[Senate Hearing 105-365]
[From the U.S. Government Printing Office]


[DOCID: f:39857.done]
                                                     S. Hrg. 105-365


 
      FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS 
                  APPROPRIATIONS FOR FISCAL YEAR 1998

=======================================================================

                                HEARINGS

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                                   on

                            H.R. 2159/S. 955

AN ACT MAKING APPROPRIATIONS FOR FOREIGN OPERATIONS, EXPORT FINANCING, 
AND RELATED PROGRAMS FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 1998, AND 
                           FOR OTHER PURPOSES

                               __________

                  Agency for International Development
                         Department of Justice
                          Department of State
                       Department of the Treasury
                       Nondepartmental witnesses
                               __________

         Printed for the use of the Committee on Appropriations


                               


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                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
SLADE GORTON, Washington             DALE BUMPERS, Arkansas
MITCH McCONNELL, Kentucky            FRANK R. LAUTENBERG, New Jersey
CONRAD BURNS, Montana                TOM HARKIN, Iowa
RICHARD C. SHELBY, Alabama           BARBARA A. MIKULSKI, Maryland
JUDD GREGG, New Hampshire            HARRY REID, Nevada
ROBERT F. BENNETT, Utah              HERB KOHL, Wisconsin
BEN NIGHTHORSE CAMPBELL, Colorado    PATTY MURRAY, Washington
LARRY CRAIG, Idaho                   BYRON DORGAN, North Dakota
LAUCH FAIRCLOTH, North Carolina      BARBARA BOXER, California
KAY BAILEY HUTCHISON, Texas
                   Steven J. Cortese, Staff Director
                 Lisa Sutherland, Deputy Staff Director
               James H. English, Minority Staff Director
                                 ------                                

   Subcommittee on Foreign Operations, Export Financing, and Related 
                                Programs

                  MITCH McCONNELL, Kentucky, Chairman
ARLEN SPECTER, Pennsylvania          PATRICK J. LEAHY, Vermont
JUDD GREGG, New Hampshire            DANIEL K. INOUYE, Hawaii
RICHARD C. SHELBY, Alabama           FRANK R. LAUTENBERG, New Jersey
ROBERT F. BENNETT, Utah              TOM HARKIN, Iowa
BEN NIGHTHORSE CAMPBELL, Colorado    BARBARA A. MIKULSKI, Maryland
TED STEVENS, Alaska                  PATTY MURRAY, Washington
                                     ROBERT C. BYRD, West Virginia
                                       (Ex officio)
                           Professional Staff
                            Robin Cleveland
                               Will Smith
                         Tim Rieser (Minority)

                                  (ii)



                            C O N T E N T S

                              ----------                              

                      Thursday, February 27, 1997

                                                                   Page

Agency for International Development.............................     1

                        Thursday, March 20, 1997

Department of Justice: Federal Bureau of Investigation...........    55
Department of State: Bureau of International Narcotics and Law 
  Enforcement Affairs............................................

                        Thursday, April 17, 1997

Agency for International Development.............................    97

                          Tuesday, May 6, 1997

Department of State..............................................   137
Agency for International Development.............................   137

                         Tuesday, May 20, 1997

Department of the Treasury.......................................   185

                         Tuesday, May 22, 1997

Department of State: Office of the Secretary.....................   215
Nondepartmental witnesses........................................   265

                                 (iii)



      FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS 
                  APPROPRIATIONS FOR FISCAL YEAR 1998

                              ----------                              


                      THURSDAY, FEBRUARY 27, 1997

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:35 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Mitch McConnell (chairman) 
presiding.
    Present: Senators McConnell, Bennett, Campbell, Leahy, and 
Lautenberg.

                  AGENCY FOR INTERNATIONAL DEVELOPMENT

STATEMENT OF HON. J. BRIAN ATWOOD, ADMINISTRATOR

              opening remarks of senator mitch mc connell

    Senator McConnell. This hearing will come to order.
    Welcome, Mr. Atwood. It is good to see you again.
    Mr. Atwood. Thank you, Mr. Chairman.
    Senator McConnell. I am pleased to have you open our fiscal 
year 1998 hearings on the administration's budget request. I am 
equally pleased with the fact that the President's request 
level finally reflects a serious commitment to advancing our 
international interests.
    Before offering some thoughts on some specific concerns I 
have about the allocation of funds within the foreign 
operations account, let me point out a small irony. Last year, 
$12.3 billion was provided for foreign operations. This year 
your budget submission of $13.3 billion reflects a $1 billion 
increase.
    I consider this $1 billion the amount that Senator Leahy 
and I have appealed and pressed the administration to request 
for the past 3 years. I welcome the request and hope that we 
have really turned the page, ending a sad chapter of neglect of 
the foreign affairs account.
    Having acknowledged your commitment, I should recognize 
that some of my colleagues are already pointing out that this 
increase exceeds other subcommittee or function requests. In 
his opening hearing, Congressman Callahan expressed concern 
about being able to pass a bill that includes a 9-percent 
increase when other subcommittees are continuing to experience 
reductions.
    Frankly, 9 percent may not be enough to compensate for the 
near fatal assault this account has suffered over the past 
decade.
    In the last 10 years, with the end of the cold war, we have 
established assistance programs to help stabilize and 
strengthen more than two dozen new, emerging democracies. At 
the same time, the resources available for foreign operations 
and export promotion have declined nearly 40 percent, from 
$20.2 billion to $12.2 billion.
    Measured against foreign aid's peak level in 1985, our 
resources have dropped nearly 60 percent. Those numbers give 
the term ``deficit'' new meaning. We are experiencing a 
critical deficiency in diplomacy's funding.
    While I strongly support the overall request level, I am 
not as convinced that the administration has distributed funds 
to best serve our interests. You have repeatedly called 
attention to the problems AID has experienced because of deep 
reductions in development assistance. While the administration 
added $1 billion to the overall foreign operations request, 
child survival programs have actually been cut. Education, 
health care, agriculture, and other development assistance 
priorities have either been straight-lined or reduced in this 
budget.
    The increase is dedicated almost entirely to down payments 
on arrears at international financial institutions and a huge 
increase in aid to Russia. In contrast, a majority of other NIS 
states have been reduced or held at the fiscal year 1997 level.
    Last year, our report recommended we graduate Russia from 
most of our grant programs, sustaining modest but declining 
support for a few projects which strengthen democracy and the 
private sector. This request continues to reflect a bias toward 
Moscow at the expense of our deep interests in the region and 
fails to recognize that we cannot buy our way out of the 
economic crisis which cripples opportunity in Russia.
    While I may not completely support the mix of funds, let me 
conclude by emphasizing once again that I am committed to 
securing as strong an overall account as possible. I urge you 
and Secretary Albright to make as persuasive a case as you can 
to the Budget Committee very soon since their decisions will 
have a significant impact on the resources allocated to our 
subcommittee.
    With that, let me turn to my friend and colleague, Senator 
Leahy, for whatever opening observations he might wish to make.

                opening remarks of senator patrick leahy

    Senator Leahy. Thank you, Mr. Chairman.
    I am glad that we are starting off this year with the AID 
Administrator.
    You have been through some rather rough times in the past 
dozen years. The last 4 years have been no exception. There are 
two dozen field missions being closed, 200 of AID's staff, 
including some of the best, were laid off last year. There has 
been a suggestion that we merge AID into the State Department. 
We get a lot of requests from Senators who want us to fund 
various programs in AID and I sometimes wonder how they can 
find the time to ask us to fund these programs when they are so 
busy giving speeches about what a waste, foreign aid is. If 
they would spend a little bit less time talking more about 
where we will find the money to fund the programs they want, we 
might be better off.
    I think it would also help if they would do as you have, 
which is make the case to the American people why a lot of this 
aid is in our national best interest. You have been an eloquent 
spokesman on that, as have some others.
    I think we are going to have questions about AID's future. 
Is it going to be an autonomous agency or part of the State 
Department, whether it expresses national interests on its own 
or the State Department's political goals which may be more 
short-term.
    Mr. Atwood's persuasiveness is reflected in the President's 
request for an increase in foreign operations, but with all of 
the programs in the budget, AID has fared the worst. The State 
Department, the international financial institutions and the 
military assistance programs got the lion's share of the 
increase. That might not have been my choice. But at least it 
does not occur to me that at any time has the administration 
asked my opinion on what might go through this committee or 
what my views might be. So I was not bothered or impressed by 
their consistency in that they did not this year.
    I am concerned about some of the problems in AID. I think 
strategic goals for each country and more in the field staff is 
good. That was long overdue and I compliment you for doing it. 
But there has been a lot of money, an enormous amount of money, 
spent on new management systems while, at the same time, some 
of the best people have been laid off.
    You are moving to a new building which, at least from the 
impression I have gotten, will be more expensive but with less 
space. This bothers me. Then, maybe it is the State 
Department's fault, but they may have required you to do some 
things you should not have. I refer to Haiti and Russia. We 
have foreign interests there, of course. There have been some 
successes there. But I am worried that in a lot of instances 
money was sent down, was spent, so that we could say look, we 
are doing something, but nothing came out of it.
    There have been a number of failures in both countries 
where AID has seen something that is not working, restructures 
the program, asks for even more money, and then basically does 
the same thing.
    I applaud you, Mr. Atwood, for your eloquence in speaking 
up for AID's mission and for what is needed. I would urge you 
to get some good, day-by-day, nuts and bolts managers who can 
handle the nitty-gritty at AID.
    I know there is at least one intended. It would help, I 
think, for these people to get down there.
    I would not continue, Mr. Chairman, though I do have some 
more comments. These are just some that occur to me now.
    Senator McConnell. Thank you, Senator Leahy.
    Mr. Atwood, why don't you go ahead and tell us what is on 
your mind.

               summary statement of hon. j. brian atwood

    Mr. Atwood. Thank you very much, Mr. Chairman and Senator 
Leahy. I want to thank both of you for the support you have 
given us over the years for a larger 150 account. This has not 
been an easy battle, and in the environment we are in all of us 
are trying to find ways to balance the budget. So very serious 
choices have to be made.
    But I think you have seen, and I would even call your 
views, those of the two of you, visionary because you do 
understand that, unless we continue to make investments in the 
global economy and investments in peace and stability through 
the 150 account, we are not going to be able to find the 
revenues necessary to balance the budget in the long run.
    So I do very much appreciate the support you have given us. 
Your prodding has succeeded in convincing the administration to 
come forward with an increase of about $1.1 billion, as you 
mentioned, this year. We keep hearing that the 40-plus percent 
decrease is not a correct number because 1985 was a year when 
we had a plus-up for the Middle East. The fact of the matter 
is, if you look at it from 1986 on and take away that plus-up, 
it is still a 34.6-percent decrease in the 150 account through 
fiscal year 1997.
    We are trying to bring that down to about 32 percent if we 
can get what the President has asked for this year. We very, 
very much appreciate your support.
    Senators, as both of you have alluded, we have been through 
really difficult times at USAID, and I think this budget 
request will enable our Agency to reach some degree of 
equilibrium, after we had to go through reductions in force.
    Let me make it clear that, while the increase that we have 
asked for in development assistance is only $65.5 million, the 
USAID will be managing an additional $476 million of the 
increase, the $1 billion increase, because we will be managing 
the SEED and NIS money--much of it, anyway--in those requests. 
It's $292 million, to be exact, of those additional requests; 
$135 million of the ESF requested mainly for transitions in the 
Middle East and Latin America.

                              agriculture

    I want to emphasize one aspect of our request for an 
increase in development assistance and that is the word 
``agriculture.''
    This is an extremely important aspect of development. About 
80 percent of the GNP's of some of these countries we work in 
are in the agriculture sector. And yet, over the years, we have 
seen the amount that we have been able to provide for 
agriculture programs, to increase productivity and get 
countries to adopt market techniques for their agriculture 
sector, diminish from 16 to 9 percent.
    Just the other day, a group of agribusiness interests and 
traditional farm associations and others interested in 
agriculture, land grant colleges, et cetera, got together and 
put out a report recommending a $2 billion increase in the 
foreign aid bill in order to pursue our agricultural interests.
    As you know, Mr. Chairman, coming from a farm State 
yourself, 1 out of every 4 acres grown in this country is for 
export. With our population stabilizing and our production 
continuing to go up, it is clear that everybody now agrees that 
increasing production overseas has increased our ability to 
export.
    Of the top 50 importers of American agricultural products, 
43 of them had been aid recipients in the past.
    So I think that our request for a food security plus-up, 
for agriculture and for agricultural research, which also 
redounds directly to the benefit of American farmers, is 
warranted, and I hope that we will be able to achieve a good 
deal more balance than we have had in the past in our 
development approach.

                          changing foreign aid

    Our foreign aid program has changed, Mr. Chairman, and a 
lot of it is due to your prodding and that of others. I can 
remember exchanges that we had a few years ago and one 
television program we did together where you said, that the aid 
program ought to serve American interests.
    Well, today we make judgments about where we work on the 
basis of the quality of the partnership we have with that 
government. We don't work in countries where they do not allow 
their people to participate in the process, where they don't 
accept the need for a market economy, where they don't accept 
the need for democratic institutions. So the quality of the 
partnership is important. The need of the country is important. 
The foreign policy interests of our country are important.
    Finally--and this is important because the Congress did 
pass the Government Performance and Results Act--performance of 
our programs is important. We are measuring those as never 
before, which got us a lot of acclaim from OMB. OMB said that 
we had submitted the best performance-based budget that any 
agency in government had submitted, which is why I think we 
were treated so relatively well in the budget process this 
year.
    So our Foreign Aid Program is a misnomer. It serves 
American interests more than it ever has in the past. It serves 
American interests by helping to achieve stability, dealing 
with crisis situations in terms of our humanitarian relief 
programs, and dealing with transition situations which are a 
crucial part today of our foreign policy in places like Bosnia, 
the former Soviet Union, South Africa, Cambodia, the West Bank, 
and Gaza. It serves our international economic interests by 
continuing to invest in the creation of new markets. And, of 
course, it most certainly serves our own humanitarian values as 
well.
    Our program serves American interests more now than ever 
before.

                          former soviet union

    Mr. Chairman, I do want to say a few words in particular, 
because you did raise these issues, about our request for 
additional funding for the former Soviet Union.
    The proposal for an additional $275 million for the NIS 
represents our effort to create permanent linkages between our 
country's democratic institutions and our business community 
and the new democratic market economies of this region. It is 
part of a strategy that will assure the strongest ties between 
our nations long after the technical assistance program we have 
undertaken is phased out.
    In this sense, the partnership for freedom proposal is a 
strategic investment in a peaceful, more stable future in this 
region.
    We have said all along that we will phase down technical 
assistance as the NIS countries continue their transformation 
to democratic market economies. We have said all along that one 
indication of the success of our technical assistance programs 
will be the discernible flow of trade and investment into these 
economies from Europe and the United States.
    There are still barriers to trade and investment. We know 
them well: crime, corruption, weak regulatory systems, the 
absence of capital markets, weak customs and tax administration 
systems and weak justice systems. Overall, these weaknesses add 
up to an unpredictable business environment.
    Our friends in these countries know this. This, for 
example, is what we discussed in the Gore-Chernomyrdin and 
Gore-Kuchma forums. These commissions are struggling to correct 
these problems and they want our help. Most importantly, they 
yearn for the day when trade and investment and not technical 
assistance characterize our relationship.
    The partnership for freedom is designed to accelerate the 
process. It is designed to force the issue, if you will. It 
makes explicit what we have always advised the Congress is our 
goal--trade, investment, and partnership between our democratic 
and market institutions and those of this vital region; $275 
million is not a large additional investment to make this 
happen. It is, I repeat, a strategic investment.
    Now I know, Mr. Chairman, you want more detail about how 
this additional money will be spent and I know that you are 
going to be holding a hearing on, I believe on March 13 with 
the NIS coordinator, Dick Morningstar, and our Assistant 
Administrator for Europe and the NIS, Tom Dine. But I do want 
to say a few words about the details here.
    The partnership for freedom has two basic components. 
First, the principal component is to promote trade and 
investment through capital mobilization. This will result from 
the combined U.S. Government effort working with private 
business organizations and NIS governments and businesses to 
remove the impediments to trade and investment. We are looking 
at several mechanisms to ensure that when good business 
projects come along, they can find the financing to move 
forward.
    Second, in order to have this kind of market economy, it 
must be based on a strong democratic civil society. Therefore, 
the second major component is to continue the development of 
institutions and organizations that are fundamental to a broad-
based participatory democracy.
    We are going to be continuing our technical assistance 
programs, but we are going to be phasing them out; and, in 
time, we are going to be using more collaborative, collegial 
approaches that emphasize partnerships and linkages between 
institutions.
    I could go into more detail, but I do have a breakout that 
I would be happy to provide for the record, Mr. Chairman, of 
how some of these funds will be spent and what our intentions 
are. I know that you will be getting into much more detail in 
your hearing on the 13th.

                         new management systems

    Let me sum up, Mr. Chairman, and thank you for giving me so 
much time. We have, indeed, overhauled the agency. We do 
believe that it is managed very well. I know that there are 
concerns, as Senator Leahy expressed, about the new management 
system. Let me just say that you don't start receiving 
complaints from your work force on a new, integrated computer 
management system until you start to deploy it, until you start 
to activate it. We have activated it, starting on October 1. We 
have forced people to begin to adapt to the changes that we are 
bringing about. We have, I certainly have, heard all of the 
screams from our work force about the problems that we have 
encountered. I want you to be assured that we are absolutely on 
top of those problems.
    They relate to two basic aspects. One is the migration of 
old data from the old 11 accounting systems that we have had 
which, as every inspector general report that has come up here 
in recent years and GAO reports as well have indicated, is not 
good, consistent data. We need to clean it up in order to make 
the NMS system work. But it is not the NMS system that is at 
fault. That is a single entry system that doesn't allow us to 
use bad data or inconsistent data. So that has been a problem. 
It has taken us time.
    Communications with the worldwide network has also been a 
problem. We are working out those problems. It is not true that 
we have, indeed, laid off people in order to put this system in 
place. If we didn't put this system in place--and this system, 
by the way, in its earlier incarnation was planned by the last 
administration, by the last Bush administration, I should say. 
Everyone in government knows that under the requirements of the 
Chief Financial Officer's Act, the GMRA, which deals with 
management and financial statements, and the Government 
Performance Results Act, we must have a system like this.
    You don't hear complaints from other government agencies, 
Mr. Chairman, because other government agencies have not made 
as much progress in actually deploying their system.

                              agency move

    Finally, regarding the move to the new building, I point 
out that this building, the Ronald Reagan building, is a 
government building. It is a government building that is 
sitting there, waiting for government occupancy. We drew the 
right straw. We've got to move into this building.
    We believe it will save us money over the long run and even 
in the immediate future, after the initial costs of the move.
    We are in commercial space now in 11 different buildings. 
In each case, we have to negotiate on an almost annual basis 
for new rental fees. Commercial buildings will charge you 
commercial rates based on inflation and other aspects of where 
the market is. A government building over time gives us more 
opportunity to see where we are going down the long run.
    It is not a fancy building. As Senator Leahy pointed out, 
our people will have less space than they had before, but there 
are tremendous efficiencies in getting everyone from 11 
buildings into one place.
    I believe very strongly that this is, again, a part of our 
effort to try to achieve equilibrium with respect to USAID, an 
agency that has been downsized by 2,700 people, has closed 26 
missions since 1993, has reduced its regulations by 55 percent, 
and is one of the pioneering agencies in implementing the 
Government Performance and Results Act.

                            u.s. leadership

    So I feel very proud, Mr. Chairman, that we were able to 
accomplish those things, that we have been able to maintain our 
leadership in the development community. We have even been able 
to do that despite the fact that we have fallen from being the 
No. 1 donor in absolute levels to being No. 4, behind economies 
like those of Japan, France, and Germany, which are one-half 
the size of ours.
    We have traditionally been near the bottom in terms of 
percentage of our GNP. We are at the absolute bottom, providing 
only 0.1 percent of our GNP to overseas development assistance. 
But when you look at it, that comes out to about $24 per 
American citizen, which is a pretty good meal for a family at 
McDonald's.
    It is not a lot to invest in our future in a global economy 
or a lot to invest in our stability, in the stability of the 
global economy, or a lot to invest in American interests.

                           prepared statement

    I feel that we have made some progress. I think we have 
done that with your help and with that of Senator Leahy and 
this entire subcommittee. I, therefore, want to make sure you 
understand that I am deeply grateful for that support and 
assistance.
    Thank you, Mr. Chairman.
    [The statement follows:]
                   Statement of Hon. J. Brian Atwood
    Chairman McConnell, Senator Leahy, and other members of the 
subcommittee, it is a pleasure to appear here today to defend the 
President's budget request for the U.S. Agency for International 
Development's (USAID's) fiscal year 1998 economic assistance request. I 
look forward to working closely with the subcommittee during the second 
Clinton Administration. It is my belief that we are entering a new and 
positive era in our international relations, and that our policies and 
approaches will be guided by the stabilizing hand of bipartisanship.
    Recently, Secretary Albright noted, ``In our democracy, we cannot 
pursue policies abroad that are not understood and supported here at 
home.'' I could not agree more. I look forward to sharing with you 
today the reasons why USAID's programs directly advance America's 
interests.
    President Clinton's budget request for fiscal year 1998 includes 
$19.4 billion for programs in international affairs. This is a modest 
increase from the previous year, and represents just slightly over 1 
percent of the federal budget. More importantly, this budget reverses 
the dangerous downward trend in funding for foreign affairs. USAID will 
manage $7.158 billion, or 37.5 percent, of those funds, including both 
USAID programs and programs administered by USAID in cooperation with 
other agencies. USAID's request for discretionary funding in the 
Foreign Operations appropriations bill includes $998 million for 
Development Assistance, $700 million for the Development Fund for 
Africa, $190 million for International Disaster Assistance, $11 million 
for credit programs, $473 million for operating expenses, $29 million 
for Inspector General operating expenses, $2.498 billion for the 
Economic Support Fund, $492 million for programs in Central and Eastern 
Europe and $900 million for programs in the New Independent States. 
USAID also requests $44.2 million for the fiscal year 1998 mandatory 
contribution to the Foreign Service Retirement and Disability Fund. In 
addition, USAID will administer $867 million in P.L. 480 funds, 
although this funding is not under the jurisdiction of this 
subcommittee.
    The total request for fiscal year 1998 USAID-managed programs 
represents an increase of $476 million over fiscal year 1997. This 
increase includes:
  --An additional $292 million for programs in Central and Eastern 
        Europe and the New Independent States. These transitional 
        programs are designed to aid Central and Eastern European 
        countries and the New Independent States through their 
        difficult passage to democracy and market economies. I know 
        this subcommittee understands both the importance and 
        challenges inherent in securing lasting change in these 
        nations. Helping to secure free societies in this region 
        remains one of America's highest foreign policy and national 
        security priorities. This increased funding demonstrates the 
        Administration's commitment to helping these nations move 
        through this turbulent time and reflects a realization that 
        such sweeping change has also been characterized by uneven 
        political and economic progress. In Central and Eastern Europe 
        support for Bosnian reconstruction and reform and efforts in 
        the Southern Tier countries will be given special emphasis. In 
        the New Independent States, the Partnership for Freedom effort 
        will build on our achievements to date and reorient our 
        assistance program--beginning with Russia and then in the other 
        New Independent States--toward longer-term and more cooperative 
        activities to spur economic growth and develop lasting links 
        between our peoples.
  --$135 million more for the Economic Support Fund.--Economic Support 
        Funds (ESF) advance key economic and political foreign policy 
        interests of the United States by providing economic assistance 
        to countries in transition to democracy, supporting the Middle 
        East peace process and financing economic stabilization 
        programs. The largest share of ESF will continue to go to 
        supporting the Middle East peace process, including $52.5 
        million to be transferred to the Middle East Development Bank. 
        The Latin America region will receive ESF funding vital to 
        support the democratic transition in Haiti and the breakthrough 
        peace accords in Guatemala. ESF will also support programs in 
        ``fledgling democracies'' such as Cambodia and Mongolia. 
        Finally, ESF will be used for assistance in sub-Saharan Africa 
        for elections, political party building and legislative 
        training for countries in transition such as Angola.
  --An increase of $65.5 million in Sustainable Development 
        Assistance.--These funds will support USAID's development goals 
        by encouraging broad-based economic growth, protecting human 
        health, slowing population growth, encouraging environmental 
        protection and advancing democracy. By fostering free markets 
        and open political systems, USAID's development programs are 
        helping to shape a world that is more stable and open to U.S. 
        trade and leadership. Specifically, the ``Promoting Food 
        Security'' pilot initiative, aimed at improving food security 
        in Africa, will in its first year target $30 million to five 
        nations: Ethiopia, Uganda, Mali, Malawi and Mozambique. This 
        initiative will support policy reform and a range of 
        agricultural research that will benefit not only Africa, but 
        other developing nations as well. Modernizing agriculture, the 
        cornerstone of the economy in most developing nations, 
        increases incomes of rural people, lowers the cost of food for 
        the urban poor and conserves the environment. By furthering 
        agricultural and, thus, economic growth in these countries, the 
        initiative has the potential to both spark U.S. exports and 
        save this country significant emergency relief food costs.
    In sum, these modest increases in spending are all vital to helping 
secure a more prosperous and stable world during the next century. I 
would also note that this year's request includes a decrease of over 
$15 million in our agency's operating expenses. This decrease is due to 
a reduction in staffing levels combined with economies achieved by 
reengineering and the restructuring of our overseas operations.
    Recognizing the importance of our unique mission, we have 
dramatically improved the management of USAID to make it the most 
effective foreign assistance agency in the world. We have overhauled 
the agency from top to bottom--its strategic approach, organization and 
management. We have demanded that our programs produce demonstrable 
results. Since 1993, we have reduced staff by over 2,700. We have cut 
senior management by 38 percent. We have reduced project design time by 
75 percent. We have reduced our regulations by 55 percent. We have 
closed 26 overseas missions and will close six more by the end of 
fiscal year 1998. Further, USAID is one of the pioneering agencies in 
implementing the Government Performance and Results Act. All of these 
actions are designed to ensure that every dollar appropriated to the 
agency can bring taxpayers the best possible return on their 
investment.
    We know you have questions about our new management systems. Let me 
try to give you my perspective on what we are doing. You must first 
understand that our new management systems are not just designed to 
replace existing financial and procurement systems. We will indeed 
replace those systems but NMS is much more than computers or software. 
Our new management systems are a new way of doing business. As you 
know, we have redesigned our old project design system to make it 
faster, simpler and more customer-oriented. We have also redesigned our 
foreign missions to empower employees, to create strategic objective 
teams and to make our programs more results-driven. The new computer 
system will facilitate these improvements. It is a management tool 
created to allow us to manage more effectively the other reforms we 
have adopted.
    As we implement the computer portion of NMS, we are bringing the 
agency's technology to the forefront of any used in government. We are 
in the process of deploying a management system that fully integrates 
project planning, budgeting, a single-entry financial system, a 
simplified procurement system, and our evaluation system. In the next 
few years, we will add workforce planning, personnel management and a 
training module to our current capabilities. All of this will be 
available to every USAID office worldwide. Deploying such a system in a 
worldwide operation is not easy, but we have made great progress.
    Let me give you a brief status report.
    As you know, we activated NMS computer system worldwide on October 
1, 1996. Since then we have been using a combination of NMS and the old 
legacy systems to process transactions. To date we have processed 142 
contracts and grants in NMS totaling $252 million and have paid 
approximately $15 million in invoices plus the $1.2 billion cash 
transfer to Israel.
    Since bringing the system up worldwide, we have been addressing two 
major challenges. One relates to the need to migrate consistent and 
accurate data from the old systems into the new. The NMS will not allow 
us to process any inconsistent or inaccurate data. This forces us to 
clean up and reconcile data and incorporate it into the new system. We 
have found this to be a more labor-intensive process than we imagined 
because the level of inaccuracy in the old systems was even greater 
than anticipated. Nonetheless, we have made great progress. We have 
migrated all 8,000 records from the old Financial Accounting Control 
System (FACS) and the 6,500 records from the Contract Information 
Management System (CIMS). We still have to reconcile this data and 
reconcile it with the data from the field Mission Accounting Systems 
(MACS), but we expect to finish that process by this summer.
    Could we have waited until all this data was reconciled before we 
activated NMS? Could we have phased in the new system one module at a 
time? We considered both of these options. We rejected them because the 
integration process would have taken years, and we would still be using 
the old legacy systems and accumulating additional data of questionable 
accuracy that would have to be migrated later in a reconciled form. 
Activating NMS has forced us to migrate the data more expeditiously 
and, in the long run, it will save us time and tax dollars.
    The second challenge has been the need to create a worldwide, high-
speed communications system. We have encountered problems with the two 
separate telecommunications systems we have been using, but we are 
making real progress in overcoming these problems. The time needed for 
transactions has been reduced, and we have several actions we are 
taking to further reduce this timeframe.
    Mr. Chairman, when I came to USAID in 1993, the need for an 
integrated management system had already been identified. A plan 
developed in 1992 called for a fully integrated financial management, 
procurement and budget system but one that did not integrate operations 
or allow us to integrate field and headquarters capabilities. This much 
less ambitious system was estimated to cost approximately $100 million. 
Our judgment was that that plan would not have given the Agency what it 
needed in a reasonable timeframe and that the cost estimate would most 
likely have been exceeded.
    What we have created is the full-fledged integrated management 
system I have described. We have consciously sought to deploy this 
system using state-of-the-art approaches. Each step of the way we have 
consulted with systems experts at OMB, GAO and the private sector, and 
we have been encouraged to move forward. My own Inspector General has 
offered superb advice on which we have acted to correct problems. He 
has also pointed out that our systems development approach is an 
unconventional one. That is his job.
    I want you to know that I understand the risks, and I believe that 
our approach will pay off. It reflects the latest thinking in systems 
development. I also understand there are risks in adopting conventional 
approaches as well. As business executive Hank Delevati of Quantum 
Corporation said recently, ``The phased approach is longer--and I 
contend riskier--because you won't get everyone involved and 
coordinated.'' Quantum Corporation was one of many large organizations 
that has successfully deployed a new integrated management system using 
the ``all at once'' approach.
    Last week we had our systems coordinators into Washington from 
around the world. We want them to know we understand the problems they 
are having and the solutions we are devising. They now have a better 
appreciation of the effort we are making. They and we are confident 
that we will accomplish what other government agencies have not.
    Mr. Chairman, we do not seek to mask the difficulties we face in 
making NMS fully operational, but we are on the right track. This 
system will not only revolutionize the way we do business at USAID, it 
will lead the way for the development of similar systems in the U.S. 
Government. We have been pleased that so many Congressional staff have 
sat through detailed briefings on NMS. We welcome your vigorous 
oversight. We welcome it because we know that together we can vastly 
improve our capacity to fulfill our mission.
    In short, we are doing everything possible on the management side 
to make America's international programs cost-effective. We want to 
achieve results that serve America's interests. Let me describe how we 
believe we serve those interests in today's world.
                      america's stake in the world
    The United States has a vital interest in maintaining a leadership 
role in the international community, and in seeing that the 
international community cooperates on the basis of shared values. 
Nowhere is this more true than in promoting development in poor nations 
and countries emerging from the long shadows of communism and 
totalitarianism. Why is this important to Americans?
    It is important because we live in a world where trends toward 
globalization and increased interdependence are powerful and 
accelerating. This means international cooperation is increasingly 
important--in areas as diverse as promoting trade, protecting the 
environment, fostering democratic governments, reducing rapid 
population growth rates, establishing market-based economies, stemming 
the flow of narcotics, slowing the spread of infectious diseases, 
coping with migration and protecting human rights. In all of these 
areas, the benefits of fruitful cooperation are significant and 
lasting, while the failure to work together will be increasingly costly 
and immediate.
    During the cold war, U.S. leadership was central and unmistakable 
as the protector of the free world against the threat of communist 
expansion. U.S. military power and economic dynamism were seen as 
essential to resisting that threat. But America's leadership then, as 
now, had a foundation stronger than our Army or our economy. The United 
States projected a compelling, and widely shared, vision of a world 
order where democracy and open systems were respected. Our vision of 
political and economic freedom, of social justice and respect for the 
individual was as powerful as any missile or any defense system. The 
United States offered the world not only security, but a better 
alternative to the Communist vision.
    The Cold War is over. We still have the strongest military and the 
strongest economy in the world. But strength alone is not a substitute 
for leadership. America's position in the 21st century will depend more 
and more on the quality of our leadership; on the perception that we 
understand and appreciate the broad interests of the international 
community, and that we act with these interests in mind; and on the 
perception that we still have the best, most compelling vision of a 
global world order. Equally important, America's domestic interests are 
now, more than ever before, inexorably linked to events that take place 
far from our own shores.
    Our modest and well-targeted foreign assistance programs directly 
advance America's interests--your constituents' interests--in three 
direct ways: by helping to prevent crises; by generating dynamic 
opportunities for expanded trade; and by providing protection from 
specific global health and environmental threats.
                    a diplomacy of crisis prevention
    One of the most profound areas of concern for the United States and 
its allies is the growing phenomena of failed states. One need only 
open a newspaper on any given day to see the perilous state in which 
many nations now find themselves. Whether it is rebels fighting in 
eastern Zaire, hostage-taking in Tajikistan, street protests in 
Belgrade, Bulgaria and Albania or the constitutional crisis in Ecuador, 
we are confronted by potentially explosive situations with the 
potential to trigger conflict or economic collapse.
    Since the mid-1980s, the number of man-made emergencies requiring a 
U.S. Government response has doubled. The staggering human, financial 
and political cost of these conflicts is reflected in the increasing 
scope and complexity of peacekeeping operations, the loss of human life 
and the exploding numbers of refugees around the globe. Since the Gulf 
War, the United States has mounted 27 military operations as a result 
of ethnic conflicts and failed states. Up to 1 million people lost 
their lives through genocide in one year in Rwanda. In the former 
Yugoslavia, the loss of human life in less than four years was the 
greatest in Europe's post-World War II history. The number of refugees 
and displaced persons in the world now numbers close to 50 million.
    As a nation, we know that we ignore the warning signs of crises 
only at our own peril. When potential crises erupt into genuine 
emergencies, it is the U.S. military most likely to be put in harm's 
way, it is U.S. economic interests that suffer and it is this nation 
that ends up providing the lion's share of humanitarian assistance to 
the victims of war and social collapse. It is abundantly clear: The 
United States has a compelling national interest in preventing and 
averting crises before they occur. Practicing a diplomacy of crisis 
prevention is one of our greatest challenges in this new era, and 
development programs have a lead role to play in these efforts.
    As we know from our own daily experience, every country is subject 
to the internal pressures to some degree of stress from ethnic, 
religious, economic and other deep-seated conflicts among their own 
citizens. What distinguishes a country that can endure these internal 
tensions from one that cannot is the relative strength of its domestic 
institutions. By institutions, I mean not just government and political 
organizations, but also tradition, culture, social practices, religion 
and the depth of human capital. In many cases, conflict is a result of 
a failure to give people a stake in their own society.
    The reality is that most nations in conflict simply lacked the 
institutional capacity to avoid escalating violence. We see prime 
examples of this in the former communist world. When communist 
institutions collapsed, and no strong institutions replaced them, 
conflict became commonplace. We obviously do not wish to see a return 
to totalitarian methods, so it is essential that we help these 
countries put democratic institutions and social conditions in place.
    A second category of countries that fall into crisis include 
nations such as Rwanda, Somalia, Sudan, Zaire, Afghanistan and Liberia. 
What these countries have in common is that they are among the least 
developed countries in the world. And, by ``least developed'' we mean 
they have the weakest institutions and least developed human resources.
    The findings of a recent CIA study of failed states confirm the 
role of underdevelopment in crises. The study attempted to find the 
indicators most commonly associated with a vulnerability to crisis. The 
three leading factors shared among nations that have succumbed to 
crisis were high infant mortality rates, a lack of openness to trade, 
and weak democratic institutions. Does this mean that if we simply 
promote trade, strengthen democracy and provide child health programs 
that crises would disappear? The study doesn't say that. What it does 
say is that these variables are reasonable proxies for a nation's 
relative level of overall development, including a country's 
willingness to invest in its own people, to concern itself with lower 
consumer prices and to create institutions to enable the people to 
participate in the development of their own society.
    The implications of this analysis for our foreign policy are 
profound. Development programs are aimed at enriching human resources, 
strengthening open institutions, and supporting political and economic 
reform. By fostering stronger institutions, a richer human resource 
base and economic and social progress, countries are better able to 
manage conflict and avoid the dangerous descent into war. Development 
programs give us the tools we need to deal with the uncertain world 
around us. I am not here today to say that development programs are an 
ironclad guarantee against crisis and collapse. But it is entirely fair 
to say that successful development and transitions out of closed 
systems vastly improve the capabilities of a country to manage division 
and conflict. This is clearly in the best interests of the United 
States.
    The challenge of crisis prevention is, in many respects, the 
logical successor to the paradigm of the Cold War. Through our 
democracy and governance programs, USAID seeks to strengthen the 
political, social and economic institutions on which management of 
conflict directly depends. Our efforts at promoting economic growth 
also encourage economic freedom. Our efforts at human resource 
development--in education and health--ensure that an increasing 
percentage of the population can take advantage of economic 
opportunity, social progress and political freedom. Our efforts to 
protect the environment and to give families the capacity to space 
their children help ensure that development progress is sustainable.
    And there is strong evidence that U.S. foreign assistance programs 
have successfully helped develop functioning stable democracies. 
Political freedoms have increased significantly in the countries where 
development activities have been most focused. Between 1982 and 1996, 
Freedom House data demonstrates that political freedom improved in 48 
countries and grew worse in 30. Of the 29 countries showing the most 
dramatic improvements in political freedoms, most were significant 
recipients of U.S. aid over the period. U.S. efforts helped nations 
such as the Philippines, South Africa, Jordan, Haiti, Bangladesh, 
Guatemala, Mozambique, Nicaragua, Uruguay and Malawi realize the dream 
of more open societies.
    We have also adopted the policy that nations that do not embrace 
democracy, and that turn their backs on their citizens, will not 
receive U.S. assistance. We cannot achieve development results if we 
have poor partners. We will not work with governments that exclude 
their people from the development process.
    International development cooperation works. In developing 
countries during the past 35 years, infant mortality has fallen from 
162 to 69 per thousand; life expectancy has risen from 50 to 65 years; 
and literacy has climbed from 35 to 67 percent.
    We cannot prevent every crisis, but we can avert many. Investing in 
these efforts is a small price to pay for a foreign policy that 
advances our interests in a more stable world.
                   advancing u.s. economic interests
    Let me turn now to the role development programs play in directly 
supporting U.S. economic interests. For both trade and investment, 
developing countries provide the most dynamic and rapidly expanding 
markets for U.S. goods and services. U.S. exports to developing 
countries in the 1990s have expanded at 12 percent annually, more than 
double the export growth to industrial countries. This is not just a 
short-term phenomenon, but reflects a trend that began emerging in the 
mid-1980s.
    U.S. exports to countries that receive U.S. assistance have 
boomed--rising by 76 percent in the last five years alone. Between 1990 
and 1995, American exports to transition and developing countries 
increased by $98.7 billion. This growth supported roughly 1.9 million 
jobs in the United States. Work in agriculture has a particularly high 
return. Forty-three of the 50 largest importers of American 
agricultural goods formerly received food aid from the United States--
that's over $40 billion a year of U.S. agricultural exports. A recent 
study by the International Food Policy Research Institute found that 
for every dollar invested in agricultural research for developing 
countries, the export market available for donor countries expands by 
more than four dollars, of which more than one dollar is for 
agricultural commodities.
    The bottom line is that by the year 2000--three short years from 
now--four out of five consumers will live in the developing world. 
USAID's programs are helping these people become America's next 
generation of customers.
    As Latin American economies have prospered, so have U.S. exports 
and jobs. The region is the fastest-growing market for U.S. exports of 
goods and services, and also one of the largest. In 1995, the Latin 
American and Caribbean region accounted for more than 70 percent of all 
U.S. exports to USAID-assisted countries. Exports of goods to all 
countries in the region reached $95 billion in 1995, more than three 
times the level 10 years ago.
    Creating the enabling environment for markets is a principal focus 
of USAID's programs. The connection with development programs, and 
USAID in particular, is quite significant. U.S. exports are growing 
much more rapidly to some developing countries than to others. What 
accounts for these differences? The major portion of the variation is 
explained by progress in terms of improved policies and institutions--
i.e., the enabling environment for markets.
    USAID-assisted countries have been among those that have made the 
greatest progress in policy and institutional reform over the past 
decade, including Thailand, Jamaica, Bolivia, El Salvador, Guatemala, 
Peru, Ghana, Costa Rica, the Philippines, Morocco, Sri Lanka, Belize, 
Panama, Tanzania, Tunisia, Indonesia, Mali, Botswana, and Uganda. 
Because of our field presence, technical expertise and experience, 
USAID can have significant influence in encouraging economic policy 
reform.
    The international financial institutions have also played a vital 
role in supporting economic reform and restructuring weak economies, 
especially in countries in transition from authoritarian regimes or 
from conflict. In response to effective U.S. leadership within the 
donor community, they have increasingly put their weight behind 
governance reform, investment in social capital, and environmental 
sustainability--significantly complementing U.S. bilateral efforts. 
U.S. investments in both bilateral and multilateral assistance programs 
are fundamental to maintaining U.S. leadership within the donor 
community and to strengthening this complementarity.
    There are some who have argued that private capital flows can 
simply replace the need for foreign assistance programs. However, it is 
important to remember that foreign assistance and private investments 
are complements--not alternatives. By and large, private investment is 
flowing today into the emerged markets of the developing world, not 
into countries where there is no rule of law, no financial 
institutions, no private sector and no predictability. It is only when 
the enabling environment for markets has been well established--by 
recipient self-help efforts often supported by foreign aid--that 
private flows begin to accelerate. Eventually private investment and 
trade will replace foreign aid, and this is what a development program 
should strive to achieve. But the issue for most of the developing 
world countries is not best captured by the phrase ``trade, not aid.'' 
The phrase ``aid, then trade'' is closer to their reality.
    Our development efforts have contributed to economic freedom 
worldwide. Of the 27 countries with large improvements in economic 
freedom between 1975 and 1995 (as measured by an index from the Fraser 
Institute), 22 have been major recipients of U.S. foreign aid. 
Continued Clinton Administration efforts to promote U.S. job creation 
through trade and investment abroad must focus on emerging markets in 
Asia, Latin America, Eastern Europe, the New Independent States and 
Africa. Hastening the fuller emergence of these dynamic new markets is 
an essential element of a long-term U.S. economic and foreign policy 
strategy for the United States. Private capital will play the largest 
role in bringing the markets of developing nations into the mainstream 
of trade and investment, but some of the most promising developing 
markets are still hampered by trade barriers, other policy distortions 
and human capacity constraints that discourage trade and private 
capital flows.
    U.S. development assistance is useful in removing these structural 
and policy barriers. By reducing barriers that keep out foreign trade, 
by fostering fair and transparent regulatory and legal regimes, and by 
building capital markets, USAID has been at the cutting-edge of the 
continued steady growth of America's economy.
               protecting america against global threats
    Foreign assistance programs are also vital in protecting the United 
States against dangers that are global in scope. By treating infectious 
diseases like AIDS, polio, and emerging viruses like Ebola before they 
reach our shores, USAID lowers health costs here at home. Our 
environmental programs help protect the air and water that Americans 
share with the rest of the world. Our family planning programs help 
slow rapid population growth and make for healthier and better-cared-
for families around the globe, ultimately reducing instability, 
migration and refugee flows.
    Let me give you several specific examples of how all Americans can 
benefit from our development efforts abroad. USAID has long been the 
leader in the battle to eradicate polio around the globe. Working with 
our neighbors, the Pan American Health Organization, American 
organizations like Rotary International and many others, we 
successfully wiped out polio in the Americas. But did you know that 
U.S. taxpayers still spend $230 million a year to immunize our children 
against the threat of polio reoccurring on this continent?
    USAID, working with a rich variety of partners, is helping to lead 
the effort to eradicate polio globally by the year 2000. This is an 
ambitious goal, but an achievable one. So by making modest resources 
available for foreign assistance, the United States stands to save $230 
million a year in domestic immunization costs. This is clearly a case 
where foreign assistance is an investment in our own self-interest.
    Or consider that USAID has reached more than 3.2 million people 
with HIV prevention education and trained more than 58,000 people to 
serve as counselors and health providers in the developing world. 
Recent computer modeling shows that USAID helped Kenya avert over 
110,000 HIV infections in just three years. Ultimately, our HIV/AIDS 
programs result in fewer Americans exposed to the virus, and lower 
health care costs for American families.
    By preventing crises, by boosting America's economy, and by 
protecting the United States from truly global threats, we are working 
abroad to keep America strong at home and abroad.
              building the institutions that serve us well
    In closing, I would say to this subcommittee that today we have the 
chance to shape the international institutions and programs that will 
protect America's prosperity, security and stability for years to come. 
This includes not only bilateral institutions such as USAID, but 
equally vital multilateral mechanisms such as the United Nations, the 
World Bank and other international financial institutions.
    It is fitting that this year we will celebrate the 50th anniversary 
of the commencement of the Marshall Plan. All now agree that the 
Marshall Plan was a stunning, unprecedented example of enlightened 
leadership. The United States understood the benefits to the United 
States of economic recovery in Europe and Japan, and the threats in 
terms of crisis and instability that would result from economic 
stagnation in these regions.
    During the Marshall Plan, foreign economic aid amounted to more 
than 1.5 percent of U.S. gross national product. Now, foreign aid is 
about one-tenth of 1 percent of our gross national product, and well 
below one-half of 1 percent of federal expenditures. Fortunately, and 
precisely because the Marshall Plan was such a success, there are many 
other nations to help us carry the mutual burden of international 
leadership. But we should still do better if we want to maintain our 
leadership role and defend our interests.
    Development cooperation, including support for countries making the 
transition from communism, and humanitarian assistance for countries in 
crisis, remains an essential part of a credible and compelling vision 
of how the international community should function. A lead role for the 
United States in development cooperation is a vital part of American 
leadership in the post-Cold War era, arguably more important now than 
ever.
    I urge your support for the President's budget request, and I look 
forward to working with you to strengthen our nation's foreign policy 
capacity.
    Thank you.
                                 ______
                                 
               U.S. Agency for International Development
              fiscal year 1998 congressional presentation
                                summary
    ``Every dollar we devote to preventing conflicts, to promoting 
democracy, to stopping the spread of disease and starvation brings a 
sure return in security and savings.'' --President William Jefferson 
Clinton State of the Union Address February 4, 1997
    The president's Budget Request for fiscal year 1998 includes $19.4 
billion for programs in international affairs. The U.S. Agency for 
International Development will manage $7.2 billion (37.5 percent) of 
those funds, which includes both USAID programs and programs 
administered by USAID in cooperation with other agencies. USAID works 
with developing nations and countries in transition to support viable 
democracies and market economies. America's fastest growing export 
markets are in developing countries--U.S. exports to countries 
receiving USAID assistance grew by $98.7 billion from 1990 to 1995, 
supporting roughly 1.9 million jobs in the U.S. By the year 2000, four 
out of five consumers in the world will live in developing nations.

Fiscal year 1998 budget request

                                                                 Percent
All other Federal spending........................................ 99.58
USAID.............................................................   .42

    USAID's programs advance both our foreign policy goals and the 
well-being of some of the world's neediest people. The fiscal year 1998 
funds will:
  --Help eradicate polio globally by the year 2000, saving American 
        taxpayers $230 million a year in domestic immunization costs;
  --Save more than 3 million lives through immunization programs;
  --Help developing nations build their capacity to open their markets 
        and tear down barriers to U.S. trade;
  --Extend family planning services to more than 19 million couples 
        around the world who could not otherwise afford them, thus 
        averting thousands of needless deaths of mothers and children;
  --Provide assistance to millions of victims of flood, famine, 
        conflict and other crises around the globe.
  --Combat worldwide environmental degradation, including global 
        climate change, biodiversity loss and natural resource 
        depletion; and,
  --Provide credit to hundreds of thousands women 
        ``microentrepreneurs'' starting small businesses.
    The request for fiscal year 1998 USAID managed programs represents 
an increase of $476 million over fiscal year 1997--including, 
principally:
  --An additional $292 million for programs in Central and Eastern 
        Europe and the NIS;
  --$135 million more for the Economic Support Fund; and
  --An increase of $65.5 million in USAID's Sustainable Development 
        Assistance.
  --The fiscal year 1998 request also includes economic growth 
        activities aimed at improving food security in Africa to help 
        feed the hungry and support for agricultural research through 
        the agency's central Global Bureau.
    The request also includes a decrease of $15.3 million in the 
agency's operating expenses.
    The fiscal year 1998 USAID request reverses the agency's downward 
budget trend of the last several years, and represents the minimum 
level necessary to implement a balanced program of sustainable 
development and humanitarian assistance that will significantly 
contribute to achieving the administration's foreign policy objectives 
in the post-Cold War era. USAID is now at a point where after four 
years of implementing a comprehensive set of management reforms, the 
Agency's program quality has greatly improved; is increasingly 
concentrated on results, improved efficiencies and more effective 
programming; and is more focused in defining its goals and objectives.

                                  [Discretionary budget authority--in millions]                                 
----------------------------------------------------------------------------------------------------------------
                                                                           Fiscal year--                        
                                                                 --------------------------------               
                                                                       1996            1997        1998 request 
                                                                   appropriated    appropriated                 
----------------------------------------------------------------------------------------------------------------
Development assistance (DA).....................................           1,619           1,132             998
Child Survival and Disease Program \1\..........................  ..............             500  ..............
Development Fund for Africa (DFA)...............................           (\2\)           (\2\)             700
International disaster assistance...............................             181             190             190
Credit programs:                                                                                                
    Micro and small enterprise development......................               2               2               2
    Urban and environmental credit..............................              11              10               9
Operating expenses--USAID \3\...................................             494             489             473
Operating expenses--USAID IG....................................              30              30              30
                                                                 -----------------------------------------------
      Subtotal--development assistance..........................           2,337           2,352           2,401
Economic support fund...........................................           2,360       \4\ 2,363           2,498
Eastern Europe..................................................             522             475             492
New Independent States..........................................             641             625             900
                                                                 -----------------------------------------------
      Subtotal--USAID appropriated..............................           5,854           5,815           6,291
Public Law 480 through USDA Title II............................             821             837             837
Title III.......................................................              50              30              30
                                                                 -----------------------------------------------
      Total USAID administered..................................           6,725           6,682           7,158
----------------------------------------------------------------------------------------------------------------
\1\ These programs are funded under Da in fiscal year 1996 and DA/DFA in fiscal year 1998.                      
\2\ Africa program funding included in DA in 1996-97.                                                           
\3\ Operating Expenses includes use of DA funds in 1996-97.                                                     
\4\ ESF includes $52.5 million requested for the Middle East Development Bank in fiscal year 1998.              

         usaid development and humanitarian programs ($2.445b)
    This request includes funding for bilateral Sustainable Development 
which is funded out of the Agency's Development Assistance (DA) and the 
Development Fund for Africa (DFA). In addition, USAID requests funding 
for the International Disaster Assistance account; USAID's credit, 
guaranty subsidy and administration programs; food assistance under 
Titles II and III of Public Law 480; USAID's and the Inspector 
General's Operating Expenses; and a mandatory payment to the Foreign 
Service Retirement and Disability Fund.
    Sustainable Development ($1.698B):
    This request, which compares to an fiscal year 1997 level of 
$1,632B (after transfers to UNICEF, the IAF, ADF and USAID's OE 
account), is the core of USAID's program. It is funded from the DA 
($998M) and DFA ($700M) accounts.
    Sustainable Development is based on four integrated, interrelated 
and mutually reinforcing goals that are aimed at addressing the long-
term economic interests of the United States. (The fifth goal, 
Humanitarian Assistance, is part of the programs described under 
USAID's request for the International Disaster Assistance and Food for 
Peace accounts.)
  --Encouraging Broad Based Economic Growth ($507.5M): This goal is 
        centered around improving market efficiency and performance, 
        expanding access and opportunity for the poor including food 
        security, and ensuring that young women and men enter adulthood 
        with basic education skills. Within the overall allocation for 
        this goal $90.7M will support basic education for children. (FY 
        1997 funding is $517.7M for this goal).
  --Stabilizing world population and protecting human health ($765M): 
        This goal is centered around four objectives: reducing 
        unintended pregnancies through increased use of family planning 
        ($400M), reducing child mortality (220.5M), reducing the spread 
        of HIV/AIDS ($117.5M) and for a variety of other activities to 
        help reduce maternal mortality and the effects of other 
        infectious diseases ($27M.) (FY 1997 funding is $764.6M for 
        this goal)
  --Protection of the environment ($290M): This goal centers on 
        reducing threats to the global environment, particularly 
        conservation of biodiversity, reduction of threats to global 
        climate change, reduction of pollution and promotion of 
        sustainable urbanization, provision of environmentally sound 
        energy activities and sustainable natural resource management. 
        (FY 1997 funding is $227.6M for this goal).
  --The increase in environment funding in fiscal year 1998 reflects 
        support of important activities in Africa, Latin America and 
        the Asia and Near East (ANE) Bureaus.
  --Funds will be provided to Guinea's Fouta Djallon Highlands program 
        to support environmental aspects of the Greater Horn of Africa 
        work on related food security issues; assist community-based 
        wildlife management initiatives in Southern Africa; 
        biodiversity conservation in Madagascar, and provide additional 
        funds to better service existing activities in countries 
        serviced by REDSO/WCA.
  --In Latin America additional monies will be used to make up for 
        deferred environmental funding in El Salvador, Jamaica and Peru 
        as well as for a program expansion in Guatemala into the Maya 
        forest areas; the result of the peace accords.
  --In ANE the increase in environmental funding will be used to make 
        up for deferred funding in fiscal year 1997.
  --Supporting democratic participation ($135.5M): This goal is 
        achieved through strengthening rule of law and respect for 
        human rights, fostering more genuine and competitive political 
        processes, increasing the development of politically active 
        civil society, and supporting the establishment of more 
        transparent and accountable government institutions. (FY 1997 
        funding is $122.5M for this goal)
                 other development assistance programs
Credit programs
    USAID believes that there are significant instances in which U.S. 
development priorities can be best funded through credit, especially in 
emerging market countries and in countries moving toward graduation 
status.
    Credit resources permit the leveraging of important amounts of 
private sector resources to support sustainable development. Credit 
programs also enable USAID to reach large populations that it would not 
otherwise be able to reach.
    Important beneficiaries of credit programs are the ``poorest of the 
poor'' in both urban and rural areas.
  --Urban and Environment program: USAID requests a total of $9M for 
        this program. This includes $3M for subsidies and $6M for 
        program administration. (This compares to the fiscal year 1997 
        appropriated level of $9.5M.)
  --The subsidies will leverage approximately $45M in loan guaranties 
        to help credit worthy borrowers to address pressing urban and 
        environmental problems.
  --Emphasis is placed on addressing urban and environmental problems 
        that impair human health, decrease child survival rates and 
        prevent economic progress.
  --Micro and Small Enterprise Credit program: USAID requests a total 
        of $2M for this program including $1.5M for credit subsidies 
        and $500,000 for program administration. (The same amount was 
        appropriated in fiscal year 1997.)
  --The program uses loans and guarantees to encourage financial 
        institutions to extend and expand credit to microentrepreneurs 
        and small businesses.
  --The primary financial instrument is the Micro and Small Business 
        Loan Portfolio Guarantee (LPG).
    Enhanced Credit Authority: As part of USAID's fiscal year 1998 
request, the Agency seeks the use of up-to $10M in Sustainable 
Development funds (including up to $1.5M for administrative expenses).
  --The ECA will provide USAID with an important tool to leverage its 
        limited resources more effectively to pursue its global 
        development priorities.
International Disaster Assistance (IDA)
  --USAID requests $190M for this program including $165M for disaster 
        relief managed by the U.S. Office of Foreign Disaster 
        Assistance and $25M for programs managed by the Agency's Office 
        of Transition Initiatives. (The IDA request is the same as the 
        fiscal year 1997 level.)
  --OFDA funds support emergency relief for natural and man-made 
        disasters, and disaster preparedness, mitigation and 
        prevention.
  --OTI activities address the head-line grabbing crises of failed 
        states as they attempt to reconstitute social and political 
        structures.
USAID Operating Expenses (OE)
    USAID requests $473M to cover the salaries and other support costs 
of USAID operations in Washington and at overseas locations. This 
compares to an fiscal year 1997 level of $488.5M (including $17.5M 
transferred from the DA account), or a reduction of $15.5M.
  --This decrease is due to a reduction in overall OE funded staffing 
        levels combined with the completion of the move of the Agency 
        headquarters, with associated one-time cost savings.
  --The savings are offset, in part, by increases associated with 
        worldwide inflation and the impact of pay raises for both U.S. 
        and foreign national staff.
Inspector General (IG) Operating Expenses
    USAID requests $29.047M for the IG operating expenses to cover the 
costs of domestic and overseas operations of the Agency's Inspector 
General. This compares to an fiscal year 1997 level of $30M.
Foreign Service Retirement and Disability Fund (FSRDF)
    These funds are not included in USAID's tables on discretionary 
funding because it is a mandatory appropriation (required as a result 
of the inclusion in fiscal year 1974 of USAID career foreign service 
employees in this fund), and it is set at $44.208M for fiscal year 1998 
to cover associated costs of that fund. This compares to the fiscal 
year 1997 level of $43.826M.
                other usaid-managed programs ($4,756.5b)
Economic Support Fund (ESF) ($2,497.6B)
    The ESF account addresses economic and political foreign policy 
interests of the United States by providing economic assistance to 
allies and countries in transition to democracy, supporting the Middle 
East peace process and financing economic stabilization programs, 
frequently in a multi-donor context.
    The largest share of these funds will go to supporting the Middle 
East Peace Process ($1.2B for Israel, $815M for Egypt, $75M for the 
West Bank Gaza, $25M for Jordan, $12M for Lebanon and $52M for transfer 
to the Middle East Development Bank) and $17M to assist other non-peace 
process countries and programs in that region.
    The Latin America region will receive $116M, with the largest share 
of those funds going to Haiti ($70M), Guatemala ($20M), and $10M for 
the ICITAP program that funds administration of Justice and police 
training programs in that region.
    ESF will be used to fund continued support of programs for 
``fledgling democracies'' in Cambodia ($37M) and Mongolia ($7M) as well 
as provide on-going assistance to the International Fund for Ireland 
(19.6M). $25M of ESF will be used for assistance in Sub-Saharan Africa 
for elections, political party building and legislative training for 
countries in transition such as Angola, the Congo and Sierra Leone, as 
well as support for U.S. NGOs to provide assistance in training local 
human rights and civil society networks in Cameroon, Rwanda and the 
Seychelles.
    (The ESF request compares an fiscal year 1997 level of $2.363B.)
Assistance for East Europe (SEED): ($492M):
    This is a transitional program designed to aid Central and Eastern 
European countries through their difficult passage to democracy and 
market economies. As countries consolidate their political and economic 
transitions they will be graduated from the assistance category and 
funding for bilateral SEED programs will be phased out. However, the 
program will remain flexible to accommodate uneven political and 
economic progress.
    The broad objectives of this program are to build market economies 
and strong private sectors, consolidate democracy, and improve the 
basic quality of life throughout the region.
  --Of the amount requested, $225M will be allocated for Bosnia 
        reconstruction and reform programs including activities 
        associated with the Dayton Peace Accords.
  --Of the non-Bosnian resources, 45 percent will go to Southern 
        Tiercountries, which have gotten off to a slower start then 
        countries in the Northern Tier, and which up to now received a 
        much smaller share of resources.
    (This request compares to an fiscal year 1997 level of $475M).
    Assistance for the New Independent States of the Former Soviet 
Union ($900M):
  --Funds under this request will be used to support these countries as 
        they make the transition to market economies and democracies as 
        responsible members of the international community.
    --In fiscal year 1998 a new initiative will be undertaken, 
Partnership for Freedom, that will build on achievements to date, 
reorient our assistance program, first to Russia and then for the other 
NIS countries, towards longer-term and more cooperative activities to 
spur economic growth and develop lasting links between our peoples.
    (This compares to an fiscal year 1997 level of $625M.)
Public Law 480 Food for Peace Titles II and III ($867M):
  --Title II: USAID requests $837M (the same as the fiscal year 1997 
        level) to address food insecurity through emergency response, 
        increased agricultural productivity and increased household 
        nutrition activities.
  --Title III: USAID requests $30M (compared to $29.5M in fiscal year 
        1997) to fund food aid to low-income, food-deficit counties to 
        encourage policy reforms aimed at achieving long-term food 
        security.
    Country level detail for all USAID administered programs will be 
presented in USAID's fiscal year 1998 Congressional Presentation to be 
submitted to the Congress in late February/early March.

                       iri rapid response request

    Senator McConnell. Thank you, Mr. Atwood.
    What I am going to do, since we have several Senators here, 
is to limit the first round to 5 minutes each so that everybody 
can get a fairly early opportunity to question Mr. Atwood. And 
for those who want to stay, they will get more time on 
subsequent rounds.
    In your testimony, you identified Cambodia and Mongolia as 
examples of our support to fledgling democracies. In Cambodia, 
IRI struggled with the AID office for more than 1 year and 
eventually terminated the relationship when the program officer 
tried to steer subgrants to personal friends.
    After Mongolia's June elections, the Asia Foundation and 
IRI submitted requests for support from AID's rapid response 
fund. After extensive negotiation over plans, I am told the 
request sat in one office for further review from October until 
February.
    We finally received the notification just this week, which 
means that no funds will actually be released until March.
    Do you have any idea why it took nearly 10 months for a 
rapid response mechanism to release crucial funds for Mongolia?
    Mr. Atwood. Mr. Chairman, I have looked into this question 
because I knew that you were concerned about it. There were, 
indeed, two offices involved here. But let me make clear that 
IRI did use core funds to begin moving very quickly. They did 
have $110,000 available.
    There is no reason why it should have taken so much time to 
get the request, the notification, up to you, I can assure you. 
Having been the head of an NGO that was the partner of IRI at 
one point, I can understand their deep frustration. I can also 
understand the problems they have in trying to make ends meet.
    So I am pleased that at least we are able to get the 
notification up to you. I assume that within the next few 
weeks, when that notification clears, we will be able to make 
them whole again.
    I want to make clear that they were not restricted from 
moving. They did move, in fact, using their own funds and also 
the core funding that was made available under the umbrella 
contract for democracy.
    Senator McConnell. So it was a reimbursement issue?
    Mr. Atwood. That's right.

                           suspension of aid

    Senator McConnell. You also said in your testimony that 
nations that do not embrace democracy will not receive U.S. 
aid. Can you give me some examples of where we have suspended 
aid because of that policy?
    Mr. Atwood. Yes; I will.
    Given the fact that we suspended a lot of these programs 
when we announced our first list of 21 countries back in 1993 
and that, indeed, some of those countries have improved their 
situation since that time, although because of budget 
considerations we have not resumed our aid programs, I think 
every time I mention countries I get messages, telegrams from 
Ambassadors, saying you know, the situation has improved here 
so you don't need to keep blasting this country.
    But I think one of the countries that I do not have any 
hesitancy in talking about, because the country is falling 
apart and we are trying desperately to put it back together 
again, is Zaire. There is an example of a country where abuse 
of human rights, corruption, and everything else brought the 
per capita income down from about $2,000 to less than $200, 
despite the fact that we put $2.2 billion worth of aid into 
Zaire over the years.
    Now a lot of it was because we wanted Mr. Mobutu to vote 
right in the United Nations and be on our side in the East-West 
struggle. But we do not have to politicize our aid any longer. 
We don't have to work with governments that abuse human rights.
    In some cases we have the option of working only with NGO's 
in countries where we think we are making progress. That is 
true in a place like Kenya, where we are not exactly happy with 
their pursuit of democratic practices. But we are making a lot 
of progress in a lot of areas, working with nongovernmental 
organizations, and we expect that our contribution there will 
help change the situation over time.
    So I would say that I would be happy to share these 
countries with you privately, if you wish. But for me to now go 
over decisions that we took 3 years ago, when I know that in 
some cases the situation has improved, I think might be 
counterproductive from a foreign policy point of view.
    Senator McConnell. I'm curious as to what the criteria are. 
For example, would you consider forcible repatriation of 
refugees consistent with democratic practices?
    Mr. Atwood. Forcible repatriation of refugees?
    Senator McConnell. Yes.
    Mr. Atwood. Generally speaking, I would not. I mean, it 
depends on the situation you want to cite. Then we can argue 
whether or not it was forcible.
    Senator McConnell. The reason I raised that is a government 
that clearly has been a friend of ours most of the time, the 
Thai Government, is forcing Burmese women and children across 
the border into SLORC gunfire. That has happened just in the 
last 3 days. That is the sort of thing, it seems to me, that 
ought to get our attention and cause a review of our assistance 
policy, including Thailand's IMET program.
    I wonder if you have any reaction to that.
    Mr. Atwood. My only reaction is that we have had the 
celebration of the graduation of Thailand from our aid program 
because they have achieved a sustainable economic system and 
political system.
    Senator McConnell. I understand that. But I just cite that 
as an example of the kind of thing that, I gather from what you 
say, would meet the criteria.
    Mr. Atwood. I don't want to talk about Thailand 
specifically because it is a closeout post. But the fact of the 
matter is when those kinds of things happen, I think it is 
important for us to take those issues up with the government 
because forced repatriation into a state such as Burma is not 
something that we approve of. We are trying our best to be 
supportive of those refugees on the Thai border, as a matter of 
fact, through humanitarian and other assistance that we 
provide.
    Senator McConnell. I am out of time on the first round.
    Senator Leahy.
    Senator Leahy. Thank you, Mr. Chairman.
    I have a number of questions that I will submit for the 
record.

                         fledgling democracies

    Mr. Atwood, you spoke about the use of ESF funds to support 
fledgling democracies. What is democratic about Cambodia? They 
had an election a few years ago, but Prime Minister Hun Sen 
lost the election and forced his way into a coalition 
government, probably one of the most corrupt anywhere.
    Do we send aid to the government itself of Cambodia? I know 
we use the Leahy war victims fund for land mine victims. But do 
we give aid to the government itself?
    Mr. Atwood. We do aid that transition, as does the entire 
international community. I think that we understand exactly 
what you are saying about the state of democracy in Cambodia. 
We worry about it a great deal. We believe that the intent 
continues to be that they are going to pursue democracy and 
democratic institutions, and it is an important transition 
given the history of that country and the devastating civil war 
with the reign of the Khmer Rouge that we have experienced.
    So we are not happy with all things that are going on 
there. We did help sponsor an election which then resulted in a 
compromise and coalition government. They are preparing for 
another election.
    We feel we have to engage to make that situation better.
    Senator Leahy. Does that mean any pressure is being 
brought? I mean, we send aid. Do we have any strings tied to 
that aid?
    Mr. Atwood. There are clear conditions in our aid program. 
Most of them are in the law. If a country does absolutely turn 
its back on democracy, for example, by stealing an election--we 
have had that situation in Niger--under the law, we have to 
close our AID mission and only pursue humanitarian goals in the 
country.
    I just had a meeting with our mission director the other 
day. There are clear standards for our involvement. But I think 
even the law, which was passed by both branches of government--
obviously, in every case--tends to lean toward engagement 
versus absolute decisionmaking. There is still a good deal of 
flexibility on the part of the administration to work a 
situation to improve it.

                          usaid budget request

    Senator Leahy. I'm looking at the increase over last year's 
appropriation, the budget request. I hope we can find the money 
because our foreign policy programs are underfunded. But it 
seems AID is still on the short end of the stick. The request 
is about a $1 billion increase above last year's level. But 
only $65 million of that $1 billion is for AID's Development 
Assistance programs, to protect the environment, to stabilize 
population growth, to stop the spread of infectious diseases. 
These are not glamorous programs. All they do is help the 
people.
    Why do they always end up in last place?
    Mr. Atwood. There are all sorts of pressures, Senator 
Leahy, as you know well. The most dramatic pressure that we are 
all under nowadays is to balance the budget. But within the 150 
account, there are also tremendous pressures.
    I certainly understand the need to pay our arrearages to 
the World Bank, for example, and have had meetings with 
Secretary Rubin. We both understand the importance of the 
overall system, the multilateral and the bilateral.
    We need to pay our arrearages at the United Nations, too, 
although there is a supplemental being considered, or at least 
being discussed with the Congress on that score. But the 150 
account is squeezed, even at $19.4 billion.

                        child survival and ngo's

    Senator Leahy. We appropriated $500 million for AID's Child 
Survival and Disease programs last year, and another $100 
million for UNICEF. This year that is being cut to $455 
million.
    I think we are only sending about 4 percent of it to NGO's. 
A great deal of it goes to for-profit contractors.
    Are we getting the biggest bang for the buck?
    Mr. Atwood. We have increased the amount that we provide 
through NGO's, NGO partnerships, from something like 22 percent 
to 34 percent.
    Senator Leahy. I'm told it is 4 percent.
    Mr. Atwood. No; in 1992, 24 percent of our aid went through 
NGO's. In 1996, it was 34 percent, Senator.
    Senator Leahy. Can you give me an example of the type of 
NGO it might be going through?
    Mr. Atwood. Well, there are hundreds of NGO's that we work 
with. I mean, some of them are doing our humanitarian programs, 
of course--the Catholic Relief Service, World Vision, and CARE. 
A lot of them are working with us on microenterprise programs. 
Some of them are working with us on family planning programs, 
some of them on democracy programs.
    It is a varied group. I would be happy to give you a list 
of all the NGO's that we work with.
    Senator Leahy. Yes; and I would also like to know whether 
it includes for-profit contractors.
    Mr. Atwood. No.
    Senator Leahy. It does not?
    Mr. Atwood. No; not that category. That is just NGO's.
    Senator Leahy. Thank you, Mr. Chairman.
    Senator McConnell. Thank you, Senator Leahy.
    [The information follows:]

          Private Voluntary and Nongovernmental Organizations

    A nongovernmental organization (NGO) is defined broadly as 
an organization organized formally or informally that is 
independent of government. For-profit firms, however, are 
excluded from this definition for USAID's internal coding 
system, and data about the amount of assistance USAID provides 
to NGOs does not include for-profit firms. Some for-profit 
firms have established separate non-profit organizations which 
meet the criteria for a private voluntary organization (PVO) 
and have so registered with USAID. The terms NGO and PVO are 
often used interchangeably, but USAID's definition of NGO for 
internal coding purposes includes not only PVOs but also 
universities and selected other non-profit organizations such 
as research institutions.
    The 24 percent and 34 percent figures I used above 
represent development assistance funding for PVOs as a percent 
of USAID's total development assistance funds.
    With regard to NGOs and child survival, USAID's total 
fiscal year 1996 child survival funding from all accounts was 
$301 million. NGOs, including universities, received about 36 
percent of this funding.
    I do not recognize the 4 percent figure which you 
mentioned. Until I know how it was calculated, the number is 
difficult to comment on.
    It might be helpful to note that some people think of the 
Office of Private and Voluntary Cooperation in our Bureau for 
Humanitarian Response (BHR/PVC) as the primary source of USAID 
funding for PVOs. In fact, while BHR/PVC plays an important 
capacity-building role for PVOs, this Office's funding for PVOs 
in fiscal year 1995 was about 4.5 percent of USAID's total 
development assistance funding for PVOs, which in fiscal year 
1995 amounted to over $715 million.
    Following is a list of registered U.S. private and 
voluntary organizations.

  registered u.s. private and voluntary organizations that work with 
                                 usaid

    The Academy for Educational Development;
    ACCION International;
    AVSC International, Inc.;
    Action for Enterprise Adventist Development and Relief 
Agency International, Inc.;
    African Christian Relief, Inc.;
    African Community Resource Center, Inc., African Medical 
and Research Foundation, Inc., The African Methodist Episcopal 
Church Service & Development Agency
    African Wildlife Foundation;
    The African-American Institute;
    African-American Labor Center;
    Africare;
    Aga Khan Foundation U.S.A. Agricultural Cooperative 
Development International;
    AICF/USA;
    Aid to Artisans, Inc.;
    Air Serv International, Inc.;
    America's Development Foundation, Inc. America-Mideast 
Educational & Training Services American Association for 
International Aging, Inc.;
    American College of Nurse-Midwives American Committee for 
Shaare Zedek Hospital in Jerusalem, Inc.;
    American Council on Education American Federation of 
Teachers Educational Foundation American Institute for Free 
Labor Development The American Jewish Joint Distribution 
Committee, Inc. American Medical Resources Foundation, Inc.;
    American National Red Cross;
    American Near East Refugee Aid;
    American ORT, Inc.;
    American Red Magen David for Israel;
    American Refugee Committee;
    AmeriCares Foundation, Inc.;
    Andean Rural Health Care, Inc.;
    Appropriate Technology International;
    Armenian Assembly of America, Inc.;
    The Armenian Relief Society, Inc.;
    Armenian Technology Group, Inc.;
    The Asia Foundation;
    Asian-American Free Labor Institute Bethany Christian 
Services International, Inc.;
    Bicentennial Volunteers, Inc.;
    Blessings International, Inc.;
    Books for Africa, Inc.;
    Brother's Brother Foundation;
    Caribbean Conservation Corporation;
    The Carter Center, Inc.;
    Catholic Near East Welfare Association;
    Catholic Relief Services;
    Center for Citizen Initiatives The Center for Health, 
Education and Economic Research, Inc.;
    Center for Marine Conservation Center for Strategic and 
International Studies, Inc.;
    Center for Victims of Torture The Centre for Development 
and Population Activities;
    ChildHope Foundation;
    Children International;
    Children of Chornobyl Relief Fund, Inc.;
    Christian Children's Fund, Inc.;
    Christian Reformed World Relief Committee;
    Christian Relief Services, Inc.;
    Church World Service, Inc.;
    Citizens Democracy Corps, Inc.;
    The Citizens Network for Foreign Affairs;
    Community of Caring;
    CONCERN Worldwide (U.S.), Inc.;
    The Conservation International Foundation The Consortium 
for the MBA Enterprise Corps, Inc. Cooperative for Assistance 
and Relief Everywhere, Inc.;
    Cooperative Housing Foundation Cooperative Office for 
Voluntary Organizations, Inc.;
    The Corporate Council on Africa;
    COUNTERPART Foundation, Inc.;
    Covenant House;
    Credit Union National Association, Inc.;
    Delphi International;
    Dian Fossey Gorilla Fund;
    Direct Relief International;
    Doctors of the World, Inc.;
    Doulos Community, Inc.;
    Ecologically Sustainable Development, Inc.;
    Education Development Center, Inc.;
    Enersol Associates, Inc.;
    Environmental Law Institute;
    Esperanca, Inc. Ethiopian Community Development Council, 
Inc.;
    Eye Care, Inc.;
    Family Health International;
    Feed My People International, Ltd.;
    Financial Services Volunteer Corps, Inc.;
    Floresta USA, Inc.;
    Food for the Hungry, Inc.;
    Food for the Poor, Inc.;
    The Foundation for a Civil Society, Ltd. Foundation for 
International Community Assistance, Inc.;
    Freedom from Hunger;
    Fund for Democracy and Development;
    The Fund for Peace The German Marshall Fund of the United 
States;
    Global Health Action, Inc.;
    Global Operations and Development;
    Goodwill Industries International, Inc.;
    Habitat for Humanity International, Inc. Hadassah, The 
Women's Zionist Organization of America, Inc. The Harry T. 
Fultz Albanian-American Educational Foundation;
    Health Alliance International;
    Health and Education Volunteers, Inc.;
    Health Volunteers Overseas;
    Heart to Heart International, Inc.;
    Heifer Project International, Inc.;
    Helen Keller International, Inc.;
    Hermandad, Inc.;
    High/Scope Educational Research Foundation Holt 
International Children's Services, Inc.;
    Institute for a New South Africa;
    Institute for Development Research, Inc.;
    Institute for EastWest Studies;
    Institute of International Education, Inc.;
    International Center for Research on Women;
    International Child Care (USA), Inc.;
    International Church Relief Fund, Inc. International City/
County Management Association International Clinical 
Epidemiology Network;
    International Development Enterprises;
    International Executive Service Corps;
    International Eye Foundation, Inc. International Foundation 
for Education and Self-Help;
    The International Human Rights Law Group International 
Institute for Energy Conservation International Institute of 
Rural Reconstruction;
    International Law Institute;
    The International Medical Corps International Partnership 
for Human Development International Planned Parenthood 
Federation, Western Hemisphere Region;
    International Rescue Committee International Services of 
Hope/Impact Medical Division;
    International Voluntary Services, Inc.;
    IPAS, Inc.;
    ISAR, Inc. Islamic African Relief Agency, United States 
Affiliate;
    Island Resources Foundation, Inc. Joint Center for 
Political and Economic Studies, Inc. Katalysis North/South 
Development Partnership;
    Larry Jones International Ministries, Inc.;
    The Life Link;
    LightHawk;
    Lithuanian Children's Relief, Inc.;
    Lutheran World Relief, Inc.;
    Magee-Womens Hospital;
    Manomet Observatory, Inc.;
    MAP International, Inc.;
    Medical Benevolence Foundation;
    Medical Care Development, Inc.;
    MEDISEND Melwood Horticultural Training Center, Inc. The 
Mennonite Economic Development Associates;
    Mercy Corps International;
    Minnesota International Health Volunteers;
    Mission Without Borders International;
    Missouri Botanical Garden;
    The Mountain Institute, Inc.;
    National Cooperative Business Association;
    National Council for International Health;
    National Council of Negro Women, Inc. National Council of 
the Young Men's Christian Association of the USA;
    National Fish and Wildlife Foundation;
    National Planning Association National Rural Electric 
Cooperative Association National Rural Electric Cooperative 
Association--International Foundation;
    National Telephone Cooperative Association;
    The Nature Conservancy;
    Nazarene Compassionate Ministries, Inc.;
    Near East Foundation;
    New York Botanical Garden;
    New York Zoological Society Northwest Medical Teams 
International, Inc.;
    Obor, Inc.;
    Operation California, Inc. Opportunities Industrialization 
Centers International, Inc.;
    OPPORTUNITY International, Inc.;
    Organization for Tropical Studies, Inc.;
    Pan American Development Foundation;
    Park West Children's Fund, Inc.;
    Parliamentary Human Rights Foundation;
    Partners in Economic Reform, Inc.;
    Partners of the Americas;
    Pathfinder International;
    The Pearl S. Buck Foundation, Inc. The People-to-People 
Health Foundation, Inc.;
    The Peregrine Fund;
    Philippine American Foundation;
    PLAN International USA, Inc., Planned Parenthood Federation 
of America, Inc.;
    Planned Parenthood of New York City, Inc.;
    Planning Assistance Polish American Congress Charitable 
Foundation;
    The Population Council;
    Population Services International Private Agencies 
Collaborating Together, Inc.;
    PRO Women Program for Appropriate Technology in Health;
    Project Concern International;
    Project Dawn, Inc.;
    Project ORBIS International, Inc.;
    Rodale Institute The Rotary Foundation of Rotary 
International;
    Sabre Foundation, Inc.;
    Salesian Missions;
    Salvadoran American Health Foundation;
    The Salvation Army World Service Office;
    Samaritan's Purse;
    Save the Children Federation, Inc.;
    Search for Common Ground;
    Shelter Now International, Inc.;
    Small Enterprise Assistance Funds;
    St. David's Relief Foundation;
    State of the World Forum;
    Strategies for International Development;
    Support Centers of America;
    TechnoServe, Inc.;
    Trees for Life, Inc.;
    Trickle Up Program;
    United Methodist Committee on Relief;
    Viet-Nam Assistance for the Handicapped;
    Vietnam Veterans of America Foundation Volunteers in 
Overseas Cooperative Assistance;
    Volunteers in Technical Assistance, Inc. Winrock 
International Institute for Agricultural Development;
    World Association for Children and Parents;
    World Concern Development Organization;
    World Education, Inc.;
    World Emergency Relief;
    World Environment Center;
    World Learning, Inc.;
    World Rehabilitation Fund, Inc.;
    World Relief Corporation;
    World Resources Institute;
    World SHARE, Inc.;
    World Vision Relief and Development, Inc.; and
    World Wildlife Fund, Inc.

                   administration of justice programs

    Senator McConnell. Senator Campbell.
    Senator Campbell. Thank you, Mr. Chairman.
    I, frankly, have no problem supporting the administration's 
modest request for a budget increase. I think the efforts of 
the USAID have made for stronger democratic nations. That has 
led to better trading partners, increased sales of American 
products, and certainly less conflict in those areas, too.
    I note with interest in your testimony the efforts you have 
made to streamline the Agency, to reduce regulations, to close 
some of the offices, things of that nature, and I certainly 
commend you on that point.
    The bottom of page 11 in your testimony leads me to ask a 
couple of questions. You talk about increased and escalating 
violence, which I guess is one of the unfortunate parts of 
democracy, and I would like to focus on this a little bit.
    The AID Program funds the Administration of Justice Program 
which primarily supports courts and prosecutors in developing 
countries. Support for other law enforcement activities is 
provided through the State Department's Bureau of International 
Narcotics and Law Enforcement, and the Justice Department 
operates an international criminal investigation training 
program. There are a number of other law enforcement programs, 
too.
    I know that we probably have more expertise on what works 
and what does not work in fighting crime, drugs, and gangs than 
anybody in the world. We have had certainly more experience at 
it.
    I, like anybody else, read a lot of accounts of the 
increased criminal activities in Russia, for instance, since 
they have tried democracy.
    I want to ask how do you ensure cooperation between your 
agency and other Federal agencies to support various 
international crime fighting programs so that we do not have 
duplications of effort?
    Mr. Atwood. I'm glad you asked because we have been 
involved in Administration of Justice Programs for many, many 
years, and there is more of a developmental aspect to our 
programs. We work in partnership. We understand what is needed 
in a country to create an institution that will do that kind of 
work.
    The State Department's relatively new Office on 
International Crime has the obvious interest in making sure 
that we can work with other governments to catch criminals and 
to try to prevent the flow of narcotics through countries and 
into our country, and the like. And then the Justice Department 
likewise has interests in this area. They have a very good 
operation that trains police officers.
    We have gotten out of that business long ago because of a 
lot of controversy. But it is an important function.
    So we have an interagency group that meets to talk about 
those issues and to talk about where we are working, what we 
are doing, and how we can collaborate to make all of our 
programs more effective.
    Senator Campbell. Are there three agencies involved in that 
interagency group?
    Mr. Atwood. Three agencies. That's right.
    Senator Campbell. How often do you meet?
    Mr. Atwood. I don't know, exactly, Senator. I don't attend 
the meetings myself. They are done at a lower level. But I 
could get you that information.
    Senator Campbell. OK, if you would, and I have several 
other questions related to that.
    [The information follows:]

          Administration of Justice: Interagency Coordination

    USAID participates in the inter-agency coordination 
process, led by the Democracy, Human Rights and Labor Bureau at 
the Department of State. The State Department's Bureau for 
Narcotics and Law Enforcement (INL) chairs an Interagency 
Working Group to coordinate various U.S. Government agencies' 
respective law enforcement training programs. An interagency 
working group meets regularly on ENI rule of law programs under 
the direction of the Coordinator's Office. Interagency 
coordination for other, long-term institutional building 
administration of justice programs is carried out in countries, 
through the country team under the direction of the U.S. 
Ambassador.

    Senator Campbell. I won't take any more time, Mr. Chairman. 
But I did want you to know that that is kind of a special 
interest for me.
    I thank you for your testimony.
    Mr. Atwood. Thank you, Senator.
    Senator McConnell. Thank you, Senator Campbell.
    Senator Lautenberg, your arrival is quite timely. As a 
matter of fact, you can take your turn if you'd like.
    Senator Lautenberg. That would be very nice.
    Senator McConnell. This has probably never happened in your 
entire Senate career, that you've arrived and immediately been 
called upon.
    Senator Lautenberg. That may be right.
    Senator McConnell. Let me just say that we are limiting 
this round to 5 minutes.
    Senator Lautenberg. OK. So I ought not take all of it 
trying to find my paper.
    Mr. Atwood, it's good to see you.
    Mr. Atwood. Likewise, Senator.

                          war crimes tribunal

    Senator Lautenberg. One of the things that has concerned 
me, and I'm sorry that I was not able to be here for your 
testimony, but I will certainly read it with interest, is 
implementation of a section of the Foreign Operations 
Appropriations Act that gives the President authority to 
withhold assistance from a country which knowingly grants 
sanctuary to indicted war criminals. I do not know if this 
subject has already been brought up.
    Senator McConnell. No; so go ahead.
    Senator Lautenberg. I am talking about countries that 
provide sanctuary to persons evading prosecution by the 
International Criminal Tribunal.
    I believe our foreign assistance program can be used to 
secure greater cooperation from the parties to the Dayton 
Agreement in arresting and transferring indicted war criminals 
to the tribunal.
    Has any funding been withheld thus far under the provision 
in fiscal year 1997?
    Mr. Atwood. We are obviously trying in Bosnia to work with 
officials who comply with the Dayton accords. We are also 
working with the War Crimes Tribunal to enhance their capacity 
to do their work. We are calling for the arrest of war 
criminals in Bosnia and the like.
    The answer to your question is that to date we have not 
withheld resources because we think it is more important to 
engage there and to try to change the conditions on the ground 
that caused those war criminals to be harbored, not by 
government officials in either Republika Srpska or the 
Government of Bosnia and the Federation, necessarily, but by 
other individuals within those societies.

                            republika srpska

    Senator Lautenberg. It is a tough decision that you make, 
only because we have a statutory obligation to try and do this. 
It seems to me that we are walking delicately all over the 
place. I'm not sure who is going to object to these people 
being picked up and tried.
    It is reported that more than one-half of the 75 
individuals indicted for war crimes by the ICT have been seen--
this is in the papers--by journalists and nongovernmental 
organizations that live in Croatia and Republika Srpska. 
Earlier this year, my office was informed that our government 
plans to allocate about one-third of the roughly $200 million 
in funding appropriated by the Congress for Republika Srpska.
    Is that still the plan?
    Mr. Atwood. We are looking at what we can do. What we have 
done in Republika Srpska is not to work with the government 
that has been elected there, by the way, but more with 
nongovernmental groups, independent media, and the like to try 
to bring about reconciliation in the country.
    If we work in the government in the area of Republika 
Srpska, our intention would be to work to strengthen democratic 
elements within that part of Bosnia, not in any way to aid 
people who might be implicated, or whatever, but, rather, to 
isolate them.
    We need to pull that republic into the Bosnian Federation, 
but, more importantly, into the international community, and we 
cannot do it by just sitting back and not working with the 
mayors, for example, of small villages that really do believe 
that they ought to see a democratic change in those particular 
municipalities.
    On the other hand, our requirements ring hollow if we do 
not indicate in specific ways our unwillingness to accept the 
status quo.
    Senator Lautenberg. Now I know that you and your department 
are not in this alone by a long shot. But I would hope that our 
government can intervene. Whether it is financially or 
otherwise--I don't want to make the decision at this committee 
table--we need to move this thing along and show that we are 
serious.
    It is an insult that they are able to thumb their noses at 
us. The fact is that their conduct is unacceptable under any 
condition in the civilized world. We are the only ones who can 
really make a difference to impact on their behavior.
    So I would hope that we could condition that funding in 
some way and resist funding everything unless we get more 
cooperation from the people we are entrusting.
    Senator McConnell. Thank you, Senator Lautenberg.

                             nis assistance

    Mr. Atwood, of the $900 million for the new NIS effort in 
the President's proposed budget, the largest portion is, once 
again, allocated to Russia. I am curious. What was the thinking 
behind allocating Russia $241 million, flat-lining Ukraine, 
reducing Armenia, and continuing support for Belarus, where a 
dictator has recently seized control?
    Mr. Atwood. The funding for Russia, as you know, Senator, 
has gone down considerably from over $2 billion--I believe 1 
year we handled about $1.2 billion of it--down to $95 million 
last year.
    We think, given the challenge that still exists there to 
bring about a democratic market economy and the goodwill that 
exists to try to pursue those issues under the Yeltsin regime, 
it warrants our increasing funding to $240-$241 million under 
this new arrangement of the partnership for freedom.
    The technical assistance aspect will continue. We still 
want to see that country break down the obstacles to trade and 
investment so that we can, indeed, follow an exit strategy that 
will have us leaving there within the next few years 
altogether.
    So I think the increase is in light of the fact that the 
pipeline is being expended very fast, that we are moving away, 
really, from government-to-government types of assistance to 
outside of Moscow, into the hinterlands. This is a very large 
country.
    I am not saying that one country is more important than the 
other. I think most people understand how important Russia is 
to the entire region, including the people of Ukraine, who want 
to see Russia become more democratic and a part of the 
international community.
    So that is our intention. It is our intention to begin to 
phase down our program. But we see the need and we see the 
importance of moving ahead with a program that will eventually 
become taken over by trade and investment, we hope, and 
linkages between democratic institutions.
    Senator McConnell. Any response to my observations about 
the other countries that I mentioned in my question?
    Mr. Atwood. Again, you know, I give you credit. You pushed 
us to some extent in a direction we wanted to go in the case of 
Ukraine.
    The problem, the only problem we face is that we had a 
finite amount of money for the former Soviet Union and you 
earmarked $225 million. I think that we have made some progress 
there. We clearly would always like flexibility. If we don't 
see reform happening, we'd like to move money from one place to 
the other.
    Nonetheless, I think we've made a great deal of progress 
with President Kuchma. Right now, we are waiting for the Rada, 
the parliament of the Ukraine, to vote for privatization and 
for further economic reforms so that we can make more progress. 
But we have made progress in Ukraine, and I think when the 
history of this era is written, the name ``McConnell'' will be 
part of it. [Laughter.]
    Senator McConnell. That's certainly not required. 
[Laughter.]
    And what about Armenia and Belarus? Any thoughts about 
those?
    Mr. Atwood. Again, we are moving, in the case of Armenia, 
from a mostly humanitarian program to really working with them. 
I have to tell you that we are troubled by what happened in the 
last election.
    The Government of Armenia knows that. A new prime minister 
has been named. We think that he is a real reformer and we are 
working with all sides in Armenia, including the government and 
the opposition. We have only requested $80 million this year, 
as opposed to what we asked for last year for Armenia. But a 
lot more of that is going to go to actual development 
assistance, as opposed to humanitarian assistance.
    I am not as familiar with the request for Belarus right off 
the top of my head. I would be happy to give you more 
information for the record on that country, Senator.
    [The information follows:]

                 Continued USAID Assistance for Belarus

    The USAID program in Belarus aims to promote a market-
oriented economy and democracy, including strengthening the 
independent media, non-governmental organizations and private 
enterprise. Because the environment for political and economic 
reforms in Belarus is increasingly inhospitable, we will 
provide assistance at only very modest levels ($5 million, or 
less than one percent of the FSA request level).
    However, we believe it important to encourage support for 
reforms, and to do this by directing our assistance primarily 
through non-governmental channels in the few areas where 
progress has been made and where USAID can effectively counter 
the weakening of democracy. Thus, our assistance request 
reflects the fact that opportunities to support reforms are 
limited under the current regime in Belarus, as well as the 
fact that other NIS countries that are willing to reform and 
seek U.S. assistance deserve the lion's share of our assistance 
resources.

