead us to hope the first fiscal year will show EurAmeiica
in the black. This would be extraordinary for a new enterprise. Over the two
or three ensuing years, profits are expected to be substantial, affoniing the
Fund a reladvely high return on its investment and providing for the reduction
in its ownership share as originally contemplated.
Alexander C Tomlinson,
President
Hungarian-American Enterprise Fund
Attachment
469
KA£r Mar.aaere.-.t Plan
Negotiations for this purpose are presently in progress,
with the expectation that the aggregate amount placed with a
ban)c for this purpose will not exceed $5 Billion.
The Fund may also establish a small fund (initially
$50,000 in total) to be disbursed for very small
entrepreneurial loans (to finance a sewing machine or a
small tractor, for example).
To enhance its capability to make loans in the
agribusiness sector (including cooperatives) the Fund may
consider purchasing an interest in a bank serving that
sector.
Merchant Banking and Ondervrltlng
The Fund may establish an investaent/merchant banking
operation in Budapest, to the extent permitted (or required)
under Hungarian law, to engage in merchant banking and
underwriting activities seen to be consistent with the
following purposes:
To assir-t in the Hungarian Government's privatization
program
To assist in the development of the capital markets of
Hungary
To provide training for Hungarians in such activities
To facilitate its own investments in securities
expected to be marketable in a reasonably short time
To seek other Investors in projects the Fund may wish
to undertake
To expand the Fund's sources of income by earning fees
for underwriting or placing securities
Review to Beet SEED Act Bequirements
The Fund will adopt, and use for review of every
potential investment or loan, a check list to assure that
all requirements of the SEED Act of 1989 limiting or
otherwise governing its loan/investment activities are
observed.
470
lUSAID
AGENCY FOR INTERNATIONAL DEVELOPMENT
TURKEY
ECONOMIC REPORT TO THE CONGRESS
JANUARY 15, 1993
471
I. Executive Summary
Policy: Turkish authorities have been Implementing vigorously an outward-oriented
and growth-stimulating adjustment program since 1980, when they broke with past
policies which had favored import substKution and an industrial structure led by state
owned enterprises. The adjustment program has featured a flexible exchange rate
regime and extensive liberalization of trade restrictions. This resulted in a tripling in
exports between 1980 and 1985 and another 50 percent rise through 1990. Areas of
policy weakness have been episodes of expansionary fiscal policy and generous wage
settlements, short-Pived attempts to control inflation, and slow progress on
privatization.
As a result of the adjustment program, the growth rate in annual GNP averaged 5
percent from 1981-1990. The inflation rate, however, doubled from 30 percent to 60
percent from 1986 to 1990, and by early 1992 had reached nearly 80 percent.
Recent Economic Performance, 1991-92: The external shock associated with the
Middle East crisis put a damper on economic activity in the second half of 1990. This
slump intensified in the first quarter of 1991 with the outbreak of war, and output
declined by 1.5 percent relative to the first quarter of 1990. However, losses in the
trade and service accounts related JGJMididdje_EaslJaisisjyer9_QffsetbyLgrar^^^^ and
concessionaLloaj:is.froni_Westecn and Arab_donorSi and,^ whenjhese loans are
included, Turkey ended 1991 with^ cujrent account surplus of 0.2 percent of GNP
(-1 .6 percent of GNP without these transfers).
Debt Situation: Through its dramatic growth of exports and the steady expansion of
its economy, Turkey has largely out-grown its extensive debt management problems
of the 1970s. Reflecting the continued high pace of repayment of medium and long-
term debt, the external debt ratio is down to 45 percent of GNP (as of September
1991). The debt service ratio continues to hover around 33 percent of exports. To_
the tJ S, Turkey has debt QutstandLng,oL|2.6jillion as Of June 1992.
II. Early Economic Background and Policv Setting
For half a century through the end of the 1970s, Turkey generally followed an
inward-looking economic strategy with heavy reliance on government intervention.
Besides erecting barriers to trade and financial flows, the Government created
numerous public enterprises and gave them extensive subsidies and import protection.
