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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 Fa st 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 ST ATES 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 s ector 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 



108 



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 



109 



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 . 

Israe l 

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. 

Fo reign Military Financin g: 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. 

Le banon : 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. 

Bahrai n: 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. 



i fraiact. CAJMAJ»<IDICCMd«. 

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4 A— — n I i rf r I iii fLfciti—MoaJv. Lri>orlMu,.H i>M f lWI. 

3 Kchuili. AJm. '"T-tf PrrTml Vet 19. No. 12. Tbc foliuc*! "^ Trirrr Tf ^^"^ »«^<^ E«TW ■ *ic I9t0-|. 1*91. 



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 


(•aft 


(>3»> 


(}11) 


(I. no (tooi 


seo 


I.ITO 


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 


• • 


• • 


(«.««> 


(t.OOO) 


<I.2S») 


a • 


• • 


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.% 


2.0 


2.0 


3.6 


3.2 


2.6 




Qadai in7-100) 








100. 


111.0 


12t.4 


161.0 


1S4.2 


334.4 


100.0 


117.7 


142.7 


164.0 


300.0 


344.1 




(MUlloM oT mmtmt SijrpUM Pomb4 


*> 




««.a7d 


»4.t4» 


44.044 


02.600 


00.444 


a • 


10.241 


30.171 


22.471 


24.30S 


30.127 


• a 


».IJ7 


10,404 


10,414 


13.410 


12.624 


, , 


• .701 


10.171 


11.017 


11.706 


14.011 


, , 


af.«)7 


22.270 


41.632 


66.101 


70.127 


a • 




(MUlloM of COTtiaa Peaada). rw aadlnt Jbm 20 




u.soe 


IS. too 


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 
1»U 
4*00 
IfiO 
31S0 
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. 



162 



♦ 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. 



163 



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. 



164 



♦ 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 



165 



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 



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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. 



171 



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 



172 



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. 



173 



♦ 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. 



174 



♦ 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 



175 



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 



176 



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: 



177 



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. 



178 



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. 



179 



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 



180 



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 







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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WRITTEN TESTIMONY OF LINDA HELLER KAMM 

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 



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ntlMI tA ttlA 1 



In fatal 1 



■FTTf U 'l I i i,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. 









AU9. 









F«b. 


1 






Sapt. 









Htr. 





*. 




Oct. 









Apr. 









Nov. 


1 






N«y 









Dm. 


t 






Junt 









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. 



230 



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. 



231 



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. LE PA NO N 
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. 



243 



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? 



261 



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: 

— Su pport 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. Fore stry 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). 



274 



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: 



276 



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: 



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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 



279 



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: 



286 



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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372 



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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385 



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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NAnONAl 



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 

>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