                           african elephants

    Senator McConnell. On another subject, I recently sent you 
a letter regarding the Zimbabwe Government's Communal Areas 
Management Program for Indigenous Resources [CAMPFIRE] and that 
is a mouthful. I have been contacted by a number of people from 
my State who are worried that AID is contributing to the 
wholesale slaughter of endangered species, such as elephants.
    Understanding that it is AID's position that CAMPFIRE is 
designed to ensure that the rural poor are active participants 
in the national development process, I wonder if you are 
prepared to address the concerns that were raised by the 
communication that I sent you.
    Mr. Atwood. First, yes. Any time you express those kinds of 
concerns, we are concerned as well. We are certainly concerned 
about the misinformation that has been going around the country 
as a result of a National Enquirer article, a newspaper not 
always known for its accuracy. In this case we can give you 
very good details as to how inaccurate the article was.
    But what I want to assure you of is, No. 1, we're looking 
into your concerns. Very specifically, David Hales, the head of 
our environment center, has been in Zimbabwe since last week. 
He is coming back on Monday. I would be happy to have him come 
up here and brief you and your staff on what his findings were 
because there were serious allegations that, for example, the 
group that we were supporting was lobbying to change the status 
of elephants under the Endangered Species Treaty and a number 
of other things that we believe not to be true. But David Hales 
is there to investigate these charges for me.
    What I want to emphasize here is that our interest is in 
conserving the natural resource base of Zimbabwe, and that 
includes the elephant, which is an endangered species. We tried 
it every other way over the years. Because of poaching, and 
because of corrupt governments, and because the communities 
weren't involved, the park areas of these countries were 
intruded upon. We saw the elephant population go down to about 
32,000 in the 1950's.
    That population is now up to 66,000 elephants because we 
have adopted community-based conservation techniques. We give 
the community a stake in taking care of the natural resource 
base, which includes the elephant, which is obviously a tourist 
attraction.
    Now as in every case of any animal population, whether it 
is deer here in this area or in Kentucky, or elephants in 
Africa, you need to cull the herd on occasion. They have 
created a tremendous amount of damage in the region. But there 
are 3,000 more elephants being born every year and about 100 or 
so taken as a result of hunting season permits that are granted 
and strictly regulated by the community in the area.
    If you don't give the community in the area a stake in 
this, then you are going to see that elephant population going 
down. Our interest is in preservation of the elephants and 
helping the communities to preserve the natural resource base 
of their own community and of their country.
    There are serious allegations beyond that. But I wanted to 
make it clear for the record that we are not sponsoring anyone 
going in and hunting trophies on an indiscriminate basis. What 
we are interested in is seeing that elephant population 
continue to grow and to protect the park areas where they live.
    Senator McConnell. I'm going to let Senator Lautenberg have 
another round. Then I will have one final question to wrap it 
up.

                      development assistance cuts

    Senator Lautenberg.
    Senator Lautenberg. Thank you. I will be fairly brief, Mr. 
Chairman.
    Mr. Atwood, what is the impact of the cuts on our ability 
to carry out the Development Assistance Program?
    Mr. Atwood. Well, Senator, we are losing some influence. 
That is my most important message to you.
    We have never claimed to do it all in terms of the gains 
that we made in development. Over the last 30 years, we have 
made some tremendous progress in reducing infant mortality by 
one-half, by providing clean drinking water to 1 billion more 
people, by increasing literacy rates by 75 percent, by 
providing food for a growing world population through the Green 
Revolution Program and by all of our contributions to 
agricultural research. But we have maintained our leadership 
capacity by convincing other countries to share the burden with 
us.
    In about 1960, we were providing 60 percent of all of the 
official development assistance in the world. Today we only 
provide 17 percent.
    But if we do not go to the table with something other than 
good ideas--and we continue to go to the table with good ideas, 
I think--and if we go to the table as No. 4 in overall 
contributions, compared to countries that are one-half the size 
of our economy, we cannot influence the other donors. In fact, 
we are influencing them in a negative way. They are cutting 
back as well.
    I think, given the progress that has been made and the need 
that is still out there, American leadership is still vital in 
this area. In addition, we've got diseases that we can control 
that affect Americans, for example. We did succeed in 
eradicating smallpox. We are able to save this country and all 
of its people $280 million each year in immunization costs for 
our children.
    We are on the verge of eradicating polio. That will save us 
$230 million per year for immunizations for our children 
against polio.
    Those kinds of things redound to the benefit of the 
American people. In addition, our exports have soared, which is 
why our economy is so strong versus that of other countries. We 
still have a lot of room for growth, but we have to realize 
that four out of five people will be living in the developing 
world by the year 2000. Those are either going to be consumers 
or they are going to be wards of the international community.
    Either we are going to benefit in terms of increased 
exports or we are going to lose in terms of increased costs for 
peacekeeping, refugee assistance, and the absence of economic 
growth.
    Senator Lautenberg. Unfortunately, it is sometimes hard to 
get the message through here, as we look primarily at the 
budget cuts, to remember that moral leadership is incumbent 
upon this democracy of ours because we are a nation with a 
conscience. We are a nation with concerns about other people. 
But also it follows on that our economic interests, as you 
indicate, are also very well served. If you have friends, just 
like within business circles in the country, if you have people 
to whom you can present product ideas, development ideas, or 
what have you and with whom you can work in cooperation, there 
is an opportunity for you. That is not the primary mission, I 
point out.
    We are, again, a country with a conscience. So it should 
be. Otherwise America is not the America that so many of us 
think about and are so proud of.
    But we are slashing away at programs where there has been 
remarkable success. I think of river blindness, for instance. 
We did not have to do much there but carry a product to the 
source of this, and it has been almost eliminated. Can you 
imagine? Hundreds of thousands of people each year are not 
going blind who otherwise might, who would have to walk with a 
young child in front of them to lead them to wherever they want 
to go. There has been some marvelous work done and your agency 
should be very proud, Mr. Atwood, for the contributions it has 
made over the years.
    Mr. Atwood. Thank you.

                 west bank and gaza microcredit program

    Senator Lautenberg. I would ask one last question, Mr. 
Chairman, and this has to do with the program, the development 
program, that we had, the microcredit program for the West Bank 
and Gaza.
    It was part of a $500 million 5-year pledge to the 
Palestinians. To date, if I am not mistaken, we have about $4.5 
million worth of expenditures made. What are the plans for the 
microcredit programs in the area? Will we continue to expand 
the programs now in place in the West Bank and Gaza? What kind 
of progress has been made in helping create financial 
institutions that would specialize in the extension of credit 
to these new enterprises?
    Mr. Atwood. Senator, before I answer your question 
specifically, let me say that I think we have made a major 
contribution to peace in that region and in the West Bank and 
Gaza in particular. We have done a lot to create wastewater 
facilities to deal with the water issue, which is a huge issue 
in that area. But there is something you may not be aware of. 
In the case of the tense negotiations over the city of Hebron 
at the last minute, one of the crucial issues was a road that 
went through the center of the city and how that road would 
look, how it could contribute to the peace. That was holding up 
the final agreement on Hebron.
    We sent a USAID engineer in from our office in Tel Aviv, 
into Hebron, to look at that situation. He provided 
architectural plans for redirecting that road and creating some 
security barriers and the like that really did push that 
agreement over the edge in the end.
    So I feel very proud of the contribution that we made 
there. We also have made a contribution generally in the sense 
that when people in the West Bank and Gaza feel a hope that 
their future is going to be better, indeed, that they will have 
access to jobs and the like, the polls--which, by the way, the 
International Republican Institute sponsors--are quite 
positive. When they poll the Palestinians on their attitude 
toward peace, they go all the way up to 70 percent in support 
of the peace process now.
    When you have problems, they tend to come down. The number 
of people that will say in a poll that they support violence 
against the State of Israel also goes way down when there is 
more hope and when they can see that jobs are being created.
    That is why, among other things, our credit programs are 
very important. We provided $14 million for the microenterprise 
sector--a loan guaranty facility, which has supported 270 small 
loans, 8,500 short-term working capital loans to 
microentrepreneurs, of whom 75 percent are women, equipment 
loans to help more than 200 vocational graduates get started in 
business, and loans averaging $23,000--which is not a 
microloan--to small Gazan businesses that are creating 
something like 800 to 1,000 jobs over a 3-year-period.
    So we believe very strongly that this is one way of doing 
it. There are other ways as well, and we need to continue, I 
think, to be leaders there. While our program isn't the 
largest--the World Bank's and the European Union's are--we 
still have led the way in helping others see how we can create 
a peaceful situation in that part of the Middle East.
    Senator Lautenberg. Not only did we help in the pursuit of 
peace, but we helped in the pursuit of expectation for an 
improvement in life. I think you said it clearly, but I would 
emphasize that unless the Palestinian people see some 
opportunity for personal improvement, family improvement, and 
so forth, they get disillusioned and I can understand why.
    Thank you, Mr. Chairman.

                             polio programs

    Senator McConnell. Thank you, Senator Lautenberg.
    Just to wrap up, Mr. Atwood, you said that we sort of 
pushed you to where you wanted to go in Ukraine. Would you put 
the polio program in that category, too, that there also we 
pushed you where you wanted to go?
    Mr. Atwood. Absolutely, Senator.

                          rotary international

    I had a wonderful meeting with Rotary International the 
other day and I think that we are in accord with what we ought 
to be doing together with Rotary. I have to commend them. 
They've put something like $100 million of privately raised 
money into this program and they deserve a lot of credit.

                       africa 10-year assessment

    Senator McConnell. As a polio victim myself when I was a 
youngster--and I was lucky--I've always taken a great deal of 
interest in that. I am glad that you are doing the same.
    While I think we probably do too many studies, last year 
the subcommittee asked you to take a look at Africa in terms of 
economic growth. We asked you to carry out a comprehensive 10-
year assessment of anticipated needs and the appropriate role 
the United States might play in addressing those requirements.
    I wonder if you have a status report on where you might be 
going with that report?
    Mr. Atwood. Yes, Senator. That report is being worked on as 
we speak. We have even come to some preliminary findings. I 
would be happy to provide those for the record.
    [The information follows:]

  Status of USAID's 10-Year Assessment for Development Assistance to 
                                 Africa

    USAID's ``vision'' for development assistance to Africa 
over the next decade is premised on a ``new vision'' for a 21st 
century Africa--one in which elected leaders are committed to 
equitable growth as a key principle of nation-building; where 
Africans take the lead in maintaining peace and resolving 
crises across the continent; where Africa's children are well-
fed, healthy, and in school; and where Africa's adults are 
healthy, literate, active in civil society and working as 
productive citizens in a global economy. This vision is based 
on four principles:
    (1) Africa's success depends on Africans themselves.--The 
Development Fund for Africa (DFA) has long advocated that 
consultation with and participation of our African partners 
would enhance the results of our assistance. Today, nearly 10 
years later, we can see that African leadership and ownership 
of the ``development agenda'' are essential for success. Where 
leaders have made hard choices for the good of their people, 
USAID-supported programs have succeeded.
    (2) Social and economic gains are not sustainable without 
broad-based economic growth.--Growth, to be effective, must not 
only focus on increasing the productive capacity of and 
economic opportunity for all Africans, but support programs 
that stabilize population growth, protect the environment, and 
foster democracy and participation.
    (3) Crisis prevention is critical.--While no nation is 
immune from the spill-over effects of crisis, stronger nations 
and economies are better able to cope. Addressing the critical 
issues of food security, conflict resolution, and post-crisis 
rehabilitation on a national and regional basis will help 
instill this strength and resilience.
    (4) Strategic coordination is essential.--Coordination 
intensifies the effectiveness of our resources. USAID's 
presence in Africa, while increasingly limited, nonetheless 
gives us an understanding of conditions that is unmatched by 
any other donor. This is key to influencing our partners and 
ensuring that our collective investments will have the greatest 
impact.
    Our 10-year Report is guided by these four basic 
principles, all of which are derived from experience in 
implementing the DFA. Our vision for future assistance to 
Africa is one that builds on past successes, adapts them to 
future conditions, and positions the U.S. to take advantage of 
new opportunities. Preliminary findings include:
    (1) We must pay even greater attention to food security.--
Without access to adequate food, child survival is threatened; 
without greater food production and the incomes to buy it, 
child and adult health are compromised. USAID's Africa Food 
Security Initiative will help promote food security in Africa 
over the next decade by focusing on key aspects of agricultural 
policy, regional trade, technology, infrastructure, and 
integration of child survival and nutrition.
    (2) We must strengthen the links between development 
assistance and trade and investment.--The global economy is 
growing, and African economies must become part of this growth. 
USAID, with a view toward ``getting the enabling environment 
right'', will help committed African nations become full 
partners in the world's economy. A key outcome is enhanced 
trade that is mutually beneficial to Africa and the U.S.
    (3) We must continue social sector investments, especially 
in health, child survival, and basic education.-- Such 
investments must be linked to economic growth activities in 
ways that help alleviate poverty and promote a better quality 
of life for all Africans.
    (4) We must sustain our support for strengthening civil 
society and preventing crises.--Strong civil societies and 
functioning democracies are essential for food security, 
growth, social sector development, and trade and investment to 
occur. These are also the building-blocks needed to avert or 
mitigate the devastating effect of natural and man-made 
disasters.
    (5) We must emphasize regional approaches to regional 
problems.--Promoting regional economic cooperation in Southern 
Africa, through the Southern African Initiative; supporting 
African-led efforts to achieve food security and overall 
stability in East Africa, through the Greater Horn of Africa 
Initiative; and promoting food security, regional cooperation, 
and further democratic transition in West Africa, are some of 
the more promising regional approaches USAID and other agencies 
are using to complement and add-value to our bilateral 
programs.
    (6) We must continue our efforts to strengthen African 
capacity.--This means increasing our engagement with a host of 
public and private African institutions and networks in ways 
that build leadership and self-reliance.
    The Assessment, which is now being drafted, will be ready 
for discussion with the Senate by May.

                      development fund for africa

    Mr. Atwood. I want to say that your requesting us to look 
strategically is a good complement to what has been done in 
past years under the Development Fund for Africa, which is to 
talk about the results that we achieved and assist those 
countries that make greatest use of our assistance. This pushes 
us to look forward.
    We clearly believe that the food security request that we 
have made is extremely important in light of the fragility of 
some of these countries with respect to growing crops. We 
believe that a great deal of progress has been made in opening 
up African societies through the so-called Leland initiative, 
the Internet and the like.
    What we need to do is to put those kinds of changes that 
are occurring in Africa in a strategic context as you have 
asked us to do.
    I am told that we are planning to provide that report this 
spring. I will be happy to give you an exact date when I get 
back to the office and look at it. But let me just say one 
thing about Africa.
    I think you can look at our programs in Africa from the 
point of view of an optimist and say you can see real progress 
there. The economic growth rates overall in 1995 were 4.4 
percent and then 5.3 percent in 1996.
    We also know that a lot of those African countries are 
failing. So if you look at Africa and you say you are a 
pessimist, that we have not succeeded much in the past--and one 
has to give some credibility to that argument--then at a 
minimum we need to prevent the worst from happening because it 
is going to cost us a lot more money if we look at it from that 
perspective.
    We are looking at putting together a trade initiative for 
Africa. As we look at that, we realize that African Governments 
still need to reform their economies if they are going to have 
any prospect of joining the global economy. I'd say there are 
about a dozen countries that are ready to take off in Africa 
now because the old East-West debate over whether or not they 
ought to have a socialist economy has really ended. And we are 
not working, in any case, in those countries which still do not 
wish to reform their economies and privatize.
    So I think whether your view is the glass is half empty or 
half full, or whether you're an optimist or a pessimist, it is 
important to look strategically. Again, you happen to be 
pushing us in exactly the right direction.
    Thank you very much, Mr. Chairman.

                     Additional committee questions

    Senator McConnell. All right. Thank you very much. We are 
going to leave the record open for any members to submit 
questions and your response in the record.
    [The following questions were not asked at the hearing, but 
were submitted to the Agency for response subsequent to the 
hearing.]
                     Additional Committee Questions
                             freedom house
    Question. Your prepared statement also mentions a Freedom house 
report which documents improvements in political freedom in 48 
countries and a deterioration in 30 countries. You go on to say in 29 
countries showing the most dramatic improvements, most were recipients 
of U.S. aid.
  --How many constitutes most?
  --Of the countries where political freedom eroded, how many received 
        U.S. aid?
    Answer. Twenty-seven of the twenty-nine countries that showed the 
most dramatic improvement were USAID recipients during the period in 
question. Benin, Mali, Malawi, South Africa, Mozambique, Chile, 
Madagascar, Argentina, Uruguay, Bolivia, Central African Republic, 
Nicaragua, Guinea-Bissau, Ethiopia, Congo, Guyana, Guatemala, Panama, 
Haiti, Bangladesh, Jordan, Ghana, Philippines, Paraguay, El Salvador, 
Guinea, and Pakistan. The others were Korea and Taiwan, both earlier 
aid recipients. An improvement of 3 points or more on a scale from two 
to fourteen was considered large.
    Of the nineteen moderate improvers (a one or two point 
improvement), seventeen were USAID recipients. Twelve of these 
countries were in Africa.
    Only seven countries showed large declines (3 points or more) in 
political freedom--Dominican Republic, Kenya, Colombia, Sri Lanka, 
Sudan, Gambia, and Nigeria. All have been USAID recipients, and USAID 
has responded according to the circumstances. We have withdrawn from 
Gambia and restricted programs in the other six countries.
    Twenty-three other countries showed moderate declines impolitical 
freedom. We have had little or no role in six of these countries: 
Syria, Venezuela, Papua New Guinea, Malaysia, Greece, and Burma. We 
have restricted programs or exited from ten others: Lebanon, Zimbabwe, 
Ivory Coast, Zaire, Tunisia, Liberia, Costa Rica, Swaziland, Burundi, 
and Rwanda. The remaining countries are Peru, Indonesia, Ecuador, and 
Egypt (declines of two points): and Morocco, Honduras, and India 
(declines of one point). In each of these seven countries we are 
achieving important development results.
                                 ______
                                 
                  Questions Submitted by Senator Leahy
                           senior management
    Question. You say in your statement that you have cut senior 
management by 38 percent. How many people does that represent? Which 
positions have been eliminated?
    Answer. At the beginning of fiscal year 1993, there were 310 senior 
managers at USAID. As of December 31, 1996, there were 186 senior 
managers. This was a cut of 124 people, actually a cut of 40 percent.
    These cuts resulted from our efforts to ``flatten'' USAID's 
management structure. We eliminated a number of deputy positions, e.g., 
some deputy mission director, deputy assistant administrator, and 
deputy office director positions. We also closed a number of missions, 
eliminating several senior management positions with each closing. And 
we consolidated several bureaus and offices in Washington further 
reducing senior management position requirements.
    Budget limitations, as well as streamlining our operations, are the 
reasons for these cuts.
                  usaid deputy administrator position
    Question. Does AID have a Deputy Administrator? Who is dealing with 
the day to day operations of the Agency?
    Answer. Since my Deputy, Carol Lancaster, left, we have used 
several different means to fill the role of the Deputy. I first rotated 
my Assistant Administrators to the Deputy spot for 30-day periods. I 
did this to broaden their agency-wide knowledge as well as to provide 
appropriate management controls. We are now actively recruiting with 
the White House for a new deputy.
                             aid downsizing
    Question. You say you have closed 26 missions overseas. Since when? 
How many new missions have you opened during that same period?
    Answer. As of September 30, 1996, 26 mission or country programs 
have closed since fiscal year 1994. This counts as separate events the 
Thailand bilateral mission closing in 1995 and the Regional Support 
Mission in Bangkok, Thailand closing in 1996. During the same period, 
USAID has opened eight missions, including West Bank/Gaza, Eritrea, and 
Bosnia.
                        outreach for contractors
    Question. The contracting process at USAID is legendary. There has 
been a perception that USAID favors the beltway bandits, and that the 
process of awarding contracts takes ages. I gather you have cut the red 
tape considerably. What progress have you made in creating a level 
playing field for contractors outside the beltway and not-for-profit 
NGOs?
    Answer. First, we put all of our upcoming procurement opportunities 
on the Internet at the planning stage so all potential bidders get an 
early, equal opportunity to know what USAID is planning to procure 
during that fiscal year. Second, we have continued our outreach program 
with vendor conferences in New Orleans, Chicago and Cleveland during 
the past year. These conferences were widely attended and we hope that 
the interest generated will lead to further diversification of our 
contractor/grantee community. As a result of these and other outreach 
efforts, 800 vendors new to USAID have begun working with the Agency 
during the last three years.
                     indefinite quantity contracts
    Question. One thing I have been concerned about is the use of 
``indefinite quantity contracts.'' You give a large amount of money to 
a contractor with few of the specifics spelled out. It gives you 
flexibility to shape the program as you go, but it also cuts down on 
competition and gives a few people control over a huge amount of money.
    An example I recently heard about is $100 million indefinite 
quantity contract with the ``International Resources Group'' and others 
for environmental policy work. Why put so much money in this one 
basket? How much of these funds will go to contractors, versus not-for-
profit NGOs? How do you make sure you are getting your money's worth, 
and how do you hold anyone accountable?
    Answer. Indefinite quantity contracts (IQCs), while usually having 
a fairly high monetary ceiling, initially only obligate a small amount 
of funds for a limited amount of services. They do provide the 
opportunity for the ordering of additional services which are defined 
at the time of order. They are a very necessary quick response 
mechanism wherein USAID can define actual requirements and obligate 
funds at the time of the actual need. Appropriately defined and awarded 
IQCs can be crucial during times of emergency response.
    However, the use of IQCs for program implementation is becoming 
limited. Rather, we are, in accordance with the new Federal Acquisition 
Streamlining Act (the Glenn Bill), awarding more Task Ordering 
contracts. While Task Ordering contracts have several features of IQCs, 
such as a limited original obligation with the capability of future 
additional orders, they are generally awarded to more than a single 
organization with the resultant orders subject to competition among the 
contract holders. This permits USAID maximum flexibility, but also 
provides the Agency with the advantages of multiple sources of supply.
    The International Resources Group (IRG) contract was a task order 
contract that for very unique reasons, went against our general policy 
of multiple awards. A single contract was awarded because we needed 
cohesive environmental policy from a coordinated source. An advisory 
group had to be set up under the contract, and if multiple awards had 
been made, the contractor selected to form the advisory group would 
have had an unfair competitive advantage over the other firms competing 
for task orders. The alternative, an advisory group for each 
contractor, would create divergent policy groups and a costly 
administrative burden for the Agency. While IRG is the prime 
contractor, and ultimately responsible for performance, they have an 
impressive array of subcontractors and plan to implement approximately 
40 percent of their contract through non-profit organizations. The task 
orders to IRG will contain performance-based scopes of work ensuring 
better performance and achievement of desired results.
                                 egypt
    Question. Maybe Egypt is a good test of the effects of re-
engineering. We have been pouring economic aid into Egypt for years. 
USAID talks a lot about getting results, and Egypt's centralized 
economy is desperately in need of reform. The Egyptian Government says 
it is committed to privatizing its economy. I have heard that for a 
dozen years or more. Do you see any way to get more results from the 
huge amount of aid we give to Egypt, especially in economic reform?
    Answer. Since 1991, U.S. assistance has significantly contributed 
to Egypt's progress on its reform agenda. The Egyptians have unified 
and stabilized their three parallel foreign exchange rates into one 
market-determined rate; liberalized interest rates; made deep cuts in 
consumer subsidies; slashed the budget deficit from about 20 percent of 
GDP to less than 1 percent, reduced inflation from 25 percent to around 
7.2 percent and accelerated the process of public sector reform and 
privatization. Substantial improvements have also been made in the 
foreign trade sector, including reduction in non-tariff barriers and 
cutting the maximum tariff on imported goods from 70 percent to 55 
percent.
    The international investment community has also taken notice. 
Standards and Poors gave Egypt sovereign debt an investment grade 
rating, on par with Greece and Poland, and over $300 million in new 
foreign investment poured into Egypt in January and February alone.
    USAID's programs have also had a significant impact on the quality 
of life for all Egyptians. Over 80,000 Egyptian children are saved each 
year through the use of USAID-financed oral rehydration therapy and 
immunizations. Infant mortality rates have declined by over 25 percent. 
Family planning programs have increased the contraceptive prevalence 
rate to around 50 percent, resulting in a significant decrease in 
fertility and a decline in the population growth rate from 2.9 percent 
to 2.1 percent over the past ten years. USAID has built more than 1,950 
primary schools. Our infrastructure activities have provided water and 
wastewater services to over 22 million people; provided 12 million 
residents of Cairo and Alexandria with reliable telephone service and 
built 40 percent of Egypt's electricity generating capacity.
    Much remains to be done. The cash transfer program, which supports 
the GOE in making needed policy reforms, is a very persuasive method of 
encouraging reforms. Furthermore, the high level dialogue directly with 
President Mubarak, as a result of the Gore-Mubarak Initiative, has been 
extremely successful in accelerating the pace of reform. Egypt is now, 
more than ever before, at a point of take-off. We expect to see an 
acceleration of reforms in the next year due in part to the influence 
of the U.S. and other donors such as the IMF and the World Bank. This 
should produce the kind of economic results that will enable Egypt to 
create jobs and a decent standard of living for all its inhabitants.
                                 egypt
    Question. Otherwise, aren't we throwing away good money after bad?
    Answer. As you can see from my previous response, we feel that 
Egypt truly is at a turning point. The pace of economic reform is 
picking up and key members of the government believe that not only is 
reform something required by foreign donors, but that it is the only 
long-term solution for Egypt's economic problems. Without reform there 
can be no growth and, without growth, Egypt will not be able to create 
enough jobs for its citizens.
    I believe that you will see economic changes in Egypt. The 
financial markets are growing and privatization is accelerating. This 
will result in a stable Egypt, a key objective of our foreign policy in 
the Middle East.
    It would be a mistake to look at Egypt's past performance and judge 
its future potential. The climate is changing and we, therefore, need 
to keep up the pressure, and the incentives, to encourage the Egyptians 
to make the needed change. With our continued technical advice and the 
financial support provided by the USAID program, the outlook is more 
optimistic than it has been.
    As I stated previously, I think that USAID can demonstrate 
tremendous results in Egypt, in all sectors. The results of our program 
are particularly obvious in the power, telecommunications and water/
wastewater sectors. Without the improvements made in these sectors, 
Egypt would not be in the economic position it is in now and economic 
growth would be a dream and not the reality that it is today.
     guatemala--fiscal year 1998 esf funding for the peace program
    Question. The peace agreement signed in Guatemala in December ended 
thirty years of one of the bloodiest wars in this hemisphere. However, 
it will take a huge effort and a lot of luck for peace to survive 
there. You expect to obligate $25 million in development aid to 
Guatemala in fiscal year 1997. Yet you are requesting just $23 million 
for fiscal year 1998. What does that say for supporting the peace 
agreement there?
    Answer. We have requested a total of over $60 million for Guatemala 
in fiscal year 1998 in Development Assistance (DA), ESF and Public Law 
480 Title II resources. Over 4 years (fiscal years 1997-2000), we are 
planning to provide $100 million in ESF funding to help Guatemala 
implement its historic peace accords. These ESF resources, in addition 
to our ongoing DA and food aid programs, will bring the total planned 
commitment to Guatemala to $260 million over the four years.
    Question. How much ESF (Economic Support Funds) do you expect to 
make available for Guatemala in fiscal year 1998?
    Answer. We expect to provide $25 million in ESF for fiscal year 
1998 under the LAC Regional Democracy Fund.
                      middle east development bank
    Question. Can you explain to me why funding for the Middle East 
Development Bank--which we incidently cannot afford--is coming out of 
the Economic Support Fund, rather than out of the multilateral 
assistance account, where the other development banks are traditionally 
funded?
    Answer. The Bank originated as a joint proposal by the key parties 
in the peace process: Egypt, Jordan, the Palestinians and Israel. The 
primary reason the Administration proposes funding the Bank from the 
Economic Support Fund is that it is an integral part of the peace 
process and is closely linked to the political and economic objectives 
of the ESF resources. It is my understanding that a secondary reason 
for this decision, on which Treasury and State consulted, is a concern 
not to have to set aside resources within the Multilateral Development 
Banks account for a new institution at a time when we are trying to 
clear U.S. arrears to existing multilateral development banks.
                              tuberculosis
    Question. In your statement you cite USAID's leadership in the 
effort to eradicate polio. I think it is worth mentioning that Congress 
had to push USAID to take that on.
    What you didn't say is how little you are doing to combat 
tuberculosis which kills more people than any other infectious 
disease--3 million annually, even though it can be cured for as little 
as $11 per person.
    If current rates continue, more than 30 million people will die 
from TB in the next decade.
    I have tried to find out how much USAID spent on TB, without a lot 
of success. I gather it's a few million dollars, which is hard to 
comprehend. Why so little?
    Answer. TB experts have recognized that treatment and control of TB 
is among the most labor-intensive of health interventions, since the 
most effective approach is Directly Observed Therapy Strategy (DOTS). 
Under DOTS, the patient is observed actually taking the prescribed 
medication by a trained health worker . The $11 per person you cited is 
the additional cost of drugs in a situation where the DOTS approach 
simply can be added on to an already fully functioning health care and 
outreach system. However, we have found that in the vast majority of 
the developing world where TB is most prevalent, we have had to start 
more or less at the foundation of building a health care delivery 
system before it would be appropriate or effective to launch DOTS. In 
fact, a high proportion of USAID's health budget, ($27.4 million or 
nearly 9 percent) is aimed directly at health systems development and 
strengthening. Without this, efforts at TB control would be futile. 
While we do not ``count'' this funding as TB-related because it has 
effects on the control of virtually all major public health problems, 
our efforts mean that the more closely targeted TB efforts of others 
have a chance of succeeding where they otherwise would not.
    These others include other U.S. government agencies (e.g., the 
Centers for Disease Control and Prevention and the National Institutes 
of Health) and universities, as well as other international agencies 
and organizations (e.g., The Joint United Nations Programme on HIV/
AIDS, the World Health Organization, the International Union Against 
Tuberculosis and Lung Disease). To maximize the impact of funds 
available to combat tuberculosis, we are supporting work of these 
groups in areas in which we have a comparative advantage. For example:
    (1) Capacity Building: We have a cooperative agreement with the 
Centers for Disease Control and Prevention (CDC) to develop operational 
research projects related to HIV and TB, especially in sub-Saharan 
Africa. Through the agreement, we support work of the World Health 
Organization's (WHO) Global TB unit (approximately $650,000) on 
incorporation of DOTS style interventions in home and community based 
TB and HIV care through an operations research training project in 
seven sub-Saharan countries.
    (2) UNAIDS: USAID has also provided $1.75 million in TB-designated 
funds to the Joint United Nations Programme on HIV/AIDS (UNAIDS) for 
use in defining cost-effective TB treatment regimes, including DOTS-
style management, for HIV-infected individuals; for surveillance of 
multidrug resistant disease as a part of a multi-donor international 
effort; and for training of 200 national TB program managers worldwide.
    (3) Prevention initiatives: In 1996, USAID allocated over $7.5 
million for infant BCG immunization to minimize the complications and 
shorten the course of pediatric tuberculosis infection.
    (4) Disease Management and control: USAID is developing a CD ROM-
based interactive computer-based program for TB case management which 
may be implemented throughout the developing and developed world, if 
found to be effective. We are also supporting field evaluations of 
national TB control programs and studies on the cost effectiveness of 
different TB control interventions among HIV-infected persons, and on 
the policy implications of the increasing threat of TB. About $500,000 
is allocated for these purposes.
                                malaria
    Question. Each year, more than 2 million children around the world 
die from malaria. USAID has led the international effort to develop a 
malaria vaccine and drugs to combat malaria. Yet your annual budget for 
this and other anti-malaria programs, like the development of repellant 
impregnated mosquito nets, is only about $8 million. Why so little?
    Answer. USAID recognizes the importance of malaria as a leading 
killer of children in Africa. Unfortunately, as overall funding levels 
have decreased, we have been forced to cut back on resources for this 
program and others. To maximize our investment, in the last few years, 
we have strengthened the focus of the program making it more results 
oriented.
  --In vaccine development, USAID's Malaria Vaccine Development Program 
        (MVDP) is now focused on finding a vaccine that is effective 
        for children in high endemic areas. We have partnered closely 
        with the National Institutes of Health (NIH) and the Walter 
        Reed Institute of Research (WRAIR) to maintain a substantial 
        U.S. effort in all of the necessary stages of malaria vaccine 
        development, and coordinate well with WHO, EU and other donors. 
        This enables us to translate current knowledge into 
        experimental vaccines which can be tested in humans. In fiscal 
        year 1996, initial safety studies of a new USAID initiated 
        experimental malaria vaccine were conducted in cooperation with 
        other USG Agencies, and a second experimental vaccine is 
        scheduled for testing in fiscal year 1997.
  --Africa Integrated Malaria Initiative (AIMI): Using the technologies 
        now known for combatting malaria, last year, USAID established 
        the Africa Integrated Malaria Initiative (AIMI) that promotes a 
        comprehensive ``package'' of approaches, including the first 
        large scale, sustainable impregnated mosquito net program in 
        Africa. The initiative is designed to make it easier for our 
        field missions to support malaria programs through a variety of 
        central, regional and country specific mechanisms, including 
        CDC, and we anticipate substantial growth in the program.
  --Extensive malaria control activities take place under other USAID 
        programs. We are the lead bilateral donor in WHO's initiative 
        for the Integrated Management of Childhood Illness (IMCI), 
        which sets clear clinical standards for treating malaria and 
        its complications. Our support for the development of new 
        technologies has produced two promising diagnostic tests that 
        health workers in the field can use to rapidly confirm malaria 
        parasite infection in a cost-effective manner. USAID continues 
        to train national malaria program managers, in Africa 
        especially, in information systems and operations research.
                            family planning
    Question. I am told there are very few family planning services in 
the West Bank and Gaza, where the crush of people is already out of 
hand. Does USAID have a family planning program there?
    Answer. We agree that population growth is a big concern for the 
West Bank and Gaza. None of USAID's bilateral program, which is 
focussed on promoting the private sector, addressing the shortage and 
economical use of water, and facilitating accountable democracy and 
governance, is used for family planning. However, through centrally-
funded programs, USAID has provided a small amount of funds for 
contraceptives and demographic data initiatives. USAID also provides 
centrally-funded assistance to the International Planned Parenthood 
Federation (IPPF) which, in West Bank and Gaza, assists with family 
planning delivery services. The European Union and UNFPA are 
contributing with $6 million and $7 million, respectively, for family 
planning and reproductive health services in the West Bank and Gaza.
                               democracy
    Question. While we are on the subject of the West Bank, there is a 
lot of concern that the Palestinian Authority is becoming more and more 
authoritarian. What are you doing to support civic organizations, human 
rights groups, or other democratic institutions?
    Answer. Democracy/Governance is a cornerstone of the USAID WB/G 
program and promoting civic participation is a key part of our entire 
program. This fiscal year, about 15 percent, or $11 million, of our 
budget is for democracy activities. We are supporting civic 
organizations and their increased participation in society through 
grants to U.S. PVOs such as the International Republican Institute and 
the National Democratic Institute. We estimate that their activities 
reach more than 30,000 Palestinians through community level civic 
forums and activities that increase the flow and diversity of 
information to citizens. These programs involve Palestinians in 
discussions on their rights and responsibilities in a democracy.
    In addition, USAID soon will directly support selected Palestinian 
non-governmental organization activities such as women's rights 
watchdog groups, posting draft laws on the Internet, televising town 
hall meetings on proposed laws, training for civil society organization 
staff and reporting on Legislative Council and Executive Authority 
actions. USAID is funding proposals from several local organizations to 
increase their ability to conduct policy analysis and fulfill advocacy 
and government monitoring functions. All these combined civil society 
efforts reach, directly or indirectly, at least one-fourth of the 
Palestinian population--over 600,000 people.
    Other USAID democracy/governance activities entail working with the 
Palestinian Legislative Council to help them be responsive to the 
concerns of their constituents. We fund public opinion polls to inform 
the Council and the Palestinian Authority of constituent concerns. We 
are also promoting linkages between civic groups/non-governmental 
organizations and the Council and the Palestinian Authority to help set 
common policy goals and increase cooperation among them.
    In supporting the creation of a democratic system, our total 
democracy/governance efforts benefit the two million Palestinians in 
the West Bank and Gaza, directly or indirectly.
                                 ______
                                 
                Questions Submitted by Senator Campbell
                   administration of justice program
    Question. USAID funds the Administration of Justice which supports 
courts and prosecutors in developing countries to strengthen 
democracies. Many developing countries are inflicted by rising crime 
rates, increasing violence, and a breakdown of law enforcement.
    Please provide the subcommittee with information on the current 
activities of the Administration of Justice program and activities 
which USAID plans to support in the coming year. Please include 
information on the impact which these activities have on the justice 
problems the activities were designed to address and any independent 
evaluating which have been conducted.
    Answer. USAID undertakes programs to strengthen the rule of law 
(ROL) (including the administration of justice) as part of its overall 
efforts to strengthen democracy and governance. Promoting democracy and 
governance advances key U.S. foreign policy objectives and is an 
essential part of USAID efforts to contribute to sustainable 
development.
    The approach undertaken by USAID in its rule of law (ROL) programs 
is determined in part by the most pressing needs within countries or 
regions. Crime control and law enforcement are important components of 
USAID's rule of law work in many regions, and USAID works in close 
coordination with the Department of Justice and the State Department in 
undertaking activities.
    For example, in Latin America, programs that address this issue 
tend to focus on enforcing due process and reducing abuses of basic 
human rights. A major element of these programs in several countries is 
a component related to enhancing the crime fighting capabilities of the 
police and investigative entities.
    In the Europe and New Independent States (ENI) region, the initial 
focus of USAID's rule of law (ROL) approach was related to creation of 
market based economies, including rewriting of legislation and judicial 
training in the commercial area. More recently, programs to address 
crime control and the strengthening of police and prosecutorial 
investigative capabilities have been undertaken.
    USAID is currently developing strategies for applying lessons 
learned in these regions to its programs in other parts of the world. 
In Africa, crime and violence are problems in many countries, but their 
solution is further complicated by cultural diversity, limited access 
to the judicial system, and weak or nonexistent legal institutions.
    In all regions there is now an added emphasis on the expansion of 
access to justice for marginalized groups (including women) and, in a 
number of failed states, efforts are directed toward recreating 
institutions destroyed by internal violence and assisting with 
reconciliation programs. The mix of objectives and the extent of change 
sought varies from country to country.
    USAID undertakes regular evaluations of particular projects. In 
1993, an overall evaluation of all USAID programs in rule of law was 
undertaken which documented the ``lessons learned'' so far in this 
critical sector. A copy of the report, Weighing in on the Scales on 
Justice is available upon request.
    Results achieved in USAID's ROL programs to date have been 
impressive. In Latin America, the region with the longest-running ROL 
programs, documented progress has been made in reducing human rights 
abuses and increasing the observance of due process rights. USAID 
programs have created viable public defense systems in Bolivia, Panama, 
and El Salvador, and are supporting their establishment in Colombia and 
Guatemala. Uruguay has made measurable progress in reducing the average 
time for handling of civil disputes. Cooperation from the judiciary 
ranges from very high in El Salvador to negligible in Colombia. 
However, the highest levels of judicial cooperation were reached with 
the small Costa Rican project where USAID supported the creation of an 
extremely active Constitutional Chamber; Costa Rican judges are now 
promoting reform efforts throughout the region. The Panama program has 
made significant progress in coordinating police and prosecutorial 
investigations, and the methods used there are now being adopted in a 
redesigned Guatemala program.
    Despite these important gains, clearly a number of challenges 
remain. The difficulties of reorienting and coordinating the activities 
of four independent agencies (police, courts, defense and prosecution) 
have taken time and required creative and flexible approaches. Mid-term 
evaluations of progress in Colombia and El Salvador, while generally 
positive, suggest the need for further actions to improve the skills of 
legal practitioners and improve the coordination of the various 
entities associated with the legal system.
    Programs in other regions are newer and thus more difficult to 
assess. An evaluation of the Russian program is scheduled for this 
spring. Programs elsewhere in ENI and other regions will be subject to 
normal evaluations.
    Question. The United States has a wealth of expertise in ``what 
works'' to fight crime, drugs, and gangs. Experts who have first-hand 
experience in these areas could be invaluable resources to other 
countries experiencing these problems if some technical assistance were 
available. What additional steps can you take to expand the scope of 
the Administration of Justice Program so valuable technical assistance 
in the United States can be provided to those countries which need it 
most?
    Answer. USAID is already tapping into a variety of resources for 
implementation of its rule of law programs, including administration of 
justice (AOJ) activities. For example, the Department of Justice's 
prosecutorial and police training entities--Office of Professional 
Development and Training (OPDAT) and International Criminal 
Investigative Training Assistance Program (ICITAP), respectively--have 
been key components of USAID's AOJ programs in Latin America, the 
Europe and New Independent States (ENI) countries and, most recently, 
in Africa.
    USAID also draws on the wealth of expertise available in the U.S. 
non-governmental sector. For example, efforts to improve court 
administration have drawn on resources from entities like the National 
Center for State Courts. This Center, as well as the Reno Judicial 
College, and various state entities have been used to improve judicial 
and prosecutorial training programs. USAID is also attempting to draw 
on state prosecutor organizations to assist with setting up basic 
prosecutorial organizations and we have used U.S. juvenile court judges 
and staff to give assistance in treating youth crime and gangs, and 
supported NGOs to set up legal assistance, advocacy, and alternative 
dispute resolution programs in disadvantaged communities.
    USAID is constantly looking for additional U.S. sources of 
specialized expertise in this area. This fiscal year, additional 
mechanisms will be established to allow USAID to expand access to 
appropriate U.S. technical expertise in this area.
    Question. As I previously noted, USAID funds the Administration of 
Justice program which primarily supports courts and prosecutors in 
developing countries. Support for other law enforcement activities is 
provided by the State Department's Bureau of International Narcotics 
and Law Enforcement. And, the Justice Department operates the 
International Criminal Investigative Training Assistance Program 
(ICITAP) which is funded by the State Department's Bureau of Latin 
American Affairs.
    How do you ensure full coordination between USAID and the other 
federal agencies which also support various international crime 
programs?
    Answer. Effective inter-agency coordination of all USG democracy 
programs occurs in the field, under the direction of the Ambassador. 
All overseas posts have established inter-agency coordinating 
committees on democracy promotion, including rule of law programs. For 
example, in the case of ICITAP's Latin American programs, agreement on 
country program directions and benchmarks to measure progress toward 
critical objectives related to these efforts is reached in a joint 
exercise in which ICITAP, Department of State's Office of Inter-
American Affairs (ARA), and USAID all participate. U.S. Ambassadors in 
Eastern Europe chair democracy commissions, which review programs 
proposed by USG agencies and by various nongovernmental organizations 
receiving US assistance.
    In Washington, there are a number of task forces, usually focussed 
on country specific issues, that also ensure close collaboration among 
the various USG entities as well as coordination with other donors 
engaged in similar efforts. Washington task forces are particularly 
important for countries like Haiti, Guatemala and El Salvador where 
major assistance efforts in this sector are underway and include not 
just USG entities but a variety of other donors, both bilateral and 
multilateral.
    Question. Is there an inter-agency working group which would ensure 
coordination of international crime programs: If so, which federal 
agencies are represented and how often does the group meet?
    Answer. USAID participates in the inter-agency coordination 
process, led by the Democracy, Human Rights and Labor Bureau at the 
Department of State. The State Department's Bureau for Narcotics and 
Law Enforcement (INL) chairs an Interagency Working Group to coordinate 
various U.S. Government agencies' respective law enforcement training 
programs. An interagency working group meets regularly on ENI rule of 
law programs under the direction of the Coordinator's Office. 
Interagency coordination for other, long-term institutional building 
administration of justice programs is carried out in countries, through 
the country team under the direction of the U.S. Ambassador.
                           microcredit summit
    Question. On February 2-4, 1997, the Microcredit Summit was held in 
Washington, DC. This international conference considered the 
microcredit program which provides small loans to the poorest of the 
poor to help them become economically self-sufficient.
    In 1994 USAID launched a microcredit initiative with half of the 
resources targeted to the poorest to support loans under $300. Please 
provide the Subcommittee with information on the status of this 
initiative and its impact. Also, please provide the Subcommittee with 
information on any plans to expand the microcredit program.
    Answer. The Microenterprise Initiative was launched in 1994 and 
renewed this year. Its primary goal is to assist the efforts of the 
poor to increase their income and assets. Two additional goals are to 
increase skills and productivity to enhance economic growth, and to 
facilitate the development of ``economic democracy.''
    USAID has worked conscientiously to fulfill the commitments it made 
for the Initiative, though circumstances have required some adjustments 
in targets.
    USAID provided $137.4 million and $140.5 million of support to 
microenterprise activities in 1994 and 1995, respectively. USAID's 
budget contracted significantly in 1995 and 1996, forcing us to trim 
overall funding targets for microenterprise. Provisional figures for 
fiscal year 1996 show USAID directing $118.9 million to 
microenterprise. USAID plans to continue supporting microenterprise at 
the $123 million in 1997 and $122 million in 1998.
    To spearhead the initiative, we established the Office of 
Microenterprise Development in the Bureau for Global Programs, Field 
Support, and Research to manage the Initiative. Accomplishments 
include: The Microenterprise Implementation Grant Program has awarded 
$30 million to 17 US PVOs and international organizations, expected to 
be serving over 400,000 clients by the end of the grants. The Prime 
Fund provided $17 million to USAID missions in 20 countries for 
institution-building, promoting an enabling environment for 
microfinance, and providing credit and savings services to over 300,000 
clients. The Microenterprise Best Practices Subgrant facility, which 
supports capacity-building, has awarded small grants to 13 
organizations. USAID has also expanded microenterprise in other 
programs: The Matching Grant and Cooperative Development Programs have 
provided $25 million to 16 US PVOs and Cooperative Development 
Organizations for microenterprise development in 29 countries. The 
Micro and Small Enterprise Development loan guarantee program manages 
loan and guarantee facilities supporting microenterprise credit in six 
countries, as well as ``bridg funds'' for two US PVOs. At the mission 
level, USAID has active microenterprise programs in all regions, 
covering 45 countries, and serving nearly 5 million clients.
                        bulgaria economic crisis
    Question. Recent news reports show that Bulgaria is in the midst of 
a severe economic crisis. Bulgarians are facing a great deal of 
deprivation, including a shortage of food and medicine. And, because of 
a poor grain crop last year, there is a shortage of bread and bread 
lines are forming.
    Please provide the subcommittee with information on what steps 
USAID is taking to provide assistance to Bulgaria, and what additional 
steps you plan to take in the future.
    Answer. The USAID/Bulgaria program has been designed to proactively 
address the Bulgarian situation. Aware that this would be a hard winter 
in Bulgaria, USAID/Bulgaria, U.S. Embassy/Bulgaria, and USAID/
Washington worked hard on an assistance package for the beleaguered 
Bulgarians. USAID has committed $2.1 million to the procurement and 
delivery of much needed pharmaceuticals to populations at risk. 
Distribution to seven targeted cities is scheduled to begin as early as 
April. An additional $400,000 has been designated for the International 
Red Cross/Red Crescent to contribute to their ongoing emergency appeal, 
mostly to support the distribution of food aid to over 41,000 needy 
beneficiaries.
    USAID/Bulgaria is working with other donors, especially the 
European countries, and donor organizations, to coordinate relief 
efforts in Bulgaria. USAID/Bulgaria is looking at potential follow-on 
programs as a recent UNDP assessment reported that the need for 
additional assistance is clear. USAID/Bulgaria continues to monitor 
closely the political and economic developments that impact on the 
standard of living for Bulgarians and remains ready to respond should a 
crisis situation arise.
                         aid to the middle east
    Question. In signing the Hebron agreement with the Palestinians, 
Israel's Prime Minister, Benjamin Netanyahu, has demonstrated Israel's 
continuing commitment to the peace process and to the willingness to 
take risks for peace. Yet the toughest issues in the peace process now 
will be addressed in the negotiations, making it more important than 
ever that the U.S. stand by its friend and ally Israel. Do you think 
that maintaining aid to Israel at current levels is important for the 
peace process to succeed?
    Answer. I fully support the President's fiscal year 1998 assistance 
request for Israel. Assistance to Israel remains a concrete 
demonstration of our unshakable commitment to the security and well 
being of a key ally.
    Question. What do you think the connection is between U.S. aid to 
Israel and Israel's ability to take risks in the peace negotiations?
    Answer. U.S. assistance to Israel represents a concrete 
demonstration of our support for a key peace process partner.
    Question. What message would a cut to Israel send to Israel's Arab 
negotiating partners?
    Answer. As I indicated, we support full fiscal year 1998 funding 
for assistance to Israel as a clear demonstration of our unshakable 
commitment to a key ally.
    Question. How would you assess the effectiveness of our aid 
programs to the other nations of the Middle East, particularly Egypt 
and Jordan?
    Answer. There is no question that our assistance to Egypt has had 
significant impact on its development. During the past year, we have 
seen significant policy reforms, essential to sustainable economic 
growth, and we are optimistic that this trend will continue. Our more 
modest assistance program to Jordan has produced significant results in 
the key areas of water conservation and use and population planning. We 
are requesting an increase in fiscal year 1998 funding levels to expand 
programs designed to enhance Jordan's economic stability, thereby 
bolstering its position as a key partner in the peace process.
    Question. Given the helpful role that Jordan has played in 
advancing the Middle East peace process, do you believe your request 
for aid to Jordan is sufficient to meet Jordan's needs?
    Answer. Ultimately, Jordan's needs must be met by market forces. 
Jordan has experienced strong economic growth in the past year, but its 
economy remains extremely vulnerable to regional events. Our assistance 
can help create the conditions for growth, but it cannot substitute for 
private sector growth. Obviously, we could do more with additional aid 
and bring Jordan more quickly to a stable economic situation. Our 
request for aid to Jordan is a compromise among Jordan's needs, the 
needs of other countries, and our assessment of how our resources can 
best be utilized.
                              foreign aid
    Question. This year the Administration requested a modest increase 
in spending on international affairs, after more than a decade of 
successive annual cuts.
    In your view, why is foreign aid so critically important? What does 
foreign aid do for the United States? Can America continue to lead 
without this program?
    Answer. Our foreign assistance programs directly advance America's 
interests in three ways: by helping to prevent crises; by generating 
dynamic opportunities for expanded trade; and by providing protection 
from specific global health and environmental threats. In the post Cold 
War era it is arguably more important than ever for U.S. leadership.
    One of the most profound areas of concern for the United States and 
its allies is the growing phenomenon of failed states that trigger 
conflict and economic collapse. The staggering human, financial, and 
political costs of these conflicts are reflected in the increasing 
scope and complexity of peacekeeping operations, the loss of human 
life, and the exploding numbers of refugees around the globe. The U.S. 
has a compelling national interest in preventing and averting crises 
before they occur.
    Development programs have a lead role to play in these efforts. 
Crises erupt when countries lack the institutional capacity to deal 
with internal conflicts. Two groups of countries are clearly the most 
vulnerable in this respect, and most cases of failed states fall into 
one of these two groups. First, many of the countries that were 
formerly communist are struggling to establish new institutions to 
replace those associated with Communism. Until they succeed in this 
daunting task, they are highly vulnerable to crisis. Second, the least 
developed countries of the world are (almost by definition) those with 
the weakest human resources and institutions, e.g. Rwanda, Somalia, 
Sudan, Zaire, Afghanistan, and Liberia. In contrast, developmentally 
more advanced countries such as Sri Lanka, India, Indonesia, Malaysia, 
and others have been able to avoid collapse despite serious internal 
conflicts and tensions.
    Our programs in developing and transitional countries are aimed at 
enriching human resources, strengthening institutions, and supporting 
political and economic reform. They are part of a much larger 
international effort. By fostering stronger institutions, a richer 
human resource base, and economic and social progress countries are 
better able to manage conflict and avoid crisis and dissolution.
    Where economic interests are concerned, developing countries 
provide the most dynamic and rapidly expanding markets for U.S. goods 
and services. U.S. exports to developing countries since 1990 have 
expanded at 12 per cent annually, more than double the growth rate of 
our exports to industrial countries. This trend has been evident since 
the mid-1980's.
    USAID programs that help create a better enabling environment for 
markets make a significant and fairly direct contribution to expansion 
of U.S. exports. While U.S. exports have expanded rapidly overall (much 
more rapidly than those of our competitors), they have grown much more 
rapidly to some developing countries than to others. The major factor 
explaining the difference is differential progress among developing 
countries in terms of improved policies and institutions that support 
markets.
    Finally, foreign assistance programs are vital in protecting the 
United States against many dangers that are global in scope. By taking 
on the challenging task of preventing and controlling infectious 
diseases like AIDS, polio, and emerging viruses like Ebola before they 
reach our shores, USAID lowers health costs here at home. Our 
environmental programs help protect the air and water than Americans 
share with the rest of the world.
    No less important, our foreign aid programs provide a critical 
foundation for continuing U.S. leadership in the global community. This 
is increasingly important in the post Cold War era.
    During the Cold War, U.S. leadership was central and unmistakable 
as the protector of the free world against the threat of communist 
expansion. U.S. military power and economic dynamism were seen as 
essential to resisting that threat. But America's leadership, then as 
now, had a foundation stronger than our military or our economy. The 
United States projected a compelling, and widely shared vision of a 
world order where democracy and open systems were respected. Our vision 
of political and economic freedom, of social justice and respect for 
the individual was as powerful as any missile or other defense system. 
The U.S. offered the world not only security, but a better alternative 
to the Communist vision.
    Leadership in foreign aid, starting with the Marshall Plan and 
renewed by President Kennedy, was a critical element of U.S. leadership 
and vision during the Cold War. Others followed our example and non-
U.S. aid expanded rapidly, to the point where the share of global 
foreign aid provided by the U.S. has fallen from about 50 percent in 
1960 to around 15 percent today.
    The Cold War is over. We still have the strongest military and the 
strongest economy in the world. But leadership depends on more than 
strength. America's position in the 21st century will increasingly 
depend on the perception that we understand and appreciate the broad 
interests of the international community, and that we act with these 
interests in mind; and on the perception that we still have the best, 
most compelling vision of a global world order. International 
development cooperation, including foreign aid provided by rich 
countries to needy countries that are making reasonable self-help 
efforts, is a vital part of this.
    Expressed negatively, a perception that America sees foreign aid as 
simply a Cold War tactic cloaked in lofty rhetoric, to be discarded now 
that the threat of Communist expansion has subsided, would cause 
irreparable damage to any U.S. claim to international leadership.
    Development cooperation, including support for countries making the 
transition from Communism and humanitarian assistance for countries in 
crisis, remains an essential part of a credible and compelling vision 
of how the international community should function. A lead role for the 
U.S. in development cooperation is a vital part of American leadership 
in the post-Cold War era, arguably more important now than ever.
                                 ______
                                 
                 Questions Submitted by Senator Stevens
                the u.s. russia investment fund (tusrif)
    Question. Mr. Atwood, as Chairman of the Appropriations Committee 
and the Senator of a State which is very interested in the continued 
development of business relations with the Russian Far East, I have 
heard some complaints about the performance of one of the enterprise 
funds (TUSRIF). Would you explain to me the formula which USAID intends 
to use when allocating funding to TUSRIF for fiscal year 1998? Please 
detail to me the oversight responsibilities of USAID toward TUSRIF.
    Answer. USAID has tentatively budgeted $33 million to TUSRIF in 
fiscal year 1998. The final obligations will depend on TUSRIF's need 
for funding based on their expenditure rate.
    Oversight of the enterprise funds, including TUSRIF, has evolved 
and expanded since the first grant agreements were signed for Poland 
and Hungary in 1990. Oversight is based on periodic written reports 
from the Fund Managers, on-site reviews and other interviews with Fund 
Managers, review and authorization of specific types of activity and 
documentation, and Inspector General reviews of external audits. The 
written reports submitted by Fund Managers include annual reports, 
including audited financial statements; semi-annual reports; monthly 
cash transaction reports; and ad-hoc reports submitted by the Fund 
Managers. In addition to USAID's oversight, the State Department 
Coordinator for NIS Assistance meets with TUSRIF management regularly. 
USAID Technical Office Reviews are comprised of semi-annual reviews in 
Washington and/or the field; semi-annual field trips to host country 
offices; site visits to selected investee firms; and annual visits to 
U.S. offices. USAID Authorization of Specific Types of Activities 
include structural changes; investments in financial institutions; 
investments in defense related enterprises; changes/additions to the 
Boards of Directors; non-investment related technical assistance; 
articles of incorporation, bylaws, company policies, etc.; and detailed 
statement of Fund objectives. In addition, the USAID Inspector General 
reviews and audits working papers of Fund's external auditors and does 
other ad-hoc reviews of enterprise fund activities.
        projects outside moscow, especially the russian far east
    Question. Mr. Atwood, I have been encouraging USAID to support 
projects in the Newly Independent States, specifically in the regions 
outside Moscow. Please explain your plans for increasing project 
activity in these areas, specifically the Russian Far East.
    Answer. Historically, about 75 percent of USAID's projects in 
Russia have been located in regions outside Moscow. USAID has always 
pursued a two-pronged strategy in Russia, working simultaneously with 
national and ``grassroots'' organizations to accelerate the process of 
economic and democratic reform. Under the Administration's proposed 
fiscal year 1998 Partnership for Freedom (PFF) initiative, USAID 
proposes to place even greater emphasis on the ``grassroots''--towns, 
regions, local organizations both public and private, and business 
associations and firms, both small and large. Other changes include 
greater emphasis on the development of sustainable trade and investment 
linkages between American and Russian companies and fostering mutually-
beneficial partnerships between American and Russian nonprofit and 
nongovernmental organizations.
    Even though most of Russia's population is concentrated west of the 
Urals, the Russian Far East offers attractive investment opportunities 
because of its rich natural resources, access to the ocean, and 
proximity to Asia and the United States. As oil investments develop off 
Sakhalin Island, we see that an increased role for USAID assistance on 
economic planning, regional development, and training-related 
activities might be extremely useful in underpinning the commercial 
development of Sakhalin.
    It is likely that the Russian Far East will be selected as one of 
the regions to participate in the Regional Investment Initiative that 
was signed by Vice President Gore and Prime Minister Chernomyrdin at 
the February 1997 meeting of the Gore-Chernomyrdin Commission. Under 
this new arrangement, U.S. Government assistance will be focused on 
several regions in Russia to stimulate real economic growth by reducing 
impediments to trade and investment.
                          former soviet union
    Question. I am considering a Full Committee hearing on all facets 
of our relationship with Russia and the former Soviet countries. Please 
tell us what activities do you have in each area of the Former Soviet 
Union. I'm interested in generic programs and the allocation for each 
such country including Russia.
    Answer. USAID would be pleased to participate in such a hearing. 
Our programs in the twelve NIS (New Independent States) of the former 
Soviet Union are broadly organized into four generic categories, each 
with one or more ``Strategic Objectives'' (or generic programs). The 
four categories are (a) economic restructuring, (b) democratic 
transition, (c) social stabilization, and (d) cross-cutting and special 
initiatives. As an example of the subdivision of these four broad 
categories into Strategic Objectives, within ``economic restructuring'' 
there are five: privatization, fiscal reform, private enterprise 
support, financial reform, and energy. Every program activity in each 
NIS country falls within one of our twelve Strategic Objectives.
    In order to provide you with the information you have requested on 
each country, I am attaching the most recent Congressional Presentation 
subsections on the twelve NIS countries. These subsections will give 
you a feel for current programs, as well as plans for activities in 
fiscal year 1998. The discussion on each country is organized by 
Strategic Objective and contains information on proposed allocation of 
funds in fiscal year 1998. I am also attaching a table that shows 
cumulative obligations through the end of fiscal year 1996 for each 
country, by Strategic Objective.
                                 ______
                                 
                 Questions Submitted by Senator Bennett
                    waste and favoritism in belarus
    Question. Ambassador Richard Swartz was our envoy to Belarus until 
January 1994. Did you ever receive warning cables from him warning of 
waste and favoritism in our bilateral assistance programs? If so, what 
action did you take regarding these warnings?
    Answer. While we cannot cite specific cables from Ambassador Swartz 
on this subject, we are aware of his concerns about waste and 
favoritism, which he expressed in meetings with us and in his writings 
on the subject.
    Ambassador Swartz has been critical of USAID's conceptualization 
and administration of the U.S. assistance program in Belarus. He has 
argued that U.S. assistance should, but has not, supported assistance 
efforts that show quick results to the people of Belarus and that 
support reform-minded elements, especially through non-governmental 
organizations. In fact, we can demonstrate that we have had some 
success in our modest assistance program, especially considering the 
difficult environment in Belarus, and that our program of working 
through non-governmental channels and targeting the grass-roots level 
has made in-roads in supporting reform in Belarus.
    The U.S. assistance program in Belarus has been very limited due to 
the unwillingness of the Government of Belarus to implement economic 
and democratic reforms. Nevertheless, to encourage reform where 
possible, U.S. assistance is geared toward grass-roots efforts in 
small-scale privatization, democracy initiatives, humanitarian 
assistance, and support for non-governmental organizations (NGOs). Most 
assistance is provided through non-governmental channels.
    Since late 1993, USAID has been funding the International Finance 
Corporation's (IFC) small-scale privatization program, which has 
resulted in a steady movement of communally-owned trade, catering and 
service enterprises into the private sector. In November 1996, IFC 
completed its 100th auction, with 14 percent of small-scale enterprises 
now privately owned.
    USAID also supports the democracy-building work of the American Bar 
Association Central and East European Law Initiative (ABA/CEELI), which 
contributed to the opening of Belarus' first publicly accessible 
international law library. This program is also strengthening legal 
organizations and the judiciary. An important new focus of the program 
is strengthening independent media, with technical assistance provided 
by the International Research and Exchanges Board (IREX) to expand 
access to and distribution of international and domestic news to 
independent media outlets, and help publishers, editors, and 
journalists improve their effectiveness.
    Since 1994, the USAID-funded Counterpart Humanitarian Assistance 
Program has organized the delivery and distribution of humanitarian 
shipments throughout Belarus with a total value of about $6 million. 
The USAID-sponsored hospital partnership program has resulted in 
Belarusian physicians being able to meet the pressing need to improve 
detection and treatment of an increased number of pediatric thyroid 
cancers resulting from the explosion of the Chernobyl Nuclear Power 
Plant. The partnership program has also helped to establish a 
contemporary poison information resource database and an intensive 
training program for clinical toxicologists.
    Finally, USAID has played a significant role in the development of 
NGOs, having contributed to the creation and strengthening of a large 
number of NGOs and having trained over 125 NGO leaders. The new NGO 
Democratic Social Service Activity will focus on strengthening NGOs to 
assist the elderly, disabled and other vulnerable groups in Belarus.
    We recognize that Ambassador Swartz has not always agreed with 
USAID's conclusions concerning the most cost-effective use of U.S. 
assistance funds. However, both as Ambassador and now, his opinions 
have been taken into account, with a final decision based on consensus 
of a variety of government and non-government opinions. In our 
selection of assistance activities, we have and will continue to choose 
projects that best support U.S. foreign policy and have the greatest 
potential for return on each assistance dollar. We are not aware of any 
waste or favoritism in USAID assistance to Belarus.
                 russian inter-regional bar association
    Question. What relationship, if any does the Russian Inter-Regional 
Bar Association have with the Russian Intelligence services or their 
Soviet predecessors?
    Answer. USAID has no contacts with, nor knowledge of this 
association.
                       lessons from privatization
    Question. Will you please comment on the problems of fraud of U.S. 
supported privatization programs in Russia, what the lessons are, and 
how they are being addressed in the Ukraine?
    Answer. The USAID financed programs have facilitated broad popular 
participation in the market reform revolution taking place in Russia. 
Privatization was an essential prerequisite for building a market-based 
economy to replace the bankrupt Soviet command economy. The USAID 
programs have actually restrained the influence of criminal activity as 
demonstrated by the following facts:
    The privatization program created 40 million Russian shareholders 
in private enterprises across Russia, making Russia the country with 
the largest group of shareholders in the world.
    Entrepreneurs are getting together, buying blocks of shares, and 
removing old managers. Boards of Directors are being formed with 
outsider shareholder participation on the boards. Shareholder rights 
groups have been formed which are lobbying to protect the rights of 
investors. Self-regulatory organizations equivalent to the NASD 
(National Association of Securities Dealers) have been created and are 
establishing practices and ethical standards for their membership.
    International investors are gaining control of enterprises.
    New laws and reforms together with enforcement agencies such as the 
Russian Securities and Exchange Commission are having an impact on 
investor protection, transparency and fair play.
    These are just a few examples of activities USAID is financing 
which are helping create a stable, fair and predictable business 
environment in Russia. Admittedly, there remain old policies, laws and 
regulations that continue to provide an incentive for fraudulent 
activities. For example, the high tax rates encourage corruption, pay-
offs and non-compliance through the use of mafia organizations. 
[Anecdote: Ask a small shop owner whether he would rather pay 30 
percent protection tax to the Mafia or 80-90 percent of his profits to 
the tax authorities. The answer is obvious.]
    The point is that progress has been made. But if we want to 
continue to deepen these reforms and complete the enormous process of 
economic restructuring, we must continue to work with the Russian 
reformers to make this happen.
    In the Ukraine, measures are being taken to protect the rights of 
shareholders and investors, as the efficient and transparent operation 
of capital markets is critical to mass privatization and the 
restructuring of Ukraine's economy. Three independent share registrars 
have been established to help ensure shareholder transparency; a 
capital market monitoring unit has been established to monitor, on 
behalf of the government, the activities of investment intermediaries; 
the Ukraine Securities Commission is drafting regulatory normative acts 
insuring shareholder and investor rights; model investment funds and a 
self regulatory association have been established to increase 
professional standards within the fund industry; mass privatization and 
public awareness programs have provided training materials, seminars 
for managers of privatized enterprises, and mass media education to the 
public on the principles of shareholder rights and corporate 
governance; an over-the-counter trading system has been established for 
trading shares of privatized enterprises and a self regulatory 
organization for broker dealers established to ensure shareholder 
rights and broad market participation in the trading of shares; and 
instituting the use of internationally accepted accounting standards 
for reporting, disclosure and other purposes to standardize industry 
practices and attract a broad range of domestic and international 
investors.
                        privatization in russia
    Question. On June 13, 1996, former CIA Director James Woolsey told 
the House National Security Committee the following: ``The unfairness 
of privatization in Russia, which has led to most ownerships being 
concentrated in the hands of the former factory managers and 
nomenclature, and increasingly also in the hands of organized crime 
figures, adds substantially to the average Russian's dissatisfaction 
with the current political and economic system.'' Is Director Woolsey's 
analysis correct?
    Answer. Director Woolsey has expressed some reasonable concerns 
regarding Russia's privatization. However, it is important to 
understand the broader institutional context which USAID and other 
donors are establishing to mitigate such potential problems.
    The privatization program in Russia envisioned 51 percent ownership 
being retained by company managers and workers to encourage, in the 
first instance, acceptance of the program. The mass privatization 
program in Russia resulted in over 40 million individual ahareholders, 
and 15,779 medium and large enterprises privatized in 86 regions of 
Russia. This was the largest privatization in world history, and there 
are now more shareholders in Russia than in the United States. Against 
this background, individual cases of management manipulation and 
malfeasance at individual firms, while unfortunate, cannot invalidate 
the historical importance of dismantling a state-controlled economy and 
giving market forces a chance to operate.
    The design of the mass privatization program in Russia limited 
criminal interference from the outset. Every Russian citizen was 
eligible to receive and use only one Privatization Voucher upon 
presentation of appropriate personal identification. In addition, the 
methods for voucher distribution, cancellation, and destruction were 
developed with anti-fraud controls and were very closely and 
successfully monitored. Even if criminal elements attempted to use 
outside means, such as creating investment funds, to control portions 
of privatized enterprises, the investment funds are highly regulated by 
the Russian Commission on Securities and Exchanges.
    It is important to note that one of the main strategies behind 
Russian privatization was to break the old branch Ministries' influence 
over enterprises and distribute the ownership as widely as possible 
among the entire population. The program was extremely successful in 
this regard. Russia's enterprises are owned by 40 million shareholders, 
and most branch ministries were completely cut out of the privatization 
process. Shareholders are insisting on enterprise restructuring, 
efficiency, and profits, and do not want criminals hijacking their 
investments. USAID has responded to these demands by:
  --Assisting Russian legal drafters on appropriate commercial 
        legislation, particularly for the tax code, law on pricing, 
        anti-monopoly law, contractual law, and securities law;
  --Helping the Russian government establish appropriate regulatory 
        bodies such as the Securities and Exchange Commission and Anti-
        Monopoly Commission;
  --Fostering the development of capital market institutions, corporate 
        governance, independent share registries, and self-regulatory 
        organizations for capital markets professionals; and
  --Assisting and training Russian law enforcement officials and 
        helping to develop the judicial system.
    To further the objective of regulatory compliance and oversight in 
the business community, the Russians have developed capital markets and 
private sector self-regulatory organizations which promote professional 
standards and business practices. An example is the Professional 
Brokers Association that is creating a national trading system modelled 
after the American National Association of Securities Dealers (NASD). 
This association is promoting transparency and recognizes that it is in 
their interest to restrict mafia or other criminal participation in 
capital markets. The Professional Brokers Association started in May 
1995 with 5 members and 8 privatized enterprises listed. It has since 
expanded nationwide with hundreds of brokers and listed enterprises, 
creating competition and transparency in the process.
    The ultimate goal of these USAID interventions is to create a 
stable, transparent, fair and predictable business environment. The 
best defense against organized crime is promoting continued economic 
stabilization and reform.
                   whistle-blower protection measures
    Question. There have been some question of pressure on those who 
criticized USAID programs in the former Soviet Union. Will you pledge 
to protect whistle-blowers and honest critics from retaliation?
    Answer. This Administration welcomes robust debate on important 
issues, and strongly supports whistle-blower protection measures. It 
has been and will continue to be my practice to encourage free 
discussion that will help us improve the efficiency of our operations 
and combat waste, fraud and abuse without fear of reprisal.
                              agriculture
    Question. In previous administrations assistance to international 
agricultural research had a high priority.
    What is in your budget this year for crop research programs such as 
the International Rice Research Institute (IRRI) in Manila?
    How does this compare with prior years?
    Answer. USAID's support to international agricultural research has 
declined substantially since fiscal year 1993. The decreased funding is 
the result of a severe and continuing decline in unearmarked funds made 
available to the Agency. In some cases, although not in the case of 
agricultural research, unearmarked programs have been eliminated 
entirely.
    There are three major components of USAID's support to 
international agricultural research. The Collaborative Research Support 
Programs (CRSPs) draw on the expertise of more than 40 U.S. 
universities to pursue research on topics of mutual interest and 
benefit to developing countries and U.S. agriculture.
    The International Agricultural Research Centers (IARCs), sponsored 
by the Consultative Group on International Agricultural Research 
(CGIAR), constitute the major multilaterally supported agricultural and 
natural resources research program for developing countries; the 
International Rice Research Institute (IRRI) is part of the CGIAR 
system of research centers.
    Our third effort is through USAID funding to enhance the 
effectiveness of National Agricultural Research Systems (NARS) through 
our bilateral and regional programs. Together, these three approaches 
bring the best tools of modern science to bear on the problems 
affecting small-farmer agriculture and natural resource management in 
Asia, Africa and Latin America.
    All three of these efforts have suffered during the budget cuts of 
recent years. After deep cuts in fiscal year 1994, the CRSP budgets 
have recovered to approximately the level of previous years. In the 
case of the CGIAR, USAID's funding declined from a fiscal year 1993 
level of $38 million to $28 million in fiscal year 1994 and fiscal year 
1995, and to $23 million in fiscal year 1996. In fiscal year 1997, 
USAID will increase funding of the CGIAR centers to $26 million; of 
this amount, $2 million will be used by the centers to increase their 
collaborative research linkages with U.S. universities. Funding for the 
third category of activity, National Agricultural Research Systems 
(NARS), has declined even more sharply than CGIAR funding during the 
last 4 years.
    Turning to IRRI specifically, USAID's funding declined from $5 
million in fiscal year 1993 to $2.9 million in fiscal year 1996, a 
reduction of 42 percent. We recognize that rice research is a critical 
factor in the global food supply equation; in Asia, rice production 
must nearly double in the coming two decades to meet rising demand. For 
fiscal year 1997, we have yet to allocate our exact level of support to 
the center; however, it is certain that IRRI will emerge as our top 
priority for a budget increase within the limitations of our overall 
resource envelope for the CGIAR.
                            microenterprise
    Question. In the Committee report of last year's Foreign Operations 
bill, we requested a report from USAID on the amount of funding going 
into poverty lending programs.
    When can we expect this report?
    Answer. USAID is preparing a survey of its 1996 portfolio, to be 
completed in the fall of this year.
    Question. In your 1994 Microenterprise Initiative you set a goal by 
the end of 1996 of half of your total Microenterprise resources would 
be devoted to loans of less than $300.
    Have you reached this goal?
    Answer. Analysis of 1995 programming shows that about 42 percent of 
USAID's total microenterprise support was aimed at poverty lending. 
Poverty lending amounted to over half of our support to microlending. 
As I said to you earlier, USAID is preparing a survey of its 1996 
portfolio and will provide the results to you as soon as they are 
available.
                                 ______
                                 
                 Questions Submitted by Senator Allard
                                campfire
    Question. Mr. Atwood, are you familiar with the USAID CAMPFIRE 
program? Could you please provide a brief explanation of the purpose 
behind the CAMPFIRE program, including the exact recipients, and their 
allotment, of program funds?
    Answer. USAID is the lead bilateral donor in the environment in 
Africa, providing over $80 million a year to support biodiversity, 
tropical forest management, and sustainable agriculture practices. The 
CAMPFIRE program, one of our more successful efforts in Africa, seeks a 
long range, sustainable balance of lands, people, and wildlife. 
CAMPFIRE was established by Zimbabweans in the mid-1980s; USAID support 
for CAMPFIRE began in 1989.
    Our expanded assistance to CAMPFIRE (currently planned at US$20.5 
million) supports:
  --Wildlife conservation ($3.1 million). Primarily executed by the 
        World Wildlife Fund and the Zimbabwe Department of National 
        Parks, activities include research and field work on the 
        ecology of wildlife habitat, alternative resource options, and 
        other issues needed by the CAMPFIRE members.
  --Community development ($3.9 million) including training staff at 
        the district level, and providing technical support so that 
        district councils can fulfill the technical and financial 
        requirements required if they are to make use of the 
        ``appropriate authority'' provided them by the Government of 
        Zimbabwe. The majority of funds go via Zimbabwe Trust, which 
        works with district councils, wards, villages and households to 
        strengthen their capacity to manage their natural resources.
  --Grants to communities and Rural District Councils ($6 million). 
        Includes capacity building activities, payments for animal 
        damage, and support for the establishment of nature-based 
        tourism infrastructure, such as electric game fencing, 
        waterhole development, trail establishment.
  --Regional communications and training ($1.2 million). Includes 
        exchange of information between nations with similar resource 
        applications, and sharing lessons learned beyond Southern 
        Africa. This component is implemented by ACTION, an 
        environmental magazine; and the African Resources Trust.
  --Planning and applied research ($2.1 million). Socio-economic and 
        biophysical research, monitoring and evaluation of program 
        impact, and coordination with the Government of Zimbabwe and 
        Southern African Development Conference (SADC). Under this 
        component the University of Zimbabwe (Centre for Applied Social 
        Sciences) collects and analyzes social and economic data from 
        participating project areas.
  --Technical/administrative assistance ($2.7 million). Includes grant 
        management, assistance to the CAMPFIRE Association and other 
        members in setting up administrative, financial and technical 
        support systems. This component is primarily implemented by 
        U.S. consulting firms (Development Alternatives, Inc and Price, 
        Waterhouse and Company).
  --USAID management/audit and evaluation. Technical oversight by USAID 
        mission, as well as audits and evaluations ($1.5 million).
    Question. To your knowledge, are any USAID funds being used to 
underwrite the cost of trophy hunting expeditions in countries targeted 
by your CAMPFIRE program?
    Answer. No. Taxpayer funds do not subsidize trophy hunting of 
elephants and other wildlife.
    However, CAMPFIRE does assist local communities, some of which do 
generate revenues by granting licenses to hunters. The revenues earned 
from these licenses are used to benefit the communities in a variety of 
ways, such as building schools. At the same time, by helping 
communities to manage resources in a responsible way, this has reduced 
unregulated hunting and poaching, and benefited the animal population.
    Question. What is the USAID time frame for completion of the 
CAMPFIRE program? Are there any indications that USAID will need to 
extend the time frame and/or the United States' commitment to the 
CAMPFIRE program? If there is no need for extending the program, are 
there indications that the CAMPFIRE program will arrive at its end goal 
of self-sufficiency for the native people within the pre-established 
time frame?
    Answer. The USAID bilateral program is now in the process of 
developing a revised strategic plan, targeting the year 2003 for 
mission closeout. The CAMPFIRE program is meeting its intended results. 
During the planned review of this plan, whether continued USAID 
involvement will be necessary in order to successfully build the 
institutional and individual capacity leading to improved rural 
livelihoods will be considered. If there are continued CAMPFIRE 
activities after the planned USAID/Zimbabwe mission closeout in 2003, 
management of those activities probably would be transferred to the 
regional mission in Botswana. Activities could include extending the 
lessons learned under CAMPFIRE to other countries in the region. While 
some rural district councils and communities will be self-sufficient at 
the end of USAID bilateral involvement, we do not believe that this 
will constitute the critical mass required to ensure the sustainability 
of the greater CAMPFIRE program.
                                 ______
                                 
               Questions Submitted by Senator Lautenberg
                   status of vitamin c pilot program
    Question. The increasing awareness of the role of vitamin C in 
preventative health care prompted Congress, beginning in 1992, to 
recommend that A.I.D. increase the fortification level of vitamin C in 
A.I.D. food/grain exports under the Public Law 480 Food Aid Program. In 
subsequent years, congressional appropriations committees, relying on 
studies which showed that new mothers and infants can readily improve 
their health through vitamin C consumption, appropriated funds and 
requested A.I.D. to perform a pilot program fortifying Public Law 480 
Program food with higher levels of vitamin C. Would you please comment 
on the current status of the pilot program, including: What is current 
status of the pilot study?
    Answer. USAID has assessed, at the point of manufacture, the 
uniformity of vitamin C in both wheat soy and corn soy blends, at 
conventional and elevated levels of vitamin C fortification. In 
progress are reviews in Haiti, Tanzania and India to assess the 
stability of vitamin C under actual field conditions. Assays of vitamin 
C in the blended food samples collected from the field are being 
conducted by a reputable laboratory in the U.S.
    Question. What are your preliminary findings?
    Answer. Vitamin C uniformity was poor in the corn soy blend at the 
point of manufacture. Commodity manufacturers, USAID and USDA are 
seeking to rectify this. Preliminary indications suggest some loss of 
vitamin C potency during shipment and storage of the blended 
commodities overseas. Preliminary results also indicate that vitamin C 
is lost during the normal food preparation of these commodities. 
Perhaps only a small part the vitamin C added may be consumed by food 
aid program recipients. This still needs to be confirmed.
    Question. When will you complete the pilot study and submit a 
report to the Appropriations Committee?
    Answer. We expect a preliminary report to be ready by mid-June and 
a final report by Fall 1997, following an Institute of Medicine/
National Academy of Sciences review.

                          subcommittee recess

    Senator McConnell. We appreciate your coming up. We look 
forward to working with you on getting a more adequate, shall I 
say, 150 account for the coming year. Thank you, the 
subcommittee will stand in recess until 10:30 a.m., Thursday, 
March 20 when we will receive testimony from FBI Director, 
Louis Freeh and Hon. Robert Gelbard, Assistant Secretary of 
State.
    [Whereupon, at 11:40 a.m., Thursday, February 27, the 
subcommittee was recessed, to reconvene at 10:30 a.m., 
Thursday, March 20.]


      FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS 
                  APPROPRIATIONS FOR FISCAL YEAR 1998

                              ----------                              


                        THURSDAY, MARCH 20, 1997

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:35 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Mitch McConnell (chairman) 
presiding.
    Present: Senators McConnell, Specter, Shelby, Campbell, and 
Leahy.

                         DEPARTMENT OF JUSTICE

                    Federal Bureau of Investigation

STATEMENT OF HON. LOUIS J. FREEH, DIRECTOR

                          DEPARTMENT OF STATE

     Bureau of International Narcotics and Law Enforcement Affairs

STATEMENT OF HON. ROBERT S. GELBARD, ASSISTANT 
            SECRETARY OF STATE

                opening statement of senator mc connell

    Senator McConnell. The hearing will come to order.
    The ranking member, Senator Leahy, is in the Judiciary 
Committee but will be here in just a little while.
    With a Senate vote likely today on Mexico's cooperation in 
the drug war and the continuing swirl of allegations about 
Chinese influence peddling, our hearing on international 
narcotics and crime is obviously timely.
    I do not think our Founding Fathers' vision of America as a 
land of opportunity includes foreign governments corrupting our 
democratic system with illegal campaign contributions. And, 
when they endowed our citizens with the inalienable rights of 
life, liberty, and pursuit of happiness, they expected the 
American Government to uphold and defend those principles. This 
means taking the drug war seriously, not making excuses for 
confusion, incompetence, or corruption. This means protecting 
American citizens at home and abroad--citizens like Paul Tatum, 
a well known U.S. businessman who was gunned down in Moscow 100 
yards from the Radisson Hotel.
    In 1993, when Senator Leahy and I visited Moscow, every 
businessman we met with said that the problem of crime and 
corruption, the lack of both enforceable laws and law 
enforcement were the biggest impediments to investment.
    Few ventured out without bullet proof cars and heavily 
armed body guards. Most had been victims of extortion attempts. 
Many had moved to the suburbs where they lived in fortified 
villas, hoping to protect their families from kidnapping.
    Four years ago, Senator Leahy and I returned with the 
business community's message. We urged the administration to 
develop a major effort to combat crime and corruption. Short of 
a serious undertaking, investment and economic growth, the 
foundation of real stability, would obviously crack.
    Unfortunately, the business community's predictions have 
now come true. There has been a steady increase in capital 
flight and foreign investment is stagnant. Billions of dollars 
in U.S. grant aid will not make a dime's worth of difference if 
this problem is not solved.
    Russian police now claim over 400 banks are controlled by 
organized crime. Are these the same institutions that the 
administration's new investment partnership intends to 
financially back?
    The Interior Ministry has said at least 40 percent of the 
economy is in the mafia's hands, control gained through 
exploiting the privatization process. Our privatization program 
was the centerpiece of the U.S. effort from 1993 through 1995. 
I think we need to be clear that we have not subsidized a 
transfer of economic power to the mafia.
    International crime is obviously not confined to Russia or 
NIS borders. Los Angeles, Miami, and New York are among several 
United States cities where 26 Russian organizations are basing 
their drug trade, prostitution rings and extortion, fraud, and 
counterfeiting operations. And if the stories are true, we are 
facing a whole, new threat to our democratic process if foreign 
governments are illegally contributing to our political system.
    In this troubling context, let me be clear on one point. 
Judge Freeh, you deserve the credit for the only serious effort 
this administration has made to tackle international crime and 
we thank you. In the face of strong opposition, you have 
continued your fight to increase funding for global FBI 
training programs and, more particularly, the International Law 
Enforcement Academy in Budapest. ILEA is one of the most 
impressive facilities I have ever had the privilege to visit. I 
am proud to have offered support through foreign operations 
funding for ILEA and we want to thank you for your leadership 
in seeing this through. It is an organization that is making a 
real difference.
    When I was there in January, the academy was running an 8-
week class with 50 midlevel police officers from Latvia, 
Lithuania, and Estonia. The deputy police commissioner from 
Buffalo was lecturing for a week on community policing 
techniques, a class each student could take with simultaneous 
translation.
    For a few million dollars a year, we are strengthening the 
professional skills of hundreds--hundreds--of police officers 
in Europe and the NIS as we improve regional law enforcement 
cooperation and our cop-to-cop relationships that directly 
serve American safety and security.
    While I am pleased with the FBI's effort, let me note my 
concern that, once again, the administration's international 
crime budget fails to meet the urgent requirements and the ever 
expanding scope of the problem. This year, the administration 
has asked for a 44-percent increase in overall funding for the 
NIS, an increase from $625 million to $900 million. Of that, 
they are requesting $10 million to combat crime in Russia, 
which triples the past budget request, but still is inadequate.
    We have spent over $4.5 billion in aid to Russia; $10 
million to combat a problem which directly affects America's 
security is simply not enough.
    Let me now turn to the second half of today's agenda, the 
international narcotics control effort. The administration 
seeks a sizeable increase, from $213 million to $230 million. 
Before I make a decision to commit more resources, I must be 
satisfied the effort is better managed.
    Today, the administration's effort suffers from a 
fundamental if not fatal flaw, which is the basic lack of 
coordination between agencies.
    Over the past several weeks, my staff has tried to respond 
to my request to build a matrix identifying the dollars we 
spend along with the agencies and number of personnel assigned 
in each country where we engage in international narcotics 
control efforts. They have been told it is not and cannot be 
done.
    For example, no one in the administration can provide an 
accounting of the number of FBI, DEA, DOD, and INL staff in 
Mexico. No one can tell me how much all agencies spend on 
counter narcotics in Mexico. The most questionable response 
actually came from the drug czar's office, where it was claimed 
they simply do not have the resources or staff to develop the 
data.
    If no one knows which agencies and how much we are spending 
in any given country, how can we possibly hope to measure the 
cost effectiveness and success of the effort?
    Judge Freeh, let us begin with your assessment of where we 
stand in our effort to combat crime, corruption, and narcotics 
trafficking. We will then hear from Ambassador Gelbard, 
Assistant Secretary of State for International Narcotics and 
Law Enforcement, the office with the key policy coordination 
role.
    I want to welcome my friend and colleague, Senator 
Campbell, here as well. I am glad to have him.
    As I said, Senator Leahy will be here shortly.
    Judge Freeh, why don't you proceed.

                 summary statement of hon. louis freeh

    Mr. Freeh. Thank you, Mr. Chairman and good morning, 
Senator Campbell.
    Let me just give a brief overview of what I think the 
issues of continuing interest are to the committee and, with 
your permission, I will submit a longer written statement for 
the record.
    The international training and law assistance programs that 
the FBI are engaged in are, in my view, not only appropriate 
but also a very good return for the tax dollars being expended. 
In addition to the ILEA Academy in Budapest--which is a 
partnership, a joint venture, between the State Department, the 
FBI, the Department of Treasury and some other agencies--for a 
very small amount of money, we are not only able to bring 
training and assistance to many different countries, but we 
have also established through our Legal Attache Program [LEGAT] 
what I like to call our first perimeter of defense around the 
world.
    We have an interest certainly in giving to new democracies 
and new police forces the fundamentals of policing. For 
instance, I am very proud of the 375 students who have now 
graduated from the ILEA. Upon completion of the course, we 
asked them to rate the most important course for them and the 
one from which they derived the most benefit. The course which 
receives that vote is the course on human dignity, which we 
think is a tribute to the curriculum. This course is designed 
to teach policing in a democracy and the balancing of public 
security with civil rights and human rights.
    But more importantly, the presence of the FBI Legal Attache 
Program and the in-country training which is supported in large 
part by the Department of State gives us the ability to protect 
Americans in a way that a global world with transnational crime 
and no borders requires us to do.
    Let me just sketch a couple of cases very, very briefly.
    The Tatum case, which you referred to, Mr. Chairman, is a 
case which is now being actively investigated by the Ministry 
of Interior in Russia with the assistance and input of our FBI 
legal attaches in Moscow. We have a strong and abiding interest 
in the resolution of that case.
    Very recently, we had a case involving Citibank. An 
individual sitting in St. Petersburg, Russia, with access to a 
laptop computer broke into Citibank accounts in New York and 
moved several millions of dollars into his own accounts, or 
attempted to move them into accounts where he would get access 
to them. Because of our relationship with the Ministry of 
Interior and our presence in that country, we were able to 
quickly address that particular episode.
    In another recent case, an individual in Sweden with a 
laptop computer hacked his way into some switching systems in 
the United States and proceeded to shut down several 911 
systems in northern Florida for several hours at a time. Those 
are systems which deliver not just police, but emergency and 
rescue services too.
    We recently have been successful in taking back many 
fugitives, not only in counterterrorism cases but in homicide 
cases. One in particular is an individual who is a member of a 
very notorious drug gang here in the District, the First and 
Kennedy crew. A member of this gang was responsible for walking 
into Washington Metropolitan Police Headquarters in November 
1994, killing two of my FBI agents and a metropolitan police 
sergeant. A fellow gang member, an individual named Kobi Mowatt 
who was wanted for a triple homicide in the District of 
Columbia, fled first to Russia and then to Eastern Africa. He 
was found as a result of our relationships with the MVD in 
Russia, who traced some Aeroflot records, and through our Legal 
Attache Program was apprehended, brought back, and pled guilty 
to that particular crime.
    There are many, many other instances where we are working 
cooperatively in what we call our practical case training 
program, where we actually partner up with police officers in 
various countries--Kazakhstan, Uzbekistan, Latvia, and Russia 
being some examples--and work on cases which impact directly on 
the United States.
    One particular case which we worked with Kazakhstan under 
this program was responsible for the seizure by Russian customs 
of 1.1 tons of cocaine. We are seeing to a greater extent 
alliances between criminal elements and criminal groups in the 
United States and organized crime groups, not just in Eurasia, 
looking to now import and ship cocaine into what are 
potentially vast markets in Eurasia.
    In a recent case in Florida, a Russian national planned to 
bring large amounts of narcotics into the United States. He was 
involved in negotiations to purchase a submarine from the 
Russians that would be used to clandestinely move cocaine from 
South America to Florida.
    There are a whole series of cases which give us the ability 
to not only fulfill our mission but protect Americans--in the 
counterterrorism area, in the drug trafficking area, and in the 
financial crimes area, even coming down to the matters that 
affect local jurisdictions, such as the triple homicide that I 
mentioned.
    We have now 81 agents overseas in our Legal Attache Program 
and 30 different offices, which are up and running. We just 
opened offices in Cairo, Tel Aviv, and Riyadh, which, for the 
first time in the history of the FBI, gives us the ability to 
directly deal with and work with our counterparts in that very 
critical region where our counterterrorism interests are of 
great particular moment.
    The training that we have done through the FSA programs and 
the SEED programs have been, in my view, extraordinarily 
successful. The State Department supported all of our requests 
for 1996, and our 1997 requests are being quickly attended to.
    I want to take a moment to thank Ambassador Gelbard 
particularly for his leadership in that regard for both the 
ILEA Academy and FSA and SEED support. The Antiterrorism 
Training Assistance Program, which is terrorism training that 
the FBI performs at the request of the Department of State, has 
also added at a very low cost, in my view, to extraordinary 
relationships with our foreign counterparts and the ability to 
project American law enforcement interests into places in the 
world where, heretofore, we really had no representation.
    Many of the other programs which are subject to funding by 
this committee have given law enforcement a very immediate and 
very successful derivative benefit. We routinely now, through 
our Legal Attache Program, discharge leads for State and local 
officers. Many of the police departments in the United States 
are very small and do not have this capability, except through 
Interpol, which is really a warrant service, not an 
investigative service. So they come to the FBI with requests 
which we pursue for them through our Legal Attache Program and 
through the Department of State.
    So all in all, I think the return on the dollar which is 
being given to the American taxpayers in terms of security, 
investigative capability, and protection is really very, very 
well received, given the amount of money that is being spent. 
Both the ILEA Program and the other training programs are, in 
my view, being conducted very successfully. We trained 
approximately 1,900 foreign police officers last year under the 
FSA and SEED authority of the State Department.
    We have a series of 40 courses which we regularly present 
around the world, courses such as hostage negotiations. The 
Russians asked us recently to teach their rescue team hostage 
negotiations, which we are in the process of doing. There is an 
internal control seminar on how to make a police force work 
with the standards of integrity which are necessary for people 
to have confidence in it. There are bomb detection courses, 
courses in crisis management, money laundering, and financial 
crimes. We have done that now in 21 countries just in fiscal 
year 1996, all with State Department funding which comes from 
this committee.
    The other long-range benefit that is being derived from 
this training is that the police officers being trained--the 
officers that you saw, Mr. Chairman, in ILEA--will be in 5 or 
10 years the chiefs of police or the commissioners of many of 
their departments. Those relationships with the FBI and the 
State Department will continue and will inure to the great 
benefit of our country.
    So both in terms of the dollars being spent, the return 
that we are getting, and the coordination between the two 
departments represented here, I think the benefits are very, 
very high.
    When we submitted to the Congress last year our 4-year 
Legal Attache Expansion Program, it was written jointly with 
Ambassador Gelbard and approved by the Attorney General and the 
Secretary of State. That has given us the planning, the 
knowledge and the coordination to take these very important 
steps in an effective and manageable way.