During much of the 1960s and 1970s, this autarkic policy achieved rapid economic
growth and subdued inflation. However, declining investment efficiency, sharply rising
energy costs and internal price rigidities caused growing imbalances by the mid and
late 1970s. Foreign exchange shortages became increasingly acute, disruption in
many industries became common, unemployment grew and inflation rose to over 100
472
percent annually. The growing current account deficits were financed largely though
short-term borrowing and the accumulation of payments an-ears, with the external debt
tripling between 1974 and 1977. Turkey's immediate crisis was abated through a
series of debt reschedulings between 1976 and 1980, but a long-term solution
required a drastic re-orientation of its economic policies.
III. Stabilization and Structural Reform
Turkey embarked on an extended stabilization and structural reform program, starting
in 1980. This program was buttressed by International Monetary Fund standby
arrangements and World Bank structural adjustment lending through 1985. Its early
features embraced: 1) a sharp reduction in the subsidies granted to the State
Economic Enterprises (SEEs) through regular, large increases in the prices of most of
their commodities • the January 1980 price increase was the major one, which
included 100 percent-120 percent rises for electricity, transport, textiles and most fuels;
2) the removal of most price controls on the private sector; 3) the complete
liberalization of interest rates; and 4) frequent devaluations and later daily
determination of the exchange rate in order to maintain export-competitiveness. The
1980-May 1981 devaluations amounted to more than 30 percent in real terms, and
between May 1981 and May 1986. the real exchange rate depreciated by about 3.6
percent annually. During the 30-month period of July 1986-December 1988, this rate
depreciated by about 5.5 percent annually. The openness of Turkey's economy also
occurred on the import side. Tariffs and quantitative restrictions were dramatically
reduced during 1984 - 1987.
Later reforms included banking deregulation, the introduction of a value-added tax,
significant reductions in tariffs and administrative controls on imports, the liberalization
of restrictions on capital movements and the slow initiation of the privatization of state
owned enterprises.
IV. Accomplishments and Weaknesses
Turkey's most significant accomplishment has been in the area of exports. Exports
rose by an impressive 19 percent annually from 1980 through 1988 so that exports as
a percentage of GNP trebled to 21 percent during that period. Export performance
has been particularly striking in industry: annual industrial exports jumped from $1.05
billion in 1980 to $8.94 billion in 1988.
The international openness of Turkey's economic policies also is reflected in the
increased importance of imports. Imports increased from about 16 percent of GNP in
the late 1970s to over 22 percent after 1984. However, the exceptionally strong
growth rate in exports led to a reduction in the trade deficit from $4.6 billion in 1980 to
the annual range of $2.7 to $3.2 billion during 1982-87. Combined with favorable
developments in tourism and other service receipts, the current account deficit
473
declined from $4.5 billion in 1980 to $1.9 billion in 1983 and to $1.0 billion in 1987,
while a $1.6 billion surplus emerged in 1988.
Turkey's other major accomplishment has been in the area of stimulating rapid
economic growth. Real GDP growth has exceeded 5 percent, on average, since 1980.
Turkey's most significant economic policy weakness has been the failure to t)ring
down the inflation rate. The average annual rate had been about 36 percent from
1973-80. There had been initial success In braking the high inflation of 109 percent in
1980 to 39 percent in 1981 and to 27 percent in 1982. A sharp cut in subsidies to
SEES and austerity in other expenditures in the early 1980s had caused the fiscal
deficit to decline to a k)w of about 3 percent of GNP in 1983. Thereafter the deficit
ratio to GNP stopped declining, and inflation accelerated in response to administered
wage increases and periodic surges in government expenditures, (particularly in the
run-up periods before major elections, such as in 1987 and 1991) and an
accommodating monetary policy. Inflation ranged between 35 percent and 48 percent
during 1983-87 but has accelerated to 50-70 percent annual rates in more recent
years.
The other major policy weakness has been in the area of privatization. A limited
program establishing privatization procedures and responsibilities was launched by
parliamentary decree in 1986. A master plan for long-term privatization was then
developed with assistance from Morgan Guaranty. It took many months of audKing
and legal preparations to make the first public offering (Teletas) in February 1988.
This offering was highly successful and, in November 1988, Coca Cola purchased
Ansan bottling company for $13 million. However, legal and political disagreements
continue to hamstring further significant progress.
