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