                           prepared statement

    I am very appreciative to you, Mr. Chairman, for your 
continuing interest in law enforcement, particularly the 
international capability that our country must have, and I 
thank the other members of the committee for your continuous 
support and your leadership in the area of international law 
enforcement. As always, it is a pleasure to appear before your 
committee.
    I would be happy to answer all of your questions.
    Senator McConnell. Thank you, Judge Freeh.
    [The statement follows:]

               Prepared Statement of Hon. Louis J. Freeh

    Recognizing the fluidity of crime around the world, the FBI 
has worked closely with the Department of State to develop a 
strategy which facilitates our ability to protect Americans' 
and American interests. Without the support and vision of 
Ambassador Gelbard, Secretary Christopher, and now Secretary 
Albright, the United States' response to international crime 
would have been disjointed and inefficient. Their leadership 
and assistance has been particularly helpful to the FBI as we 
have developed a response to this problem. The FBI is 
particularly indebted to Ambassador Gelbard for all he has done 
for law enforcement over the last several years.
    The United States cannot simply fight crime on our own 
soil; we must be proactive to prevent these criminal 
organizations from gaining strength. Therefore, the FBI has 
underway a multi-faceted approach to better protect Americans 
at home and abroad, and to train and assist our fellow law 
enforcement organizations in fighting crime within their own 
countries. We have expanded our Legal Attache program, 
increased our international training efforts, and developed 
programs to open the lines of communication among law 
enforcement officials. Crime is a transnational phenomenon; it 
knows no boundaries. By slowing the spread and development of 
complex criminal enterprises in their home country, we can 
prevent their establishing a foothold within the U.S.
    One of the first areas where the FBI proactively sought 
partnerships was the countries of Eastern Europe, the Baltics 
and Russia. The responses of these countries to our offers of 
assistance have been overwhelmingly positive. One of our first 
activities in this region was the opening of the Legal Attache 
office in Moscow to work closely with Russian police against a 
variety of costly crimes. From July 1994 to the present, the 
number of cases worked by the FBI agents in Moscow has 
increased from 20 to approximately 275. Since that time, we 
have also opened offices in Tallinn, Estonia; Kiev, Ukraine; 
and Warsaw, Poland. Our 1998 budget proposes opening additional 
offices in Almaty, Kazakhstan; Prague, Czech Republic; and 
Tashkent, Uzbekistan; as well as other locations.
    The strength and success of organized crime has become an 
increasing problem in this region of the world as it is in the 
United States. According to the Nezavisimaya Gazeta, (Moscow, 
1996), Moscow police break up at least two organized crime 
gangs each day, but each gang is replaced by a new one. There 
are now more than 200 groups active in Moscow; bloody 
``altercations'' between groups are an almost daily occurrence. 
In Lithuania there are an estimated 100 organized criminal 
groups with total core membership of about 1,200 criminals. 
Latvian and Estonian police estimate that there are 10-15 such 
groups operating in each of their countries. In Vilnius, the 
crime rate is high, and it is estimated that 70 percent of the 
offenses are not reported to police. The situation is far worse 
in Estonia and only slightly better in Latvia.
    Through cooperative efforts, we have begun to achieve 
successes. The June 1995 arrest and subsequent prosecution in 
New York City of Vyacheslav Kirillovich Ivankov and five of his 
associates on federal charges of conspiracy to commit extortion 
continues to be recognized in Russia and the U.S. as a shining 
example of FBI-Russian police cooperation. Ivankov, convicted 
in U.S. District Court last July, was sentenced in January to 
over nine years in prison. More recently, in July 1996, an 
Ivankov associate was killed in a gangland-style shooting in 
Vienna, Austria. Efforts by the FBI Legal Attache office in 
Vienna helped authorities identify and arrest two Georgian 
suspects in the shooting.
    In another successful cooperative effort, a major computer 
fraud investigation continues into the diversion of over $10 
million by a St. Petersburg, Russia, gang to dummy accounts at 
Citibank in New York. Russian Ministry of Interior (MVD) 
officers and FBI Agents have worked closely to investigate this 
case. For instance, Russian police officers traveled to New 
York last August to obtain evidence. Russian investigators 
assigned to this case also attended the Computers Crimes 
Conference in New York earlier this month.
    However, the success of these cooperative efforts does not 
lessen the danger which exists for these countries and the U.S. 
The FBI is supporting the ongoing MVD investigation into the 
November 1996 murder of American citizen Paul Tatum in Moscow. 
Mr. Tatum was murdered November 3, 1996, in a subway station 
outside of a hotel whose ownership he was disputing. While this 
killing of a businessman was the first involving a U.S. 
citizen, this use of force has become far too common in Russia. 
The cooperation occurring in the investigation of this case 
continues to strengthen our law enforcement relationship and 
provides a glimpse into the crime and corruption problem which 
still plagues the Russian democracy. Through our cooperative 
efforts, we hope to help the Russian authorities develop law 
enforcement tools and investigative techniques to assist them 
in their battle against this problem.
    One of the most difficult law enforcement problems facing 
many of the New Independent States (NIS) and Eastern European 
nations is drug trafficking. The scourge of drug trafficking 
has had a devastating impact on the entire global community. 
Russia, the NIS, and Eastern Europe are certainly not immune to 
this epidemic. Criminal organizations in these emerging 
democracies are taking advantage of the relaxed borders and 
improved telecommunications systems that have emerged in recent 
years to facilitate their illegitimate operations. These 
countries are targets of opportunity for the major drug 
trafficking organizations, like the Colombian cartels, which 
seek to establish new and lucrative markets.
    Our increased cooperation has netted some success. For 
example, the FBI's Miami office in January 1997, arrested 
Ludwig Fainberg on racketeering charges. Fainberg was indicted 
by a Federal Grand Jury, along with two associates, on 30 
counts of RICO conspiracy, narcotics conspiracy, interstate 
transportation of stolen property, and other crimes. As part of 
a plan which illustrates growing drug trafficking efforts 
between elements in Russia and South America, Fainberg proposed 
the purchase of a Russian diesel submarine to smuggle cocaine, 
according to the charges.
    The FBI, in coordination with the Department of Justice, 
the Department of State and others, completed a four-year 
expansion plan for our Legal Attache program. I am happy to say 
that we have met our initial goals in this plan and continue to 
open offices. Last fiscal year, we opened three offices (Cairo, 
Egypt; Islamabad, Pakistan; and Tel Aviv, Israel) and this 
fiscal year we have already opened four (Warsaw, Poland; 
Riyadh, Saudi Arabia; Tallinn, Estonia; and Kiev, Ukraine). We 
plan to open three more offices this year (Pretoria, South 
Africa; New Delhi, India; and Buenos Aires, Argentina). 
Presently, we have 82 agents and 61 support employees in 30 
nations around the world. During fiscal year 1996, these 
offices handled 3,355 cases and 5,767 lead assignments.
    The FBI's Legal Attache program is the single most 
significant factor in the Bureau's ability to detect, deter, 
and investigate international crimes in which the United States 
or our citizens are victims. By stationing agents abroad and 
establishing operational links with foreign police, the FBI 
substantially expands the nation's perimeter of law enforcement 
protection.
    The Legal Attaches play an important role as conduits for 
information regarding international criminals and crime. They 
also act as facilitators for our international training 
programs. Through the Legal Attaches, foreign law enforcement 
officials become aware of the training opportunities which are 
open to them. At the host governments invitation, the FBI 
conducts an analysis of that country's crime problem and police 
training needs. We then provide the host government with 
recommendations to enhance their techniques and capabilities 
with FBI assistance and training initiatives. Several 
assessments have been conducted in the last two years with 
additional assessments planned for fiscal year 1997. The Legal 
Attaches also screen potential students and make 
recommendations regarding student's attendance.
    Combating this growing international crime problem cannot 
be done by the FBI alone. We rely on our partners within the 
United States Government to work together to fight this 
problem. Recently, the FBI and Department of State have 
undertaken a number of efforts to clarify our roles and 
increase cooperation between our employees. The most important 
result of these efforts was the negotiation and signing of a 
comprehensive Memorandum of Understanding (MOU) regarding the 
Legal Attache's relationship to the Chief of Mission. This MOU 
clarifies the importance of our relationship and the need for 
cooperation in order to be successful overseas. In addition, a 
Diplomatic Security Special Agent has been detailed to the FBI 
to help ensure open and clear communication on policy and 
operational issues. In the future, we also hope to implement a 
comprehensive training program to sensitize DOS and FBI 
personnel to interagency issues. Through these efforts, we have 
strengthened our relationship and ensured a coordinated 
strategy overseas.
    The FBI also works closely with other government agencies 
in one of the United States finest law enforcement 
achievements--the establishment and opening of the 
International Law Enforcement Academy in Budapest, Hungary. I 
know, Mr. Chairman, that you recently visited the ILEA and saw 
firsthand the importance that this facility plays in developing 
working relationships among law enforcement officials. The ILEA 
is a direct outgrowth of our trip to Eastern Europe in 1994 and 
President Clinton's direction to U.S. Government agencies to 
join together to build the world's capabilities in fighting 
international crime. The Academy represents the combined 
efforts of the Department of State (DOS), the Department of 
Justice (DOJ), the FBI, the Drug Enforcement Administration 
(DEA), the Internal Revenue Service (IRS), the United States 
Secret Service (USSS), the Federal Law Enforcement Training 
Center (FLETC), the Alcohol Tobacco and Firearms (ATF), and 
other agencies and countries. It is truly a case where all of 
these law enforcement agencies are working together as partners 
toward a common goal. I cannot speak highly enough about the 
contributions ATF, DEA, Secret Service, IRS, the Federal Law 
Enforcement Training Center in the Department of Treasury and 
the Department of State's Bureau of Diplomatic Security have 
made in making the Academy succeed. The Academy brings together 
seasoned investigators as instructors and law enforcement 
officers from across Eastern Europe, Russia, and the NIS to 
learn policing under the rule of law.
    The opening of ILEA in April 1995, was an important step 
toward establishing a mechanism for regional law enforcement 
training in Eastern Europe. At ILEA, police officers from 
Eastern Europe, Russia and the Baltic states are being trained 
in techniques used to combat modern criminal activity, 
including organized crime and terrorist groups. To date, 377 
students from 19 countries have graduated from the eight-week 
professional development seminar which is the cornerstone of 
activity at the ILEA. In addition, 18 other courses have been 
taught by six different U.S. Government agencies. For example, 
the FBI taught a footwear and tire impression class for 20 
students from Poland, Slovenia, Slovakia, Hungary, and the 
Czech Republic. The United States Secret Service has taught two 
counterfeiting courses for 53 students from Belarus, Ukraine, 
Russia, Hungary, the Czech Republic, Slovakia, Slovenia, and 
Estonia. In addition, ILEA instructors participated in the 
United Nations sanctioned training initiative, under the 
auspices of the Austrian Interior Ministry, for 300 Bosnian 
police officers in Vienna.
    The FBI also conducts training courses with funds allocated 
to the FBI by the U.S. Department of State Bureau for 
International Narcotics and Law Enforcement Affairs (INL) and 
funding from Freedom and Support Act (FSA) and Support for 
Eastern European Democracies (SEED) funds. In fiscal 1997, the 
FBI will receive $1,341,000 from FSA; $1,074,000 from SEED; and 
$3,168,700 from INL for a total of $5,583,700 in funding from 
the Department of State. These funds are used to support the 
teaching of a variety of courses designed to meet particular 
needs of the host country.
    Through the FBI's in-country training program, the FBI 
conducts one and two-week schools in foreign nations which 
concentrate on police operations and technical skills. Our in-
country training is very broad, ranging from basic 
investigative techniques to police integrity internal control 
courses. We use seasoned, senior FBI street agent instructors 
who use their extensive practical experience in training our 
foreign counterparts in policing under the rule of law. The 
instructors in these programs have an established expertise in 
criminal investigations, especially organized crime and white 
collar crime. Their credibility is not only essential for 
effective instruction but also is very effective in building 
the cop-to-cop bridges that we so critically need.
    During fiscal year 1996 the FBI, provided over 52 training 
courses in 21 countries for 2,078 foreign law enforcement 
personnel through FSA and SEED funding. In 1997, the FBI plans 
to conduct 170 training courses for 59 countries for an 
estimated 4,606 foreign law enforcement personnel. This 
dramatic increase in training is due to the increase in funding 
made available by the Department of State for world wide 
training. The FBI projects a 10 percent increase in training 
courses to be conducted in fiscal year 1998.
    One beneficial part of this training is the opportunity it 
provides the trainers and the trainees to interact about 
specific crime problems being encountered in their countries, 
how to address the problem, share experiences learned in the 
process and forge new relationships for future cooperation on 
matters of mutual interest and concern. To further build upon 
these initial training courses, the FBI has also begun another 
initiative--Practical Case Training (PCT). The PCT initiatives 
allow the FBI to invite law enforcement officers from abroad to 
take part in hands-on, on-the-job practical case training 
regarding mutual investigative interests. The program also 
sends FBI Agents to foreign countries to train their counter-
parts in the same methodology.
    The PCT serves as a forum in which case information and 
investigative techniques can be shared in effort to combat 
those criminal elements that are common to both nations. This 
program has been extremely well-received and successful. 
Currently, an FBI agent with an expertise in financial crimes 
is assisting the Czech government in its efforts to investigate 
financial fraud, specifically irregularities in the Czech 
banking system. As a result, Czech authorities are becoming 
much stronger in their ability to thwart future criminal bank 
failures. For example, the Czechs are in the process of forming 
financial crime task forces modeled after US examples. The PCT 
serves as a forum in which case information and investigative 
techniques can be shared in an effort to combat those criminal 
elements that are common to both nations.
    In another example of this cooperative program, Russian 
police officers have now worked side-by-side with Agents in ten 
FBI field offices, resulting in testimony and other support by 
Russians in major FBI cases such as the Ivankov organized crime 
and Citibank fraud investigations. In Russia, an ambitious FBI 
commitment to training has already resulted in 36 one-week 
seminars throughout Russia, with at least ten more slated for 
the remainder of this fiscal year. The practical result is that 
there now exists a network of Russian investigators who are 
better prepared to not only meet their own crime challenges but 
to assist the FBI in its responsibility to protect American 
citizens.
    Under the auspices of the State Department's Antiterrorism 
Training Assistance (ATA) program, and working with the 
Department of Defense, the FBI has also developed two training 
courses which attempt to counter threats of concern to the 
United States--terrorism and those involving weapons of mass 
destruction. In conjunction with the ATA program, the FBI will 
be conducting multiple sessions of three specific anti-
terrorism courses this year. Countries being considered as 
attendees include Brazil, Egypt, Morocco and Turkey. The first 
two-week course, the Criminal Justice Executive Forum (CJEF), 
provides senior level law enforcement officials with current 
leadership, management, and organizational concepts and 
experiences critical to the direction of national law 
enforcement agencies and the coordination of multi-agency 
crisis management policy and strategy. CJEF was first conducted 
in May 1996, and the FBI plans to conduct three of these 
seminars this year.
    We are also working with the ATA program in developing a 
Major Case Management course to provide the basis for managing 
the investigation of terrorist crimes. It specifies the 
procedure for forming an investigative task force. The course 
will enhance the abilities of foreign criminal investigation 
agencies to investigate, arrest, prosecute and convict 
perpetrators of terrorist crimes. The first country to be 
invited to participate in this training was El Salvador. From 
March 3-14, 1997, the FBI taught this course to 25 law 
enforcement officials from the government of El Salvador. This 
course was the first time that judges, prosecutors and police 
officers from El Salvador had been brought together under their 
new constitution to discuss issues such as how to conduct a 
major case investigation and how to form an investigative team.
    We have also developed with ATA a two-week Terrorist Crime 
Scene Investigation course. This course teaches investigators 
the principles of crime scene management and seeks to provide 
the participants with the skill to conduct crime scene 
searches, to process physical evidence, and to provide 
testimony in judicial proceedings. An important part of crime 
scene management involves principles of searching for 
perishable physical evidence, such as fingerprints and 
impressions of tires and tools. The majority of this course is 
conducted in an academic learning environment using lecture, 
group discussion, case studies, and practical exercises.
    Proliferation of weapons of mass destruction and their 
delivery systems poses one of the greatest threats to our 
national and international security now and for the foreseeable 
future. A recent example illustrates the extent of this threat. 
In December 1994, Czech authorities seized 2.72 kilograms of 
weapons grade uranium 235 in Prague. Three persons were 
arrested including the leader, a Czech nuclear engineer who had 
been trained in the former Soviet Union and had personal ties 
with two Russian businessmen. The Czechs had no information 
about the destination of the shipment, but estimate that the 
uranium was worth ``several million dollars.'' This case 
represents the largest quantity of weapons-usable material 
seized outside Russia. In another case, one man died and at 
least four others were hospitalized from overexposure to 
radiation after a tiny sliver of Cesium 137, a radioactive 
source, was found inside the man's home in Estonia. The United 
States must take a proactive role to assist these countries 
with this serious threat.
    Last July, Secretary of Defense William J. Perry and I 
submitted a joint report to the Congress titled,'' DOD-FBI 
Counter Proliferation Program'' which called for the 
development of a training program to improve the ability of 
states of the Former Soviet Union, the Baltic countries, and 
Eastern Europe to prevent, deter and investigate any aspects of 
crimes related to the proliferation and/or diversion of 
nuclear, biological, and chemical weapons and their delivery 
systems, as well as to prevent the illicit trade in related 
materials. This training program will be developed for the 
entire law enforcement community--from investigators to 
prosecutors to judges. The plan calls for U.S. representatives 
to discuss and evaluate the existing counter-proliferation and 
anti-nuclear smuggling apparatus and the legal structures and 
principles for the development of legislative, regulatory, and 
law enforcement frameworks. In addition to the FBI and DOD, 
participating agencies include the DOS, Intelligence Community, 
DOE, DOC, and USCS. Training outside the U.S. will take place 
at the ILEA.
    The FBI realizes the threat which international crimes pose 
to the American public and the importance that international 
partnerships play in the effort to stop these crimes. However, 
we cannot do this alone. Without the support of the Congress, 
the Department of State, and our other law enforcement partners 
here in the U.S., this effort will be fruitless. Through our 
joint endeavors, we have seen positive results; however, we 
cannot stop now. As long as criminals and their organizations 
believe they can exploit the law, we must continue our quest to 
educate and assist our law enforcement partners around the 
world--and in turn receive their assistance and cooperation.

                summary statement of hon. robert gelbard

    Senator McConnell. Why don't we go to Mr. Gelbard and get 
his opening statement. Then we will get to our questions.
    Ambassador Gelbard. Thank you, Mr. Chairman.
    I would like to submit a written statement for the record, 
please.
    Senator McConnell. Without objection, that will be made a 
part of the record.
    Ambassador Gelbard. The importance of the issues which we 
are here to discuss has become ever more acute in recent years. 
As Director Freeh has said, there has been a dramatic change in 
the world. And, as you, too, said in your opening statement, 
Mr. Chairman, the world has seen a dramatic shift, particularly 
in the wake of the end of the cold war.
    Senator McConnell. Why don't you pull the microphone a 
little closer.
    Ambassador Gelbard. In October 1995, President Clinton 
spoke at the 50th anniversary of the United Nations in New 
York. The subjects he decided to address were not the 
traditional ones that one might have expected. Instead of 
talking about issues related to what might have been expected 
to be a geopolitical tour de raison, he focused on the issues 
that this hearing is about. He focused on the new foreign 
policy and international security issues, of drug trafficking, 
transnational crime, terrorism, traffic and weapons of mass 
destruction, and money laundering.
    Along those same lines, he identified new instruments, new 
tools, new weapons which we needed to bring to bear on these 
problems.
    On the one hand, we are focusing very strongly on the need 
to protect American citizens because the nature of these 
transnational criminal enterprises, as Director Freeh has said, 
has now meant that either organizations are working worldwide, 
as we particularly see in the case of Nigerian drug trafficking 
and other criminal enterprises, or through linkages which we 
see, that have been brought about between criminal 
organizations on the basis of telecommunication advances, 
transportation changes, and computers.
    As a result, we in the State Department changed the shift 
rather dramatically of what had traditionally been the Bureau 
of International Narcotics Matters. When then-Secretary 
Christopher asked me to take this job, we focused on the need 
to change the focus, to broaden it to include law enforcement 
issues, international crime issues, and other related matters.
    Between my Bureau, and other law enforcement entities, and 
other parts of the U.S. Government, we have developed new 
relationships which now result in much stronger exchanges of 
personnel, much stronger communication, and much closer working 
relationships.
    Director Freeh mentioned, for example, that we have jointly 
worked to establish the International Law Enforcement Academy 
in Budapest. We are now looking, between the State Department 
and the rest of the law enforcement community, at establishing 
another such regional entity for the Latin American and 
Caribbean region in this fiscal year, and, funding permitting, 
we want to look at the prospects of establishing a similar 
entity in Southeast Asia in fiscal year 1998.
    At the same time, the relationships between the State 
Department and the FBI in particular have developed in closer 
ways than ever before. I accompanied Director Freeh on his trip 
to Russia, Ukraine, and other parts of central Europe in the 
summer of 1994, which produced the idea for establishing the 
International Law Enforcement Academy. The director of that 
academy is, as you know, Mr. Chairman, an FBI official. We have 
provided approximately $11.2 million in funding to support the 
activities of that academy and have now earmarked approximately 
$5 million for the establishment of the regional institution in 
Latin America and the Caribbean this fiscal year.
    As we deal with these problems, we recognize that this 
involves a fundamental shift in the way we look at 
international affairs. The issues of international crime, the 
issues of drug trafficking, money laundering and other related 
problems have clearly become among the fundamental priorities 
for us not only as they affect American citizens but as they 
affect the stability of our friends and allies around the 
world.
    We do not see to the degree as we did before the threats to 
international security coming from the traditional left and the 
traditional right. But instead we do see some fundamental 
attempts to try to erode or destroy the efforts to develop 
strong democratic institutions coming from international crime.
    Clearly, the most dramatic example that we see of that is 
in Colombia, where drug trafficking organizations and other 
criminal enterprises have made woeful, successful attempts, 
efforts to undermine democratic institutions, economic, and 
social institutions in one of the oldest democracies in the 
Western Hemisphere.
    Similarly in Nigeria we have a regime which is completely 
linked into criminal enterprises. And, of course, as you know 
well, Mr. Chairman, in Burma, the SLORC has a strong alliance 
with criminal enterprises. It is no accident that in these 
three countries we see a complete disregard for the rule of law 
and a complete alliance between those who would violate human 
rights and those who are engaged in criminal action.
    We are deeply concerned in central Europe and in Eastern 
Europe with similar efforts by criminal enterprises to try to 
attack the new democratic institutions as well as economic and 
social institutions which those countries are trying to develop 
and consolidate.
    As a result of that, what we are trying to do, whether 
based on the INL budget, my own bureau's budget, or funds we 
receive from the Freedom Support Act or the Seed Act is work 
with the Federal Bureau of Investigation and other law 
enforcement entities to try to develop strong institutional 
defenses in those countries, to try to develop what is needed 
to combat these threats.
    I should note, too, that we are also working in South 
Africa to try to do the same. The government of President 
Mandela has requested our assistance as they try to change what 
were repressive law enforcement institutions, akin to those in 
the former Soviet Union and central Europe, to democratic 
police agencies and to try to develop the structures that are 
needed to really defend against the threats that exist in that 
country.
    As a result, we are now working to provide support in 
counternarcotics, border controls, advice to the Ministry of 
Justice on developing reviews of their criminal laws and 
criminal procedures, and the DEA and Customs have now set up 
offices with the FBI scheduled in this fiscal year.
    We see the efforts that are involved, whether it is in 
Russia, Ukraine, South Africa, Colombia, Mexico, or in 
Southeast Asia as fundamental to the establishment and 
consolidation of democracy as well as for the protection of 
American citizens.

                           prepared statement

    As a result, we have tried to be as careful as possible to 
support our colleagues in the law enforcement community as well 
as in the Department of Justice and other parts of the U.S. 
Government in our mutual efforts to train and equip their 
counterparts and develop the appropriate institutional 
frameworks that are needed in the effort against these 
problems.
    Thank you, Mr. Chairman.
    Senator McConnell. Thank you, Mr. Gelbard.
    [The statement follows:]

              Prepared Statement of Hon. Robert S. Gelbard

           international narcotics control budget and program

    Good afternoon Mr. Chairman, Members of the Subcommittee, 
ladies and gentlemen.
    I appreciate the opportunity to discuss the program that 
will be funded by $230 million requested by the President for 
the International Narcotics Control account for fiscal year 
1998. A unique specific purpose of this element of our Foreign 
Operations account is to directly protect American citizens 
within the U.S. from illicit drugs produced abroad, and from 
other transnational crime.

                           new under the sun

    Abuse of psychoactive substances, and criminal acts by one 
person against another, are as old as human society. Protecting 
individuals from crime is traditionally one of the fundamental 
responsibilities of government. In an earlier time, it was an 
area in which a government might occasionally ask assistance of 
another, as when we sought extradition of Butch Cassidy and the 
Sundance Kid when they evaded U.S. prosecution by fleeing to 
Bolivia. Mostly, though, crime and criminals were a domestic 
matter.
    The extent to which things once exclusively domestic have 
become internationalized is almost a cliche. What is true of 
industry, science and trade is true of crime. Once, criminals 
in one country might occasionally have dealt with those in 
another. Now, criminal enterprise is as truly transnational as 
any other business. The financial and geographic scope of 
transnational criminal enterprise has grown beyond the reach of 
any individual government. It equals or exceeds even the 
proverbial scope of multinational corporations.
    This is something new under the sun, as different as a 
Butch and Sundance from the Cali Cartel. A global economy with 
global communications compels governments to address new 
issues, and in so doing to recognize that no one government can 
respond without the effective collaboration of all. A truly 
global reach of illicit drugs and other transnational crime is 
similarly something new under the sun. It compels innovative 
and nontraditional responses. The President's guidance 
regarding the International Crime Initiative (PDD-42) and on 
international efforts against cocaine and heroin (PDD-14 and -
44) has provided the basis for defining such responses. The 
International Narcotics Control request for fiscal year 1998 is 
an integral part of that response.

                 narcotics: old problem, new approaches

    Illegal traffic in heroin and cocaine has existed since the 
pharmaceutical industry discovered a century ago how to refine 
these potent and tremendously addicting drugs. Both originate 
from raw material produced outside the U.S. Raw material for 
the entire world supply of cocaine originates in only three 
South American countries. The international community worked 
for decades to establish a treaty regime to regulate and 
control production, traffic and abuse of these drugs, based on 
the Single Convention on Narcotic Drugs and other elements of 
the United Nations drug control regime.
    More recently, a new level of multinationalization and 
polycriminality arose in illegal international drug trade. 
Transnational criminal enterprises originated with drug 
trafficking in Colombia and Mexico, but grew to New York and 
Houston, carrying other forms of crime and violence with them. 
Asian criminal enterprises smuggle drugs and illegal aliens 
alike into the U.S. and other countries.
    Virtually all nations are now committed by treaty to 
prevent cultivation of crops that are raw material for drugs of 
abuse, illegal processing of those crops to dangerous drugs, 
and international smuggling of such drugs to their consumers. 
But treaty commitments, however significant, are of value to 
the U.S. and other nations only if backed by government 
capability to implement them. The International Narcotics 
Control program is an essential element of the cooperative 
effort of the international community to control production, 
international smuggling and abuse of illegal drugs. It 
implements elements of our National Drug Control Strategy 
calling for reducing production of these drugs abroad, and 
preventing their smuggling to the U.S. It provides training, 
advice and material support to equip other governments with 
institutional capabilities to make their treaty commitments 
effective enough in practice to protect the American people 
from dangerous drugs originating abroad.
    In fiscal year 1998, the INC program will again fund 
training by DEA, Customs, Coast Guard and other USG agencies to 
improve capabilities of drug law enforcement agencies 
throughout the world, and in doing so will build relationships 
that enhance the ability of our law enforcement agencies to 
carry out their own missions of enforcing U.S. law. The INC 
program supports activities by the UN International Drug 
Control Program and promotes support by other donors to reduce 
production and attack trafficking in illicit drugs in 
countries, especially the major Asian producers of heroin, 
where our bilateral access is limited. Bilateral INC projects 
in selected countries where heroin and cocaine trafficking are 
most significant provide sustained training, advisory and 
material support to enhance the capabilities of their drug law 
enforcement institutions.
    This program is not limited to drug trafficking. As 
important as it is, taken alone, this is like giving aspirin 
for a fever without antibiotics to cure the infection causing 
it. Our National Drug Control Strategy prescribes a 
comprehensive effort to break foreign drug sources of drug 
supply and production. The INC program includes significant 
elements whose purpose is not just to reduce the symptoms but 
to cure the problem, to permanently reduce production of the 
crops from which illicit drugs of abuse come.
    The INC account includes a regionally funded aviation 
component that supports reduction of illicit drug crops by 
destruction with herbicides applied by USG-owned and -supported 
aircraft. These have operated effectively in Colombia, 
Guatemala, Panama, Venezuela and other countries. It also 
supports aviation aspects of our bilateral country projects in 
the three principal cocaine raw material source countries, 
Peru, Bolivia and Colombia. In 1993, the President decided that 
the INC account should include economic (formerly ESF) and 
military (formerly FMF) assistance provided since the 1980's to 
advance our drug control goals. The equivalents to these former 
programs are also now included in the INC drug source country 
projects.
    In fiscal year 1998, over half of our INC request is 
devoted to bilateral projects in the three coca source 
countries, and aviation support for them. In these countries, 
our goal is not limited to drug law enforcement. We promote and 
support comprehensive programs by those countries to reduce 
and, within the decade of our National Drug Control Strategy, 
eliminate commercial-scale cultivation of coca destined for 
illicit cocaine production. This demands robust, efficient host 
government institutions for drug enforcement and interdiction, 
to control prices the illegal drug industry can offer farmers 
growing drug crops. It demands equally robust, efficient 
development of licit economic livelihood, to enable farmers to 
escape dependence on illegal coca and prevent re-establishment 
of the crop.
    INC-funded assistance has helped implement a design worked 
out in the Peruvian government national drug control plan 
approved in 1994. By 1996, coca cultivation was reduced by 18 
percent, to the lowest level since the mid-1980's. The National 
Drug Control Strategy identifies the enhanced support for INC 
activities in Peru reflected in this fiscal year 1998 request 
as one of its most important foreign drug supply control 
initiatives for the coming decade. Implementing the important 
long-term goal of eliminating illicit coca cultivation in Peru 
and the other cocaine source countries, will not be quick or 
easy. The INC program for 1998 and future years is an important 
part of the means by which we intend to get there. With 
continuing support from Congress, we are persuaded that it is 
possible to do, and that we must do it.

       crime and criminal justice: new occasions teach new duties

    In fiscal year 1997, for the first time, the INC 
appropriation included a separate sub-element devoted 
specifically to assisting the criminal justice institutions of 
other countries to define and implement activities against 
forms of crime other than illegal drug production and traffic. 
The types and manner of assistance are familiar to us: funding 
the provision of training, professional and technical advice, 
providing material and financial support to criminal justice 
institutions, is something the INC program has been doing for 
drug law enforcement for two decades. The reasons our 
activities have been expanded to more aspects of the general 
issue of crime and criminal justice institutions, and some of 
the consequences of this expansion, are new and different 
occasions for the INC program. I would like to devote somewhat 
greater time and attention today to them.
    Drug trafficking, in today's world, is far from the only 
criminal activity that reaches from beyond a country's borders 
to victimize its citizens. The same explosive economic, 
technological and social developments that globalized legal 
activities, and production and trade in illegal drugs, affected 
other types of lawbreaking. Once, it took being in a village to 
perpetrate a fraud. Today, a swindler can be physically half a 
world away from a victim. As the scope for illegal activity 
expanded, so did its organization; as legal businesses got 
bigger, so did illegal ones. Criminal organizations like the 
Sicilian Mafia, well known for centuries, expanded to global 
dimensions. Criminal organizations that gained transnational 
scope trafficking drugs from East Asia or Mexico entered allied 
forms of illegal activity, like smuggling aliens.
    Crime on an organized, transnational basis has become a 
fact of the modern world. Cars stolen in the U.S. are sent 
illegally to other nations to avoid high import tariffs. The 
National Insurance Crime Bureau reports that 40 percent of all 
vehicles stolen off U.S. streets ultimately are moved to other 
countries, costing insurance companies and customers millions 
of dollars a year. Illegal immigration and alien smuggling 
reach into the U.S. and other industrialized countries; in 
Washington a year ago, a seemingly legitimate U-Haul truck had 
a minor accident, and was found to be packed with illegal 
Mexican migrants who had been smuggled some 3,000 miles in 
deplorable conditions.
    The smugglers were tied to criminal organizations in 
Mexico. Nigerian criminal groups are wreaking havoc with 
American, European and Asian citizens. Last year, it is 
estimated that Americans lost $20 billion to Nigerian fraud 
scams--mostly in the insurance industry, but also with credit 
cards. In one recent instance, the trail of a costly telephone 
swindle in the U.S. led to Moldova, others to otherwise obscure 
island ministates in the South Pacific. Asian criminal groups 
in the U.S. and Europe exploit their own countrymen. Promising 
a better life, these groups smuggle illegal aliens into the 
U.S. or other countries, and then hold them hostage to large 
sums of money they will never be able to pay. Money launderers 
use sophisticated international banking and financial systems 
to legitimize the illegal proceeds of drug trafficking or other 
criminal activity, or illegally evade tax or other laws of 
individual countries.
    The reach and complexity of these activities is by itself 
sufficient to compel us and the international community to 
recognize them as a greater and more immediate threat than our 
domestic law enforcement agencies have dealt with. However, the 
matter does not rest with this. Transnational criminal groups 
find a favorable business environment in debilitated legal 
institutions of formerly totalitarian states, like the former 
Soviet Union or Eastern Europe. Those criminal groups thus 
acquire a vested interest in perpetuating that institutional 
debilitation. They bring to corruption resources far greater 
than weak governments can dispose to prevent it. Where 
transnational criminality on a vast scale has an interest in 
seeing that courts belong to the highest bidder, impartial and 
authoritative judicial institutions essential to democracy will 
be stillborn.
    The advance of democracy thus brings with it special 
challenges. As politically authoritarian or totalitarian 
systems break down, whether of the left, as in Russia, or the 
right, as in South Africa, their countries must develop new 
legal and institutional capacities characteristic of 
democracies to maintain law and order. Police officers whose 
approach to investigation was to round up usual suspects are 
utterly unequipped to deal with criminals experienced in 
evading mature law enforcement institutions in established and 
stable democratic states. The resulting political and social 
environment has tremendous possibilities for individuals 
interested in making money from others, without regard for law.
    Transnational crime thus has two significant new 
dimensions. It reaches to subject ordinary American citizens in 
their home states and cities more directly to crime whose 
perpetrators are beyond the reach of U.S. law enforcement than 
has ever been the case before. The corrosive effect of 
transnational crime can debilitate, subvert, even destroy the 
institutions of a state responsible to act against it. Without 
functioning criminal justice institutions, there is no law. 
Without law, democratic political institutions that our foreign 
policy is to promote cannot function.
    These are the twin elements of explanation and 
justification for this new component of the INC account. 
Projects and activities begun over the past few years, and 
sustained through fiscal year 1997 by the first INC criminal 
justice appropriation, will be maintained and enhanced under 
this requested appropriation for fiscal year 1998 to more 
effectively protect Americans from crime initiated abroad, and 
to further the development of criminal justice institutions 
indispensable to our foreign policy goals of preserving peace 
and stability and promoting democracy.
    President Clinton used his address to the 50th Anniversary 
session of the UN General Assembly to call the attention of the 
global community to the emergence of nontraditional threats to 
the security of nations and the safety of citizens, including 
transnational organized crime. The U.S. has led industrialized 
countries through groups of experts of the G-7/P-8 countries to 
concert national policies and approaches to transnational crime 
issues. The Summit of the Americas follow-up ministerial 
meeting on money laundering in December 1995 approved a 
declaration calling for enlargement and improvement of action 
by governments in the hemisphere to prevent illegal money 
laundering, and providing for mutual consideration of 
government activities that once would have been jealously 
argued to be of no legitimate international concern. Actions in 
the Summit and other international fora to establish and define 
international norms relating to governmental corruption 
represent another aspect of growing governmental recognition of 
the national security dimensions of transnational crime.
    With this INC program, the U.S. has led the world in 
developing programmatic responses to this global challenge in 
specific situations. Our experience over two decades of 
enhancing the institutional capabilities of other governments 
to define and implement national efforts against illicit drug 
trafficking is equally pertinent to law enforcement and 
judicial institutions addressed to other forms of crime. The 
Support for East European Democracy and Freedom Support Acts 
provided training, advice and technical assistance, including 
the establishment of an International Law Enforcement Academy 
at Budapest, to strengthen institutional capacities of formerly 
totalitarian governments in Eastern Europe and the former 
Soviet Union to establish and maintain institutions of domestic 
law and order appropriate to democratic society. The fiscal 
year 1998 INC criminal justice appropriation, along with SEED 
and FSA funding that will be allocated to INL, will help to 
sustain and support these activities as vital elements of our 
national foreign policy priorities in these regions. We 
recently agreed to a wide-ranging program to provide advice and 
assistance to South Africa to review, revise and improve its 
domestic criminal laws.
    Much has been accomplished already. In fiscal year 1995, 
over 4,100 law enforcement officers from Central Europe and the 
former Soviet Union received training, a level that was 
sustained in fiscal year 1996. In 1996, 250 law enforcement 
officials from this region participated in an 8-week ILEA 
program for police managers, with the cooperation and support 
of instructors from Germany, the UK, Canada, Italy, Russia and 
the council of Europe.
    In our immediate region, INC-funded training in stolen 
vehicle detection and recovery in Panama, El Salvador, Honduras 
and Venezuela supported an initiative, developed in cooperation 
with the National Insurance Crime Bureau and the FBI, to 
establish treaty arrangements to identify, recover and return 
stolen vehicles to owners. In 1997, this initiative is being 
expanded to Central Europe. A Caribbean Crime Initiative 
against organized criminal activity has been developed, and 
training such as, for example, a regional witness security 
program has been provided to improve protection of witnesses 
prior to and during trial.
    New extradition treaties with Bolivia, France, Poland, 
Cyprus and Spain better respond to the realities of modern 
transnational crime, and reflect the willingness of governments 
in a wide variety of nations to cooperate to prevent criminals 
from evading prosecution by fleeing to other countries.
    During fiscal year 1998, the requested INC appropriation 
will fund law enforcement training programs and technical 
assistance to the New Independent States, Russia, Central 
Europe, Latin America, Africa and East Asia, provided by 
federal, state and local law enforcement agencies, the 
Department of Justice's International Criminal Investigative 
Training and Assistance Program (ICITAP), and other 
organizations. The program will place particular emphasis on 
money laundering, alien smuggling, and enhancing the 
institutional capabilities of other governments to combat 
organized and financial crime.
    In Russia and the New Independent States, and in Central 
Europe, INL-managed training funded by INC, FSA and SEED funds 
will be offered to strengthen the capacity of criminal justice 
institutions to act against organized crime, including 
financial and white collar crimes, illegal drug traffic, and 
traffic in nuclear materials. Training is offered in basic law 
enforcement techniques, and advanced technical assistance 
programs will be continued in Poland, Czech Republic, Bulgaria, 
the Baltics, Slovakia and Hungary, and support will be 
maintained for the ILEA at Budapest. We will provide assistance 
to the NIS, Russia and Central European countries to combat 
alien smuggling by enacting anti-smuggling legislation, 
training and cooperation through existing international groups. 
A first regional training program on illegal migration was held 
in 1996 at the ILEA. These activities are carried out in close 
collaboration and coordination with Federal enforcement 
agencies, including the FBI--represented today by Director 
Freeh--and other Justice and Treasury agencies. These agencies 
participate in an interagency working group which coordinates 
training programs carried out for students from Central Europe 
and the NIS.
    In Latin America and the Caribbean, the fiscal year 1998 
INC appropriation will support civilian law enforcement 
training, and seek to establish a regional law enforcement 
academy modeled on the ILEA at Budapest. INC funds will support 
a third phase of the program to negotiate bilateral agreements 
on stolen vehicles, to provide standard procedures for recovery 
and return from Central America, and training for local law 
enforcement officers, to reduce the annual loss to car theft of 
several hundred millions of dollars by U.S. citizens. This 
program will be expanded to South America and other parts of 
the world where stolen U.S. vehicles are being marketed in 
large numbers.
    In Africa, law enforcement training and technical 
assistance funded by the fiscal year 1998 INC appropriation 
will emphasize respect for human rights by demonstrating how 
U.S. criminal justice agencies function to enhance the rule of 
law. INC funding will support technical assistance to law 
enforcement agencies in South Africa responsible for preventing 
illegal trafficking in nuclear materials and weapons. In East 
Asia, INC-funded law enforcement training will be provided to 
institutions responsible for action against organized criminal 
groups involved in alien smuggling, and to prevent money 
laundering.

                        conclusion: miles to go

    Our National Drug Control Strategy emphatically states that 
the metaphor of ``war'' must be recognized as totally 
inappropriate to our nation's drug problem. It is equally 
inappropriate to transnational crime. Wars are expected to end. 
They involve enemies that are nations, not unnatural 
transnational enemies whose only motivation is money. A 
democratic nation must utterly reject the concept of a ``war'' 
against its own people. The new transnational challenges of 
narcotics and crime demand responses different from the 
traditional international diplomacy of war and peace.
    After the Second World War, the United States and Western 
Europe defined multinational security institutions in NATO, 
whose integration of national security activities once seen as 
exclusively sovereign prerogatives was unprecedented. We cannot 
use capabilities and institutional arrangements we created to 
confront the danger of war between sovereign nations to deal 
with the dangers of transnational crime and narcotics. The 
times and circumstances call upon us, however, to be equally 
innovative, and not allow precedent or tradition to block 
effective response.
    The international community's response to transnational 
crime remains less comprehensive and mature than to that of 
illicit drugs. There is need for continued development of the 
global policy recognition that the threats of transnational 
crime and illegal drugs have become as much an element of 
global foreign policy as war and peace.
    One important consequence of this is that governmental 
activities and agencies once considered purely domestic have 
developed, and must continue to develop, operational 
relationships on a permanent basis with comparable institutions 
of other governments. Sustaining representatives abroad of U.S. 
domestic law enforcement agencies such as the FBI, DEA, Customs 
Service, ATF and others must become not an ancillary and 
peripheral element of our diplomatic missions, but as central 
as any part of traditional diplomacy. Practitioners of 
traditional diplomacy, in our Foreign Service and others, must 
become conversant with the issues and professional expertise of 
law enforcement agencies. In turn, diplomats can offer to the 
enforcement agencies the support of a profession whose essence 
is leading other governments to do, or not do, that which is in 
the national interest of one's own country.
    In 1996, the Department of State worked with FBI to develop 
a five-year strategy for FBI staffing and operations overseas. 
The study published in June 1996 embodies the view that the 
traditional foreign affairs community and U.S. law enforcement 
entities must develop similar world views regarding the roles 
of U.S. law enforcement agencies in overseas programs. There 
has been good progress in recent years, but there remains work 
to do in streamlining mechanisms for overseas law enforcement 
staffing, law enforcement coordination within country teams 
abroad, and appropriate reporting from missions abroad to 
Washington agencies to facilitate coordination. In this 
context, I stress again that the oversight authority provided 
by law to the Chief of Mission in any country is central to the 
ultimate success of all policies and programs in those 
countries.
    Our fiscal year 1998 INC appropriation is the broadest and 
most effective means by which coordinated assistance by U.S. 
law enforcement agencies is delivered to strengthen the 
capabilities of counterpart foreign institutions. The INC 
program is fundamental to framing and implementing U.S. 
national foreign policy responses to production and traffic of 
illicit drugs abroad, and transnational crime. It is a novel, 
significant employment of known programs and capabilities to 
respond creatively to foreign policy challenges of the next 
century, as we and others formerly did for those of war and 
peace. We must continue to define and implement new and 
innovative forms of multinational cooperation and collaboration 
against transnational criminal organizations. If the 
international community cannot define institutions and 
arrangements that respond to the imperatives of these 
challenges, the ultimate result will be as destructive to our 
nations and our peoples as any lost war in history. People die. 
People are deprived of their personal liberty by addiction to 
drugs. People are stripped of their property by criminals and 
their crimes. As our Founding Fathers so eloquently declared 
centuries ago, it is precisely for the protection of the 
citizen from such threats that democratic governments and 
institutions exist. Without effective institutions for the 
preservation of law and order, democracy itself cannot long 
hope to survive.
    Mr. Chairman, I welcome your questions and those of your 
Subcommittee, concerning this request.

                  remarks of senator patrick j. leahy

    Senator McConnell. Our ranking member, Senator Leahy, would 
like to make an opening observation, too, and then we will go 
to questions.
    Senator Leahy. Thank you, Mr. Chairman. We had the 
Judiciary Committee meeting upstairs.
    Senator McConnell. Right, and I mentioned that that is 
where you were.
    Senator Leahy. Thank you. You deserve a great deal of the 
credit for giving the problem of international crime so much 
attention, both as ranking member and chairman of this 
subcommittee. You have been very, very strong on this and I 
commend you for it.
    Director Freeh, you and I have had many conversations about 
this and I appreciate the effort you have made personally and 
the effort that members of your staff have made to keep me 
apprised, as well as other members, of the problem of 
international crime.
    As Mr. Gelbard, I, and all the rest of us know, as we 
travel abroad and talk to people in these areas where we are 
trying to help them build a market economy, to build up a 
middle class, to support democracy, it all falls apart if crime 
is so prevalent that it invades everything you do in business, 
from getting your permits to being able to even open a door of 
a business.

                           prepared statement

    What we have done in Budapest and elsewhere I think is 
extremely important and it will continue to have my support. I 
think it is a daunting task. I did not even fully expect the 
enormity of it when I first started looking at it and I 
appreciate both of you being here and what you are doing.
    I will put my full statement in the record.
    [The statement follows:]

              Prepared Statement of Senator Patrick Leahy

    Mr. Chairman, you deserve a great deal of credit for giving 
the problem of international crime the attention it deserves. 
It would be hard to think of anything in this bill more 
relevant to the American people. That is not to take away from 
anything else. It is simply to point out how serious a problem 
this has become--from Russia to Nigeria to Colombia, the power 
of organized crime and the drug cartels has grown sharply.
    These countries are unable to deal effectively with these 
problems. Their police officers are under-paid, often poorly 
trained, and in many cases involved in criminal enterprises 
themselves.
    The effect on foreign investment is devastating. American 
companies are not going to put up with all the bureaucratic 
headaches of doing business in Russia and the other NIS 
countries, if the system is run by organized crime.
    Director Freeh, this subcommittee has tried to give you the 
resources to work with these countries to combat these crimes. 
I have heard that the International Law Enforcement Academy at 
Budapest is an excellent facility.
    But training police is not enough. We also need to train 
judges, court personnel, prosecutors and defenders. And we need 
to help these countries rewrite their criminal codes. The State 
Department is doing some of this work. Let's not forget that 
the State Department is first and foremost responsible for 
foreign policy. You need to work closely together.
    I think Mr. Gelbard knows of my skepticism about the 
international counter-narcotics program. We have spent an awful 
lot of money to stop the flow of drugs into this country, and 
it has not slowed one bit.
    That is not to say we should not try, because I recognize 
that the drug cartels threaten democracy itself in the 
countries where they are strongest. But let's not fool 
ourselves into thinking that we are going to make a dent in the 
drug problem as long as the demand is there.
    Let's also not repeat our mistakes. How many times have we 
sent aid to the armed forces in these countries, and closed our 
eyes to the human rights abuses, because of some misguided idea 
that the ends justified the means?
    Last year I wrote a provision that became law, with the 
Chairman's support, which aims to keep our aid out of the hands 
of people who violate human rights. This is very important to 
me, and I want to be sure we agree on how to implement that 
law.
    Thank you, Mr. Chairman.

                          international crime

    Senator McConnell. Thank you, Senator Leahy. I appreciate 
your kind comments.
    Director Freeh, we have all, of course, read the recent 
stories about alleged efforts of foreign governments to 
influence the American political process. Obviously, this is a 
complex issue which the Governmental Affairs Committee and, 
hopefully, an independent counsel will pursue in all 
appropriate detail.
    However, there are a few questions that I hope you can 
answer as this issue potentially bears on international crime.
    Do we have a legal attache in Beijing?
    Mr. Freeh. No, sir; we don't. We have a legal attache 
office in Hong Kong. The Congress has approved the opening of 
the office in Beijing. It has been funded. We have not yet been 
able to locate the agents who have already been selected to the 
Beijing office, which we need to do, we think, before July when 
Hong Kong reverts to the People's Republic of China [PRC] 
control.
    Senator McConnell. How would you characterize the FBI's 
coverage of Chinese criminal activities? Obviously, I would 
draw a distinction between individual or organized criminal 
enterprise versus officially sanctioned activities, such as 
have been at least alleged in the influence peddling stories.
    Mr. Freeh. We have had quite a bit of law enforcement and 
criminal justice associations with the Ministry of Public 
Security--that is, the law enforcement agency in the PRC.
    We had a recent case, actually, where we were able to 
return to the PRC an individual who was an employee of the 
Central Bank of the People's Republic of China, who embezzled 
and attempted to move several millions of dollars out of that 
bank in the PRC into North America. Working with the Ministry 
of Public Security, we were able to locate and return most of 
that money.
    We work with them, as the DEA does and as the State 
Department does, in drug interdiction matters. We have had a 
number of the PRC police officers come to Quantico for some 
training and high level exchanges. We also work with them on a 
case-by-case basis through our legal attache, as the DEA does. 
We have actually had some good successes with respect to those 
law enforcement matters.
    Senator McConnell. Jim Lilley, our former Ambassador to 
China, has publicly confirmed extensive official Chinese use of 
funds to attempt to influence the American political system. 
Would you agree with his assessment that this is a widespread, 
long-standing, serious law enforcement problem?
    Mr. Freeh. One of the subjects that the grand jury and the 
task force is currently investigating are allegations with 
respect to not just illegal political activities and 
contributions, but also to the national security aspect--
whether any of the funding, attempted funding, or planning 
originated not by an individual per se but by a foreign 
government, a state sponsor or ministry. That is really the 
heart of part of what our grand jury is currently doing.
    I think the most I could probably tell you is that the 
allegations are in there. They are being treated very 
seriously. I have assigned 25 agents and an inspector full-
time, with many other agents around the country and even in our 
legal attaches, to follow leads in that investigation. There is 
not a matter that has my attention to a greater degree right 
now.
    Senator McConnell. Including espionage, are you aware of 
any other criminal activities sanctioned by the Chinese 
Government?
    Mr. Freeh. I don't know that I could go into this in a 
nonclassified forum. I would certainly be happy to provide you 
with some material, mostly of a classified nature, which has 
indications of perhaps other activities not necessarily 
relating to the Government, but to individuals perhaps 
associated with the Government.
    Because of the nature of it, I don't think I could do it in 
open forum.
    Senator McConnell. Fair enough.
    The White House Press Office has taken the position that an 
FBI agent and another NSC staffer misunderstood instructions to 
protect sensitive information regarding illegal Chinese 
activities.
    [Clerk's note.--The White House claims crucial information 
on Chinese activities was never provided to senior policymakers 
or the President--that all these people were unaware or 
uniformed about illegal campaign activities.]
    Senator McConnell. I think it is very unusual that a senior 
FBI agent with 25 years experience would not understand basic 
instructions regarding the dissemination of protected 
information and issue orders not to advise senior officials of 
important information.
    It is my understanding that the Commander in Chief is both 
entitled to and should expect to have access to any and all 
information developed by our intelligence and law enforcement 
agencies.
    Is there information not available to the President?
    Mr. Freeh. With respect to national security matters?
    Senator McConnell. Yes.
    Mr. Freeh. I don't believe so, sir.
    I know the Attorney General is looking at all of the 
matters relating to the current investigations that are being 
undertaken and will make a decision, as appropriate, as to 
whether matters which are pursued or discovered in the context 
of a criminal investigation are appropriately disseminated to 
national security policymakers, including the President.
    I believe that national security information at this point 
is being appropriately reported.
    Senator McConnell. Have you ever instructed an FBI agent 
not to make information available to the President?
    Mr. Freeh. No.
    Senator McConnell. Did the FBI agent involved in this case 
have a record of misunderstanding security guidelines and 
procedures or a history of denying information to superiors?
    Mr. Freeh. Not as far as I know sir.
    Senator McConnell. Can you shed any light on how the 
information was handled?
    Mr. Freeh. I really don't know that I could say more than 
has already been publicly discussed. My understanding was that 
the national security staffers were going to be briefed on a 
matter which the Attorney General and I thought was very 
important and very significant. Neither I nor anybody on my 
staff placed any restrictions with respect to that information 
going up the chain of command in the National Security Council. 
I don't think such a restriction would make much sense.
    I also note that the White House counsel on Tuesday, I 
believe, did issue a written statement which said, in effect, 
that one of the staffers had a recollection that the 
information should not be disseminated outside the room. The 
second staffer had no memory and was relying on the first.
    The statement also said that the staffers elected not to 
brief that information up, even though the regulations they 
were aware of in the NSC would have permitted that. I think 
that is the state of the public record right now.
    We certainly put no restrictions on that. When we came to 
brief the committees, we briefed the Intelligence Committees in 
the House and Senate, mostly senior staff. No restrictions were 
put on that briefing as to reports to the members. Otherwise 
the briefing wouldn't make any sense, in my view.
    Senator McConnell. What is the basic standard or threshold 
for advising a government official that he or she may be the 
target or an unwitting participant in a criminal effort?
    Mr. Freeh. It is really a decision which is a case-by-case 
determination. We look at the information that we have and a 
determination is made whether there is any basis to believe 
that a criminal offense is being committed, whether or not the 
person who may be the recipient of the effort or the attempt is 
witting or unwitting. We weigh the national security concerns 
in terms of making sure that an official is aware of an 
unwitting attempt to influence him or her or some policy. But 
that is always balanced against a determination, sometimes 
based on very preliminary facts, that the person may 
potentially be a subject themselves of a criminal case, in 
which case we would reserve, perhaps temporarily, the advice 
and the notification.
    It is really done on a case-by-case basis, looking at all 
the facts and determining and balancing national security 
interests against the protection of a criminal case.
    Senator McConnell. What I am trying to determine is if in 
briefing White House and other officials, did the FBI provide 
general warnings that an individual should be aware of possible 
illegal overtures from or was the FBI more specific in advising 
a course of action, such as United States officials should take 
steps to avoid contact with specific Chinese officials or 
individuals.
    Mr. Freeh. Again, I could go into the subject matter of the 
June briefing with you. I would be happy to do that. But, it is 
a classified briefing, and I don't think I could do it here.
    Senator McConnell. There seems to be some confusion about 
why some members were advised of Chinese efforts which may have 
been targeted against them and others were not. The New York 
Times suggested you drew up a list of 30 individuals who might 
be the target of Chinese efforts. Yet it is suggested you only 
briefed a half dozen.
    Is that accurate?
    Mr. Freeh. That is basically accurate, sir. Six members--
actually seven members--who were briefed were briefed on the 
basis of what we and the Department of Justice determined was 
very specific information, more than just general interest, and 
the determination was made on that basis. We also advised the 
staffs of both intelligence committees before we briefed the 
members.
    Senator McConnell. Was the information treated as a counter 
intelligence matter or as a criminal investigation? And did 
that determination affect the manner in which the information 
was handled or disseminated?
    Mr. Freeh. It was treated strictly as counterintelligence, 
national security information. There was no indication then, 
and now, and in the period between that, that any of the people 
to whom we made notification were in any way involved or 
knowing of any improper or inappropriate activity, which is why 
we certainly advised them quickly.
    Senator McConnell. Do you believe all appropriate and 
standard procedures were followed in this investigation, and, 
more specifically, the handling and use of the information?
    Mr. Freeh. We are reviewing, as we speak, that whole 
process. I want to make sure that we did appropriately bring 
the information as it was developed to the people who needed to 
have it.
    I am not 100 percent sure that that was done, but I will be 
when I finish the review.
    Senator McConnell. Finally on this issue, have all the 
members with presumed interests in the matter been informed?
    Mr. Freeh. They are being informed, sir. Yes.
    Senator McConnell. Senator Leahy, have you any questions?
    Senator Leahy. Yes.
    Senator Specter. Mr. Chairman, might I interrupt for just a 
moment?
    We are in the course of hearings down the hall on Conrail, 
so I cannot be present. But I wanted to come and say that I 
consider this a very important hearing. I thank the chairman 
for scheduling it and I will be following the transcript 
closely and working with you, Mr. Director.
    Thank you for the interruption, Mr. Chairman.
    Senator McConnell. Thank you, Senator Specter.
    Senator Leahy.
    Senator Leahy. It's always good to have you here, Arlen.
    Senator Specter. And the shorter the better, perhaps. 
[Laughter.]
    Senator Leahy. Along the lines of the question the chairman 
was asking, have we found any indication of other countries 
doing similar things and have Members of Congress been warned 
about other countries?
    Mr. Freeh. Not anywhere close to the degree that was 
involved in this particular situation, no.
    Senator Leahy. Have members been given warnings about other 
countries?
    Mr. Freeh. Not to my knowledge.
    Senator Leahy. Director Freeh and Secretary Gelbard, you 
have been both involved in the question of training police 
officers. But there is also a need for qualified court 
personnel, judges, court reporters, prosecutors, defenders, and 
the revision of criminal codes.
    When I have talked with some of the people in the Russian 
court system, there are things that we take for granted--public 
defenders, independent prosecutors, somebody who actually keeps 
a transcript--and I wonder if the FBI and State coordinate on 
this, and whether that further infrastructure training is in 
there?
    Ambassador Gelbard. Yes, Senator, we do.
    We have an interagency group that is set up to examine on a 
country by country and also subregional bases exactly the kinds 
of programs we provide funding for. What we try to look at is 
exactly as you say, Senator, the totality of what is required 
in the justice sector. Whether it is in Russia or, as I was 
mentioning earlier, South Africa, we are very concerned about 
training police in the right kinds of techniques, starting with 
the basic concepts of democratic, community based policing, but 
also prosecutors, public defenders, judges, and the legal 
framework that wraps it all up.
    In Russia, for example, we have had two assistant U.S. 
attorneys who have been working out of the Embassy, advising 
various parts of the Russian Government, including the Duma, on 
revisions of the criminal procedures code and the criminal 
code--the Duma and their executive branch.
    We have had programs that fund training of public defenders 
and prosecutors working through the ABA, through the Justice 
Department, and so on.
    We are trying to work increasingly, too, through State and 
local governments. Mr. Chairman, I would point out that we have 
been working in particular with the University of Louisville 
and the Southern Police Institute in Romania, Hungary, and 
Ukraine on some of these issues, too.
    Senator Leahy. Do you find that the private sector, the 
companies that may invest there, do they check with you on 
this? Do they ask you about this?
    Ambassador Gelbard. Through our Embassy in Moscow, for 
example, there is a liaison relationship to discuss issues.
    Senator Leahy. Is it used?
    Ambassador Gelbard. Excuse me?
    Senator Leahy. Is it used? Is it an active one?
    Ambassador Gelbard. Yes, sir.
    Senator Leahy. Tell the two U.S. attorneys, the assistant 
U.S. attorneys who are over there that if they get to stay in 
townhouse No. 1 to be sure and lock the door. [Laughter.]
    Ambassador Gelbard. I will do that, sir.
    Senator Leahy. I'm sorry. That's an inside joke, so to 
speak. [Laughter.]
    Mr. Gelbard, we spent $103 billion between 1986 and 1996 on 
combatting drugs, $20 billion for international counter 
narcotics programs. During 1988 to 1995, drug cultivation, drug 
related activities increased in Latin America, the Caribbean, 
and Southeast Asia. The amount of cocaine coming into the 
United States has remained steady since 1988. We spend billions 
but the street price doesn't change.
    We take money out of development assistance and put it into 
counternarcotics. Another $17 million has been requested for 
fiscal year 1998 for counternarcotics programs. Is it really 
making any difference?
    Ambassador Gelbard. Yes; it is, Senator.
    First, these are problems which took us a long time to get 
into, and the solutions are going to take a while. These are 
not issues which can be solved through short term solutions 
except in the cases of specific discreet arrests of 
individuals.
    What we are fundamentally talking about here is institution 
building, trying to develop institutions in countries that 
either are new democracies or are democracies which have 
serious problems in terms of corruption. Whether those 
institution building mechanisms relate to something as basic as 
helicopter units or they involve longer-term problems, such as 
being able to develop strong judiciaries, these take a while.
    We have seen some good, important results. For example, 
over the course of last year, we saw an 18-percent decrease, 
net decrease, in coca cultivation in Peru thanks in significant 
part, in overwhelming part, to efforts by the United States to 
support alternative development, which have caused farmers to 
walk away from the coca fields, along with strong interdiction 
efforts, which meant support for the Peruvian police and 
military to stop the transit of coca and coca paste.
    Senator Leahy. But you know, in some ways I feel, with all 
the good intentions of everybody involved, I feel in some ways 
that some of these counter narcotics efforts are like King 
Canute telling the tide not to come in. We have cut down 
cultivation in Peru but the cultivation goes up somewhere else.
    Frankly, I am becoming increasingly worried that we waste a 
lot of money. We send equipment to other countries--and I have 
an amendment on that that you are now supposedly following--to 
stop this. But the problem is here.
    If we are going to have a huge demand in the United States 
for these drugs, with all the money from the United States, you 
are going to continue to have corruption no matter what you do. 
If you stop it in one country, it is going to come from 
somewhere else as long as the demand is here.
    I think maybe at some point, as we try to decide how we 
presssure the Governments of Mexico, Colombia, Peru, and 
elsewhere, we here in the United States are going to have to 
ask ourselves are we doing that just to shift the blame to 
somebody else. If we cannot find some way to stop our adults 
and our children from using drugs, nothing you, I, the 
chairman, or anybody else can do is going to stop it.
    Ambassador Gelbard. Senator, I agree with you fully. That 
is why this administration has developed a balanced strategy 
with more emphasis on demand reduction and more emphasis on 
supply reduction. But to continue the use of European metaphors 
with King Canute, we can't have a Maginot type of defense line. 
We cannot try to build a wall around the United States.
    So what we are trying to do is put greater emphasis on both 
sides of the equation.
    Senator Leahy. I mentioned that I had written to Secretary 
Albright about my amendment prohibiting the transfer of U.S. 
equipment to units of security forces if members have been 
implicated in gross violations of human rights, unless the 
Government is taking steps to hold them accountable. I am told 
the administration intends to apply that law to all 
counternarcotics related assistance, including FMF and drawdown 
equipment.
    Am I correct on the administration's policy?
    Ambassador Gelbard. Yes, sir.
    We take this issue very seriously. We have put great 
emphasis on this problem of end-use monitoring as it relates to 
human rights.
    We sent out a telegram to all diplomatic posts on this 
issue. As I told your staff, I will be happy to supply a copy 
of that to you.
    We have explained the amendment concerning the use of funds 
from now on. Posts were instructed that if gross human rights 
violations are reported to have been committed by any recipient 
units, they must report on steps taken by the host government 
to bring those responsible to justice.
    We are making sure that units that receive any of this 
equipment, whether it is from our budget or FMF funds, have 
been examined with the utmost care.
    We have started that, particularly with Colombia because of 
the overwhelming amount of assistance that goes to that 
country. I have personally discussed this issue with the 
Colombian Minister of Justice, with the former Colombian 
Minister of Defense, who is now their Ambassador here. Our 
Ambassador has worked this issue very carefully with all the 
appropriate people in the Colombian Government, and we are 
assuring, to the maximum extent possible, that any of this is 
avoided.
    My bureau and the Bureau of Democracy, Human Rights and 
Labor also met recently with Amnesty International and reviewed 
all the steps we were taking. I am told we received a very 
positive reaction on that.
    Senator Leahy. Thank you.
    Thank you, Mr. Chairman.
    Senator McConnell. Thank you, Senator Leahy.
    Senator Campbell.
    Senator Campbell. Thank you, Mr. Chairman.
    I would like to associate myself with some of the comments 
of Senator Leahy. To start with, I know that a lot of your 
mission, that of both of you, has to do with interdiction. But 
if Prohibition taught us anything some years ago, it was that 
you almost cannot reduce the supply unless you can reduce the 
demand, and as long as Americans, too many of them, think they 
just can't get along without drugs, we are always going to have 
to fight the war, which you are doing.
    I know that both your agencies, as many Federal law 
enforcement agencies in the last few years in at least some 
circles in America, have sort of been under assault. I just 
want to reaffirm, as the chairman has, that you do have friends 
on this committee. I want you to know that I am certainly one 
of them.
    I want to get back a little bit to terrorism and 
international crime, if I could, Mr. Chairman, just for a 
couple of questions.
    As you probably know, Director Freeh, we are going to host 
the G-7 summit in Denver this year, which will bring leaders 
from the seven major countries, major industrialized countries, 
all into Denver at the same time.
    We are also involved in this very, very difficult and 
extensive trial of the people who have been accused of bombing 
the Oklahoma City Federal Center.
    I am a little bit concerned about how we are coordinating 
our efforts from a national and local standpoint. Certainly, 
Colorado does not have the resources to be able to keep a close 
eye on things and we know that these big international events, 
whether it is the Olympic games, the Super Bowl, or whatever, 
seem to attract nuts now because they know they can get 
international attention through the media if they do some 
outlandish thing as they did in Atlanta.
    I would like to know a little bit, though I know some of 
the things you cannot talk about and I would not expect you to. 
I know that some of this is very carefully guarded information 
and that's fine. But I would like to know in what role, in 
general terms, the FBI is providing assistance to the G-7 
summit in Denver.
    Mr. Freeh. Yes; surely, Senator.
    We have a dedicated set of resources, including a command 
structure back at headquarters. We call it our Special Events 
Program, which is a freestanding unit. This unit's assignment 
is to prepare for, assess, and then carry out the coordination 
as well as the operational deployment of not just FBI 
resources, but Federal resources integrated with State 
resources, for certain major events. You mentioned several of 
them. Certainly, there is the Olympics. In addition, this unit 
was involved during both Presidential conventions and also 
during the inauguration. Within 2 weeks last year, we had both 
the 50th anniversary of the United Nations with 200 world 
leaders and the Pope visiting. With the New York City Police 
Department, the Secret Service, the Department of State, and 
many other agencies, a plan was put together which was very 
well coordinated and also, thank goodness, very successful.
    We are doing the same thing with respect to the Denver G-7 
Summit. We have already started the planning. Actually, the 
planning has been going on for several months, coordinated by 
the FBI but in close conjunction with the Secret Service, the 
Department of State, and particularly the Bureau of Diplomatic 
Security. We also use the intelligence agencies for collecting 
any information which will be available pertinent to the 
security of that event. All of the State and local authorities, 
not just the police authorities but the rescue authorities, the 
emergency response, and FEMA are part of that integrated 
planning. It is actually a very complex written plan.
    Senator Campbell. Excuse me for interrupting, but is that 
done through what is commonly called the interagency task 
force?
    Mr. Freeh. Yes; that is one mechanism for doing that. But 
just to give you an example, with respect to the Olympics 
planning and some of the more recent events, we even liaison 
with the military to insure that, if necessary, we have special 
capabilities available for any extraordinary problems that 
might arise.
    I would be happy to brief you and actually show you the 
plan that we have. It is being done very closely with the State 
and local authorities of Colorado.
    Senator Campbell. If I could arrange a time, I would like 
to see that, and I think that Senator Allard, the other Senator 
from Colorado, would also like to, too.
    Ambassador Gelbard. May I add a point to that, please?
    Senator Campbell. Yes; please do.
    Ambassador Gelbard. An additional thing that I think would 
be of interest to you is that, starting with the Lyons Summit 
and now moving toward the Denver Summit, we have made working 
with our allies in the G-7 and Russia, which is now a part of 
this process, the issues of international crime, terrorism, and 
drug trafficking fundamental parts of those summit processes in 
terms of substance.
    We are now chairing a major group comprised of those 
countries that is working toward implementation and development 
of some new major initiatives which would be announced at the 
summit based on the work that was done at Lyons.
    Senator Campbell. These will be announced in Denver?
    Ambassador Gelbard. Yes, sir.
    We had a first meeting under the U.S. leadership in 
January. A second meeting will be taking place here in 
Washington next month, and we are continuing to develop some 
very strong initiatives dealing with transnational crime in 
working with the G-7 and Russia in the PA context.
    Senator Campbell. Maybe I should ask you the important 
question since you are going into a great deal of detail. Do 
you have the financial resources to do this?
    Mr. Freeh. Yes, sir; we do.
    Senator Campbell. Without any additional funds you think 
you will be able to do this?
    Mr. Freeh. Yes; I think so. I mean we don't have, 
unfortunately, separate line item funding for those matters. 
Funding is coming out of our general operations budget, just 
like our investigation in New York in the TWA case. We spent 
several millions of dollars. We don't have any special funding 
or special appropriation for that, particularly in this case 
because it has not yet been ruled a criminal act or an act of 
terrorism. But, it's the same with the G-7 Denver planning. 
That is coming out of our general operations funds.
    Senator Campbell. There seems to be an escalation of work 
for you, an unexpected one, such as the bombing or the disaster 
that that plane went through. I was concerned that you have the 
resources to be able to keep up with those, that unexpected 
growth.
    Let me just get to one other question, Mr. Chairman. 
Director Freeh, perhaps both witnesses, mentioned about some of 
the escalation of crime going on in the new democracies, the 
countries that are trying the democratic way. There are some 
increased activities in some very, very sophisticated 
countries, too.
    I have been interested in reading lately about the increase 
of gangs in the Scandinavian countries. They certainly do not 
have a new culture, but they have a new situation which they 
have never dealt with before. I think maybe it is because they 
don't have the equivalent of RICO or some of the statutes that 
we have in place to combat this.
    They have been using pretty strong firepower against each 
other in control of the drug trade, including rocket launchers, 
grenades, automatic weapons, and so on.
    They were referred to in the newspapers as ``biker gangs.'' 
But, as I understand it, most of them do not ride motorcycles, 
though some of them do and, therefore, they are called biker 
gangs.
    Because the Danish Government has called on the United 
States for some help, I would like to ask you what is the FBI 
doing to assistant Denmark in particular? Can you speak to 
that?
    Mr. Freeh. Yes, sir; I can.
    We, not only in Denmark, but also in Sweden.
    Senator Campbell. Yes; all three of the Scandinavian 
countries.
    Mr. Freeh. Their Minister of Justice and the heads of their 
police agencies have been here. We have met with them. We have 
given them briefings on our violent crime techniques and 
investigative strategies. Since then, we have had an exchange 
of officers and experts. We have also offered to furnish them 
additional assistance.
    As you point out--I understand that their statutory ability 
to deal with certain types of enterprise crimes, even on a 
simple conspiracy level, are not what they are in this country. 
They don't have the history of statutory law or case law to 
criminalize large enterprises. It is more of an individual 
case-by-case determination.
    They have asked us about our investigative techniques. We 
have given them briefings on our use of informants, undercover 
techniques, and wiretapping. But, they do not have a lot of 
those authorities under their current statutes.

             high intensity drug trafficking agency [hidta]

    Senator Campbell. One report, Mr. Chairman, even said that 
one of these so-called gangs rents a government building to 
operate out of, which I found interesting. So we are way ahead 
of them in some of our abilities to deal with these gangs.
    Let me ask one other question, if I can, which deals with 
another group, an agency, called the High Intensity Drug 
Trafficking Agency [HIDTA]. We have had an increase in drug 
traffic in Colorado. As you put more pressure on drug 
traffickers in California, they look for the line of least 
resistance, and we have found a marked increase in Colorado.
    Last year we managed to get a HIDTA office set up in 
Denver, one in Salt Lake City, and one in Laramie, WY, too, 
which basically are to coordinate other agencies in the 
reduction of drug trafficking.
    I want to ask, Mr. Gelbard, if you could reflect on how 
your agency is working with HIDTA.
    Ambassador Gelbard. Well, Senator, we actually do not 
because our programs are all international. But this is 
something that General McCaffrey and the law enforcement 
community work on very closely.
    Senator Campbell. I assumed that since a lot of this is 
coming up over the border into Mexico and then through New 
Mexico into Colorado there might be some involvement with your 
agency.
    Ambassador Gelbard. Our programs are fundamentally directed 
to working with agencies that work internationally and with 
foreign governments.
    Senator Campbell. I see. Thank you.
    Thank you, Mr. Chairman.
    Senator McConnell. Thank you, Senator Campbell.
    This question is addressed primarily to you, Ambassador 
Gelbard, but I might ask Judge Freeh if he has anything to add.
    Focusing on Asia, I understand Singapore is becoming the 
key money laundering haven of choice for Asian drug 
traffickers. So it looks like they are busy not only in 
Scandinavia but in other places.
    Is this due to the bank secrecy laws? Either of you may 
respond.
    Ambassador Gelbard. We are very concerned about significant 
money laundering efforts in a number of countries in Southeast 
Asia. Singapore is certainly one of them.
    We have been pressing the Government of Singapore to 
undertake some fundamental legislative reforms to try to 
develop internationally accepted standards and laws as 
developed through the financial action task force.
    This is a high priority for us because we are very 
concerned about drug funds being laundered through there, 
particularly funds from Burma. We are also pressing the 
governments, particularly the Government of Thailand, which 
assures us, most recently at a meeting that I had with their 
Ambassador this week, that they will be presenting a law to 
their parliament shortly. In fact, this was a subject that 
President Clinton raised with their prime minister during his 
visit there in November, and we are pressing other governments 
in the region to undertake similar measures.
    Senator McConnell. Do you have anything to add on that, 
Judge Freeh?

                            money laundering

    Mr. Freeh. We are, as part of the 4-year plan approved by 
the Congress, planning to open up a legal attache office in 
Singapore next year. My counterparts in the Singapore law 
enforcement authorities have expressed an interest in 
information about our money laundering strategies here in the 
United States; the statutory authority that we use; and, how we 
implement that on an enforcement basis.
    I think that that presence over there, in addition to many 
other matters of mutual interest including counterterrorism, 
will help to begin to address the concerns that Ambassador 
Gelbard has spoken about.
    Ambassador Gelbard. I should add, Mr. Chairman, if I may, 
that we have been pressing through the financial action task 
force for the establishment of an Asian Financial Action Task 
Force. This is now coming to fruition. We see this as a 
mechanism to try to get regional cooperation to develop the 
highest level standards that we can on this issue.
    Senator McConnell. Ambassador Gelbard, shifting to Burma, 
as you know I have been a leader of the movement to enforce 
unilateral sanctions against Burma and I plan to try that again 
this year. It was watered down on the floor of the Senate last 
year so that we ended up with something considerably less 
tough.
    Focusing on Burma, I am convinced that only a democratic 
ally with common principles could be counted on to engage in a 
serious effort to combat narcotics. I also agree with 
observations you made in the Far Eastern Economic Review that 
SLORC officials are exploiting drug trafficking money and the 
longer the political impasse continues, the more embedded the 
drug trade is likely to become.
    Given your views, can you explain why our Charge recently 
hosted a meeting in his home involving U.S. Senators and drug 
traffickers identified in the International Narcotics Control 
Strategy Report?
    Ambassador Gelbard. The meeting which took place, which was 
in November of last year, was done on the occasion of a visit 
by a Senator. This was done when there was a request for a 
meeting with Aung San Suu Kyi. The SLORC requested that other 
political parties be included, too, and Aung San Suu Kyi also 
supported that view, as I understand it from our Embassy, 
because, according to our Embassy, she felt that this would add 
to her legitimization and support within the country because of 
being seen with other political leaders.
    Parties were asked to supply individuals to this meeting 
and two individuals whom we, in my bureau, discovered later to 
be associated with drug trafficking were present. In 
particular, it was Matu Nao of the Kachin Defense Army, and Tin 
Ying of the New Democratic Army.
    We were obviously deeply disturbed and shocked to discover 
this. We have instructed our Embassy about contacts with any 
such individuals in the future and particularly organizations 
which we feel might be associated with drug traffickers or have 
drug traffickers involved and how they are to deal with them.
    I should say that in the past I have noticed that the SLORC 
has gone out of its way to try to make sure that when Members 
of the United States Congress are in Burma that there are 
suspicious individuals who do meet with them in a variety of 
circumstances. And in the occasions with which I am familiar, 
Members of Congress unknowingly have met with such individuals, 
sometimes without having had contact with the U.S. Embassy or 
the U.S. Government before they did this.
    We are obviously very, very concerned about this. That is 
why we sent out an instruction immediately afterward regarding 
future conduct for the Embassy in terms of its contacts.
    Senator McConnell. Are you saying, then, that it was 
inadvertent and also unavoidable? Or is it avoidable in the 
future? What are you saying?
    Ambassador Gelbard. In this case it was inadvertent. There 
are, obviously, as you very well know, sir, many organizations, 
many ethnic group entities in Burma which have individuals 
involved who are related to drug trafficking. It is not 
unavoidable.
    We want to have senior officials of our Embassy avoid 
contact with those individuals and they have been so 
instructed. And we obviously want to make sure that no Members 
of Congress have contact with such individuals when we can have 
any say in that matter.

                           burmese drug lord

    Senator McConnell. Khun Sa, the notorious Burmese drug 
lord, now lives in a Rangoon villa, openly enjoying the fruits 
of his ill-gotten profits. Has the United States formally 
requested his extradition?
    Ambassador Gelbard. I believe we have, sir. In fact, I am 
on record as having said over the last several years that we 
have strongly believed that the SLORC had no intention of 
really trying to get Khun Sa out of the business. I said so in 
a press conference in June 1995 in Bangkok and was lambasted 
for that by the SLORC. I felt good about that.
    Senator McConnell. You should.
    Ambassador Gelbard. But it is, in fact, our view that Khun 
Sa is still in the business. We do not feel, I do not feel 
personally, that he ever left the drug trafficking business and 
I have reason to believe that he is back associated with heroin 
trafficking and certainly associated with major amphetamine 
manufacturing. This major amphetamine effort is not directed at 
the United States. We have no reason to believe that this is 
coming here. However, we are well aware that there is a massive 
amount of amphetamines coming out of the area in which he was 
located that now are being consumed in Thailand and in other 
countries in Southeast and in East Asia.
    We have every reason to believe, of course, that he is 
under the protection of the SLORC. As you well know, Mr. 
Chairman, he has been given the honorific of ``Gu,'' and he has 
now been elevated to a position of great honor. I think it is 
yet another demonstration, and I'm sure you would agree, Mr. 
Chairman, of the criminal activities of the SLORC.
    Senator McConnell. Since my proposal for unilateral 
sanctions was defeated, there was a substitute offered by 
Senator Cohen and supported by the administration. It did have 
some criteria in it which I do not have in front of me. But I 
am curious as to whether you think those criteria have now been 
met.
    Ambassador Gelbard. Sir; I couldn't hear you.
    Senator McConnell. Have the criteria of the Cohen amendment 
targeted at Burma now been met?
    Ambassador Gelbard. We are studying that right now. There 
is a policy review in the administration and I hope we will 
come forward with a conclusion to that shortly.
    Senator McConnell. When?
    Ambassador Gelbard. Shortly. I recently discussed this with 
Secretary Albright and I know she is deeply engaged and 
concerned about this issue.

                chinese cooperation on counternarcotics

    Senator McConnell. Well, we are looking forward to hearing 
from you soon. I am looking forward to hearing from you soon 
because I think the criteria of the Cohen amendment have 
obviously been met by the recent escalation of arrests and 
activities which threaten Aung San Suu Kyi and others.
    I have one final question before turning to Senator Shelby.
    This is still focusing on Burma. Can you describe the 
extent of Chinese cooperation on counternarcotics in that part 
of the world? With an increase in local addiction rates, I 
would think they would be increasingly willing to work with us 
on a solution to shut down the Burma border. I just wonder what 
you might be able to add on that subject.
    Ambassador Gelbard. We have discussed this issue 
periodically with the Chinese Government. I led a delegation to 
China in January 1994, which included two officials from the 
FBI, incidentally. In the course of that trip, I visited Yunan 
Province, right across from the border.
    It is exceedingly clear, tragically clear, as you state, 
Mr. Chairman, that China is suffering seriously. Addiction is 
up, which means HIV and AIDS infections are up. I visited, in 
fact, a rehabilitation center and it was truly tragic to see 
this.
    The Chinese Government has been attempting, as I understand 
it, to engage particularly with the northern ethnic groups near 
their border on alternative development programs and on other 
kinds of programs to try to wean peasant farmers out of opium 
poppy cultivation.
    They have a direct vested interest, obviously, and they 
have been engaged also talking to the SLORC, trying to put 
greater emphasis on greater action from the SLORC on this 
problem.
    One of the fundamental problems, though, that we continue 
to have not just with China but with all the countries in 
Southeast Asia, too, is their strategy of so-called 
constructive engagement with the SLORC. I simply do not believe 
that is feasible.
    Senator McConnell. But that has been our strategy as well, 
has it not?
    Ambassador Gelbard. I wouldn't call it that, certainly not 
on drug issues.
    Senator McConnell. How would you characterize it?

                              drug issues

    Ambassador Gelbard. On drug issues, unfortunately, because 
we have no confidence at this point that they would be prepared 
to use funds appropriately, we do not provide funds to the 
SLORC. The only funds that have been provided have been those 
to OSS-1, earmarked under last year's budget by the Congress. 
Now I am interested in providing some funds to the U.N. drug 
control program for eradication of opium poppy in the Wa area 
with an alternative development program associated with it if 
and when--and only if and when--I am satisfied with the 
criteria that have been built into the program.
    Senator McConnell. Thank you.
    Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman. Mr. Chairman, I 
was chairing another committee and that is why I was not here. 
I'm sorry that I missed the testimony and probably some of the 
questions. But I hope I am not redundant.
    Judge Freeh, it is good to see you today.
    Going back into, Judge Freeh, when you briefed the national 
security staff, or someone under you did. Is the purpose of the 
briefing generally to impart very important information to the 
national security staff that you believe they ought to know and 
ultimately that the President should know?
    Mr. Freeh. Yes, sir.
    Senator Shelby. And you do this when there is a need to do 
it?
    Mr. Freeh. Yes; it is actually done on a very regular 
basis.
    Senator Shelby. A regular basis.
    Mr. Freeh. The FBI staff to NSC staff communication, both 
at a mid- and senior-level, is an ongoing process. It may 
happen several times a week on whatever matters are of 
interest.
    Senator Shelby. Judge Freeh, as the director, is there an 
expectation of some kind at the Bureau, at the FBI, that by 
briefing the NSC staff, which you do, on very important news, 
on explosive news, you are effectively notifying the President 
through the chain? Is that basically right?
    Mr. Freeh. It is my understanding and certainly----
    Senator Shelby. That would be your hope, anyway, wouldn't 
it?
    Mr. Freeh. Well, it would be my understanding and my 
expectation that we brief----
    Senator Shelby. Expectation.
    Mr. Freeh [continuing]. Someone on the staff of a matter of 
interest, that that is a matter that is for the NSC. We don't 
have any particular interest or any responsibility to brief any 
single member of the NSC to the exclusion of anyone else.
    Senator Shelby. Absolutely.
    Have you been concerned with the breakdown in this case 
that has been talked about in the press and otherwise in some 
of the committees, that information, very explosive 
information, was given to or allegedly given to the National 
Security Council staffers and it never went anywhere, so they 
say, from inside the NSC?
    Mr. Freeh. Without characterizing the nature of the 
information----
    Senator Shelby. Well, you wouldn't call it routine 
information, would you?
    Mr. Freeh. Well, we have discussed what the information was 
in a classified setting.
    Senator Shelby. That's right, we have, and I cannot get 
into that and you would not, either.
    Mr. Freeh. Yes, sir. No. If somebody briefs a member of my 
staff, even at midlevel, on a matter which----
    Senator Shelby. It's important information.
    Mr. Freeh [continuing]. If it's important information and 
they are briefed on it, I expect them to use their sound 
judgment to get it to me as appropriately as they can. That is 
the nature of briefings in Washington. The Director, the 
Attorney General, the head of the National Security Agency or 
staffs, counsels, cannot, would not have the time all day to 
just keep reporting things. That is why we rely on staff-to-
staff briefings.

                        intelligence information

    Senator Shelby. But as the Director of the Federal Bureau 
of Investigation, when you impart information, important 
information to National Security Council staff, you need some 
kind of understanding or assurance that this critical, 
relevant, intelligence information--if that's what it was--is 
able to reach the President of the United States. Isn't that 
the purpose of why you're doing this?
    Mr. Freeh. Depending on the particular information----
    Senator Shelby. Absolutely, sure.
    Mr. Freeh [continuing]. Depending upon the context in which 
it is known and communicated, it is fair to say, and I would 
agree with the proposition, that it is my understanding and 
expectation that people at the NSC, just as people at the FBI, 
would use their judgment and prudence to decide whether an 
issue should be briefed up the chain.
    Senator Shelby. Would it ever be appropriate, in your 
judgment, for the FBI to attempt to restrict the dissemination 
of intelligence information to the NSC or the President?
    Mr. Freeh. I cannot think of any instance where that would 
occur except in a very extraordinary instance, certainly not 
one that applied here.
    Senator Shelby. Are you aware, Judge Freeh, of any other 
time that the National Security Council staff was briefed by 
the FBI and that that information, when it was very important 
information, was not passed up the chain of command?
    Mr. Freeh. Yes, sir; I can recall one. I would be happy to 
go into it with you at a different session.
    Senator Shelby. Yes; I understand.
    Was this the same basic National Security Council under the 
Clinton administration?
    Mr. Freeh. Yes; it was the current National Security 
Council.
    Senator Shelby. Mr. Secretary, shifting over to you for 
just 1 minute, what about the hard targets that you are after 
around the country? How are we going to deal with those? It is 
difficult to assess them. I understand your report notes the 
success and progress we have made against the drug trade in 
1996. But I am concerned that it is difficult to actually 
measure what success is. You know, we hear so many horror 
stories and we hear all the others. And yet, we talk about 
success. Gosh, I want success. I know that the Director wants 
success. You want success.
    But what kind of benchmarks or goals are in place to 
measure what success is? Are we playing games with ourselves or 
the American people? I hope not.
    I know you are a serious person, but it seems like we are 
going backward in a lot of areas. Do you want to comment?
    Ambassador Gelbard. I don't think we are going backward, 
Senator.
    As I was saying earlier, before you arrived, this is a 
process. Trying to solve, trying to have success in counter 
narcotics is a medium to long-term proposition. This is a 
problem that took us a long time to get into and it is going to 
take us a long time to get out.
    First, we have been on the domestic side trying to 
establish some clear benchmarks in terms of reducing demand. 
That is in the President's national drug control strategy, and 
there has been over the last several years----
    Senator Shelby. If we could do that, that would be a big 
step.

                       u.s. consumption of heroin

    Ambassador Gelbard. There has, in fact, been some 
significant progress in terms of dramatic decreases in 
consumption of heroin and some other drugs--excuse me--of 
cocaine and some other drugs.
    There is alarming news, as you are aware, Senator, in terms 
of teenage consumption of marijuana, now of heroin to a small 
extent, and a bit of cocaine.
    U.S. consumption of heroin has been rising, but it still is 
very small compared to worldwide consumption. It only 
represents about 3 to 4 percent of worldwide heroin 
consumption.
    Senator Shelby. But aren't you disturbed by the fact that 
it is rising, the demand?
    Ambassador Gelbard. Absolutely. I am disturbed both in my 
professional capacity and personally. As the father of a 16-
year-old girl who does not take drugs--as far as I know--I am 
deeply disturbed when I see this happening nationwide.
    Internationally, we try to set up benchmarks and goals both 
short-term and long-term. We work with the law enforcement 
community to establish both in the cocaine area and in the 
heroin area targeting systems. I don't want to get into how we 
do all that, but it is something where there is a clearcut 
process.
    We have had real success working with the Colombian police, 
for example, and General Serrano, the head of the Colombian 
police, has been very generous in expressing publicly his 
support as they have been able to capture the leadership of the 
Cali Cartel.
    We have had similar success recently in some other areas, 
in some other places around the world.
    In Thailand, for example, our DEA, working with other 
agencies of the United States Government and the Thai police, 
have had enormous success in capturing some of Khun Sa's top 
lieutenants in an operation with which you are familiar, Mr. 
Chairman, called tiger trap. The Thai Government has started 
extraditing its own citizens to the United States--
unprecedented.
    We have targeted under the leadership of the Attorney 
General certain ideas in terms of getting countries to accept 
the extradition of their own nationals. We now have new world-
class treaties that facilitate the extradition of nationals. We 
have just signed one with Argentina and Bolivia. Mexico has 
started extraditing its own nationals last year for the first 
time in history.
    In eradication, we made dramatic progress last year. I 
mentioned earlier that Peru is the largest producer of coca in 
the world. You and I met, Senator, when you visited me in 
Bolivia.
    Senator Shelby. That's right.

                            coca production

    Ambassador Gelbard. We have seen dramatic progress, an 18-
percent decrease in coca production in Peru. We saw a decrease 
in Bolivia. Unfortunately, we saw an increase in Colombia, but 
the Colombian police are working with great dedication spraying 
these coca plants.
    I am optimistic in that sense that we have set out some 
clear benchmarks. General McCaffrey has shown great leadership 
in bringing together the interagency community on this. The law 
enforcement community on this I think is working better than 
ever before in terms of trying to do this.
    As Director Freeh said in his opening statement, with the 
projection of more FBI personnel overseas, something we have 
worked on cooperatively, more DEA personnel, and other agency 
law enforcement personnel, we are now able to work on 
enforcement and training in much better ways than ever before, 
too.
    Senator Shelby. How concerned are you with the poppy growth 
in Colombia? You are dealing with coca and dealing with heroin.
    Ambassador Gelbard. We are deeply concerned.
    There was about a 7-percent increase in poppy cultivation 
in Colombia last year to approximately, I think, about--it's 
only about 15,000 acres. But that is high concentrate, with 
three crops a year. Almost all of that is directed to the 
United States market, and Colombians have taken over virtually 
all of the heroin market in the Northeast. You cannot find 
Southeast Asian heroin on the streets of New York anymore, I am 
told.
    So we have targeted this as part of our major effort. All 
of Colombia's eradication efforts are financed through my 
bureau, and the Colombian police have been doing a superb 
effort in trying to target these very small patches of opium 
poppies and trying to eradicate them with great support from 
us.
    We have now included American pilots to help train them on 
an on-the-job basis. Very sadly, we lost one of our pilots last 
year when his plane crashed. So we consider this one of our 
very top priorities.
    We are also spraying opium poppies in Venezuela because the 
Colombian trafficking groups have now franchised into 
Venezuela. We and the Peruvian Government have heard rumors 
about moving into Peru.
    We are working very closely with the Peruvian Government to 
seek this out and they are eager to eradicate that, too. So we 
are deeply focused on this issue.
    Senator Shelby. If 80 percent of the drugs coming into the 
United States, if this is true--I have heard those numbers 
used--is coming through Mexico one way or the other--trucks, 
cars, air, who knows--haven't we got, I would not say 
insurmountable problems, but a tough road to plough there?
    Ambassador Gelbard. I think the figure is a little lower. 
We believe that probably it is somewhere between 50 and 60 
percent of the cocaine, down from probably around 70 percent.
    Senator Shelby. OK, it was higher at one time.

                      heroin and cocaine seizures

    Ambassador Gelbard. It was higher. But we have embarked, we 
have been working with the Mexican Government and particularly 
with President Zedillo on what we consider to be very important 
efforts.
    When you look at the statistics, it is very clear that 
arrests, eradication efforts, and seizures have all gone up 
pretty dramatically since he came into office. The amount of 
marijuana now being grown in Mexico has plummeted by one-half 
over the last couple of years.
    Heroin seizures went up 79 percent in 1996 over 1995 in 
Mexico. Cocaine seizures went up a much smaller percent, about 
7 percent, but the point is they are up.
    What President Zedillo was faced with when he came into 
office was this. He identified this as their No. 1 national 
security problem, but he presses buttons, he pulls levers, and 
nothing happens because he recognizes that he has little in the 
way of institutional capabilities.
    We are trying to work to support him, and the FBI, once 
again, is giving terrific support to trying to help develop 
institutional capabilities along with DEA, Customs, and other 
organizations, funded by us.
    But this has to be a source, a fundamental focus, the 
biggest focus of our attentions.
    Senator Shelby. This may have been asked by Senator 
McConnell or others earlier when I was not in the room. I ask 
both of you how can we deal with governments whose higher 
officials that we have to deal with at the country to country 
level from time to time have been, we find out, corrupted by 
drugs or trade over the years? I know that some people would 
say well, gosh, that is the business of these countries, like 
Mexico or Colombia, whoever we deal with. But it is also our 
business because the caliber of people we deal with depends to 
a great extent on what we share with them, how much we trust 
them. That will go a long way on how well we deal with the drug 
trade down the road.
    Judge Freeh.
    Mr. Freeh. I think it is a two-part process. Part of it is 
the long-range institution building that the Ambassador spoke 
about. I mean, they need the training, the models, the 
resources to put together a capable force, and one that is 
honest and respected.
    The other thing you do on an interim basis is you identify, 
by trial and error sometimes, the people who have the honesty 
and integrity to protect your investigations. For instance, in 
the early 1980's, we found a young magistrate in Sicily, 
Giovanni Falcone, who we found by experience could be trusted 
with our most sensitive investigations. He was privy to title 
III's, electronic surveillance informant information, and 
worked, until he and his wife were murdered by the mafia, with 
complete trustworthiness and courage.
    In Russia, we have identified officers in the MVD with whom 
we have worked in very sensitive cases. In a case in New York, 
we arrested a guy named Ivankov, a very powerful member of a 
Russian organized crime group, who was taking root in New York 
City and organizing criminal elements there. We worked that 
case in a clandestine manner for a period of time with Russian 
officials.
    We had Russian police officers with FBI agents in cars 
doing surveillances in Brighton Beach.
    So I think part of it is trial and error, developing people 
through ILEA, through our training programs, who we can trust 
and rely upon. It is a very time consuming and very perilous 
process. We have to be very cautious how we proceed.
    Ambassador Gelbard. There is another side to that coin, 
too. When we identify individuals who are corrupt, one of the 
new measures we have tried to really undertake with much 
greater intensity is something as simple as revoking visas.
    The U.S. visa is a very prized commodity, and we have used 
this as a way of stigmatizing individuals. The President of 
Colombia had his visa revoked, as well as several other members 
of his cabinet and a significant number of members of their 
congress. It is known and it is a mark of Cain.
    We have done it elsewhere. For example, in Thailand it is 
well known that two very senior politicians in Thailand had 
their visas revoked. This has been a source of controversy. But 
we are very confident about that view.
    The good news, for example, is in the Western Hemisphere, 
increasingly governments are themselves concerned about 
corruption. For example, there has now been an inter-American 
Anti-Corruption Convention that has been approved within the 
hemisphere. Governments are coming to us and asking for 
assistance in setting up anticorruption measures.
    One of the things our law enforcement community is helping 
with, or our police training people are helping with is setting 
up internal affairs units. Increasingly, we are working with 
governments to set up their own capabilities in those areas, 
too.
    Senator Shelby. Mr. Chairman, thank you for your 
indulgence.