V. Recent Economic Performance and Outlook
The new coalition govemment, elected in October 1991, has promised early action to
rectify these weaknesses in order to bring the inflation rate under control. While the
economy grew rapidly during 1990, was sluggish during most of 1991, while data for
the first half on 1992 indicate that it may now be in an upswing. Although the current
account and trade deficits grew during the first half of 1992 compared to the first half
of 1991 (See Table I, Annex 1), increased capital inflows reduced the overall balance
of payments deficit to half of what It had been for the same period in 1991.
A. Fiscal Policies and Progress Towards Privatization
The central budget deficit had been fairly stable at about three percent of GDP during
the late 1980s but showed a particularly sharp increase occurring during 1991, owing
to pre-election expenditures that year. About half of the public sector deficit is not
recorded in Table I, being run up by the SEEs. When account is taken of the 34
474
trillion lira debt assumed by the SEEs during 1991, public sector borrowing amounted
to some 10 percent of GNP, over three percentage points higher than during 1990.
For the January- June 1992 period, budget revenues Increased 76 percent while
expenditures grew by 87 percent, resulting In a budget deficit of TL 17,024 billion,
more than double the budget deficit of the same period in 1991. The money supply
Increased 21 percent from January to June of 1992. and was up 52.5 percent for the
year ending June 1992.
The weak budget performance has been the result of large wage settlements, the
failure of state enterprises to Implement adequate domestic price increases and the
large burdens inherent in maintaining a bloated public sector with negligible progress
made in privatization. In response to pressures from organized labor, private and
public-sector wages were increased in 1989 and 1990 by 120 percent to 140 percent
each year. Wages were increased by 40 percent again in July 1991, on top of similar
increases at the beginning of the year. On July 28, 1992, the minimum wage was
increased by 80 percent for worl<ers over 16 years of age.
In August 1991, the government increased its costs in supporting farmers by raising
the price levels on many crops by 60 percent-76 percent and by sharp increases in
the fertilizer subsidy. The price levels on most Turi<ish crops had already been priced
above world market levels. Similar electioneering pressure had resulted in minimal
price increases at the SEEs through mid-December 1991. But. the increases
announced then were still modest, e,g, only 20 percent for sugar, 22 percent for
electricity and 9 percent to 27 percent for liquid fuels.
The government has failed to privatize fully more than a couple of SEEs. Its principal
success has been in selling to the public small portions of some 20 SEEs. Its sale of
five cement companies to a French firm for $105 million was blocked by the
Constitutional Court during 1989 because the government did not follow its own rules
and offer shares to the employees first. The new coalition's privatization program
appears to focus on selling the government's shares in private joint venture
companies, rather than tackling the 120 companies where the government is the sole
owner. At the end of January 1992, the state's 51 percent share in a local gas
company was sold to the French gas company, which already had a 49 percent share
of the company, for TL 350 billion. Public holdings in four other companies are to be
sold off in this new program; these companies are in insurance, tea and canned fruit.
Efforts to privatize SEEs broadly continue to be stymied by accounting, legal and
political difficulties plus the large size of most SEEs compared to the limited resources
of private purchasers. The three dozen SEEs and their 100 or so wholly or mainly
controlled subsidiaries account for 50 percent or more of the budget deficit.
Privatization of these enterprises represents a major opportunity for reducing the
deficit.
475
B. Inflation. Economic Growth, and the Balance of Payments
The inflation rate had Jumped from 39 percent In 1987 to 75 percent in 1986. There
had been small movements downwards during 1989 and 1990 to 60 percent during
the latter year partly in response to policies encouraging the appreciation of the
Turi<ish lira, but performar>ce again deteriorated during 1991 to about 67%. For the
first half of 1992, CPI inflation of 26.7 percent was down slightly from the 30.8 percent
of the same period in 1991.
The average annual Increase in real GNP was 4.7 percent during 1989-91. or about
half a percentage point below the average for the decade of the 1980s. Performance
during 1989 and 1991 was sluggish: one and two per cent, respectively, while real
grov^h in GNP surged by nearly 10 percent during 1990. In the first half of 1992 real
GNP increased by 6.4%, a significant improvement over the 0.8 percent decrease in
real GNP of the first half of 1991. Much of the improved growth is attributed to growth
in industrial production.