                             russian crime

    Senator McConnell. Thank you, Senator Shelby.
    Let's wrap it up. You mentioned Russian crime, Director 
Freeh, so let's wrap this up with a Russian question.
    Is the Russian mafia coming into the United States in a 
particular way? Is it individuals or is it groups, networks, 
and are they concentrating on sectors? Are they in drugs, are 
they in counterfeiting, or are they all over the place?
    What form is Russian mafia influence in the United States 
taking?
    Mr. Freeh. In respect to the first part of your question, 
there is a continuing presence in terms of individuals 
identified, sometimes prior to their arrival here, as members 
associated with Russian organized crime groups, who then do 
what other groups have done in the past. That is, organize 
cells and groups as Ivankov did in Brooklyn. They engage, we 
find, in a variety of different criminal enterprises across a 
broad spectrum.
    For instance, we have cases in California where Russian 
organized crime members and fragments of groups here have 
worked on gasoline excise tax schemes, which require quite a 
bit of sophistication setting up paper corporations.
    We had another group in the West who was investigated and 
convicted for a multimillion dollar health fraud scam. Ivankov 
was convicted in New York City for extortion, basic loan-
sharking type extortion. The case that I mentioned, indicted 
recently in Florida, is a drug case in which discussions were 
had about getting a submarine from Russia and using it to 
transport drugs.
    We find them involved in a wide variety of schemes, 
including complicated, sophisticated crimes. The sophistication 
of these groups and individuals is a symbol of their 
capability.
    Many of them have continuing contacts with Russia, both 
financial and otherwise. They certainly look at the United 
States as a great place to do criminal business. They are also 
organizing, as they were in Florida, to bring drugs back into 
Russia and central Europe. There are also combinations that we 
and the DEA have seen between some of the Russian groups and 
South American narcotics groups, which is a very dangerous 
omen, I think, for everyone.
    So there are individuals, they are organizing groups here, 
and they are involved in a wide variety of sophisticated 
criminal activity.

                     additional committee questions

    Senator McConnell. Both of you gentlemen have your work cut 
out for you and we wish you well.
    There will be some additional questions which will be 
submitted for your response in the record.
    [The following questions were not asked at the hearing but 
were submitted to the Department for response subsequent to the 
hearing.]
              Questions Submitted by Senator Patrick Leahy
                                 mexico
    Question. I do not believe that decertifying Mexico is a wise 
approach at this point, but I am also very disappointed by how little 
success we have had in getting the Mexican Government to deal 
effectively with the corruption and human rights abuses by the Mexican 
police and armed forces. What specific improvement in these areas are 
you expecting from the Mexican Government?
    Answer. Corruption and other abuses of official authority by law 
enforcement and military personnel continue to be very serious problems 
in Mexico. These abuses seriously impair the Government of Mexico's 
ability to combat drug trafficking effectively or, on a broader scale, 
to pursue needed reforms in other sectors.
    President Zedillo recognizes that narcotics trafficking and related 
corruption pose the greatest threats to Mexico's national security and 
has vowed an all-out effort to combat them. The February 18 arrest of 
the national anti-drug coordinator underscores the problem, but 
likewise demonstrated the Zedillo Administration's determination to 
address it forthrightly. Some critics cite such revelations of 
narcotics-related corruption as evidence that the situation is getting 
worse. We view it differently. These revelations came as a result of 
Mexican government investigations, not external initiatives. We are 
encouraged that such revelations are a sign that things are improving.
    The Government of Mexico has launched a major reorganization and 
reform effort within its criminal justice system, including creation of 
a new anti-drug law enforcement agency and specialized investigative 
units. The U.S. has offered to provide a comprehensive training and 
technical support package, drawing on the talent and expertise of many 
U.S. agencies. Training is underway, concentrating specifically on 
skills and procedures relating to implementation of the newly-passed 
Organized Crime Bill and anti-money laundering legislation.
    This is clearly a long-term effort, and there will be failures and 
further disappointments along the way. However, it is in the long-term 
interests of both Mexico and the U.S. to keep pressing ahead.
    In 1997, based on bilateral discussions, the two governments will 
seek to achieve:
  --Tangible progress in dismantling major narcotics trafficking 
        organizations, including arrest and prosecution of their 
        leadership.
  --Strengthened investigative and prosecutorial capabilities, as 
        demonstrated by adequate screening, training and financing of 
        the bilateral task forces and organized crime prosecutors unit.
  --Enhanced interdiction effort, encompassing maritime and overland 
        interdiction as well as air interdiction.
  --Enhanced eradication campaign and other efforts to reduce the 
        production of illicit drug crops.
  --Enforcement of newly-published regulations that require reporting 
        of financial transactions involving large sums of currency and 
        suspicious circumstances, and implementation of the money 
        laundering legislation passed in May 1996.
  --Implementation of an effective asset forfeiture program.
  --Implementation of an effective control system on diversion of 
        precursor and essential chemicals.
  --Enhanced relationship with the U.S. on extradition and return of 
        fugitives.
  --Expediting the mutual legal assistance treaty process.
  --Investigation and prosecution of corruption at all levels of 
        government, and complementary action to strengthen governmental 
        institutions to prevent corruption and other abuses of official 
        authority from recurring.
                           colombia drawdown
    Question. You want to use your 614 waiver authority to make 
available $30 million in prior year military aid to the Colombian army 
and police.
    I understand why you want to do this. I also understand that the 
police, who have a fairly good human rights record, cannot do the job 
alone. But it seems like every week my office receives a report of some 
atrocity by the Colombian army, or paramilitary groups they are linked 
to. Is this another example of the ends, no matter how hopeless, 
justify the means, no matter how contemptible? In other words, even 
though we know the army is corrupt and violates human rights, we are 
going to give them aid anyway because no one else can do the job? Isn't 
that what is really going on?
    Answer. We share your concerns about human rights abuses in 
Colombia. As detailed in our human rights report, the situation is 
grave and complex, with violations committed by many different groups. 
The Administration believes that the type of assistance under 
consideration for Colombia is not only critical to the types of 
programs we must continue with elements of the Colombian government 
committed to counternarcotics efforts, but is also vital to the 
national security interests of the United States.
    In this regard, the plan under consideration would provide 
equipment to the Colombian National Police and those elements of the 
Colombian Armed forces which support them. As a matter of policy, the 
Colombian Army provides essential ground support for eradication 
(spray) missions and seizes and destroys labs and drug shipments 
jointly with the police.
    In addition, training designed to improve performance on 
counternarcotics activities, promote professional development, foster 
respect for human rights, civilian control of the military and improved 
military justice would be provided using International Military 
Education and Training funds.
    We are currently weighing carefully what types of equipment we 
might provide to selected military units with a CN support role. Please 
be assured that, in keeping with the spirit of recent legislation 
requiring human rights conditions on International Narcotics Control 
(INC) funds, we will extend the spirit of these human rights conditions 
to all USG counternarcotics assistance to Colombia's security forces.
    Embassy Bogota has been working to improve end use monitoring 
(EUM), especially vis-a-vis human rights concerns. The finalized 
procedures for the 506(a)(2) transfer will serve as the basis for 
monitoring any equipment that might be provided under the 614 waiver. 
We will review the human rights record of personnel in recipient units 
prior to providing counternarcotics assistance. Ambassador Frechette is 
finalizing an EUM agreement with the newly-appointed minister of 
defense. The proposed agreement will safeguard against use of USG-
origin equipment by known human rights violators, and will provide a 
mechanism for transfer out of the unit of any individual who is alleged 
to have been involved in serious human rights violations, without 
prejudice and in accordance with Colombian law, while the allegations 
are investigated.
                                nigeria
    Question. The Nigerian Government is notoriously repressive. I wish 
they spent half as much effort fighting drug traffickers, as they do 
repressing legitimate dissent by their own people.
    Nigeria has become a major narcotics transit center. I don't know 
if the Nigerian Government is directly involved in the drug trade, but 
it clearly tolerates drug activity and the corruption associated with 
it. The State Department called Nigeria's counter-narcotics efforts in 
1996 ``inadequate'' and ``marginal.'' What hope do you see there for a 
more cooperative relationship?
    Answer. Although we characterized Nigeria's counter-narcotics 
efforts in 1996 as ``inadequate,'' there were some positive 
developments. For example, although the majority of drug-related 
convictions were of minor traffickers, the Nigeria Drug Law Enforcement 
Agency (NDLEA) reported that the GON did convict 537 narcotics 
producers/traffickers in 1996. The NDLEA also improved performance and 
cleaned up corruption within its ranks, firing 600 corrupt NDLEA 
officers. In addition, in collaboration with the UN Drug Control 
Program, Nigeria developed a national strategy to reduce demand for 
drugs.
    In December 1996, Jonathan Winer, Deputy Assistant Secretary in the 
Bureau for International Narcotics and Law Enforcement Affairs, led an 
eleven-member interagency team to Nigeria. Although the delegation's 
principal mandate was the discussion of money laundering issues, the 
Government of Nigeria (GON) was extremely forthcoming in providing 
access to high-level officials across the board, and wide-ranging 
discussions took place on a variety of law enforcement issues, 
including narcotics trafficking, immigration and deportation issues, 
extradition, ``419'' (advance-fee) fraud, international criminal 
activity by Nigerians, and more effective sharing of crime-related 
information. Team members identified with their Nigerian counterparts a 
number of areas for future cooperation.
    The team made it clear that the GON needed to provide evidence of 
its good faith in cooperative efforts by resuming extraditions of 
Nigerian nationals wanted in the United States on narcotics and other 
criminal charges. Though the GON agreed with this request and promised 
that extraditions would resume, to date none have taken place. When the 
GON told us that all extradition packets previously submitted had been 
lost and requested resubmission of new packets, the Department of 
Justice quickly resubmitted the most significant cases. Although the US 
Government continues to work towards a more cooperative relationship 
with the Nigerian Government on counter-narcotics, we are discouraged 
by the lack of progress so far on extraditions.
                      alternative crop production
    Questions. I understand that a small part of funds in this program 
go to support AID's efforts to teach farmers to cultivate legitimate 
crops rather than coca. How much are we spending on these programs, and 
where have they been successful? Should we be spending more resources 
on these efforts?
    Answer. The International Narcotics Control program for fiscal year 
1997 includes $66,208,000, 34.3 percent of narcotics programs, for 
illicit crop reduction by economic incentives, eradication and related 
programs. $80,800,000, 37.8 percent of narcotics programs, is requested 
for this purpose in fiscal year 1998. This includes opium poppy 
substitution in Laos, Pakistan and Thailand, and coca crop destruction 
by aerial herbicides in Colombia. The largest part, in excess of $43 
million in fiscal year 1998, is to reduce coca cultivation in Bolivia 
and Peru.
    In Peru, AID is implementing an alternative development project 
specifically designed to reduce coca cultivation by economic assistance 
to communities that undertake to prevent new and reduce existing coca. 
This began in May 1995, and is directly supported by coca crop 
verification surveys by another Peruvian agency also supported by the 
INC program. In 1996, the U.S. Government estimated coca cultivation in 
Peru at 94,400 hectares, 18 percent less than in 1995, and the lowest 
figure in Peru since these estimates began in 1986.
    In Bolivia, since the 1980's, in conjunction with that government's 
program for voluntary compensated eradication of coca by growers, AID 
assistance greatly increased licit crops and economic activities in the 
main coca region. Verified eradication of coca since 1988 exceeds 
40,000 hectares. While planting of new coca has kept this from 
correspondingly reducing net coca cultivation, we are reviewing this 
program with a view to attaining net reduction on a national basis.
    The 1997 National Drug Control Strategy recognizes that specially 
designed rural development assistance can reduce coca destined for 
illicit drug production. Our goal is to greatly reduce and hopefully 
eliminate large-scale coca cultivation during the ten-year Strategy 
period. However, it is vital to recognize that economic alternatives 
cannot do this alone. These projects depend for success also on 
reducing prices drug traffickers pay farmers for coca products, which 
depends on effective action to control illicit drug trafficking. These 
activities similarly depend on this appropriation. It clearly would be 
advantageous to increase support for alternative development, but if 
support for activities against illicit drug traffic is not also 
correspondingly enhanced, alternative development by itself will fail 
to produce its intended result.

                          subcommittee recess

    Senator McConnell. Thank you, the subcommitee will stand in 
recess until 11 a.m., Thursday, April 17 when we will receive 
testimony from Charles Kartman, Acting Assistant Secretary of 
State.
    [Whereupon, at 12:10 p.m., Thursday, March 20, the 
subcommittee was recessed, to reconvene at 11 a.m., Thursday, 
April 17.]


      FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS 
                  APPROPRIATIONS FOR FISCAL YEAR 1998

                              ----------                              


                        THURSDAY, APRIL 17, 1997

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 11:10 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Mitch McConnell (chairman) 
presiding.
    Present: Senators McConnell, Bennett, and Leahy.

                          DEPARTMENT OF STATE

STATEMENT OF HON. CHARLES KARTMAN, ACTING ASSISTANT 
            SECRETARY OF STATE
ACCOMPANIED BY:
        AURELIA BRAZEAL, DEPUTY ASSISTANT SECRETARY
        JEFFREY BADER, DEPUTY ASSISTANT SECRETARY

                opening remarks of senator patrick leahy

    Senator Leahy. I am Patrick Leahy and the ranking member on 
this subcommittee.
    Senator McConnell has asked me to start the hearing because 
he is tied up in the Rules Committee. And to make it more 
difficult, the Rules Committee changed its schedule at the very 
last minute. He will be here as soon as he can.
    Mr. Secretary, we appreciate you coming down here to 
testify. I know that discussions are underway in New York with 
the North Koreans. And I realize that this means that you have 
to do what, unfortunately, Senator McConnell and I have been 
trying to do today, which is to be in two places at once.
    I have talked with the President on occasion about what we 
are trying to do in Korea, to feed starving people. But 
obviously, we have some concerns, about where the food aid goes 
and where not. We do not want to make it easy for the North 
Koreans to do whatever they want militarily, while we send them 
humanitarian aid.
    I also want to say that I fully support Senator McConnell's 
efforts in Burma. The SLORC regime stole the democratic 
election. Aung San Suu Kyi remains in virtual house arrest. 
Hundreds of her supporters have been jailed.
    We had legislation passed last year. I believe those 
conditions have been met. I think the President has to impose 
the sanctions the bill calls for. And I intend to keep pushing 
for that.
    I have very serious concerns about the Chinese Government's 
assault on civil liberties in Hong Kong. I have visited Hong 
Kong many times. Anyone who does not see that the Chinese are 
systematically dismantling the underpinnings of democracy, are 
fooling themselves.
    Perhaps some felt comfortable when former Prime Minister 
Thatcher announced that this was all worked out. It now seems 
that, to some extent she, too, was fooled. But we should not 
allow ourselves to continue to be fooled. I think we need to 
speak out very forcefully, and to be prepared to use our 
economic leverage to counter that assault.
    In Indonesia, the Suharto government, which is among the 
world's most corrupt, has sought to intimidate, arrest and 
brutalize its prodemocracy opponents. And in East Timor the 
human rights situation remains deplorable.
    The Indonesian Government has dismissed the reports of 
political killings, disappearances, and torture and instead 
engaged in a public relations campaign to bury the truth.
    Cambodia is another example of a corrupt government doing 
its best to subvert the forces of democracy. With Presidential 
elections scheduled for next year, Prime Minister Hun Sen's 
political opponents are being harassed and attacked on every 
front. And I am afraid that we are not doing enough to stand up 
for the forces of democracy there.
    Having said all of that, I know the Pacific rim countries 
hold enormous economic and strategic importance for the United 
States. I saw that when I visited Vietnam, China, Hong Kong, 
and Taiwan last November. And obviously, we have to be engaged 
economically.
    But we are the world's greatest democracy, the world's most 
powerful democracy. And we have to stand up, whether it is 
aggressively trying to prevent an arms race in the Far East or 
standing up for basic democratic principles.
    We have been joined by the chairman. And under his new 
policy of trying to get look-alike Senators on either side of 
him when he is here. [Laughter.]
    We have Senator Bennett from Utah. And if I might, Mr. 
Chairman, tell just one very quick story: And this is during 
the height of President Dole--Senator Dole----
    Senator McConnell. Thank you. We were hoping. [Laughter.]
    Senator Leahy. I know you were. [Laughter.]
    Senator, so was he.
    In Senator Dole's campaign for the Presidency, I had a 
Vermonter come up to me and say they were very, very pleased to 
see me giving strong support to Senator Dole.
    And I said, ``Well, Senator Dole is a very good friend of 
mine. I think the world of him, but I am a Democrat, and I am 
supporting President Clinton.''
    They said, ``No, no; we have this photograph of you at a 
fund raiser introducing Bob Dole.''
    They brought out the photograph. And it was Senator Bennett 
and Bob Dole. [Laughter.]
    And I guess we just all--if you are tall, bald, and white-
haired, you all look alike. [Laughter.]
    Over to you, Mr. Chairman.

                 opening remarks of senator mc connell

    Senator McConnell [presiding]. I do not know how to top 
that. [Laughter.]
    I am sorry for the delay. It is the case around here, there 
are a lot of things going on at one time.
    Mr. Kartman, I understand you have been in New York 
participating in the negotiations with South and North Korea. 
We appreciate your interrupting that schedule to return here to 
testify today.
    The policy and programs developed by your bureau are 
exceptionally important to U.S. security, economic and 
political interests. I believe the administration has worked 
and largely succeeded in assuring both friend and potential foe 
that we are a Pacific nation determined to sustain our presence 
and promote stability and mutual prosperity.
    However, our strategic commitment is routinely challenged 
by a host of tough, tactical issues involving trade, human and 
civil rights, and both conventional and nuclear weapons 
proliferation.
    In spite of our difference, every nation continues to seek 
active American leadership and engagement to maintain the 
balance of power which has afforded unprecedented economic 
growth and to a lesser, but still important extent, democratic 
rights as well.
    Our involvement has eased regional concerns about Japan's 
and China's expanding strength as well as Japan's and China's 
concerns about each others emerging roles.
    A decade ago, it would have been difficult to imagine the 
United States would join South Korea in responding to an 
international appeal to avoid famine in North Korea, a subject 
which dominates the front page of today's Washington Post.
    And in the aftermath of Tiananmen Square, a peaceful 
transition in Hong Kong was not the currency of conventional 
wisdom.
    But signs of progress are shadowed by some serious 
problems. And let me just mention a few before we get to your 
testimony.
    With most favored nation [MFN] on the horizon, the debate 
continues over China's long-term intentions. Are we 
contributing to building a well-armed economic superpower with 
expansionist ambitions; or will economic growth yield political 
liberalization, with China increasingly assuming an important 
role as a responsible global leader?
    Obviously, our decisions and China's choices will have a 
major impact on Hong Kong's future. In this context, let me 
both note and welcome President Clinton's decision to see 
Martin Lee. It sends a strong signal of American support for 
democracy.
    In striking contrast, in Burma, the administration's record 
of support for democracy and Aung San Suu Kyi, has been 
extraordinarily disappointing. After 6 years, on July 10, 1995, 
Suu Kyi was formally released from house arrest.
    Sadly as of last October, she seems to once again be under 
de facto house arrest. In addition, thousands of Burmese have 
been arrested, tortured, subjected to forced relocations and 
slave labor.
    The United Nations and every human rights organization I am 
aware of has condemned SLORC's conduct and urged that Suu Kyi's 
legitimately elected government be restored to office. Since 
July 10, 1995, the administration has told me our policy has 
been under review. Even on the slowest learning curve, 655 days 
is a long, long review.
    Finally, turning to North Korea: Last week, the 
administration announced an additional contribution of 
emergency food aid for North Korea, bringing this year's total 
to $25 million.
    I understand the World Food Program intends to target the 
most vulnerable sector by providing food primarily for children 
under 6. I think this is a position most of us will be able to 
support.
    But this appeal only responds to 4 million of more than 18 
million estimated to be on the brink of starvation. I 
understand from reliable sources that North Korea's public 
distribution system will run out of food for the general 
population, at the latest, by mid-July, obviously a worrisome 
prospect.
    I also have been told that soldiers are not starving 
because the military runs its own farms to supply food. General 
Shalikashvili's recent comments that there has been no 
reduction in the level of military threat or exercises 
underscores that point.

                           prepared statement

    Adding to the volatile mix is the North's nuclear 
capabilities. We are obviously engaged in a very delicate 
balancing act with North Korea, hoping to secure a permanent 
peace while trying to prevent a domestic crisis from erupting 
which could unleash a still very strong military threat.
    Those are some of the items I assume you will touch on 
today and that we will be anxious to ask you about when we get 
to questions.
    [The statement follows:]

             Prepared Statement of Senator Mitch McConnell

    Mr. Kartman, I understand you have been in New York 
participating in the negotiations with South and North Korea. I 
appreciate your interrupting that important schedule to return 
here to testify.
    The policy and programs developed by your bureau are 
exceptionally important to U.S. security, economic and 
political interests. I believe the Administration has worked, 
and largely succeeded, in assuring both friend and potential 
foe that we are a Pacific nation determined to sustain our 
presence and promote stability and mutual prosperity. However, 
our strategic commitment is routinely challenged by a host of 
tough, tactical issues involving trade, human and civil rights 
and both conventional and nuclear weapons proliferation.
    In spite of our differences, every nation continues to seek 
active American leadership and engagement to maintain the 
balance of power which has afforded unprecedented economic 
growth and to a lesser, but still important extent, democratic 
rights. Our involvement has eased regional concerns about Japan 
and China's expanding strength, as well as Japan and China's 
concerns about each other's emerging roles.
    A decade ago, it would have been difficult to imagine the 
United States would join South Korea in responding to an 
international appeal to avoid famine in North Korea--and, in 
the aftermath of Tiananmen Square, a peaceful transition in 
Hong Kong was not the currency of conventional wisdom.
    But, signs of progress are shadowed by some serious 
problems. Let me tick off just a few of the issues I hope we 
can discuss today:
    With MFN on the horizon, the debate continues over China's 
long term intentions. Are we contributing to building a well-
armed economic super-power with expansionist ambitions? Or, 
will economic growth yield political liberalization with China 
increasingly assuming an important role as a responsible global 
leader? Obviously, our decisions and China's choices will have 
a major impact on Hong Kong's future. In this context, let me 
both note and welcome the recent Presidential decision to see 
Martin Lee; it sends a strong signal of American support for 
democrats everywhere.
    In striking contrast, in Burma, the Administration's record 
of support for democracy and its most vocal champion, Aung San 
Suu Kyi, has been disappointing. After six years, on July 10, 
1995 Aung San Suu Kyi was formally released from house arrest. 
Sadly, as of last October she seems once again to be under de 
facto house arrest. In addition, thousands of Burmese have been 
arrested, tortured, subjected to forced relocations and slave 
labor. The U.N. and every human rights organization I am aware 
of has condemned SLORC's conduct and urged that Suu Kyi's 
legitimately elected government be restored to office. Since 
July 10, 1995 the Administration has told me our policy has 
been under review. Even on the slowest learning curve, 654 days 
is a long, long review period.
    Finally, turning to North Korea. Last week the 
Administration announced an additional contribution of 
emergency food aid for North Korea bringing this year's total 
to $25 million. I understand the World Food Program (WFP) 
intends to target the most vulnerable sector by providing food 
primarily for children under six--I think this is a position 
most of my colleagues can support. But, this appeal only 
responds to 4 million of more than 18 million estimated to be 
on the brink of starvation. I understand from reliable sources 
that North Korea's Public Distribution System will run out of 
food for the general population, at the latest, by mid-July, 
obviously a worrisome prospect. I also have been told that 
soldiers are not starving because the military runs its own 
farms to supply food. General Shalikashvili's recent comments 
that there has been no reduction in the level of military 
threat or exercises underscore this point. Adding to this 
volatile mix, is the North's nuclear capabilities. We are 
obviously engaged in a very delicate balancing act with the 
North Koreans, hoping to secure a permanent peace while trying 
to prevent a domestic crisis from erupting which could unleash 
a still very strong military threat.

               summary statement of hon. charles kartman

    Senator McConnell. So why do you not proceed?
    Mr. Kartman. Thank you very much, Mr. Chairman and members 
of the committee.
    Together with my colleagues, Aurelia Brazeal and Jeffrey 
Bader, I thank you for this opportunity to present an overview 
of the administration's policy in East Asia and the Pacific.
    We have submitted a detailed statement for you.
    United States interests in the Asia-Pacific region are 
abiding and underpin our global foreign policy. Secretary 
Albright has said our commitment to the region is solid because 
it is solidly based on American interests.
    We have strengthened our core alliances and reconfirmed our 
intention to maintain a forward troop presence in the region. 
We have also buttressed our other cooperative bilateral 
security arrangements and actively supported multilateral 
security dialogs such as the ASEAN regional forum.
    We have aggressively promoted American economic interests 
and elevated the diplomatic profile of our efforts to address 
transnational problems in the region.
    Secretary Albright has stressed that America has a vital 
interest in remaining a Pacific power. She gave testimony to 
that commitment in her meetings with leaders in Tokyo, Seoul, 
and Beijing as part of her first overseas trip as Secretary of 
State in February.
    And last November, President Clinton underlined the United 
States intention to remain deeply engaged in Asia and the 
Pacific when he visited three important partners for regional 
cooperation, Australia, the Philippines, and Thailand.
    I would now like to mention briefly some, but by no means 
all, of our key interests in relations in the region.
    Any discussion of overall Asia policy should begin with the 
cornerstone of United States engagement in the region, our 
global partnership with Japan.
    Most governments in East Asia see the United States-Japan 
partnership as key to political and military stability and to 
economic prosperity in the region. At the April 1996 summit in 
Tokyo, President Clinton and Prime Minister Hashimoto signed a 
joint security declaration reaffirming the importance of the 
United States-Japan alliance.
    We have an ambitious program on global issues known as the 
common agenda. And we are encouraging Japan to promote strong 
domestic demand for its products, open its markets further to 
imports and to regulate its economy.
    Although we have had some successes under the framework 
agreement, we need better implementation of existing agreements 
and outstanding issues such as civil aviation.
    Let me now turn to Korea. Our goal in the Korean Peninsula 
is to build a durable peace on the Peninsula and to facilitate 
progress by the Korean people themselves toward national 
reunification.
    As you mentioned, I have excused myself from the 
discussions that are going on in New York where, together with 
our South Korean allies, we spent several hours in intense 
negotiations with the North Korean delegation led by a Vice 
Foreign Minister. I will return there tomorrow.
    These discussions are an effort to persuade North Korea to 
accept President Clinton and President Kim's proposal for four-
party peace  talks  involving  the  North  and  the  South,  as 
 well  as  the United States and China, concerning a reduction 
of tensions in the peninsula and the establishment of a 
permanent peace to replace the 1953 Armistice Agreement.
    We are also discussing bilaterally with the North Koreans 
other important issues, including efforts to recover the 
remains of Korean war-era MIA's, proposals to end North Korean 
development and export of missiles and missile technology, and 
implementation of our commitment to exchange liaison offices in 
Washington and Pyongyang.
    On a strictly humanitarian level, we have provided 
approximately $33 million in cash and in-kind support for 
emergency relief assistance, basically medical supplies and 
food for targeted sectors of the North Koreans.
    It is difficult to predict the pace of progress in our 
dealings with North Korea, however. North Korea's economic 
difficulties have created opportunities for diplomacy, but they 
also pose dangers.
    Our approach, which is in full coordination with the ROK, 
offers the DPRK a way to deal with its current crisis; that is, 
through responsible engagement with the United States, the ROK, 
and the international community.
    Let me now turn to China. In recent months, few if any 
foreign policy issues have been the subject of more intense 
debate than China.
    China is a major power whose influence will continue to 
expand in the 21st century. We seek a productive relationship 
with the secure, open, and successful China that is 
increasingly integrated into the international system and a 
responsible member of the international community.
    The administration is convinced that we can best advance 
our long-term interests by expanding and intensifying dialog 
with China's leaders at the highest levels. In line with this, 
we expect an exchange of state visits in 1997-98.
    Secretary Albright's decision to visit Beijing as part of 
her overseas--her first overseas trip reflected the importance 
we attach to laying a firm foundation for bilateral relations.
    Engagement with China should not be seen as implying 
approval of Chinese Government practices or policies. It is a 
vehicle by which we can expand areas of cooperation to advance 
our strategic interests, such as the search for stability on 
the Korean Peninsula.
    It also enables us to deal forthrightly with China on 
issues where we have differences, including human rights, 
market access, and some of China's weapons and dual-use item 
sales.
    Our bilateral trade deficit with China is a source of 
growing concern. Although the rate of growth of the deficit 
with China is slowing, its size, $39.5 billion, is politically 
unsustainable.
    We strongly support China's entry into the WTO on 
commercially acceptable terms.
    We have had serious difficulty with China on 
nonproliferation, largely over Chinese exports of arms as well 
as sensitive goods and technologies, primarily to Iran and 
Pakistan.
    In the missile and chemical areas, we continue to have 
concerns about the nature of China's commitment to abide by the 
MTCR guidelines, and about China's willingness to strengthen 
its chemical export control system and curb its dual-use 
chemical-related transfers to Iran.
    Human rights is an important issue in our relations with 
China. And we raise it at every high level meeting. We urge 
China to take steps to improve the human rights situation by 
releasing political prisoners and allowing prison visits by 
international human rights organizations.
    In just over 2 months time, the world's attention will be 
focused on the reversion of Hong Kong. We expect China to honor 
its commitments to preserve Hong Kong's high degree of autonomy 
and its unique way of life.
    Vice President Gore and Secretary Albright expressed our 
views regarding Hong Kong in meetings with Chinese leaders 
during their visits in February and March. And Secretary 
Albright will raise Hong Kong again when Vice Premier Qian 
Qichen visits Washington later this month.
    Secretary Albright will represent the United States at the 
Hong Kong reversion ceremony, a measure of the importance we 
place on this event, our support for the terms agreed to by the 
British and the Chinese, and our interest in the future of Hong 
Kong.
    Let me briefly highlight other important interests we have 
in the region.
    One of the President's most significant, if sometimes 
overlooked, foreign policy accomplishments has been the 
elevation of the Asia-Pacific region in general on the foreign 
policy agenda.
    Through his vision of a genuine Pacific community of 
interests, the President has elevated APEC to the leaders 
level.
    The administration has also played a prominent role in 
shaping a new regional security architecture through the 
creation of the ASEAN regional forum and other subregional 
dialogs.
    Regional dialog and architecture such as the ARF are 
designed to complement our existing core alliances, as well as 
cooperative security arrangements with other friendly nations.
    However, as you noted in your statement, Mr. Chairman, in 
sad contrast to the largely positive trends elsewhere in the 
region, the people of Burma continue to live under a highly 
authoritarian military regime.
    The SLORC refuses to engage the democratic opposition in 
dialog, and continues to engage in widespread human rights 
violations.
    The activities of Aung San Suu Kyi and her party, the 
National League for Democracy, are monitored and circumscribed 
by the regime.
    The Cohen-Feinstein Burma sanctions provisions, which were 
signed into law by the President on September 30, 1996, require 
the President to impose a ban on new United States investment 
in Burma under now well-known conditions.
    We continue to watch the situation in Burma closely and 
will impose such a ban if the President makes that 
determination.
    With the recent Senate confirmation of Pete Peterson as the 
first American Ambassador to Hanoi, I am confident we will be 
able to encourage more effective cooperation from the SRV on 
issues of national interest, especially on obtaining the 
fullest possible accounting for Americans missing from the 
conflict, which remains our top bilateral priority.
    We will also be in a position to urge greater political and 
religious freedom in Vietnam.
    Sometime this year, we hope to open a Consulate General in 
Ho Chi Minh City, which will enable us to better process former 
boat people for possible resettlement in the United States, as 
well as provide consular and commercial services to American 
citizens.
    Mr. Chairman, in conclusion, I would like to note two 
countries in East Asia which deserve the full support of the 
United States as they continue their difficult transition to 
democracy, Cambodia and Mongolia.
    In Cambodia, the traditional threat posed by the Khmer 
Rouge, while not eliminated, has receded considerably following 
a series of large scale defections to the government side.
    However, other internal threats, political violence most 
notable among them, now pose a grave challenge to Cambodia's 
transition to a democratic future.
    The United States is equally committed to assisting the 
Mongolian people with their remarkable transition to democratic 
government through programs made possible by ESF and by 
encouraging active involvement by NGO's.
    Mongolia's 7-year democracy building experience and 
experiment with a free-market economy is truly an Asian success 
story.
    So, Mr. Chairman, the breadth of our interests in the Asia-
Pacific region, our partnerships and alliances, and the 
challenges we face there will increase in importance as we 
enter the next century.

                           prepared statement

    The successes I have reviewed with you today vastly 
outnumber the problems, some admittedly serious, which remain. 
With the cooperation of Congress, we plan to continue the 
active pursuit of peace and stability, prosperity and 
individual rights and liberties throughout Asia and the 
Pacific.
    Thank you very much. We will be glad to answer questions.
    Senator McConnell. Thank you.
    [The statement follows:]

       Prepared Statement of Assistant Secretary Charles Kartman

                       introduction and overview

    Mr. Chairman, Members of the Committee: Together with my 
colleagues, Aurelia Brazeal and Jeffrey Bader, I thank you for 
this opportunity to present an overview of the Administration's 
policy in East Asia and the Pacific.
    U.S. interests in the Asia-Pacific region--security, 
political, economic, socio-cultural--are abiding and underpin 
our global foreign policy. As Secretary Albright said on April 
15, our commitment to the region is solid because it is solidly 
based on American interests. Together with our partners in the 
region, the Administration is committed to building a community 
across the Pacific based on shared interests, economic 
interdependence, respect for democratic principles, and a 
common commitment to peace.
    The United States has employed a multi-pronged, reinforcing 
approach in providing leadership to seize the opportunity for 
mutually beneficial cooperation in the region. On the security 
front, we have strengthened our core alliances and buttressed 
other cooperative bilateral security relationships. We have 
reconfirmed our intention to maintain a forward troop presence 
in the region, as Vice President Gore underscored in Japan last 
month. At the same time, we have actively supported 
multilateral security dialogues, such as the ASEAN Regional 
Forum, which now includes both Russia and India as members.
    We have aggressively promoted American economic interests 
in this dynamic part of the globe, regionally through our 
participation in APEC and bilaterally through negotiations with 
Japan, the PRC and other prominent economies. The growth of the 
ASEAN economies and their general commitment to market-oriented 
free trade principles figures prominently in how the United 
States pursues trade and other economic interests. The East 
Asia and Pacific region has surpassed Western Europe to become 
the largest regional trading partner of the United States. 
Close to 40 percent of our global trade is with the countries 
of the Pacific Rim.
    In recent years, we have also elevated the diplomatic 
profile of our efforts to address trans-national problems in 
the Asia-Pacific region which by definition have no respect for 
boundaries: weapons proliferation, terrorism, narcotics 
trafficking, and environmental degradation. For example, 
sustainable development and the environment figured prominently 
on Vice President Gore's agenda during his visit to Japan, 
China and Korea in late March.
    In her confirmation hearings in January and in subsequent 
Congressional testimony, Secretary Albright stressed that 
America has a vital interest in remaining a Pacific power. She 
gave testimony to that commitment in her first overseas trip as 
Secretary of State in February. In Tokyo and Seoul, she 
reaffirmed America's intention to do its part to help build a 
secure and peaceful future for Asia and the Pacific and the 
vitality of our strong security relationships with key allies. 
In Beijing, the Secretary encouraged China's active and 
responsible participation in the international community.
    Last November, within days of being reelected to a second 
term, President Clinton underlined his conviction that the 
United States intends to remain deeply engaged in Asia and the 
Pacific when he visited three important partners for regional 
cooperation--Australia, the Philippines and Thailand. Secretary 
Cohen has just returned from consultations in Northeast Asia. 
General Shalikashvili is there now. And less than two weeks 
ago, Treasury Secretary Rubin travelled to Vietnam where he 
advanced the process of economic normalization between our two 
countries.
    Having briefly outlined the main elements of our Asia 
policy, I would now like to lay out in more detail some of our 
key interests and relations in the region.

                                 japan

    Any discussion of overall Asia policy should begin with the 
cornerstone of U.S. engagement in the region: our global 
partnership with Japan. The United States is committed to 
working closely with Japan to meet the many international 
security, political and global challenges of the 21st century.
    Most governments in East Asia generally see the U.S.-Japan 
partnership as key to political and military stability and to 
economic prosperity in the region. The United States and Japan, 
in close consultation with the Republic of Korea, seek 
continued stability on the Korean Peninsula and the faithful 
execution of the October 1994 U.S.-DPRK Agreed Framework which 
froze North Korea's nuclear program. Japan joined the United 
States and the ROK as founding members of the Korean Energy 
Development Organization (KEDO). Japan has committed to fund a 
significant portion of the multi-billion dollar light-water 
reactor project for North Korea. Japan has likewise given 
strong support for the proposed Four Party proposal involving 
the United States, the ROK, the DPRK, and China.
    Both we and Japan encourage and support China's active, 
constructive role in the international community. Our 
governments continue to engage China on a broad range of 
issues, including nonproliferation, trade, human rights, and 
Hong Kong. We both share an interest in seeing that China is 
successfully integrated into the core institutions of the 
international community and, in so doing, meets its 
responsibilities and obligations.
    In the United Nations, where Japan has the second largest 
individual country assessment, we have worked together to 
promote reform of the organization. We strongly support Japan's 
bid for permanent membership on the Security Council. In recent 
years, Japan has displayed greater willingness to participate 
in UN peacekeeping operations, as it continues to be an active 
leader in financing a range of international humanitarian 
relief efforts such as Bosnia reconstruction, the Middle East 
Peace Process and programs to cope with refugee crises in 
Africa.
    Under the U.S.-Japan Common Agenda, launched in July 1993, 
Japan and the United States are cooperating on more than two 
dozen initiatives covering a broad range of the world's most 
pressing global problems such as health, rapid population 
growth and the environment.
    At the April 1996 Summit in Tokyo, President Clinton and 
Prime Minister Hashimoto signed a Joint Security Declaration 
which reaffirmed the importance of the U.S.-Japan alliance. At 
present, there are about 43,000 U.S. military personnel in 
Japan. Japan provides about $5 billion a year in Host Nation 
Support (HNS), or about 70 percent of the non-salary costs of 
maintaining U.S. forces in Japan. We will continue to maintain 
our forces in Japan, as part of our 100,000 forward-deployed 
troops in the region, for the foreseeable future.
    The Joint Security Declaration also endorsed the then-
ongoing work of the U.S.-Japan Special Action Committee on 
Okinawa (SACO), which completed its work in December 1996 by 
announcing substantial consolidations of U.S. bases in Okinawa. 
SACO reflected the recognition by both the United States and 
Japan that the sensibilities of Okinawan communities regarding 
the U.S. military presence needed to addressed in order to 
sustain, for the long term, our forward deployments in Okinawa.
    Japan is our largest trading partner after Canada. It is 
also the world's second largest economy. However, except for 
1996 when real GDP growth was 3.6 percent due to a large fiscal 
stimulus and low interest rates, economic growth has been flat 
since the real estate and stock bubble burst in 1990. The 
government's plan to reduce spending and raise the consumption 
tax is expected to constrain economic growth in 1997. Japan 
remains a massive net exporter of goods to the rest of the 
world. Although Japan's merchandise trade surplus with the 
United States fell to $48 billion in 1996 from $59 billion in 
1995, the surplus is expected to rise in 1997 as the weaker yen 
increases Japan's exports and reduces its imports.
    We are encouraging Japan to promote strong domestic demand 
for its products, open its markets further to imports and 
deregulate its economy. Excessive regulation and non-
transparent procedures, however, continue to be a drag on 
Japanese growth and to impede the access of American firms and 
products to Japanese markets. Prime Minister Hashimoto said 
that deregulation is one of his administration's top 
priorities. His strong leadership will be important in 
overcoming bureaucratic and economic interests who favor the 
status quo.
    Our trade policy aims at opening Japan's markets, so that 
foreign firms can compete on an equal footing. The Framework 
Agreement, signed by President Clinton and then-Prime Minister 
Miyazawa in 1993, governs our bilateral trade relationship. 
Since then, we have negotiated 23 trade agreements. Under the 
Framework, we have had successes not only in autos and auto 
parts, but in insurance, semiconductors and intellectual 
property rights protection. We have enjoyed similar success in 
our WTO case involving distilled spirits. Nevertheless, Japan 
remains a difficult market especially for new entrants owing to 
government regulation, exclusionary private business practices, 
and inadequate anti-trust enforcement. We are pressing Japan to 
implement existing agreements, including on autos and auto 
parts and government procurement, and to deregulate its 
economy. We are also working hard to address outstanding issues 
such as civil aviation and telecommunications.

                                 korea

    Mr. Chairman, I have just returned from New York, where 
together with our South Korean allies we have spent several 
hours in intense discussions with a North Korean delegation led 
by Vice Foreign Minister Kim Gye Gwan. I will return to New 
York tomorrow to continue those talks.
    I would like to discuss briefly the Administration's basic 
policy approach toward the Democratic People's Republic of 
Korea (DPRK). Our overall goals in this policy are to build a 
durable peace on the Korean Peninsula as a key contribution to 
regional stability, and to facilitate progress by the Korean 
people themselves toward national reunification.
    Central to our strategy for managing North Korea is our 
commitment to consult regularly and closely with our South 
Korean allies, to ensure that our North Korea policy remains 
tightly coordinated. Recent visits to Seoul by the Vice 
President, Secretary Albright, Secretary Cohen and General 
Shalikashvili have all contributed to that objective. The U.S.-
ROK security alliance, which has withstood nearly five decades 
of challenges and changes, remains at the heart of our policy 
on the Peninsula. Our joint ability to deter North Korean 
aggression is stronger than ever. The Republic of Korea, which 
emerged from the Korean War in ruins, has built itself into a 
vibrant democracy with a robust economy. The United States is 
rightly proud of the role we have played in this process, in 
the first instance, by ensuring the security of our ally.
    Negotiated in close consultation with our South Korean and 
Japanese allies, the October 1994 Agreed Framework not only 
provided a means to address our concerns about the North Korean 
nuclear program, but also laid out a structure to pursue our 
other diplomatic objectives with the DPRK. Since November 1994, 
a freeze on key existing facilities in North Korea's nuclear 
program has been in place and is being continuously monitored 
by the International Atomic Energy Agency (IAEA) as well as by 
our own national technical means. Under the Agreed Framework, 
the North will forego the right to reprocess spent fuel and 
will, instead, safely store and eventually transfer the 
existing fuel out of the country.
    I would note that the existing spent fuel contains material 
which could be used to build nuclear weapons. Thanks to the 
hard work of a team of experts led by the Department of Energy, 
which is in North Korea working 12 hours a day, six days a 
week, the task of putting this material into storage under IAEA 
safeguards is more than half completed. Actual canning of the 
spent fuel began in April 1996 and is planned for completion 
later this year. Upon the completion of canning activities, the 
spent fuel will remain at the spent fuel storage basin at 
Nyongbyon where it will continue to be subject to monitoring by 
the IAEA until it is transferred out of the DPRK.
    The Agreed Framework also provides that, in return for the 
freeze and dismantlement of the DPRK's present nuclear program, 
the United States will organize under its leadership an 
international consortium to finance and supply two light-water 
reactors (LWR), as well as heavy fuel oil shipments, to the 
DPRK. Under American, South Korean and Japanese leadership, the 
Korean Peninsula Energy Development Organization (KEDO) has 
grown into an important arm of our three countries' coordinated 
diplomacy. KEDO currently has ten members, spread over five 
continents, and has received financial contributions from over 
twenty-one countries. The European Union (EU) recently 
announced that it would join KEDO as the fourth member of its 
Executive Board. The EU's commitment to contribute $20 million 
annually to KEDO over five years will help put KEDO finances on 
a more solid footing. Nonetheless, KEDO is running a serious 
deficit in its oil funding account; the deficit was $2.7 
million in 1995, and about $33.5 million in 1996.
    The combination of new EU funding, the U.S. contribution to 
KEDO, and the contributions of other countries is critically 
important to ensure that KEDO's commitment to deliver heavy 
fuel oil to the DPRK is met. These deliveries are essential to 
the integrity of the nuclear freeze, since they help compensate 
the DPRK for the loss of energy production from nuclear 
reactors which were under construction before the Agreed 
Framework. KEDO is also taking steps to ensure the proper use 
of this fuel by the North. We are following this situation very 
closely.
    KEDO has negotiated five protocols to the LWR Supply 
Agreement which define the terms and conditions for reactor 
construction. It has sent seven teams of technical experts--
American, South Korean and Japanese--to the DPRK to gather 
necessary geological, environmental, and structural information 
about the proposed LWR site in the DPRK. We anticipate 
groundbreaking on the project to begin in late spring. As the 
LWR project progresses, North Korea's contact with the world 
and with the ROK will rapidly increase. Most specialists 
working on the project will be ROK citizens, and South Korea's 
national power company--KEPCO--is the prime contractor. 
Already, the LWR project has facilitated North-South contact 
through almost constant KEDO-DPRK negotiations at KEDO 
headquarters in New York City and through the regular visits of 
South Koreans, under KEDO sponsorship, to the North to prepare 
for the reactor project.
    The Agreed Framework also called on the United States and 
the DPRK to improve bilateral relations through resolution of 
issues of importance to the U.S. The pace of change will 
depend, of course, on the degree to which the DPRK is prepared 
to move further along the positive path on which it embarked 
with the signing of the Agreed Framework. Another key element, 
which was written into the Agreed Framework at our insistence, 
is the expectation of progress in North-South relations. In our 
subsequent diplomatic contacts with the DPRK, we have stressed 
consistently and frequently the necessity of such contact.
    North Korea's agreement to sit down with the United States 
and ROK on March 5 to hear our joint briefing on President 
Clinton and President Kim's proposal for Four Party peace talks 
was tangible evidence of the recent success of our policies in 
engaging the DPRK and encouraging inter-Korean dialogue. This 
joint briefing will, we hope, lead to discussions involving the 
North and South, as well as the United States and China, 
concerning a reduction of tensions on the Peninsula and the 
establishment of permanent peace to replace the 1953 Armistice.
    Two days after the joint briefing on the Four Party talks, 
accompanied by officials from the Department of Defense and the 
National Security Council, I met with the same DPRK delegation 
to discuss the range of bilateral issues between our two 
countries. Among the issues I raised in that meeting were 
efforts to recover the remains of Korean War-era MIAs, 
proposals to end North Korean development and export of 
missiles and missile technology, and implementation of our 
commitment to exchange liaison offices in Washington and 
Pyongyang.
    U.S. negotiators first met with DPRK officials in April 
1996 to discuss our concerns about North Korea's development, 
deployment, and proliferation of missiles and missile 
technology. The DPRK has agreed to a second round of these 
talks to be held May 12-13 in New York. Putting an end to these 
threats is a top U.S. priority.
    Under terms of the Agreed Framework, the United States and 
North Korea agreed to exchange liaison offices--the lowest 
level of diplomatic representation between countries--as soon 
as technical issues could be resolved. Although we are still 
discussing some of these matters, including arrangements for 
supplying and supporting our office in Pyongyang and the 
North's ability to find suitable offices in Washington, 
conditions appear to be improving for the realization of this 
commitment. The establishment of these small-scale offices 
would be of practical benefit to both sides. We are very 
grateful to Sweden for its willingness to act as our protecting 
power in the DPRK. However, as American citizens increasingly 
visit the DPRK--as journalists, academics, humanitarian relief 
workers or specialists in the canning, remains, or fuel 
monitoring projects--we feel the need to be able to provide 
them directly with consular protection and support. A full-time 
diplomatic presence in Pyongyang will also give us a first-hand 
perspective on the situation and provide us with improved 
access to North Korean officials.
    In recognition of the progress made on issues of concern to 
us, we have taken a number of modest steps since January 1995 
to ease economic sanctions against the DPRK. In December 1996, 
for example, we approved the license of a U.S. firm to pursue a 
commercial deal to sell North Korea up to 500,000 tons of 
grain, consistent with our policy of sympathetic consideration 
of all applications for provision of foodstuffs on commercial 
terms. We understand that negotiations to conclude this deal 
for a limited shipment on a commercial basis were recently 
successful. We will consider further sanctions-easing measures 
as North Korea makes progress on issues of concern to us.
    On a strictly humanitarian level, the United States has 
participated in international efforts to alleviate the 
suffering of North Korean civilians affected by recent flooding 
and food shortages there. Over the past two years, we have 
provided approximately $33 million in cash and in-kind support 
for emergency relief assistance--basically, medical supplies 
and food--for the North. These contributions have been made in 
the spirit of the American tradition of providing assistance to 
people in need, without regard to politics.
    Our most recent donation, announced April 15 after close 
consultation with the ROK and Japan, is a donation of 50,000 
metric tons of corn valued at approximately $15 million for use 
in feeding 2.6 million children under the age of 6 in North 
Korea. This assistance, which will be in the form of PL 480 
Title II Emergency Food Aid, is in response to the UN World 
Food Program's (WFP) April 3 announcement that it was expanding 
its outstanding appeal by an additional 100,000 metric tons, 
bringing its total appeal to 200,000 metric tons, valued at $95 
million. UN agencies with staff in North Korea will arrange the 
delivery of our contribution. The WFP, which will monitor the 
distribution, has demonstrated its ability to ensure that 
assistance reaches the intended civilian beneficiaries.
    The latest WFP appeal, even if fully subscribed, will only 
meet 5 percent of the North's estimated 2 million ton shortfall 
of grain this year. However, the appeal is designed to get food 
in the pipeline now for delivery to those most vulnerable to 
the threat of famine.
    The United States has not acted alone in providing 
humanitarian assistance to the DPRK. In February, the ROK 
announced a $6 million contribution to the WFP appeal, and we 
expect South Korea to respond to the WFP's expanded appeal. 
Japan donated $6 million in response to the 1995 UN appeal and 
is considering its response to the expanded WFP appeal. Canada 
has contributed $4 million and Australia $2.2 million; Denmark, 
Norway, and New Zealand have also announced contributions.
    Experience has taught us that it is difficult to predict 
the pace of progress in our dealings with North Korea, and 
events can move quickly on the Korean Peninsula. Persistent 
diplomacy by the United States, in close coordination with the 
ROK, has laid the groundwork for a possible improvement of the 
situation on the Peninsula. North Korea's economic difficulties 
have created opportunities for diplomacy, but they also pose 
dangers.
    In summary, although there is clearly a long way to go, I 
am cautiously optimistic about our effort to promote lasting 
peace on the Korean Peninsula. It has at its foundation the 
U.S.-ROK security alliance and our commitment to deter North 
Korean aggression. It seeks to reduce tensions, but insists on 
the principle of reciprocity enshrined in the Agreed Framework. 
It recognizes the long-standing American tradition of offering 
assistance to needy people regardless of the political views of 
their leaders. And, it offers the DPRK a way to deal with its 
current crisis--through responsible engagement with the United 
States, the ROK, and the international community.

                                 china

    Mr. Chairman, in recent months few if any foreign policy 
issues have been the subject of more intense debate than China. 
Constructive relations with the PRC are of fundamental 
importance to the preservation of world peace and regional 
stability. As Secretary Albright noted in her address at the 
Naval Academy two days ago, no nation is destined to play a 
larger role in shaping the future of Asia than China. Already, 
China is a major power whose influence will continue to expand 
in the 21st century.
    We seek a productive relationship with a secure, open and 
successful China that is increasingly integrated into the 
international system and a responsible member of the 
international community. American interests are served best by 
a China that does not threaten others. China, in turn, is less 
likely to be hostile if it does not feel threatened. American 
interests are not served by a policy that seeks to contain or 
isolate China. We would not only eventually fail, but an effort 
to do so would undercut the stability that all countries in the 
Asia-Pacific region need for the future to be secure and 
prosperous.
    A China that evolves as a power that is stable, politically 
and economically more open and non-threatening militarily--in 
short, a China that is moving toward, not away, from a secure 
international order--is profoundly in our national interest. 
Ultimately, of course, China will determine its own course, and 
there is no assurance that our policy of engagement will 
succeed in moving China in the direction of the international 
community, away from more nationalistic, self-absorbed 
policies. But we can and should help shape its choices. This 
can be accomplished most effectively by continuing our present 
policy of deepening our strategic dialogue with China.
    The Administration is convinced that we can best advance 
our long-term interests by expanding and intensifying dialogue 
with China's leaders at the highest levels. In line with this, 
we expect an exchange of state visits in 1997 and 1998.
    Secretary Albright's decision to visit Beijing as part of 
her first overseas trip reflected the importance we attach to 
laying a firm foundation for bilateral relations. Meetings such 
as those during the Vice President's visit to China in March 
are conducive to a productive dialogue in which differences can 
be aired.
    Engagement with China should not be seen as implying 
approval of Chinese government practices or policies. It is a 
vehicle by which we can expand areas of cooperation to advance 
our strategic interests--such as the CTBT and stability on the 
Korean Peninsula. It also enables us to deal forthrightly with 
China on issues where we have differences--including human 
rights, market access and some of China's weapons and dual-use 
items sales.
    Our relationship with China has many dimensions. We have a 
positive agenda, where we seek productive dialogue on issues of 
mutual interest: global and regional security cooperation--
including at the UN--on matters such as the situation on the 
Korean peninsula; arms control and nonproliferation; trade and 
investment; sustainable development and protection of the 
environment; and the ongoing fight against drug trafficking, 
alien smuggling, international crime and terrorism. On the 
other hand, just as we try to expand areas of cooperation 
wherever possible, so do we work assiduously on those areas 
marked by differences. I would like to mention briefly some of 
the key issues in the relationship.
    Taiwan is a longstanding issue between us. As provided in 
three joint communiques with the PRC, the United States 
recognizes the Government of the PRC as the sole legal 
government of China and acknowledges the Chinese position that 
there is just one China, and that Taiwan is a part of China. 
However, we maintain strong unofficial ties with the people of 
Taiwan, in cultural, commercial and other areas. We welcome the 
democratic transformation of Taiwan.
    While the Taiwan issue is a matter for the parties involved 
to resolve, we have a strong and continuing interest that any 
resolution be peaceful. The United States has an abiding 
interest in the region's continued peace and stability, and 
under the Taiwan Relations Act (TRA), any effort to determine 
the future of Taiwan by other than peaceful means would be of 
grave concern to the United States. The TRA requires the United 
States to make available to Taiwan defense equipment to 
maintain a sufficient self-defense capability. The PRC has 
always opposed arms sales to Taiwan, which it regards as 
interference in its internal affairs, and they continue to be a 
source of friction. Since differences between Beijing and 
Taipei remain a potential source of instability, we have 
stressed to both sides the importance of avoiding provocation 
and of resuming cross-Strait dialogue as a possible route 
toward eventual resolution of this problem.
    A growing source of concern is our bilateral trade deficit 
with China. Although the rate of growth of the deficit with 
China is slowing, its size--$39.5 billion--is politically 
unsustainable. We continue to press for implementation of our 
bilateral market access and intellectual property rights 
agreements, and we are seeking increased access for our goods 
and services in the negotiations on China's accession to the 
World Trade Organization. We strongly support China's entry 
into the WTO on commercially acceptable terms. Both sides are 
working to intensify negotiations.
    Chinese cooperation is essential to achieve our regional 
and global nonproliferation objectives, and we have made 
progress. We engage the Chinese on nonproliferation frequently 
and at various levels. We urge that China accept and abide by 
international nonproliferation agreements and norms.
    China's evolving attitude toward nonproliferation norms can 
be seen in Chinese actions in the 1990s. In 1992, it acceded to 
the Nonproliferation Treaty (NPT), in 1993, it signed the 
Chemical Weapons Convention (CWC), which its National People's 
Congress approved last December; in 1994, China stated it would 
abide by the guidelines and parameters of the Missile 
Technology Control Regime (MTCR), joined the United States in 
calling for the negotiation of a multilateral agreement banning 
the production of fissile material for nuclear weapons, and 
played a constructive role with North Korea in obtaining its 
agreement to eliminate its nuclear weapons program; in 1995, 
China supported the successful effort to make the NPT 
permanent; in 1996, China stopped testing nuclear weapons and 
signed the Comprehensive Test Ban Treaty (CTBT); and this year, 
China joined with other members of the IAEA in negotiating and 
recommending that the IAEA Board of Governors adopt new 
safeguards to strengthen the IAEA's ability to detect 
undeclared nuclear activities in states with comprehensive 
safeguards agreements.
    We and China need to build on these steps. We will need 
Beijing's active cooperation to help bring North Korea into 
full compliance with its NPT and IAEA safeguards obligations, 
to help avert a destabilizing nuclear and missile competition 
in South Asia, and to help stabilize the Persian Gulf region by 
curbing exports to Iran and supporting fully Security Council 
resolutions on Iraq. We have urged China to join the new 
Wassenaar Arrangement of 33 major arms suppliers that have 
agreed not to sell arms and sensitive technologies to Iran.
    At the same time, we have had serious difficulties with 
China on nonproliferation, largely over Chinese exports of arms 
as well as sensitive goods and technologies, primarily to Iran 
and Pakistan. Our intensive engagement with the Chinese over 
the last few years on nuclear export issues has begun to yield 
some concrete results. China has shown a greater willingness to 
scrutinize and restrain its nuclear exports and cooperative 
activities, to strengthen their national export controls, and 
to address more promptly and seriously our concerns. If we 
continue to make progress, we would hope to be in a position to 
implement the long-dormant 1985 U.S.-China Agreement for 
Nuclear Cooperation, which would bring major benefits to both 
countries. In the missile and chemical areas, however, we 
continue to have concerns about the nature of China's 
commitment to abide by the MTCR guidelines and about China's 
willingness to strengthen its chemical export control system 
and curb its dual-use chemical-related transfers to Iran.
    Human rights is an important issue in our relations with 
China, and we raise it at every high-level meeting. Our 
concerns are well documented in the State Department's annual 
country reports of human rights practices. We urge China to 
take steps to improve the human rights situation by releasing 
political prisoners and allowing prison visits by international 
human rights organizations.
    Some argue that the United States should restrict access 
for Chinese goods to the domestic American market until China 
improves its record on human rights. However, this 
Administration believes that revoking or conditioning Most 
Favored Nation (MFN) tariff treatment for China would not 
advance human rights there. On the contrary, denial of MFN 
would remove a beneficial influence for creating a more open 
China; undermine American leadership in the region and the 
confidence of our Asian allies; damage our economy, harm Taiwan 
and especially Hong Kong, whose economies are intertwined 
closely with that of the PRC; and would damage our ability to 
work constructively with China. In the Administration's view, 
renewing MFN unconditionally for China is the best way to 
advance American interests, a conclusion reached by every 
American president since 1979.
    Although longstanding U.S. policy recognizes Tibet as part 
of China, we strongly support the resumption by Beijing, 
without preconditions, of negotiations with the Dalai Lama to 
protect Tibet's distinctive heritage and culture. We would 
welcome any formula for discussions agreed upon by 
representatives of the Dalai Lama and of the PRC. The Dalai 
Lama will visit Washington next week.
    In just over two months' time, the world's attention will 
be focused on the reversion of Hong Kong. Under the 1984 Sino-
British Joint Declaration, Hong Kong will become a Special 
Administrative Region (SAR) of the PRC at midnight on July 1, 
1997, after which it will continue to enjoy a high degree of 
autonomy in all areas but foreign affairs and defense. We are 
expressing at the highest levels our interest in a smooth and 
successful transition, and in the future of Hong Kong. We 
expect China to honor its commitments to preserve Hong Kong's 
high degree of autonomy and its unique way of life. We believe 
that the protection of civil liberties and individual freedoms, 
including freedom of expression, is important to Hong Kong's 
way of life and vital to continuing confidence there.
    China has a strong self-interest in Hong Kong's continued 
prosperity, and it understands Hong Kong's critical role in 
providing and funneling the capital, technology, and 
entrepreneurial skills that fuel China's economic growth.
    Vice President Gore and Secretary Albright expressed our 
views regarding Hong Kong in meetings with Chinese leaders 
during their visits in February and March, and Secretary 
Albright will raise Hong Kong again when Vice Premier Qian 
Qichen visits Washington later this month. We believe the 
Chinese leaders understand our interest, and they express their 
intention to preserve Hong Kong's autonomy and way of life. 
Secretary Albright will represent the United States at the Hong 
Kong reversion ceremony, a measure of the importance we place 
on this event, our support for the terms agreed to by the 
British and the Chinese, and our interest in the future of Hong 
Kong. As mentioned by the Hong Kong Policy Act of 1992, the 
Administration will monitor the situation after reversion and 
report on any erosion in Hong Kong's autonomy.

              pacific community and regional architecture

    Mr. Chairman, in any broad discussion of U.S. policy in 
Asia, Northeast Asia tends to dominate. Today, I want to 
briefly highlight other important interests we have in this 
dynamic region.
    One of the most significant if sometimes overlooked foreign 
policy accomplishments of the First Clinton Administration was 
the elevation of the Asia-Pacific region in general on the 
foreign policy agenda. This elevation continues in the Second 
Administration. Through his vision of a genuine Pacific 
community of interests, the President has nurtured the APEC 
process, founded in 1989, to the Leaders level. In November of 
this year, APEC leaders will come to the North American 
continent, where the city of Vancouver will play proud host.
    This Administration has also played a prominent role in 
shaping a new regional security architecture through the 
creation of the ASEAN Regional Forum (ARF) and other sub-
regional dialogues. Since its inception in 1994, the 
accomplishments of the ASEAN Regional Forum--whose membership 
now numbers 21--have been significant. Regional dialogue and 
architecture such as the ARF are designed to complement 
existing core alliances--with Japan, the ROK, Australia, 
Thailand and the Philippines--as well as cooperative security 
arrangements with other friendly nations.

                               australia

    Australia is the southern anchor of the U.S. presence in 
the Asia-Pacific region. A stalwart and dependable ally, 
Australians have fought by our side in every major conflict in 
the 20th century. In addition to our military alliance, we and 
Australia have a long and profound history of cooperation on 
multilateral issues. Australia has provided timely and 
important financial support to KEDO, and was instrumental in 
helping bring about a positive outcome on the CTBT.

                                 asean

    With over 330 million people, the seven ASEAN nations--
Indonesia, Malaysia, Singapore, Thailand, the Philippines, 
Brunei, and Vietnam--have become collectively our fourth 
largest overseas market. U.S. companies have invested over $30 
billion in the ASEAN countries, an investment which helped 
produce two-way trade valued at more than $100 billion. ASEAN 
boasts some of the world's fastest growing economies, and is 
likely to remain a vibrant market for U.S. goods and services 
for the foreseeable future.
    ASEAN, together with the ASEAN Regional Forum, has become a 
force for regional stability and a vehicle for increased 
involvement in both regional and global affairs. The seven 
ASEAN nations border the South China Sea in a region fraught 
with historical tensions and overlapping territorial claims. 
However, the economic and cultural ties which bind the ASEAN 
nations have served to reduce volatility in this strategic 
area. Thailand and the Philippines are treaty allies of the 
United States, and we have a cooperative security arrangement 
with Singapore. Both Malaysia and the Sultanate of Brunei have 
contributed significant financial support for various 
multilateral assistance efforts underway in Bosnia.

                               indonesia

    In many respects, no country better symbolizes the dynamic 
reality of ASEAN than Indonesia. By far the largest of the 
ASEAN nations with its 200 million population, Indonesia has 
chosen over the last 30 years to work closely with its 
neighbors through that organization to encourage consensual, 
constructive approaches to regional challenges. No other factor 
is of greater importance to the region's long-term stability 
and unparalleled economic growth. In the process, Indonesia has 
played key roles in bringing democratic elections to Cambodia 
and in using its chairmanship of the Organization of the 
Islamic Conference to broker a peace agreement to end a 
decades-long conflict in the southern Philippines. Indonesia 
also hosted the 1994 APEC Leaders Meeting, where leaders agreed 
to free up regional trade and investment by the years 2010 and 
2020 for developed and developing countries.
    Stability in the region and in Indonesia has provided the 
necessary preconditions for one of the most remarkable economic 
success stories of any developing nation. GDP growth has 
averaged in the neighborhood of 7 percent over several decades. 
This growth has been balanced by developing country standards; 
World Bank studies show income gaps between the richest and 
poorest ranks of society to be among the smallest of virtually 
any developing country. This economic growth has benefited U.S. 
interests as well. Our own bilateral trade has grown by nearly 
60 percent over the last five years, to almost $12.3 billion. 
U.S. investment, including outlays in the oil and gas sector, 
totals in the vicinity of $20 billion.
    We have important differences over human rights issues with 
Indonesia. Administration officials, including President 
Clinton, repeatedly have made clear that our relationship, as 
strong as it is, cannot reach its full potential until 
Indonesia improves its human rights performance. And we intend 
to continue raising these issues and to ensure that our views 
are known to the government and to the Indonesian people. The 
United States looks forward to a more democratic Indonesia. We 
believe the best way for that to happen would be through a 
process of evolutionary change that does not threaten the kind 
of stability that has brought so much to Indonesia and to the 
wider region. To encourage these trends--and many trends in 
Indonesia are positive--the United States needs a relationship 
that will serve our broad interests in fostering regional 
stability, prosperity, and representative government.
    We also are concerned about the human rights conditions in 
East Timor. We are encouraged by U.N. Secretary General Anan's 
decision to appoint a special representative to focus on the 
East Timor issue and the resumption of Indonesian-Portuguese 
discussions. We view favorably proposals to give the Timorese 
greater control of their political and economic life and to 
accord recognition to East Timor's unique history and culture.

                                 burma

    In marked contrast to the largely positive trends in 
Southeast Asia, the people of Burma continue to live under a 
highly authoritarian military regime, the State Law and Order 
Restoration Council (SLORC), which has made no progress in 
recent months in moving toward greater democratization and 
respect for human rights. The SLORC continues to dominate the 
political, economic and social life of the country, refuses to 
engage the democratic opposition in dialogue, and continues to 
engage in widespread human rights violations.
    Political party activity remains severely restricted. The 
activities of Aung San Suu Kyi and her party, the National 
League for Democracy (NLD), are monitored and circumscribed by 
the regime. Several hundred political prisoners are in 
detention, including 29 Members of Parliament elected in 1990. 
Since late September 1996, Aung San Suu Kyi has been prevented 
from addressing party supporters in front of her house, as the 
SLORC puts up blockades to prevent gatherings there. Since late 
December, the SLORC has generally allowed her to meet with 
visitors at her compound if the authorities are notified in 
advance. She meets relatively often with diplomats and her 
supporters. Since the beginning of the year, she has had three 
large gatherings of more than 1,500 supporters on her compound.
    The Cohen-Feinstein Burma sanctions provisions, which were 
signed into law by the President on September 30, 1996, as part 
of the Fiscal Year 1997 Omnibus Appropriations Act, require the 
President to impose a ban on new U.S. investment in Burma if he 
determines and certifies to Congress that, after September 30, 
1996, the Government of Burma has ``physically harmed, 
rearrested for political acts, or exiled Daw Aung San Suu Kyi 
or has committed large-scale repression of or violence against 
the democratic opposition.'' We continue to watch the situation 
in Burma closely and will impose such a ban if the President 
makes that determination.
    In an effort to promote democratic change in Burma, we have 
engaged in a vigorous multilateral strategy to encourage the 
EU, ASEAN, Japan and other nations to urge progress by the 
SLORC in the key areas of our concern--democracy, human rights 
and counternarcotics. The Administration has imposed visa 
restrictions on senior leaders of the regime and their 
families. We maintain other forms of pressure against the 
SLORC: we have cut off economic aid and GSP benefits; 
prohibited Eximbank financing and OPIC insurance; maintained an 
arms embargo; blocked assistance from international financial 
institutions; and downgraded the level of our official 
representation to Charge d'Affaires. Further, in light of 
Burma's abysmal performance in the area of counternarcotics, 
for eight years we have decertified Burma as not cooperating 
with the United States against narcotics production and 
trafficking.
    We also have strong concerns about the Burma Army's attacks 
on the Karen near the Thai-Burma border. We have pressed the 
SLORC to halt these attacks and to ensure safe passage for 
returning refugees. Up to 12,000 Karen were forced to flee into 
Thailand, the vast majority of them civilians, including women, 
children and the elderly. Thousands of civilians were forcibly 
conscripted to serve as porters for the Burma Army in its 
offensive. We also expressed our deep concern to the Thai 
Government regarding the incidents in which Karen civilians who 
were fleeing the fighting in Burma were sent back across the 
border. Thailand has stopped these incidents and has assured us 
that it intends to return to its former policy of providing 
refuge for such persons until conditions inside Burma permit 
their safe and voluntary return.

                                vietnam

    Mr. Chairman, we welcome the recent Senate confirmation of 
Pete Peterson as the first American Ambassador to Hanoi. With 
Ambassador Peterson's presence there, I am confident that we 
will be able to encourage more effective cooperation from the 
SRV on issues of national interest, especially in obtaining the 
fullest possible accounting for Americans missing from the 
conflict, which remains our top bilateral priority. It will 
also bolster our ongoing efforts to urge greater political and 
religious freedom in Vietnam. Another priority is to work with 
the SRV to streamline the process known as ROVR (Resettlement 
Opportunity for Vietnamese Returnees), whereby certain 
Vietnamese returnees can be interviewed in Vietnam for possible 
resettlement in the United States. Sometime this year, we hope 
to open a Consulate General in Ho Chi Minh City, which will 
enable us to implement the ROVR program more effectively as 
well as provide consular and commercial services to American 
citizens.
    Vietnamese leaders have made emphatically clear that 
integration of the economy into the region is a top national 
priority. We support this process, as it would also serve the 
interests of regional stability. We look forward to further 
progress in normalizing economic relations between the United 
States and Vietnam. During his recent visit, Secretary Rubin 
signed a debt agreement between our two countries. We have also 
launched a series of negotiations which we hope will lead to a 
bilateral trade agreement. Other talks have begun on 
intellectual property rights and civil aviation.

             transition to democracy: cambodia and mongolia

    Finally, Mr. Chairman, I would like discuss two countries 
in East Asia which deserve the full support of the United 
States as they continue the difficult transition to democracy: 
Cambodia and Mongolia.
    In Cambodia, the traditional threat posed by the Khmer 
Rouge, while not eliminated, has receded considerably following 
a series of large scale defections to the government side. 
However, other internal threats--political violence most 
notable among them--now pose a grave challenge to Cambodia's 
transition to a democratic future. The March 30 assassination 
attempt against opposition leader Sam Rainsy, which we strongly 
condemned, is one example of the type of political violence 
that must be eradicated. We call on all factions to commit 
themselves to the development of the Cambodian nation and the 
peaceful settlement of their differences.
    We are committed to assisting the Mongolian people with 
their remarkable transition to democratic government, through 
programs made possible by Economic Support Funds (ESF) and by 
encouraging active involvement by NGOs. Mongolia was the first 
formerly communist country in Asia to embrace democracy, 
holding elections in 1990. Senator Robb and former Secretary of 
State James Baker joined American election monitors sponsored 
by the Asia Foundation to witness the 1996 parliamentary 
elections. No other monitors or officials came from any other 
country, thus making our presence all the more important as a 
concrete symbol of international support for Mongolia's bold 
but arduous continuing democratic experiment. Like Cambodia's 
return from Khmer Rouge terror, Mongolia's seven year democracy 
building experience and experiment with a free market economy 
is truly an Asian success story.

                               conclusion

    The breadth of our interests in the Asia-Pacific region, 
our partnerships and alliances, and the challenges we face 
there will increase in importance as we enter the next century. 
Through careful diplomacy, the nurturing of relationships with 
other Pacific countries and the dynamism of our private sector 
throughout the region, the United States remains a principal 
actor and force for stability. Our future lies, in great part, 
in the Pacific. The Administration, in consultation with 
Congress, has been rigorous in promoting U.S. interests 
throughout the region. The successes I have reviewed with you 
today vastly outnumber the problems--some admittedly serious--
which remain. We will only surmount those challenges, however, 
through the kind of proactive diplomacy which has characterized 
this Administration. With the cooperation of Congress, we plan 
to continue the active pursuit of peace and stability, 
prosperity, and individual rights and liberties throughout Asia 
and the Pacific.
    Thank you.

                                 burma

    Senator McConnell. Let me start out with Burma, and then I 
will turn to Senator Bennett.
    On several occasions over the past few years, the U.N. 
Special Rapporteur on Burma has reported on SLORC's widespread 
abuses, including the use of slave labor and carrying out 
forced relocations of ethnic groups, particularly in areas ripe 
for economic development.
    I would like for you to comment on SLORC's record in these 
two areas, forced labor and forced relocation.
    Mr. Kartman. Mr. Chairman, may I ask my colleague, Jeffrey 
Bader, to reply?
    Senator McConnell. OK.
    Mr. Bader. Mr. Chairman, we have seen the reports on use of 
forced labor, particularly in minority areas. We have condemned 
them. International organizations including the ILO have been 
looking into them.
    We regard these as unacceptable practices. We have 
highlighted them in our public commentary and on human rights 
reports.
    Senator McConnell. Am I to assume that you are going to be 
answering all of the Burma questions?
    Mr. Bader. Yes.
    Senator McConnell. All right. The State Department Human 
Rights Report indicates several hundred members of Aung San Suu 
Kyi's National League for Democracy have been arrested for 
political reasons. Amnesty International reported over 2,000 
citizens were arrested last year for political reasons.
    Do you see this as an improving or deteriorating political 
situation?
    Mr. Bader. The numbers you cited are the same numbers that 
we have seen. We would certainly not characterize this as an 
improving situation. The term we have used is that there seems 
to be a pattern of rolling repression on the part of the SLORC.
    We do not see any signs of imminent improvement or 
liberalization. These steps, I think, continue a pattern on the 
part of the SLORC that is very disturbing.
    Senator McConnell. You would agree, though, that many 
observers feel that things have actually deteriorated.
    Mr. Bader. Yes; I would agree with that.
    Senator McConnell. That may not be your view, but many, 
many feel that.
    Mr. Bader. Yes.
    Senator McConnell. Has Aung San Suu Kyi been able to travel 
freely beyond her compound since last October?
    Mr. Bader. She has been able to travel beyond her compound, 
but not consistently freely. For awhile after October, she was 
restricted to her compound. Then toward the end of the year, 
the beginning of this year, she was allowed out of her compound 
for some meetings if she gave notification to the SLORC's 
security. She has had a number of meetings outside of the 
compound.
    She still is under considerable restraint in her movements.
    Senator McConnell. On how many occasions has she left the 
compound for political meetings?
    Mr. Bader. I will have to get back to you with an exact 
answer. I am aware of three meetings. There may be more, but I 
am aware of three.
    [The information follows:]

                Political Meetings Outside the Compound

    Since the beginning of the year, Aung San Suu Kyi has met 
both inside and outside her compound with a large but 
uncountable number of Burmese and foreign visitors. Most if not 
all of these activities could be characterized as 
``political.'' Many of these meetings are held at U Kyi Maung's 
house, a few blocks from her own. She has attended luncheons 
and teas at various ambassadors' residences in Rangoon on an 
average of two or three times a week until recently, when she 
decided as a general rule to have diplomats call on her at her 
compound.
    The U.S. Charge meets her on average once every 2 weeks or 
so, sometimes more often, both at her compound and at his 
residence. She has also held four large public political 
rallies or other events at her compound since the beginning of 
the year: Independence Day, Unity Day, Resistance Day, and 
Burmese New Year. She reports to our Embassy that she is in the 
midst of intensive daily political activities inside the 
compound focused on training NLD members and strengthening her 
party organization.

                                 slorc

    Senator McConnell. She recently said that SLORC was 
escalating attacks against her supporters and noted the 
kidnaping of 12 NLD members, 1 of whom was left dead beside a 
road.
    Do you agree with her characterization that pressure is 
escalating?
    Mr. Bader. I would agree with that characterization.
    Senator McConnell. Secretary Gelbard recently told this 
subcommittee that SLORC refused to extradite Khun Sa with whom 
we are all familiar, a notorious narcowarlord. In fact, he 
lives a protected, lavish life in Rangoon.
    Gelbard testified that there had been no improvement in 
counternarcotics efforts by SLORC.
    I am wondering if you can point to any initiative or effort 
they have made to address this, the growing opium production 
problem.
    Mr. Bader. Burma remains the source of approximately 60 
percent of the heroin that flows into the United States. We 
have decertified them as a cooperating country in narcotics 
cooperation with the United States.
    So, obviously, we do not consider their cooperation close 
to adequate. The only item I could cite of recent interest is 
that we did recently conduct an opium crop survey in opium-
growing areas in Burma. The SLORC did cooperate in allowing us 
to perform that survey.
    Senator McConnell. Given the fact that the one thing they 
are pretty good at is maintaining an army, have they not been 
using their army against narcotics traffickers?
    Mr. Bader. The assessment of most observers, including our 
own, is what they have been doing with the army is dealing with 
insurgencies or former insurgencies among minority peoples 
along the border.
    Those areas are traditionally the opium-growing areas of 
Burma. And the highest priority of the army has been to achieve 
cease-fires in order to improve stability in Burma.
    They have not taken on, in anything like the way we would 
like to see, counternarcotics activities.
    Senator McConnell. Well, in fact, you use the word 
``stability.'' That is really a euphemism for ``suppression,'' 
is it not, or ``repression''?
    Mr. Bader. Well, they have achieved cease-fires with some 
of these groups.
    Senator McConnell. The Karen part of the National Coalition 
of Burma, the Coalition of Ethnic Groups, which has called for 
the restoration of Suu Kyi and the NLD to office, do you 
consider this group part of the democratic opposition?
    Mr. Bader. The Karen National Union has not reached 
agreement with the SLORC, it has not reached a cease-fire. They 
are the one ethnic group that has not.
    There are certainly elements of the Karen Group that we 
would consider to be elements of the democratic opposition 
allied with Suu Kyi. On the other hand, the KNU is also armed.
    It is a difficult question in looking at the KNU as a 
whole, as to whether the KNU, since they are armed, constitutes 
a democratic group or not.
    But we certainly would say that there are democratic 
elements among the Karen and that they have every right to be 
considered as such when we are looking at the SLORC's treatment 
of democratic opposition in Burma.
    Senator McConnell. According to reliable refugee groups, 
SLORC's recent attack on Karen camps is one of the most brutal 
to date. Are these military attacks, in your view, an effort to 
eliminate any opposition to SLORC?
    Mr. Bader. They are an effort to eliminate Karen opposition 
to the SLORC. The figures we have seen indicate that about 
18,000 Karen were forced over the border into Thailand.
    We were disturbed some weeks ago when some of these Karen 
were forced back into Burma by elements of the Thai Army. In 
the last 5 or 6 weeks, behavior in that regard seems to have 
altered, and they have been receiving protection in Thailand.
    Senator McConnell. Is it still the U.S. position that the 
1990 elections were free and fair and that the NLD and Aung San 
Suu Kyi were legitimately elected to office?
    Mr. Bader. That is our position.
    Senator McConnell. As a result of the Foreign Operations 
appropriations bill last year, current law states:

    Sanctions must be imposed if any action is taken to harm, 
rearrest for political reasons, or exile Suu Kyi or if SLORC 
engages in a wide-scale repression against the democratic 
opposition.

    You have just testified on the restrictions on her 
movements, the escalation in attacks on the NLD and other 
members of the democratic opposition.
    If these actions do not meet the threshold, I would like 
for you to tell me exactly what you are looking for in terms of 
outrageous conduct by SLORC to meet the test under current law.
    Is it the administration's view that anything short of the 
assassination of Suu Kyi is not enough to meet the criteria of 
the existing law?
    Mr. Bader. No; that would not be our view, Mr. Chairman.
    Mr. Chairman, I heard your opening statement, and you 
referred to 655 days of review. All I can say is that this 
matter remains under review, and it is getting high level, 
intensive attention in the U.S. Government at this time.
    A determination has not yet been made. We take the Cohen-
Feinstein law very seriously. There are a number of elements in 
it that we have acted upon already, for example, the visa ban 
on high level SLORC officials and their families traveling to 
the United States, as well as organizing an international 
campaign to try to apply multilateral pressure against the 
SLORC.
    With our European Union and ASEAN colleagues, we have taken 
a number of steps in that regard and have achieved some 
results.
    The thrust of your question, I am sure, is directed at the 
new investment ban. Secretary Albright, in a speech at the 
United States Naval Academy on Tuesday, made it clear that the 
SLORC is on notice that unless the clouds of repression over 
Burma are lifted, then it could look forward to an investment 
ban being imposed.
    Senator McConnell. Well, that would be certainly a step in 
the right direction. It seems to me that it is perfectly clear 
that the administration has been--either because it was a low 
priority or because of fear of offending our Asian trading 
partners--has had little or no interest in this issue to this 
point, and even gone to great lengths to avoid complying, in my 
view, with even existing law.
    It makes me wonder whether anything short of a 
congressional mandate--congressionally mandated implementation 
of sanctions is going to get your attention. I certainly hope 
that this extended review may come to an end sometime soon.
    Mr. Bader. I certainly note what you said, Mr. Chairman. I 
will convey that to the appropriate executive offices when I go 
back from this hearing. I understand the passion and the 
intensity of your view.
    If I could just make one other point on this: Our policy 
with Burma has not been one of tolerance. Aside from this one 
question of the investment ban, we have taken, as you know, a 
large number of measures designed to show our abhorrence for 
the behavior of the SLORC.
    As you know, we have no Ambassador there or charge 
d'affaires. We have withdrawn GSP benefits from Burma. We have 
blocked international financial institution support to Burma. 
We have decertified it as a narcotics cooperating country.
    It receives no assistance. We have imposed an arms embargo. 
And as I say, we have worked closely with our allies to achieve 
some degree of coordination on this. But I certainly understand 
the point you are making, and I will carry that back with me 
today.
    Senator McConnell. It seems to me nothing short of 
sanctions plus U.S. leadership to try to encourage others to do 
the same thing--and I think unilateral sanctions, candidly, 
probably are not going to have a huge impact.
    But if America coupled that with the kind of leadership 
that it showed in the South African situation, I think there is 
every reason to believe that if we were willing to use up some 
chits on this issue, that we could get some results.
    I would like now to turn to Senator Bennett.

                  remarks of senator robert f. bennett

    Senator Bennett. Thank you, Mr. Chairman.
    I will just comment: The reference to this being in the 
focus of very high officials should be underscored. It is very 
much in the focus of very high officials here, starting with 
the chairman, but not stopping with the chairman.
    There are a number of us who share his view on this, and 
this is not something that the committee as a whole is going to 
let go by.
    That being said, Mr. Kartman, I would like to turn to you 
for a moment. We have before us, first, a picture of a Navy 
escort vessel, U.S.S. Stark, after it was hit by an Exocet 
missile in 1987, 10 years ago.
    Next to that is the Chinese version of the Exocet 10 years 
later, the C-802, which the Chinese claim to be new and 
improved; indeed much improved.
    In this brochure seeking to sell that missile, the Chinese 
describe the C-802 as a missile with mighty attack capability 
and great firepower.
    Would you agree with that characterization of the missile?
    Mr. Kartman. Senator Bennett and Mr. Chairman, when I 
introduced Jeffrey Bader, Deputy Assistant Secretary, to have 
him answer questions on Burma, it appeared that he was our 
resident Burma expert.
    But  in  fact,  he  is  probably  the  premier  China  
expert  in  the United States Government. So I am going to ask 
him to answer this question also.
    Senator Bennett. Mr. Bader, would you agree with the 
characterization in the brochure about the missile being one of 
mighty attack capability and great firepower?
    Mr. Bader. I would agree that we are disturbed by the 
reports of intentions to provide this missile to Iran, and that 
it does constitute a threat to the United States Navy in the 
region. I would certainly agree with that.
    It is, as you have said, an Exocet-like missile with 
capabilities that are very disturbing to us.
    Senator Bennett. You have run ahead of me, and that is 
fine. [Laughter.]
    It is being marketed to Iran, and it is being marketed 
again, in the words of the brochure, the sales brochure, for 
attacking escort vessels. And the Stark, of course, is a U.S. 
Navy escort vessel of exactly the kind that this is being 
marketed as a target to.
    Now, on the right, there is a picture of five Chinese 
missile boats on their way to Iran with C-802's aboard. You see 
the C-802 missiles on the back deck of those five Chinese 
missile boats.
    Recently, Deputy Assistant Secretary of State Einhorn 
stated, ``These cruise missiles pose new and direct threats to 
deployed U.S. forces.''
    Do I assume from your comment that you agree with that?
    Mr. Bader. Yes; I do.
    Senator Bennett. Now, the other picture is of a land-based 
version of this C-802. And Mr. Einhorn recently suggested that 
the land-based version is on its way to Iran.
    Do you agree that that is the case?
    Mr. Bader. If Mr. Einhorn said it, I have no reason to 
doubt it.
    Senator Bennett. Well, the problem with all of this was a 
statement, in response to a question that I raised, by 
Secretary Albright that these missiles are not destabilizing 
under the definitions in the Gore-McCain Act.
    Now, has the State Department asked the U.S. Navy for its 
evaluation of this threat?
    If we could put up the map, that helps us understand why 
the Navy might be a little bit--of a little bit different 
attitude as to what is not destabilizing in the area.
    This is the Persian Gulf. You see it comes down. Iran is 
the country to the north of the gulf. The entire coastline of 
the gulf is Iranian. There are 500 miles of coastline. And in 
that 500-mile area, the land-based missile could be hidden in 
caves or deployed from the back of trucks.
    And when you come around the Gulf of Hormuz, it is 
impossible for an escort vessel not to be within range of one 
of these missiles.
    So my question is: Has the State Department asked the U.S. 
Navy for its evaluation of the threat these missiles might pose 
to U.S. forces in the gulf?
    Mr. Bader. There is, as you know, legislation on the books 
the Iran-Iraq Nonproliferation Act, which does set up the 
criteria of whether or not something constitutes a threat to 
the stability of the region as a basis for determination for 
whether sanctions will be imposed.
    We do have an interagency process for evaluating questions 
like this. The Defense Department, the Navy and JCS would be 
active players in that process.
    The determination of whether or not a particular system 
reaches the threshold of satisfying the requirements of that 
act or is in itself destabilizing is a complex process.
    I do not sit on that committee. I would not want to 
prejudge the factors that they weigh in determining what is 
destabilizing.
    There are all manner of weapons that are being provided to 
the region by all manner of players.
    My understanding is that the administration has not yet 
made a decision that what we have seen to date is 
destabilizing. It is disturbing, absolutely. And I share the 
points that you have made.
    And the Navy has been a player in this process.
    Senator Bennett. Well----
    Mr. Bader. If I could just add one more point----
    Senator Bennett. Yes.
    Mr. Bader. Senator, we have made it very clear to the 
Chinese how we feel about this, during the visits of Vice 
President Gore and Secretary Albright to Beijing.
    We have also highlighted our concerns over these weapon 
systems to the Chinese in nonproliferation talks, so they can 
have no illusions about the strength of our feeling on this 
subject.
    Senator Bennett. I listened carefully, but I did not quite 
hear an answer to my question, which is: Has the State 
Department asked the Navy for its evaluation of the threat?
    I heard that there are consultations going on, and that 
there is a group that is worrying about this, and that it is 
highly complex.
    But I did not hear, ``Yes, we have asked the Navy,'' 
because my next question is: If we asked the Navy, what did the 
Navy tell you?
    Is there any way you can provide that for the record?
    Mr. Bader. Can I get back to you for the record on that? I 
was trying to give you a sense of the interagency process, but 
I do not know the specific answer----
    Senator Bennett. OK.
    Mr. Bader [continuing]. As to whether there has been a 
formal request and a formal answer.
    Senator Bennett. I have a sense that the Navy may be a 
little more worried than the State Department.
    Mr. Bader. We are very worried about it, as well, I assure 
you.
    Senator Bennett. Well, I am glad to know that you are 
worried about it.
    I have a letter to Secretary Albright which I would ask 
you, Secretary Kartman, to deliver to the Secretary, asking 
that the administration either enforce the Gore-McCain Act in 
this circumstance or come up with some kind of alternative plan 
of equal strength.
    We have in excess of 15,000 United States service personnel 
in this area, who are in direct harm's way as a result of these 
missiles going to Iran. And I think for those 15,000 people and 
their families--let alone, of course, American interests in the 
area with respect to the free-flow of oil through the Strait of 
Hormuz--that this one ought to move up the scale pretty 
quickly.
    And that is why I have engaged in these questions to 
Secretary Albright and have this letter for the Secretary, 
which I would ask you to deliver to her.
    And I would ask, Mr. Chairman, that the letter be included 
now at the conclusion of my questions.
    Senator McConnell. It will be made a part of the record.
    Senator Bennett. Thank you, Mr. Chairman.
    Senator McConnell. Thank you, Senator Bennett. That was 
very interesting.
    [The letter follows:]
                 Letter From Senator Robert F. Bennett
                                               U.S. Senate,
                                    Washington, DC, April 17, 1997.
Hon. Madeleine K. Albright,
Secretary of State,
Washington, DC.
    Dear Secretary Albright: During 1996 Chinese defense companies 
delivered a number of missile boats to the Iranian Revolutionary Guard 
Navy. Each missile boat was armed with four C-802 cruise missiles. 
Recently, Deputy Assistant Secretary of State Robert Einhorn told the 
Senate, ``These cruise missiles pose new, direct threats to deployed 
U.S. forces.''
    It is now my understanding that China is about to deliver the land 
variant of the C-802 to Iran. When the Iranian Revolutionary Guard 
acquires C-802's in quantity, it will have a weapon with greater range, 
reliability, accuracy, and mobility than anything currently in its 
inventory.
    The delivery of advanced cruise missiles to Iran is a violation of 
the Gore-McCain Act. However, in answer to my query on this issue in 
January, you answered, ``The Administration has concluded at present 
that the known transfers (of C-802's) are not of a destabilizing number 
and type.''
    However, I believe that the arrival of additional C-802's in Iran 
is a matter of grave concern to the United States, and the 
Administration has an obligation either to sanction the perpetrators or 
put in motion an alternative policy of equivalent strength.
            Sincerely,
                                         Robert F. Bennett,
                                                      U.S. Senator.

                        fuel oil for north korea

    Senator McConnell. Mr. Kartman, over the past year, the 
United States has led a very aggressive effort to raise funds, 
as you discussed in your testimony, to support fuel oil for 
North Korea.
    It was especially significant that the European Union 
looked beyond its immediate regional requirements in the 
Balkans and pledged $20 million annually for the next several 
years.
    What I thought was rather shocking was the anemic and 
declining contribution offered by Singapore. They dropped from 
a $300,000 pledge to $200,000.
    Adding to this problem are recent reports that Singapore, a 
government with severe penalties for drug use and trafficking, 
has actually become the banking facility of choice for Burma's 
drug thugs.
    Singapore considers itself a major player in Asia politics, 
and certainly has economic interests, as we all know, in 
securing regional stability.
    Could you give me some explanation?
    Mr. Kartman. May I first address KEDO fund raising?
    Senator McConnell. Yes.
    Mr. Kartman. And then I would like to turn to Ambassador 
Brazeal with your permission to respond on your other questions 
regarding Singapore.
    I was recently in Singapore, and went over our KEDO efforts 
with senior officials of the Foreign Ministry there. I found 
that they are in broad and fundamental agreement with what we 
are trying to achieve.
    I underscored for them that it seemed that European efforts 
were more substantial than those closer to home within the 
region. And they took that aboard. They expressed some 
understanding of the view I was expressing.
    But they demurred that they were not a very wealthy 
country, and they noted that at least they had made a 
commitment for a multiyear contribution which is, after all, of 
some significance to us. We would like to see more of that from 
others.
    This is one that we are going to come back to. So I think, 
basically, I agree with your characterization. Maybe I would 
not use the word ``anemic,'' but something less than they are 
capable of doing or than what I think they ought to be doing.
    With respect to the other issue you raised, banking, may I 
turn to Aurelia Brazeal, please?
    Ms. Brazeal. Thank you.
    I would just add regarding KEDO that we hope Singapore, 
also being a leader, will consider the levels because that 
encourages other countries also to consider higher levels. We 
have raised that point with them, and we will continue to do 
so, as well as joining KEDO.
    On money laundering, we have worked with the law 
enforcement authorities in Singapore on that question. And in 
1996, they seized $20 million of laundered drug money in a DEA-
assisted investigation.
    So we are engaged in the issue of money laundering and drug 
trafficking.
    I note that Singapore is also a member of the financial 
action task force that looks into these questions, narcotics-
associated money.
    Money laundering is a criminal offense in Singapore. 
Bankers can be held personally liable in such cases.
    But the most recent efforts we have underway are to work 
with the Government of Singapore to begin negotiations for a 
designation agreement that would permit our two countries to 
better pool our resources to combat more effectively drug 
trafficking and money laundering.
    We had our last meeting the end of March. We would hope to 
begin negotiations fairly soon on that.
    Senator McConnell. Mr. Kartman, is there anything you can 
add beyond your testimony about your discussions in New York?
    Mr. Kartman. Mr. Chairman, I would like to be able to give 
you a very complete description of where things are in a more 
private setting, if that would be convenient for you.
    But for the record, these talks are underway. The North 
Koreans have raised over and over again their highest priority, 
which is food. And we have raised over and over again our 
desire to see them enter these peace talks.
    Both sides have agreed that the two things are not linked. 
But there we are.
    Senator McConnell. Do you agree with General 
Shalikashvili's statements that the North continues to pose a 
significant military threat to the South?
    Mr. Kartman. Absolutely, I do agree. One of the principal 
problems for South Korea and American forces for many years has 
been a heavy emphasis on North Korean artillery that is forward 
deployed.
    And we suspect there is a possible plan to use weapons of 
mass destruction, perhaps chemical, biological weapons. We also 
have watched with some concern the growth of their special 
operations forces, which are designed to be inserted behind the 
lines to disrupt communications and the forward flow of forces 
to the front lines.
    Senator McConnell. And all of these people are pretty well 
fed and ready to go, right?
    Mr. Kartman. Actually, we do not know that, Mr. Chairman.
    Senator McConnell. Is there any division in North Korea to 
speak of between the military and the civilian leadership?
    Mr. Kartman. We are hearing that more and more. Sometimes 
we hear that from North Koreans themselves. For instance, the 
recent high-level defector, Hwang Jang Yop who is still in the 
Philippines, has noted that he has some concern about the 
growing influence of the military in North Korea.
    It is not clear to us what precisely that means in terms of 
their future policies or intentions. But we have always felt 
that one of the fundamental structural flaws of the North 
Korean regime is the over-reliance on the military as an 
instrument for all things and the fact that it is getting about 
25 percent of their gross domestic product.
    If they would change that, we think that would solve a lot 
of their internal problems.
    Senator McConnell. They could not change that overnight, 
though. I gather from reading the paper that we are looking--
and you may have alluded to this in your statement; I cannot 
remember--that we are looking at a huge crisis by midsummer.
    And I assume the Chinese, the Japanese, and the South 
Koreans are not at all interested in having a massive wave of 
starving refugees.
    Is there a plan being developed to provide food aid on a 
much more massive scale than is currently being conducted 
should that come to pass this summer?
    Mr. Kartman. Well, Mr. Chairman, there are two things I 
would like to mention in that regard.
    First, we feel that North Korea must make some important 
changes in their system. You have noted that there may not be 
much time before the present situation reaches crisis 
proportions. The delay in North Korea making those changes is 
hard to explain, and it seems to be completely internal to 
their own system, the death of Kim Il Sung and the 3-year 
period of mourning, among other factors.
    There is an international----
    Senator McConnell. But my question is----
    Mr. Kartman. Yes.
    Senator McConnell. They are not going to become a thriving 
capitalist country by July or able to feed themselves. My 
question is this: Are there plans underway should this food 
crisis hit the level it could in July to feed these people, to 
avoid the kind of out-migration that would probably follow 
that?
    Mr. Kartman. Well, if I may, we are in a very intense round 
of discussions with all of the countries in the region who are 
the principal food providers for North Korea. And those would 
be China, South Korea, and Japan.
    The Chinese recently announced a 70,000-ton food aid 
donation to go along with the donations that had been 
previously announced by the United States and the ROK. We are 
still in discussion with the Japanese.
    Those amounts, as you noted, may not be sufficient to feed 
the North Koreans through what may become a crisis. However, we 
do to some extent rely on the judgments of those countries that 
are closest to North Korea.
    If there is a serious problem, I imagine that the world 
community is going to have to step in and help the North Korean 
people be fed.
    Is there a plan for it? No; there is not a plan. The 
present state of affairs is that we are responding to 
international appeals as they are issued by the relevant 
international organizations.
    Senator McConnell. Finally, let me shift to Hong Kong. Like 
the Secretary of State, I am planning on being there on July 1.
    I have taken an interest in Hong Kong for some time--I do 
not know whether you are familiar with the United States-Hong 
Kong Policy Act which President Bush signed in 1992. The act 
basically wrote into United States law, language consistent 
with the joint declaration so that United States and Hong 
Kong's bilateral relationship would be sustained intact after 
July 1, 1997. We are all watching with great interest, as I am 
sure you are, the various steps that are being taken leading up 
to July 1.
    You probably noticed in today's Washington Post the George 
Will column referring to a new book by Bernstein and Monroe 
called ``The Coming Conflict With China.''
    They argue that China's political evolution may not be 
toward pluralism at all, but down toward something like early 
20th century fascism.
    Will adds to the argument that attributes of concern also 
include a cult of the party state, a state dominated by the 
army and allied with financial interests, coupled with a 
powerful sense of nationalism.
    I am wondering if you could comment on that thesis that our 
engagement policy is, as George Will put it, ``a pedestal 
without a statue.''
    Mr. Kartman. May I----
    Senator McConnell. It is a good thing you were here, Mr. 
Bader.
    Mr. Bader. Mr. Chairman, I did see the George Will piece. 
First of all, I would not agree with the general direction that 
he foresees as most likely. That does not mean that I discount 
it.
    We are talking about unknowns here. Predictions here are 
extremely dangerous. I think what we can predict with some 
certainty is that we are looking at a country that has been 
growing about 10 percent a year for the last 20 years. That is, 
you know, among the most explosive economic growth in human 
history.
    This is a country that sees itself as a major regional 
power, certainly. Its top priority is economic modernization. 
It has been undertaking a more modest program of military 
modernization.
    What will China look like 20 years from now? Well, if you 
look at what China looked like 20 years ago, despite the 
considerable human rights abuses, and the failure of the system 
to evolve politically, I think we have to say that the China we 
are looking at now is a more open and liberal China than what 
we saw 20 years ago.
    The trend since Deng Xiaoping opened up China to the West 
and toward greater options for the Chinese people has been for 
greater integration of China in the world community.
    China has joined the major international organizations and 
has become accepting of the disciplines of those organizations.
    There is a long way to go. Their behavior is not 
satisfactory in the area of weapons of mass destruction. They 
have not come close to meeting WTO standards yet. There is 
still considerable concern in the region about China's 
behavior.
    And the program of political reform which was in its 
rudimentary stages before 1989 has essentially been halted 
since 1989 except for some changes in statutes in the last 
couple of years which provide the beginning, rudimentary steps 
toward the rule of law.
    The jury is out. I would not discount the Will thesis as a 
possible outcome. I think that by a policy of engagement with 
China--and that does not simply mean engagement with China's 
leadership--but engagement at all levels of Chinese society, we 
maximize the chances for having a liberalizing and a softening 
effect upon the direction that China will be going in the next 
20 years. That, I think, is the impact that we have had in the 
last 20 years.
    But one cannot say with confidence, since our ability to 
affect the situation is only marginal, what the outcome will 
be.
    Senator McConnell. Almost as interesting as watching the 
evolution in China is watching the evolution of policy in the 
administration. The President in 1992 campaigned for the 
termination of MFN has done a 180-degree turn and supports 
extension of MFN. The Vice President, a couple of weeks ago 
went to China but did not go to Hong Kong, yet we know the 
President is going to meet with Martin Lee tomorrow.
    Do we--are we witnessing here an evolution of policy in the 
administration with regard to how to handle China?
    Mr. Bader. The administration has set clear lines for its 
China policy for the next several years. I mean, I----
    Senator McConnell. Clear?
    Mr. Bader. Certainly, a policy was pursued in 1993 with 
regard to MFN that is no longer the policy of the 
administration. But the basic outlines of the policy of where 
we are going for the next few years have been laid down.
    We are planning state visits by President Jiang Zemin and 
President Clinton over the next 2 years. In the lead-up to 
those visits, and during those visits, we hope to build a 
stronger basis for the relationship and to make progress on the 
outstanding bilateral issues which are numerous, where we have 
problems.
    We do not believe that an approach of making China a pariah 
or----
    Senator McConnell. Well, why did Gore not go to Hong Kong?
    Mr. Bader. I would have to leave that to Vice President 
Gore to explain which stops he chose. I know he did raise Hong 
Kong in virtually all of his meetings in Beijing.
    He raised our concerns in three or four of the meetings I 
saw in considerable detail, but cannot go to every place on 
every trip. He went to China, Japan, and Korea. I cannot give 
you more of an answer than that.
    But Secretary Albright did announce that she would be going 
for the reversion.
    Vice President Gore's not going to Hong Kong was not meant 
in any way to suggest indifference to Hong Kong. As I said, he 
raised it forcefully with the Chinese leaders.
    Senator McConnell. The Hong Kong and Shanghai Banking 
Corporation said back in 1990 that it had detected a 
significant increase in capital flight, about $2.8 billion in 
private, nontrade capital in 1989.
    Do you have any current figures to reflect the capital 
flight situation in Hong Kong.
    Mr. Bader. We can give you figures on that, Mr. Chairman. I 
know we do have figures.
    My impression is that was a temporary phenomenon in the 
wake of a severe loss of confidence in 1989. My understanding 
is that the Hong Kong dollar is trading at the upper end of the 
peg to the United States dollar at the moment, and that United 
States dollar reserves in Hong Kong are upward of $60 billion. 
Hong Kong has, I think, about the third largest reserve funds 
in the world, of any currency.
    There are no controls on capital in and out of Hong Kong. 
There are flows all of the time outward and inward, depending 
upon levels of confidence.
    I think the economic indicators over the past year in Hong 
Kong have been, for the most part, positive. I do not think we 
have seen any indication of capital flight.
    Senator McConnell. My recollection was--and I could not--
this may no longer be accurate. My recollection from a couple 
of years ago is that there were 22,000 Americans living in Hong 
Kong, many of them working for American businesses.
    Are you pretty comfortable that these American businesses 
are going to still be able to operate and thrive?
    Mr. Bader. The American businesses are pretty comfortable. 
I mean, if you looked at the surveys of the American Chamber of 
Commerce, which was done confidentially, they generally show 
that about 95 percent of the companies have confidence in the 
future of Hong Kong.
    They have a number of concerns which mostly involve issues 
of danger of corruption coming from the North and the future of 
the rule of law in Hong Kong. They are not without worries.
    And a number of companies have set up corporate 
headquarters outside of Hong Kong in order to assure protection 
of their assets. But----
    Senator McConnell. Would you describe the mood in Hong Kong 
these days as less apprehensive than it was in 1989 after 
Tiananmen, or more?
    Mr. Bader. I would describe it as less apprehensive than in 
1989. But of course, that was a low point. You had a million 
people in the streets demonstrating in sympathy for the 
students up in Beijing.
    There was an outflow of people from Hong Kong in 1989-91, 
in the wake of that. But since then, the immigration flows have 
decreased, and population has stabilized.
    There is no question that there are concerns though, Mr. 
Chairman. And I think that your statements, as I recall, 
alluded----
    Senator McConnell. Do you think the abolishing of LEGCO is 
consistent with the joint declaration?
    Mr. Bader. Mr. Chairman, we have strongly criticized the 
abolition of LEGCO. We have strongly criticized the creation of 
the provisional LEGCO. We have not taken a position----
    Senator McConnell. In fact, the joint declaration, did it 
not, described the makeup of LEGCO post July 1, 1997? Did it 
not?
    Mr. Bader. The joint declaration said that there shall be 
an elected LEGCO----
    Senator McConnell. Yes.
    Mr. Bader [continuing]. I believe was the language. So what 
we have said is it should not have been abolished; the 
provisional LEGCO should not have been created; and we expect 
to see an elected LEGCO created as soon as possible in order to 
assure that there is conformity with the requirements of the 
joint declaration. But we have not taken an----
    Senator McConnell. Do you think the Chinese basically just 
do not view the joint declaration as binding on them in any 
way?
    Mr. Bader. No; I think that the Chinese do see the joint 
declaration as binding. They have a different view of the joint 
declaration, of course, that we do not share in many respects.
    But, you know, the way they approach the joint 
declaration--I do not like to come up here speaking for China. 
But since you asked the question about the Chinese perception, 
let me try it for a minute.
    The Chinese view the joint declaration as essentially 
freezing the situation in 1984. They felt that whatever system 
was in place in 1984, that that was what was being bequeathed 
to them in 1997.
    So they have seen changes since then as contrary to the 
joint declaration. That is not a view we share. But that is why 
they have attacked certain changes in statutes since 1984.
    Senator McConnell. Well, thank you very much. We appreciate 
all three of you being here today.
    Good luck in New York, Mr. Kartman.
    Mr. Kartman. Thank you, Mr. Chairman.

                     Additional committee questions

    Senator McConnell. There will be some additional questions 
which will be submitted for your response in the record.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing.]
                     Additional Committee Questions
    Question. Which Asian countries have ratified the CWC so far?
    Answer. The following countries have ratified the Chemical Weapons 
Convention as of September 15:

                             COUNTRIES THAT RATIFIED THE CHEMICAL WEAPONS CONVENTION                            
Australia............................  May 6, 1994             Maldives................  May 31, 1994.          
Bangladesh...........................  Apr 25, 1997            Mongolia................  Jan. 17, 1995.         
Brunei Darussalam....................  July 28, 1997           Papua New Guinea........  Apr. 17, 1996.         
China................................  Apr. 25, 1997           Philippines.............  Dec. 11, 1996.         
Cook Islands.........................  July 15, 1994           Singapore...............  May 21, 1997.          
Fiji.................................  Jan. 20, 1993           Sri Lanka...............  Aug. 19, 1994.         
India................................  Sept. 3, 1996           Tajikistan..............  Jan. 11, 1995.         
Japan................................  Sept. 15, 1995          Turkmenistan............  Sept. 29, 1994.        
Korea (Republic of)..................  Apr. 28, 1997           Uzbekistan..............  July 23, 1996.         
Laos (P.D.R.)........................  Feb. 25, 1997                                                            
                                                                                                                

    Question. Of those who haven't, what is your assessment of their 
reluctance?
    Answer. There are several factors contributing to the reluctance of 
some states to ratify the Convention, including:
  --difficulties in the legislative process;
  --concerns regarding the costs and complexities associated with 
        implementation;
  --reluctance to submit facilities to intrusive inspections; and
  --in the case of North Korea, aversion to destroying CW stockpiles.
    Question. What about biological weapons? Is there the same 
reluctance to sign off on eliminating these weapons as well?
    Answer. No, we do not see a similar reluctance to ratify the BWC, 
which has 140 States Parties (including North Korea) compared to the 
CWC's 99.
    Question. Can you offer some impressions on Asian perspectives on 
regional security pressure points?
    For instance, how do the Southeast Asian nations, such as Indonesia 
or Singapore, perceive the nuclear and conventional capabilities of 
India?
    What would factor into a Japanese decision to expand their 
capabilities to project conventional force or acquire a nuclear 
capability?
                                 india
    Answer. The Southeast Asian nations do not perceive India as a 
threat. They do however, encourage India to take a responsible position 
on nuclear and security issues. For example, on the Comprehensive Test 
Ban Treaty which is supported by all ASEAN nations, India has been 
urged by ASEAN to change its stance and sign the ban. India was made a 
member of the ASEAN Regional Forum in 1996 in order to encourage 
constructive Indian participation in regional security efforts.
                                 japan
    We do not expect that Japan will either expand its capabilities to 
project conventional force or acquire an indigenous nuclear capability.
    Under Article 9 of the Japanese Constitution, the Japanese people 
``forever renounce'' the ``threat or use of force as a means of 
settling international disputes.'' Under its interpretation of the 
constitution, the Government of Japan limits the use of military force 
to the defense of national territory in the event of an attack.
    Barring dramatic changes in the regional strategic landscape, we 
think that these issues are strictly hypothetical and are extremely 
unlikely developments in the foreseeable future.
                                 ______
                                 
       Questions Submitted by Senator McConnell and Senator Leahy
                                cambodia
    Question. Last Easter Sunday, a grenade attack on an opposition 
rally outside the National Assembly in Cambodia killed 16 people and 
wounded more than a 100, including an American citizen. The 
demonstration's leader, Sam Rainsy, who himself barely avoided the 
deadly blast, was in Washington last week appealing to the United 
States to take concrete steps to support the democratic process in 
Cambodia. There is a growing fear among international observers in the 
country that this attack will not only subdue political expression in 
the future, but may delay indefinitely national elections in Cambodia, 
scheduled for late 1998.
    It seems clear that unless steps are taken immediately, the 
democratic progress Cambodia has made thus far will be supplanted by 
more intimidation, terror and political killings.
    What specifically is the United States Government doing to bolster 
the democratic movement in Cambodia?
    There have been accusations made that Prime Minister Hun Sen, and 
his Cambodian People's Party were responsible for the terrorist attack.
    Do we have any concrete evidence to back the assertions that Hun 
Sen, or any other political group, was directly responsible for this 
attack?
    Have the Cambodian authorities committed to a thorough and 
comprehensive investigation into this attack?
    Mr. Secretary, do you believe the United States should condition 
any future economic assistance to Cambodia on the progress in this 
investigation?
    Answer. We share your concern that acts of political violence such 
as this could put at risk the significant progress toward democracy 
Cambodia has made since the U.N.-sponsored elections in 1993, and 
possibly disrupt the elections scheduled for 1998.
    We issued a press statement on March 30 condemning the grenade 
attack and calling upon the Cambodian government to take all possible 
steps to identify and punish the perpetrators.
    The State Department called in the Cambodian ambassador on March 
31. We condemned the attack and urged the Cambodian government to take 
steps now to prevent further political violence and bring to justice 
those responsible. Similar demarches were delivered in Phnom Penh to 
Foreign Minister Ung Huot and to the Co-ministers of the Interior. 
Deputy Secretary of State Strobe Talbott met with Mr. Sam Rainsy and 
his wife on April 9. Mr. Talbott expressed relief that Sam Rainsy had 
escaped without serious injury and outrage that others had not. We have 
called on Cambodia to conduct a speedy credible investigation of the 
incident and to identify and punish the perpetrators.
    We do not have concrete evidence indicating who was responsible for 
the attack.
    The United States does not provide direct assistance to the 
Government of Cambodia. Because of the government's weak accountability 
and implementation capacity, USAID's program is being implemented 
through direct USAID contracts, grants and cooperative agreements to 
NGOs. We do not believe that conditions linked to the investigation of 
the grenade attack should be placed on our humanitarian assistance.
                                 ______
                                 
                  Questions Submitted by Senator Leahy
                            ngawang choephel
    Question. Ngawang Choephel, a former Fulbright Scholar at 
Middlebury College who returned to Tibet to make a documentary film, 
was sentenced to 18 years in a Chinese prison for espionage. The 
Chinese have never produced a shred of evidence to support the charge. 
I raised this case with President Jiang Zemin in Beijing, and have 
written numerous times to top officials in China. I appreciated that 
this case was included in the State Department's Annual Human Rights 
report.
    What, besides saying you are upset, can we expect the 
administration to do on behalf of Ngawang Choephel and other political 
prisoners in China? Do you have any reason to believe that the Chinese 
will pay attention?
    Answer. I, and other senior levels of this Administration, have 
raised--and will continue to raise--our concerns with Chinese leaders 
at the highest level about human rights in China, including Tibet. The 
case of Ngawang Choephel is of serious concern to the U.S. Government. 
Our Embassy has sought more information from the Chinese government 
about the evidence involved, but has gotten no substantive reply beyond 
what you have received. In testimony on May 13 before the Senate 
Foreign Relations Committee, we said, ``We cannot understand why such a 
sentence should have been imposed when there has been no public 
explanation of why his activities were unlawful.''
    We will continue to raise our concerns over China's treatment of 
those who peacefully express their political and religious views, and 
urge China to release those incarcerated for exercising their basic 
rights. Raising China's violations of basic freedoms in such 
multilateral fora as the U.N. Human Rights Commission also serves to 
focus world attention on China. The Chinese Government is concerned 
about its international image. It is noteworthy, for example, that in 
response to international pressure, China announced that it would sign 
the International Covenant on Economic, Social and Cultural Rights by 
the end of this year, and is actively considering signing the 
International Covenant on Civil and Political Rights.
                               indonesia
    Question. The Suharto Government has shown no tolerance for 
political opposition candidates, even declaring the main opposition 
leader ineligible for the coming election. The administration states 
that democratization is a priority for our policy toward Indonesia. 
What is the administration doing to promote a democratic transition and 
political freedom in Indonesia?
    Answer. Over the last 30 years, Indonesia has made remarkable 
progress, becoming one of the major engines of economic growth in 
Southeast Asia and increasing per capita income from $100 to about 
$1000. Political progress has not kept pace with economic growth, 
however. As former Secretary Christopher stated in testimony before the 
Senate Foreign Relations Committee last year:
    At the present time, I think that there's a strong interest in 
seeing an orderly transition of power there that will recognize the 
pluralism that should exist in a country of that magnitude and 
importance. So we will be encouraging a transition there that expresses 
the popular will.
    The United States has long encouraged greater respect for human 
rights, democracy, and worker rights in Indonesia. For example, the 
U.S. is the leading international supporter of non-governmental 
organizations in Indonesia that are working for good governance, 
greater democracy, and sound environmental policies. U.S. AID programs 
also contribute to Indonesian efforts to develop greater transparency 
in government decision making to reduce corruption.
    In addition, we make it a practice to raise human rights in all of 
our senior-level meetings with Indonesian officials and to speak out 
publicly about human rights problems when this is warranted. With 
regard to worker rights, we have negotiated benchmarks with the 
Indonesian Government that have helped improve the labor situation in 
certain areas. We intend to continue this process, and to urge the 
Government to adhere to internationally accepted labor standards.
    The Indonesian military is the key to improving human rights in 
Indonesia. International Military Education and Training (IMET) 
provides the opportunity for Indonesian military personnel to be 
educated in the United States, to observe our commitment to 
international law and American values, and to acquire additional 
skills. Our experience is that IMET graduates are more professional, 
more committed to improving their own armed forces, and more likely to 
be at the forefront in reforming their own services. IMET is 
particularly important to educate senior officials of Indonesia's armed 
forces in greater respect for civilian control of the military, 
improvements in military justice, and responsible defense resource 
management in accordance with internationally recognized human rights.
    If we are to speak frankly about Indonesia's human rights problems, 
it is also important in our view to acknowledge Indonesia's 
accomplishments in other areas. Indonesia is a key contributor, for 
example, to regional stability that has helped produce the remarkable 
economic growth in Southeast Asia. Indonesia's own economic policies 
have ensured widespread benefits for its own population as well. U.S. 
trade with Indonesia is growing rapidly, and contributes to prosperity 
in both countries, while helping open the Indonesian economy to 
positive outside influences.
    Congressional funding for the programs mentioned above has been 
extremely important, and we hope that it will continue. We want to 
encourage the positive trends and policies we see in Indonesia 
particularly regarding more respect for human rights. Ultimately, 
however, it is up to the Indonesian Government and people to shape a 
democratic society at a time and in a manner they think best.
    Question. After the crack down against political opposition groups 
last September, I and several other Members of Congress spoke out 
against the sale of F-16s to Indonesia. Yet just days after the 
administration put the sale on hold because of these human rights 
concerns, Secretary Lord announced in Jakarta that the sale would 
proceed in 1997. Does the administration intend to complete the sale. 
If so, on what conditions?
    Answer. As we said last fall, the U.S. remains committed to the 
sale. However, the Administration has decided not to notify the 
Congress of the transfer at this time.
    Our arms sales decisions are based on a number of considerations 
including regional, bilateral, and domestic political factors.
    When we decide to move forward, we will do so in a context that 
offers the greatest assurance of success.
    We will continue to consult closely with the Congress as the 
process moves forward.
    Question. I know the State Department has tried to inject a degree 
of restraint into the Administration's policy on arms sales. 
Unfortunately, the Commerce and Defense Departments seem to 
consistently win out. If there is money to be made, they support it, 
regardless of the potential consequences down the road. I thought that 
might change with a Democratic administration, but if anything, you 
have outdone your predecessors.
    Too many times, we have seen our weapons come back to haunt us, 
whether landmines or tanks. We saw that in Somalia, the Persian Gulf, 
and Bosnia.
    What is the administration's policy on arms sales to the Asian 
countries, especially those where the armed forces are involved in 
suppressing democracy?
    Answer. The U.S. policy on arms sales to Asia follows the 
President's Conventional Arms Transfer (CAT) Policy of February 1995 
which declares we will transfer arms to support the legitimate security 
needs of friends and allies, and that we will refrain from transfers 
that may adversely affect regional security or contribute to violation 
of human rights and democracy. The policy contains an extensive list of 
generic decision-making criteria to be used in evaluating all proposed 
U.S. arms transfers.
    The CAT policy requires that we seek to enhance multilateral 
restraint, but recognizes that only rarely will our interests be served 
by unilateral restraint. Although decisions on U.S. arms transfers are 
to be made primarily on foreign policy and national security grounds, 
the policy takes into account the implication of transfers for 
preservation of the defense industrial base.
    We are seeking to strike a proper balance between the imperatives 
to transfer arms and the need for restraint to avoid destabilizing arms 
races and diversion of resources from economic and social needs. We 
make full use of the Intelligence Community to ensure we have the best 
information available for arms transfer decision, are improving our 
oversight of weapons technology-sharing negotiations between DOD and 
foreign militaries and are applying the evaluative criteria in the CAT 
policy in the interagency arms transfer process.
    In the case of countries in the region where human rights problems 
exist, the CAT policy requires us to take into consideration the effect 
of weapons transfers on the specific situation. For example, in Burma 
we are not willing to make any arms transfers given the human rights 
situation there. In Indonesia, we have a formal policy that prohibits 
the transfer of small arms, crowd control, and other related equipment. 
In other countries, we have imposed temporary bans of specific weapons 
transfers when the situation warranted.
    Question. It is obvious that the Chinese Government is losing no 
time to whittle away at democracy and political freedom in Hong Kong. 
If this assault continues, what are the Administration's options for 
responding to it?
    Answer. The United States has long supported development of open, 
accountable, and democratic government in Hong Kong. Such a government 
has become essential part of Hong Kong's successful business and 
political environment. We have told Chinese leaders at the highest 
level that we expect China to honor its commitments in the 1984 UK-PRC 
joint declaration and the 1990 Chinese Basic Law to preserve Hong 
Kong's way of life, basic freedoms, civil liberties and rule of law.
    The key question is whether China will live up to its commitments 
to preserve Hong Kong's high degree of autonomy. In some areas, such as 
economic and immigration matters, China's statements and actions have 
been reassuring. In other areas, such as respect for political 
institutions and the freedom of expression, Beijing has done things 
that represent a step backward. In the event Hong Kong's autonomy is 
damaged, the U.S. will act consistent with the U.S.-Hong Kong Policy 
Act of 1992, which calls on the President to report to the Congress if 
Hong Kong is unable to carry out its bilateral obligations to us. A 
roll-back in freedoms and democratic development would also negatively 
affect U.S.-China relations. We have made that clear to the PRC in our 
diplomatic dialogue and our public statements. We will continue to 
convey to both the Chinese and to the new Hong Kong Special 
Administrative Region Government our expectation that Hong Kong's 
autonomy, stability and prosperity be preserved consistent with the 
principles of the joint declaration.
    We are encouraged that the new Chief Executive, C.H. Tung, has 
stated his commitment to maintaining Hong Kong's high degree of 
autonomy, its economic system, and its way of life, and has announced 
plans to hold elections for a new legislature in less than a year. As 
the Secretary said in Hong Kong, we will be watching closely and 
discussing developments with both Chinese and Hong Kong authorities.
                                 korea
    Question. I understand the North Koreans have finally agreed to 
attend Four Party Talks with officials from the U.S., China, and South 
Korea. I want to stress how important I believe it is that the aim of 
these discussions be to promote dialogue between North and South Korea. 
There is only so much we can do, and we cannot substitute ourselves for 
the South Koreans. What do you expect these talks to accomplish?
    The freeze on North Korea's nuclear program has been in place since 
November 1994. How do you explain that a government as paranoid as 
North Korea would give up its ambition to be a nuclear power? How 
certain are you that there is no cheating going on?
    What portion of KEDO's budget are we paying? Who pays the rest?
    Answer. The goal of the Four Party talks is to reduce tension and 
increase peaceful cooperation between the two Koreas, and ultimately to 
replace the 1953 Armistice Agreement with a permanent peace treaty. 
Another important area for discussion will be economic cooperation, 
both to address North Korea's immediate needs and its long-term 
problems. Institutionalizing North-South dialogue will be central to 
this process.
    For this reason, the U.S. expects South and North Korea to be the 
leading negotiators within the Four Party talks. This reflects our 
longstanding policy that the future of the Korean Peninsula is for the 
Korean people to determine. However, the U.S. will be a full and active 
participant in the talks.
    North Korea has not yet fully agreed to attend Four Party Talks, 
but has indicated that it will continue to discuss its participation 
with U.S. and South Korean officials.
    Regarding North Korea's decision to enter into the Agreed 
Framework, although we cannot know for certain the DPRK's motives, we 
assume that North Korea agreed to freeze and eventually dismantle it 
nuclear program in exchange for perceived benefits, including increased 
dialogue and potential political and economic relations with the United 
States.
    We are confident that we can monitor North Korea's compliance in 
fulfilling the provisions of the Agreed Framework. Inspectors of the 
international Atomic Energy Agency (IAEA) have maintained a continuous 
presence at the DPRK's Nyongbyon nuclear facility since 1994 and visit 
the nearby nuclear support facilities on a weekly basis. Moreover, a 
U.S. team also resides at Nyongbyon and works inside the nuclear 
facility in a joint project with North Koreans to place the spent 
nuclear fuel from the DPRK's reactor into safe, long-term storage, 
under IAEA monitoring. In addition, our National Technical Means can 
detect any significant activities at the construction sites where work 
on two nuclear power plants has been suspended in accordance with the 
Agreed Framework.
    Through these various means of monitoring and verifying North 
Korean compliance with the Agreed Framework, we have ascertained that 
the DPRK is complying with the freeze provisions of the Agreed 
Framework. The DPRK's 5-megawatt nuclear reactor is not operating, and 
its reprocessing facility and fuel fabrication facility have also been 
shut down. North Korea has also ceased construction at both the 50-
megawatt reactor at Yongbyon and the 200-megawatt reactor at Taechon.
    Regarding KEDO's budget, the three founding members of the 
organization--the U.S., Japan, and South Korea--share KEDO's 
administrative and operating costs. In the past, the U.S. has paid 
roughly a third of those expenses. Funding for KEDO's projects, 
including the provision of proliferation-resistant LWRs to North Korea 
(costing several billion dollars), will be provided primarily by South 
Korea and Japan. In addition to supporting a portion of KEDO's 
administrative costs, the U.S. contribution to KEDO will also help fund 
heavy fuel oil (HFO) deliveries to the DPRK, which are required until 
the first LWR is completed. Additional funding for HFO will come from 
members of the international community. To date, over 22 countries 
other than the U.S., as well as the European Union, have contributed or 
pledged over $100 million to KEDO for this purpose.
                              china-tibet
    Question. You reiterate in your statement that ``longstanding U.S. 
policy recognizes Tibet as part of China.''
    Hasn't this policy, unintentionally but effectively, given China a 
green light to destroy Tibet's cultural autonomy? By the time China is 
willing to enter into negotiations with the Dalai Lama, as you have 
urged, what will be left to negotiate about? The way things are going, 
Tibet as a unique entity will exist in name only. Does your policy mean 
anything?
    Answer. We share your concerns, but should point out that no 
country recognizes Tibet as a sovereign state. The United States, 
however, along with many other countries seeks improved human rights in 
China, including in Tibet. In particular, we support the preservation 
of Tibet's unique cultural and religious heritage and raise our 
concerns about Chinese policies with Chinese leaders at the highest 
levels.
    The United States has urged China to respect Tibet's unique 
religious, linguistic and cultural traditions, and the human rights of 
Tibetans as it formulates its policies for Tibet. The United States 
encourages China and the Dalai Lama to hold serious discussions aimed 
at resolution of the differences at an early date, without 
preconditions. We have consistently asserted that any questions 
surrounding Tibet and its relationship to Chinese authorities in 
Beijing should be resolved by direct dialogue between the Tibetans, in 
particular the Dalai Lama, and the Chinese.
    The Dalai Lama would obviously be a key player if discussions 
develop between the PRC and Tibetans living outside China. As a sign of 
the great respect the President and Vice President have for the Dalai 
Lama as a religious leader, they have met with him on a number of 
occasions, most recently on April 23. The Dalai Lama has the respect 
and affection of the Tibetan people, and the PRC should take advantage 
of this and talk with him. We urge a resumption of the dialogue between 
the Chinese government and the Dalai Lama and his representatives as 
the best way to defuse tensions--and potential violence--in Tibet and 
believe the Chinese Government recognizes that it is in its own self-
interests to resolve the issue peacefully.
    China has said it will not resume the dialogue until the Dalai Lama 
publicly acknowledges that Tibet is part of China and that he does not 
seek an independent Tibet. The Dalai Lama has told us that he seeks 
autonomy for Tibet, not independence, and that he is prepared to resume 
the dialogue any place, any time. We have urged him to use every 
channel available to communicate that position directly and clearly to 
the Chinese. We have made clear to the Chinese the importance we attach 
to resuming the dialogue. We see a basis for a dialogue here and 
encourage both parties to pursue its restoration.
                                 korea
    Question. I am told that North Korea recently agreed to accept 
Taiwan's nuclear waste, in return for $200 million. Is this true? How 
has South Korea reacted to this?
    Answer. Taipower announced in January that it had concluded a 
commercial contract with North Korea to ship low-level nuclear waste to 
the DPRK. The contract is worth approximately $200 million. We 
understand that the waste material contains no uranium or plutonium, 
but consists of contaminated clothing, filters, sludge, tubing, etc. 
Concern is therefore environmental rather than a matter of 
proliferation.
    South Korea announced almost immediately its total opposition to 
this transaction, and has lobbied in international fora and bilaterally 
to have this transshipment deal terminated.
                                 ______
                                 
                 Questions Submitted by Senator Bennett
    Question. What is the Administration's position regarding the 
Taiwan-North-Korea Nuclear Waste-Agreement?
    Answer. We are mindful of Taiwan's need for viable storage options 
for its low-level nuclear waste. We also understand the ROK's concerns 
and have encouraged Taiwan to take into account South Korean and 
regional views. To verify to the international community the exact 
nature of the materials and that shipment and storage will conform to 
internationally accepted guidelines, we have urged Taiwan to request 
the assistance of the International Atomic Energy Agency (IAEA). The 
IAEA is the principal international body with the technical ability to 
independently address the issues involved. Ultimately, Taiwan must 
demonstrate that all steps in this transaction are in accordance with 
international guidelines.
    Question. If the Administration has concerns over this agreement, 
what are they and how does the Administration intend to address them?
    Answer. Our concerns are noted above. We continue to raise them 
with the Taiwan authorities and other interested parties.
                                 ______
                                 
                Questions Submitted by Senator Campbell
                               east timor
    Many Members of Congress and the Portuguese-American community are 
concerned about human rights in East Timor, Indonesia. The East 
Timorese have suffered a campaign of repression since Portugal withdrew 
from the colony in 1974 and Indonesia annexed East Timor. The country 
was closed to the outside world until 1989, and even now access is 
still restricted. Journalists and international human rights monitors 
are rarely granted permission to visit.
    Question. (A) What is your agency doing to help protect the rights 
and civil liberties of the East Timorese left in Indonesia?
    Answer. (A) We share Congressional concern for the people of East 
Timor, and we are actively seeking to improve human rights in the 
province.
    The United States strongly supports resumption of the direct 
discussions, facilitated by the UN Secretary General, between Indonesia 
and Portugal to resolve their differences on East Timor. We are 
encouraged that Secretary General Kofi Annan's recent decision to 
appoint Ambassador Jamsheed Marker to be his Special Representative for 
East Timor will give new impetus to these key discussions. On May 7, 
John Shattuck, Assistant Secretary for East Asian and Pacific Affairs 
and Aurelia E. Brazeal, Deputy Assistant Secretary for East Asian and 
Pacific Affairs met with Ambassador Marker.
    The situation in East Timor has long been an important part of our 
dialogue with the Government of Indonesia. President Clinton, for 
example, has raised our concerns directly with President Soeharto. 
Secretaries of State Christopher and Albright have discussed them 
extensively with Foreign Minister Alatas, as have Ambassador Roy and 
his embassy colleagues with their counterparts in Jakarta. President 
Clinton has also discussed the East Timor situation with Portuguese 
Prime Minister Guterres.
    While many of our efforts involve quiet diplomacy, we also have not 
been reluctant to support public expressions of concern where 
appropriate. For example, we have supported action on East Timor at the 
United Nations Human Rights Commission. Only last month, the Commission 
passed a resolution, with U.S. cosponsorship, that expresses deep 
concerns over Indonesian policies there.
    It will be important for an overall solution in East Timor to 
incorporate proposals that give East Timorese themselves greater 
control over their economic and political life, in keeping with their 
unique history and culture. In the meantime, we have urged the 
government to reduce troop levels, to allow increased access to the 
province, and to release prisoners of conscience. We have also called 
on the East Timor resistance to forswear violence and join efforts to 
achieve a peaceful resolution of the dispute. Two U.S. Congressmen, 
Ambassador Roy, and Assistant Secretary of State for Democracy, Human 
Rights, and Labor, John Shattuck, recently visited the area, and other 
embassy officers have visited six times in the past ten months. 
Assistant Secretary Shattuck also visited the imprisoned East Timorese 
activist Fernando de Araujo last March.
    Over the years, we have been the largest international aid donor to 
East Timor, with eight projects now currently under way with a total 
budget of $15.8 million. Our aid programs are designed to improve the 
lives of average Timorese, while helping them achieve more control over 
their own economic future.
    Question. (B) What type of foreign assistance is most beneficial in 
a difficult situation such as this?
    Answer. (B) USAID has the largest donor assistance programs in East 
Timor. Between 1991 and 1995 USAID directed approximately $11 million 
to Indonesian and U.S. non-governmental organizations for rural and 
community development activities such as teaching skills to develop 
local NGOs, drilling wells, draining land, monitoring human rights, 
improving farming technology, educating orphans, increasing practical 
business skills, training community self-help groups, establishing 
micro-enterprises, strengthening the institutional capacity of the 
University of East Timor, assisting rural cooperative improve product 
development and marketing, training journalists, expanding coffee 
cooperatives, and providing investment in urban environmental 
infrastructure such as shelter, water supply, and sanitation. USAID has 
also supported the work of the International Committee of the Red Cross 
to reunite families and to monitor the human rights situation in East 
Timor.
    Given East Timor's rural economy and political situation, the most 
beneficial use of funding would be on programs to increase rural 
incomes, to provide vocational training for Timorese youth, to manage 
its water supply, to assist East Timorese protect their human rights 
and to advance the peace process would be most beneficial. One of the 
largest constraints on our aid program has been the ability of East 
Timor NGOs to absorb our assistance.
                             crime in asia
    Question. As we are aware, China, North Korea, Vietnam and other 
East Asian countries are often in the news for committing abuses 
against human rights. But what many of us are less familiar with is the 
other types of crime in East Asia. These include visa fraud, drug 
smuggling, murder, bribery and corruption. Some of this rampant crime 
can be attributed to frustration at the pace of reform and backlash 
against a repressive government.
    The Chinese authorities have launched a highly publicized campaign 
of prosecution and punishment, called the ``Strike Hard'' attack on 
crime, which goes along with a harsh anti-corruption campaign. In 1996, 
news sources reported that the Chinese had publicly executed over 1000 
citizens in this crackdown.
    Lacking training in criminal justice, many countries resort to a 
system of complete intolerance, resulting in large-scale punishment and 
public executions.
    In the past, Congress has funded programs that aid in law 
enforcement and corrections training abroad. What type of aid programs 
can the U.S. fund to aid in crime prevention measures in East Asia, 
without seeming to support such arbitrary and extreme punishments?
    What recommendations would you like Congress to consider in fiscal 
year 1998 to help adequately fund crime prevention and law enforcement 
measures abroad?
    Answer. USG funds appropriated to the Bureau of International 
Narcotics and Law Enforcement Matters are used for the following kinds 
of programs in East Asia: demand reduction training, alternative 
development (in opium producing countries such as Laos), and law 
enforcement support and training. Law enforcement training includes 
specific training programs offered by DEA, Customs, the Coast Guard, 
the U.S. Secret Service, etc., which are directed at drug interdiction, 
smuggling, counterfeiting and other forms of financial fraud. Some 
funds go to equipment purchases to help modernize counternarcotics 
police units, with purchases ranging from motorcycles and radios to a 
drug testing laboratory. USG funds also support advisors who may be 
made available to specific host government institutions for 
consultations on a range of law enforcement-related activities, such as 
writing laws affecting money laundering, advising banks on methodology 
for detecting and protecting against various financial fraud schemes, 
running a court system, etc.
    INL has presented a budget proposal for counternarcotics and law 
enforcement programs in Asia for fiscal year 1988. Our recommendations 
are contained in this package.
                         asian organized crime
    Question. What is your bureau doing to help fight this type of non-
territorial organized gang violence?
    To what extent does your agency coordinate with the FBI and with 
federal agencies to reduce the amount of criminal activity perpetuated 
by Asian gangs?
    Answer. While the State Department and its bureaus do not focus on 
domestic organized crime gangs, the Department does coordinate closely 
with those USG law enforcement agencies which have overseas as well as 
domestic missions. Members of the FBI, INS, Customs, DEA and DOD serve 
on detail to the Department of State in the Bureau of International 
Narcotics and Law Enforcement. While most of their work, once again, is 
not focused on Asian gangs in the United States, they do work with 
personnel of the Department of State to coordinate such issues as 
repatriation of smuggled (largely Chinese) aliens and the extradition 
for prosecution in the United States of drug traffickers whose 
activities in the United States doubtless contributes to some of the 
crime in American Asian communities.
    The Department of State also has an active policy with regard to 
denying visas to identified criminals. As the parent agency for our 
Embassies and Consulates abroad, the Department is also fully engaged 
in helping USG law enforcement agencies to further investigations 
abroad, to negotiate mutual legal assistance treaties which facilitate 
information exchanges with other governments on law enforcement matters 
and plays a key role in seeking the cooperation of host governments on 
issues such as drug trafficking, credit card fraud, alien and other 
smuggling and other financial crimes which impact on Asian and other 
communities in the United States.

                          subcommittee recess

    Senator McConnell. We appreciate all three of you being 
here today, the subcommittee will stand in recess until 2 p.m., 
Tuesday, May 6 when we will receive testimony from Ambassador 
Morningstar of the Department of State and Thomas Dine from the 
Agency for International Development.
    [Whereupon, at 12:15 p.m., Thursday, April 17, the 
subcommittee was recessed, to reconvene at 2 p.m., Tuesday, May 
6.]


      FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS 
                  APPROPRIATIONS FOR FISCAL YEAR 1998

                              ----------                              


                          TUESDAY, MAY 6, 1997

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 2:40 p.m., in room S-128, the 
Capitol, Hon. Mitch McConnell (chairman) presiding.
    Present: Senators McConnell, Campbell, Leahy, and Murray.

                          DEPARTMENT OF STATE

STATEMENT OF HON. RICHARD L. MORNINGSTAR, AMBASSADOR, 
            SPECIAL ADVISOR TO THE PRESIDENT AND 
            SECRETARY OF STATE ON ASSISTANCE TO THE NEW 
            INDEPENDENT STATES

                  AGENCY FOR INTERNATIONAL DEVELOPMENT

STATEMENT OF HON. THOMAS A DINE, ASSISTANT 
            ADMINISTRATOR, BUREAU OF EUROPE AND THE NEW 
            INDEPENDENT STATES

                 OPENING REMARKS OF SENATOR MC CONNELL

    Senator McConnell. The hearing will come to order.
    I am sure Senator Leahy will be here momentarily. We have 
been upstairs voting. And I am sure he will be down shortly.
    I welcome, Mr. Dine and Mr. Morningstar, here today. And I 
would like to make essentially three points this afternoon, 
before going to your statements.
    First, I believe the administration's request for Russia, 
once again, is disproportionately large relative to the overall 
request and our broader regional interests. Second, I am 
concerned that in order to sell an overall increase, the 
packaging seems more important to the administration than 
developing a sound product. Third, the legal and law 
enforcement issues, which Senator Leahy and I have been talking 
about for 4 years, still do not receive the emphasis that I 
think they should. So let me elaborate just a bit on that.
    In a recent letter to congressional leaders, the President 
urged us to fully fund his request for foreign aid. For the 
record, his general position is one that I, as you all know, 
strongly support. He pointed out one of the reasons why full 
funding is so important is the sharp decline in our assistance 
to the NIS since fiscal year 1994. And he pointed out that that 
means we are investing very little in many parts of the former 
Soviet Union.
    For example, we have only $44 million for Kazakstan, 
Turkmenistan, and Azerbaijan, countries whose huge energy 
resources make them major economic interests. That is a quote 
from the President. The congressional funding levels have 
little to do with the fact that the administration has only 
provided $44 million for these three countries.
    The squeeze is in fact the result of a significant drop in 
the administration's NIS request last year, combined with 
chronic overspending on Russia. To put the problem in context, 
we should compare $44 million for these three countries with 
the request for Russia of $241 million, which is only a small 
share of the total of more than $4 billion provided for Moscow 
since 1993. Having drawn attention to the pressures which tend 
to compromise our interests in the non-Russian states, the 
administration still provides Russia both the largest share and 
the largest increase, this year, from $95 million to $241 
million.
    Now, Russia certainly deserves some support. But I continue 
to believe the private sector is far more important to Moscow's 
future than any assistance we may provide. In contrast, our aid 
is vital to the survival of the smaller states. I intend to 
provide the highest level of NIS aid possible within budget 
constraints. But, I do not share the administration's 
priorities. Just as one example, given the remarkable reforms 
engineered by President Shevardnadze, it is my hope to 
substantially increase United States support for Georgia.
     While the administration seems sure of its commitment to 
Russia, its commitment to develop a sound, substantive basis 
for these programs, it seems to me, comes up short. I 
appreciate the shift in the marketing strategy and the new 
emphasis that the Partnership for Freedom places on trade, 
investment and business priorities--activities which, in 
principle, I think we all support. However, the request 
included $160 million for a new business development program, 
to be administered by the Eximbank. I think we have learned 
through discussions with the Bank this initiative is simply not 
supportable. Traditionally, Exim uses local banks to support 
its transactions.
    Given how weak the banking institutions are in virtually 
every country, Exim staff has told us they would have to use 
nearly one-half of the $160 million to field staff to assure 
the appropriate lending and financial analyses could be 
prepared to prevent major losses. Even then there would be 
serious reservations about how soon and effectively the program 
could be implemented.
    While I wonder why the commitment was made in the first 
place, I understand you have dropped that idea. I do hope you 
will be able to answer how you plan to spend the $160 million 
now available.
    Finally, let me turn to crime and corruption. Senator Leahy 
and I have been calling attention to this problem since 1993. 
The first year I chaired the subcommittee, the Senate report 
stated:

    The incidence of crime and corruption have markedly 
increased since last year's recommendation. The committee is 
deeply concerned about reports that more than 5,000 organized 
criminal enterprises have developed throughout the NIS.

    Our primary concern was and is simple: The private sector 
is the key to jobs and economic stability. If businesses refuse 
to invest because of corruption and crime, obviously there will 
be no growth. I only wish the administration spent as much time 
developing solutions to this problem as it does fighting Senate 
earmarks. Unfortunately, another year has passed without 
significant action. There continues to be fresh compelling 
evidence of how widespread and acute this crisis is.
    Whether it is the murder of an American in Moscow over a 
sour business deal or routine allegations that contracts are 
moving legal targets and very difficult to enforce, it seems to 
me we are now bearing the bitter fruit of neglecting this 
critical area. The problems which have surfaced in Ukraine in 
the last several months are the most recent examples of the 
spread of crime and corruption.
    Obviously, recalcitrant parliaments, unwilling to pass or 
enforce reforms, must assume a share of the responsibility. 
But, what we see unravelling is a dangerous cycle, where crime 
and corruption, reaching the most senior levels of government, 
are sapping investor confidence, which in turns stalls economic 
growth. And stagnant growth means stagnant wages for the 
average citizen, including members of the police force. And if 
their wages drag, so do their enforcement efforts. Which means 
the cycle of crime and corruption spirals ever downward.
    To arrest this cycle we need to target and increase our 
commitment to meaningful legal and law enforcement training. 
After spending over $500 million on privatizing companies, it 
seems worthwhile that we be able to protect them. One example 
of what we can do is evident in Ukraine. For 3 years, the 
Government has asked for and not received support to establish 
an FBI-like training academy to teach its law enforcement 
community how to combat crime, especially the white-collar 
variety.
    I intend to make this kind of project and combating crime 
and corruption a high funding priority, particularly since I 
believe it serves our interests as well as the interests of the 
region.
    So let me at this point turn to you, Mr. Dine, and you, Mr. 
Morningstar, for your opening statements. And then we will go 
to questions.

              summary statement of ambassador morningstar

    Mr. Morningstar. Thank you, Mr. Chairman and members of the 
subcommittee.
    The issues that you have raised in your opening statement 
are all very important issues, and I hope during the course of 
the hearing today to answer most of those. And if the 
opportunity does not arise to deal with every issue, I look 
forward to the opportunity of meeting with you later to go over 
each and every one of the issues that you raised.
    I appreciate the opportunity to appear before you today to 
discuss one of the President's top priorities in the foreign 
affairs budget, the Partnership for Freedom. The fiscal year 
1998 request for NIS assistance is $900 million. And this 
request is based on a strategic refocus of our assistance 
efforts as we move into the 21st century.
    The Partnership for Freedom rests on a very simple 
principle. And I do not think we can say it enough. And that is 
that we, the United States, have no greater national security 
interest than the stability of Russia, Ukraine, and the other 
New Independent States, and the consolidation of their 
transition to market democracies.
    Our most dangerous adversary of all time, the former Soviet 
Union, is no more. We have an enhanced opportunity today to 
influence and shape the future of the New Independent States 
that were the Soviet Union. Stability in this region over the 
next 5 to 10 years is dependent on the achievement of economic 
growth.
    With respect to Russia specifically, a recent article in 
the Financial Times, I think, framed the issue quite well. Will 
Russia choose open and fair capitalism or the corrupt 
monopolistic capitalism and all that could entail? The article 
pointed out that it might take more than a generation to answer 
this question, but that recent changes in the government could 
present some opportunities.
    This is why the Partnership for Freedom is important. How 
can we help all of the countries of the New Independent States 
give their citizens a more tangible stake in the reform? The 
first way to do this, I would submit, is by mobilizing capital 
and increasing investment, to create jobs and ultimately 
utilizing the private sector as we suggested. This will require 
NIS leaders to take on more aggressive legal and policy reforms 
to improve the environment for business. This will require more 
capital, particularly in the region and to smaller businesses. 
And this will require, as you pointed out, increased efforts in 
the NIS to fight crime and corruption.
    Second, we need to stay engaged to strengthen the 
democratic organizations that will allow citizens to influence 
government and to advocate change. We must continue to persuade 
and cajole. The real change will come from the bottom up, as 
well as from strong leadership. And I know this is something 
you have pointed out many times in the past.
    Why did we ask for a larger budget this year? And why is 
our opportunity to have an impact greater than it ever was?
    First, the Partnership for Freedom responds to the need for 
a second phase of engagement in the NIS, which builds on the 
foundation of basic structural reform, such as privatization, 
such as macroeconomic stabilization that is taking place in 
most of these countries. Our active engagement, which will 
focus on the push for real growth in these economies, is 
crucial.
    Second, we look hard at what we can do with our assistance 
resources to make the biggest impact. On the subject of 
investment, for example, we have identified that a major gap 
exists in financing small business, particularly in the 
regions. This finding is based on over 50 interviews that I and 
my staff have done with professionals and experts both here and 
in the NIS, as well as at least eight business roundtables, 
getting the views of American and NIS business people.
    In fact, since I originally wrote this, there have been a 
couple more. It is quite interesting that just a year ago, I do 
not think we could have made the same findings that we make 
now. A year ago we were hearing about the lack of a qualified 
demand for financing, emphasizing the word ``qualified.'' Now 
that has changed. And we have learned from the EBRD's small-
loan program, from NGO's, like the Eurasian Foundation, CCI, 
the Consumer Citizens' Initiative, and FINCA, which does a lot 
of microcredit work, that the demand far outstrips the supply 
of capital.
    In fact, we have also found, from the EBRD program as well 
as some of our enterprise fund programs, that with respect to 
small business lending, there are banks within the regions--
many banks in the regions--that can be worked with and can be 
used to help distribute money, to help lend money to small 
businesses. And we can talk more about that later.
    Another crucial opportunity in our proposal is that we do 
propose to more than double the amount of resources we direct 
to anticrime and law enforcement. And these last few years have 
built the foundations that allow us to do more to fight crime 
and corruption.
    Third, now is the time that we really need to emphasize 
also the cooperative mutually beneficial activities. U.S. 
business, universities, scientific organizations, hospitals, 
towns and cities all over the United States see the benefits in 
developing close linkages with the NIS. These ties do more than 
our governments could ever do to achieve constructive 
relationships and have an impact on a community level every 
week.
    I see new evidence of the value of these partnerships. 
Yesterday, for example, I spoke to 43 Ukraine bankers and 
faculty members from the International Management Institute in 
Kiev. The have a partnership with Carnegie-Mellon in 
Pittsburgh. IMI sponsored a study tool for this group that is 
getting a master's degree in Kiev to promote banking in the 
United States and show how they can improve their banking 
systems. These, I think, can be extremely valuable and have a 
long-term effect.
    Fourth, we continue to hear from our Ambassadors in the NIS 
and from notable leaders of reform, such as Andrei Kozyrev, for 
example, and Grigori Yavlinsky, that one of our largest returns 
on investment and assistance dollars are some exchanges and 
support for the hundreds of nascent democracy NGO's, human 
rights groups and political parties that are springing up in 
that region. I would submit that these programs cannot be done 
by anyone but the United States. We represent the clearest 
vision of the future.
    The Partnership for Freedom proposes specifically to double 
the number of exchanges. We have proposed to do more democracy 
work in countries in Central Asia and the Caucasus that are 
lagging in some ways.
    Another recent illustration on exchange is Ambassador 
Courtney of Georgia--and by the way, we would be increasing 
Georgia by something like 60 percent in the Partnership for 
Freedom--sent in a cable. We have a graph with respect to the 
country dollars that are back there.
    In any event, Ambassador Courtney sent in a cable, 
outlining the profound impact that the alumni of United States 
exchange programs are having in Georgia. He mentioned that the 
chairs of two key parliamentary committees, a leader of the 
independent media, and several others doing high-profile 
community work have been graduates of those programs. 
Particularly in his case, he is referring to the Muskie 
fellows.
    Fifth, the regions have emerged as the most promising bases 
for reform and growth. When we talk about doing small business 
in the regions, we are talking about doing it in regions where 
there has already been indications of success and where we 
think we can build on that. One illustration, for example, is 
the Novgorod region in northwest Russia. That is really a model 
where we need to be working. The regional government there is 
taking aggressive steps to improve the investment climate and 
encourage growth. Tax incentives for foreign investors and 
strong early results in getting investment targets actually 
done have occurred. And it is action, not just words.
    This region and others like it--the Russian Far East is 
another area where we clearly intend to develop our regional 
initiative--are where we can and must do more and where we will 
see the kind of results that push and pull the country along. 
We are developing a Partnership for Freedom pilot program with 
existing funds, using Novgorod as the pilot, utilizing more 
investment and more partnerships.
    I must add here, as I am sure you know, that the new 
Russian Cabinet includes two notable leaders of Russia's most 
progressive regions, Nizhny Novgorod and Samara. And hopefully 
this will bode well for increasing our efforts in the regions 
and how success there now will affect the center. We need to 
encourage pressure from the bottom up to make the changes that 
need to be made.
    Let me just say a few words about Ukraine. I did return 
from Kiev late the week before last, where I met with Ukrainian 
leaders to discuss our concerns about the downturn in the 
investment climate and the treatment of various United States 
companies. And there are very serious issues with this country. 
Mr. Lemire from Gala Radio is sitting here in the audience 
today.
    But let me say in the strongest possible terms that the 
development of Ukraine as a stable market democracy is in our 
national interest and certainly in Ukraine's national interest. 
If they show the political will to deal with these issues, we 
have to be prepared to work with them, particularly relating to 
transparency in business/government interactions.
    On the other hand, if these concerns are not addressed 
completely, we should consider scaling back assistance in 
certain sectors where backtracking of reform has been a 
problem. The ultimate issue, the real ultimate issue when all 
is said and done, is that Ukraine's future and all that they 
have achieved in the last 5 years is at stake, and we need to 
do everything we can, through whatever methods we can, to help 
ensure that future.
    And as you know, President Kuchma is scheduled to come here 
the week after next.
    Senator Leahy. Is that still on?
    Mr. Morningstar. That is still on.
    I think it is critical that trip take place. This is an 
opportunity for the President and the Vice President and 
Members of Congress such as yourselves to discuss with him the 
magnitude of these issues and the large stakes that are 
involved. President Kuchma announced on April 10 an 
anticorruption decree, which, if implemented, could solve a lot 
of these problems. And you have to establish that that 
political will does exist and, if it does, we need to help as 
much as we can.
    But, in the meantime, the kinds of investment disputes, 
such as Mr. Lemire has, really do have to be solved. They are 
symptoms of underlying problems. But until they are solved, 
there is going to be constant pressure that we are all up 
against.
    Senator McConnell. Can I just interrupt you on that point.
    Given the current state of affairs, how much would that 
decree be worth in terms of the likelihood of it having an 
impact?
    Mr. Morningstar. We will have to see. The decree itself, 
when you read it, if it were all implemented, deals with all of 
the issues that need to take place.
    Senator McConnell. That is really my question.
    Mr. Morningstar. What I kept trying to impress upon the 
Ukrainian officials when I was there was that the real issue is 
not the American assistance program. The real issue is not 
President Kuchma's visit. The real issue is that Ukraine will 
develop and thrive as a market democracy. As long as you have 
the kinds of problems we are talking about, which discourage 
investment--not just United States investment, but also 
Ukrainian domestic investment, European investment, investment 
wherever it is--unless you solve all of these problems, 
whatever problems you come up with, it is not going to do any 
good, because you cannot grow. And you just have to face up to 
these issues.
    I think that President Kuchma understands that. I think 
many of the senior officials do understand it. And all we can 
do is to keep impressing upon them the importance that this 
needs to be done. And there are some very--at the risk of 
elaborating--I am basically done with my opening statement 
anyway--but there is tremendous short-term risk. It is not just 
our assistance program. It is the World Bank Program for 
leveraging, in which there are really millions and millions--
probably over $1 billion at risk at this point by Ukraine if 
Ukraine does not heed the conditionality with respect to those.
    So there are leverage points. But, at the same time, we 
have to keep our eye on the ball and recognize that what we 
need to accomplish, the ultimate goal, is a strong Ukraine. And 
that is very important to all of us. I think we all agree on 
that goal.
    And it is an example, I think, that, with respect to our 
programs in general, that we have to respond appropriately to 
both the setbacks and breakthroughs that are inevitably going 
to be part of this transformation, whatever the country will 
be. In Ukraine, hopefully what we are talking about is a short-
term setback.

                           prepared statement

    In Russia, at least on the economic front, there appear to 
be some breakthroughs. We have to recognize that this is an up-
and-down process. And for this reason, frankly, I am more 
certain than I ever was that our request for fiscal year 1998 
is in the right direction and is the way that U.S. assistance 
should be refocused in the future. We need to be able to stay 
engaged and we need to retain the flexibility to respond to 
both the setbacks and the breakthroughs with appropriate 
support.
    [The statement follows:]
        Prepared Statement of Ambassador Richard L. Morningstar
    Mr. Chairman and members of the Subcommittee, I am very pleased to 
have the opportunity to testify here today about the Administration's 
plans for assistance to the New Independent States of the former Soviet 
Union, and most importantly about one of the President's top priorities 
in the foreign affairs budget, the Partnership for Freedom. The fiscal 
year 1998 budget request for NIS assistance is $900 million, up from 
$625 million in fiscal year 1997. The Partnership for Freedom supplies 
the vision and the framework for sustainable, mutually-beneficial 
cooperation between the people of the United States and the people of 
the New Independent States, and thus for a more secure and prosperous 
future.
    Partnership for Freedom rests on a simple principle: the security 
of the United States and the rest of the world is immeasurably enhanced 
if Russia, Ukraine and the rest of the NIS are stable market 
democracies. We must take specific actions to help these countries 
attain economic growth. Lack of growth will ultimately lead to 
destabilization which could raise new threats to our national security.
    We must also accept the fact that reform in the NIS is a complex 
generational process, the outcome of which is, today, not yet secured. 
For example, although last summer's presidential election in Russia was 
remarkably free and fair, a monumental signal in its own right of 
reform's progress, 40 percent of Russian voters opted for the past. 
Many people in the NIS are still significantly worse off economically 
than they were in the Soviet Union.
    We must stay visibly and materially engaged to help ensure that 
lasting democratic and market institutions take root and prosper in the 
region. Over the next few years, we must help give people throughout 
the NIS region a more tangible stake in reform. The cost of this 
investment is small relative to the far-reaching benefits that stable, 
democratic New Independent States hold for the American people.
    Presidents Clinton and Yeltsin issued a joint statement in Helsinki 
outlining their commitment to stimulating investment and growth in 
Russia, and to advancing Russia's membership in international 
organizations. Included in this statement was President Yeltsin's 
agenda to launch Russia on to its next phase of reform, including 
comprehensive tax reform, laws to strengthen the Production Sharing 
Agreements needed for energy sector investment, tough anti-crime laws, 
and ratification of the U.S.-Russia Bilateral Investment Treaty. 
Presidents Clinton and Yeltsin also applauded plans announced by Vice 
President Gore and Prime Minister Chernomyrdin to launch a regional 
investment initiative, that will attract resources to key regions, 
including the Russian Far East. This initiative will demonstrate the 
impact of joint efforts on policy reform, investment finance, and the 
creation of new channels of commercial cooperation between regions in 
both countries. Although the primary responsibilities, and 
capabilities, for advancing the economic growth and reform agenda lie 
within Russia, this recognition that joint efforts between the United 
States and Russia play a significant, mutually beneficial role in the 
process is an underlying assumption of the Partnership for Freedom.
    With Congress' support, the Partnership for Freedom will respond to 
this imperative. The United States represents the potential of 
democracy like no other nation in the world, and thus our visible 
engagement in the reform process provides a crucial boost to the 
hundreds of thousands of people with a new voice, and new economic 
opportunities, in the future of their nations.
    The Partnership for Freedom will deliver a strategic refocus of our 
approach to assistance, focused on fostering economic growth and 
investment, and no less important, on strengthening the myriad of new 
democratic institutions, most of them non-governmental, that have 
emerged over the past five years. These dual tracks for a reinvigorated 
program will give us the greatest chance of success in sustaining the 
political impetus for reform and democracy.
    It is particularly important that Partnership for Freedom will be 
even more significant at the times that tensions between our nations 
are high. Business, people-to-people, and community ties are mechanisms 
which increase the survivability of stable market democracies over the 
long term, whatever the political situation is at a given point in 
time.
           phase i--u.s. assistance from 1992 to the present
    We can consider the first phase of our engagement in the NIS to be 
complete when basic structural and institutional changes to a market 
democracy have taken place, such as:
  --Private ownership--the private sector's share of GDP is now over 60 
        percent in Russia, 50-60 percent in Moldova, 50 percent in 
        Ukraine, 40 percent in Kyrgyzstan, and 35 percent in 
        Kazakhstan. Privatization to this degree is a key building 
        block for future economic reform and growth.
  --Elections--reasonably fair and open elections have had a 
        significant impact the political process in Russia, Ukraine, 
        and Moldova-Russia now has held parliamentary, presidential, 
        and regional elections since December, 1995. In those countries 
        whose commitment to elections and independent political parties 
        appears more tenuous, and where elections have been tainted, 
        political leadership has had to accept the consequences of 
        international scrutiny and condemnation.
  --Civil society--non-governmental organizations (NGOs) did not exist 
        in the NIS in 1992. Since that time, there has been explosive 
        growth in this sector, particularly in civic associations, 
        policy think tanks, private universities, business and industry 
        associations, citizen action groups, environmental groups, and 
        many more varieties of public interest and advocacy 
        organizations.
    In addition to what is outlined above, other key building blocks 
are the rule of law, independent media, and functioning capital markets 
and financial institutions. Russia is closest to meeting these 
criteria, and Moldova, Kyrgyzstan, Ukraine, and Georgia are next in 
line. The other NIS countries are reforming at a slower pace.
    The Administration's current proposal for introducing the 
Partnership for Freedom creates a staggered transition for the NIS 
countries from broad-based technical assistance programs to the 
concentration of resources on fewer actitivities. For example, over 91 
percent of the fiscal year 1998 program in Russia will be under PFF, in 
Ukraine, 51 percent under PFF and in Kazakhstan, 53 percent. Over the 
next four to five years, technical assistance will phase out in each 
country, and the longer term framework for remaining Freedom Support 
Act activities in the New Independent States will be the Partnership 
for Freedom package.
                   phase ii: partnership for freedom
    The United States and the New Independent States ultimately want 
constructive bilateral relationships based on mutual respect and mutual 
geopolitical, economic and trade interests, not relationships based on 
assistance as such.
    The Partnership for Freedom will include the following activities:
I. Investment and capital mobilization
    1. Increase investment support in the regions, emphasizing small 
business and microcredit.--Implemented through Eurasia Foundation, 
selected USAID grantees, EBRD Small Loan Program, USAID Loan Guarantees 
for Micro & Small Enterprises, Eximbank, OPIC, Trade and Development 
Agency, science & technology foundation up to $163 million.
    2. Continue support for NIS enterprise funds.--Up to $64 million.
    3. Remove impediments to trade and investment.--Targeted technical 
assistance for tax reform, WTO accession, legal reform accounting 
standards reform $20 million.
    4. Facilitate and accelerate World Bank and other IFI loans to NIS 
governments.--Help NIS governments meet the structural reform 
conditions required by the World Bank and IMF for the release of major 
loans $12 million.
    5. Link business training to specific investment projects involving 
U.S. companies and capital.--Improve capabilities of enterprise 
managers, particularly in the regions, in those enterprises engaged in 
trade and investment with U.S. companies, small loan programs, and 
enterprise funds, $17 million.
II. Consolidation of democracy and civil society gains
    1. Significantly expand law enforcement and criminal justice reform 
activities to address problems of crime and corruption.--Increase 
training in financial fraud, money laundering, organized crime, anti-
narcotics, bank inspection; increase support to the International Law 
Enforcement Academy (ILEA) in Budapest for training NIS law enforcement 
professionals; provide non-lethal material support, such as forensics, 
computer and communications equipment; increase training for judges and 
prosecutors, $29 million.
    2. Endow foundations to create sustainable support for new 
democratic institutions.--Create long-term vehicles for U.S. support 
for democratic institutions such as NGOs, independent media, citizens' 
advocacy groups that will carry on beyond the end of U.S. bilateral 
assistance activities; select foundations to be endowed partially on 
the basis of private matching funds, $41 million.
    3. Expand institutional partnerships to support cooperative 
activities at community levels, and expand cooperative activities in 
such areas of mutual interest as health, environment, energy, and 
technology commercialization.--Support partnerships between business 
associations, hospitals, universities, cities, bar associations, 
charities, and other non-governmental organizations to foster and 
deepen commitments to participatory civil society and productive, 
mutually beneficial relationships between the NIS and the United 
States; work through binational commissions with Russia and Ukraine, 
$59 million.
    4. Increase professional and academic exchanges with emphasis on 
young leaders.--Seek to more than double the number of NIS citizens 
coming to stay in the U.S. for month, semester, and academic year 
programs; recruiting business interns, young professionals, and 
students; emphasizing community-based, home stay programs, $58 million.
    5. Strengthen democratic political organizations as they become 
part of the greater network of citizens organizations.--Continue 
political party development through IRI and NDI, and support for 
election reform, and related NGOs and human rights organizations, $28 
million.
    The fiscal year 1998 request for $900 million is a 44-percent 
increase above the current fiscal year's budget for the NIS. This level 
of funding, combined with the strategic refocus of the program, will be 
able to support at least double the number of exchanges and 
partnerships. These funds will direct more than five times the amount 
of resources into investment programs, and more than double the level 
of effort on law enforcement and anticrime activities compared to 
fiscal year 1997.
    Another major effect of these additional funds will be more 
resources for democracy and economic restructuring work in Central Asia 
(+60 percent), Georgia (+60 percent) and Azerbaijan (+90 percent)--
countries of key geopolitical and economic interest to the United 
States, that have not been adequately supported due to overall budget 
constraints combined with congressional earmarks. Russia's budget will 
be up significantly from this year's $95 million to $241 million. Over 
91 percent of the Russia budget will be directed to PFF activities. The 
amount allocated to Russia is still only 15 percent of that allocated 
in fiscal year 1994.
    The Partnership for Freedom is structured to operate in parallel 
with U.S. government security-related programs to promote arms control, 
nonproliferation, and regional stability. These include Department of 
Defense programs for Cooperative Threat Reduction, 
Counterproliferation, and Warsaw Initiative/Partnership for Peace 
efforts, as well as Department of Energy programs such as the Materials 
Protection, Control & Accounting activities. The PFF helps to 
strengthen our efforts in these security areas, and vice versa. All of 
these programs should be reviewed as a cohesive package, which together 
fulfill U.S. national security objectives.
                            lessons learned
    I have been in this position now for over two years. The approach 
that I have taken in this time period, and presented to this committee 
on numerous occasions, has been aggressively focused on the notion of 
continuous improvement to maximize our effectiveness in meeting U.S. 
national interests, and to maximize our return on the investment of 
U.S. taxpayer dollars in the reform process. The implementing agencies 
and organizations have accomplished a tremendous amount in this regard, 
and Mr. Dine will get into more of that detail for USAID later in this 
presentation.
    We have learned how far small amounts of funding can go to support 
reformers in real and lasting ways. Smaller, regionally based programs, 
that are encouraged to be flexible and adapt to local needs, work best. 
We have never, and will never, invest as much as it would take to do it 
all, to make ``the'' critical difference. I actually do not believe 
that is even possible. But, we have made, and must continue to make, 
many small differences. Today, regions in Russia such as Novgorod, 
Samara, Nizhny Novgorod have become models of accomplishment for the 
rest of the country on what is achievable by taking advantage of 
targeted assistance programs. We must and will do more in regions to 
create visible community-based impact. The heros of the new market 
democracies in the NIS are not USAID, not the World Bank, not the EBRD; 
they are the people that we have supported, educated and made small 
loans to over the past five years--reformers, entrepreneurs, and 
advocates for change from all levels of society, who deserve the credit 
for all the real and lasting accomplishments. They are winning a 
courageous battle.
    We have learned that cost sharing works. Programs such as USAID's 
small business service centers and the Morozov small business training 
project in Russia have achieved 40 percent to 50 percent cost recovery 
from fee-for-service. The programs that recruit volunteer experts to 
assist and train private entrepreneurs and farmers all rely on major 
cost sharing with their NIS clients, in addition to the valuable, 
donated time of the skilled Americans who volunteer. One of our most 
important exchange programs, Community Connections, (also known as PEP 
in some regions), is achieving great success in a pilot effort to have 
the professional exchange participants pay all of their travel costs to 
the United States, and some of their per diem expenses while they are 
here. All of these community-based exchanges receive a tremendous 
amount of in-kind contributions of organizing time, accommodations, 
local transportation and training from American communities all over 
the country that host these NIS groups. We have found that people who 
have a financial stake in the program will make the best use of it.
    We have learned that the time lag between capital availability in 
our investment programs, such as TUSRIF, OPIC, EXIM and our various 
funds, and the disbursement of that capital has been partially 
unavoidable, as the NIS entrepreneurs come up the learning curve, and 
the impediments to investment in these countries remain numerous. 
Nonetheless, we have also observed that with skilled shepherding, and 
high quality training of local financial institutions, more can be 
achieved--particularly with smaller projects and companies, and that we 
can now direct more resources where there are gaps, and make the 
necessary adjustments to the programs.
    We have learned that it doesn't make sense to spend assistance 
dollars on restructuring large, formerly state-owned companies. 
Companies with a chance of pulling through this transition will be able 
to find the resources to pay for the consulting or training that it 
needs. Many business services providers exist now, both indigenous and 
foreign. We have ended programs that were funded back in 1994 and 1995 
to do this kind of work, and retargeted private enterprise training 
resources to small and medium enterprises. NIS governments must play a 
critical role, as reform legislation is required to allow enterprises 
to sell land and other assets, shed some of the burdens of social 
services, and make a fair return on investment in a rational tax 
environment.
    We have learned that we can accomplish tremendous leverage by 
focusing our technical assistance in some instances on helping the NIS 
meet structural reform conditions for major loans from international 
financial institutions. We, and most importantly the NIS side, achieve 
a tremendous return on our assistance investment through this kind of 
coordination.
    We have also re-learned some old lessons about U.S. assistance--
that well managed, internationally coordinated humanitarian assistance 
efforts can save lives and help to maintain the stability of a region 
or country. In Armenia, Georgia and Azerbaijan, a region that faces 
numerous ethnic and cross-border conflicts since the break-up of the 
former Soviet Union, U.S. resources and leadership to bring in food, 
fuel and medical commodities and to fund the Caucasus Logistics 
Advisory Unit, have made a difference in helping these nations get 
through their most challenging early years. President Shevardnadze has 
stated on several occasions that it was U.S. humanitarian assistance 
that made the critical difference in helping Georgia maintain its 
stability and independence. The leverage that we have been able to 
achieve in our humanitarian program since inception in the NIS is huge 
and has often gone unnoticed--$1.6 billion worth of 100 percent donated 
and surplus commodities delivered to 12 NIS countries in 480 airlifts, 
costing under $174 million in transport(through the end of calender 
year 1996). We should be very proud of this accomplishment.
                                 russia
    While recognizing that some crucial forms of technical assistance, 
particularly those that address key impediments to investment like tax 
reform, will require continued work, the implementation of the 
Partnership for Freedom in Russia will create a much greater emphasis 
on Russia's regions and will address the following goals:
  --1. Working with regional governments to address key obstacles to 
        investment, helping them to gain access to international 
        capital markets, and strengthening regional financial 
        institutions.
  --2. Increasing the availability of financing in the regions through 
        EXIM, OPIC, the U.S.-Russia Investment Fund, other small and 
        medium-sized lending and equity investment programs, and 
        microcredit activities.
  --3. Increasing the level of support for exchanges and regional and 
        community-based institutional partnerships, that will link 
        cities, universities, law schools, policy think tanks, and a 
        variety of NGOS and citizens' organizations.
    This regional approach to the PFF in Russia has been developed 
through extensive consultations with numerous American and Russian 
professionals and policymakers in the field of investment and economic 
development in Russia, who have identified the gaps in programs to date 
to be a lack of credit for smaller businesses in the regions--the major 
engine for growth and real incomes for the Russian people. Vice 
President Gore and Prime Minister Chernomyrdin highlighted the 
importance of a regional investment initiative in a joint statement at 
the last meeting of the U.S-Russia Binational Commission in Washington 
this past January. The Russian Far East has been acknowledged by both 
the U.S. and Russia as a region of great economic potential and will be 
included in this initiative. Other potential participating regions 
include oblasts in the Urals region and the Southern Russia-Volga 
region.
    One extremely promising oblast in the Northwest of Russia, 
Novgorod, has been identified as an appropriate area to launch a 
``quick start'' demonstration of the PFF and the regional investment 
initiative, due to the regional government's reform action, strong 
interest from the U.S. business community in Russia, and a significant 
level of existing assistance resources and programs on which to build.
    The Novgorod region, with a population of about 750,000 people, 
today provides one of the most compelling illustrations of Russia's 
promise to become a prospering market economy. Although the region 
suffers from the same fundamental economic and structural problems as 
the rest of Russia, it leads Russia with the highest per capita foreign 
investment. Perhaps not coincidentally, Novgorod has one of the oldest 
traditions of democracy in Russia. Founded in the 9th century, medieval 
Novgorod was governed by an assembly of its citizens, the ``veche''; 
and prior to the establishment of St. Petersburg, was the major trading 
center of Northwest Russia. Now, through the dynamic leadership of its 
elected governor, Novgorod has established an investment-friendly 
climate, and has been recognized by the American Chamber of Commerce in 
Russia as one of the most progressive regions of Russia today. This 
region is not waiting for a handout, but instead is working diligently 
to enact reforms that have mobilized capital investment. This region, 
and others like it, should be the foci of our assistance effort through 
the Partnership for Freedom; there is no point to these programs if the 
local leadership, both in government and in the private sector, is not 
a major part of the solution, and willing to act to create real 
opportunity for the future.
    One component of the PFF, ``partnerships and cooperative 
activities'' is best understood through the examples of working 
partnerships in the region. One notable example happens to be in 
Russia--the partnership between the World Institute for the Disabled 
and the All-Russia Society of Disabled. With the material support, 
know-how, and encouragement of their U.S. partner the Russia group's 
membership has climbed to 2.4 million in 78 different regions. They 
have helped members set up over 1700 enterprises, as well as 
manufacturing companies that make wheelchairs and other equipment for 
the disabled. Their public education and outreach, leadership training, 
legislative advocacy, and efforts to bring disabled children more into 
the mainstream of Russian life add up to an incredibly powerful lesson 
for all NGOs in the NIS. Partnerships such as this one must have an 
important place in our long term engagement with Russians through the 
Partnership for Freedom. Many more existing relationships between U.S. 
and Russian organizations will be able to have significantly greater 
impacts on their communities with relatively small amounts of money.
    Securing and advancing reform also requires leadership, and we are 
very encouraged by the newly invigorated government's approach to 
taking on some pressing issues such as demonopolization and public 
administration reform.
                  ukraine, central asia, the caucasus
    The non-Russian NIS are still facing the most fundamental 
challenges of building new market democracies. These nations are 
building all of their government institutions from the ground up. The 
rule of law, media, and basic market institutions, such as banks, 
capital markets, and regulatory institutions are also at early stages 
in their development.
    Our national interest in supporting these countries through their 
transitions to becoming stable, independent, market-oriented 
democracies is extremely strong. The Partnership for Freedom approach, 
and the Administration's fiscal year 1998 budget request of $900 
million, will allow the appropriate level of assistance resources to be 
directed to the non-Russian nations.
    In Ukraine, with the second largest population and economy of the 
NIS, stability and growth are crucial to a secure and undivided Europe. 
In 1996, several important actions, including the removal of the last 
nuclear weapons, ratification of a new constitution, and the successful 
introduction of a new currency, gave us great confidence in increasing 
assistance to Ukraine. Since last October, we have grown increasingly 
concerned about backtracking on key reforms--particularly in 
privatization, agriculture, and the energy sector, and about 
bureaucratic obstacles and corruption, particularly as these affect 
U.S. investors. I raised these issues in Kyiv last week with Ukrainian 
leaders. If these problems are not addressed concretely, we will 
consider scaling back assistance in certain sectors where backtracking 
on reform has been of greatest concern. We are also consulting with 
other donors and the IFIs to ensure that all of our programs are 
conditioned on measures of reform.
    We have supported Ukraine because it is is our national interest to 
do so, and this has not changed. Ukraine's reforms, as in all of the 
NIS, are part of a generational process that will have setbacks as well 
as great breakthroughs. We must be prepared to stay engaged through 
this process, and we must retain flexibility in our assistance program 
so that we can respond to both the setbacks and the breakthoughs with 
appropriate levels and forms of support. We must be realistic and have 
the ability to be flexible in meeting changing circumstances
    Assistance to the fledging market democracies of Central Asia and 
the Caucasus are strongly in our national interest. Their strategic 
location between Russia, the Middle East, and China, coupled with vast 
energy resources, make their stability vital to U.S. interests. We will 
continue to help nascent democratic organizations and institutions, 
such as the independent media, non-governmental citizens groups, and 
educational institutions, establish active, effective roles in these 
countries. Economic restructuring and support for small businesses will 
also continue to be a prominent part of our assistance program in 
Central Asia.
    The Administration continues to oppose Section 907 of the Freedom 
Support Act, which since its inception in 1992, has hindered U.S. 
policy interests in the Caucasus region and Azerbaijan by severely 
limiting the promotion of U.S. investment, the encouragement of 
democratic and market development, and the advancement of the Nagorno-
Karabakh peace process. We view our assistance efforts in the Caucasus 
region as a vehicle for furthering our policy objectives and interests 
in the region. The loss of U.S. influence in Azerbaijan threatens to 
undermine overall efforts for peace in the region.
                               conclusion
    The courage of the citizens of Russia, Ukraine, and all the New 
Independent States to stay on the path of reform is bolstered by our 
investment in democracy, free markets, and building strong people-to-
people linkages with Americans. We must consider the strategic 
importance of the NIS both in a historical context, and as a part of 
our vision of the world that our children will inherit. The New 
Independent States greatly appreciate U.S. assistance, but do not want 
to rely on aid. The Partnership for Freedom is one of the top 
priorities of the Administration's foreign affairs budget. This is 
because the vital importance of constructive, mutually-beneficial 
relations with the NIS, and, as Secretary Albright recently expressed 
it in recent testimony, ``the ultimate victory of freedom over 
despotism'' are so important for the security of every American. U.S. 
assistance to date, and looking ahead to the Partnership for Freedom, 
is one of the smartest investments we can make to help insure the 
security, health and prosperity of future generations.

                                ukraine

    Senator Leahy. Is President Kuchma going to be told very 
strongly--is it going to be made very clear to him that the 
Congress is not going to continue sending money with this kind 
of corruption going on? One of the news items indicated 
Motorola walked away from an investment that could have been 
extremely helpful to them.
    It is even the little things like gouging people who are 
there. I saw it myself when I stayed there, in a cockroach-and 
rat-infested room at $280 a night, and things like this. It is 
outrageous. And if they think they can just keep on doing it, 
even though they realize they are killing the goose that lays 
the golden egg, they are in for a surprise.
    Mr. Morningstar. We had a hearing a few weeks ago, prior to 
my going to Ukraine, on the House side. And I quoted him. It 
was not just from one congressman, it was from several members. 
And I quoted them. And I told all of the officials at these 
high levels that you have got to understand, why should we be 
giving money to Ukraine? This is what we are facing on the 
Hill. Why should we give any money to Ukraine if you are 
treating our businesses this way?
    And I think they understand it. And as far as the message 
goes, I have been involved very deeply in the preparations for 
the meetings between Vice President Gore and President Kuchma. 
In fact, I am the chairman of the Committee on Joint Economic 
Cooperation. And I can assure you that the message, in a very 
constructive way, will also be presented very strongly by the 
Vice President.
    Senator Campbell. Would the gentleman yield for a question 
on this point?
    Senator Leahy. Yes.
    Senator Campbell. I have always been a believer that there 
should be some linkage between American aid and how they treat 
our businesses. But I guess we are just supposed to keep giving 
it away and let our businesses take a bath. But I have one 
particular point, and I am sure there are many, but I just 
happened to pull something from our own files. One of my 
constituents entered a 10-year contract with authorities in the 
Ukraine to sell advertising time on television. And then, one 
of the two national channels, after he had a contract and after 
he got off the ground for a couple of years, simply managed, 
through government authority, to take the contract away from 
him and just virtually left him hanging. And he is now in the 
courts to try to get some redress.
    Obviously, I think somehow he is not going to prevail. And 
I just wanted your opinion on whether we should not link some 
of this aid. You are asking for $900 million, and to give that 
without any kind of connection to how we are treated over there 
is wrong to do that.
    Senator McConnell. Let me add on, before you answer Senator 
Campbell's question, since we have kind of gotten started here. 
You mentioned setbacks versus breakthroughs. I would describe 
this as a setback, another setback. After you deal with that, I 
would like to know if there have been any breakthroughs in 
Ukraine.
    Mr. Morningstar. Sure. Yes, first, the question with 
respect to the issue you have raised. You have raised, I think, 
one of the more difficult issues that comes up and has come up 
in Ukraine in a series of issues. And Mr. Lemire's case is an 
example--basically the same thing that involves problems 
relating to the National Broadcasting Council, in which there 
literally are arbitration decrees that have been awarded. The 
issue--and certainly in Mr. Lemire's case and some other cases 
I can point to--is not, as it turns out, that there was not a 
process by which one could go through to get relief. The issue 
has been, once the arbitration decree was awarded, it has not 
been enforced.
    There is a promise outstanding, at least, with respect to 
Mr. Lemire's case, that the issue will be solved before 
President Kuchma shows up. We will see if that happens. What we 
have found is that, with respect to cases which are, in 
effect--and I do not want to shortchange the solutions, but 
ones that are easier to solve--for example, that just require 
the signature of the Prime Minister, even though there may be 6 
or 8 months of delays in achieving that--that, it seems, we are 
dealing with right now, because of pressure, the pressure that 
has been shown.
    Senator Campbell. How about reducing the amount of money 
that their request is by the amount they have cheated American 
businesses?
    Mr. Morningstar. Well, we could do that. And that would 
come pretty close to eliminating our Ukraine program.
    Senator Campbell. Well, they are trying to eliminate the 
American partners.
    Mr. Morningstar. Let me answer that in a couple of ways. 
And I think there will be, if in fact some of these disputes 
are not solved, I think in fact there will be cuts. And I think 
it will be beyond any individual's control. But one of the 
things we have to be careful about is we do not want to cut our 
nose to spite our face either. The whole purpose of the 
Partnership for Freedom is to get into areas that are not 
direct assistance to government-related activities, to do 
things that will help the private sector, to create more 
partnerships, and establish the kind of relationships between 
communities that will help create pressure from the bottom up.
    And I think that it is going to be very important that we 
emphasize those activities and that we do not lose that and we 
do not throw out the baby with the bath water.
    Senator Campbell. I understand that, Mr. Chairman. But when 
you go home, you have to justify giving $900 million of 
American taxpayers' money to Ukraine and the Soviet Union. And 
when you have businessmen in your own State that have been 
cheated out of their part of the business in the same place you 
are trying to give this money, it is a darn difficult thing to 
justify.
    Senator Leahy. You have the further problem, too, I might 
say, when you see something in Russia, when you see the way 
they jerk people around. Certainly like a very high profile 
thing like the exhibit that was at the Corcoran. It is a kind 
of shakedown that they are probably used to doing on the 
streets of Moscow, but suddenly they are doing it on the 
streets of Washington and the whole Nation is watching. And I 
come from a State that is pretty internationalist in its 
affiliations, and you know, they say we are making a mistake 
because all this money is just being siphoned off or we are 
being naive.
    Our Ambassador in the Ukraine seems to take a far softer 
attitude toward it than you do, Ambassador Morningstar. Somehow 
we have got to get across that it is not a bottomless pit. I 
commend the chairman, who has been as strong an 
internationalist on this issue as anybody. But we all have to 
go back home and explain why.
    I have supported money for Ukraine, and we have supported 
each other on the former Soviet Union, and we want it to work. 
I do not think there is anybody in this room that does not want 
it to work. Our business people want it to work. Our Government 
wants it to work. But I do not think they are listening over 
there.
    Senator McConnell. My question was, are there any 
breakthroughs to point to?
    Mr. Morningstar. Sure, there have been some. It is easy to 
look at the glass as half empty, or maybe today one might argue 
two-thirds empty for the time being. The Ukraine has achieved 
the enactment of a constitution. They did that last year. And 
President Kuchma deserves a lot of credit for that.
    From a macroeconomic standpoint, they have shown some very 
significant successes in bringing the rate of inflation down 
and introducing a new currency. That has maintained stability. 
There is a lot of successful work that is going on out in the 
regions. We have achieved a memorandum of understanding with 
respect to Chernobyl. And we have had some success in our 
negotiations with them just in the last few weeks in connection 
with the sarcophagus. So there are successes.
    And there are issues. And we have to address the issues. 
And it is not just simply by cutting off the aid. It is 
addressing the cause of the problems and trying to get 
assurances for the political will that will allow us to help 
them to create transparency, to create the deregulation which 
is necessary to eliminate a lot of the opportunity for 
corruption that has grown up over the years.
    Senator McConnell. Well, let us get Mr. Dine's statement, 
and then we will come back to questions.

                 summary statement of hon. thomas dine

    Mr. Dine. Thank you, Mr. Chairman, Senator Leahy. I join 
Dick Morningstar in urging this committee to seriously consider 
the administration's request for the New Independent States of 
$900 million under the FREEDOM Support Act. USAID is scheduled 
and is planned to implement much of this appropriated number, 
and I think it is a critical, critical effort on all our parts 
to engage in this task.
    AID has been and is a direct part of and involved with 
overall genuine progress in the region. In my prepared 
testimony, Mr. Chairman, I list a lot of results that AID has 
been directly involved in, and I urge that our prepared 
statements be inserted in the record, as I am sure they will 
be.
    Senator McConnell. Yes; they will be made a part of the 
record.
    Mr. Dine. It is also true that in several spots of the 
region progress has been slow, uneven, among and in countries 
and in sectors, as one would expect, in dismantling communism 
and in building free market democracies.
    The discussion that has just taken place among all of you 
about Ukraine, about the treatment of American citizens and 
American investments, I believe underlines three points: how 
difficult this job is to promote change--to promote change from 
where these places were for 70-plus years and if not even 
before that, the necessity of building a foundation for these 
societies, and, for the most part, Mr. Chairman and Senator 
Leahy, the people we deal with did not grow up with a textbook 
on capitalism. They did not grow up with a Constitution of the 
United States, with Hobbs, Locke, Montesquieu, you name it. We 
are dealing with people who are trying and having a great 
difficulty in building market democracies.

                    transfer of expertise, not cash

    And, finally, just to reiterate something or to correct 
something that Senator Campbell said. He kept using the word 
``give.'' I would say one of the important parts of this whole 
program has been the fact that when Congress passed the SEED 
Act in 1989 and the FREEDOM Support Act of 1991, you made sure 
that this was technical assistance, the transfer of expertise 
and not the transfer of cash. And so we are not giving anyone 
any money. We are trying to promote the transfer of knowledge, 
in fact, so that we can eventually get to that point that Dick 
Morningstar just mentioned about partnership.

                     reform progress in the region

    Let me move on now to some charts, to give you a snapshot 
picture, a range of the progress that I mentioned.
    Chart No. 1 shows the place of both the NIS and the central 
and Eastern European countries on a trend line. And you notice 
this is the average of economic policy and democratic freedoms. 
The European Union countries are up here. This data is taken 
from the European Bank for Reconstruction and Development 
[EBRD] and Freedom House here in Washington.
    As you can see, the countries of the northern tier of 
central and Eastern Europe are by far in the lead. Then comes a 
second category of countries, starting with Romania and the 
first NIS countries roughly. Ukraine has been sliding backward 
in recent times, but we will get to that in 1 minute. Some of 
the NIS countries in the southern tier of the central and 
Eastern European countries are in the second bunch.
    The third bunch are basically NIS countries. Two others did 
not make the chart frankly--Serbia and Bosnia--but they are 
also in the portfolio that I have been assigned responsibility 
for. You mentioned a couple of those, Mr. Chairman, in Europe, 
in your statement. Others are not reforming countries as of 
now, and that is a fact of life, although, I agree with you, 
they have tremendous natural resources.
    Our objective, it seems to me--and that is what we have 
been trying to do--is, No. 1, get countries going this way and 
to get this trend line, which is now headed this way, closer 
and closer to the European Union standard. That is basically 
the strategy we are pursuing right now with the technical 
assistance, as well as with the World Bank, IMF, EBRD, European 
Union and other bilateral programs.

                policy reforms bring foreign investment

    I have another chart. I just want to reconfirm what my 
friend Dick Morningstar has just said. This chart shows that 
countries that exhibit real policy reform--and again, the 
northern tier of central and Eastern Europe and those with 
natural resources you will see come up in this--but this chart 
shows that real policy reforms have greater foreign investment 
per capita. And this is what the Partnership for Freedom is all 
about, to increase the investment, to lure people where reform 
has taken place.
    Changes are occurring. As I have indicated, USAID has had a 
hand in basic changes. We have been engaged, over the last 
couple of years, in privatization; 49 percent of the GDP of the 
countries of the New Independent States is now produced by the 
private sector. I have another chart for a different kind of 
hearing, but if you took the central and Eastern European 
countries, you would see that it is about 65 percent. Again, 
more progress is being made in central and Eastern European 
countries for a variety reasons, both historical as well as the 
fact that they have a couple of years head start on the New 
Independent States. Some 55 percent of the GDP in Russia is now 
produced by the private sector.
    So, again, Russia is ahead of all of the others. 
Unfortunately, Ukraine is hovering around the 40-percent mark. 
We have helped them with fiscal reform, we have been involved 
with budgeting and helping them with tax codes, et cetera.
    In enterprise development, a tremendous amount of work has 
been involved in legal and regulatory reform, civil codes in 
Moldova and Russia and other places, guaranteeing freedom of 
contracts and protection of private property.
    In the financial sector, we have been able to help set up 
stock markets and other capital markets, working with the 
national banks and commercial banks. But, as indicated in the 
previous discussion, so much of this is spotty. So much of this 
is still incomplete.
    In the energy and environment area, we have had some 
success, including in Ukraine, although that has slowed down 
now. But among the Central Asian Republics, for instance, we 
have gotten involved in the Aral Sea problems, and from that, 
begun to work with all five countries of the Central Asian 
Republics, so they would work together on the water problem and 
water management and water financing. We have been a catalyst 
to 13 short-term water-sharing agreements between these five 
countries, and we look forward to more.
    We have been involved in the Russian Far East on 
environmental reform. We have been involved with environmental 
NGO's, through the American NGO, ISAR.
    And, finally, in democratic institution building, it could 
not be tougher. It is easier to do economic reform, frankly, 
than democratic reform. But we have been involved in civil 
society work, media work, judiciary work, and political party 
building. The overall point that I would like to stress here is 
the value of the process, the idea of transparency.
    Transparency is really foreign to these folks. It is 
something that we are trying to transfer as we are engaged in 
our work, whether it is democracy building, tax code, or 
whatever. So while communism is defeated and even dismantled, 
democracy is still not victorious. And I think we have got to 
stay involved in this process.