The main determinants of slow growth during 1989 had been the drought-induced fall
of 11.5 percent in agricultural production and declines in mining and public investment
and in non-residential private investment. Important stimulants to the 1990 growth
surge were the recovery of agriculture and a 12.4 percent rise in real private
consumption, as a result of large real wage increases. The increase in government
consumption was also exceptionally high, partly reflecting extra expenditures related to
the Persian Gulf crisis. Private residential investment declined by 9%, while
non-residential investment accelerated sharply to an average rate of 24%.
Sluggishness in private investment was apparently the main cause of the slow growth
during 1991.
Turkey's trade balance had reached its most favorable position during 1988 at
negative $1.8 billion, as a result of an unusually large increase in exports (Table II,
Annex B). The trade deficit then widened sharply during 1989 and 1990 to an
unsustainable high of $9.6 billion, during the latter year. A slowdown in exports during
the two years was matched by an explosive growth in imports during 1990. Part of
the explanation for the import surge during 1990 had been increased consumer
demand. The major reason for the deterioration in the trade balance had been a
swing in exchange rate competitiveness. The lira appreciated strongly by nine percent
(in real effective terms) during 1989 and by 17 percent during 1990.
In 1991 the trade deficit was still quite large at $7.3 billion, and for the first half of 1992
the trade deficit was already greater at $3.4 billion than it had been for the same
period in 1991 ($3.0 billion).
The current account balance would have deteriorated more sharply, had it not been
for a sharp rise of $1.3 billion in worker remittances during 1989 and for continuing
476
Improvements in net services Income and for the official grants received in connection
with the Gulf crisis during 1990. With the Turkish lira depreciating again during 1991
and with subdued economic growth, imports were stagnant and exports grew fairly
strongly. The reduction of expenditures on Imports was largely due to lower world
petroleum prices and a 20 percent rise in domestic oil production. Combined with a
further sharp rise in official grants and tourism performing better than initially feared,
the current account improved to a surplus of $0.3 billion during 1991. For the first half
of 1992, however, the current account was again in deficit of $0.8 billion.
VI. Debt Sen,nce Prospects
Turkey had reached an unsustainable debt position by the late 1970s. Debt
reschedulings during 1978-80 gave it breathing space, while its structural reform
program was prepared and then implemented during the early 1980s. Turkey's
external debt doubled to $40.2 billion during the 1984-87 period (see Table III), but
then grew much more modestly as the current account deficits narrowed. Rapid
economic growth, favorable balance-of-payments developments, and generally
prudent debt policies during the last decade have permitted Turkey to manage its
large debt burden reasonably well. The ratio of total debt to GNP had peaked at 59
percent in 1987 (in 1980 this ratio was 39 percent) and has then dropped steadily to
52 percent in 1989 and to 46 percent in 1991 (see table 3). Debt service payments,
which had dropped from 37 percent of exports in 1988 to 28 percent of exports by
1990, increased slightly in 1992 to 33 percent of exports.
Turkey has begun to pursue prudent debt policies in recent years, as reduced current
account deficits required only a slow rise in the total debt since 1987 to about $45.6
billion in 1991. Though the government deliberately cut short-term debt during 1988
and 1989, this latter trend was reversed during 1990, with a 65 percent rise in the
accumulation of short-term debt as several SEEs boosted their borrowing from
external short-term sources to cover their deficits. Data for 1991 indicate that Turkey
had begun to rein in this less secure form of borrowing. Turkey's foreign exchange
reserves (less gold) were about $4.7 billion at the end of 1989, $6.0 billion at the end
of 1990, and $5.1 billion at the end of 1991, and $4.3 billion as of June 1992.
Turkey still has a moderate debt service burden equal to about 33 percent of exports.
Continued progress in promoting exports and private sector transfers will assist Turkey
in making the necessary debt payments without difficulty. The U.S. government has
recently provided the GOT with a cash transfer of $75 million at the end of 1992. An
additional $125 million of ESF cash transfer for Turkey is planned from FY1993 funds.