                                ukraine

    Finally, I want to contrast our activities in two NIS 
countries, Ukraine and Georgia. As this discussion has already 
indicated, Ukraine today faces excruciating difficulties the 
confluence of political stalemate, the lack of reform, and 
stagnancy in the economy that is showing signs of contraction. 
This is a very, very important time, frankly. It is a 
crossroads for Ukraine and for United States-Ukrainian 
relations. We see continued dominance of monopolies, state 
control of the agricultural sector, delay, again, in 
privatization, failure to collect payments in the electrical 
power arena, the resignation of the key reformer, Minister 
Pynzanek, and an international and domestic barrage of 
allegations and of corruption.
    So this is coming to a head. And as Dick indicated, the 
World Bank is seriously considering the suspension of three 
major loans and delaying several new ones. The IMF has said it 
will not go forward with the important extended facility fund 
unless all conditions are met. Foreign investors, particularly 
small and large American companies--and I am going to use your 
words, because I have got them down--are walking away. And 
Ukraine must face this particular dilemma.
    President Kuchma will be meeting, as Dick indicated, with 
high officials of this administration, as well as yourselves. I 
believe this administration will be delivering a hard-hitting 
message on the urgent need to turn this situation around and 
get back on track, as it was 6 months ago, and implement 
economic reforms in a way that reinforces the reasons for the 
Congress earmarking so much technical assistance in fiscal 
years 1996-97.
    Mr. Chairman, slowly but surely, Ukraine had been 
progressing, and we ought to keep that in mind. And USAID can 
show results in privatization and a modern constitution, in the 
energy sector, in local governments, in community-based 
projects, and an independent media.

                                georgia

    Let me turn to Georgia. Georgia faced a turning point 2 
years ago, and held elections in December 1995--a nationwide 
election in which Edward Shevardnadze was duely elected 
President of the nation-state and a parliament was elected as 
well. That parliament has turned out to be not only very 
active, but very proreform. Together, the executive and 
legislative branches in that particular small country have been 
engaged together on reform policies. Therefore, we see a 
tremendous contrast there from the Ukraine. Again, like the 
Ukraine, Georgia has a new constitution. AID has helped set up 
a Center for Economic Policy and Reform, which has been at the 
heart of so many of these economic reform policies.
    We have seen a frontal attack on corruption. President 
Shevardnadze has fired his finance minister after all kinds of 
allegations. There is macroeconomic stabilization. Inflation is 
way down. Prices are liberalized. Currency has stabilized. 
There has been a real development of reform for us and our 
involvement in energy restructuring, where we have seen the 
sale of hydro powerplants, a new national regulatory body for 
the power sectors, an agreement with the Azerbaijan 
international oil consortium and the Government of Azerbaijan 
on the oil pipeline issues, and the new Black Sea port of 
Sokhumi.
    And, finally, we see a lot of investment coming into 
Georgia. And I believe, as Dick indicated, it is important that 
we increase the amount of assistance to Georgia, to reward 
reform.

                           prepared statement

    So, Mr. Chairman and Senator Leahy, I hope this committee 
supports USAID's continuing efforts to help the NIS countries 
reform, and to vote for the full $900 million appropriations in 
the FREEDOM Support Act request for fiscal year 1998. It is in 
the U.S. national interest to sustain changes, or lock them in, 
to make them irreversible, and to continue to work on economic 
stabilization and structural change, so that these translate 
into growth and investment and the societies themselves head 
toward the victory circle of full participatory democracies.
    Thank you.
    [The statement follows:]
                  Prepared Statement of Thomas A. Dine
    Mr. Chairman, Members of the Committee: I am pleased to have the 
opportunity to testify today in support of the Administration's request 
for $900 million under the FREEDOM Support Act for USAID's activities 
in the Newly Independent States (NIS). I believe, and this testimony 
will demonstrate, that overall progress in dismantling communism and in 
building democratic governments and free market economies in its place 
merits your strong support. I also wish to restate the Administration's 
support for an appropriation of $492 million under the Support for East 
European Democracy (SEED) Act for our activities in Central Europe, $15 
million in economic support funds (ESF) for Cyprus to support 
bicommunal activities and scholarships, and $50 million in ESF for 
Turkey plus $4 million for family planning. The Administration requests 
as well $19.6 million in ESF for the International Fund for Ireland 
which, like our Cyprus request, is designed specifically to promote 
peace between two communities sharing an island. I also wish to state 
that the Administration strongly opposes Section 907 of the Freedom 
Support Act because its restrictions impede the United States 
government's ability to implement more effectively our development 
assistance program in Azerbaijan and thereby slows the advancement of 
U.S. interests in a strategically significant region.
    The President's request for $900 million for the NIS, an increase 
from $625 million this year, follows three years of falling 
appropriations levels. After the large fiscal year 1994 appropriation 
of $2.5 billion, assistance levels fell to $850 million in fiscal year 
1995, $641 million in fiscal year 1996 and $625 million in fiscal year 
1997. Resources for most of the New Independent States have dropped 
below the levels needed to spur and cement fundamental reform. The 
United States relationship with Ukraine, Russia, and other key states 
in the NIS remain vital to our national security, and we need a 
framework for a new phase of U.S engagement, focused on trade and 
investment and building enduring ties between their citizens and ours. 
The proposed Partnership for Freedom would be established for those 
purposes.
    First a word on Ukraine. As reported extensively in the media, 
there are real problems in Ukraine. The perceived level of official and 
unofficial corruption is pervasive and deep. Internal reform appears 
stagnant and the economy is beginning to show signs of contraction. The 
Deputy Prime Minister, the country's leading reformer, recently 
resigned. Major and small U.S. companies, faced with harassment, 
intimidation, and bribery are leaving the country. Business disputes 
are on the increase and because of continued state control over the 
agricultural sector, delays in privatization, and failure to collect 
payments in the electricity sector, the World Bank is seriously 
considering the suspension of three critical loans. Corruption, of 
course, is nothing new in the areas of the former Soviet Union. 
Ukraine, no less than anywhere else in the former Soviet Union, lived 
under a regime that was conceived in corruption and governed corruptly 
until its fall from power. That is, in fact, why we are in the former 
Soviet Union--to help Ukraine, Russia and the others establish economic 
and governmental systems that are honest, transparent and fair. We 
cannot expect American investors to do business in Ukraine or any of 
the NIS countries if they are not going to be treated fairly. That is 
why the state of economic reform and the transparency of economic 
decision-making have been high on our agenda in discussions with the 
Ukrainian government and will be at the top of the agenda at the Gore-
Kuchma Commission meetings next week.
    It is the intention of the Administration to let the Ukrainian 
government know, in no uncertain terms, that we will not support the 
continued stalling of reform and transparency initiatives and certainly 
not the mistreatment of our citizens. We will be looking not only for a 
verbal response; we will also hold the GOU to a series of actions which 
it has, in various international loan and assistance agreements, agreed 
to undertake during the coming weeks and months if we are to continue 
our support. We are examining our program in Ukraine to gauge which 
activities are dependent on progress in reform. This committee has seen 
fit to earmark over one-third of total FREEDOM Support resources to 
Ukraine in 1997 and 1996. You have every right to know that these 
resources are being utilized to provide the maximum protection to U.S. 
interests including U.S. investors. You may wish to provide the 
Administration with sufficient flexibility on earmarked funds to ensure 
that your concerns, and ours, are being met. But, rest assured, in this 
case as in others, no one is more determined than USAID to ensure that 
corruption does not taint our efforts and that our assistance is 
buttressing actions to root out corruption at all levels.
    It has now been five years since this Committee took the historic 
step of funding assistance to the NIS. This action reflected the 
decision by Congress, and President George Bush, that the United States 
would seize the opportunity provided by the break-up of Soviet 
Communism to help the states formerly incorporated into the Soviet 
Union make the transition to democratic market economies. It was based 
on the premise that the people of these nations wanted to transform 
their entire way of existence and that reformers welcomed US technical 
assistance. It was based on the hope that our involvement would 
forestall the return of totalitarianism and state socialism and help 
ensure democratic futures for the people of the former Soviet Union. 
Today the American people have every right to hear if the programs they 
are funding have produced tangible results.
    I am pleased to report that, at this juncture, we are witnessing 
broad and unmistakable signs that reform is achieving demonstrable 
results. Communism is being dismantled, and a viable middle class based 
upon the empowerment of the individual is being created--not evenly, 
not everywhere in the NIS and often in fits and starts--but across 
enough of the region, and in enough sectors, that we can say that its 
roots have taken strong hold of people's outlooks and expectations. 
Reform has given oxygen to the life blood of civil society and private 
enterprise. And it has produced some remarkable results.
    That is especially remarkable when we consider the context. We are 
speaking here of the former Soviet Union, for seventy years under the 
fists of Brezhnev, Stalin, and Lenin.
    Under Communism, there were no market institutions, no legal 
foundations for a market economy, no democracy and no basic 
institutions for citizen participation. All real power rested with the 
Communist party and the thoroughly corrupt central government. The 
individual was powerless, with no control over his or her personal 
destiny--much less over the destiny of his community or nation. Today, 
just six years after the hammer and sickle flag was lowered at the 
Kremlin, I am able to report to you about a region in transformation, 
about people suddenly empowered both economically and politically.
    A quick snapshot. In Russia, the private sector now accounts for 60 
percent of GDP and employs about half of the labor force. In Ukraine, 
some 400 formerly state-owned companies a month are being auctioned 
off. The Central Asian Republic of Kazakstan opened its first private 
stock exchange in Almaty in April 1995. In Kyrgyzstan, economic 
stabilization has helped make the local currency, the som, the most 
stable currency in the region, at times appreciating against the 
dollar. Eleven individual television stations operate in Georgia, 
independent and free of government control.
    I am pleased to say that the United States, led by USAID, has had a 
part in each of those changes and the others I will attempt to describe 
for you today.
    These results testify to a U.S. assistance program that has had a 
strong positive impact. Would I claim that change would not have 
occurred without the United States? No. The collapse of the Soviet 
system, and its history of eight decades of failure, ensured that much 
of the old system would be swept away as soon as the people of the 
region had the opportunity to rid themselves of it.
    But, at the same time, I can state with confidence that without our 
assistance program, a program not of cash giveaways but of hard 
technical and practical assistance, change could have taken any number 
of paths--including authoritarian, nationalist approaches which would 
not safeguard personal freedoms and would have been inimicable to U.S. 
national interests. The wrong kind of change might even have reignited 
the cold war and all the costs the renewed threat of confrontation 
would entail.
    Modern free enterprise does not just happen. You cannot expect a 
modern banking system or stock market to just evolve from the ruins of 
state socialism. Someone has to show the way, offer the models and the 
counsel. That is what we are doing. Similarly, democracy is an idea, a 
worthy political goal. But nations with little or no democratic 
tradition need someone to show the way to create a system that will 
support democracy. That means election laws and codes and 
constitutions. Again, the U.S. shows the way. And, although other 
nations and multilateral institutions are playing an important role in 
the building of the NIS, it is appropriate that the United States play 
a central role. The former Soviet bloc was governed by the principle 
that the state counts and that individuals do not. The United States, 
the world's oldest democracy, is built on just the opposite idea; the 
rights, privileges and opportunities for the individual is the bedrock 
of our nation's greatness. Our goal is similarly to help empower 
individual citizens who, under the previous system, were considered 
insignificant or not considered at all.
    The USAID program pursues three strategic goals in the region: 
economic restructuring, democratic transition and social stabilization. 
It is under these rubrics that USAID has achieved our results.
    Economic Restructuring: Since 1992, USAID programs have contributed 
to sweeping economic changes, including mass privatization, land 
privatization, fiscal reform, development of modern financial systems 
and energy sector restructuring. Establishment of private property 
rights and the growth of entrepreneurship have given ordinary citizens 
a stake in the new economic system. With USAID assistance, most 
countries have made systemic changes such as creation of laws and 
institutions to permit private business, as well as specific changes in 
practices such as adopting Western accounting principles and banking 
practices. The severe output declines experienced by most NIS countries 
since the collapse of the Soviet Union appear to have bottomed out. 
Economic restructuring is pursued through privatization, fiscal reform, 
enterprise development, financial sector development and energy/
environment reform.
    Privatization: Almost 50 percent of GDP in the NIS is now generated 
by the private sector, as compared to less than 10 percent when the 
Soviet Union collapsed in 1991 USAID has been instrumental in this 
process. In Russia, for example, a recent agricultural land 
privatization law gives citizens the right to buy and sell land for the 
first time since the 1917 revolution. Titles to nearly a thousand 
parcels of land had been transferred to privatized industrial 
enterprises throughout Russia by October 1996.
    Fiscal Reform: Throughout the region USAID has helped governments 
adopt more effective budgeting and expenditure procedures, reform tax 
regimes to make them more conducive to business growth, and improve tax 
administration to raise the revenues essential for good governance. For 
example, with USAID assistance, Kazakstan's new tax code was approved 
in April 1995 and introduced in June 1995. Regarded as the most 
efficient and equitable code to be adopted in any former Soviet 
republic, it is serving as a model for draft codes elsewhere. A new tax 
code has been completed in Uzbekistan and awaits enactment by Congress. 
A budget law and a treasury law are near completion.
    Enterprise Development: In nearly every country in the region, 
USAID is assisting enterprises to operate more competitively, and 
helping reduce government interference in the marketplace. For example, 
in Russia, passage of the Civil Code, guaranteeing freedom of contract 
and protection of private property, is a major advance in creating a 
legal and regulatory environment to support a market economy.
    Financial Sector Development: USAID is helping establish stock 
markets and improve commercial banks so that businesses get access to 
investment and operating capital and buy and sell assets. For example, 
Moldova is the first NIS country to establish an independent securities 
market agency with ministry status. The Moldova stock exchange opened 
in June 1995 and, by the end of the year, 300,000 shares had been 
traded.
    Energy and Environment: Throughout the region, USAID is helping to 
reduce waste in the production and use of energy and improve the 
reliability of power supplies. It is also working to prevent further 
environmental damage and to reverse the effects of decades of 
indifference to the environment under the Communist regimes. For 
example, since 1995, with USAID assistance, 13 short-term water sharing 
agreements have been signed between countries in Central Asia. Three of 
seven agreements approved this past year have included provision for 
hydroelectricity generation in the Aral Sea.
    Economic restructuring is starting to show results in terms of 
economic performance. The output decline which followed the collapse of 
the Soviet state has slowed considerably with preliminary estimates 
indicating that eight NIS countries experienced positive economic 
growth in 1996. Even more encouraging, impressive gains in inflation 
reduction bode well for future growth.
    It is clear that foreign investment follows economic reform. All 
the countries of the NIS, with the exception of oil/gas-rich Kazakstan, 
Azerbaijan, and Turkmenistan, fall neatly along a trend line 
associating economic policy reforms and per capita foreign investment. 
This tells us that our efforts to assist reform will result in growth.
    Democratic Transition: Democratic governance is critical to these 
formerly authoritarian states. Under communist rule, there was 
widespread abuse of civil and human rights and little access to 
information or citizen participation in political decisionmaking. Now 
free and fair elections are being held across the region, governments 
are being decentralized, independent media access is making information 
available and increasing government accountability, and NGOs are 
attracting support and influencing policy as they help articulate 
citizens' needs. USAID's democracy and governance programs help make 
recipient governments transparent and responsive to the public by 
creating checks and balances against the arbitrary power of political 
leadership and the state bureaucracy. They also create the legal and 
informational environments which facilitate community initiative 
outside government and protect individual rights. Increasingly, USAID's 
support for the development of commercial laws provides the environment 
necessary for individuals to enjoy economic freedom on a par with newly 
acquired personal freedom. Progress in building democratic institutions 
has been just as dramatic, and USAID has been just as central to this 
progress.
    Civil society: In promoting citizen participation in civil society, 
USAID has helped install the machinery of free and fair elections, 
strengthened competitive political parties, assisted the development of 
NGOs, and aided the growth and independence of public broadcast and 
print media. In 1996, for example, Azerbaijan, Kyrgyzstan, Kazakstan 
and Russia all received election-related training and technical 
assistance which complemented ongoing long-term political process 
programs. In 1996, Russia held a free and fair presidential election 
after which the defeated parties accepted the results, pledging to 
continue their activities through the democratic process rather than 
seek to overturn the results.
    We have helped build and strengthen the all-important nongovernment 
sector. In 1991, only a handful of NGOs operated in Russia; now there 
are more than 40,000. USAID has assisted numerous activities intended 
to support citizen and NGO participation in community and national 
life. We have helped establish free and independent media. Internews, 
an American NGO supported by USAID which trains print and electronic 
media professionals, has helped transform Russia from a nation which, 
in 1991, received all its news from one source to one in which there 
are more than 500 broadcasting companies. The new independent media 
coverage of the war in Chechnya is widely credited with having fostered 
public awareness of the situation there.
    Rule of Law: USAID is also assisting countries throughout the 
region to strengthen the rule of law. We have helped draft 
constitutions, train judges, prosecutors, and trial attorneys, and 
establish jury trial systems. For example, in June 1996, after 
considerable input from USAID grantees, the Ukrainian parliament 
ratified its first post-Soviet constitution. Georgia is drafting a new 
civil code.
    Local Government: USAID is helping to bring good government closer 
to the people by assisting with decentralization of power from the 
national to local level and working with mayors and municipal 
authorities to improve governance and delivery of essential public 
services. For example, in Kazakstan, USAID grantees have established 
housing associations, new institutional mechanisms by which citizens 
can get maintenance work performed.
    Social Stabilization: When social dislocation is ignored or 
inadequately addressed, citizens suffer. Citizens associate their 
plight with reforms, and in some cases have used newly acquired voting 
rights to elect politicians who exploit these concerns. Neither USAID 
nor other donors can finance social ``safety nets,'' but the agency can 
provide targeted technical assistance to strengthen the countries' own 
social protection systems. For example, helping Russia and Ukraine to 
move away from virtually free housing for all to market-based rents and 
maintenance fees has improved the quality of housing while freeing 
municipalities' resources for targeted subsidies for the most 
vulnerable groups. In areas affected by civil strife, USAID has played 
a major role in alleviating suffering, particularly in the Caucasus and 
Tajikistan.
    Reproductive health programs are being funded in Central Asia, 
Moldova, Russia and Ukraine. Preliminary data indicate that service 
improvements have resulted in reduced abortion rates and increased 
contraceptive use. In Central Asia, the USAID-supported Aral Sea 
initiative has fostered regional cooperation in protecting the Sea from 
further degradation and will ultimately provide potable water to over a 
million people.
    Noting these successes, it is reasonable to ask why, if things are 
going so well, do we need an increase in funding? The simple answer is 
that it is in the national interest of the United States to sustain 
these changes, lock them in, make them irreversible. Economic 
stabilization and structural change do not automatically translate into 
investment and growth, nor do new political systems automatically 
develop into full participatory democracies. As the political and 
economic transitions in the region proceed, we will move from guiding 
and advising on the mechanisms of structural change to maintaining 
connections to these countries in ways that sustain these transitions. 
Our engagement will evolve towards more normal, mutually beneficial 
bilateral relations.
    The New Independent States still have far to go. This region is too 
critical to U.S. strategic interests for us to abandon. The stakes for 
the United States are still high in terms of promoting regional 
stability independence from disruptive regimes in the region, and 
growing markets for American businesses.
    We need a longer time frame and more resources than we had 
anticipated a year ago. Much remains to be done, including further work 
in improving the policy/legal/regulatory environment that has been 
discouraging trade and investment, reform of the tax regimes to 
facilitate business investment and provide the revenues necessary for 
legitimate public functions, developing capital markets and commercial 
banking so that private enterprise can flourish, restructuring wasteful 
energy systems, like those in Central Asia, continuing support to 
grass-roots NGOs and to the development of political parties and 
independent media that spur popular participation in civil affairs, 
strengthening of judicial systems to fight crime and corruption and 
facilitate the settlement of commercial disputes, and continuing the 
decentralization of power and authority from central governments to 
local governments in which local citizens have more say.
    Accordingly, the Administration is proposing the Partnership for 
Freedom that would change the emphasis of our engagement with the 
countries that are ready for such a change--from assistance to 
partnership. It builds on successes in our assistance program while 
focusing on trade and investment, exchanges and cooperative activities. 
This initiative will support opportunities for U.S. business and help 
support partnership activities by private U.S. organizations. A key 
aspect of Partnership for Freedom activities will be their mutuality. 
U.S. assistance is not charity, and the Partnership for Freedom 
stresses areas in which both sides will benefit.
    The results and successes I have just cited do not come out of the 
air. They are not the product of guesswork. Through a collaborative 
process with USAID development partners, field missions defined sets of 
results, performance indicators and targets for measuring progress 
against the achievement of strategic objectives. With these tools in 
place, USAID is systematically incorporating performance information 
into program reviews, planning and decisionmaking.
    Country progress monitoring examines macroeconomic performance, 
democracy and governance, and social sector data to help determine 
whether continued assistance is necessary or justified. In combination 
with other factors, this information helps form the basis for country-
level resource requests as well as decisions on country graduation from 
U.S. assistance.
    By managing for results, USAID has confirmed that many of the 
countries in the region are implementing the policy and institutional 
changes needed to make reform real. Not all the indicators are good. 
While we applaud the successful completion of the first democratic 
Presidential election in Russia's history, we also must take into 
account that some 40 percent of Russian voters chose the anti-reform 
candidate. In several countries, economic reform has advanced far 
faster than democratic reform. The undermining of parliamentary 
independence by the government in Belarus, a repressive regime in 
Turkmenistan, and the disputed Fall 1996 elections in Armenia remind us 
that progress toward democracy in the NIS is far from uniform.
    Some social trends are also troubling, indicating that economic 
reform has not always led to economic growth and equitable distribution 
of wealth. Some of the NIS countries--most notably Russia--are now 
experiencing income inequalities comparable to Latin American levels. 
Although this may be attributable, in part, to wealth creation among a 
few, poverty has also increased significantly. There is also the growth 
in crime which is a serious threat to democracy and to the willingness 
of US business to operate in parts of the NIS environment.
    While five countries in the NIS witnessed an increase in life 
expectancy since 1991, on balance, the region experienced a decrease. 
Life expectancy among Russian males has plummeted--from 64 years in 
1989 to 59 in 1993 and possibly as low as 57 today. In addition, six 
countries in the region have experienced an increase in infant 
mortality since 1991.
    Just as the overall improvement in conditions in the NIS argues for 
our continued involvement to help sustain and deepen reform, so too do 
the less successful transitions argue for redoubled effort. The 
building of free enterprise democracy in nations that have primarily 
known despotism is not an exact science. There are no books that tell 
USAID how to confront the withering of both a nation's industrial 
capacity and its spirit after decades and decades of centralized 
repression. No books, no manuals, except the ones we are writing. We 
learn from our successes and we learn from our mistakes. That is why 
the program I am describing today bears so little resemblance to the 
program that the United States envisioned at the time the Soviet Union 
dissolved. At that time we thought that our immediate mission was to be 
the eradication of hunger; we discussed massive food relief. We 
envisioned humanitarian assistance. But almost immediately we realized 
that pure humanitarian assistance was not the answer. As the old adage 
goes, it is better to teach the hungry how to fish for themselves 
rather than to provide a one-time supply. Thus we have developed our 
program of cooperation and partnership.
    This year, in contrast to past years, I decided that our 
Congressional testimony would not be arranged by country. I decided 
instead that our testimony would reflect the way we actually do 
business--by strategic objective. USAID's program in the NIS is not a 
potpourri designed to produce a variety of salutary effects on life in 
this or that country. It is rather a tightly focused program of 
targeted assistance to promote U.S. economic and security interests by 
supporting economic reform, democratic transition and social stability 
in each respective country and across the region as a whole.
    We have every right to be proud of our accomplishments in the NIS. 
And when I say ``we,'' I mean two succeeding administrations, and the 
three Congresses. Back in 1992, it was President Bush who saw the fall 
of the Soviet state not merely as cause for celebration (which it was 
and is) but as an opportunity to build peace and trade relations with 
nations which, for decades, we essentially had neither. The FREEDOM 
Support Act, which funds our assistance program, was the vehicle this 
Committee sponsored and Congress enacted to facilitate this transition. 
Upon his inauguration, President Clinton continued and advanced his 
predecessor's vision.
    I wish we could say that we have finished the job and are ready to 
pack our bags and come home. I cannot say that. But we have made 
progress throughout the entire region. As you will see in the appendix 
to this testimony, we have had successes in every country and in every 
area of reform. Reform is happening. But not overnight. As we have 
learned over and over, the revolutions that accomplish things overnight 
are those that tear down. Building takes time but we are doing it. I am 
bullish about the future of this region.
    Mr. Chairman: Again, thank you for inviting me to appear today. I 
look forward to working with you over the coming years.
                                 ______
                                 
                                Appendix
                Results in the Newly Independent States
                       building market economies
Russia:
    As a direct result of USAID assistance, Russia's mass privatization 
program (completed in mid-1994) transferred ownership of approximately 
120,000 businesses from the state to over 40 million private 
shareholders. The Russian people now have a stake in the economy and in 
reform, and have the opportunity as entrepreneurs and investors to make 
their own economic choices.
    The private sector now accounts for 55 percent of GDP and employs 
about half of the labor force. New businesses are springing up, 
creating thousands of jobs. More than 200 institutions and 
organizations which support entrepreneurship and innovation, such as 
business incubators and business support centers, are flourishing.
    A recent agricultural land privatization law gives citizens the 
right to buy and sell land for the first time since the 1917 
revolution. Titles to nearly a thousand parcels of land had been 
transferred to privatized industrial enterprises throughout Russia by 
October 1996.
    A nascent residential mortgage market has been formed on the heels 
of privatization of over half of Russia's housing stock. Some 25 banks 
are now making housing mortgage loans on market terms--so Russians can 
buy and sell. Where public housing remains, 80 percent of 
municipalities have means tests for housing allowances, permitting them 
to move to cost recovery.
    The legal and regulatory framework to make the marketplace 
transparent and businesses subject to the public interest is beginning 
to be put in place. More needs to be done to make the tax system fair 
and non-confiscatory, to prevent money laundering and other forms of 
corruption, and to improve corporate governance, but a good beginning 
has been made:
    Passage of the Civil Code, which guarantees both freedom of 
contract and protection of private property, is a major advance in 
creating a legal and regulatory environment to support a flourishing 
market economy. The passage of scores of other laws and regulations has 
begun to establish the basis for trade and investment.
    Capital markets are up and running, and regulatory mechanisms are 
in place. Stock exchanges, clearing and settlement organizations, share 
registries and depositories, and a securities commission are operating. 
Several legal reform programs specifically address capital markets 
issues, including corporate governance and shareholder rights.
Ukraine
    Just two years into its serious economic reform program, Ukraine 
has made considerable progress in monetary stabilization, trade 
liberalization, and a substantial reduction in inflation, meriting 
support of the World Bank and IMF.
    USAID-assisted enterprise privatization is now well underway. 
Bolstered by World Bank loan conditionality, some 400 companies a month 
are entering the auction process. Approximately 30,000 of Ukraine's 
estimated 40,000-45,000 small-scale state enterprises and over 3,500 
medium and large enterprises have been privatized.
    The National Bank of Ukraine (NBU) has taken significant steps 
toward establishing a sound banking sector. NBU's Interbank Payment 
System is fully functional with technical execution of payments now 
taking minutes rather than weeks. Prudent banking regulations have been 
enacted and approximately 1750 employees from over 100 banks have 
attended training at the National Center for Training Bank Personnel, 
which was created with substantial investment from NBU.
    Parliament approved a broad strategy that establishes an open and 
competitive structure for the long term evolution of capital markets in 
Ukraine. An Association of Investment Businesses has been established, 
uniting 140 investment funds and trust companies under a common code of 
conduct. An Over-the-Counter trading system and a self-regulatory 
organization to govern it have been established. Live trading began in 
June 1996.
    With USAID support, Ukrainian Government introduced targeted, 
means-tested subsidies for housing and utilities in conjunction with 
IMF-mandated price increases. More than 3.2 million families were 
reached through the subsidies program, enabling price increases for 
housing and communal services. As a result, net savings of $600 million 
was estimated for the 1995 national budget.
Moldova
    Moldova is a reform leader, with a stable currency, low inflation, 
liberalized prices and open trade, and substantial privatization of 
state assets.
    The mass privatization program has nearly been completed, with the 
participation of 90 percent of the eligible population and resulting in 
the privatization of an estimated two-thirds of the Republic's agro-
industrial assets.
    It is the first NIS country to establish an independent securities 
market regulating entity (SEC) with Ministry status. The Moldova Stock 
exchange opened June 1995 and by the end of the year, over 300,000 
shares had been traded.
The Caucasus
    Despite a necessary preoccupation with meeting humanitarian needs 
resulting from the region's conflict, Armenia has made progress in 
developing a market economy. It has moved into real economic growth, 
first in the former Soviet Union to do so; taken initial steps in 
privatizing agriculture and industry; and begun the legal, regulatory 
and policy framework needed for competition and growth.
    Armenia was the first of the former Soviet republics to adopt a 
real property law which defines basic private property interests and 
rights. Housing stock is being privatized and a real estate market is 
developing.
    The Central Bank of Armenia has greatly strengthened its primary 
functions, with U.S. technical assistance; bank examiners are enforcing 
bank laws and regulations, and installing an electronic accounting and 
payments system.
    Efforts are well under way in Armenia to de-monopolize the 
electricity sector, rationalize energy pricing, and improve tariff 
collection. Armenergo, the power utility previously responsible for all 
electricity generation, transmission, and distribution, has been 
effectively ``unbundled'' into three generation companies, one 
transmission and dispatching company, and approximately 52 distribution 
companies.
    Georgia has made progress in macro-economic stabilization, reducing 
inflation, liberalizing prices and stabilizing its currency.
    Restructuring in Georgia's energy sector has resulted in the sale 
of a number of hydro power plants to private investors, and creation of 
a national regulatory body for the power sector. Georgia is 
participating in an agreement with the Azerbaijan International 
Operating Company and the Government of Azerbaijan on oil transit 
issues.
                            in central asia
    Accession to GATT/WTO. Both Kazakstan and Kyrgyzstan are well along 
the way regarding the steps in the submission process for accession to 
the World Trade Organization. The memorandum on the Foreign Trade 
Regime of Kazakstan was prepared with assistance of advisors from 
USAID. Negotiations, which will take at least one year, are expected to 
begin in mid-1997. Accession would provide a certain level of comfort 
for foreign and domestic investors that a legal framework is in place. 
It would also provide for dispute resolution mechanisms, again, adding 
to the comfort level of foreign and domestic investors.
    New tax codes in Kazakstan and Kyrgyzstan. With USAID assistance, 
both countries have signed into law the most comprehensive and systemic 
bodies of law dealing with taxes that have been introduced within the 
NIS. As such, they will serve as models for other Central Asian and NIS 
countries that seek to improve fiscal systems and strengthen government 
revenues. When fully implemented, both codes will have a tremendous 
impact on the establishment of a sound fiscal policy which is fair, 
transparent, enforceable, and non-confiscatory. Businessmen have long 
told us that lack of such codes has been a major constraint to 
investment and is a factor in business corruption.
    Commercial Law. A commercial law training program for judges, 
attorneys, and prosecutors is being implemented in Kazakstan and 
Kyrgyzstan. This training is designed to address problems of white-
collar commercial crimes which are a growing problem as these two 
societies undertake market reforms.
    Capital Markets. In both Kazakstan and Kyrgyzstan, a Securities 
Commission has been established as a fully independent body apart from 
the Ministry of Finance with full regulatory authority over the capital 
market. The Central Asian Stock Exchange in Almaty has been operating 
for two years; the Kyrgyz Stock Exchange has approximately 25 companies 
listed on its exchange although trading volume is as yet very light.
    Microenterprise Support. The FINCA Program (Foundation for 
International Community Assistance) in Kyrgystan is only a little over 
a year old, but has already started to show amazing success in 
mobilizing resources for the growth of microenterprises. Focused 
primarily on women entrepreneurs (98 percent), FINCA has created 264 
village banks with trained staff and an active membership of over 3,000 
depositors. These community institutions have lent $500,000 to over 
8,000 microentrepreneurs in the past year. While only a small amount of 
money in traditional USAID project terms, this credit is not only 
attaining its objective of accelerating growth of microenterprises, but 
in many cases these enterprises are now stimulating development of new 
agricultural production and distribution systems in the rural sector.
    Internet Homepage, a first for Kazakstan. You may be interested to 
know, Mr. Chairman, that Kazakstan's Stock Exchange is reaching out to 
investors worldwide, and with USAID assistance, has established an 
internet homepage. Available in both English and Russian, it provides 
company specific information on privatization and the Kazakstani 
securities market. The Homepage includes databases on joint stock 
companies, upcoming company sales, and legal information related to 
business activities. It is also the only location on the Internet that 
carries news from the Kazakstani press. USAID's objectives of ``more 
sustainable private business operations'' are being launched to new 
heights with the Homepage. Address: http://www.matrix.ru/stockinfo
    Eurobonds. In December 1996, Kazakstan offered $200 million dollars 
of three-year maturity Eurobonds to international investors; interest 
was so high that the offering was oversubscribed. This offering came 
after USAID-funded U.S. Treasury advisors provided assistance to the 
Ministry of Finance. This bond offering is of critical importance 
because proceeds from this issue will be used to reduce government wage 
arrears, purchase electrical power and fuel, as well as fund the 
acquisition of medicines and other supplies for the health sector.
    Energy Sector Reforms. As a result of USAID technical assistance 
and partnerships between Cincinnati Gas and Electric and Kazaki 
utilities, 70 percent of electrical generation in Kazakstan is being 
sold to the private sector, including American investors such as AES of 
Alexandria, Virginia. This reform represents billions of dollars of 
private capital. Soon to follow will be distribution companies. In the 
Caspian Sea context, the largest new petroleum potential in the world, 
USAID is currently helping to develop an oil and gas legal, regulatory 
and environmental framework based on international standards to further 
private investment.
                  establishing democratic institutions
Russia
    In 1996, Russia held presidential, parliamentary, and local 
elections all in the space of one year. And the process had real 
credibility among the citizenry and international election observers. 
The fact that 40 percent voted against reform in the Presidential 
election tells us there is still much to be done to win support for 
further change, but it also attests to the legitimacy of the elections.
    Judicial reform has resulted from workshops, training and 
exchanges, including a pilot program to reintroduce jury trials for 
serious criminal offenses in selected regions. USAID has provided 
copies of the Civil Code, Part I, to all judges and trained over 40 
percent of them in commercial law.
    There are now 40,000 registered NGOs in Russia, up from just a 
handful in 1991, representing citizens' interests and advocating policy 
change at the national and local levels.
    One of the most striking differences between the Russia of 1991 and 
today is the variety of media outlets bringing information to people. 
In 1991, all Russia received its televised news from only one source, 
the government controlled service. Today there are at least 500 
broadcasting companies producing original programming in Russia. The 
Russian government can no longer keep a war in Chechnya or the health 
of its leader a secret from its citizens. Internews, an American NGO, 
has played a key role in Russia with USAID funding by training and 
networking both broadcast and print media in the private sector.
Ukraine
    A fundamental first step in the establishment of the rule of law 
was accomplished with the June 28, 1996 adoption of a new constitution. 
The U.S. Government's programs in Ukraine contributed significantly by 
sponsoring town meetings to encourage wide public debate; providing 
lawmakers with information on comparative constitutional systems; 
assisting Ukraine's independent media, which provided extensive 
coverage; and supporting a public education campaign.
    With USAID assistance, local governments are becoming more 
responsive to their constituents. They have introduced a variety of 
democratic reforms such as more open budgeting, town meetings, citizen 
task forces, constituency outreach and local government watchdog 
groups, many of which have never before existed. Municipal services are 
more efficient and better financed.
    USAID developed a network of 25 Press Clubs throughout Ukraine 
where journalists can meet on a weekly/biweekly basis with GNU 
officials to discuss different issues of privatization and economic 
reform. Weekly meetings at the Kiev Press club meetings are shown 
nationally during the main news program on UT-1, providing a very 
effective means for GNU officials to reach a large audience.
Caucasus
    Armenia has made strides and had setbacks in its democratic 
transition in the past year. It held parliamentary elections and 
approved a new constitution in 1995. In late 1996, presidential and 
local elections were held but international observers described them as 
flawed.
    An objective, professional and independent journalistic cadre is a 
necessary component of democracy, and its development is a major USAID 
focus. USAID helped to organize Armenia's independent television 
stations into a network with a capacity for objective, professional 
journalism.
    Progress in democratic political processes is further along in 
Georgia than elsewhere in the Caucasus. The parliament is one of the 
most progressive in the former Soviet Union. There is a perceptible 
strong will in the political leadership, in the media and among civic 
groups to advance and protect the new democracy, to establish a 
transparent system of public administration and the rule of law.
    Georgia is drafting a new Civil Code.
    USAID support has led to the creation of 50 new Georgian NGOs 
participating in democratic and market reform.
    An independent television network was created in Georgia with 11 
individual stations.
    In Azerbaijan, USAID and its NGO partners have made headway in 
strengthening the NGO sector, independent media These nascent entities 
are critical to support a transition toward democratic governance.
Central Asia
    NGO Development. Turkmenistan is not a democracy, yet USAID 
provides critical support for the growth and development of country-
wide citizen initiatives. We are providing this support through the 
ASSAYER (formerly the Institute for Soviet-American Relations) grant 
program for assistance to environmental non-governmental organizations. 
While government policy prohibits the import of foreign magazines and 
newspapers, the Turkmen NGO, Catena, working with its U.S. partner, the 
Sacred Earth Network, provides free NGO access to information from all 
over the world through Catena's Internet link-up. Catena pays for its 
work with local NGOs by offering reasonable and reliable paid Internet 
service to Turkmen businesses and government officials.
    Turkmen NGO Promotes Civic Education. Another Turkmen NGO, Dialog 
Center for Civic Education, can be counted along with Catena, as one of 
the few indigenous groups actively working in the rather restrictive 
environment of Turkmenistan. With USAID funding through the National 
Endowment for Democracy and a grant from the USAID funded NGO, 
Counterpart, Dialog recently took a significant step towards wide 
dissemination of the concepts of civic education by publishing a book 
entitled ``The ABCs of Civic Education.'' This book has been well 
received as a vehicle for disseminating and promoting democratic 
principles and the concepts of civic education.
    Media Support. Internews, an organization funded by USAID through 
the Soros Foundation, promotes independence and diversity of the 
broadcasting media in Kazakstan, Kyrgyzstan, and Uzbekistan. Internews 
has been a prominent voice in promoting democracy through the 
establishment of independent television stations. It is helping to 
establish independent television stations by providing equipment, 
technical, and business training. Numerous independent stations have 
benefited from workshops and instructional materials. The impact of the 
work of Internews is greater access by the public to an increasingly 
strengthened and diversified broadcast media.
    National Elections. USAID provided funding to the American Bar 
Association and the American Legal Consortium to prepare analyses of 
the Kazakstani Constitution which was passed by national referendum in 
September 1995. According to the Kazakstani government, 90 percent of 
the population turned out to vote.
    Responsive and Accountable Local Government. With USAID funding 
through International City Managers Association (ICMA) technical 
assistance, the Semipalatinsk region of Kazakstan is benefitting from a 
determination to reform local government. The region has privatized 
housing, established open and competitive contracting for providing 
goods and services and established a short-term safety net for those 
who are most affected by the transition process to a market economy. 
When housing was originally privatized, the government discovered it 
could no longer provide maintenance services. ICMA provided assistance 
in the formation of housing associations, the new institutional 
mechanisms through which homeowners may channel requests for 
maintenance services. Fledgling results are that homeowners now get 
maintenance work done much sooner and the government gets out of the 
recurrent cost business of apartment and home repairs and maintenance.
    Eurasia Foundation. In the last couple of years, the Eurasia 
Foundation has blazed the trail in responding effectively to on-the-
ground reform needs as seen by NIS citizens and institutions 
themselves. In the Central Asian Republics, the Foundation has invested 
roughly $6 million to support reform minded grassroots initiatives such 
as the liberalization of laws governing media and the free press, the 
development of new modes of citizen-government relationships through 
linkages between university and training programs on public 
administration reform, and the strengthening and expansion of the 
nonprofit sector through newly established NGO resource centers. 
Finally, to better address the growing demand such new and innovative 
programs in this area of the world, the Foundation has opened a smaller 
satellite office in Almaty that broadens its outreach ability.
                    strengthening the social sectors
Russia:
    Social impacts of societal change are also critical. Reform efforts 
could be jeopardized if, for example, citizens cannot access basic 
health services or other services essential to their welfare. Likewise, 
failure of Russia to address its serious problems of environmental 
pollution and unsustainable management of natural resources will both 
undermine long-term economic growth and produce substantial negative 
global environmental impacts.
    Health reform has produced new policies, laws, and models that are 
helping Russia improve the quality, organization, and financing of its 
health care system. Health care is no longer always controlled from the 
center, and is becoming more efficient and responsive to patient needs.
    U.S.-Russian hospital partnerships have taught Russian health 
professionals state-of-the-art practices in several specializations, 
including women's clinical services, and contributed to improved 
hospital management. Modern contraceptive use is increasing and 
abortions are decreasing.
    Modern economic tools are being incorporated in to environmental 
policy-making, e.g., introduction of user fees and regional forestry 
codes. Environmental NGOs are vigorously pursuing public education, 
clean-up projects, and legal and legislative efforts.
Ukraine
    Ukraine is making progress in protecting the most vulnerable 
members of society during the economic transition and making serves 
more efficient and financially sustainable. Universal price subsidies 
are giving way to assistance based on need. The income-based benefits 
program on housing and utilities, developed with USAID support, is a 
model for a broader program of means-tested benefits for the needy. It 
has resulted in a savings of $600 million in 1995 and a projected $1 
billion in 1996.
    The number of NGOs has grown markedly, from roughly 40 in 1990 to 
an estimated 5,000 in 1995, with almost half working to provide social 
services that the government may no longer be able to afford. USAID 
programs have trained over 1,200 NGO leaders, partnered U.S. private 
and voluntary organizations with Ukrainian NGOs, and provided critical 
support to social service, public policy, human rights, and women's 
NGOs and civic organizations. Recently, USAID launched a new program to 
strengthen social service and advocacy NGOs and to improve the legal 
and regulatory environment for NGOs.
    Health care efforts are combatting a diphtheria epidemic, reforming 
delivery and financing at local levels, for better responsiveness to 
citizen needs, improving water quality, and making modern family 
planning methods available instead of abortion.
Caucasus
    U.S. assistance to the Caucasus has been predominantly 
humanitarian, given the severe hardships engendered by regional 
conflict for all the peoples of this area. Food shipments have fed 
needy citizens, refugees and displaced persons; fuel shipments have 
increased electric power; winter warmth programs have provided heat for 
houses and schools. School attendance in Armenia rose significantly as 
a direct result of this heating program. Pharmaceuticals have met 
medical needs and large segments of the vulnerable populations have 
received vaccines against infectious disease.
Central Asia
    Privatization in the Health Sector. In Kazakstan, the state-owned 
pharmaceutical distribution and retail system known as ``Farmatsiya'' 
has been almost completely privatized, helped along by USAID-funded 
technical assistance. Of 1,378 pharmacies, 691 have been auctioned and 
562 were privatized by the end of 1996.
    Health Reform in Kyrgyzstan. A critical element of USAID's health 
sector reform in the NIS is empowering consumers by promoting choice 
and responsibility. For the first time ever, Kyrgyz consumers have an 
opportunity to choose their health care provider. In June 1996, the 
health reform program launched a family medicine enrollment campaign in 
which 86 percent of residents in Karokol city and 96 percent of 
residents in Tyup in eastern Kyrgyzstan selected from a newly 
refurbished group of family practices.
    Women's Health in Central Asia. USAID has allocated $22 million 
since 1993 to reduce high maternal mortality in the Central Asian 
Republics related to high fertility and the use of abortion for 
fertility control. As you may know, in the former Soviet Union abortion 
was the main method of birth control and many women had multiple 
abortions in their lifetimes. The American International Health 
Alliance (AIHA) received funds in 1996 to establish two women's health 
clinics in partnership hospitals in Kazakstan and one in Uzbekistan.
    USAID reproductive health programs support modern, effective, and 
well-financed family planning services by providing assistance in 
strategic planning for nation-wide approaches, clinical training, 
expanding contraceptive marketing and informing men and women about 
modern contraceptives as an alternative to abortion. In 1997, USAID 
will support family planning training for Kyrgyz general family 
practitioners in group practice to expand services beyond women's 
clinics, and continue to expand and strengthen contraceptive marketing 
programs in Kazakstan and Uzbekistan. Project sites reported a 58-
percent increase in modern contraceptive use and a 30-percent reduction 
in abortions in 1994.
    In 1996, a single center, Marriage and Family Center in Bishkek, 
Krygyz Republic reported an almost 50 percent decrease in the numbers 
of abortions since 1994 and a 200 percent increase in the use of oral 
contraceptives (1994-1,333 clients to 1996 4,140 clients) during that 
period. Clearly there is a hunger for modern methods which can lead to 
nation-wide impacts.
    Aral Sea: In Kazakstan, Turkmenistan, and Uzbekistan, the US 
through USAID provided technical assistance for upgrading and improving 
water systems to supply potable water to populations at risk. By 
focusing on providing safe drinking water supply, which is an 
environmental problem of the highest priority to each national 
government, U.S. credibility and access was greatly enhanced. USAID's 
tangible investments in potable water improvements have helped in turn 
to create strong working relationships with the region's new 
governments on issues of water management. Beginning in 1995, this 
credibility was used to establish a new USAID-supported regional 
program on water resources management to introduce concepts of water 
economics and conservation prevalent in the United States and Europe to 
the broader Aral Basin.

                   contrasting georgia to the ukraine

    Senator McConnell. I did find it interesting, your 
contrasting Georgia to Ukraine. Georgia has certainly made 
significant progress, and I think it is reasonable to assume 
that this subcommittee, at least in the chairman's mark, is 
going to reward that progress with additional support. Ukraine 
is certainly, for all of the reasons you all have outlined, a 
mixed bag.
    I think of Ukraine's decision not to sell turbines for the 
Iran nuclear reactor, something which the Russians continue to 
support, as clearly something on the plus side for Ukraine. I 
mean it cost them $400 million or $500 million to refuse to 
sell those turbines to Iran, while our good friends, the 
Russians, continue to help the Iranians with that facility.
    When I asked you, Mr. Morningstar, to give us some of the 
breakthroughs, you did give us some. But one does get the 
impression that it is really quite a mixed bag.
    Is it your view, either of you, that in addition to the 
problems of organized crime in Ukraine, that there is also a 
problem, a significant problem, with official government 
corruption as well?
    Mr. Morningstar. At various levels and in various 
instances, I think it is pretty clear that corruption is 
existent. I think if anyone has to look at the cause of some of 
that corruption and what one does about it, part of it, as I 
mentioned earlier, is a result of the incredible amount of 
bureaucratization and regulations that literally give the 
opportunity for government officials to assert undue influence.
    Senator McConnell. So it is more systemic?
    Mr. Morningstar. I would say it is a combination. I think 
too often we simply say the problem in Ukraine is corruption. 
Yes; corruption is a problem. It is a problem in a lot of the 
NIS countries and other countries in the world as we all know. 
But it also is a systemic issue relating to some of the archaic 
laws and the bureaucracy and regulations in the country as 
well, and the opportunity, as I said before, to exert undue 
influence. We need to work on it.
    Senator McConnell. To the extent that it may also be 
individuals in key places, is it widely known who those 
individuals are? And if it is, in your view, why has not 
President Kuchma just dismissed them?
    Mr. Morningstar. The answer is I have no idea why President 
Kuchma has or has not dealt with various officials. Anything 
that I would say about any individual would be pure speculation 
and not based on any hard evidence. I do know that President 
Kuchma, over the last month, as a result of his new clean hands 
campaign on anticorruption--at least I have been told--has had 
some very, very hard meetings with good government officials. 
And it is my understanding that some officials have in fact 
been dismissed over the past month for corruption.

                              transparency

    Mr. Dine. Mr. Chairman, I would just like to add one item, 
and come back to the term I used before, ``transparency.'' The 
deregulation package that we and the IMF have proposed will 
enhance the theme of transparency that will start to overcome 
the official corruption that has been engaged in. So there are 
ways of working on this problem. But, basically, it is an 
internal problem that has to be faced up to.

                            american values

    The thing that always amazes me, in the 3\1/2\ years I have 
been in this job now, every time I come back to this country, I 
always ask myself, how are we different? And the two things 
that always strike me is, No. 1, the Puritan ethic. And, yes, 
we have our problems with corruption, but it is considered a 
value, a no-no value. It is something that is ingrained in all 
of us about right and wrong.
    And, second, it is the Constitution, the flexibility, the 
ambiguity, the genius of our Constitution. And these countries 
are still in a straitjacket of the past. The burden of history 
overwhelms them. If you read Russian literature even before 
communism, it is all about corruption. Most of our literature 
is about victory.
    Senator Leahy. Mr. Chairman, I just wondered, Ambassador 
Morningstar, in your answer to the question, among the people 
involved in corruption, would that include Prime Minister 
Lazarenko? I mean he is accused, in the press anyway, of all 
kinds of corruption.
    Mr. Morningstar. I think it would be unwise for me to make 
any kind of direct allegation with respect to the Prime 
Minister. I certainly do not have any specific evidence of 
corruption on his part. But I am well aware of everything that 
has been written.

                  prepared statement of senator leahy

    Senator Leahy. I just want to make sure you are aware of 
what has been said.
    Mr. Chairman, can I just leave my statements and questions 
for the record? I have to go back to another committee.
    Senator McConnell. Yes; Senator Leahy's statement will be 
made a part of the record. And you are also submitting 
questions, are you?
    Senator Leahy. I am. I raise some of the same skepticisms 
as you. And I think we both want to help in any way we can. But 
they are making it harder and harder to pull this sled.
    [The statement follows:]

              Prepared Statement of Senator Patrick Leahy

    Mr. Chairman, it would be hard to think of a more important 
foreign policy goal that supporting democracy and market 
economies in the former Soviet Union. I was pleased to see the 
increase in funding for aid to the NIS in the President's 1998 
budget request.
    These countries are really starting over from scratch--in 
fact it may be even harder because they have to reverse so much 
of the damage that was done over the past 70 years.
    We have to be realistic in our expectations--the problems 
there are not going to solved overnight. But we also need to 
learn from our mistakes. As far as I can tell, our efforts have 
been plagued by poor design, poor management, and often 
disappointing results.
    Some of that was predictable--we are talking about 
countries where there are powerful forces opposed to change. 
But we have seen some of the same problems of other hastily 
conceived aid programs. I am reminded of what happened in 
Panama after the overthrow of General Noriega. We rushed a lot 
of money down there, and a lot was wasted. We did the same 
thing in Nicaragua. Then, just to show how little we learn from 
our mistakes, we repeated some of them in Russia and Ukraine.
    That is not to say that nothing has been accomplished. When 
you consider where they started, a lot has been accomplished--
from hospital partnerships to legal reform. But many AID 
personnel were ignorant of the language and culture, and relied 
on foreign nationals who took advantage. High-priced 
contractors with past connections to AID but no previous 
experience in the NIS, ``reinvented'' themselves to get AID 
contracts from NIS funds.
    Today, many Russians, who have not received a paycheck in 
months, have lost faith in their government and in our ability 
to help them. I am sorry to say that I share some of their 
disillusionment.
    Add to that the rampant corruption and organized crime, and 
the picture becomes pretty bleak.
    I want to see this program succeed. I think the new 
``Partnership for Freedom,'' as much as I dislike slogans, 
represents a step in the right direction. I am a big fan of 
partnerships and exchange programs. Like Chairman McConnell, I 
strongly support programs to combat organized crime. And I 
certainly favor doing all we can to promote trade and 
investment.
    But if someone asked me whether AID and the State 
Department are capable of carrying out a cost effective program 
in the NIS, I would have to say ``I don't know.'' The record is 
mixed.
    I have supported aid to Ukraine, and believe President 
Kuchma is trying to do the right thing. But the corruption that 
has infested his government, which has plagued American 
businesses trying to get a foothold there, is outrageous. 
Investment contracts don't seem to be worth the paper they are 
printed on. Company representatives have been threatened, their 
property stolen, and several large businesses have simply 
pulled out. Millions of dollars have been lost. Others are 
fighting their cases in the Ukrainian courts, with little hope 
of getting justice. The Gala Radio case is one appalling 
example.
    I know Chairman McConnell is concerned about this, as I am, 
and we will be watching the situation there very closely.
    I know you both--Mr. Morningstar and Mr. Dine, are also 
concerned. But it is no longer enough to say you are ``raising 
these concerns at the highest levels.'' The situation is worse, 
not better, and the Ukrainian officials' response has been to 
dismiss most of the complaints as fabrications. They are not.
    Mr. Chairman, I am going to support the President's request 
for the NIS, because I believe it is in our national interest. 
But I also want to work closely with you so we get the maximum 
results for our money, and American investors are treated 
fairly.
    Thank you.

                               corruption

    Mr. Morningstar. Is it possible, since you did ask, just 
quickly before you leave, Senator Leahy--you did ask a 
question--why should we continue to pour money into these 
countries? Could I just briefly respond to that?
    I think that we need to have the discipline, all of us, to 
do what is rational and to do what makes sense. And in my view, 
that means doing what is in our national interest and carrying 
out those programs which make sense, which continue to make 
sense, depending on whatever the circumstances may be. I think, 
for example, to cut assistance simply as a pure punishment does 
not make sense.
    I think what makes sense is that if the Ukraine, for 
example, is making no progress--if we determine, in 
consultation, that in fact they are making no progress in the 
agricultural area--and I could make a very strong case that 
they are not--then, yes, maybe that program should be suspended 
or deferred until certain conditionality takes place. That, in 
effect, is what the World Bank is doing. I think you could say 
the same with respect to the energy market and with respect to 
privatization.
    But I think it would be a mistake and against our own 
national interests simply to take the punishment approach, 
whether it be with respect to Ukraine, Russia or any of the 
other countries. But, again, we want to help the private 
sector, to help the communities, to help the individual 
citizens.
    Senator Leahy. Thank you.

                                ukraine

    Senator McConnell. The dilemma, it seems to me, is 
fundamentally this. Because of size and strategic geographic 
location, I am sure we would all agree--with all due respect to 
the other former Soviet republics--that Ukraine is potentially 
the most important of all the non-Russian republics. Although 
we have had some tussles over just how much emphasis you put in 
Moscow at the expense of the other republics, helping Ukraine 
achieve its potential is in our national interest, we would all 
agree.
    At this juncture, having seen the mixed bag of progress--
and, clearly, when contrasted with Georgia, they do not a have 
good record--the dilemma is what is the best way to go from 
here?
    Now, the administration--any administration--would prefer 
to have no earmarks, and we have had those tussles in the last 
4 years. I have felt we needed to have them or you would spend 
all the money in Russia. You have wanted the flexibility, and I 
understand. If I were in your shoes, I would want it as well.
    But this year, after 4 years of this subcommittee's steady 
support for Ukraine, with the earmark I find myself 
disappointed in what those 4 years have brought. And I am 
trying to think through--and I am thinking out loud here with 
you--as to where we go from here.
    Even though you would like to have a blank check, I think 
we are probably not going to give you a blank check. But in 
filling in some of the lines in the check, I am torn this year 
as to what is the best way to send a message, the carrot or the 
stick. It seems to me it is not clear.
    Mr. Dine.
    Mr. Dine. I think you and I have experienced other accounts 
in which this question has come up. There is no doubt in my 
mind, that, after all of this effort, if things seem to be as 
bad as we all agree, you have to hold out the opportunity, but 
only if they perform. To me, that is natural, that is human 
nature. And that is often how we get over some stumbling.
    You know, if you look at Georgia before that December 1995 
election, it was mired in corruption, assassination, and the 
whole Abkazia situation had complicated things further. And we 
were very, very concerned. The election itself happened to be a 
liberating event. And all of the attributes that we have so 
respected Mr. Shevardnadze for and also the parliament--you may 
have met the 33-year-old speaker when he was here--he was 
impressive. And there are many more like him.
    And I think, with patience, with hard work, patience, 
carrots and sticks, Ukraine is going to bust out of itself, 
too. We have got to help them get beyond the past.
    Senator McConnell. I like having the Georgian example in 
the neighborhood.
    Mr. Dine. They butt up against Hungary, too. And Hungary, 
in foreign investments, is No. 1. And it drives them crazy 
every time we use it as an example. Again, the basic 
fundamental stuff of private property, of individual rights, 
and of limited government has to get through to them. After 
all, that is our revolution, and it is still going on.
    Senator McConnell. Let me ask you one more question in this 
round, then I will turn to Senator Murray.
    I know, of course, you would like to have no earmarks at 
all. On the assumption you are going to have some, which would 
you rather have? Given where we are today with Ukraine and 
where we could like to go, where would you put your priorities?
    Mr. Morningstar. Do you mean from a country earmark 
standpoint?
    Senator McConnell. Let me rephrase the question. Assuming 
we gave you essentially unearmarked funds for Ukraine, tell me 
again what your priorities would be for the next 12 months.

                              partnerships

    Mr. Morningstar. I would say that the priorities should be 
in four or five different areas. First, I think we should 
institute in Ukraine as many Partnership for Freedom-type 
activities as possible. I think we ought to emphasize 
activities that are at the local and community level, and 
increase exchanges and increase partnerships and use those as 
vehicles and mechanisms to get assistance and cooperation to 
the local level. That, in turn, will generate pressure on the 
national level.
    Second, I would want to continue to work with Ukraine in 
the area of legal reform--to the extent that we have determined 
that in fact there was a will and there is a chance of moving 
forward to continue to work with them on criminal codes with 
respect to criminal procedures codes and generally with respect 
to the rule of law.
    Next, I would want to get into areas where they really 
showed a genuine commitment to move forward. If President 
Kuchma can convince all of us that in fact he is serious about 
the issues relating to corruption, I think we do need to help 
with respect to transparency issues, both in connection with 
the regulation--work with him on things such as conflict of 
interest, open tender processing, the kinds of things that 
basically will show that they have a fair process. I think we 
should continue working with small business.
    Senator McConnell. What about the law enforcement training 
issues?
    Mr. Morningstar. I would include that. The law enforcement 
training continues to be important. I think those programs are 
beginning to show some results.
    Senator McConnell. How about the economy? They are doing 
great work.
    Mr. Morningstar. Everything I hear about it is sensational. 
We ought to be increasing what we can do in that area. I think 
that, with respect to Chernobyl, we are going to have to make 
sure to continue that. A memorandum of understanding and some 
of the earmarks with respect to that assistance should continue 
to move forward. The issues are basic, in the area of energy 
reform, the area of agriculture, the area of privatization, 
whether or not Ukraine shows that they are serious.
    I can make a very strong argument that given the continuing 
development of Parastatal, the failure of the privatized grain 
elevators, the issue relating to grain embargoes, all the work 
we have done on commodity exchanges is going to naught because 
of state control over that issue. And that is an area that we 
gave some very serious consideration to suspending or deferring 
until they show that they are moving ahead.
    I think we also need to work very closely with the World 
Bank, in coordinating with them with respect to their 
conditionalities and when they feel that they can go forward in 
the areas of central agriculture, energy and public 
administration and privatization, that we should work with them 
in a coordinated way.

              reformists' triumphs in bulgaria and romania

    Mr. Dine. I fully agree with what Dick just said. We faced 
a similar situation a couple of years ago in Bulgaria. The 
socialist government ruled from the center and refused to 
reform. We were knocking our heads up against the wall. And our 
mission director there said let us go to the cities, let us go 
to the municipalities. And we started working in 10 
municipalities, even with socialists. And after the elections, 
reformers had won 9 out of 10. These folks wanted to reform as 
fast as possible--privatization, housing, you name it, land, 
urban land, utilities, urban waste, great.
    And Romania had its breakthrough on its election. There is 
a new day there. And we are working very closely with the 
government. And now there is the Bulgarian situation. And so if 
we do the steady work, the fundamentals, I believe time takes 
care of itself.
    Mr. Morningstar. The type of thing we ought to be doing--
just to give a plug to a program--a prominent member of the 
Ukrainian art community came up with a program that AID is now 
funding that is exactly the kind of thing we need to be 
emphasizing, which is pushing the relationship between cities 
and using relationships between cities as vehicles to provide 
assistance to Ukrainian communities.
    For example, if a given community has a problem with 
respect to sewage or a problem where it wants to learn more 
about municipal bond financing or whatever it may happen to be 
that these are the kinds of things we need to do.
    Senator McConnell. Senator Murray.
    Senator Murray. Thank you, Mr. Chairman.
    And thank you, Mr. Morningstar and Mr. Dine. It is good to 
see you again. I appreciate all of your work, particularly, of 
course, in the Russian Far East.
    As you know, we have had continuing conversations about 
that. And, as you know, that is an area that my State is very 
interested in, both dealing with the challenges and the 
tremendous opportunities that are there. And I appreciate the 
work that has been done there.
    I just have a couple of questions. And you probably know my 
first one, which is the funding for the west coast group, for 
the Gore-Chernomyrdin Commission. I heard there is a little bit 
of progress in that. Can you tell me about it?
    Mr. Morningstar. The commitment was made, as you know, by 
me some months ago. And as I understand, a letter went to you 
from Mr. Kalicki of the Commerce Department, pledging the 
$216,000 that would go to the secretariat. In any event, there 
is no question that money will be provided. And it is necessary 
that it be provided for the activities.

                           exchange programs

    Senator Murray. I am very much looking forward to receiving 
that letter. If you can make sure that that happens.
    The other area I really wanted to ask you about today is 
exchange programs that have been funded by USAID. And of 
particular importance to me is the Newly Independent Youth 
Exchange Program. I wondered if you could update me on where 
you see that going, particularly with the consolidation in the 
State Department.
    Mr. Morningstar. This is something we were concerned about 
in our office when we announced the consolidations would take 
place. And in fact we confirmed with USIA that there would be 
no interference at all with how the exchange programs are run, 
at least through fiscal year 1998, as a result of this 
consolidation. And we can give you and the staff some more 
information with respect to that.
    The Partnership for Freedom program budget, you might note, 
wherever it is on one of these charts here, if we can pull it 
out, would show a doubling of moneys that would be going to 
exchanges. It is going from about $30 million in fiscal year 
1998 to $59 million, as that chart shows. And we think that the 
efficiencies in the program would literally more than double 
the exchanges.
    Senator Murray. Efficiencies meaning?
    Mr. Morningstar. Lower cost per exchange. And we have been 
successful in the last couple of years in reducing the cost of 
exchanges significantly, in many cases by as much as one-half, 
by doing more with respect to home stays and doing more with 
respect to, at least on a professional level as opposed to the 
student level, people paying their own way. And it is 
interesting, by paying their own way, they are able to use 
Aeroflot, which is much, much less expensive than American 
carriers, I have to say.
    Senator Murray. I appreciate that. And let me just say for 
the record that I think this is extremely important that we 
keep those programs intact. The real way we are going to have 
democracy in the future, the real way that Russia is going to 
succeed in the future is for those young people to have those 
kinds of experiences that allow them to go home and share with 
their fellow students and to become leaders for tomorrow. And 
so I want to make sure that we keep those intact as we go 
through some of these changes in those programs.
    Mr. Morningstar. And that is the basic underpinning of our 
new initiative.
    Senator Murray. Thank you.
    Thank you, Mr. Chairman.
    Senator McConnell. Thank you, Senator Murray.
    OK, let us go to Russia. Last year, the Russian GDP 
declined 6 percent. A lot of the problem seems to result from a 
tax system, described by the New York Times as ``a hodgepodge 
of Soviet-era law, ad hoc new taxes and favors granted to the 
well connected.'' Because of the revenue shortfalls at the end 
of January, workers were waiting for $8.6 billion in overdue 
wages, a problem compounded by the fact that the soldiers have 
not been paid in 4 months.
    Last year you came up here and said the IMF and the 
administration had confidence that laws were on the verge of 
being passed to rationalize the tax system. In fact, just 
before the elections, the IMF had enough confidence to release 
an additional installment of a $10 billion loan--a decision 
some viewed as rather political. Since then, the IMF has 
withheld three installments because of a lack of tax receipts 
and the absence of any budget reform. Apparently, last week, 
based upon commitments by President Yeltsin to reform 
telecommunications, energy and rail monopolies, the IMF 
announced plans to release more than $700 million.
    I guess the question is this: Is the appearance of reform 
rather than concrete results all that seem to matter to IMF, 
and, for that matter, to the administration?
    Mr. Morningstar. Obviously my answer is ``no.'' But I will 
elaborate. First of all, the whole area of tax reform is one of 
the few areas of technical assistance in Russia that I think we 
need to stay very much involved in. In fact, in our new 
program----

                       new investment initiative

    Senator McConnell. Assuming we have any credibility at all 
in tax reform.
    Mr. Morningstar. Part of the new investment initiative 
includes continuing to provide moneys with respect to obstacles 
to trade and investment. The whole situation with respect to 
the Tax Code is obviously very important. Things went very 
slowly in the last year, obviously. And it is very frustrating 
and had a lot to do with elections, and it had a lot to do with 
President Yeltsin being sick and all sorts of excuses.
    That does not matter. What does matter is that because of 
our work with the appropriate officials in the Russian 
Government, a tax code, a rational tax code, was finally agreed 
to by the government just a couple of weeks ago. There was an 
article about it, I think, in today's Wall Street Journal. And 
that code has been submitted to the Duma. Or if it has not been 
submitted, it is within hours of being submitted.
    Senator McConnell. Does that have a pretty good chance of 
passing, do you know?
    Mr. Morningstar. There is some optimism. What happened is, 
one of the debates that has been going on in Russia over the 
last couple of months is whether it should be submitted as a 
full code or whether it should be submitted in pieces. What 
they finally decided to do was submit it as a full code, which 
includes total revision of the value-added tax. It includes a 
revised corporate profits tax, which allow for basic business 
expenditures, for example, that never existed before. It allows 
for depreciation and for revisions with respect to tax 
administration. And there are other aspects as well.
    And so what their strategy was to do was to submit it as a 
full code, and then, if necessary, break it up into individual 
pieces. But they are optimistic that it can pass, hopefully 
during this year. And one of the things that I found in my 
trips to Russia, in dealing with government officials at high 
levels, as well as the Duma members and members of the Budget 
Committee, who were very much involved with the tax codes, and 
frankly members of all parties, is that they all requested tax 
assistance. And it really does need to be cleaned up. So we do 
hold out some optimism.
    Also, one of the more positive things that happened is when 
the finance minister came in, one of the changes that was made 
virtually right away was the change in the new director of tax 
estate services, who was appointed. And there was also a note 
in the paper this morning that said that Gazprom--and this is 
just a note in the paper, I do not have any other information--
had agreed to pay $2.5 billion in back taxes. And again, they 
are getting serious about the issue.
    Mr. Dine. The government has agreed to pay Gazprom several 
more billion more dollars, though.
    Senator McConnell. I was just thinking, if the Russians 
pulled this off and successfully reform their tax code, we may 
have them testify over here before the Finance Committee. 
[Laughter.]
    Mr. Dine. But, overall, Mr. Chairman, the economy in Russia 
is on the right course. In the month of April, they had only 1 
percent inflation. This is the first time it has reached 1 
percent. Whether or not it is going to continue to go down, we 
will see.
    Senator McConnell. What statistic did you use in the 
percentage of the economy in private hands in Russia?
    Mr. Dine. I said 55 percent.
    Senator McConnell. Fifty-five percent; I thought you said 
65. Was it 55?
    Mr. Dine. I said 55 percent of GDP comes from their private 
sector.
    That is the official statistic. In all these countries, if 
you look at the gray economy, it changes. But those are the 
official statistics.
    Senator McConnell. On the corruption issue, we spent a lot 
of time on corruption in Ukraine. It is a fairly serious 
problem still in Russia. Have there been any examples in the 
last year or so of any senior Russian officials being indicted 
or prosecuted for corruption?

                            organized crime

    Mr. Morningstar. I do not know. I am not saying it is not 
the case, but I do not know of any senior official that has 
been actually indicted. I know people have been removed from 
the government. But I do not know of any.
    Senator McConnell. Is the organized crime problem still 
about where it was 1 year ago?
    Mr. Morningstar. It is still obviously a very significant 
problem. If you talk to Russians, they will argue that in fact 
the situation has gotten somewhat better. If you talk to 
American businesses in general, they think the problem is 
handleable--handleable from the standpoint that I think that 
most business people, American business people, who I have 
spoken to, will say that if you know who you are dealing with 
and if you lay down the ground rules right up front as to how 
you are going to deal with your partners and people within the 
government, that they can generally avoid many of the problems.
    That is not true in every case. I can give you horror 
stories in Russia, as is the case in Ukraine. But there seems 
to be the view that the problem is manageable, but that we need 
to keep working very, very hard with respect to it.
    Mr. Dine. And again, in conversations I have had recently, 
individuals have indicated that they do not have to park their 
money anymore in Cyprus or Switzerland.
    Mr. Morningstar. One of the other factors that has happened 
in the last couple of months--and we will see how it all works 
out--is that Nemtsov, who really, if you take what he is saying 
at face value, is really trying to do some very remarkable 
things with respect to demonopolization and corruption. I had 
an opportunity to meet with him a few times in his prior life, 
when he was the Governor. And he really is a very impressive 
person. And I tried to explain myself and not get too excited 
about some of these breakthroughs, just like we do not want to 
get overly excited about some of the setbacks.
    Senator McConnell. Ambassador Morningstar, with regards to 
your testimony for a minute, you had a section on lessons 
learned that was refreshingly frank. I was particularly pleased 
to see you acknowledge the subcommittee's longstanding interest 
in seeing an emphasis on more small-scale, grassroots 
initiatives. However, I am somewhat stunned by your statement, 
``We have learned that it does not make sense to spend 
additional dollars on restructuring large, formerly state-owned 
companies.'' And that is a quote from your statement.
    According to one private study, we spent more than half-a-
billion dollars on privatization and follow-on activities. And 
so I am curious as to when you figured out that was the wrong 
approach and why.
    Mr. Morningstar. Well, I very early came to the conclusion 
that we were not going to be very successful at our efforts 
with respect to larger-scale enterprise structures. We had a 
program--and Tom and I agreed to cut it very shortly after I 
came into my position--called the Powers Program, in which we 
were given $800,000 each, through a group of consultants, and 
to then take that $800,000 and go into a specific company and 
tell them how they were going to restructure things.
    What we found out very quickly was, one, that it did not 
work, and, second, that these companies can afford to do it 
themselves. They have plenty of assets. And even beyond that, 
if we simply hand out the money for programs such as this, they 
are not going to have anywhere near the commitment to following 
through on the recommendations that in fact are made. These 
companies have to have a piece of the action if they are really 
going to believe or they are really going to appreciate and 
follow through on the advice that they are getting. And we have 
taken that approach now through all of our business training 
programs.
    The Morozov Institute, which has, I think, been a very 
successful, now Russian-run, training program, is very much on 
a cost-sharing basis.
    Senator McConnell. What is happening to all of these 
megaenterprises? Are they fading away, downsizing, going out of 
business? What is happening to these massive, state-run 
enterprises?
    Mr. Dine. It depends on which country you are in.
    Senator McConnell. We are talking about Russia.

                    state-owned companies in russia

    Mr. Dine. Well, there is a whole range. Some of them look 
like they are petrified at a period in time and they are just 
standing still. Nothing is going on inside. Some are paying or 
pretend to be paying workers still, but nobody wants to buy the 
whole thing or part of the dinosaur. And so they are just going 
to languish until somebody comes in and buys the land and 
starts all over.
    Senator McConnell. Well, they are presumably not making a 
profit if they are laying people off.
    Mr. Dine. They are not making a profit and not laying 
people off.
    I remember one discussion outside of Moscow less than 1 
year ago with a company manager. He was railing about all of 
the expenses he had because he had to run the hockey team, he 
had to run the high school and the grade school, he had to run 
a dormitory, he had to run a food servicing unit, and he also 
had to do some products. And he was not breaking even. But he 
could not break--the state cannot pick up--there is no social 
safety net, or not a sufficient one, and, therefore, he was 
stuck with all of these expenses. It was not a dead dinosaur; 
it was alive. He was trying to take part of the factory and 
make it profitable.
    Mr. Morningstar. They are having some successes, I guess, 
with respect to some of these companies, with people coming in 
and purchasing bits of it.
    But if there is any issue that keeps me up in the middle of 
the night, this is the one. Because I have a really hard time 
figuring out how these large-scale enterprises are going to 
come down in size in a way that is balanced by the growth of 
new business and the creation of new jobs. And that is why I 
keep coming back to the point that we have got to do as much as 
we possibly can do in these countries to build from the bottom 
up and build the private sector. And even then, it is still 
going to be a major, major issue for years to come.
    Senator McConnell. Are not a huge number of these 
enterprises, by Western standards, bankrupt?
    Mr. Morningstar. Sure.
    Senator McConnell. Is there such a thing as bankruptcy in 
Russia?
    Mr. Dine. Yes; but there is not enough case law even in the 
civil codes. They comment on the bankruptcy, but----
    Senator McConnell. It probably ought to be in receivership 
or bankruptcy, the assets.
    Mr. Dine [continuing]. But they are still owned by the 
state.
    Mr. Morningstar. This is one of the things that I believe 
Nemtsov is trying to do. And the value of doing it is at least 
this whole question of hidden unemployment will disappear. When 
they talk about their unemployment numbers being in the low-
single digits, it is ridiculous. I mean you have all of these 
people that are sitting, doing nothing, in these large 
enterprises. And they need to recognize the situation for what 
it is, and then determine how do we take care of these people 
if there are not any jobs coming fast enough to take their 
place.
    Senator McConnell. I will never forget, I was at a seminar 
4 or 5 years ago, there was a speaker there who was talking 
about one Russian enterprise that made SS-18 or SS-24 missiles 
and Christmas tree lights. Obviously, some central planner in 
Moscow said, now, who are we going to assign the Christmas tree 
lights to? And they found a place on the map. That kind of 
thing is still hanging on.
    Mr. Dine. Well, the ministries, politically, hold on to 
these useless companies. And this gets to, again, given the 
broader brush, the 35-year-olds and below are not interested.
    Senator McConnell. They are all starting small businesses. 
That is the good news.
    Mr. Dine. And the interesting thing to me is that those 
above that, who came out of these factories, who came out of 
these enterprises, who are now major entrepreneurs, I mean 
clearly, in the human chemistry, they just knew how to take off 
without stealing.
    Senator McConnell. But there is the vitality in the 
economy, people are starting little businesses and growing off 
to the side.
    Mr. Morningstar. Absolutely. That is what the Partnership 
for Freedom is all about. And the problem with the large 
enterprises, if I might, is it affects other areas of reform as 
well.
    One of the things we are concerned about in Ukraine is the 
energy reform. Over the last year, the World Bank is 
complaining the tax collections are coming down, overall 
collections are coming down. There is a reason why that is 
happening. One, it is harder to collect in winter than in the 
summer. But what is happening in the winter is that the 
government is continuing to provide subsidies to its large 
enterprises with respect to electricity. And so that is grossly 
inflating the problem of nonpayment. So how do you do energy 
reform when you have these kinds of issues?
    Mr. Dine. Just one other point. Do not forgot that in this 
whole account, there are other countries. There are economies 
beginning to move quickly. And it is proliferating with the 
small businessmen. For the most part, they are really moving 
and they are showing real growth. I will mention Georgia and 
Moldova. There are varying degrees of progress here. And it is 
going to be the middle class, the entrepreneurial middle class, 
that will build these countries for the future.
    Senator McConnell. Just a couple of things to close. The 
Russian Enterprise Fund has been a big disappointment, I 
gather. They have spent more on legal fees than on successful 
investments. And Mr. Morningstar, you were going to review it. 
I am curious if you could give us any hope.
    Mr. Morningstar. I think there is some hope. We have been 
working very, very hard with all of the enterprise funds, not 
just the United States-Russian investment fund, over the last 6 
months, to work with them to develop performance measures and 
to develop strategic objectives that will in fact increase the 
rate of investment. They have had, I think, a difficult time 
over the last few years.
    Even successful enterprise funds in Eastern Europe have 
taken some time to get up and going. We are caught in between 
the need for and the importance of making rational business 
decisions. We do not make investments in projects that they do 
not expect to be successful--that is not going to teach anybody 
anything--while at the same time trying to get money.
    We are emphasizing small business lending in the regions, 
which we think can be very successful--it already is--and can 
be a more successful major activity. And we are encouraging 
them to be open to projects that they think can be commercially 
profitable and, when that is the case, to take the risk.
    We think that the new CEO understands the importance of 
moving forward. He has told me he is concerned. He wants to 
move faster. And one of his principal objectives is to get more 
reasonable projects out the door more quickly, including in the 
Russian Far East. And that is where Senator Stevens' staff and 
Senator Murray are working.

                        ukraine health earmarks

    Senator McConnell. Finally, last year I put a couple of 
earmarks in for breast cancer and for children of Chernobyl, 
and I wonder if you could give me an update on where 
implementation of those stand.
    Mr. Dine. These are beginning to work out pretty well. On 
the Ukraine earmark on birth defects, we have received a 
proposal from the University of South Alabama. We have reviewed 
it. We have provided preliminary comments. And we are 
optimistic that we can develop that into a good program.
    On Ukraine childhood mental and physical illness, we are 
going to issue a request for applications during the next few 
months regarding screening and treatment of mental and physical 
illness and children. And we understand the birth defects 
requirements to be technically and operationally distinct from 
the broader mandate to address childhood mental and physical 
illness related to Chernobyl. So we are taking those very 
seriously.

                     Additional committee questions

    Senator McConnell. All right. Well, thank you both for 
being here. I appreciate it very much and we will continue to 
talk.
    There will be some additional questions which will be 
submitted for your response in the record.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]

                     Additional Committee Questions

                  Agency for International Development

                    independent media outside moscow

    Question. I have read recent news reports regarding the 
consolidation of broadcast media in Moscow by powerful economic 
powers, leaving concerns that the sovereignty of the media will 
succumb to political forces as well. What is USAID doing to 
support decentralized, independent media outside of Moscow?
    Answer. USAID/Russia works with Internews and the Russian 
American Press and Information Center (RAPIC) to support the 
development of independent television, print, and electronic 
media--almost exclusively outside of Moscow.
    Internews provides training and advisory services on both 
technical and business issues, seed grants of equipment, and 
program support to more than 90 regional independent television 
stations. Although most of these stations started from scratch 
in the early 1990's, by the end of 1996, more than 20 stations 
were grossing in excess of $100,000 in monthly revenues. 
Internews now estimates that up to 30 percent of the prime-time 
viewing audience is now watching regional stations.
    RAPIC works principally with independent, regional 
newspapers. Through the Media Development Program (which RAPIC 
and Internews jointly implement), RAPIC has deployed a number 
of consulting teams which bring American media specialists to 
Russia on a volunteer basis to work with independent media 
organizations on business practices, including financial 
management and advertising. RAPIC is also exploring mechanisms 
to encourage alternative investment mechanisms, particularly 
leasing mechanisms, which would provide cash-strapped 
independent regional media organizations with an alternative to 
state-owned presses, transmitters, and other capital equipment.
    The competition for advertising revenues is tough and the 
availability of needed capital financing is still limited. Top 
quality independent media operations are, however, increasingly 
seen as good investment opportunities. The U.S.-Russian 
Investment Fund (TUSRIF) has already invested in media 
companies in St. Petersburg. Metromedia (U.S.) continues to 
pursue its business interests in radio and television. And, as 
the question notes, major Russian companies with apparent 
political biases are also purchasing media outlets.
    In USAID's view, Russian television managers hold the keys 
to the two factors most likely to ensure the continued 
independence of independent media in the regions: Presentation 
of high-quality and unbiased presentation of news and managing 
financially-sound businesses.
    Therefore, USAID's strategy is to continue to work with 
regional media managers on these highly-related goals. Without 
a good quality product capable of attracting a growing 
audience, advertising revenues are not going to grow. Without 
good management of those advertising revenues, the media 
company is unlikely to attract larger equity investments or 
secure needed loans.
    This strategy may not prevent a biased investor from taking 
over a regional media operation but it should ensure that 
managers can turn down such potential investors if they wish.
                                ------                                


                  Questions Submitted by Senator Leahy

           american college of physicians partnership program

    Question. Mr. Dine, I have been approached, as I believe 
you have, by representatives of the American College of 
Physicians, about their idea to develop a partnership program 
dedicated to professional medical education in the NIS.
    The idea is to send American doctors, who would volunteer 
their time, to the NIS to provide continuing medical education 
in the diseases that contribute the most to excess morbidity 
and mortality, and where appropriate medical care could bring a 
measurable benefit to health. They are talking about 
cardiovascular disease, infections, diabetes, oncology, 
respiratory disease.
    They believe this would be complementary to the hospital 
partnership program and other efforts we are making to improve 
healthcare there. What do you think?
    Answer. A partnership between representatives of the 
American College of Physicians and a counterpart institution or 
institutions in the NIS focussing on professional medical 
education in the NIS would certainly complement current USG 
efforts to improve health care in the NIS, including the 
hospital partnership program.
    The current hospital partnership program under the American 
International Health Alliance agreement with USAID is scheduled 
to conclude in December of 1998.
    Beginning in fiscal year 1998, USAID plans to compete a 
follow-on partnership program, the specific parameters of which 
have yet to be determined. However, such a partnership as 
proposed by the American College of Physicians may be 
considered during any future solicitations for follow-on 
partnership programs. All future partnerships are contingent on 
the availability of future funds.

                              agriculture

    Question. Mr. Dine, let me read you a quote from a recent 
``L.A. Times'' article about the current state of agriculture 
in Russia: ``Agriculture reform's most visible result has been 
to create a new underclass of rural poor, tied to the land 
because they have no money to leave, with little more hope of 
freedom or well-being than their serf ancestors had more than a 
century ago.''
    I hear that USAID is pretty much out of the agriculture 
business. Grain harvests in Russia are steadily shrinking. Have 
we neglected an important part of the Russian economy?
    Answer. It is true that USAID support for the Russian 
agriculture sector has been limited. Because of the magnitude 
of the economic problems and the fact that this sector has been 
one of the least reform-minded, USAID (as well as some other 
donors) felt that in helping to create a market economy, 
agriculture was not the place to begin. Instead, we 
concentrated on promoting systemic changes such as tax and 
legal reform and development of capital markets (which would 
also benefit agriculture), and in other areas where 
opportunities for short term success were greater. In the past 
3 years, with USAID/Russia's increasingly severe budget 
constraints and little progress in agrarian policy reform, we 
continued to give relatively low priority to agriculture.
    Nevertheless, USAID's Russia program has undertaken some 
significant activities in farm reorganization and post 
restructuring support. Over 400 new, smaller, more efficient, 
privately owned agricultural enterprises were created from 64 
reorganized farms in 15 oblasts. An institutional capacity was 
also established for Russians to expand farm reorganization in 
these oblasts and to new regions. Through the Market-Oriented 
Farm Support Activity (MOFSA), we are developing replicable 
pilot models for agribusiness, credit, and social services. 
Recognizing the success of the farm reorganization activity, 
the Russian government requested USAID to extend the program; 
however, because of budget restrictions we were unable to do 
so. Similarly, MOFSA, while designed to be implemented in four 
oblasts, was cut back to two.
    With reformers now back at the helm of the federal 
government, personnel changes in the Ministry of Agriculture, 
and a number of regional governments taking progressive 
approaches to agrarian reform, we hope to begin a dialogue with 
Russian federal and regional authorities on a range of 
agricultural reform initiatives.

                     center for citizen initiatives

    Question. I know you are familiar with the Center for 
Citizen Initiatives, and its efforts to develop a sustainable 
agriculture extension program in Russia.
    USAID has supported this in the past, and I understand you 
are going to find some money for them this year. I want you to 
know that I support this. Environmentally safe agriculture 
makes as much sense in Russia as it does anywhere else. If we 
can help them promote these techniques--if there are people 
there who want to learn, we should help them. Would you like to 
comment?
    Answer. In all of USAID's agricultural projects, we are 
concerned with promoting environmentally safe and sustainable 
agriculture. We agree that CCI's work in this field has been 
useful. We are now carefully considering CCI's proposed new 
activities. Development of a full-scale agricultural extension 
system is a long term and ambitious undertaking, which the 
current Russia budget will not allow. We are encouraging CCI to 
focus on providing extension-type information that will give 
privatized farms access to technology and help them to better 
manage their resources, thus enabling them to compete in a 
market economy.
                                ------                                


                 Questions Submitted by Senator Bennett

                           title viii funding

    Question. The complex post-Soviet transition requires the 
United States to continue maintaining the domestic intellectual 
resources that have helped shape our policy. At present, the 
only program currently devoted to this objective is the program 
on research and training on Eastern Europe and the Independent 
States of the former Soviet Union (Title VIII). Do you support 
the continuation of the Title VIII program? If so, how do you 
propose to best ensure the integrity of this important program?
    Answer. We share your confidence that the Title VIII 
program has historically produced significant research on the 
countries of Central and Eastern Europe and the NIS. We 
continue to support the Title VIII program. The budget for 
Title VIII will be $4.2 million for fiscal year 1997, with 
$900,000 from the SEED budget (for Central and Eastern Europe) 
and $3.3 million from FREEDOM Support Act funds (for the NIS).
    Congress enacted Title VIII to promote the U.S. national 
interest by funding important research that otherwise was not 
financed by private and academic sources. We are happy to see 
that Central and Eastern Europe is increasingly the subject of 
privately funded American research. For example, institutions 
which did not exist when Title VIII was conceived, such as the 
Central European University, the American University in 
Bulgaria, and the Soros Foundation, are now promoting long-term 
research by American scholars in this critical region.
    Congress urged funding of Title VIII in the SEED and 
FREEDOM Support Act budgets. While we understand why this was 
done, it is a very tenuous arrangement. The non-Bosnia funding 
under the SEED Act continues to decline. Further, we expect 
SEED, as a temporary program, to be greatly reduced by the year 
2000. We have recently announced the ``graduation'' of five 
more Central European states from SEED over the next three 
years. As a result, we have had to apply cuts to the Title VIII 
program along with the rest of the SEED program. To preserve 
the long-term integrity of Title VIII, a more durable funding 
vehicle than SEED must be found.
    At the request of the State Department's Bureau for 
Intelligence and Research (INR), we have agreed to seek fiscal 
year 1998 funds for Title VIII within the combined resources of 
the SEED Act and FREEDOM Support Act accounts. Traditionally, 
funding for Title VIII has come from the INR Bureau's budget. 
We look forward to working with Congress to find a better 
lasting funding arrangement than the SEED Act and FREEDOM 
Support Act accounts.

                        russian demonopolization

    Question. A recent Russian Government initiative has been a 
prominent anti-monopoly drive designed-ostensibly-to break 
apart the communist era monopolies that inhibit further 
economic reform.
    Yet the major monopolies-such as Gazprom and the Unified 
Electrical System-are to remain under government control. And 
the Russian government is now moving to create a state monopoly 
in the telecommunications industry.
    First Deputy Prime Minister Boris Nemtsov has even stated 
that ``the richer Gazprom is the richer Russia is.''
    Are any U.S. assistance funds being provided to what 
amounts to a Russian policy of claiming demonopolization, while 
at the same time strengthening them?
    Answer. U.S. foreign assistance funds have, in fact, been 
deployed to assist the Government of the Russian Federation 
(GOR) in formulating recent reform initiatives related to 
natural monopolies, i.e., those sectors such as utilities where 
the magnitude of infrastructural investments make more than one 
provider inefficient or impractical). U.S. foreign assistance 
is also being used to strengthen regulatory commissions whose 
purpose is to foster competition and prevent monopolistic 
entities from exploiting their market position. The combined 
assistance in these two areas has been approximately $4 million 
since 1994. However, it should be clear that U.S. assistance is 
not returning Russia to Communist era monopolies, but rather 
supporting a series of structural reforms and improved Western-
style regulatory actions.
    The Russian Government's commitment to the reform process 
was demonstrated on April 28, 1997, when President Boris 
Yeltsin signed Decree No. 426 approving a concept of structural 
reforms in the natural monopolies and a three year plan to 
improve the system of regulation of the natural monopolies, 
including price regulation, deregulation of activities that are 
not ``natural monopolies,'' and promotion of competitive 
markets for natural monopoly products and services. These 
reforms are to include the privatization of certain areas 
controlled by monopolistic entities, such as Gazprom and the 
Unified Electrical System Rossii (UES Rossii).
    Presidential Decree No. 426 specifically calls for Gazprom 
to be demonopolized to the extent that exploration, development 
and production functions-which are not, in reality, natural 
monopolies-will be opened up to other competitors. In addition, 
regulatory steps will be taken to ensure that these competitors 
will have non-discriminatory open access to the pipeline 
network and reasonable transportation tariffs.
    The Decree also calls for UES Rossii restructuring from a 
monolithic entity, to separate entities in the fields of power 
generating supply, power transmission, the operation of the 
national wholesale energy market, and local distribution of 
power.
    The GOR exercises the regulatory control necessary to 
ensure competitive and economic pricing and fair access to 
transportation services; however, it does not control the 75 
percent of stock required under Russian law to effect the 
reorganization of the two companies advocated in Decree No. 
426. In fact foreign investors own large blocks of UES Rossii 
stock. It is hoped that the restructuring proposed under Decree 
No. 426 as well as the influence of foreign investors will 
result in enterprises that are well-managed, appropriately 
regulated, and prosperous.
    A comprehensive reform of the telecommunications industry 
is also addressed in Presidential Decree No. 426. Although the 
GOR does plan to combine the monopoly in local service with the 
monopoly in long-distance, this is, in fact, an effort to 
package the telecommunications entities so that large parts of 
them can be privatized. The GOR has stated that the sale of 49 
percent of the combined monopoly is imminent, subject to 
signature of the Presidential Decree. Plans for the sale are 
virtually complete. Provided the sale goes forward as planned 
and the new Federal Communications Regulatory Commission is 
formed-which will be due in large measure to U.S. assistance-
the reform of the telecommunications industry will, in fact, be 
significantly advanced. In addition, expanding cellular 
telephone networks are already creating substantial competition 
within the telecom industry which serves to mitigate 
monopolistic tendencies.

                  property rights or freedom of speech

    Question. The development of property rights and the 
creation of a free and independent press are key objectives of 
American assistance policy in the NIS.
    Yet these two fundamentals of a democratic society are now 
in conflict as Lukoil, Russia's largest oil company, has 
attempted to censor Izvestiya, a leading pro-reform newspaper. 
Piotr Nayev, a Lukoil spokesman, summed up the conflict by 
concluding that ``property rights are [more] important and 
freedom of speech * * * must be in second place.''
    What provisions has the administration made to handle 
America [sic] policy in the event of conflict between 
fundamental assistance priorities? Will it support property 
rights or freedom of speech?
    Answer. USAID does not envision a fundamental ``trade-off'' 
between property rights and freedom of speech issues. Property 
rights--so long as governed by rule of law and accepted anti-
monopoly limitations (which have not yet taken hold in 
Russia)--should, in principle, go hand in hand with freedom of 
the press. The development of diversified capital markets, as 
free as possible from corruption or from state domination, 
would maximize the range of lending and investment sources 
available to the mass media, enabling the free development of a 
broadly pluralistic range of media outlets. In principle, 
property rights as well as freedom of speech constitute 
mutually-supporting components in democracy and in democratic 
media systems.
    USAID supports the freedoms of speech and press through 
many programs, including the RAPIC-supported Standing 
Commission on Freedom of Information, the Glasnost Defense 
Foundation, and the Media Law and Policy Center. These and 
other USAID programs promote legal progress toward a regulatory 
environment that is conducive to the continued development of a 
free press.
    USAID's Media Development Program (MDP) and Media Viability 
Fund (MVF) are working to expand the range of lending and 
investment sources available to the independent media. These 
programs, in addition to the LUKOILs of the world, will provide 
independent media outlets with many additional sources of 
capital infusion.
    In terms of property rights, USAID has provided technical 
support for privatization, legal drafting, and improved 
regulation of natural monopolies in the public interest, 
including in the telecommunications area. A broadened range of 
legally recognized property rights, with careful limitations 
placed upon monopolistic tendencies, will serve to provide 
important preconditions for a more pluralistic range of 
ownership in the media sector as well.