477
Table I: Turkey
BiUioasTuftidiLin
REVENUES
Oik«t Mxittoa
EXrENOin/RES
DEnOT
DrfKM<«e(CNr
— Government Finance \t
i9n
1988
1989
1990
1991
Juuaty-Juae
1991 1992
1S.44
ir.H
iijr
M.sr
N.11
H.4t MW
•.•r
i«ii
u.n
*%*»
7tM
»o.iT u«*
1.W
l.M
■ M
11.14
tOM
(•' it.n
it.n ti4t u.tr M.M iMtr
-t.U -IM -T.M -I1.T* -*i.r«
-aOT -tM -II* -IJi
-101
\A C*nU4iG0v«<nfn«Al OAly Local fnwfiic^4i4»4t SCCt •»< Spactai ^iAd bwtfg*
4*.tl M4|
-•r» -iT.ot
n* -4 It
Table 11: Turkey --
BOliouofUSS
Balance of
Payments
I9S7
1988
1989
1990
1991
Juuuy
1991
-June
1992
Ckmai Ammm
E^M
«•.«
tl.OS
ii.ro
ISO*
1»0T
*.**
0.04
ISfM*
MJt
i*.ri
1000
B.0O
11.00
0.S4
10M
a>UMB
-•J*
-«.n
-4JI
-0.00
-TM
-•M
-141
S*mo>iNcl
OM
1J1
10*
144
1.00
0.00
• TT
frwftit Triwfrn N«l
tjar
•.u
*I4
*.*!
*0S
1*1
1U
OfTKial TrtMlcn N«l
OM
ou
04*
1.14
*.tl
10*
osr
CUHREKT ACCOU.VT KA1J\SCE
•0(1
1.90
000
•to*
o»r
-0 01
-or*
CWK4I Acoul % •! CSr
-%*
tJ
It
-«0
-10
na
».
CArrTAL ACCOf NT BALANCE
1.««
-0*0 '
or*
404
-*40
-110
1U
ERBORS AND OMISSIONS
-oil
Ott
0 0?
-0 4T
001
en
1
EXCEPTIONAL nSANClNG
eoe
000
eoe
• 00
• •0
• »•
1
• ••
1 COLNTtllPART ITEMS
ou
-010
• OS
• ir
• IT
-0»4
1
• ••
1
OVERALL BOP
-0.2*
aio
soo
-100
-lOJ
-0 01
-•40
Oikcf Dtu
RcalCNTCrawikC*)
ri
*0
10
• t
01
0*
• 4
lin«i>»(«)
400
cot
•It
4«0
s»t
!••
isr
!
Sou'c* C»^'«iB»«» o«Turk«r and iMf •!»«
•••M
1
t
-^
478
Table III: Turkey - - External Debt
Billions of USS
I. Dabuncd Exitroal Dtbl
II. E>cbl Service
III. RiliM («)
1987 1988 1989 1990
1991
Toiil
Medium A Loo|-TcnD
Mulliliicnl
Bilalcral
Priviit
Sbon-Tcm
40.2)
40.?2
41.79
49.19
90.33
32.ai
94.31
38.01
30 94
30.79
• •0
0.10
• 74
0.99
0.17
11. ••
11.3*
11 43
1209
9.93
11.12
13.73
1S.11
1900
21.01
7.62
e.42
9.79
0 90
090
Medium A Loo|-Tcm
Priscipil Payneali
200
3.03
4.02
304
4.10
iDicreil Payntou
2.30
2.90
2.01
3.20
3.43
Debt Sei%-icc Ratio
lolcretl PajtoroU/CDP
Total Oebi'GOP
34 00
39.00
32.29
2919
32.00
3.90
490
300
3.10
3.11
59.00
97.90
92.39
45.32
45.97
SOURCE: World Bank
479
ECONOMIC REPORT TO THE CONGRESS
PORTUGAL
April 1993
I. Executive Sunmarv
Since 1974, Portugal has undergone a remarkable transformation,
both economically and politically. It is now a pluralistic
democratic state which is fully integrated into the European
Community (EC) . Its policy performance under a recent IMF
standby arrangement was exemplary. Real GDP growth was quite
robust in the latter half of the 1980s, even during recent years
of stagnation in the world economy. The unemployment rate in
1990 was below 5% and export volumes rose by over 12% (following
a rise of nearly 20% in 1989) . The Government of Portugal (GOP)
has pursued a policy of prepaying its foreign debts, financed
from privatization receipts. This has contributed to a decline
in the country's debt-to-GDP ratio from 55% in 1986 to 31% in
1990. Direct investment grew by over eightfold during the same
period, and foreign reserves by nearly tenfold.