                          subcommittee recess

    Senator McConnell. The subcommittee will stand in recess 
until 2 p.m., Tuesday, May 20, when we will receive testimony 
from the Secretary of the Treasury, Hon. Robert E. Rubin.
    [Whereupon, at 4:05 p.m., Tuesday, May 6, the subcommittee 
was recessed, to reconvene at 2 p.m., Tuesday, May 20.]


      FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS 
                  APPROPRIATIONS FOR FISCAL YEAR 1998

                              ----------                              


                         TUESDAY, MAY 20, 1997

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 2:41 p.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Mitch McConnell (chairman) 
presiding.
    Present: Senators McConnell, Bennett, and Leahy.

                       DEPARTMENT OF THE TREASURY

STATEMENT OF HON. ROBERT E. RUBIN, SECRETARY OF THE 
            TREASURY
ACCOMPANIED BY DAVID LIPTON, ASSISTANT SECRETARY FOR INTERNATIONAL 
            AFFAIRS

                opening statement of senator mc connell

    Senator McConnell. The hearing will come to order.
    Secretary Rubin, we apologize for being a few moments late; 
we had a vote. And that always comes first.
    Mr. Secretary, there is good news and bad news. The good 
news is the Budget Committee resolution, as it currently 
stands, essentially protects the President's request level for 
the 150 account. It also specifically allows for adjustments in 
the discretionary caps if we decide to appropriate funds to 
cover U.S. arrears, the most notable being $234 million for the 
International Development Association.
    The bad news is I believe Congress will be reluctant to 
fulfill the new pledge of $800 million to IDA 11 and provide 
the $234 million to complete the IDA 10 pledge unless there is 
an immediate positive decision, allowing United States 
procurement access to money segregated by donors in the interim 
trust fund.
    Let me provide my understanding of where I think we stand. 
Last year, IDA donors expressed their frustration with U.S. 
arrears by establishing a separate account, allegedly as a 
bridge to cover fiscal year 1997 project funding shortfalls. 
Although our obligation at the time was $934 million, the ITF 
set aside $3.3 billion, which only companies from ITF donors 
could bid on. At the same time, the subcommittee strongly 
recommended the United States withhold all fiscal year 1997 
funds unless this idea was abandoned. Our views reflected the 
longstanding fact that the U.S. share of procurement has 
consistently been less than our share as the single largest IDA 
donor. So a decision to link procurement with contributions was 
inconsistent, ill-advised and, for that matter, just plain 
unfair.
    Nonetheless, the administration voted to approve that 
arrangement. It should not have come as a surprise when the 
Congress decided to withhold funds until March 1997, when you 
were to report on efforts to dismantle the ITF and open up 
procurement. That report was a helpful review of the 
administration's efforts to overcome considerable legal, 
political and practical obstacles presented by the ITF. Not the 
least of the problems was the fact that by the time a key 
deputies meeting was held in February, nearly two-thirds of the 
ITF resources has been obligated for projects, leaving a 
balance of roughly $1 billion.
    After intensive negotiations, I understand you now have a 
tentative agreement which potentially will make the balance 
available for U.S. competition. The exact status of a decision 
on this balance will have a clear impact on our recommendation 
in the coming weeks regarding your fiscal 1998 request, as well 
as clearing up the arrears. And we are obviously hopeful you 
can make a report on that today.
    Let me turn for a moment to some specific concerns about 
the management of the World Bank and IDA. I want to commend Mr. 
Wolfensohn for his declared intent to increase the development 
impact of lending as he improves cost effectiveness and 
services. His agenda has been well outlined in a recently 
released report, known as the strategic compact. I hope this is 
not one more study in a long line of studies which have failed 
to produce real progress.
    Some 5 years ago, the Bank's portfolio management task 
force report identified serious performance problems related to 
project structure as well as the policy and practical 
impediments to development posed by borrowing nations. While 
the Bank continues to attempt to address past task force 
recommendations, and no doubt will respond to Mr. Wolfensohn's 
new challenges, there are ongoing systemic concerns. The Bank 
has been slow to effectively implement, coordinate and make 
improvements in the country assistance strategies which link 
new lending with ongoing assessments of performance.
    The consequence of not enforcing benchmarks is evident in 
the Bank's internal assessment that the percentage of problem 
projects has not declined since 1992. Their documents reflect 
the fact that of the 737 projects funded between 1985 and 1993, 
32 percent of World Bank and 41 percent of IDA projects were 
rated unsatisfactory. Reviewed by region, the numbers tell 
another important story. In the Pacific, 81 percent of projects 
received a satisfactory rating, but in Africa--the target of 
one-third of IDA loans--only one-half the projects were 
considered satisfactory.
    Let me just note that these projects are not exactly 
failing a particularly tough test. The standards for meeting 
the satisfactory test are not only lenient, the evaluations are 
largely administered by the loan managers, consulting from 
headquarters with the borrower. Rigorous independent field 
audits are not currently conducted, but I think they must be 
considered to establish integrity and credibility in the 
evaluation process.
    Obviously concerns such as these are what prompted Mr. 
Wolfensohn's review. However, I am dubious about the 
congressional support, given the strategic compact's solutions 
will cost $100 million to $150 million a year, largely to get 
rid of so-called redundant staff, while at the same time, Bank 
officials are enjoying the luxury of a new gold-leaf executive 
dining room, which Newsweek reported cost $25 a square foot.
    Mr. Secretary, I raise these issues because I respect how 
hard you have worked to restore congressional confidence in the 
multilateral banks. In light of these observations, it may seem 
a thankless task on your part, but let me assure you it is 
because I believe these institutions are vital to leveraging 
resources to serve development interests that we intend to work 
with you to try to improve them.
    Let me now turn to my good friend and colleague, the 
ranking member, Senator Leahy.

                    opening remarks of senator leahy

    Senator Leahy. Thank you very much, Mr. Chairman.
    Mr. Secretary, I want to commend you and the Treasury 
Department for what you have done over the past couple of years 
in negotiating replenishments for the international financial 
institutions. It probably reflects some of your skills from 
Wall Street or some magic or something, but you were able to 
reduce the amounts of U.S. contributions at a time when are not 
even able to pay our past debts.
    I suspect it also reflects that some of the other donors 
can and should pay more. Our pledge to IDA has dropped from 
$1.25 billion to $800 million. I am sitting here with the 
chairman trying to figure out where we get the $800 million, 
but it is a lot better than $1.25 billion.
    We have seen similar reductions at the other banks. You 
have also negotiated some important reforms. The African 
Development Fund is an example. The institution has squandered 
hundreds of millions of dollars, and it is now headed in the 
right direction. I do not know if we are going to be able to 
come up with the $50 million pledge, but I want to applaud you 
because you pushed for changes that were long overdue.
    These institutions are extremely important to the United 
States. They are extremely important to their client countries. 
In many ways, they are also the bane of our existence. They 
have far more than their share of arrogant, overpaid staff. 
They strike me, at least, as not having the time of day for 
anyone unless it is a government official. I can get through 
easily if it is Senator Leahy calling. If it is somebody else 
who they don't know, it is a different story.
    They pay attention to a government official. They prefer 
one, I think, that is equally disinterested in the views of the 
very people who are most likely to be affected by their 
decisions.
    I suppose a lot of bureaucracies act like that, but it is 
amazing. I cannot think of very many that could rival the 
arrogance of some of the bureaucracts at IMF and World Bank. 
They treat representatives of the nongovernmental community 
like pests to be pacified, grudgingly--it's an old boys 
network.
    Now, having said that, I know exceptions, like Jim 
Wolfensohn. I think he is the right man for the job. Nobody 
else has been able to get control of the place. And his 
strategic compact, if it gains broad support within the 
institution, could make a real difference. But if I cannot get, 
or my staff cannot get, the Bank's or the IMF's attention on 
even the little tiny issues, I hate to think what other people 
have to go through.
    The people who the long-time bureaucracy ought to emulate 
are the people who are most respected, like Mr. Wolfensohn. He 
is capable of understanding. He is accessible. He does 
understand what is needed. And I wish some of those below him 
would. It makes me wonder if we should sit things out for a 
year to see if they might change their attitude, or maybe 
somehow we might end up with a new crop of middle managers who 
do not act like they own the place.
    I guess they know we are not going to walk away for a year. 
They figure that presidents of the Bank will come and go, 
Members of Congress come and go, Secretaries of the Treasury 
will come and go. Certainly even some of the countries they are 
supposed to help, unfortunately, come and go. But, by God, they 
and their perks stay on.
    And I do not fault you, obviously. You have done more to 
try to improve this than anybody I know. But I have stood up 
for these institutions in the past, notwithstanding some of the 
arrogant indifference of some people down there. I have done it 
because I thought that our national interest and world interest 
demanded that. But I am finding it more and more difficult to 
defend, especially as more and more people come to me with 
examples that, if it was my staff doing that, they would be 
fired on the spot.
    I mention that for whatever it is worth. But again, I want 
to compliment you for what you have done. And if I could say 
anything at all, it is just keep it up.
    Thank you, Mr. Chairman.
    Senator McConnell. Let me just say before turning to you, 
Mr. Secretary, we had a similar problem to the one Senator 
Leahy was describing with regard to burley tobacco programs in 
Malawi. The top managers were as responsive as the desk 
officers were abusive. They actually told my constituents that 
they were wasting their time. That is a direct quote. It is 
really an astonishing state of affairs. Nevertheless, Mr. 
Secretary, please proceed. And we are glad to have you here. 
[Laughter.]
    I bet you are delighted.

                  summary statement of secretary rubin

    Secretary Rubin. Very nice to be here, Senator.
    I do not know that I have a very meaningful response, other 
than to----
    Senator McConnell. I am not expecting you to. Go ahead.
    Senator Leahy. We are not. We just want to put this on the 
record. And not that anybody is going to pay the least bit of 
attention down there to what we say.
    Senator McConnell. Yes; we feel so much better. [Laughter.]
    Secretary Rubin. Well, you transfer your grief, I guess. 
[Laughter.]
    You know it is interesting, though. Having run a large 
private sector organization for a while, the people at the top 
in our place I thought were always very responsive. The more 
junior you got in the organization, the more arrogance seemed 
to be a problem. So I think it is not a problem unique to the 
World Bank or the IMF, though it may exist in exacerbated 
levels there; I do not know.
    In any event, let me say, Mr. Chairman, Senator Leahy, that 
it is a pleasure to be here. And as you both have said, this is 
a concern that all of us share and all of us recognize the 
vital importance of these institutions to our national 
interests. And it is my hope that the spirit of bipartisanship, 
that has prevailed in recent weeks in regard to the budget 
agreement and the CWC before that, can be applied to dealing 
with these very important institutions.
    The President has said on a number of occasions that we are 
truly the indispensable nation, and I can see it as I go to G-7 
and other meetings. We are truly the only Nation in the world 
today who can provide effective leadership on the issues of the 
global economy. But I think it is also equally clear that if we 
are going to maintain the ability to do that, we have got to be 
seen as bearing our fair share of the burdens. And that very 
much includes full participation in these institutions--in the 
United Nations and the various international financial 
institutions--the World Bank, the IMF, and the regional 
development banks.
    The contributions that we make to these institutions and 
other international programs, as you know, Mr. Chairman, are 
less than 1 percent of our budget, but they give us enormous 
leverage. We have calculated, with respect to the multilateral 
development banks, that our roughly $1.2 billion contribution 
put us in a position to have enormous, enormous influence over 
roughly $46 billion of lending. And that is the kind of 
influence that, it seems to me, is enormously in our Nation's 
self-interest to maintain.
    We have worked forcefully for reforms, as Senator Leahy 
suggested in his comments--even as we have negotiated major 
reductions in our budgetary commitments. If you go through this 
account by account, we have negotiated, on average, a 40-
percent reduction in future U.S. obligations to the 
multilateral development banks. And once we pay our arrears, 
then on an ongoing basis, we will be at a level of about $1.2 
billion.
    We have also taken the lead in securing broad-ranging 
reforms in the international financial institutions with 
respect to both the multilateral development banks and the IMF. 
There are programs to reduce overhead. There are programs to 
become more open, and to do more to prevent corruption--a more 
recent but I think very important focus of both institutions. 
And lending has been shifted to provide the underpinnings for 
the private sector, rather than to try to substitute for what 
the private sector can otherwise do. There has also been an 
increased sensitivity with respect to environmental issues.
    I have in my written statement a number of examples. I will 
leave that for the written statement and not repeat them here, 
other than to mention two. One is, as you mentioned, Jim 
Wolfensohn's strategic compact at the World Bank, which we 
think is very responsive to the issues of the World Bank and 
which we have supported very strongly, while at the same time 
continuing to work with Jim Wolfensohn and the World Bank with 
respect to minimizing the costs associated with the program.
    And second is the African Development Bank, which has had 
serious problems. They have now instituted a sweeping 
reorganization, including term limits and replacement of 70 
percent of its managers.
    All this notwithstanding, we are now behind in our payments 
to the multilateral development banks by $862 million. And 
though we are by far the world's largest and richest economy, 
we are the largest debtor in the United Nations. And we account 
for the great preponderance of the arrears to the multilateral 
development banks and the global environmental facility.
    Our budget request of $1.6 billion for the multilateral 
development banks includes something over $300 million to 
partially pay down those arrears. And that is the first payment 
on a proposed 3-year payment plan, which will then eliminate 
the arrears altogether. The remainder, of course, would go to 
meet our annual commitments.
    I do not think there is any question, Mr. Chairman, that if 
one goes to the G-7 meetings and attends meetings at these 
institutions that we are getting to the position where, if we 
do not both pay our arrears and participate fully on an ongoing 
basis, that we very much put at risk our ability to continue to 
have a quite disproportionate influence on shaping economic 
policy with respect to the developing countries. We also put at 
risk achieving various of our foreign policy priorities through 
the international financial institutions, which have been very 
active in Bosnia, the former Soviet Union, and Africa as just 
three examples.
    As I said a moment ago, our budget request is based solely 
and simply on the view that it is in our national self-
interest, both in terms of our economy and our national 
security. As developing nations grow, their markets become 
larger. And as their markets become larger, we export more to 
them. And that, of course, increases American jobs and 
standards of living.
    Let me just, if I may, focus on one particular area of the 
world, because I think it has now become front and center in 
our thinking, and that is Africa. The IMF's ESAF, IDA debt 
reduction, and African Development Fund requests are integral 
to a broader effort on the part of the administration to foster 
growth in Africa, which is clearly that part of the world that 
lags furthest behind the global economy.
    A growing and dynamic Africa, an Africa with democracy and 
open markets, economic reform and sustainable development would 
not only provide higher standards of living to its people, but 
it would provide new and better markets to the United States. 
It would deal with environmental problems that affect not only 
Africa but affect us. And it would contribute to our national 
security, particularly, hopefully, enabling us to avoid the 
costs that are involved in dealing with the crises that have 
developed from time to time in Africa.
    We have proposed a bold initiative to foster solid 
macroeconomic conditions, open trade and other economic reforms 
to attract private sector capital to Africa, and to promote 
growth in Africa. And we are working with Congress on a 
bipartisan basis to do that. The international financial 
institutions play a critical role in that effort. The 
international financial institutions' work in promoting growth 
in developing nations clearly has benefited American businesses 
and workers. United States firms exported more than $25 billion 
worth of goods and services to the 79 very poor countries that 
are eligible for IDA--or that were eligible--for IDA funds in 
1995, and roughly $60 billion to IDA graduates.
    The IMF, for its part, has been critical with respect to 
fostering stability in the global financial markets, preventing 
crises, and when crises did develop, in dealing with those 
crises. And that is very much in the interest of all members of 
the global financial community, very much including ourselves. 
In effect, they have become the guarantor, of this vastly 
increased global financial market, with the vastly increased 
flows of capital that have enormous benefits, but also carry 
with them risks.
    Before I close, let me mention one final issue. Our fiscal 
year 1998 budget includes a request for $3.5 billion for the 
U.S. participation in the IMF's new arrangements to borrow. 
This new line of credit would build on the general arrangements 
to borrow, and in effect, would provide a larger reserve for 
the IMF in the event of threatened systemic crisis.
    The idea for the NAB really grew out of the Mexican 
situation, when, looking at that situation, it struck us that, 
in these vastly enlarged global financial markets, there could 
come a day when there might be a crisis that could be of such 
size and such systemic significance that it could not be dealt 
with adequately with the resources currently available.
    We are also reviewing the adequacy of the IMF's normal 
quota reserves. And if--and I stress if--that review shows that 
a quota increase is necessary for the IMF to do its job over 
the medium term, and if we can negotiate a satisfactory 
arrangement--and that is a second very important if--then we 
will request an increase in the U.S. quota. Obviously we will 
continue to consult very closely with Congress on this matter.
    In both cases, as you know, the funds that would be used 
both in the NAB and in the quota, if called upon, would not 
count as outlays in the budget process, and, therefore, would 
not increase the deficit.

                           prepared statement

    Mr. Chairman, let me close by saying that the 
administration stands ready to work with you, with your 
committee, to maintain the bipartisan commitment to these 
institutions that has existed for over 50 years, and which I 
believe enormously serves the economic and national security 
interests of our country.
    Thank you very much. Assistant Secretary Lipton and I would 
be delighted to respond to any questions you may have.
    [The statement follows:]
            Prepared Statement of Secretary Robert E. Rubin
    Mr. Chairman, it is a pleasure to testify today on the President's 
fiscal year 1998 budget request for foreign operations. Over the last 
few weeks, we have seen how much we can accomplish when we act together 
in a bipartisan manner: Congress passed the Chemical Weapons Convention 
and, of course, we've reached an agreement on a plan to balance the 
budget. We should now carry that spirit of bipartisanship to other key 
priorities that are facing the nation and we will be working on issues 
such as fast track authority and most favored nation status for China 
in the near future. Today, I would like to discuss one of our most 
important priorities: the imperative of maintaining U.S. leadership in 
the global economy by fully funding our share in the international 
financial institutions.
    As President Clinton has said, the United States is the only 
country that can provide effective leadership in today's world--and it 
is more important than ever for our own well-being that we do so. 
However, for us to function as the world's indispensable nation, we 
must participate fully in the international institutions and the global 
economy. We must fully commit to our foreign affairs budget, which pays 
for the United Nations, bilateral assistance programs and the 
international financial institutions (IFI's)--the World Bank, the 
International Monetary Fund and the regional development banks. 
Accounting for less than one percent of the federal budget, these 
programs provide an enormous return for American taxpayers. Abroad, 
they help bring peace and stability, foster democracy, build free 
markets and free trade, and promote sustainable development. At home, 
that leads to increased exports, high quality American jobs and greater 
economic and national security.
    The Clinton Administration has worked hard with Congress to 
maintain support for the multilateral development banks (MDB's). We 
have achieved increases in social sector lending by the MDB's and 
worked forcefully for continued reforms, even as we have negotiated 
major reductions of our budgetary commitments. We have, in fact, made 
significant progress on all fronts. Account by account, we have 
negotiated, on average, a 40 percent reduction in future U.S. 
obligations to the MDB's, which, after we pay our arrears, will lower 
our total annual commitment to $1.2 billion. On the basis of this 
annual U.S. investment, we are able to strongly influence the $46 
billion that the MDB's lend.
    The Administration, working with Congress, has taken the lead in 
securing needed administrative reform in the IFI's. The MDB's and the 
IMF are reducing overhead, becoming more open, doing more to prevent 
corruption and promote the private sector, and becoming more sensitive 
to environmental concerns. They are, in fact, providing us with better 
value for the money than at any time in their history. To cite a few 
examples:
  --The World Bank, long a target of criticism, has become more open, 
        and has cut its administrative budget 10 percent in real terms 
        over the last two years. The Bank has now embarked on a new 
        reform program, the Strategic Compact, which is very responsive 
        to U.S. reform priorities. We support President Wolfensohn's 
        efforts to reform and we are working closely with him to 
        minimize the costs associated with this program.
  --The IMF has also controlled its administrative budget, cutting it 
        by one percent in real terms over the last three fiscal years. 
        It has made substantial advances in transparency and 
        strengthened its capacity to detect financial crises.
  --The Inter-American Development Bank has cut its budget by 5 percent 
        in real terms since 1995 and staffing is down 12 percent from 
        its peak in 1988. Yet loans managed by the bank have increased 
        48 percent since 1991.
  --The African Development Bank has instituted a sweeping 
        reorganization including term limits and replacing 70 percent 
        of its managers.
    Despite this progress, we are now behind in our payments to the 
MDB's by $862 million. We are the world's largest and richest economy 
yet we are the largest debtor to the United Nations, and account for 
the lion's share of arrears to the MDB's and the Global Environment 
Fund. Nations around the globe, who look to us for leadership, are 
seriously questioning our willingness to lead. Our budget request of 
$1.6 billion for the MDB's includes over $300 million to partially pay 
down those arrears, the first payment on a proposed three year plan, 
with the remainder going to meet our annual commitments.
    This year is critical. If we do not meet our commitments, we will 
put at risk our leadership in these institutions and thereby our 
ability to shape policy with respect to developing countries. This 
risks affecting foreign policy priorities in places from Bosnia to the 
former Soviet Union to Africa. Failure to meet our commitments would 
also undercut our ability to direct ongoing reforms. We cannot lead 
with other people's money.
    We make this budget request purely and simply because it is in our 
economic and national security interest. The IFI's are important to our 
interests for two basic reasons. First, they help foster growth in the 
developing world. That, in turn, promotes global prosperity and 
stability, which creates new markets for U.S. goods.
    The IFI's have been instrumental in the economic renewal of Asia, 
Latin America, and central and Eastern Europe, helping foster economic 
reform and democracy which has turned these regions into dynamic 
emerging markets. The MDB's are also building the essential foundations 
for growth in the poorest countries by funding child survival, and 
improvements in health, education and basic infrastructure. The IMF's 
Enhanced Structural Adjustment Facility (ESAF) lays the groundwork for 
the banks' efforts through the macroeconomic and structural conditions 
attached to ESAF loans.
    Last month, I traveled to Vietnam, a very poor country in the midst 
of transformation from a state run economy to a market economy, 
struggling to build the infrastructure of a modern economy. I met with 
the general secretary of the Communist Party, the prime minister and 
the finance minister. These officials--the leaders in what is still a 
communist country, a country that fought a war with the United States 
only 25 years ago--were keenly focused on what constitutes a market 
economy, how you get there, and how to attract more foreign investment. 
It is precisely this kind of help in developing a modern market-based 
economy that the IFI's can provide.
    While in Vietnam, I visited a school outside Ho Chi Minh City. I 
saw how World Bank funds provided for a new school building and 
textbooks for children. I only wish that every member of Congress could 
see what our money buys.
    The ESAF, IDA, debt reduction and African Development Fund requests 
are integral to the Administration's effort to foster growth in Africa, 
an area vastly behind in development. A growing and dynamic Africa--an 
Africa committed to democracy, economic reform, and sustainable 
development--will provide higher standards of living for its people and 
be more stable politically and socially. That, in turn, will present 
new markets for American businesses, create jobs and increase standards 
of living in this country. It will also strengthen our national 
security as stability in any part of the globe contributes to our 
national security. Hopefully, it will save us the very high costs of 
responding to crises in Africa. We have proposed a bold initiative to 
foster solid macroeconomic conditions, open trade and other economic 
reforms to attract private sector capital and promote growth--and we 
are working with Congress on a bipartisan basis to enact it. We will 
need the help of the IFI's to move forward with our initiative.
    The IFIs' work in promoting growth in developing nations has 
clearly benefited U.S. businesses and workers. U.S. firms exported more 
than $25 billion worth of goods and services to the 79 very poor 
countries eligible for IDA funds in 1995 and roughly $60 billion worth 
to IDA graduates. Of course, the MDB's also benefit American businesses 
and workers directly through the projects they finance. In the past 
year alone, U.S. firms received over $3.2 billion in direct business 
from the MDB's.
    The IMF is critical to fostering a stable, well-functioning global 
financial system that facilitates the trade and investment flows 
necessary to the growth and opening of markets around the world. The 
IMF serves us very well as the guardian and guarantor of that system, 
helping to integrate its newest participants and preventing and 
containing severe financial shocks.
    Before I close, let me mention one final issue. Our fiscal year 
1998 budget includes a request for $3.5 billion for U.S. participation 
in the IMF's New Arrangements to Borrow. This new line of credit would 
build on the General Arrangements to Borrow and provide a larger 
reserve tank for the IMF to respond to financial shocks that create 
systemic risk, and do so in a manner that reduces our share of the 
burden. We are also reviewing the adequacy of the IMF's normal quota 
resources. If that review shows that a quota increase is necessary for 
the IMF to do its job over the medium term--and if we are able to 
negotiate a satisfactory agreement within the IMF--then we will request 
an increase in the U.S. quota. We will continue to consult closely with 
Congress as this process develops. Like funds for the NAB, use of these 
funds would not be scored as outlays, as they are offset by the 
creation of a counterpart claim on the IMF that is liquid and interest 
bearing.
    Mr. Chairman, there has been a tremendous movement over the past 
decade toward a global economy. Countless U.S. workers and businesses 
depend on trade--and a thriving global economy--for their livelihoods. 
The World Bank, the regional development banks, the IMF, the United 
Nations and bilateral assistance programs, play vital roles in the 
global economy by promoting economic growth, democracy, free markets, 
the rule of law, a stable international monetary system and sustainable 
development. They advance the interests of the American people.
    But our ability to advance those interests will be gravely 
jeopardized if we do not begin this year to pay what we owe and to 
fully fund our current commitments. The Administration stands ready to 
work with you to maintain the bipartisan commitment to these 
institutions that has existed for fifty years and which gives us the 
power to guide global economic growth and reform. Thank you very much.

                                 burma

    Senator McConnell. OK, thank you very much. I am going to 
ask that your full statement be made a part of the record and 
lead off with a question about Burma. At the Asian Development 
Bank meeting in Japan recently, Burma was lobbying for a 
resumption of funding. And the President of ADB, the Asian 
Development Bank, Sato, indicated Burma ``badly needs economic 
aid.''
    What is the current U.S. position on resumption of loans to 
Burma?
    Secretary Rubin. Well, we are in the process, as you know, 
of imposing sanctions on Burma, although the content of those 
sanctions are still under discussion in the administration.
    Senator McConnell. On that issue, when do you expect that 
to be finished and the sanctions to be imposed?
    Secretary Rubin. I am not sure, Mr. Chairman.
    Do you know when the work on that will be done?
    Mr. Lipton. It should be in the next day.
    Secretary Rubin. The next day.
    Mr. Lipton. I believe so.
    Secretary Rubin. That is tomorrow.
    Mr. Lipton. On the Executive order? I think it is coming.
    Secretary Rubin. OK. Well, in the relatively near future, 
then. [Laughter.]
    Senator McConnell. But what about the question of ADB 
loans?
    Mr. Lipton. Well, as far as we know, there are no 
operations being prepared. I was unaware of the statement of 
President Sato to which you referred. But it would be our 
position not to favor--not to vote to support any loans that 
they might choose to----
    Senator McConnell. I am sorry?
    Mr. Lipton. I say, it would be our position to oppose any 
loans that they might bring to the board. But it is not our--it 
is our understanding that they have no planned operations in 
Burma.
    Senator McConnell. But if they did, we would oppose it?
    Mr. Lipton. It would be our position that we would oppose 
those.
    Senator McConnell. Good.
    You spent some time speaking about IDA. I can see we may 
get into a chicken and egg problem, where other donors are 
insisting we fulfill the fiscal year 1998 commitment and clear 
arrears or they will not release the $1 billion from the ITF, 
while we insist the funds be released before further 
appropriations. I just want to make it clear that the blackmail 
did not work last time and it is not going to work this time.
    We have been the largest contributors over the longest time 
to IDA, and, frankly, demanded very little in return. Without 
specific action, there may be a serious backlash and there 
might be little support for funding even here in the Senate. I 
am just curious, how do we solve this problem?
    Secretary Rubin. It is a good question, Mr. Chairman. As 
you know, we worked very vigorously. We have sent letters. When 
I spoke at the World Bank, I referred to it in my remarks. And 
sometime in the last two or three G-7 finance ministers 
meetings, I brought it up there. We abstained--we did not vote 
in favor of this, by the way--we abstained at the meeting.
    We are very much opposed to this being done. On the other 
hand, the view of the other donors was that many of them had--
in fact, probably all of them--had worse deficit problems than 
we did, and they were contributing and we were not. And they 
had parliamentary problems of their own. And so they said that 
the only way they could warrant or justify this with their 
parliaments was to say that if we did not participate, then we 
would not have procurement opportunities.
    We opposed that, we strongly opposed it, but it succeeded 
nonetheless. We did manage to get this billion dollars put 
aside. And I think you are right, we are in a bit of a chicken 
and egg situation. We have exerted every bit of energy and 
resource that we can think of to get this thing reversed now 
for the very reason you just said--so that it would not create 
a burden in terms of our working with Congress. And thus far at 
least, we have not been successful, although we will continue 
to try. But I do not know how we get it unraveled at this 
point, Mr. Chairman.
    But I must say, we are totally opposed to what they did. I 
think it was a mistake. I think it was foolish. I think it has 
interfered with their ability to get funding. And it was a very 
unwise thing to do. But from their perspective, they have said 
that they have worse deficits than we do. We have been for some 
years now, the most successful major industrial country in the 
world economically, and yet we are the one country that is not 
willing to contribute. So they felt, from that point of view, 
this was the position they needed to take with their 
parliaments.
    Senator McConnell. Obviously we have a continuing dilemma.
    Secretary Rubin. We have a continuing dilemma that we will 
do our best to unravel, but I cannot promise you that we are 
going to be successful--although it is not for lack of trying.
    Senator McConnell. In the justification materials for IDA, 
your Department stated, ``IDA increasingly conditions its 
lending on implementation of specific economic reform programs, 
rewarding those who reform and denying loans to those who do 
not.''
    I am curious as to whether or not you could give me some 
examples of nonreformers who have been denied loans.
    Mr. Lipton. Well, first, to make a summary statement, if 
you look at the IDA-eligible countries, the top--if you look at 
the best performances, the top 50 percent, they have been 
receiving 84 percent of the funds from IDA. So that is a 
measuring, of course, in terms of the results of their reforms, 
but I think it shows that the World Bank has attempted to 
channel the funds, in general, to those that are embarking on 
reforms.
    I think, clearly, there are examples--and I can get you a 
list of examples--from Africa, where countries that are not 
embarking on reform are not receiving support. And there are 
also a number of countries where there is a prospect for 
reform. The World Bank negotiates a structural adjustment or a 
sectoral adjustment loan, but withholds the go-ahead for 
funding until the reforms that have been promised have been 
carried out.
    And to give an example there, in Haiti, a country that is 
very important to us, the World Bank has negotiated a loan last 
year, but it is awaiting further reform steps by the Haitian 
Government in order to begin the disbursement.
    Senator McConnell. Well, I would like the list of all the 
nonreformers who have been denied loans.
    [The information follows:]
        Information on IDA Selectivity Based on Economic Reform
    Countries with the best policy performance received much higher IDA 
funding per capita over the last 3 years than countries with below-
average policy performance. IDA-eligible countries who received the top 
rating in terms of their progress on economic reform received $13.4 per 
capita in IDA loans over the 1994-96 period. Those with the lowest 
rating received $1.1 per capita. Overall, 84 percent of IDA lending 
over this period went to countries rated average or better.
    Countries with very poor policy performance do not receive any 
funding from IDA. For instance, there has been no lending to Myanmar, 
Nigeria, Sudan or Zaire for a number of years. Other countries where 
poor policy performance has resulted in minimal levels of lending 
include Angola and the Central African Republic.
    IDA's objective is to concentrate its efforts in the poorest 
countries and in countries with the social and economic policies more 
conducive to development. Bolivia, Cote d'Ivoire, Mauritania and 
Vietnam are among the IDA-eligible countries with better policy 
performance and are also among the highest recipients of IDA lending.
    At the same level of income, the better the country's policies the 
larger the lending program IDA is prepared to undertake. For instance:
  --Mali and Niger have per capita GNPs in the $200-250 range but 
        Mali's superior policies are reflected in recent annual lending 
        averaging $9 per capita compared to $5 per capita for Niger;
  --IDA lending to Laos averages $9 per capita per year, while 
        Cambodia's weaker policy performance results in lending of only 
        $6 per capita there;
  --Malawi's policies have allowed IDA to lend an annual average of $12 
        per capita to this very poor country (GNP per capita equal 
        $160), while even poorer Tanzania (GNP per capita equal $130) 
        received less than $4 per capita because of its much weaker 
        policy performance; and
  --Senegal and Guinea both have GNP per capita in the $500-600 range 
        but Senegal's policy performance warranted annual IDA lending 
        of $12 per capita while Guinea's performance led IDA to limit 
        lending to about $7 per capita.

                               world bank

    Senator McConnell. The World Bank reports that 81 percent 
of the projects in Asia are in satisfactory shape--I think I 
mentioned this in my opening statement--compared with a 51-
percent approval rating for African projects. Given this 
disparity, why are we only making a down payment, roughly, of 
$50 million out of $237 million on the Asian Development Fund's 
arrearage, while clearing all of IDA's, where more than a third 
of the lending is to Africa?
    Secretary Rubin. Let me take the first shot at that and 
then let me ask David to participate.
    I guess it would be my view, Mr. Chairman, that IDA is 
really dealing with the most difficult problems that we face 
right now in the developing world, and particularly in the case 
of Africa. And I think that that is where the largest amounts 
of money exist. That is where our influence can have the 
largest effect on the developing world. And I think it is where 
our credibility is most at stake if we do not pay back our 
arrears.
    So I think that clearly in IDA, which is the flagship 
multilateral development bank, and also the one that is in many 
ways dealing with the most serious issues that we need to face, 
we need to get ourselves back where we need to be. That would 
be my sort of overall, if you will, strategic----
    Senator McConnell. But in this particular situation, is not 
saying the poorer your performance, the more we will award you?
    Secretary Rubin. I do not think so, because I think you are 
dealing--and I will let David answer, because he can probably 
give you, in many ways, a more specific answer than I can--but 
I think that you are dealing with much more difficult 
circumstances in many cases when you look at the full range of 
the IDA portfolio than when you look at it from the point of 
the Asian Development Bank.
    David.
    Mr. Lipton. I think that we are concerned about the problem 
that you mention, the performance of projects and loans. We 
have tried to approach getting improvements in the banks by 
negotiating replenishments that we think suit the needs of the 
Bank, and trying to see that the lending is kept within the 
bounds of the resources available. We would like to see the 
arrears paid down to all the institutions.
    I think the reason we have focused on IDA first is, as 
Secretary Rubin mentioned, because it is the flagship bank and 
because of the very great attention that other donors have 
brought to bear on the arrears that we have had there for some 
time period.
    Secretary Rubin. You know, it just occurs to me, too, I was 
at lunch a few weeks ago over at the World Bank, and Jim 
Wolfensohn was talking with the representatives of the Board 
about the focus that he intends as he goes forward. He intends 
to have a heightened focus on the quality of the loan 
portfolio.
    And I think, you might be influenced by where you think 
they are going. Basically I think it is a strategic judgment of 
which institution should priority--of the importance of IDA and 
the importance of our making up our arrears, and of what they 
do with the breadth of countries they deal with, including, as 
I say, a lot of the most difficult problems in the developing 
world.
    Senator McConnell. Well, I look forward to getting the list 
of nonreformers who have been denied loans. My general reaction 
is that we have a different standard at work here. I think I 
hear you admitting that we have a different standard here, 
because of the problems.
    Secretary Rubin. You know, I am not sure it is not 
necessarily a different standard as much as it is that if you 
are going to deal with more difficult countries, I think you 
are going to wind up with lower success rates.
    Mr. Lipton. Yes; surely the problems in Asia in World Bank 
loans were greater when the Asian countries were not doing as 
well. And I think that their performance is surely improved in 
part because of the work that they have gone through with the 
World Bank, and now the performance numbers at the Asian 
Development Bank, in some measure, reflect that.
    Secretary Rubin. Just, if I may, make one other comment. I 
think it was last year that we did not fund the African 
Development Bank, was it not, because we really had lost 
confidence in the top management.
    Mr. Lipton. It was 2 years ago.
    Secretary Rubin. It was 2 years ago. If you felt at the 
World Bank you had a real lack of confidence in top management, 
then I think, Mr. Chairman, all of what I said notwithstanding, 
it seems to me that you might take the position that we are 
going to withhold funding or reduce it or one thing or another. 
But just exactly the opposite is the case--we have a president 
who we really have enormous confidence in, although I think he 
has got a very difficult job ahead of him.
    Senator McConnell. Well, speaking of Asia, why is IDA in 
China at all? I mean China is still getting IDA loans. Given 
the huge influx of private capital, why have not we graduated 
China from this kind of concessional lending?
    Secretary Rubin. David.
    Mr. Lipton. We have negotiated with other IDA donors that, 
following the next replenishment, the IDA 11 replenishment, 
China will be graduated. At present, we vote against all loans 
to China, all World Bank loans to China, besides those that 
satisfy basic human needs requirements, as a part of our China 
policy. We have a very great sympathy with the idea of 
graduation. And we have also been urging, I think with success, 
that the amount of funds that China will receive during IDA 11 
is diminished, and that then they are graduated thereafter.
    Senator McConnell. OK, I am going to stop my first round.
    Senator Leahy.
    Senator Leahy. Thank you, Mr. Chairman.
    I notice the budget agreement calls for $19 billion for 
international affairs, which is good; an additional $415 
million for U.N. and MDB arrears, but only if the Congress 
appropriates this additional money. Why this kind of 
arrangement?
    Secretary Rubin. You mean the arrearages money?
    Senator Leahy. Yes.
    Secretary Rubin. Well my understanding----
    Senator Leahy. Why not just put it in the budget right to 
begin with?
    Secretary Rubin. Yes; my understanding was that that was a 
function of some different views and degrees of enthusiasm 
amongst some of the participants. Your chairman is shaking his 
head, probably with respect to doing this. And so that was the 
technique that was developed. Is that a fair characterization?
    Senator McConnell. I think that is a fair characterization.
    Senator Leahy. Well, unfortunately, a lot of the Members of 
Congress have been able to contain their own enthusiasm for 
these arrearage payments. And this probably will not kindle--
this arrangement probably will not kindle enthusiasm. But we 
will see what happens.
    Secretary Rubin. Well, it may not have been optimal, but it 
may have been the art of the deal.
    Senator Leahy. I understand. So you are telling me what I 
suspected.
    The MDB's do not really talk to many local people about 
what they are going to do on their loan decisions--at least I 
get that impression. It is sort of like an Olympian--we know 
better than all of you folks, so we will just kind of make up 
our mind in our board rooms and over our lunches and so on.
    I know the World Bank conducts environmental impact 
assessments before approving loans. But would it not make sense 
for them to go down and actually consult with the local people 
who are going to be affected, rather than just the Government 
or just some very high-level parts of government--especially in 
some of the countries where there is a lot of corruption at the 
highest levels?
    Mr. Lipton. Yes; I think that that is correct and I think 
it is something that we have been pressing the World Bank and 
the other development banks to do. I think it is something that 
Jim Wolfensohn has focussed on right now. An important part--
perhaps the most important part of his strategic compact--
involves moving to the field people with the responsibility to 
make decisions about the World Bank's lending operations, and 
having what they call greater front-line contact, in part, to 
increase the interactions that their staff have with people, 
not just the Government, but people who are affected by the 
operations that they undertake.
    Senator Leahy. Well, we also see this with the IMF. I mean 
the IMF has all this confidentiality, which strikes me as, you 
know, confidentiality is cover your ass kind of 
confidentiality. That is a parliamentary expression. 
[Laughter.]
    It is from an old Jefferson manual that is rarely used 
today. Mr. Lipton does not know quite what to do with that.
    Mr. Lipton. No; I appreciate the expression. [Laughter.]
    Senator Leahy. It is not unknown in the hallowed halls of 
the Treasury?
    Mr. Lipton. No; I have heard that. I have heard that 
expression. [Laughter.]
    Again, we have urged the IMF to publish its board papers. 
We have now gotten to a point where they publish the so-called 
recent economic developments papers. There are other member 
governments who probably allegedly heard that expression and do 
not want the so-called confidential assessments that the staff 
make of their economic policies to be published unexpurgated.
    Senator Leahy. And I understand that. But it is also you 
can kind of spin it out too far.
    Mr. Lipton. Oh, no; I agree.
    Senator Leahy. It is like for years the Department of 
Defense, the CIA, and everybody else in our own Government, 
everything was classified. Well, everything was classified 
because a lot of mistakes get covered up that way. Those who 
resist the Freedom of Information Act in our country, it is so 
often because it covers mistakes.
    And I realize you do not want to start looking for an 
assessment on a loan and topple a government doing it because 
of too much candor, but what I am concerned about, and I think 
it underscores my point, is that many times that is not the 
reason. Many times it is that a lot of these things just go 
belly up and nobody wants to ever have to take responsibility 
for it.
    Mr. Lipton. I think that is part of it. And I think that 
the point you made in your opening remarks about culture is an 
important part of it. I think that there has been a culture of 
closed, confidential operations at the IMF in particular, but 
also at the World Bank, for a long time. And I think, 
especially at the World Bank, Wolfensohn is trying to address 
that.
    And at the Fund, we continue to press for further 
disclosure of reports. There is now going to be so-called press 
information notices that summarize, somewhat expurgated, the 
conclusions that the IMF has made about a country's policies. 
We will continue to press to have candid assessments of the 
staff made public.
    Secretary Rubin. David, is not there also a new information 
disclosure--well, these new disclosure requirements that 
started about 6 months ago or something like that?
    Mr. Lipton. Yes; that is different. That is to get 
countries to reveal the data in a very transparent way, the 
data that describe economic developments in their countries.
    Senator Leahy. I am looking at a couple of the different 
things in the budget--the Middle East Development Bank, the 
North American Development Bank. You propose to fund the Middle 
East Bank with economic support funds rather than multilateral 
assistance. I suspect we are going to have precious few 
economic support funds, or ESF, to play around with, to say 
nothing about putting it in something like the Middle East 
Bank. And then we are already giving one-half our foreign aid 
to the Middle East. And we have got to rob this from somewhere 
else if we are going to put it there.
    Then you look at the North American Bank, which is on our 
border, there is pollution, a need for water treatment, waste 
disposal and all, that affects an awful lot of Americans very 
directly. If we have to choose between the Middle East 
Development Bank or the North American Development Bank, which 
one do we go with?
    Secretary Rubin. We would recommend you do both. 
[Laughter.]
    Senator Leahy. There are going to have to be choices. Do we 
go with U.S. interests along our border? Or do we say that we 
are already spending billions of dollars in the Middle East and 
maybe somebody else ought to help out?
    Secretary Rubin. Well, could I take one shot at that? 
Senator, if you take a look at the budget, at least as we have 
submitted it, all of this would fit within the budget that was 
part of the budget agreement. So I do not think you would 
actually be forced to make that choice unless----
    Senator Leahy. Well, if we take ESF funds, I mean we are 
going to take them from somewhere. There is not enough money to 
do some of the things we are now doing.
    Secretary Rubin. For the Middle East Development Bank you 
are talking about?
    Senator Leahy. Yes.
    Secretary Rubin. Yes, David?
    Mr. Lipton. Yes; I mean----
    Secretary Rubin. But that would not be a choice between 
that and the NAD Bank, I do not think.
    Senator Leahy. No; I know. But I am just saying that I do 
not think everything can be funded. That is what I am saying.
    Secretary Rubin. The use of the ESF funds, that is another 
question. David?
    Mr. Lipton. The Middle East Bank funding request is in the 
ESF mainly because it is understood that the success of that 
bank will come along with progress in the peace process. That 
is one where there would be multilateralization of our 
contribution. We hope still to entice other countries who have 
not yet joined that effort to do so.
    The North American Bank is very important to us.
    Senator Leahy. Which is more important?
    Mr. Lipton. I think that is a very hard question to answer.
    Senator Leahy. Well, I know it is a hard question. That is 
why I am asking you.
    Mr. Lipton. OK, I would say that the--in terms of the time 
priorities, I think it is unlikely that the Middle East Bank 
will be up and running until the peace process makes further 
strides and there is a greater coming together among the 
parties in the region about working together in such a 
cooperative way. So in terms of time priorities, I think that 
the North American Bank is now beginning to operate and will 
need these funds and is a very high priority.
    Secretary Rubin. But I guess I still do not quite 
understand why you frame the choice that way. And I do not 
profess----
    Senator Leahy. Well, because I think, Mr. Secretary, I am 
looking at this budget, and somehow everything that the 
administration wants is funded in here, but there are other 
things that the Congress wants that are different from the 
administration that are not funded if we fund all of the 
administration's priorities. So we are going to be making some 
choices. And I realize one is ESF and one is not.
    Secretary Rubin. That is what I meant.
    Senator Leahy. But at some point we have got to make 
choices. Do we really break arms and knuckles and all to fund 
one or fund the other? And if it is a question of which is more 
important to U.S. interests, which of the two?
    Secretary Rubin. The only reason I made my comment--I know 
there are a lot of people who felt the NAD Bank was sort of a 
concomitant part of NAFTA, to deal both with problems in 
communities with trade displacement problems as well as 
environmental problems, and that is listed in our list of 
multilateral development banks and the like, whereas the Middle 
East Development Bank was moved over to the ESF--was this year 
the first time?
    Mr. Lipton. This year.
    Secretary Rubin. Yes; this year for the first time. So I 
would have thought maybe--maybe this is wrong--but I would have 
thought maybe the choice with respect to the Middle East 
Development Bank was versus other items in that ESF account. 
That is all I meant.
    Senator Leahy. I would note just a couple of points in 
here, Mr. Chairman--that while our law says that the 
administration should oppose loans to countries that give 
sanctuary to war criminals, about 1 week ago Senator Lautenberg 
and I sent a letter to the Secretary urging a delay of a vote 
on a World Bank loan to the Government of Croatia for its 
failure to live up to its commitment to arrest and turn over 
war criminals.
    And I understand from a letter just received from Secretary 
Rubin that they had to support the loan because the State 
Department said to support the loan. And I understand that. I 
am not questioning, on a foreign policy issue like this, the 
ultimate call on something like that should be with the State 
Department. But a few days ago, I think the State Department 
was criticizing Croatia for not arresting war criminals. So I 
think it is an issue that, when Secretary Albright comes here, 
we should ask about. Because we either go after them or not. We 
are going to support the war crimes tribunal or not.
    Another thing I should note is that the World Bank is 
negotiating an agreement with Croatia. And they said they will 
support demining programs only if the Croatian Government 
agreed not to lay more land mines in their territory. I wish 
all the banks, if they are going to give countries money--and 
I, as you know, strongly supported demining efforts worldwide--
they should be able to give you the money, but you should have 
to agree to stop using mines.
    I have other items that I will put into the record, Mr. 
Chairman. I probably caused enough confusion already this 
afternoon, or problems.
    Secretary Rubin. No, no; we appreciate the comments, and it 
gives us good things to focus on.
    Senator Leahy. And everybody else. My phones will be 
ringing off the hook now. Thank you.
    Senator McConnell. Thank you, Senator Leahy.
    Senator Bennett.
    Senator Bennett. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary. I appreciate the opportunity of 
visiting with you in this forum, somewhat different from the 
one where we usually have contact.
    You talk in your formal statement about visiting Vietnam.
    Secretary Rubin. Yes.
    Senator Bennett. And you say, and I quote:

    I visited a school outside Ho Chi Minh City. I saw how 
World Bank funds provided for a new school building and 
textbooks for children. I only wish that every Member of 
Congress could see what our money buys.

    I have been to Vietnam and realize, with you, how poor a 
country that is and how much they need any kind of help they 
could get. But I would like to now go over the border, up to 
China, and raise the issue of whether or not the money that the 
World Bank is putting into China is going for schools and 
textbooks for children or in fact, since money is fungible, is 
it going for something else?
    Now, it may just be coincidence that World Bank loans for 
China last year were about $2.5 billion and Chinese purchases 
of weapons from Russia were about $2.5 billion. But, again, 
money is fungible, and it could well be that they say, well, we 
are spending your money on school buildings and textbooks for 
children, while we are spending our money on weapons from 
China.
    Are you aware that China has been engaged in a very 
extensive and expensive program of modernizing its strategic 
rocket forces and purchasing advanced weaponry from Russia?
    Secretary Rubin. Senator, I have a general awareness from 
discussions that I have been part of that they have been 
modernizing their military forces. You say, on the one hand, 
the World Bank--we do not support any loans with respect to 
China that do not go for what we call basic human needs. On the 
other hand, you correctly say that money is fungible. And in 
the final analysis, there is probably no way to really be 
strictly enforcing with respect to that.
    I think it may have been before you came in, but Secretary 
Lipton mentioned to the chairman that we have been a very 
strong supporter of China no longer receiving IDA funds. And 
they will graduate at the end of this IDA 11.
    Senator Bennett. Yes; I heard that, and I have the figures 
in front of me. Here is a report: ``China and the Multilateral 
Development Banks,'' done for the Congress by CRS over at the 
Library of Congress. Just from this report--and quickly, I will 
not expect you to get the numbers, but they are in the report 
and I will just run them down in a hurry--the World Bank gave 
China $1.5 billion--this is in 1996--$1.5 billion for 
infrastructure, $400 million for industry, $60 million for 
agriculture, $10 million more social sectors, $500 million for 
the environment--and the author of the report makes it clear 
that the word ``environment'' is being stretched enormously to 
cover just about anything--and nothing for economic reform.
    But you go down to IDA, they have nothing for 
infrastructure--$90 million for industry, 100 for agriculture, 
220 for social sectors, 50 for the environment, and nothing for 
economic reform. You begin to put these together--then you go 
down to the Asian Development Bank, they have got $652 million 
for infrastructure, 280 for industry, 70 for agriculture, 28 
for social sectors, 112 for the environment, and nothing for 
economic reform.
    You have three sources. You end up with $4 billion. And you 
blend them in these various categories, and each category gets 
funded fairly well. And they can say, yes, the IDA money is 
getting cut off, but we are going to pick it up from the Asian 
Development Bank or from the World Bank. And we are still going 
to buy weapons from the Russians, trying to build up a nuclear 
capability and maybe cause problems for their neighbors, and 
eventually for the United States. I think it is something worth 
raising and being concerned about.
    Secretary Rubin. When you say pick it up from the World 
Bank, Senator, I am sorry? Are you talking about the hard 
dollar window?
    Senator Bennett. Yes.
    Secretary Rubin. Yes; I would imagine--David, I do not 
know--that if they did not borrow it from the World Bank, 
giving that it is a hard dollar window, they could probably get 
comparable money in the private sector, I would think.
    Mr. Lipton. In some cases, I think that is true.
    Senator, I think you put your finger on a very important 
problem of fungibility which applies to China and other 
countries around the world. The World Bank tries as best it can 
to overcome the problem by trying to see that its loans, where 
it is supporting policy reform, are bringing changes that 
promote sound economic policies--our economic values. And there 
is some of that in the case of China.
    When they do project loans--and there is the issue of 
fungibility--they try to ensure that they are carrying out 
projects where there is some additionality, whether it is 
conveying expertise or in some way, whether it is working on 
environmental projects, where they can show that the Government 
would not or might not have done this on its own.
    But in the case of China, I think we concur with you that 
the overall risk of this is too great that China's policies are 
those that we do not support. We do not support lending there, 
and we try to convince other member countries of the World Bank 
to join us in this effort. We only support loans that are in 
the area of basic human needs, essentially for this family of 
reasons.
    Senator Bennett. Thank you. I appreciate hearing that. I am 
one who supports MFN for China. I think the worst thing we 
could do in terms of having an impact on China would be to 
withdraw, so that there would be no American influence there at 
all in economic terms. And the strongest American influence I 
think we exercise there is in terms of American companies who 
are there, who would be forced out if we were to deprive China 
of MFN. So I am not one who says, in the name of human rights 
or arms purchases or anything else, we should kill MFN for 
China.
    But I did want to raise the issue of Western money, using 
the term in a nongeographic sense--an ideological sense--
Western money going into China so that they can then use the 
fungibility of that money to purchase weapons of mass 
destruction from the Russians and perhaps then import them for 
additional profits to the Iranians and the North Koreans, and 
there is some indication they are doing some of that.
    Thank you, Mr. Chairman. I have nothing further.
    Senator McConnell. Thank you, Senator Bennett.
    Just a couple of more, Mr. Secretary.
    As a lot of people predicted, the Bank has been pretty slow 
to achieve any measurable results in Bosnia. One of the 
explanations has been the requirement that the Bank work 
directly with the counterpart development agencies, which were 
of course shattered by the war. I wonder if you could give us 
an update on the Bank obligations in Bosnia. What have they 
actually accomplished and where?
    Secretary Rubin. Mr. Chairman, David Lipton has been the 
lead person in the United States Government on dealing with 
Bosnia with respect to all economic issues.
    Senator McConnell. OK.
    Secretary Rubin. David?
    Mr. Lipton. I think the Bank has played a remarkably 
constructive role in Bosnia. First, even before the Dayton 
negotiations, they helped to map out a reconstruction plan for 
Bosnia. They had relations with the Muslim authorities, the 
Bosnians, going back into the summer of 1995. They developed a 
recovery plan that had recovery, over the period to the year 
2000, rising to two-thirds of the prewar income. They developed 
sectoral plans for reconstruction, and they developed a basic 
policy framework.
    They began with the very difficult problem that Bosnia had 
inherited claims and debts to the World Bank upon the 
dissolution of Yugoslavia, and worked hard to find an 
imaginative way to in part get those repaid and in part get 
those rescheduled. And they began a lending program in the 
early part of 1996.
    They had to be a little unconventional in beginning to 
support Bosnia before there was an IMF agreement with Bosnia. 
This support came in essence, before the state institutions had 
come together. And so what they did was work with the Republic 
of Bosnia and with the Federation entity--one of the two 
entities under the Dayton process.
    At this point, the Bank has made one very substantial 
program loan. It is called a TAC loan. It was disbursed late 
last year. They have a number of project loans that they have 
prepared. They are awaiting--and I think it makes sense for 
them to--to await an IMF agreement. The IMF has been 
negotiating for most of this year with the State Government of 
Bosnia and the two entities, the Federation and the Republic of 
Srpska, to try and come together on a set of economic 
institutions, where the parties will cooperate, and a set of 
macroeconomic policies that makes sense for Bosnia.
    We believe that further large loans from the World Bank 
should wait until there is this overall cooperation structure 
and policy structure, but that then the World Bank should 
resume policy lending in that context.
    Senator McConnell. OK. Finally, I want to touch on the 
European Bank. It is rather impressive that the Bank has 
committed to self-sufficiency after the current capital 
increase. I am curious as to how they achieve that result and 
if we can expect any other bank to accomplish the same results.
    Secretary Rubin. David?
    Mr. Lipton. The European Bank is in a bit of a unique 
situation in that it supports transition in Eastern Europe and 
in the former Soviet Union. And I guess we all are hoping that 
transition will in fact be temporary. The replenishment doubles 
their capital base from $10 billion to $20 billion, roughly 
speaking. And they will have the ability to lend or invest out 
of the reflows from the first installment.
    But already the EBRD is beginning to graduate certain of 
the countries in central Europe, something that we have 
supported as long as graduation is not a cutoff that is 
absolute for countries. We believe that many of the countries 
in central Europe can be graduated from certain kinds of 
support as the private sector can pick that up, and that the 
Bank should turn its attention to the southern tier--Bulgaria 
and Romania--and to the parts of the former Soviet Union that 
really are now in greater need.
    But the approach that leads to declaring that they will not 
need any further capital is the idea that in another 10 years 
or so, really, the transition should be, as far as reforms are 
concerned and creating private sector institutions, the 
transition should be completed. And then a process of income 
convergence would continue for some years after that.
    Senator McConnell. Since we are the largest shareholder in 
that Bank, do you find it curious that we are between fourth 
and sixth in all of the procurement categories?
    Mr. Lipton. Yes; I believe that the last data I saw had us 
at fifth, with about 8-and-some-odd percent of the procurement, 
with about a 10-percent share. Typically, our shares for 
procurement are somewhat less than our shares of contributions, 
because borrowing countries are able to be in the procurement 
pool along with contributing countries. It is true that we are 
behind a couple of the borrowing countries, where there is a 
lot of local procurement that is allowed. I think we can 
provide you with a list of those.
    [The information follows:]

                     EBRD PUBLIC SECTOR PROCUREMENT                     
                       [Top 10 countries--1991-96]                      
------------------------------------------------------------------------
                 Country                  ECU million\1\      Percent   
------------------------------------------------------------------------
Germany.................................          204.77            11.3
Italy...................................          183.63            10.1
France..................................          161.13             8.9
United States...........................          124.14             6.9
Russia..................................          116.27             6.4
Hungary.................................          115.37             6.4
United Kingdom..........................           89.41             4.9
Slovenia................................           89.12             4.9
Poland..................................           79.53             4.4
Finland.................................           57.95             3.2
------------------------------------------------------------------------
\1\ Exchange rate on December 31, 1996 was 1ECU=$1.24.                  

    Senator McConnell. Anything we can do to improve that?
    Mr. Lipton. Well, I will grant that--I have heard 
complaints from U.S. companies who say that they feel that they 
should be doing better. And they suspect that the Bank is not 
being fair. We have pressed and will continue to press to see 
that American companies are treated fairly in this process. But 
I think that it would not really make sense to try to block the 
regional countries, the borrowing countries, from being 
involved in the procurement. It is really part of the effort to 
promote their private sectors, to try and get their private 
companies--in particular, construction companies--into the 
process.
    Senator McConnell. Senator Bennett, would you like another 
round?
    Senator Bennett. No, thank you, Mr. Chairman.
    Senator McConnell. I think we are essentially through, Mr. 
Secretary. Thank you very much for coming.
    Secretary Rubin. Mr. Chairman, thank you for having us.

                     Additional committee questions

    Senator McConnell. There will be some additional questions 
which will be submitted for your response in the record.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing.]
                     Additional Committee Questions
    Question. Mr. Secretary, I am concerned about the current number of 
cases involving expropriated property of American citizens abroad.
    Could you provide the subcommittee with a comprehensive list and 
approximate values of properties expropriated by foreign governments in 
which claims by American citizens have not been satisfied?
    Answer. This information is outside Treasury jurisdiction. I will 
have to refer this question to other agencies in the U.S. Government.
    [Clerk's note.--The Department of Treasury, or any other U.S. 
Government agency, was unable to provide an answer to any part of this 
question as of December 31, 1997.]
                                 ______
                                 
               Questions Submitted by Senator Lautenberg
  upcoming votes on assistance to countries that may be harboring war 
                               criminals
    Question. What upcoming votes are there at the World Bank or any 
other international financial institutions for which you are seeking 
advice from the State Department with respect to implementing Section 
568 of the Foreign Operations Appropriations Act, 1997, concerning 
sanctions against countries that are harboring war criminals? What 
countries have you been advised are on the ``watch list'' because of 
their lack of cooperations with the war crimes tribunal?
    Answer. The State Department has cited concerns about Croatia's 
implementation of the Dayton accords, including its cooperation with 
the International Criminal Tribunal for Former Yugoslavia (ICTY). In 
March, at the State Department's request we instructed the U.S. 
Executive Director at the IMF to abstain in the vote on the proposed 
Extended Fund Facility arrangement for Croatia. Indeed we seek guidance 
from the State Department on all proposed IFI loans for Croatia. Also, 
we seek guidance from State on all IFI loans to Bosnia-Herzegovina that 
would benefit the Republika Srpska. Since Serbia-Montenegro is excluded 
from IFI membership under the ``outer wall'' of sanctions agreed by the 
international community, it is not eligible for loans from the IFIs.
    Rwanda is also on this list.
    Question. I have run up against obstacles in trying to obtain 
information about votes that are taking place in the IFI's. Can you 
provide me with a list of all World Bank and IMF votes related to 
Croatia, Serbia, and Bosnia that are projected to take place between 
now and the end of 1998, including a description of the projects to be 
voted on and the projected dates of consideration?
    Answer. The following is a tentative list of upcoming projects in 
the IFI's.
                                croatia
July
    World Bank Investment Recovery Project loan to four commercial 
banks for on lending to private sector and enterprises to be 
privatized; $30 million.
    EBRD equity investment to help establish the first venture capital 
fund in Croatia, the Croatia Capital Partnership Ltd; co-sponsors 
include privatized Zagrebacka Banka (with about 24 percent remaining 
ownership by State funds and State-owned companies, including State-
owned companies in the process of privatization) and a group of British 
private investors; $5 million.
    IMF completion of first review under EFF Arrangement; SDR 28.78 
million (about $40 million).
    MIGA guarantee to Danish investor Brodrene Hartmann A/S for an 
investment in a privatized Croatian egg-packaging company, Hartmann-
Bilokalnik Ambalaza d.o.o.; to be approved on a ``no objections'' 
basis, unless 3 EDs request a Board discussion; $6.7 million guarantee.
    EBRD loan to the Government-owned National Agricultural Wholesale 
Market Company for on lending to 6 regional government-owned wholesale 
market companies; the project aims to improve the efficiency of 
wholesaling in Croatia's 6 largest cities; $17.9 million.
Late July
    EBRD investment in privatization of Slavonska Banka; related to 
World Bank Investment Recovery Project above; $19 million.
October
    EBRD multi-project facility for $50 million of equity investments 
with the Italian dairy products company, Parmalat SpA, in various 
countries of eastern Europe and the former Soviet Union; EBRD 
management would have the authority to decide on investing in these 
sub-projects, including possibly in Croatia.
End of November
    EBRD discussion of its proposed investment Strategy for Croatia.
December
    IMF Board's second review under Croatia's EFF Arrangement; SDR 
28.78 million (about $40 million) of immediate purchases will be 
authorized by Board, provided that Croatia has satisfied the end-
September 1997 performance criteria. Another $40 million tranche would 
be authorized automatically in February 1998, if management determines 
that Croatia has satisfied end-December performance criteria.
    EBRD investment to support privatization of Slavonska Banka; 
related to World Bank Investment Recovery Project above; awaiting 
Government of Croatia decision; $19 million.
Early 1998
    World Bank Municipal Environmental Infrastructure Investment 
Project loan to reduce environmental pollution by financing assistance 
to 6 municipalities to improve their wastewater collection, treatment 
and disposal systems; under preparation; $45 million.
    World Bank Municipal Environmental Infrastructure Investment 
Project loan to reduce environmental pollution by financing assistance 
to 6 municipalities to improve their wastewater collection, treatment 
and disposal systems; $41 million.
January through March
    EBRD loan to a Croatian food company; at least DM 50 million.
February
    IMF EFF tranche of SDR 28.78 million (about $40 million) becomes 
available without Executive Board review, provided Croatia has 
satisfied end-December 1997 performance criteria.
February through March
    Possible IMF Board discussion of Article IV consultation on 
economic policies.
March
    World Bank Railway Rehabilitation Project loan to rehabilitate the 
damaged railroad system including reintegrating the areas that had been 
under rebel Serb control; $100 million.
No tentative date
    World Bank Public Sector Adjustment Loan to reduce recurrent public 
expenditures and improve the fiscal and regulatory framework of public 
finances; under preparation; $100 million.
    World Bank Public Sector Adjustment Loan to reduce recurrent public 
expenditures and improve the fiscal and regulatory framework of public 
finances; under preparation; $100 million.
    IFC loan and equity investment in partly privatized paper 
manufacturer, Belisce d.d., for modernization, environmental 
improvements and refinancing some existing loans; $13.4 million.
     bosnia-herzegovina (all dates tentative and subject to change)
July
    EBRD investment in share capital of private sector bank, Market 
Banka, based in Sarajevo; Board approved with U.S. support; $1.5 
million.
August
    IDA Interim Trust Fund credit for Emergency Wood Supply and Forest 
Management Project to rehabilitate harvesting capacity and support 
management of forest resources in the Federation and Republika Srpska; 
$7 million.
    IDA credit for Republika Srpska Reconstruction Assistance Project; 
finance imports of farm machinery and livestock, repairs of public 
apartment buildings, imports of road maintenance equipment and spare 
parts, repairs of water supply and sewerage systems, imports of 
critical parts to restore electric power supply and fiscal support; 
policy objectives are to reform trade policy, link and reintegrate 
infrastructure between the entities, and to assist RS economic 
recovery; $26 million.
    IDA Interim Trust Fund credit for Second Transport Reconstruction 
Project; support for reconstruction and rehabilitation of roads, 
bridges, tunnels, railways, and urban transit systems throughout the 
Federation and RS; $30 million.
    IDA Interim Trust Fund credit for Second Education Reconstruction 
Project; finance reconstruction of war-damaged schools, emergency 
delivery of textbooks and other educational materials, and support 
teacher education in the Federation and RS; $11 million.
End-August
    EBRD investment in Horizonte Enterprise Fund; joint project with 
IFC; $5 million.
September
    EBRD Emergency Power Sector loan; emergency renovations for three 
public utilities in Bosniak, Croat and Serb regions; $15.6 million.
    Possible IMF Standby Arrangement.
    EBRD equity investment in Horizonte Enterprise Fund which will 
invest in small and medium-sized enterprises in Bosnia and Herzegovina; 
joint project with IFC and Scandinavian Government-owned funds; $5 
million.
October
    IDA Emergency Gas System Reconstruction Project credit to support 
reconstruction of transmission pipeline and distribution system in 
Sarajevo and to strengthen institutions; $25 million.
    EBRD loan to Sarajevska Pivara, partly privatized brewery in 
Sarajevo; joint project with IFC; $5.2 million.
November
    IMF Board discussion of Article IV consultation on economic 
policies and institutions.
December
    IFC loan to small private sector Sarajevo-registered firm, Akmeat--
Akova Impex, to refurbish existing facilities and install new equipment 
for the production of hot dogs and other meat products; $1.8 million.
    IFC loan to socially-owned/state-owned pharmaceutical manufacturer 
Bosnalijek to refurbish existing facilities and install new equipment 
to modernize and expand production capacity for oral drugs; the company 
is to be privatized; $2.4 million.
January
    IDA Republika Srpska Emergency Pilot Credit to provide line of 
credit to enterprises in Republika Srpska; $5 million.
No tentative date
    EBRD Telecommunications Rehabilitation Project loan to 3 public 
utilities in Bosniak, Croat and Serb areas for emergency renovations; 
under preparation; $20 million.
    EBRD investment in Bosnia & Herzegovina Reconstruction Equity Fund, 
a small business venture capital fund; under preparation; $16 million.
    IDA Banking and Enterprise Privatization Project credit to support 
design and implementation of a privatization plan and to provide lines 
of credit to banks for restructuring; under preparation; $30 million.
    IDA Public Finance Reform Project credit to improve fiscal 
efficiency and ensure policies conducive to private sector led growth; 
under preparation; $million to be determined.
    IDA Second Electric Power Reconstruction Project credit to support 
rehabilitation of power stations and transmission and distribution 
networks; under preparation; $25 million.
    IDA Interim Trust Fund credit for Wood Supply and Forest Management 
Project to rehabilitate harvesting capacity and support management of 
forest resources in the Federation and Republika Srpska; $7 million.
    IFC Wood Sector Agency Credit Line to provide a line of credit to 
6-10 small and medium-sized wood sector enterprises in the Federation 
and Republika Srpska using up to 5 local commercial banks as IFC's 
agents; $10 million.
    IDA Republika Srpska Enterprise Credit to provide line of credit to 
enterprises in Republika Srpska; $5 million.
    EBRD Emergency Power Sector loan; emergency renovations for three 
public utilities in Bosniak, Croat and Serb regions; $15.2 million.
    IDA credit for Reconstruction Assistance (Republika Srpska) 
Project; finance essential reconstruction activities, including civil 
works for housing repairs and water supply system rehabilitation, 
imports for agriculture and repairs to electric power systems; also 
support economic reintegration of Bosnia through trade reforms; 
postponed from August 28 at U.S. request; $17 million.
                 prevent war criminals from benefiting
    Question. In a recent letter to Senator Leahy and me, you mentioned 
that the Treasury Department ``will continue to work closely with the 
World Bank to ensure that monitoring takes place to prevent any 
suspected war criminals from benefitting from Bank-administered 
loans.''
    Could you describe specifically what the Treasury Department and 
the World Bank have been doing in this regard?
    Answer. Treasury and State consult with World Bank staff in 
implementing the conditionality policy agreed upon by the international 
community to support those localities implementing the Dayton accords, 
including cooperation on war crimes issues, and to withhold support 
from those not implementing Dayton. These consultations include 
discussions of the loan pipeline.
    While the World Bank must be non-political, it wants to support the 
Dayton accords. In designing its projects, the Bank consults very 
closely with the Office of the High Representative, which advises 
donors on conditionality issues, including war crimes issues.
    Question. Are the ownerships and boards of recipient companies or 
entities checked in some fashion to ensure that the indicted do not 
benefit? Is there written material describing this process? Who is 
responsible for doing so?
    Answer. So far, the Bank has done very little lending involving 
companies in Bosnia. The Bank's Project Implementation Units (PIUs) are 
under a commitment to screen all proposed disbursements. The PIUs are 
audited much more frequently in Bosnia than elsewhere, because of 
general concerns about corruption as well as war criminals.
    As part of its due diligence, the Bank audits the PIUs more 
frequently, and consults with the OHR and with NGOs and other 
particular groups about corruption and war crimes issues.
    So far the Bank's projects have never benefitted war criminals.
                      middle east development bank
    Question. The United States was a leader in the effort to create 
the Bank for Economic Cooperation and Development in the Middle East 
and North Africa (MEDB), and effort which I strongly supported. The 
MEDB is a key element of the effort to strengthen the economic 
foundation that will be essential if we are to have a lasting peace in 
the Middle East.
    Why has the Administration proposed funding the Bank out of 
Economic Support Funds (ESF) instead of funding it directly as is done 
with other regional development banks?
    Answer. It is most appropriate to use ESF to support the Bank 
because the mission of the Bank is closely linked to the political and 
economic objectives of ESF.
    The Bank originated as a joint proposal by the four core parties in 
the peace process: Egypt, Israel, Jordan and the Palestinians.
    The Bank will be a major presence in the Middle East, helping to 
lock in the political commitment to peace and regional economic 
cooperation. The regional parties will be able to demonstrate the 
concrete economic rewards of cooperation.
    Question. What do you see as the prospects for getting the Bank off 
the ground during the coming year?
    Answer. The MEDB Articles of Agreement will enter into force--
allowing the Bank to begin operations--when shareholders with 65 
percent of the agreed subscriptions ratify the Articles. Since the U.S. 
represents 27 percent of the agreed subscriptions, entry into force 
could theoretically occur without U.S. involvement but it is highly 
unlikely given the importance of a U.S. role.
                 international development association
    Question. I am concerned about funding for the International 
Development Association (IDA) which lends money on concessional terms 
to the poorest countries of the world. Because of U.S. failure to pay 
our entire contribution to the tenth replenishment to IDA, other donors 
have had to fill in the gap for fiscal year 1997, and U.S. companies 
have been excluded from a portion of this year's IDA procurement. I'd 
like for you to clarify on the record what effect our arrears to IDA 
have in poor countries and on the U.S. leadership role in the world?
    How effective has IDA lending been in terms of economic development 
and poverty alleviation?
    Answer. Because of its focus on poverty alleviation, IDA has made a 
significant contribution to poverty alleviation. Below are cited some 
of the strongest indicators of how poverty has been reduced in the last 
several decades. We believe that many of these improvements would not 
have come about were it not for IDA. The U.S. role in guiding the IDA 
and the other MDBs in the last 50 years has focused and shaped their 
operations, tangibly improving the lives of millions in the developing 
world, and making poverty reduction a primary goal. Even though it may 
not always appear so, life in even the poorest countries has improved 
dramatically in many respects, thanks in large part to the efforts of 
the IDA and the other IFIs. Since 1970, in the poorest countries (with 
incomes less than $700 in 1993) the following results have been 
achieved:
  --Fertility rates and infant mortality rates are both down 40 
        percent.
  --The number of children enrolled in secondary schools has nearly 
        doubled from 22 percent to 42 percent and primary school 
        enrollment has increased 36 percent.
  --Literacy rates have risen 33 percent.
  --Life expectancy has increased from 54 to 62 years.
  --The percent of people with access to safe drinking water has risen 
        from 22 percent to 69 percent.
    Question. How effective has IDA lending been in terms of opening up 
new markets for U.S. goods and services?
    Answer. Building new markets in the developing world is critical to 
U.S. economic interests as long as our domestic growth continues to 
rely heavily on exports. Thirty-five percent of our economic growth 
over the last five years has come in the export sector. With exports to 
developing countries now 42 percent of total exports and growing at 
nearly twice the pace of those to industrialized countries, we need to 
nurture stable, growing trading partners to ensure our future 
prosperity. IDA graduates purchased $65 billion in U.S. exports in 
1996, up from $61 billion in 1995. Current IDA borrowers purchased $27 
billion in U.S. exports in 1996.
    Question. Has the United States lost influence with other donor 
countries and the general direction of the IDA program because of its 
failure to fully fund its contribution to the tenth replenishment?
    Answer. When the U.S. does not make its payments, our influence 
does indeed erode. We are regularly pushing the Bank to accomplish 
reforms and enact policies that we believe are important to improving 
the Bank's development potential, but by not paying IDA-10 on time, we 
lost our leverage in pushing our initiatives forward.
    Our IDA-10 payments should have been completed in fiscal year 1996. 
The Bush administration negotiated the agreement and Congress 
authorized it. In fiscal year 1997 we put no new money toward IDA and 
instead put our full appropriation toward paying off arrears. The U.S. 
was faced with being the only country to fall three years behind its 
commitment. Prompt payment of arrears is essential for any country's 
credibility, but particularly for the U.S. since we control such a 
large part of the voting shares.
    Our future commitments to IDA and the rest of the MDBs have been 
reduced by 40 percent. With full MDB arrears clearance, we will be able 
to fund all of the MDBs, including IDA, for less than we used to pay 
for IDA alone.
    Question. In your opinion, is the U.S. share of the next IDA 
replenishment (the eleventh) fair?
    Answer. The U.S. pledge of $800 million per year for two years is 
40 percent less than the prior annual commitment to IDA-10 of $1.25 
billion per year, which had been negotiated by the previous 
Administration. The overall level of IDA concessional lending is 
expected to average over $7 billion per year despite the U.S. reduction 
in funding, with World Bank net income, carryover of IDA-10 resources, 
and IDA repayments making up for lower donor contributions. Thus, the 
U.S. share is fair not only for the U.S., but also for the Bank.
                                 ______
                                 
                Questions Submitted by Senator Campbell
                         denver summit of eight
    In June, my home state of Colorado will host the Denver Summit of 
Eight, which will bring together leaders of the seven major 
industrialized nations and Russia for three days to discuss economic 
and monetary policy.
    This meeting marks an historic change in the format for the G-7 
Summit. For the first time in the 23-year history of these economic 
summits, Russia will participate as a member, rather than as an 
observer.
    Question. The United States provides millions of dollars in foreign 
aid to Russia. What additional steps can the United States take at the 
summit to improve the climate in Russia for American businessmen and 
women?
    Answer. For the past five years, U.S. assistance to Russia has been 
aimed chiefly at promoting the country's transition to a market-
oriented economy. Through our intensive work with the international 
financial institutions and bilateral efforts through the Gore-
Chernomyrdin Commission, the US has helped Russia stabilize its economy 
and advance the process of improving the country's investment climate. 
We have been and continue to promote legal reform and the development 
of regulatory mechanisms in Russia that are vital to enabling American 
and other foreign investors to participate in the many opportunities 
available in Russia on an equal footing with domestic investors, and to 
create an environment in which investors can be confident of a return 
ontheir capital as well as return of their capital. Our efforts have 
been aimed at critical areas including:
  --Reforming Russia's tax system to promote lower rates that are more 
        uniformly applied and enforced across taxpayers.
  --Advancing Russian legislation pertaining to Production Sharing 
        Agreements (PSAs) that could open the way for US companies to 
        participate in the development of Russia's vast energy 
        resources.
  --Reducing onerous licensing requirements faced by both foreign and 
        domestic firms, involving payment of fees and administrative 
        burdens, which could stop even a highly motivated entrepreneur 
        from starting a legitimate enterprise.
    The upcoming summit provides us with an excellent opportunity to 
engage Russia's leadership at the highest levels in an effort to 
advance these critical reforms.
    Question. What are some of your goals for the United States during 
the Summit of Eight?
    Answer. Treasury's work for the Denver Summit is focused on Summit 
Leaders' economic and financial discussions. We anticipate three chief 
themes: financial stability; development, with a special focus on sub-
Saharan Africa; and cooperating to combat international financial 
crimes.
    At the Denver Summit, we intend to build on the financial stability 
accomplishments from Halifax and Lyon to manage the risks presented by 
globalization of financial markets, such that a financial crisis 
originating in a major financial institution or market is less likely 
to spill over to other markets. Special working groups have been 
preparing reports on improving prudential standards for emerging market 
countries,
    We will work to improve governance, which is crucial to sustainable 
economic development, by asking IFIs to help countries combat 
corruption and reduce incentives and opportunities for corrupt 
practices, and regional development banks to collaborate fully with 
World Bank efforts to raise public procurement standards worldwide.
    We will seek Summit Leaders' endorsement of the OECD Ministers' 
call to eliminate tax deductibility of bribes, and to negotiate by 
year-end a high standard international convention to criminalize 
bribery, to submit national criminalization legislation by April 1, 
1998, and to seeks its enactment and convention entry-into-force by the 
end of 1998.
    We will particularly focus our development attention on Sub-Saharan 
Africa, committing to improve their exports' access, and to consider 
strengthened assistance for reforming countries with the greatest need. 
We will examine our own bilateral aid and trade promotion programs to 
ensure their support for climates conducive to economic growth, and to 
strengthen cooperation among concerned institutions to facilitate and 
coordinate capacity building efforts. We also will urge IFIs to 
strengthen efforts to support reforming Sub-Saharan African countries, 
reporting on implementation at the September World Bank/IMF annual 
meeting.
    We will seek Summit countries' commitments to help reduce 
international financial crime, including money laundering, through 
endorsing an expansion of the Financial Action Task Force, which is 
leading the international fight against moneylaundering, and mandating 
recommendations on strengthening international cooperation between law 
enforcement and financial regulatory agencies on international cases 
involving serious financial crimes and regulatory abuse.
    Question. What are the implications for the United States from the 
change in Russia's status at the summit?
    [Clerk's note.--The Department of Treasury was unable to provide an 
answer to any part of this question as of December 31, 1997.]
                                 ______
                                 
                 Questions Submitted by Senator Bennett
    Question. When will the World Bank's new policy on child labor be 
finalized and how will it be carried out?
    Answer. The World Bank paper on child labor is expected by the end 
of the year. We will work with the Bank on full and rapid 
implementation of the measures in the paper.
    [Clerk note.-- Prior to the subcommittee publication date, the 
World Bank completed the Child Labor Report and Treasury has submitted 
it to the subcommittee.]
    Question. What is the U.S. position on Asian Development Bank 
funding for the military regime in Burma i.e., the SLORC?
    Answer. Public Law 104-208, the Fiscal Year 1997 Foreign Operations 
Appropriation Act, requires the United States to vote against 
assistance to Burma in any of the IFI's until the President determines 
and certifies to Congress that Burma has made progress in improving 
human rights practices and implementing democratic government. Since 
1988, no new loans or technical assistance of any kind had been 
extended to Burma from the ADB. The U.S. has been one of the most 
active Bank members in ensuring that the military regime receives no 
funding.
    Question. The Congressional Research Service \1\ judges that the 
Chinese Government will not borrow market rate money to fund social 
programs and non-commercial agriculture. Does Treasury agree with this?
---------------------------------------------------------------------------
    \1\ Document 97-518 F [summary page].
---------------------------------------------------------------------------
    Answer. China has generally been unwilling to borrow at market 
rates for social programs and non-commercial agriculture. We have no 
reason to expect that this position will change.
    Question. About how much has the World Bank lent to China since 
1985?
    Answer. The total amount from IDA and the IBRD since 1985 is $25.3 
billion.
    Question. Is it not true that the Chinese government has been 
engaged in a multi-billion dollar strategic and advanced conventional 
weapon acquisition program?
    Answer. China is seeking to modernize its forces, but increases in 
spending are not dramatic and much spending has gone for increased 
personnel costs.
    Most of China's weapons technologies are 30-40 years behind those 
of the U.S. China's power projection capability is rudimentary and its 
sustained power projection ability virtually non-existent.
    Question. Does not World Bank Group support for social programs and 
non-commercial agriculture allow the Chinese Government to divert 
resources to modern weapons programs?
    Answer. As China develops economically, it seeks funding from MDBs, 
like other developing countries. Through our engagement policy, we are 
attempting to develop a relationship that will encourage China to 
accept what we believe to be true--that it will be able to find greater 
security inside, rather than outside, the international system.
    Encouraging China's economic reforms and its integration into the 
world economy--including through MDB programs--is a key part of our 
engagement strategy.

                          subcommittee recess

    Senator McConnell. The subcommittee will stand in recess 
until 10:30 a.m., Thursday, May 22 when we will receive 
testimony on the fiscal year 1998 budget request from the 
Secretary of State, Hon. Madeleine Albright.
    [Whereupon, at 3:43 p.m., Tuesday, May 20, the subcommittee 
was recessed, to reconvene at 10:30 a.m., Thursday, May 22.]


      FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS 
                  APPROPRIATIONS FOR FISCAL YEAR 1998

                              ----------                              


                         THURSDAY, MAY 22, 1997

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:35 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Mitch McConnell (chairman) 
presiding.
    Present: Senators McConnell, Specter, Bennett, Campbell, 
Stevens, Leahy, Lautenberg, Mikulski, and Murray.

                          DEPARTMENT OF STATE

                        Office of the Secretary

STATEMENT OF HON. MADELEINE K. ALBRIGHT, SECRETARY OF 
            STATE

                opening statement of senator mc connell

    Senator McConnell. This hearing will come to order.
    I want to welcome the Secretary of State again this year, 
although in a different capacity.
    This week the Senate will pass a budget resolution which 
increases funding for the administration of America's 
international relations. This is a very positive, important 
development which you have vigorously promoted and for which 
you deserve high praise. Senator Leahy and I have been waging a 
campaign for several years to add $1 billion back to the 
function 150 account, but were unable to persuade the White 
House or the State Department of the urgency of the crisis in 
previous years.
    I want to say, Madam Secretary, I know that you weighed in 
on this issue this year. I want to congratulate you for your 
success in that regard. We intend to support your request here 
in the Congress on a bipartisan basis.
    Reacting to a perception of public indifference, the 
administration has been fundamentally averse to accepting the 
price of our global responsibilities. It has been clear to me 
for some time that public opposition to all things foreign has 
been greatly exaggerated. The proof is evident in the 
consistently strong votes for the subcommittee's bills. 
Unfortunately, it is also clear that we could not strengthen 
funding levels without the administration's commitment to the 
effort which, as I indicated, you have skillfully engineered. 
Your fresh perspective has made a decisive difference and we 
thank you for that.
    The increase is vital to our interest and it is certainly 
well-timed. The world today seems relatively peaceful, 
particularly when compared to the past violence in Central 
Africa, Central America, Bosnia, Chechnya, and Cambodia. For 
more than a decade, few continents have been conflict free. 
However, I believe we should all be cautioned. The absence of 
conflict must not lull us into a false sense of security, a 
sense which could suggest that it is time to withdraw from the 
rest of the world. To the contrary, our times are framed by 
high expectations and real risks, enormous opportunities and 
steep costs. Stability, the hallmark of success, hinges on a 
durable, believable American commitment to steady leadership 
and sustained engagement.
    Let me illustrate my point by turning to two examples, 
Bosnia and Cambodia, where a heavy investment of American 
credibility and resources has reduced tensions but not yet 
solidified democracy or economic growth. Indeed, I worry that a 
false sense of security risks a return to conflict.
    A few weeks ago, I met with Bosnian Minister Silajdzic who 
identified the three top issues which I agree must be addressed 
for his country to survive. They are reconstruction, refugee 
resettlement, and war crimes.
    Tuesday, when Secretary Rubin testified, I raised my 
concerns about the slow pace of the World Bank reconstruction 
efforts. While our bilateral aid program is in reasonably good 
shape, with more than $400 million committed of the $600 
million pledged, standing alone it is insufficient to meet the 
urgent and massive requirements. The bank must accelerate the 
commitment of funds.
    The more intractable issues which I urge you to focus on 
today are the safe resettlement of the displaced and refugee 
population and the arrest and prosecution of war criminals. We 
probably all need a better sense of how our aid program is 
facilitating solutions.
    As an outspoken critic of the atrocities committed to 
achieve ethnic cleansing, I know you share the view of many on 
this subcommittee that reconciliation and peace in Bosnia are 
not possible without the moral reckoning envisioned by the war 
crimes tribunal. However, it seems this worthy idea is 
foundering. Short of a major renewed effort when our troops 
withdraw, I fear Bosnia will once again disintegrate into 
conflict, and this time with an American arsenal. In this 
context, I am especially interested in hearing your perspective 
on how our assistance program might be used to prompt the 
regions leaders to turn over war criminals.
    Cambodia presents similar problems and opportunities to 
leverage our aid. After $3 billion and a major international 
peacekeeping intervention, we all had high hopes Cambodia would 
recover from the savage legacy of the Khmer Rouge killing 
fields. Instead, we have seen Hun Sen systematically destroy 
the legitimate political opposition. Easter Sunday at a rally 
against government corruption, four grenades were tossed into 
the crowd, killing 16 and injuring more than 80 people, 
including 1 American.
    Madam Secretary, this incident is a part of an ominous 
pattern which threatens Cambodia's future and the region's 
stability. Our policy should express clear and unequivocal 
opposition to political violence. Our aid must leverage 
judicial reforms, the protection of a free press, and an 
immediate end to the campaign of terror and violence against 
legitimate political parties.
    We also should concentrate our considerable influence and 
resources in support of a regulatory framework and institutions 
to assure the elections scheduled for next year are conducted 
in a free and fair manner. We are 18 months from elections and 
there is no census, no voter rolls, no independent election 
commission, nor an agreed draft to electoral law.
    These are two trouble spots that have the potential to 
challenge, if not jeopardize, our political interests in 
European stability and our economic stakes in expanding 
prospering markets in Asia. As threats they hardly stand alone. 
Beneath a surface calm, there are countless problems which U.S. 
diplomacy and dollars are in a unique position to prevent or 
resolve. To summarize just a few, NATO expansion, so key to 
European stability, began and has been sustained, obviously, by 
American security assistance and leadership. Peace on the 
Korean peninsula assumes an American role. A solution to the 
stalemate between Armenia and Azerbaijan depends on United 
States aid and meaningful participation in the Minsk group. 
Zaire's troubles are far from over and should Mr. Kabila commit 
to a democratic course, he will need all the assistance we can 
offer to reconstruct that shattered nation. And, finally, our 
active leadership is essential in the effort to restore Aung 
San Suu Kyi to office and democracy to Burma.