The GOP has overcome many problems in the last few years. Since
moving from a crawling-peg to a managed-float policy, the GOP has
also joined the exchange rate mechanism (ERM) of the European
Monetary System (EMS) . As of December 16, 1992 (a fortnight
ahead of schedule) , all restrictions on capital movement were
lifted, which greatly freed acquisitions by nonresident
investors. Given its ability to attract even greater foreign
investment and the benefits of EC integration, Portugal's
econoTnic prospects look exceptionally good. By 1990, GDP per
capita stood at $5,670, which is approximately the same as South
Korea's per capita GDP, according to the IMF; 1991 GDP almost
reached that of Ireland, reported the CIA. In virtually every
respect, Portugal has graduated from the rank of developing
country.
II. Economic Background and Policy Setting
In the three years following the socialist revolution of April
1974, Portugal's political and economic systems were radically
transformed. A representative political system was introduced
and trade unions were legalized. In the economic sphere,
however, three major institutional changes hampered Portugal's
potential for sustained economic growth:
1. Under a comprehensive land reform, large farms in the
central wheat-growing regions of the country were taken over
by landless farmers and worker cooperatives.
480
2. Labor legislation was enacted making it extremely
difficult to disoiss employees.
3. Banks, insurance and transportation companies, and
large industrial companies were nationalized.
The public sector deficit expanded rapidly, partly to finance
these nationalizations, and also due to large public sector wage
increases, generous subsidies for food and fuel, large increases
in government staff, and rapid expansion in public investment.
These developments, along with the 1974 oil price shock,
declining remittances, and continuing political unrest, resulted
in falling productivity and serious balance-of-payments
difficulties.
During a 1978-80 IMF stabilization program, Portugal initially
succeeded in substantially reducing the balance-of-payments
deficit, but did not make much progress in lowering the GOP's
budget deficit. The annual inflation rate rose above 22% due to
a lapse in adjustment efforts. In 1982, the budget deficit
comprised 13% of GDP, and the payments current account deficit
rose to 14* of GDP.
These adverse circumstances convinced the GOP to undertake a
second IMF-supported stabilization program in 1983-85. The
program centered on deep cuts in aggregate demand through
restrictive tax, expenditure, and credit policies; sharp price
adjustments; and crawling-peg devaluations to change relative
prices in favor of the export sector. Stabilization was
accompanied by recession, with real GDP falling by 0.3% during
1983 and another 1.6% during 1984. But the stabilization
program, accorjpanied by structural reforms under the aegis of
integration into the EC, laid the basis for a prolonged economic
boom.
III. Relations with the European Community
In 1986, Portugal acceded formally to the European Community
(EC) , providing the GOP with virtually unimpeded access to the
goods, capital and labor markets of other EC members. This
helped launch their sustained economic boom. Portugal's dramatic
economic turnaround since 1985 has been based both on the very
favorable external trade and investment environment created by
the accession, and substantial structural adjustment assistance
from the EC.
Under the Articles of Accession, a transition period of seven
years (ten years for agriculture) was allowed during which
Portugal undertook to drop all trade and capital barriers against
other members and adopt the Common Agriculture Policy. Sizeable
481
amounts of structural adjustment funds were provided to assist
the process of making Portugal a competitive member of the EC.
Entry into the EC was thus a dynamic force for change in
Portugal's economy, both through financial assistance and via the
accompanying economic stabilization and structural adjustment
conditions attached to the assistance. Large increases in
private foreign investment were stimulated by a vastly improved
level of business confidence, attributable both to Portugal's
accession to the EC and to its successful implementation of
economic stabilization and structural adjustment measures.
Investment was also spurred by the country's low tax burden,
which still ranks among the lowest in Europe.
IV. Recent Economic Policies and Performance
The economic policies adopted by the GOP in the early 1980s laid
the basis for a dramatic turnaround in the economy after 1985.
Although expansionary fiscal policies contributed to overheated
domestic demand, with associated higher inflation levels and
rising imports, exports grew dramatically, as did income from
tourism and remittances. Foreign investment also rose rapidly,
and important progress was made in privatization of public
enterprises as well as accelerated foreign debt repayment.
Government Finance. The GOP's large and persistent public sector
borrowing requirement (PSBR) remained a threat to anti-
inflationary efforts throughout much of the 1980 's. Following
the socialist revolution, rapid rises in public sector
expenditures were followed by growing public debt and interest
payments. Underlying problems included pervasive subsidies, a
weak tax system and bloated public sector employment. The PSBR
peaked at nearly 18% of GDP in 1985, then hovered in the 10%
range until 1988. More rapid progress in reducing expenditures
was retarded partly by disbursements of large net transfers from
the EC, which requires matching budgetary outlays. In order to
keep down budget deficits, the GOP now prefers that structural
funds be disbursed more slowly.
Much of the early progress in reducing the budget deficit
resulted from increases in prices and reduced subsidies for food,
feed, fertilizer, and fuels. From 1983-85, most public
enterprises were given freedom to raise prices in line with
market developments and in accordance with their need to raise
investment capital, reducing their dependence on the government
budget. But prices for those pr4oducts for which government
retained control on average did not keep pace with inflation.
Subsidy expenditures began to rise again in 1988, although in
1989 domestic prices for petroleum products were increased to
conform with international prices.
482
In 1986, a new petroleum tax and value added tax (VAT) were
introduced, substituting for a complex array of earlier taxes.
By 1989, it was estimated that implementation of the VAT system,
coupled with the rationalization of income taxes, had yielded an
increase in revenue equivalent to 1.2% of GDP. Improvements in
government revenue, together with sharply reduced borrowing by
public enterprises, led to a decrease in the public sector
borrowing requirement which resulted in a more acceptable 6.1% of
GDP in 1989. The GOP's program to assume predetermined amounts
of enterprise debt, and then retire it using privatization
proceeds, was clearly a contributory factor: receipts from
privatization in 1990 amounted to 2% of GDP, 80% of which was
devoted to reduction of foreign public debt. The public sector
borrowing requirement remained below 7% of GDP in 1990.
Monetary and Exchange Rate Policies. The challenge for Portugal
following completion of its IMF standby agreement in 1985 was to
improve coordination of fiscal and monetary policies, while
deepening financial markets, liberalizing foreign exchange
allocation and moving to indirect monetary controls.
Considerable progress has been made in liberalization of banking,
following a decade of state-controlled monopoly, and in
transition to less administered forms of monetary control.
Measures included deregulation of interest rates, liberalization
of foreign exchange transactions, and introduction of various new
financial instruments. In addition, the central bank was given
authority to operate in the money market.
Persistently high government deficits resulted in past monetary
policies inconsistent with the goal of convergence with the
inflation rates of other EC members, a prerequisite to European
monetary union. One result was that inflation increased to
double-digit levels again in 1989, necessitating a tightening of
credit controls. The exchange rate at that time was devalued
under a "crawling peg" policy, according to which aggregate
nominal depreciation could not exceed 3% per annum. But large
unanticipated capital inflows led to progressive appreciation in
the real effective exchange rate. In response, in October 1990
the GOP switched from a crawling-peg to a managed float policy
allowing the exchange rate to fluctuate around a basket of five
European currencies. Following the inception of better anti-
inflationary policies, the GOP joined the exchange rate mechanism
(ERM) of the European Monetary System (EMS) in April 1992. In
order to contain exchange rate movements, the GOP has had to
intervene repeatedly. The bulk of these official interventions
has served to prevent further appreciation of the escudo, with
only a few instances of depreciation intervention — notably in
the wake of the Gulf War in 1991.
483
Privatization. The July 1987 election of the first single-party
najority government since the 1974-75 revolution led to a series
of measures designed to facilitate private sector activity and
privatization. By March of 1988, the new government had ratified
a law permitting the sale of up to 49% of the equity in state
enterprises to private interests; this was revised in 1989 to
allow the purchase of majority Interests. Other laws opened
additional sectors to private investment entry, including steel,
petrochemicals, oil refining, transport, telecommunications, and
energy. Separate laws were passed to Increase the amount of
privately owned land vis-a-vis that of cooperatives and to open
new sectors such as newspapers and radio broadcasting to private
enterprise. Privatization revenues in 1990 were estimated to be
in the range of 2% of GDP. Authorities authorized the
participation of foreign investors in privatization auctions,
except in the case of financial institutions, which are to remain
under domestic control.
V. Recent Economic Performance and Outlook
Portugal enjoyed strong economic perforf^ance in the early 1990s,
with a real growth rate of approximately 3.5% and unemployment
falling below 4%. Export volumes, after growing by nearly 20% in
1989, sustained an increase of nearly 13% in 1990; in terms of
dollar value, exports grew by more than 25% on average annually
in 1990/1991. Imports also picked up, shifting the external
current account from a surplus of 0.4% of GDP to a deficit of
0.3%. Despite prepayments on the government's external debt and
tightened controls on capital inflows from abroad, net capital
inflows remained buoyant, and indeed more than sufficient to
cover the increased deficit on current account. Non-gold
reserves rose by over 45% in 1990 (and an additional 30% in
1991), bringing them to the equivalent of 7.6 months of imports,
up from only 2 months in 1986.
The weakness in this performance, however, stems from persistent
inflation, which peaked in 1990 at 13.4%. In 1991, consumer
price inflation dropped to 11.4% and should continue to be
contained. 1991 *s decline in inflation was most pronounced in
the second half of the year, and the year-on-year inflation rates
were below 10% in each of the last three months of the year. The
expansionary fiscal policy of the late 1980s fueled excess
demand, as reflected both by rising import demand and shortages
in certain labor markets. Nontradeable goods prices rose by 19%
in 1990 although the trade deficit gap closed marginally in 1991.
These items coupled with recovery in important export markets,
and continuing improvements in receipts from services (including
tourism) , allowed the current account deficit in 1991 to remain
under 1% of GDP. This amount was more than financed by
autonomous capital inflows, leading to a further buildup of
official reserves.
484
In short, Portugal has turned in an exceptional economic
performance, and appears able to continue doing so. Export
growth has been phenomenal. Private foreign investment also is
quite strong, stimulated by the economic policies that the GOP
has pursued and by integration into the EC, which has provided
insurance that these policies will be sustained. By 1991, GDP
per capita was $8,400 — a level which surpasses countries such
as Greece at $7,730 per capita, according to CIA sources. In
virtually every respect, it appears that Portugal has graduated
from the ranks of developing countries.
VI. Debt-Service Prospects
Portugal's external debt burden has fallen substantially from its
peak in 1985, when it constituted 81% of GDP. Restraint on new
public and public-guaranteed borrowing, strong balance-of-
payments results and solid GDP growth contributed to the decline
in total debt to about 31% of GDP by the end of 1990. Total
external debt in comparison to Portugal's foreign exchange
earnings fell even faster. Recent improvements in the GOP's
debt-servicing burden are also reflected by the government
prepayments made from 1986 onward, financed from privatization
receipts.
Portugal should continue to have little difficulty in servicing
its debts in the medium term, given strong autonomous capital
inflows, renittances and net income on services account. Given
Portugal's full EC membership, these sources of income appear
secure.
485
TABLE I
GOVERNMENT OF PORTUGAL FINANCES
(Billions of escudos)
19S6
1917
19M
1989
1990
1991
Current Revenue
16S9
1173
2285
2819
3268
3998
Taxes
ISIO
16S5
2103
2485
2919
3487
NooUx Revenue
149
lt7
182
334
349
511
Cun«nt Expenditures
1764
2023
2341
2757
3398
4121
of which
Subsidies
131
9t
110
127
128
511
Interest
405
452
467
510
698
864
Current BsUnce
-lOS
-151
-56
63
-131
-173
Capitjl Revenue
IIS
41
23
101
109
173
Capita] Expenditure
317
29S
334
473
553
665
Capital Ba)aitcc
-202
-256
-311
-372
-444
-492
Overall Balance
-307
-407
-367
-309
-574
-665
PSBR
453
545
55i
435
567
500
As Percent of GDP
Current Expenditure
39.9
39.1
39
38.5
39.8
40.8
Capiul Expenditure
7.2
5.7
5.6
6.6
6.5
6.6
Overall DeScit
6.9
1.9
6.1
4.3
6.7
6.6
PSBR
10.2
10.5
9.3
6.1
6.6
4.9
Memorandum Items
GDP (bil. etcudos)
4420
5175
6003
7168
8530
986S
Inflation (CPI - rent)
11.3%
9.4%
9.7H
12.6%
13.4%
12.4%
Real Efr. Exch. Rate
99
97.7
98.3
102.7
109.3
116.8
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