                           prepared statement

    I welcome your energy and your activism. We are looking 
forward to this hearing.
    I am going to call on my dear colleague, Senator Leahy, the 
ranking member, and then we will hear from you, Madam 
Secretary. Senator Leahy.
    [The statement follows:]

                Prepared Statement of Senator McConnell

    This week, the Senate will pass a budget resolution which 
increases funding for the administration of America's 
international relations. This is a very positive, important 
development which you vigorously promoted and for which you 
deserve high praise. Senator Leahy and I have been waging a 
campaign for several years to add $1 billion back to the 
function 150 account, but were unable to persuade the White 
House or State Department of the urgency of the crisis.
    Reacting to a perception of public indifference, the 
Administration has been fundamentally averse to accepting the 
price of our global responsibilities. It has been clear to me 
for some time that public opposition to all things foreign has 
been greatly exaggerated; the proof is evident in the 
consistently strong votes for this Subcommittee's bills. 
Unfortunately, it was also clear that we could not strengthen 
funding levels without the Administration's commitment to the 
effort which you skillfully engineered. Your fresh perspective 
has made a decisive difference.
    The increase is vital to our interests and well timed. The 
world today seems relatively peaceful, particularly when 
compared to the past violence in Central Africa, Central 
America, Bosnia, Chechnya, and Cambodia. For more than a 
decade, few continents have been conflict free. However, I 
believe we should all be cautioned--the absence of conflict 
must not lull us into a false sense of security, a sense which 
could suggest it is time to withdraw from the world. To the 
contrary, our times are framed by high expectations and real 
risks, enormous opportunities and steep costs. Stability, the 
hallmark of success, hinges on a durable, believable American 
commitment to steady leadership and sustained engagement.
    Let me illustrate my point by turning to two examples, 
Bosnia and Cambodia, where our heavy investment of American 
credibility and resources has not yet produced either 
prosperity or stability. Indeed, I worry that a false sense of 
security risks a return to conflict.
    A few weeks ago, I met with Bosnian Minister Silajdzic who 
identified the three top issues which I agree must be addressed 
for his country to survive. They are reconstruction refugee 
resettlement and war crimes.
    Tuesday, when Secretary Rubin testified I raised my 
concerns about the slow pace of the World Bank reconstruction 
efforts. While our bilateral aid program is in reasonably good 
shape, standing alone it is insufficient to meet the urgent and 
massive requirements. The Bank must accelerate the commitment 
of funds.
    The more intractable issues which I urge you to focus on 
today are the safe resettlement of the displaced and refugee 
population and the arrest and prosecution of war criminals. We 
probably all need a better sense of how our aid program is 
facilitating solutions.
    As an outspoken critic of the atrocities committed to 
further ethnic cleansing, I know you share the view of many on 
this Subcommittee that reconciliation and peace in Bosnia are 
not possible without the moral reckoning envisioned by the war 
crimes tribunal. However, it seems this worthy idea is 
foundering. Short of a renewed effort on the order of magnitude 
of the Dayton negotiations, I fear Bosnia will once again 
disintegrate into conflict, and this time with an American 
arsenal. In this context, I am especially interested in hearing 
your perspective on how our assistance program might prompt 
improved cooperation from the region's leaders.
    Cambodia presents a similar problem and opportunity to 
leverage our aid. After $3 billion and a major international 
peacekeeping intervention, we all had high hopes Cambodia would 
recover from the savage legacy of the Khmer Rouge killing 
fields. Instead, we have seen Hun Sen systematically destroy 
the legitimate political opposition. Easter Sunday, at a rally 
against government corruption, four grenades were tossed into 
the crowd killing sixteen and injuring more than eighty people, 
including one American.
    Secretary Albright, this incident is part of a ominous 
pattern which threatens Cambodia's future and the region's 
stability. Our policy should be clear and unequivocal in 
opposition to political violence. Our aid should leverage 
judicial reforms, protection of a free press, and an immediate 
end to the campaign of terror and violence against legitimate 
political parties. We also should concentrate our considerable 
influence and resources in support of a framework and 
institutions to assure the elections scheduled for next year 
are conducted in a free and fair manner.
    These two trouble spots have the potential to challenge, if 
not jeopardize, our political interests in European stability 
and our economic stakes in expanding prospering markets in 
Asia. As threats, they hardly stand alone. Beneath a surface 
calm, there are problems which U.S. diplomacy and dollars are 
in a unique position to prevent or resolve. Peace on the Korean 
peninsula assumes on an American role. A solution to the 
stalemate between Armenia and Azerbaijan depends on U.S. aid 
and meaningful participation in the Minsk group. Zaire's 
troubles are far from over and should Mr. Kabila commit to a 
democratic course, he will need all the assistance we can offer 
to reconstruct his shattered nation. And, finally, our active 
leadership is essential in the effort to restore Aung San Suu 
Kyi to office and democracy to Burma.
    I welcome your energy and activism and look forward to your 
assessment of our place in the world today.

                    opening remarks of senator leahy

    Senator Leahy. Thank you, Mr. Chairman.
    Madam Secretary, it is a pleasure to have you here. 
Secretary Albright and I have known each other I think almost 
from the first month I came here to the Senate, and I do not 
think there was anybody more pleased than I and the other 
members of the Leahy family when she was nominated and then 
confirmed to be our Secretary of State.
    I want to echo what Chairman McConnell said about the time 
and effort you have devoted to winning support for additional 
resources for foreign assistance. Sometimes some of your 
predecessors did not recognize what you obviously know so well, 
that you can have the greatest policies in the world, but if 
you do not have the resources to carry them out, they are not 
much more than historical talking points that will be in 
somebody's archives somewhere. You want them to be enacted, not 
archived, and I agree with you on that.
    Our foreign assistance budget has been dangerously 
underfunded since the end of the cold war. Now, that in not to 
say that some of the programs we had were not in dire need of 
reform. We threw away money in Zaire and in Central America. We 
propped up some of the world's worst dictators. We ignored 
pressing development needs. We could have used our money more 
wisely during that period.
    But that time is gone. Now we have new challenges. The news 
from the Budget Committee has been encouraging. As Senator 
McConnell said, he and I have consistently called for the funds 
necessary for the United States to play a leadership role in 
the world. We have done this under both Democrat and Republican 
Presidents. So, you have some dependable allies here both among 
Republicans and Democrats.
    I will make one other point. It is also a point you have 
made very strongly. There is no substitute for American 
leadership. We are the wealthiest, most powerful, Nation on 
Earth. No democracy in history has ever attained what we have, 
but we should not just slap ourselves on the back. It has a 
whole lot of leadership responsibilities that go with it. We 
are not or should not be an isolationist country. We have 
responsibilities worldwide and you, Madam Secretary, have shown 
a willingness to face up to those responsibilities and those 
opportunities as much or more than anybody I know. Whether it 
is protecting the Earth's environment or controlling the spread 
of plutonium, or building global defenses against health 
epidemics or fighting international organized crime, or banning 
the use of antipersonnel landmines, it is not going to happen 
unless we set the example and push forward. These are immensely 
difficult challenges and I am going to do whatever I can to 
support you when I can.
    But I also hope that you will encourage the administration 
to challenge conventional wisdom. Take risks. Not everything we 
do is going to work out. Not everything is going to be 
successful. Not everything is going to be politically popular.
    I think of the Marshall plan. When President Truman 
proposed that, I think it had around 10 percent support or less 
in this country. Think what the world would be like today if he 
had not persisted.
    Take risks. It is the only way we can leave the past behind 
and seize what I think are the opportunities of a very unique 
period in our history as we go into this new millennium. You 
and I spoke a little bit about these challenges yesterday, in 
Bosnia and the Middle East, China and Central Africa. Your 
plate is overflowing and more so all the time.
    I think it is time for the United States to push hard for 
solutions. Do not hold back.
    Obviously, one area that I have always been concerned about 
is antipersonnel landmines. They maim or kill somebody every 22 
minutes. The United States has proudly taken strong steps on 
the Test Ban Treaty on Nuclear Weapons by taking the initiative 
and going first. We have taken strong steps in the Chemical 
Weapons Convention by taking the initial steps unilaterally and 
going forward. Landmines have killed a lot and maimed a lot 
more innocent people than chemical weapons or nuclear weapons.
    Yesterday the British Government announced they will sign a 
treaty banning the weapons at Ottawa this December, the United 
States should do that. We ought to be leading the world, not 
sitting on the sidelines on such an important moral issue. We 
need the kind of leadership, Madam Secretary, that you showed 
so courageously at the United Nations, and I would urge the 
President and the administration to look back at how well you 
did there and let us move forward on this. Several of us, 
including around this table, on both sides of the aisle, will 
continue to push it. Thank you again for being here.
    Thank you, Mr. Chairman.
    Senator McConnell. Madam Secretary, before turning to you, 
we have the honor this morning of having with us the 
distinguished chairman of the full Appropriations Committee, 
Senator Stevens. Do you have any opening observations, Mr. 
Chairman?

                   opening remarks of senator stevens

    Senator Stevens. Thank you, Mr. Chairman. I have just come 
to welcome the Secretary to our committee for the first time 
since I have been chairman. As we remarked coming in, we have a 
longstanding, almost family relationship, and I am delighted 
that you are here.
    I have only one comment. I am sending you a letter, Madam 
Secretary, about the recent statement of the Canadian 
Government that they will once again put fines on fishing 
vessels coming up into the waters off Alaska from Seattle and 
Portland. We went through that once before and finally got a 
bill passed that the President signed to repay all of those 
people who paid fines to the Canadian Government before. It is 
a government responsibility to maintain the freedom of the 
seas, and I hope that we are able to do that.
    I do not ask any questions now. Maybe Senator Murray will 
ask questions about it when she gets the opportunity. I am 
going back to the conference, but I do welcome you.
    I want to say, as chairman, I have been very appreciative 
of the State Department under your administration responding 
promptly to our requests. We have had just excellent 
cooperation with the committee since you have become Secretary, 
and I welcome that. I am sure all the members do. Thank you 
very much.
    Secretary Albright. Thank you very much.
    Senator McConnell. Thank you very much, Mr. Chairman.
    We are going to have a vote in about 10 minutes, but what 
we are going to try to do here is go on and get started, and if 
we have to have a break, it will be a very brief one. We will 
just run over and vote and come right back.
    So, Madam Secretary, we look forward to hearing from you.

              summary statement of hon. madeleine albright

    Secretary Albright. Thank you very much, Mr. Chairman. I 
really am delighted to be here this morning on such a fine day 
in this auspicious spring, a spring in which two teams from 
your State made it to the final eight at the NCAA basketball 
tournament, in which Senator Mikulski's Orioles for which I 
started out are in first place, and in which Senator Leahy can 
look forward to a new Batman movie. [Laughter.]
    And in which the executive branch and Congress are moving 
rapidly toward agreement on a budget resolution.
    I am most heartened by the budget resolution in that it 
treats international affairs as the priority it is, and I very 
much appreciate not only your kind words, but also the help of 
many members of this subcommittee in achieving what we have 
gotten. I think we are all in this together, and I thank you 
all very much for your support on this.
    Now that the action moves here to appropriations, I hope 
that this subcommittee and the subcommittee chaired by Senator 
Gregg will receive large enough allocations to fund our arrears 
to the United Nations and the multilateral banks, while also 
meeting the President's request for current year funding for 
our foreign operations programs.
    These programs are designed to protect the interests of our 
citizens in an age when national borders are porous, markets 
are global, and many of the threats to our safety and security 
cannot be dealt with by any one nation acting alone.
    Mr. Chairman, the subcommittee has my written statement 
which, as I am assured by those who wrote it, is brilliant in 
its entirety. [Laughter.]
    Senator McConnell. That will be made a part of the record.
    Secretary Albright. However, to save more time for 
questions and to keep us all awake, I will focus my oral 
remarks on programs or policies that relate directly to this 
funding request as opposed, for example, to NATO enlargement or 
our China policy and that I believe we also should focus on 
things that require our particular attention.
    I will begin for programs for maintaining the security and 
safety of our people. Here I emphasize the importance we attach 
to the Korean Peninsula Energy Development Organization [KEDO]. 
As you know, KEDO stems from our framework agreement for 
freezing and ultimately dismantling North Korea's dangerous 
nuclear weapons program.
    Last February I had the opportunity to visit Korea's 
demilitarized zone and talk to our Armed Forces there. I also 
had the chance to meet with officials in Seoul and to reaffirm 
our strong friendship for the Republic of Korea. I returned 
from that visit more convinced than ever that KEDO is a 
national security bargain for the United States. Our 
contributions are helping to generate support from others that 
will ultimately dwarf our own. We are asking $30 million for 
the American share this year and I hope we will have your 
support on that.
    Also in the category of protecting our security is the $230 
million we are requesting for the war against drugs. Obviously 
there are many battles yet to be won, but I am encouraged by 
the progress being made in reducing coca production, signing 
law enforcement cooperation agreements, and disrupting the 
profits of notorious traffickers such as the Cali cartel.
    I am encouraged as well by the joint commitment we made 
earlier this month with Mexico to work together as allies on 
every aspect of our shared problem. The State Department will 
be working hard with others to translate that commitment into 
sustained progress on the ground, in the air, at sea, and in 
our neighborhoods.
    Mr. Chairman, when we support arms control and 
antinarcotics initiatives, we advance the long-term interests 
and safety of our people. The same is true when we help end 
conflicts and reduce tensions in troubled regions around the 
world. In the Middle East, we face an extremely difficult and 
complex situation because Arabs and Israelis alike are doubting 
their faith in the peace process and in one another. We believe 
that the way forward begins with the restoration of competence 
and a sense of shared interests. All parties must accept as a 
starting point that there is no room for terrorism or violence 
as a tool of negotiation. There can be no rationalizations or 
room for debate on that central point.
    Looking ahead, Israelis must see that violence or threats 
of violence will not be used against them as a means of 
leverage in negotiations. Palestinians must see that Israelis 
are not taking unilateral actions which foreclose options on 
issues reserved for permanent negotiations. And both must 
assume responsibility for improving the negotiating climate.
    Arab-Israeli peace remains a high priority for the 
administration and for the United States. To support our active 
diplomacy, we must maintain appropriate bilateral assistance to 
Israel, Jordan, and Egypt while contributing to economic growth 
and the creation of democratic institutions within the 
Palestinian authority.
    It is also essential to American interests and to the 
future stability of Europe that we fully implement the Dayton 
Agreement for peace in Bosnia. Since Dayton was signed, our 
initial security goals have been achieved and economic 
reconstruction has begun.
    Unfortunately, there remain important areas where progress 
has been slow due to the failure of many Bosnian leaders to 
embrace true political and social integration.
    Now, President Clinton has approved measures to encourage 
further and more rapid progress toward the core goals of 
Dayton. Next week I will be visiting Sarajevo, Brcko, Banja 
Luka, and other locations in the region to demonstrate 
America's commitment to a single Bosnian state with two 
multiethnic entities. I will also be making a more detailed 
statement in New York tonight regarding the administration's 
policy toward Bosnia.
    The heart of our message is that the international 
community, including both civilian and military components, 
must make clear that those who contribute to peace in Bosnia 
will be supported, while those who obstruct peace should pay a 
price. For example, our new open cities support project 
provides assistance to communities and only to communities that 
have demonstrated a willingness to allow persons from ethnic 
minorities to return safely to their homes.
    One city where it is especially critical that residents 
work for unity and peace is Brcko. Because of its strategic 
location and the terrible ethnic cleansing that occurred there, 
a peaceful, multiethnic Brcko would be a powerful symbol to the 
rest of Bosnia and a springboard toward success for the entire 
Dayton process.
    Our goal in Brcko, as in Bosnia more generally, is to 
reconnect what has been disconnected to restore the flow of 
transportation, communication, commerce, and social interaction 
among the various ethnic communities.
    There are those who resist this process and there are many 
in Bosnia and elsewhere who are skeptical that it will succeed, 
but these are the same people who said that the war could not 
be ended, that Dayton could not be negotiated, and that the 
United States and Europe, including Russia, could never come 
together on behalf of a Balkans peace.
    The administration does not underestimate the obstacles, 
but neither do we underestimate the stakes. We are determined 
to use our leverage and to press ahead with our partners both 
in and outside Bosnia to support the work of the International 
War Crimes Tribunal and to help create institutions that 
improve security, permit more displaced persons and refugees to 
return home, enhance civil liberties, and allow democratic 
institutions to take root.
    In this effort, we pledge regular consultations with this 
subcommittee and with others in Congress and seek your support.
    Switching continents, Mr. Chairman, today in the newly 
renamed Democratic Republic of Congo, our goal is to encourage 
a peaceful transition based on democratic principles. We 
welcome Mr. Kabila's declared intention to form a broadly based 
interim government, and we have made it clear that we would 
like to see a government that is also transparent in its 
activities so that the people of this long-troubled nation may 
know that the days of secret looting and secret terror will not 
return.
    We also want to see a government that respects human 
rights, assures due process, and cooperates with the 
international community in caring for refugees and 
investigating reports of atrocities.
    Finally, we will look to the new authorities to adopt 
democratic practices and build democratic institutions, to work 
actively to prevent that vast country's fragmentation, and to 
foster stable and peaceful relations with its neighbors.
    The Democratic Republic of Congo is a nation rich in both 
human and natural resources. In the weeks ahead, we will work 
with officials in that country and elsewhere to improve 
prospects for a democratic, prosperous, and peaceful future. We 
will also consult closely with Congress concerning the 
evolution of our policy.
    Mr. Chairman and members of the subcommittee, America's 
leadership is derived not only from economic and military 
power, but also from the power of our ideals, and fundamental 
to our ideals is our commitment to democracy. Accordingly, we 
are asking your support for programs to strengthen democratic 
institutions in the world, including central Europe and the New 
Independent States, [NIS].
    Mr. Chairman, the transition from communism to democracy in 
central Europe is the product of central European courage, 
energy, and vision. But the United States may be proud of the 
role the SEED program, for which we are requesting $492 million 
this year, continues to play in assisting the process of 
economic and political reform. You all have mentioned the 
Marshall plan, but what was once said about the Marshall plan 
may fairly be said about this program. It has served as--and I 
quote: ``the lubricant in an engine, not the fuel, allowing a 
machine to run that would otherwise buckle and bind.''
    A democratic Russia is also an essential partner in our 
efforts to build a secure Europe. In Helsinki, Presidents 
Clinton and Yeltsin expressed their commitment to stimulating 
growth in investment in Russia while citing President Yeltsin's 
plan to launch Russia on its next phase of reform.
    In recognition of progress made and of our stake in 
strengthening market democracies, we have this year revamped 
our assistance program to Russia and the other NIS. Of the $900 
million we have requested, $528 million will fund a new 
partnership for freedom.
    This initiative will concentrate on the promotion of 
business, trade, and investment, and the rule of law, and it 
will include increased professional and academic exchanges.
    Mr. Chairman, before wrapping up, I want also to ask your 
support for a full range of our programs in support of economic 
and sustainable development. These include our requests for the 
Export-Import Bank, the Trade and Development Agency, our 
population programs, the global environment fund, important 
U.N. programs, such as UNICEF and UNDP, and the multilateral 
banks. Taken together, these programs make an enormous 
contribution to America's well-being by promoting U.S. 
investment and by helping our neighbors' trading partners and 
friends to build healthier and more prosperous and more stable 
societies.
    I know, Mr. Chairman and members of the subcommittee, that 
supporting foreign assistance is not the easiest vote for a 
Senator to make. We are all concerned about priorities at home, 
but I think as many of you have said, we also know that neither 
our history, nor our character, nor our self-interest will 
allow us to withdraw from the center stage of global, 
political, and economic life.
    There is, after all, no more immediate or local an issue 
than whether our sons and daughters will some day be called 
upon to do battle in big wars because we failed to prevent or 
contain the small ones.
    There are few more significant economic issues than whether 
we will find ourselves forced into a new arms race because of 
setbacks in the former Soviet Union or because nuclear weapons 
have fallen into the wrong hands.
    There are few goals more important to our workers than 
opening new markets overseas.
    There are few matters more urgent for our communities than 
reducing the flow of drugs across our borders.
    And there are few questions more vital to our children than 
whether we will bequeath to them a world that is relatively 
stable and respectful of the law or one that is brutal, 
anarchic, or violent.
    I will cease so you can go and vote.
    Senator McConnell. I think probably the least disruptive 
thing to do--and feel free to come back to the back room--would 
be for us to recess the hearing, all go vote, and come right 
back. If you would like to come back here, that would be fine.
    Secretary Albright. Very good. Then I will give you my 
final two paragraphs when you come back.
    [A brief recess was taken.]
    Senator McConnell. The hearing will resume.
    Madam Secretary, had you completed your statement? If not, 
go ahead.
    Secretary Albright. Well, I had one more paragraph.
    Senator McConnell. All right. We will take your last 
paragraph.
    Secretary Albright. I think it is germane actually because 
it does talk about executive/legislative relations.
    A half a century ago, a great American generation, led by 
President Truman and supported by Members of Congress from both 
parties, rose above the weariness of war's aftermath and the 
temptation of isolation to secure the future. Working with our 
allies, they made the investments and built the institutions 
that would keep the peace, defend freedom, and create economic 
progress through five decades.
    I think it is clear that it is up to us in our time to do 
what they did in their time, to support an active role for 
America, protect American interests, keep American commitments, 
and help where we can those from around the world who share our 
values.

                           prepared statement

    In that effort, I pledge my own best efforts as Secretary 
of State and I solicit your support in it. From your opening 
statement, I would say that we are on the same wavelength.
    Thank you very much.
    [The statement follows:]

            Prepared Statement of Hon. Madeleine K. Albright

    Mr. Chairman and Members of the Subcommittee, I am pleased 
to have the opportunity to testify this morning, for the first 
time in my new capacity. I hope very much that we will be able 
to continue the frank relationship we enjoyed while I served as 
our Permanent Representative to the United Nations. Together, 
we have an important job to do, and I look forward to working 
with you not only this year but in the future.
    I want to acknowledge at the outset that this Subcommittee 
and members on it have been leaders in supporting an active and 
engaged U.S. foreign policy. We have not always agreed on all 
subjects, but the disagreements have almost always been on 
tactics not on goals. We all agree that the United States is, 
and should remain, vigilant in protecting its interests, 
careful and reliable in its commitments and a forceful advocate 
for freedom, human rights, open markets and the rule of law.
    I am heartened that the agreement on the Budget Resolution 
worked out by the Administration and Congressional leaders 
treats international affairs as the priority it is. I know that 
Senator Lautenberg and others on this Subcommittee were 
important actors in this process and I want to thank you for 
your support.
    Now, the action moves to appropriations. Consistent with 
the Budget Resolution, I hope that this Subcommittee and the 
Subcommittee on Commerce, Justice and State Appropriations will 
receive allocations sufficient to fund both our regular 
international programs and to pay our arrearages to the United 
Nations and the multilateral development banks.
    I hope that my testimony this morning will help persuade 
any who may doubt that such an allocation would serve our 
nation and our people well.
    Mr. Chairman, I am here today to ask your support and that 
of the Subcommittee for the President's request for funds for 
the foreign operations programs of the United States.
    Put simply, the goal of those programs is to protect the 
interests of our citizens in an age when national borders are 
porous, markets are global, and many of the threats to our 
safety and security cannot be dealt with by any one nation 
acting alone.
    The President's request seeks to ensure that we will have 
the foreign policy tools we need to sustain principled and 
purposeful American leadership.
    It includes funds for programs that will help us to promote 
peace and maintain our security; to safeguard our people from 
the continuing threat posed by weapons of mass destruction; to 
build prosperity for Americans at home by opening new markets 
overseas; to promote democratic values and strengthen 
democratic institutions; to respond to the global threats of 
international terrorism, crime, drugs and pollution; and to 
care for those who are in desperate need of humanitarian aid.
    Let me begin my discussion here this morning with our 
programs for maintaining the security and safety of our people.

                          maintaining security

    The Cold War may be over, but the threat posed by nuclear 
and other weapons of mass destruction has only been reduced, 
not ended.
    Our efforts to reduce the number and stop the spread of 
weapons of mass destruction contribute to what former Defense 
Secretary Perry called ``preventive defense.'' We pursue these 
initiatives not as favors to others, but because they are a 
national security bargain for the American people.
    With strong U.S. leadership, and bipartisan support from 
the Congress, much has been accomplished. Achievements range 
from the removal of nuclear weapons from Belarus, Kazakstan and 
Ukraine to recent approval by the Senate--with the help of many 
members of this Subcommittee--of our participation in the 
Chemical Weapons Convention.
    But arms control and nonproliferation are works in 
progress, and we will need your help and that of the Congress, 
as a whole, to continue that progress.
    The 1994 Agreed Framework between the United States and 
North Korea froze and established a roadmap for dismantling 
that country's dangerous nuclear weapons program. With our 
partners, we created the Korean Peninsula Energy Development 
Organization (KEDO) to implement key aspects of the agreement. 
Our earlier commitment helped jump-start KEDO and generated 
contributions from Japan and South Korea that will ultimately 
dwarf our own.
    KEDO now has 10 members--and we will bring in at least 
three more this year to share the burden. I appreciate the 
support this Subcommittee has shown in the past for our 
participation in KEDO, and ask your support for our proposed 
$30 million contribution in fiscal year 1998. Those funds will 
leverage the support of others, while contributing directly to 
the safety and security of the American people.
    I also ask your support for our proposed $36 million 
voluntary contribution to the International Atomic Energy 
Agency (IAEA). These funds will help that agency to verify 
compliance with the Nuclear Non-Proliferation Treaty in more 
than 820 locations in 61 countries.
    We are also continuing efforts to fulfill the President's 
call for negotiations leading to a worldwide ban on the use, 
stockpiling, production, and transfer of anti-personnel 
landmines.
    Just last week, ACDA Director John Holum was in Geneva to 
urge the Conference on Disarmament to begin that negotiation in 
earnest. He also voiced U.S. support for the complementary 
process now under way in Ottawa. As Director Holum made clear, 
we don't under-estimate the challenges at the Conference on 
Disarmament. However, that venue does provide the best 
opportunity to negotiate an APL ban that is truly comprehensive 
and effective. This issue remains a high foreign policy 
priority for the United States, and I will continue to consult 
closely with Senator Leahy--who has been an inspiring and 
determined leader on this issue--and other Members of Congress 
concerning it.
    Finally, I join President Clinton in his call last Friday 
for early Senate approval of the pending protocol on landmines. 
By strengthening the restrictions on landmine use, this 
protocol will help prevent many casualties and is, in the 
President's words ``an essential step toward a total ban.''
    Mr. Chairman, international narcotics trafficking also 
endangers Americans. The President, and law enforcement 
agencies and educators at all levels are committed to doing the 
job at home. But we cannot hope to safeguard our citizens 
unless we also fight this menace abroad, where illicit drugs 
are produced and ill-gotten gains are hidden away.
    Under the President's leadership, we have moved 
aggressively and with results. This past year, our support for 
eradication and interdiction helped knock coca production in 
Peru to its lowest level in a decade. Cooperation with Paraguay 
has improved. New law enforcement cooperation agreements with 
Argentina, Brazil and Bolivia have been signed. And by 
economically targeting individuals and front companies, we have 
done much to disrupt the business and decrease the profits of 
the notorious Cali cartel.
    In Mexico, drug seizures and arrests are up. New laws have 
been enacted to fight money-laundering. Mexico has set a 
precedent by extraditing its own nationals to the United States 
to be prosecuted for drug-related crimes. And amidst all the 
publicity and real problems related to corruption, it is worth 
remembering that 200 Mexican law enforcement personnel were 
killed last year in the battle against drug trafficking.
    During the meeting of the U.S.-Mexico Binational Commission 
earlier this month, Presidents Zedillo and Clinton reaffirmed 
the commitment of our two nations to work together as allies to 
reduce demand, intercept shipments, arrest traffickers, 
confiscate profits and professionalize every aspect of law 
enforcement response. We will be working hard, in close 
cooperation with representatives from the White House and other 
agencies, to translate this commitment into further progress in 
the war against drugs.
    We are asking this Subcommittee to support our efforts in 
Latin America and around the world by approving our request for 
$230 million to combat international narcotics and crime. In 
addition to other anti-crime initiatives, these funds support 
our source country narcotics eradication and alternative 
development programs, provide material and logistical support 
for police and military in strategic areas, and finance our 
comprehensive heroin control strategy.
    America is the world's leader in the fight against 
international terror, which continues to claim victims despite 
steady improvements in multinational law enforcement and 
information-sharing. We are persisting--and making some 
headway--in encouraging our allies to refrain from business as 
usual with Iran until that nation ends its support for 
terrorism. And we remain steadfast in our support for United 
Nations sanctions against Libya and Iraq.
    To supplement our diplomatic initiatives, we have requested 
$19 million for our anti-terrorism programs. These funds will 
be used primarily to enhance the skills of police and security 
officials in selected countries so that they may be more 
effective partners in preventing and punishing terrorist acts.

                            promoting peace

    When we support arms control and anti-terrorism efforts in 
other countries and regions, we advance the long-term interests 
and safety of Americans. The same is true when we help end 
conflicts and reduce tensions in regions important to the 
interests of the United States.
    Today, I will cite three cases involving past, present or 
potential conflicts where our budgetary resources are affected, 
our interests are engaged and our participation or leadership 
is required.
    In the Middle East, we face an extremely difficult and 
complex situation in the Arab-Israeli peace process.
    Since 1993, the parties have made enormous gains in 
transforming the political landscape of their historically 
troubled region and laying the foundation for an enduring 
peace.
    In recent months, however, those gains have been threatened 
and the people of the region have once again become the victims 
of confrontation and acts of violence. The reason is that Arabs 
and Israelis alike are doubting their faith in the peace 
process and in one another.
    We have, in the past, experienced setbacks to peace in the 
Middle East, but we have persevered. Despite present problems, 
we will continue to look for a way forward. That way begins 
with restoration of the confidence, trust and sense of shared 
interests upon which the peace process rests.
    All parties must recognize and fully accept that there is 
no room for terrorism or violence as a tool of negotiation. 
There can be no rationalizations or room for debate on that 
central point.
    Looking ahead, Israelis must see that terror and threats of 
violence will not be used against them as a means of leveraging 
their position in negotiations. Palestinians must see that 
Israelis are not taking unilateral actions which foreclose 
options on issues that are reserved for permanent negotiations. 
And both must assume responsibility for reversing the 
deterioration in the negotiating environment. In that regard, 
we have encouraged friends of peace in the Arab world not to 
take actions which could make progress towards peace more 
difficult.
    Arab-Israeli peace remains a high priority for the 
Administration and for the United States. We have an enormous 
stake in the future of the region, and we remain in almost 
continual contact with representatives of all sides. To support 
our diplomacy, we must maintain appropriate bilateral 
assistance to Israel, Jordan and Egypt, while contributing to 
economic growth and the creation of democratic institutions 
within the Palestinian Authority.
    It is also essential to American interests and to the 
future stability of Europe that we finish the job and fully 
implement the Dayton Agreement for peace in Bosnia.
    Fulfillment of these Accords would produce a stable, 
undivided Bosnia that would cease to be a source of instability 
in southern Europe.
    It would also make possible over time the full integration 
of the Balkans into European institutions; contribute to 
regional prosperity; bolster democracy; prevent the area from 
becoming a base for transnational crime; create a further bar 
to meddling by Iran; and create a precedent-setting model for 
resolving ethnic differences on the basis of justice and 
respect for human rights.
    Since Dayton was signed, our initial security goals have 
been achieved and economic reconstruction has begun.
    Unfortunately, there remain important areas where progress 
has been slow due to the failure of Bosnian leaders, especially 
in Bosnian Serb entity, the Republika Srpska, to embrace 
political and social integration.
    Today, and in days to come, we will be re-dedicating 
ourselves to the goal of full implementation of the Dayton 
Accords and to a single Bosnian state with two multi-ethnic 
entities. Next week, I will be visiting Sarajevo, Brcko, Banja 
Luka and other locations in the region. I will also be making a 
more detailed statement in New York tonight regarding the 
Administration's policy towards Bosnia.
    The heart of our message is that the international 
community, including both civilian and military components, 
must re-energize its commitment to implement Dayton.
    For example, while SFOR will remain principally focused on 
enforcing the military aspects of the Dayton Agreement, it will 
build on its past accomplishments by actively supporting 
crucial civil implementation tasks, within its mandate and 
capabilities. These include helping to create a secure 
environment for managed refugee returns and the installation of 
elected officials in targeted areas, and specific economic 
reconstruction projects which could include inter-entity 
telecommunications and restoring civil aviation.
    Full implementation must be our goal in all sectors, and 
the parties cannot pick and choose those elements they prefer 
at the expense of others. If they are not complying on key 
implementation tasks, it will not be business as usual for 
their politicians or their military leaders. For example, if 
the parties do not comply with their arms control obligations, 
SFOR has the option to restrict military movements and 
training.
    On the civilian side, as well, we will move ahead with 
fresh energy to help those in Bosnia striving to build a true 
national community.
    For example, our Open Cities Support Project provides 
assistance to communities, and only to communities, that have 
demonstrated a willingness to allow persons from ethnic 
minorities to return safely to their homes.
    To date, we have identified four municipalities in 
different parts of Bosnia to participate at a cost of $3.6 
million. We have an additional $5 million available to help 
repair buildings, provide agricultural support and business 
credit and to train workers in eligible communities.
    One city where it is especially critical that residents 
work for unity and peace is Brcko. Because of its strategic 
location and the terrible ethnic cleansing that occurred there, 
a peaceful, multi-ethnic Brcko would be a powerful symbol to 
the rest of Bosnia.
    Our goal in Brcko, as in Bosnia more generally, is to 
reconnect what has been disconnected, to restore the flow of 
transportation, communication, commerce and social interaction 
among the various ethnic communities.
    There are those who resist this process; and there are many 
in Bosnia and elsewhere who are skeptical that it will succeed. 
These are the same people who said that the war could not be 
ended; that Dayton could not be negotiated; and that the United 
States and Europe, including Russia, could never come together 
on behalf of a Balkans peace.
    The Administration does not under-estimate the obstacles, 
but neither do we under-estimate the stakes. We are determined 
to press ahead with our partners both in and outside Bosnia to 
support the work of the International War Crimes Tribunal in 
every way we can, and to help create institutions that improve 
security, permit more displaced persons and refugees to return 
home, enhance civil liberties, and allow the institutions of a 
unitary, multi-ethnic and democratic state to take root.
    In this effort, we pledge regular consultations with this 
Subcommittee and with others in Congress, and seek your 
support.
    Mr. Chairman, of the many outbreaks of violence around the 
world in recent years, the interrelated conflicts in Central 
Africa have been the most deadly.
    Today, in the Democratic Republic of Congo, formerly Zaire, 
our goal is to encourage a peaceful and stable transition to a 
new era based on democratic representation and popular 
responsibility.
    We note that the victorious Alliance leader, Laurent 
Kabila, has said he intends to form an interim government that 
includes representatives from various components of Congolese 
society.
    We welcome that intention and have expressed our 
willingness to work with others to provide appropriate help to 
a transitional government that demonstrates a commitment to 
broad-based political participation, democratic practices, and 
human rights.
    We have made it clear that what we would like to see is a 
transitional government that, in addition to being broadly-
representative, is also transparent in its activities, so that 
the Congolese people know that the days of secret looting and 
secret terror will not return.
    We also want to see a government that respects the rights 
of its people, assures due process to those charged with 
crimes, and cooperates fully with the international community 
in caring for refugees and investigating reports of atrocities.
    Finally, we will look to the new authorities to adopt 
democratic practices and build democratic institutions, to work 
actively to prevent Congo's fragmentation, and to foster stable 
and peaceful relations with its neighbors.
    The Congo is a nation rich in both human and natural 
resources. In the weeks ahead, we will work with officials in 
that country and elsewhere to improve prospects for a 
democratic, prosperous and peaceful future. We will also 
consult closely with the Congress concerning the evolution of 
our policy.
    The United States supports international peacekeeping 
activities that serve our interests through payment of our 
assessments to United Nations peacekeeping operations and 
through our voluntary peacekeeping account, for which we are 
seeking $90 million in fiscal year 1998. Operations expected to 
be funded by this account include, among others, peacekeeping 
and observer activities in the Great Lakes region of Africa, 
the Multinational Force and Observers in the Sinai, the Israel-
Lebanon Monitoring Group and peacekeeping and preventive 
diplomacy missions of the OSCE.
    As we work with others to resolve problems such as civil 
conflict and proliferation, we need strong partnerships with 
other leading nations. These are the bonds that hold together 
not only our foreign policy, but the entire international 
system.
    By acting together, we are able to elevate standards of 
international behavior, spur economic and social progress, and 
strengthen the rule of law. We also leverage resources far 
beyond our own.
    Today, for example, many of the same countries that are 
working to implement peace in Bosnia are also striving to build 
lasting stability through NATO's Partnership for Peace. This 
year we have requested $70 million in military assistance for 
Partner countries. We are also requesting $20 million for 
Central European Defense Loans (CEDL), to help recipient 
countries build defensively-oriented, civilian-controlled 
militaries with strong ties to the United States.
    While preserving NATO's traditional purposes and strengths, 
we are also adapting it to meet new missions and take in new 
members. At the July summit in Madrid, NATO will invite a 
number of Central European states to begin negotiations to join 
the alliance. As President Clinton has repeatedly made clear, 
this is part of a larger strategy, developed with our allies, 
to build a future for Europe in which every democracy is our 
partner and every partner is a builder of peace. Also 
contributing to this goal is the historic ``founding act'' 
between NATO and Russia that was reached last week, and that 
establishes the basis for long term cooperation on security 
matters. In addition, a new Euro-Atlantic Council will provide 
the framework for consultations involving NATO and Europe's 
other democratic states.
    In this context, Mr. Chairman, I might add that I 
appreciate the counsel I have received from members of the 
Senate's NATO Observer Group and from other Senators with an 
interest in the evolution of Europe's economic and security 
institutions. This is a process of enormous importance and can 
only benefit from vigorous and wide-ranging examination of the 
issues.
    Meanwhile, the economic, political and military evolution 
of nations in Asia will also have a profound effect on American 
security and foreign policy.
    Today, we are working with allies and friends to build an 
Asia-Pacific community based on shared interests and a common 
commitment to peace.
    Over the last few years, we have reinvigorated our Asian 
alliances while maintaining our forward deployment of 100,000 
American troops in the Western Pacific. We are encouraging new 
efforts to build security and resolve disputes peacefully 
through bodies such as the ASEAN Regional Forum.
    Our core alliances in Asia are as strong, and our 
cooperation as broad, as they have ever been. Our relationship 
with our closest Asian ally, Japan, is underpinned by our 
shared commitment to open and democratic societies. We consult 
regularly on issues from peace in Asia to development in 
Africa. We appreciate Japan's generous financial support for 
the Middle East peace process and for our Common Agenda of 
environmental initiatives around the world.
    We are working closely with the Republic of Korea, another 
key ally, to maintain stability on the Korean peninsula and to 
explore possibilities for permanent reconciliation. Our 
cooperation is growing in numerous other areas as well, as 
Seoul, anchor of the world's 11th-largest economy, takes on a 
larger regional and global role.
    We are also deeply engaged in managing our complex 
relationship with China, as it emerges as a key Asian and 
global power.
    The evolution of our relations with China will depend 
primarily on how China defines its own national interests 
during the remainder of this century and into the next. Through 
our strategic dialogue, we are encouraging the Chinese to 
accept what we believe is true--that China will be able to find 
greater security, prosperity and well-being inside a rule-based 
international system than outside. Accordingly, the President 
has decided to renew China's most-favored-nation trading 
status, equivalent to normal trading relations, for the coming 
year.
    Currently, China is constructively engaged with the 
international community in some areas; in some, it is not. We 
have been able to work together well with respect to the North 
Korea nuclear issue and banning nuclear tests. We have also 
made progress on a range of specific commercial concerns and 
laid the basis for cooperation on responding to global threats 
of terrorism, crime, drugs and pollution.
    We do, however, still have important differences with 
China, especially on trade, arms-related transfers and human 
rights, including Tibet. We do not hesitate to raise these 
differences privately with China's leaders, or to express our 
beliefs publicly concerning the need for all countries to 
respect international standards. We will continue to voice 
strong concern about the need for China to meet its commitments 
concerning Hong Kong, a message that I will deliver, in person, 
at the time of the former colony's reversion to Chinese 
authority on July 1. And, while we will adhere to our ``one 
China'' policy, we will also maintain robust unofficial ties 
with Taiwan.

                          promoting democracy

    Mr. Chairman, America's global leadership is derived not 
only from our economic and military power, but from the power 
of our ideals. And fundamental to American ideals is our 
commitment to democracy.
    Today, in Burma, as the Chairman has often and eloquently 
reminded us, a legitimate democratic movement with demonstrated 
popular support has been brutally repressed. That movement has 
urged the international community to limit foreign investment. 
What is more, Burma's government protects and profits from the 
world's largest heroin trafficking enterprise.
    Last month, in response to deepening repression in Burma, 
President Clinton decided to impose investment sanctions under 
a law approved last year by Congress. In combination with the 
earlier actions we and other nations have taken, together with 
shareholder and consumer pressure, we believe this step will 
deal a further blow to investor confidence in Burma. It has 
sent a message to the military regime that it will not attract 
the capital investment it needs unless it begins a genuine 
dialogue with its own people.
    We also bolster democracy through our economic support and 
development assistance programs in selected countries around 
the world. For example, we are requesting $202 million in 
economic support funds for democratic development in countries 
such as Haiti, Angola, Cambodia and for regional programs that 
promote respect for civil liberties and the rule of law.
    We are also continuing major programs for strengthening 
democratic transitions in Central Europe through the Support 
for East Europe Democracy (SEED) program and in the New 
Independent States (NIS).
    The transition from Communism to democracy is the product 
of Central European courage, energy and vision. But the United 
States may be proud of the role the SEED program continues to 
play in assisting the process of economic and political reform. 
What was once said about the Marshall Plan may fairly be said 
about this program, it has served as ``the lubricant in an 
engine--not the fuel--allowing a machine to run that would 
otherwise buckle and bind.''
    Through SEED, for which we are requesting $492 million this 
year, we have been able to serve as technical adviser on the 
ways and means of building democratic institutions and 
processes, developing financial sectors that attract investment 
and coping with energy and environmental problems.
    Clearly, progress has not been even either over time or 
among countries in the region. But the overall direction has 
been steady in the direction of less centralization, increased 
reliance on private enterprise, more civil liberties and 
greater development of the rule of law.
    Central and eastern Europe remain as important to American 
interests today as when the original SEED act was passed. The 
nations here are proving that democracy and economic prosperity 
can be built on the ruins of failed communist systems--a 
valuable example for countries further to the east. Central 
Europe is a growing market for U.S. goods and services, and a 
gateway to the vast potential markets in Russia and Ukraine. 
Finally, a peaceful, democratic Central Europe gives the U.S. 
and the Atlantic alliance greater assurance of security at a 
relatively low cost.
    A democratic Russia is also an essential partner in our 
efforts to build a secure Europe. Russia's transition has been 
arduous and uncertain. More difficult times lie ahead. But open 
markets and democratic institutions have taken hold. If Russia 
is to become a full and productive partner in a Europe at 
peace, that progress must continue.
    The United States has a profound interest in encouraging 
Russia to continue its democratic and economic reforms, to 
respect fully the sovereignty of its neighbors, and to join us 
in addressing critical regional and global issues.
    In Helsinki, Presidents Clinton and Yeltsin issued a joint 
statement outlining their commitment to stimulating growth and 
investment in Russia, advancing Russia's integration into 
international organizations and citing President Yeltsin's plan 
to launch Russia on its next phase of reform.
    In recognition of the progress that has been made, and of 
the magnitude of our stake in the strengthening of market 
democracies in the region, we have this year revamped our 
assistance program to Russia and the other NIS. Of the $900 
million we have requested, $528 million will fund a new 
Partnership for Freedom.
    This initiative will concentrate on activities to promote 
business, trade and investment and those that would more fully 
establish the rule of law. It will support opportunities for 
U.S. business and help support partnerships with private U.S. 
organizations. And it will increase professional and academic 
exchanges.
    In the aftermath of the Soviet Union's disintegration, the 
NIS had to build their government institutions from the ground 
up. In most cases, media and basic market institutions, such as 
banks, capital markets and regulatory institutions remain at 
early stages of development.
    In several countries, economic reform has advanced faster 
than democratic reform. We are concerned, for example, by the 
undermining of parliamentary independence in Belarus, by 
continued repression in Turkmenistan and by the disputed nature 
of elections held last fall in Armenia.
    We are concerned, as well, that in some sectors of the NIS, 
weak institutions of government have led to a vacuum of 
effective authority that has opened the way to a rapid increase 
in criminal activity. This is hampering fledgling democratic 
institutions, creating social instability and discouraging 
foreign investment.
    We have responded by substantially increasing the 
proportion of our assistance that is designed to strengthen law 
enforcement and judicial institutions and promote the rule of 
law. Since 1995, for example, we have provided law enforcement 
training to nearly 10,000 officials in Central Europe and the 
NIS. We have developed regional criminal justice training 
programs for more than 1,000 law enforcement officers and 
prosecutors at the International Law Enforcement Academy in 
Budapest. And we have greatly increased our formal cooperation 
with Central European and NIS governments through agreements 
that allow us to share information and coordinate 
investigatory, prosecutorial and crime preventive activities.
    Throughout this region and, indeed, the world, the United 
States represents the potential of democracy. Wherever we are 
visibly involved and engaged, we give hope to people who 
believe in freedom and who want democratic institutions to 
succeed. By building partnerships with other freedom-loving 
peoples, we sustain the growth of open markets and democracy 
that has enhanced our own security and prosperity, and which 
has been the signature element of our age. If, however, we were 
to abandon or walk away from our partners in these countries, 
we would heighten the possibility that their societies would 
retreat into repression or dissolve into the disorder within 
which terrorists and criminals thrive.
    Certainly, assistance to the strategically-located and 
energy-rich democracies of Central Asia and the Caucasus is 
strongly in our national interest. The purpose of our aid is to 
help small businesses gain a greater foothold and to assist 
nascent democratic organizations, such as the independent 
media, public interest groups and educational institutions 
establish active, effective roles.
    In this connection, I note that the Administration 
continues strongly to oppose section 907 of the Freedom Support 
Act, which undermines U.S. influence and policy flexibility in 
the Caucasus region and Azerbaijan.
    The Administration continues to support assistance for 
Ukraine as part of our long term strategic partnership with 
that country. Last week's first full meeting of the U.S.-
Ukraine Binational Commission underscored the value we place on 
a stable, democratic Ukraine that is working cooperatively with 
us on a range of issues. During those meetings, we were able to 
express our support for the process of economic and political 
reform, while also expressing concern about the problem of 
corruption that has been chilling outside investment in 
Ukraine.

                          promoting prosperity

    Mr. Chairman, peace and security are paramount goals of our 
international programs, but promoting economic prosperity is 
another top priority.
    The Clinton Administration has had extraordinary success in 
helping our economy grow at home by opening markets abroad. Our 
exports have grown by 34 percent since 1993, generating 1.6 
million new jobs. Since the North American Free Trade Agreement 
entered into force three years ago, U.S. exports to Mexico have 
risen by more than one-third and overall trade has more than 
doubled. We have laid the groundwork for free and open trade in 
our hemisphere by 2005 and in the Asia-Pacific region by 2020. 
And we have put our full weight behind better enforcement of 
intellectual property standards, and fuller consideration of 
core labor rights, at the World Trade Organization.
    Looking ahead, we all know that competition for the world's 
markets is fierce. Often, our firms go head-to-head with 
foreign competitors who receive active help from their own 
governments.
    Our goal is to see that American companies, workers and 
farmers have a level playing field on which to compete.
    As long as I am Secretary of State, our diplomacy will 
strive for a global economic system that is increasingly open 
and fair. Our embassies will provide all appropriate help to 
American firms. Our negotiators will seek trade agreements that 
help create new American jobs. And I will personally make the 
point to other governments that if their countries want to sell 
in our backyard, they had better allow America to do business 
in theirs.
    Fortunately, our diplomats are doing their jobs. One of the 
pleasures of my own job is hearing about compliments from 
American corporations like this one. After executing a contract 
to build a power generating plant in Yemen, officials from CAE 
Development of Lexington, Kentucky wrote that ``Every 
Department of State employee contacted was top notch and eager 
to help * * * we could not have obtained this contract without 
their help.''
    But our diplomats and our businesspeople need your 
commitment as well, and your support for our requests for the 
Export-Import Bank and the Trade and Development Agency.
    The Overseas Private Investment Corporation, I am pleased 
to say, is now self-sustaining. Its commitments have grown by a 
factor of five over the last five years, and it has shown 
profits repeatedly, reaching $209 million in 1996.

                   promoting sustainable development

    Mr. Chairman, many of America's fastest-growing markets are 
in developing countries, where the transition to an open 
economic system is underway, but incomplete. Often, these 
countries are held back by high rates of population growth, 
lack of access to health care and education, a scarcity of 
natural resources or conflict.
    When democratic institutions in a developing country are 
weak, that country will be less likely to grow peacefully, less 
inclined to confront international terrorists and criminals, 
and less able to do its part to protect the environment.
    That is why our sustainable development programs are a 
sound investment in American security and well-being.
    This year, we have given them a new focus on one of the 
most basic problems that stifles development and sparks 
conflict--food security. Programs to improve the dependability 
of crops and distribution of food in Africa can help make sure 
hunger is no longer a constant threat to the lives of people 
and the stability of societies.
    Our financial support and pressure for reform have helped 
the United Nations Development Program to become the central 
coordinating and funding mechanism for UN development 
assistance. Every dollar we contribute leverages $8-10 from 
other nations in support of Bosnian reconstruction, Rwandan 
judicial reform, and Cambodian de-mining--to name just a few 
projects. I urge this Subcommittee to support the President's 
full request of $100 million for UNDP.
    We have maintained our request for funding for UNICEF at 
$100 million for fiscal year 1998. Like UNDP, UNICEF plays an 
important role in countries suffering from, or recovering from, 
the devastation caused by civil or international conflict. 
UNICEF helps protect children--a society's most vulnerable 
members and its hope for the future--from the Balkans to 
Liberia.
    We have requested $795 million for population and health 
programs. By stabilizing population growth rates, developing 
nations can devote more of their scarce resources to meet the 
basic needs of their citizens. Moreover, our voluntary family 
planning programs serve our broader interests by advancing the 
status of women, reducing the flow of refugees, protecting the 
environment, and promoting economic growth.
    We are developing forward-looking programs to protect the 
global environment and promote sound management of natural 
resources with our request of $341.5 million. Of this amount, 
AID programs totaling $290 million are used for projects such 
as helping to reclaim land for agriculture in Mali, cut 
greenhouse gas emissions in the Philippines and acquire 
American ``green technology'' in Nepal.
    Our $100 million request for the Global Environment Fund 
(GEF) provides loans for developing country projects to 
preserve biodiversity, inhibit global warming, protect oceans, 
and mitigate depletion of the ozone layer. A key U.S. priority 
in the GEF is to increase support for private sector efforts on 
behalf of sustainable development, including new tools such as 
project guarantees and equity investments in promising 
environmental technology firms.
    As Treasury Secretary Rubin testified earlier this week, we 
have also requested an increase to restore full funding and 
begin to pay our debts to the multilateral development banks 
and the IDA, where our support for reform has achieved results. 
For example, the World Bank has increased accountability and 
transparency while cutting its administrative budget by 10 
percent, and the African Development Bank has tightened lending 
rules, cut staff by 20 percent and appointed external auditors.
    The Budget Resolution provides you with the flexibility to 
respond favorably to our request, and we hope you will take 
advantage of the opportunity to maintain U.S. leadership in 
these institutions.

                   providing humanitarian assistance

    The President's request of $650 million for Migration and 
Refugee Assistance would enable the United States to continue 
contributing to the relief of those victimized by human or 
natural disaster. We have also requested that our international 
disaster assistance and Office of Transition Initiatives 
programs be funded at the same levels as last year.

                               conclusion

    Mr. Chairman, I know that supporting foreign assistance is 
not the easiest vote for a Member of Congress to make. 
Americans, all of us, are deeply concerned about problems here 
at home; about the budget, about the quality of our schools, 
about crime.
    No one understands better than the President that we cannot 
hope to lead abroad unless we are first strong at home. That is 
precisely why he has placed his primary emphasis on building a 
strong and growing domestic economy.
    But the Administration also knows that neither our history, 
nor our character, nor our self-interest will allow us to 
withdraw from the center stage of global political and economic 
life. In today's world, domestic policy and foreign policy are 
no longer separable things.
    There is, after all, no more immediate or local an issue 
than whether our sons and daughters will someday be called upon 
to do battle in big wars because we failed to prevent or 
contain small ones.
    There are few more significant economic issues than whether 
we will find ourselves forced into a new arms race because of 
setbacks in the former Soviet Union or because nuclear weapons 
have fallen into the wrong hands.
    There are few goals more important to our workers than 
opening new markets for American goods overseas.
    There are few matters more urgent for our communities than 
reducing the flow of drugs across our borders.
    And there are few questions more vital for our children 
than whether we will bequeath to them a world that is 
relatively stable and respectful of the law, or one that is 
brutal, anarchic or violent.
    A half century ago, a great American generation, led by 
President Truman, and supported by Members of Congress from 
both parties, rose above the weariness of war's aftermath, and 
the temptation of isolation, to secure the future. Working with 
our allies, they made the investments, and built the 
institutions, that would keep the peace, defend freedom and 
create economic progress through five decades.
    Members of the Subcommittee, it is up to us in our time to 
do what they did in their time. To support an active role for 
America on the world stage. To protect American interests. To 
keep American commitments. And to help where we can those from 
around the world who share our values.
    In that effort, I pledge my own best efforts as Secretary 
of State. And I earnestly solicit your support.
    Thank you very much. And now, I would be happy to respond 
to any questions you might have.

                  reduction in aid to israel and egypt

    Senator McConnell. Thank you, Madam Secretary.
    Given the attendance at the hearing today of members, we 
are going to have 5-minute rounds, and I will lead off by just 
referring to this morning's paper in which Bob Novak and 
Rowland Evans suggest the administration is considering a 
reduction in aid to Israel and aid to Egypt in order to provide 
Jordan with roughly $100 million. I was curious, Madam 
Secretary, whether that is something you are pursuing.

                 assistance for jordan and middle east

    Secretary Albright. Mr. Chairman, we have for some time now 
been seeking ways to provide substantial additional assistance 
for Jordan and other friends of peace in the Middle East. The 
President has asked us to do that. King Hussein has taken 
genuine risks for peace and he deserves our support.
    The President has had discussions with Prime Minister 
Netanyahu who supports the establishment of a Middle East peace 
and stability fund for this purpose. We are still examining 
with Israel and Egypt the details of how to accomplish this, 
and when our discussions reach a conclusion, we will consult 
with you more closely. But we do very much believe that Jordan 
and King Hussein, who have played such a crucial role, do in 
fact need some assistance in this area.
    Senator McConnell. We will look forward to discussing that 
with you further.
    I would like to shift to the NATO issue, upon which you 
spent some time in your statement. I think it is accurate to 
say that I was a supporter of expansion of NATO even before it 
was Clinton administration policy, so I am very much in 
sympathy with the direction that the administration is finally 
taking.
    You are familiar with the arguments that are being advanced 
against NATO expansion, much of it related to the potential 
cost to the United States. So, in the area of infrastructure 
the suggestion has been made that the defense capabilities of 
applicants are simply inadequate and that we would probably 
have to fund a significant proportion of the increase in these 
capabilities.
    We have been told that our costs; that is, the American 
costs associated with infrastructure could be roughly $150 
million to $200 million annually and drawn from the defense 
account. Is that your understanding of where that money is to 
come from?

                             nato expansion

    Secretary Albright. Yes, sir.
    Let me just say, first of all, I appreciate very much what 
you said in terms of support for the policy because I think 
this is one of the major initiatives of our time and one that 
we should be discussing and one that we truly do believe will 
complete for central and Eastern Europe what was done for 
Western Europe 50 years ago.
    We are making it quite clear that NATO enlargement is not 
cost free and that, as with many aspects of American security, 
it is not free. We estimate that it will cost the United States 
somewhere between $1.5 billion and $2 billion over a 10-year 
period, which does come down to around $200 million a year, and 
it would not come out of our budget, but the defense budget.
    Senator McConnell. Is it your understanding that the 
modernization of forces costs were to be borne by the new 
members coming in?
    Secretary Albright. Yes; and let me just also make that 
clear, Mr. Chairman. First of all, one of the considerations 
that is going to be taken into account in inviting new members 
is the extent to which their national budgets do reflect a 
commitment to modernizing their forces and having an 
appropriate expenditure for defense.
    Second, we are also not going to be the country bearing the 
lion's share of the cost for NATO expansion. Other NATO 
members, the European members, we expect will be picking up the 
lion's share. So, the new members will pay for their 
modernization. Other NATO members will pick up their share and 
our cost is as I stated.
    Senator McConnell. Is it further the assumption that most 
of these armies are bigger than they should be, that the 
reductions in forces in these countries should produce the 
money that they need for modernization? Is that another 
assumption?
    Secretary Albright. That is one part of the assumption. I 
think that they clearly have to restructure their forces and 
some savings will be produced.
    We are concerned, as I am sure you are, that they develop a 
balance between what they are going to be spending on defense 
and modernization versus what they need for their economic 
advancement. But we are looking with them at an appropriate 
percentage of their budget and urging them to either get up to 
that point or come down to it. But we do think that some of 
their restructuring of their forces should produce some savings 
for them.
    Senator McConnell. It is not clear that it will, though, is 
it? The chairman and I recently were in Hungary and we were 
talking to the Defense Minister. He said they had already 
reduced their force by one-third, and it was not producing the 
savings that they had anticipated. So, this may or may not 
provide the money for modernization. Is that a correct 
assumption?
    Secretary Albright. That is true, but let me just say again 
NATO enlargement is not a scholarship program. They are going 
to have to pay their way and also be responsible members of the 
foremost alliance of our time. So, one of the considerations 
here is their ability to perform within the NATO alliance and 
to modernize their forces and to pay their way.
    Senator McConnell. I think it is important that we not let 
that be used as a reason, however, not to expand NATO. Is it 
safe to assume that the militaries of the countries currently 
in NATO are not all exactly equal in capability?
    Secretary Albright. I think that is safe to assume, but 
they play their role. I think that it is a privilege to be a 
part of NATO and these countries know that, and we believe that 
the countries that would be under consideration would be those 
that could in fact play their role on a calibrated basis as we 
all do in NATO.
    Senator McConnell. I see my red light is on, but I am going 
to fudge here for 1 minute because Senator Leahy really is 
entitled to go second as ranking member, assuming he gets here 
fairly soon.
    While we are on NATO, we all have followed with a good deal 
of interest the agreement, if that is the proper terminology, 
that has been concluded conceptually between Russia and NATO. 
Are there any codicils, letters of intent, or other side 
agreements with reference to that conceptual agreement that 
exist and that need to be commented upon?
    Secretary Albright. We are calling this the Founding Act, 
and it is very straightforward. What you see is what you get. 
What it does, Mr. Chairman, is basically codifies a lot of 
existing NATO policy and states principles such as that we have 
no intention, reason, or plan to station nuclear forces within 
the new countries, which is a NATO doctrinal point. It creates 
a joint council which is the mechanism whereby the cooperation 
will take place. It restates generalized principles about no 
subordination of NATO to other organizations, no second class 
citizenship. It is a straightforward document which does not 
have any side letters or codicils.
    Senator McConnell. What has been the reaction of the former 
Soviet republics and the Baltic countries to this agreement?

               soviet/baltic reaction to nato enlargement

    Secretary Albright. I think the reaction to the agreement 
has been good. It is no secret that their reaction to NATO 
enlargement is not good. They are making no secret of the fact 
that they do not favor NATO enlargement. We know that and we 
have operated on that basis.
    Also, when I spoke with both President Yeltsin and Foreign 
Minister Primakov, I made quite clear that our going forward 
with NATO enlargement was not dependent upon them signing this 
founding act. We had been prepared to go on to Madrid--that is 
the conference where the invitations will be made to the new 
members--whether there was a NATO/Russia document or not. We 
now do not have to do that because they in fact are prepared to 
sign such a document on May 27 in Paris.
    I think their reaction to the document is positive. They 
see it, as we do, as a way for the Russians to be part of a 
European system.
    Senator McConnell. I meant the reaction of the former 
Soviet republics to the Russia/NATO agreement.
    Secretary Albright. I am sorry. I think there we have not 
heard anything specifically against the NATO/Russia document. I 
think that others would like to have similar agreements with 
either us or NATO. Ukraine, for instance. We are pursuing a 
Ukraine/NATO document at the same time. We are developing a 
relationship with the Baltics that I think shows our desire to 
include them increasingly in all European activities and in a 
Baltic plan.
    Senator McConnell. What about as candidates for admission 
to NATO themselves?
    Secretary Albright. Well, we have said all along that the 
first shall not be last, that NATO is open to all democracies 
and market economies, and have made very clear that there are 
no members that are automatically excluded. That includes the 
former Soviet republics.
    Senator McConnell. I may want to come back to NATO.
    I am going to turn to Senator Lautenberg.
    Senator Lautenberg. Thank you very much, Mr. Chairman. I 
will be fairly brief.
    I am delighted to see you, Madam Secretary, as usual and 
continue to be impressed with your energy and your ability and 
would encourage you onward and upward, to keep going.
    I am working on a subject of interest to all of us here and 
that is the budget, so I am sorry that I was not here earlier 
to hear your full remarks.
    You know a subject of significant interest to me is what is 
happening with those accused of war crimes in the former 
Yugoslavia, particularly where we have an ability to reach to 
these people. I know that you met with the Croatian Foreign 
Minister Granic last week. I appreciated the tough message that 
you delivered about Croatia's need to cooperate with the War 
Crimes Tribunal.
    Now, following your meeting, a State Department spokesman, 
Nick Burns, stated that there are individuals who are on 
Croatian soil who are indicted and have not been turned over 
and that you raised specific names of people who need to be 
turned over to The Hague for the work of the crimes tribunal. 
Burns reiterated those points at a later time.
    Did you deliver specific names of war criminals? And I ask 
you that because Burns has spoken about the many occasions in 
the plural. So, were you able to identify any better who they 
were, where we were looking to pick them up? Their availability 
apparently is fairly obvious to lots of people and nothing is 
happening. I wonder if you might be able to tell me whether----
    Secretary Albright. Yes; first of all, Senator, I really 
would like to thank you personally for all the tremendous work 
you have done on the budget, and I think that we have all 
recognized here this morning the pleasure that we are having 
with the 150 account being prioritized. I think that makes a 
big difference, and I am very grateful to you for what you have 
done.
    Senator Lautenberg. Senator McConnell as well in this 
regard I must say.

                          war crimes tribunal

    Secretary Albright. On your question, first of all, let me 
say that this is an issue that we and I specifically take very 
seriously. I delivered a very tough message to the Croatian 
Foreign Minister generally, not just on the war crimes, but the 
need for them to cooperate better in Eastern Slavonia and to be 
generally more cooperative in supporting the Dayton accords.
    What I said was that they needed to cooperate in greater 
degree with the War Crimes Tribunal and a name that I used as 
an example of the need for further cooperation was Kordic, and 
they know the other names. I was using more as examples of the 
kinds of things they needed to do to cooperate.
    I did say to them that we were pleased that they had 
finally transferred Mr. Aleksovski and that this was the kind 
of cooperation that was required. It had taken them too long to 
do that but I made it very clear that they needed to do more.
    He and his delegation committed to apprehend any indicted 
persons on Croatian territory and to use his Government's 
influence with the Bosnian Croats because Kordic is not in 
Croatia itself.
    I think that what we need to do--and as I said, I am 
delivering a speech on this tonight--is to be much more 
assertive in terms of supporting the War Crimes Tribunal and 
that is our intention.
    Senator Lautenberg. As a matter of fact, if we complete our 
work on the budget, I will hear your speech directly tonight in 
New York.
    You know that my view has been that any engagements with 
multilaterals and bilaterals that are part of an aid program or 
a development program with Croatia ought to be carefully 
reviewed before we consent with our representatives. I am 
trying to figure out why the State Department gave the go-ahead 
for the United States to vote in favor of the $100 million 
enterprise and the financial sector adjustment loan for Croatia 
at the World Bank on May 13. It was just days before your 
meeting in Croatia with the Croatians.
    Secretary Albright. Let me explain that a little bit. First 
of all, we had in fact held back on a previous vote in order to 
get them to try to use that leverage on the Aleksovski 
turnover. They in fact then did that and we felt it was a good 
idea to show that if they cooperated, there was a sign that we 
approved. I think we have other ways of maintaining leverage. 
We will continue to do that.
    I am going to go, Senator, to the region as soon as I 
finish these meetings in Europe at the end of next week. I will 
again deliver this message, but I think that it is wise to do 
sticks and carrots a little bit here and that is our 
opportunity to do it.
    Senator Lautenberg. So, is it the stick's turn next?
    Secretary Albright. Well, if we do not get something for 
the carrot, there will be a stick; yes.
    Senator Lautenberg. I would urge you to make sure that the 
law is appropriately laid down.
    I would ask one other thing, Mr. Chairman. You are 
planning, I see by the papers, to be in Banja Luka. Is the 
subject of war criminals going to be on the agenda when you are 
there?
    Secretary Albright. The subject of war criminals will be on 
my lips wherever I go. It is something that I feel very 
strongly about. I think that those of us that have followed 
this issue as carefully as you all have know that in order to 
have ultimate reconciliation and justice, it is important for 
the war criminals to be surrendered and for there to be the 
fullest support for the work of the War Crimes Tribunal. I have 
spent a lot of time with Chief Prosecutor Luis Arbor in this 
attempt.
    Senator Lautenberg. I urge you to keep the pressure on, 
Madam Secretary.
    Thank you, Mr. Chairman.
    Senator McConnell. Thank you, Senator Lautenberg.
    Senator Specter.
    Senator Specter. Thank you, Mr. Chairman.
    Secretary of State Albright, I join my colleagues in 
welcoming you here and compliment you on your extraordinary 
work in a short tenure. You come with a great background and we 
look forward to working with you.
    In the limited time available to me, I will focus on 
problems in the Mideast. You and I have talked about these 
before and I gave you a little heads-up before the session 
started after the recess. I want to talk to you about the 
Palestinians and I want to talk to you about Egypt.
    The terrorist attack in Israel which killed three Israelis 
and wounded dozens more on March 21 was preceded by activity by 
Yasser Arafat on March 9 holding a well-publicized meeting with 
Hamas leaders and shortly, thereafter, released Maqadmeh from 
prison, and Maqadmeh then made a speech on the day of the 
bombing in Tel Aviv saying: ``Nothing can stop Israel except 
holy warriors carrying explosives on their bodies to destroy 
the enemies of God.''
    Prime Minister Netanyahu then said that Arafat had given a 
green light to carrying on the terrorist activities.
    About the same time, there was a disclosure by El Ed, the 
Deputy Education Minister, who said that Arafat had prior 
knowledge of the 1993 plot to bomb New York City's World Trade 
Center. I have asked the Attorney General to follow up on that 
because if that is true, we could extradite Arafat to the 
United States under our laws.
    The question that I have is whether Arafat gave that green 
light. You have not yet responded to the letter and I am not 
saying you should have. It is not an easy question, but if it 
is determined that Arafat did give a green light, as you know, 
we have the provisions of the amendment which Senator Shelby 
and I introduced which would cut off United States aid to the 
Palestinians, the $500 million, if they do not change their 
charter, which I think they have not done. But that is not the 
more pressing issue. The more pressing issue is whether Arafat 
gave the green light for terrorism. But if that proves to be 
the case, should we not cut off United States aid to the 
Palestinians?

                               terrorism

    Secretary Albright. Senator, you have asked me this 
question and it is a very serious question and I will do my 
best to answer it. But let me put it a little bit into context.
    I think we have to remember the remarkable achievements 
that were made in the Middle East peace process when we were 
all on the lawn at the White House, and it had a lot to do with 
the development of a new set of relationships between Arafat 
and Prime Minister Rabin and us. I think we all celebrated what 
we thought was the beginning of a new peace era. All of that 
was built on the necessity for there to be bonds of confidence 
developed among the leaders.
    Those bonds have now been very seriously stretched and 
tattered in some respects, and there is a great deal of 
frustration I think on all sides about the lack of progress in 
the peace process and the resumption of activities, terrorist 
bombings. There is absolutely no place for terrorism in the 
Middle East or anywhere. We have spoken out very loudly against 
it and see that there have been those who have said there is a 
moral equivalence between bombs and bulldozers. We do not 
accept that and believe that terrorism is totally unacceptable 
and we have made that clear.
    We have and had told Arafat privately at the time that he 
had to do everything he could to stop terrorist acts. We have 
no evidence that there was a green light. But clearly he----
    Senator Specter. Madam Secretary, are you satisfied that 
there was not a green light given by Arafat?
    Secretary Albright. To the best of my knowledge, I cannot 
show that there was a green light. What there was not was a red 
light that made it very clear that terrorist acts were 
unacceptable.
    Senator Specter. Well, Madam Secretary, if there was 
neither green nor red, it seems to me that is not acceptable. I 
think we have to expect a red light from Arafat. I think that 
is his commitment, and short of that, how can we fail to cut 
off the aid to the Palestinians?
    Secretary Albright. It is very hard to sort out all the 
facts. I think we have to keep in mind what it is we are trying 
to accomplish here, and that is ultimately some kind of a 
resumption of negotiations between the Palestinians whose 
leader is Arafat and the Israelis in order to move the process 
forward and we need to keep looking forward.
    We are all very frustrated at the moment. We have seen a 
breakdown in a process that we all applauded, and I think we 
have to be very careful in how we react at this stage to make 
sure that we do not worsen the situation, but try to get the 
peace process back on track.
    Senator Specter. Well, Madam Secretary, I agree with you 
about the importance of the peace process, but it seems to me 
we just cannot compromise on the terrorist issue. I was very 
much concerned--and this is not your bailiwick--when Marzook 
was released from detention where he had been held for months, 
years, and taken back on a military aircraft going to Jordan. I 
just think we cannot wink at terrorism. And I know you do not 
wink at terrorism. It is a tough judgment, but my own view is 
that if there is not a red light, we ought not to give the 
Palestinians the aid.
    Let me ask you one final question. I ask the chairman if I 
might raise an issue as to Egypt. Egypt has a commitment with 
Israel not to have boycotts, and there is not a warm peace 
there.
    Now, on March 31 of this year, the Arab League foreign 
ministers meeting in Cairo adopted a resolution which calls for 
an Arab boycott. President Mubarak has been a very good friend, 
very instrumental. We give $2.1 billion to Egypt along with $3 
billion to Israel as a result of Camp David, and I have always 
thought it is money well spent.
    But if Egypt is not living up to its commitments on the 
boycott issue--and that is just one of them. I will put some 
papers in the record for further amplification--should we 
consider withholding or reducing the $1.2 billion which we give 
in foreign aid to Egypt?
    [The letters follow:]
                   Letter From Senator Arlen Specter
                                               U.S. Senate,
                                    Washington, DC, March 24, 1997.
Hon. Madeleine Albright,
Secretary of State,
Washington, DC.
    Dear Secretary Albright: According to the weekend press reports, 
Israeli Prime Minister Benjamin Netanyahu has stated that Palestinian 
Chairman Yasir Arafat has indirectly given a green light to the 
terrorists resulting in the suicide bomb which killed and wounded many 
Israelis last Friday.
    According to the news reports, Chairman Arafat and the Palestinian 
authority released Ibrahim Maqadmeh. Prime Minister Netanyahu further 
stated that Chairman Arafat and the Palestinian authority have failed 
to detain known terrorists and to confiscate weaponry.
    In my judgment, it is very important for the State Department to 
make a factual determination as to whether Chairman Arafat and the 
Palestinian authority did give a green light indirectly to the 
terrorists and whether there was a failure to detain known terrorists 
and to confiscate weaponry.
    I would appreciate your advice, as promptly as possible, on your 
Department's conclusion as to whether Chairman Arafat and the 
Palestinian authority gave an indirect green light to the terrorists.
    As you know, an amendment offered by Senator Shelby and myself to 
the Middle East Peace Facilitation Act of 1995 conditions the $500 
million in U.S. aid to the Palestinian authority on presidential 
certification that the Palestinian authority is complying with all of 
its commitments under its peace accords with Israel, including its 
commitment to prevent acts of terrorism and undertake ``legal measures 
against terrorists, including the arrest and prosecution of individuals 
suspected of perpetrating acts of violence and terror''.
    The Senate Appropriations Subcommittee on Foreign Operations, on 
which I sit, will soon be considering this issue for fiscal year 1998 
so I would appreciate your prompt response.
    In addition, I would appreciate your advising me as to whether 
there is any U.S. aid in the pipeline which has not yet been turned 
over to the Palestinian authority. If so, I request that such payments 
be withheld until the determination as to whether the Palestinian 
authority is complying with the Specter-Shelby amendment.
            Sincerely,
                                             Arlen Specter,
                                                      U.S. Senator.
                                 ______
                                 
                   Letter From Senator Arlen Specter
                                       U.S. Senate,
                               Committee on Appropriations,
                                      Washington, DC, May 13, 1997.
The President,
The White House,
Washington, DC.
    Dear Mr. President: I am writing to you in response to recent 
events in the Middle East.
    On March 21, 1997, a bomb exploded in a Tel Aviv cafe killing 3 
Israelis and wounding 40. The militant Islamic group Hamas claimed 
responsibility for this attack. According to the press reports 
following the attack, Israeli Prime Minister Benjamin Netanyahu has 
stated that Chairman Yassir Arafat indirectly gave a green light to 
terrorists resulting in this attack.
    According to the Washington Post (March 24, 1997), this attack 
followed months of warnings from your Administration to Yassir Arafat 
that he was being too lenient with Islamic extremists. It has been 
reported that in recent months Arafat has released 120 out of 200 
arrested Hamas/Islamic Jihad activists that Israel specifically 
requested be kept in jail, including Ibrahim Maqadmeh, who is regarded 
as the head of a military wing of Hamas. In addition, Prime Minister 
Netanyahu has stated that Chairman Arafat and the Palestinian authority 
have failed to detain known terrorists and to confiscate weaponry.
    In my judgment, it is very important that the United States 
Government make a factual determination as to whether Chairman Arafat 
and the Palestinian authority did give a green light indirectly to the 
terrorists and whether there was a failure to detain known terrorists 
and to confiscate weaponry. On March 24, 1997, I wrote to Secretary of 
State Madeline Albright and requested that she advise me on the State 
Department's conclusions on these issues. I have not yet received a 
response to my letter.
    Given the importance and urgency of this issue, I would appreciate 
it if you would ask your national security staff to review the evidence 
and advise me, as promptly as possible, on your conclusion as to 
whether Chairman Arafat and the Palestinian authority gave an indirect 
green light to the terrorists.
    As you know, an amendment offered by Senator Shelby and myself to 
the fiscal year 1995 Foreign Operations Appropriations Bill conditions 
the $500 million in U.S. aid to the Palestinian authority on 
presidential certification that the Palestinian authority is complying 
with all of its commitments under its peace accords with Israel, 
including its commitment to prevent acts of terrorism and undertake 
``legal measures against terrorists, including the arrest and 
prosecution of individuals suspected of perpetrating acts of violence 
and terror''.
    The Senate Appropriations Subcommittee on Foreign Operations, on 
which I sit, will soon be considering this issue for fiscal year 1998 
so I would appreciate your prompt response.
    In addition, I would appreciate your advising me as to whether 
there is any U.S. aid in the pipeline which has not yet been turned 
over to the Palestinian authority. If so, I request that such payments 
be withheld until the determination as to whether the Palestinian 
authority is complying with the Specter-Shelby amendment.
    On a related matter, I would appreciate your review of our large 
foreign aid package to Egypt in light of Egypt's recent actions in 
obstruction of the Arab-Israeli peace process.
    On March 31, 1997, the Arab League foreign ministers meeting in 
Cairo adopted a resolution which recommended: stopping the 
normalization steps which have been taken with Israel * * * and halting 
all dealing with it [Israel], including closing offices and missions * 
* * and continuing to maintain the primary Arab boycott and 
reactivating it against Israel * * * .
    Egypt's support for this resolution appears to violate Article 3 of 
the Egyptian-Israeli Peace Treaty of March, 1979 which stipulates that: 
Each party * * * undertakes to refrain from organizing, instigating, 
inciting, assisting, or participating in acts or threats of 
belligerency, hostility, subversion or violence against the other Party 
* * * . The Parties agree that the normal relationship established 
between them will include * * * termination of economic boycotts and 
discriminatory barriers to the free movement of people and goods * * * .

    While it is my understanding that Egypt is exempt from 
participating in this economic boycott, its efforts to get other 
nations to participate in the boycott seem to violate both the spirit 
and the letter of the peace treaty.
    Unfortunately, the Arab League resolution is only the last in a 
series of provocative Egyptian actions against Israel. As you will 
recall, when fighting broke out between Israelis and Palestinians after 
Israel opened an archaeological tunnel in Jerusalem this past 
September, you invited President Mubarak, Prime Minister Netanyahu, 
Chairman Arafat and King Hussein to Washington in an effort to solve 
the crisis. President Mubarak was the only one of these leaders to 
boycott your Washington summit.
    Also, in recent years Egypt's Government-backed newspapers, 
including Al-Ahram and Al-Goumhuriwa, have published many vicious anti-
Israel cartoons which are often nothing short of anti-Semitic. In the 
cartoons that I have seen, Israelis are frequently portrayed as blood-
thirsty demons and Nazis. In many of these cartoons, Jews are depicted 
as dark, bearded, hook-nosed men clad in black--an image which is 
itself reminiscent of the Nazi era.
    The United States gives Egypt over $2.1 billion in foreign aid each 
year. Our country undertook this serious commitment to Egypt after 
Egypt signed the peace accords with Israel. If Egypt's actions now 
serve to undermine these accords, then the level of aid must be 
reevaluated. As with every other country, Egypt's aid package should 
reflect the extent to which Egypt's actions further U.S. policy in the 
region.
    Thank you for your attention to these important matters.
            Sincerely,
                                             Arlen Specter,
                                                      U.S. Senator.

                             peace process

    Secretary Albright. Let me say that I think we need to 
remember what you have said as part of your comment and 
question, that Egypt has played a very important role in the 
overall peace process. When President Clinton met with 
President Mubarak when President Mubarak was here, we made very 
clear the importance to them of playing a constructive role in 
the whole peace process.
    They continue to play a useful role and I think that we 
would make a mistake if we had unilateral cuts here at this 
time in dealing with Egypt.
    If I might, Senator, it also goes back to your first 
question. As I said, I think we are in a pretty tough patch. We 
have been in tough patches before. We need to get through it. 
We are basically optimistic because that is our nature, but 
where I would be really concerned and would lead me to 
pessimism is if we were to undue all the work that has been 
done in the previous years of bringing the parties together.
    After that meeting in Cairo, I called many Arab leaders and 
asked them not to move the process backward. It is very hard to 
unravel things, and, therefore, I would hope, even on our part 
here, that as the United States we continue to press both 
parties to get the peace process back on track, not take 
actions that would make it more difficult for us to continue to 
have our catalytic, honest broker role and to be vigilant but 
always understanding that we need to move forward and that by 
taking unilateral action in response to a specific action, we 
in effect make it more difficult for ourselves to play an 
active role, which we intend to continue to do.
    Senator Specter. Thank you very much, Madam Secretary.
    Thank you, Mr. Chairman.
    Senator McConnell. Thank you, Senator Specter.
    Senator Leahy.
    Senator Leahy. Thank you, Mr. Chairman.
    Senator Harkin had wanted to be here. His brother is quite 
ill and so was unable to be. I have some questions he had 
wanted to ask, and I would like to just submit those for the 
record.
    Senator McConnell. That will be done.
    Senator Leahy. I mention them because they were things that 
he is very, very concerned about and if it were not for the 
illness, he would be here.
    Madam Secretary, I know you talked about NATO enlargement, 
and I have not made up my mind on that question. I am watching 
it very carefully and am privileged to be part of the Senate 
observer group on this. I think you have made great progress 
with the Russians on it. My concerns have been numerous: the 
cost to the American taxpayers, and I know that has been 
discussed with Senator McConnell.
    The implications the NATO/Russian charter has for the Start 
II Treaty is another one. I am concerned about whether Start II 
is going to be a casualty of this agreement. Are we expanding 
NATO at the cost of undercutting progress in reducing a really 
dangerous threat, 20,000 Russian nuclear warheads? Do see any 
chance that Russia will ratify Start II this year?

                           ratifying start ii

    Secretary Albright. Senator, this is very much a part of 
the discussions that President Clinton and President Yeltsin 
had and that I had had prior to that in Moscow, and we have 
made very clear to the Russians the importance of their 
ratifying Start II and then moving on to Start III.
    While there clearly are complications within the Duma, 
President Yeltsin had committed himself, as had Foreign 
Minister Primakov to actively pursuing the ratification of 
Start II. So, we will press that and press them also, once that 
is done, to move on to Start III.
    I agree with you. These were very important arms control 
treaties. They are important to us. We will keep pressing the 
case.
    But what I believe has been so interesting in this phase is 
how we are moving forward in new relationships that are built 
on these kind of longstanding arms control agreements that 
allow us to move into new areas to provide better security.
    And to go into your original question, we did talk about 
the cost of NATO enlargement, but I keep remembering that it 
costs more to fight and have a war than to think about how to 
preserve the peace. Even at the cost of $200 million a year, I 
think it is a good deal for the American people.
    Senator Leahy. I understand that. My concern is it becomes 
less of a good deal if we lose major nuclear arms control 
agreements because of it. It is one of the things that concerns 
some of us who still have questions on NATO expansion. I have 
always been a strong supporter of NATO. I think it is extremely 
important.
    I said to you before my concern that NATO would have become 
irrelevant had we not bolstered it in Bosnia. Had we not made 
that a significant NATO matter, we could have ended up with an 
irrelevant meeting group that periodically would meet in 
Brussels and feel good about the world but be otherwise 
irrelevant, as compared to a situation where you could have a 
relevant and significant NATO, which I think is important. I 
think a military alliance of that nature run by democratic 
nations is in our best interest, especially in that part of the 
world.
    Speaking of Bosnia, I was pleased to see you are going back 
to Bosnia. You and I traveled there with the President about a 
year and a half ago on the trip from hell. [Laughter.]
    But actually I found it very interesting, and I think it is 
important for you to go. If we are going to withdraw our 
troops, we have got a lot of work ahead of us.
    I saw an article in last Sunday's New York Times. ``It 
would be a mistake to say there is peace in Bosnia,'' said a 
top NATO commander. ``We have only the absence of war. We gave 
the civilian officials the time and space to carry out the 
Dayton agreement, but they failed. Nothing has been 
accomplished. The moment we pack up and leave next year, the 
war could well start over again.'' It went on to say that many 
civilian administrators, while acknowledging their failures, 
say the refusal by NATO leaders to arrest people indicted on 
charges of war crimes and protect refugees who want to return, 
has left them without the power to make the parties respect the 
peace agreement.
    I am sure that you have thought about the concerns of the 
Bosnian, Serbs, and Croats, who do not want to live together. 
You have thought about what happens if we leave, NATO pulls 
out, and Karadzic is still in power.
    What do you think it is going to look like a year from now? 
I am not talking about just the date of pullout. What kind of 
progress are we going to have a year from now?
    Secretary Albright. Just one point back on the historic 
question. Just the way we do not sign on and ratify treaties 
that we do not think are in our national interests, we believe 
that the Russians will see a ratified Start in their national 
interests because if they do not do that, they are in a worse 
strategic position than they would be otherwise.
    Senator Leahy. I agree.
    Secretary Albright. So, I think that they should do it. The 
truth is that the Duma might have found objections to Start II 
whether we were enlarging NATO or not, but I think the issue 
here is that it is in their national interest.
    On the question of Bosnia, you have heard me say this 
before, but I think it does bear repeating. There are those who 
are always talking about the deadline of the withdrawal of SFOR 
without focusing enough on all the work that can and should be 
done in the intervening period. As you know, I was a professor, 
and this really reminds me of the student who comes in the 
first day of the semester and sees that there is a paper due on 
the final day and that student says, I would like an extension, 
please. [Laughter.]
    Senator Leahy. That never happened to you as a professor, 
Dr. Albright.
    Secretary Albright. And I would have said to that student, 
do not worry about that. Let us get some work done. So, that is 
what this is about and that is what my speech is about.
    Clearly the military has performed brilliantly in Bosnia. 
The civilian aspect of this has lagged, and what we need to do 
now is to reinvigorate the civilian part of the Dayton 
agreement and get full civilian/military cooperation in this 
phase.
    There is a great deal that can be done. The chairman, in 
his opening statement, asked about what kind of programs there 
were. Was there conditionality? How were we dealing with this 
issue? What I will be talking about tonight is basically a way 
to use our assistance to bring about our goals and that is a 
multiethnic state, so that assistance would go to, for 
instance, one initiative, open cities, where we would pick 
certain cities, towns and support their projects that in fact 
help to bring the various ethnic groups together. We obviously 
favor the return of refugees, not only to majority areas, but 
to minority where they are in the minority and that is where 
these open cities are.
    On the war criminals issues, I have made very clear that we 
understand the cancerous effect that continues when there are 
war criminals and the difficulty of having true reconciliation. 
We are pledging our full, aggressive support to the War Crimes 
Tribunal.
    Senator McConnell. Thanks, Senator Leahy.
    Senator Bennett.
    Senator Bennett. Thanks, Mr. Chairman, and welcome, Madam 
Secretary.
    I would like to talk to you about the Iranian buildup in 
the gulf. I talked to others from your Department about this 
before, and I do not know whether they told you about it or 
not, but we will go through some of the same ground.
    Since the last hearing there has been a publication called 
Worldwide Maritime Challenges, 1997, put out by the Office of 
Naval Intelligence. I would like to turn to page 22 of that and 
here is a copy of it so that you can read along. It says, 
``Discoveries after the gulf war clearly indicate that Iraq 
maintained an aggressive WMD procurement program.'' For those 
in the audience, WMD means weapons of mass destruction, 
nuclear, chemical, and biological weapons. Now, that is fine. 
That is history.
    Now, it goes on. ``A similar situation exists today in 
Iran''--I underline the word ``today''--``with a steady flow of 
materials and technologies from China to Iran. This exchange is 
one of the most active WMD programs in the Third World, and is 
taking place''--again the present tense, ``is taking place''--
``in a region of great strategic interest to the United 
States.''
    Do you agree with that assessment by the Office of Naval 
Intelligence?

                      weapons of mass destruction

    Secretary Albright. Well, let me say that we do share your 
deep concern about what is going on in this area. We have 
expressed our concerns to China and we will continue to do so.
    We also are continuously monitoring, through all means 
available to us, all advanced weapons transfers whether from 
China to Iran and Iraq, or whether from China or any other 
nation. We are watching the situation very, very carefully. We 
are concerned. There is no question about it.
    I do not know whether I would agree specifically with the 
way that this is worded, but I can assure you that this is of 
major concern to us.
    Senator Bennett. Are there any new developments regarding 
Chinese weapons transfers to Iran that you can share with us?
    Secretary Albright. Well, let me go through this with you a 
little bit. We have been concerned about China's sales of 
chemical weapons, and yesterday we imposed sanctions on seven 
Chinese entities for their export of chemical goods and 
equipment to Iran which we believe could be used in Iran's 
chemical weapons program.
    The sanctions are against specific individuals and 
companies and not against the Government of China and we have 
no evidence that the Chinese Government was involved in these 
exports.
    The sanctions prohibit the U.S. Government from procuring 
goods from the sanctioned entities and also prohibit the 
importation into the United States of any products produced by 
the sanctioned entities.
    The Chinese Government has stated publicly its commitment 
to the Chemical Weapons Convention, and we hope that this 
action on our part will serve to encourage the Chinese 
Government to improve its export controls so that these kinds 
of entities are prevented in the future from assisting Iran's 
chemical weapons program. This is to be published in the 
Federal Register today.
    Senator Bennett. Thank you. I find that very encouraging 
and I appreciate your sharing that with the committee.
    If I could shift now to advanced conventional weapons, I 
would like to do with you the same thing I did with Mr. Bader 
when he was here and just elevate the awareness, if I might.
    This is a picture of the U.S.S. Stark, the American escort 
vessel that was struck by a cruise missile 10 years ago this 
month, and 37 American sailors died.
    Now, here is a picture of Chinese missile boats that are 
capable of carrying missiles equivalent or better than the 
Exocet missile that struck the Stark. You see there are five 
such missile boats on the back of this Chinese cargo ship. Each 
one of those has four missile launchers on it, and they are 
capable of launching the C-802 missile which is described by 
Chinese missile salesmen as being available for use against 
escort vessels. And that is exactly what the Stark was, an 
escort vessel.
    Now, if the Office of Naval Intelligence is right and the 
Iranians are now receiving land-based versions of the C-802--we 
know they have 60 C-802's in sea-based version. Here is the 
land-based version of the C-802--they would then be capable of 
attacking American naval vessels, escort vessels, from both the 
sea and the land.
    Now, it is against American law, namely, the Gore-McCain 
Act, to deliver cruise missiles to Iran. What is the 
administration's position on Gore-McCain and Chinese cruise 
missile sales? I asked this question of Mr. Bader and he has 
not yet responded.
    One of the questions I asked him was, Have you asked the 
Navy for its opinion as to whether or not the presence of these 
missiles in the area is destabilizing? So, I would repeat to 
you, have you asked the Navy if they think the presence of 
these missiles are destabilizing, and if you have any comment 
on the overall situation.

                          conventional weapons

    Secretary Albright. Thank you very much, Senator.
    We do in fact again share your deep concern about China's 
transfers of sophisticated conventional weapons, particularly 
this C-802 antiship cruise missile. As I expressed to you in a 
response to a letter on April 17 that you sent to me, we have 
expressed our concerns to China and we will continue to do 
that.
    We also continuously monitor through all the means 
available to us all advanced conventional weapons transfers to 
Iran and Iraq, as I said, whether from China or any other 
nation, and we carefully examine every report and take 
appropriate action when the information warrants.
    As you know, the Gore-McCain Act provides for the 
imposition of sanctions when a foreign person or country 
transfers goods or technology so as to contribute knowingly and 
materially to the efforts by Iran and Iraq to acquire 
destabilizing numbers and types of certain advanced 
conventional weapons.
    I take very seriously our need to prevent Iran and Iraq 
from becoming any more of a threat to regional stability than 
they already pose, and you can be certain that we will--and I 
personally will--continue to monitor any further development on 
this issue. We remain vigilant and will continue to review this 
with the appropriate agencies, including the Departments of 
Defense and the Navy whether these transfers have met the 
threshold specified in the Gore-McCain Act.
    If I might, Senator, take advantage of both the questions 
that you have asked to give a little bit of a broader context. 
There clearly is a very serious problem in our society or in 
the international system today about the transfer of weapons. 
We are in a situation where there are a number of countries 
that have sophisticated weapons systems that are selling them 
to other countries and there is much more of a movement of 
these kinds of weapons than previously because of the greater 
availability.
    We see it as a problem and we are doing everything we can 
to control such movements. We have developed a variety of 
international regimes to try, No. 1, to develop a system to 
monitor them, and then No. 2, to develop a system of action 
once that has been discovered. It is not perfect. It is far 
from perfect. I think these are the major challenges we have as 
we enter the 21st century.
    It is a very different world and the United States has to 
be out there up front creating these new missile controls or 
conventional regimes, but it is a problem. And I am not here to 
tell you that we have a perfect system. What we do have is a 
functioning international system where we are the leaders and 
we have to make sure that the others abide by it. I just want 
to tell you that we are on the same side on this. We have to do 
everything we can but it is very hard, and I am here to tell 
you it is very hard.
    Senator Bennett. Thank you.
    If I could quickly, Mr. Chairman, in view of the 
Secretary's response about sanctions brought against 
individuals on the chemical transfer--and I am, as I say, 
delighted to hear that. Are you aware of the allegation that 
polytechnologies is the entity that brokered the Chinese 
missile deal and are you looking at the possibility of 
sanctions there? You can answer that for the record if you do 
not have that.
    Secretary Albright. I will have to answer that for the 
record, sir.
    Senator Bennett. And I have some other questions for the 
record, but I thank the chair.
    Senator McConnell. Thank you, Senator Bennett.
    Senator Specter asked a couple of questions about the 
Palestinian authorities. As you may know, Madam Secretary, 
there is a current specific problem relating to an American 
citizen--a Mr. Kuttab I think is his name--who has been tossed 
in prison by the Palestinian authority. His crime was to 
broadcast over an American-financed television network 
proceedings of the Palestinian Legislature. So, as far as I 
know, unless something has happened this morning, he is in jail 
for this crime. I wonder if you are familiar with this case, 
and if you are, what if anything we are doing to get this 
American citizen out.

                        american citizen jailed

    Secretary Albright. Yes, sir; we have been dealing with it 
this morning. We obviously think it is unjustified. The Consul 
General there has been to visit the journalist in question and 
we have demarched the Palestinians on this and we will continue 
to do so. We consider this a serious issue and will stay on top 
of it.
    What is troublesome I think is generally a sense that there 
is not enough of an attempt to have a rule of law. This is a 
problem, but on the specific case we are using all our 
diplomatic channels to getting this person released.
    Senator McConnell. I wish you well.
    Turning to Burma, a subject you and I have discussed off 
and on for years, first let me congratulate you for the step 
that the administration took recently in implementing the 
provisions of a law that I actually voted against because I 
thought it was too weak--that was the Cohen-Feinstein measure. 
The administration has responded to that and implemented a 
variety of different sanctions including the bar on new 
investment.
    I might tell you, though, Madam Secretary, I am now hearing 
the people who fought against sanctions earlier saying give 
sanctions a chance, meaning I gather that they think they can 
live with what has been done so far and it is not going to 
pinch too much and their concern that we may go further, we 
meaning either the Congress or the administration or both of us 
working together.
    So, my question really is this. Where do we go from here? 
Are you going to lead an active effort to encourage the ASEAN 
countries and other countries to follow our lead? What is the 
next step? How are we going to try to influence the restoration 
of democracy in Burma?

                            burma sanctions

    Secretary Albright. Mr. Chairman, we have indeed discussed 
the subject often and at length, and I am very pleased that we 
were in fact able to get these sanctions imposed. They went 
into effect at 12:01 a.m. yesterday. We want to make sure that 
they are properly carried out.
    Let me, if I might, just quite openly share with you a 
concern. I read today that Aung San Suu Kyi is under even 
greater pressure, that they are about to hold a congress or a 
convention of her party, that a number of people have been 
arrested, 50 I think, and others are being watched, and that 
there is every indication that the SLORC is reacting to the 
sanctions as well by putting additional pressure on her. It is 
clear to me that they have no intention of responding to her 
efforts in a dialog.
    I think what we need to do is discuss with you and with 
other sources about how to proceed on this because she in fact, 
obviously, believes that the international pressure helps. But 
at some stage, she is under increasing threats, and I think we 
have to watch this carefully and I will.
    As far as the other nations are concerned, we have not----
    Senator McConnell. If I may interject, as you and I both 
know, she would like for us to go further than we have gone.
    Secretary Albright. I think she would. Having this 
discussion right here is not the best idea, but I do think that 
we need to talk about this because they are brutal. The SLORC's 
are genuinely immoral, brutal leaders who do not seem to care. 
So, I think we need to look at how these sanctions are going to 
be carried out and the next steps.
    As far as the ASEAN countries are concerned, I have written 
to the various leaders. We would very much like to slow down 
the possibility of Burma coming into the ASEAN. Their approach 
to this, quite frankly, is different from ours. They believe 
that they need to engage with Burma. We have obviously taken a 
completely different step.
    But I would welcome our continuing dialog on this. I am not 
sure that taking further steps at this stage would improve the 
situation, but here we have only had 24 hours. This is the 
reaction that we are seeing.
    But the only thing I can assure you of--and I have been 
true to my word--is I will stay on this case with you.
    Senator McConnell. Well, I do not want to put words in your 
mouth, but do I correctly hear you saying that it is not your 
current intention to encourage the ASEAN countries to follow us 
in the steps that we have taken?
    Secretary Albright. No; I mean, we have been in touch in a 
variety of ways with the other ASEAN countries and we have 
tried very hard to get them to follow our steps. They do not 
seem to be interested in it because they have a different 
approach.
    But this subject will be very much on our minds as we talk 
to them, and I will relook at whether we should take some 
further action in terms of encouraging them further. We have 
tried, Senator.
    Senator McConnell. I want to stay in that part of the world 
and turn to Cambodia. There is a growing fear among 
international observers that the Easter Sunday grenade attack 
is an early warning of a slide toward civil war in that 
country. At the very least, the escalating problems are going 
to delay or potentially delay national elections which are 
scheduled for late 1998.
    It is increasingly clear that unless steps are taken soon, 
the democratic progress Cambodia has made could well be 
destroyed by intimidation, terror, and political killings, all 
of which that country is all too familiar with.
    My first question is, What specifically is the United 
States Government doing to bolster the democratic movement in 
Cambodia?

                          violence in cambodia

    Secretary Albright. First of all, again, Senator, I agree 
with your assessment of the situation. We have done what we can 
in terms of trying to help the Cambodian democratic forces. We 
are concerned by these acts of violence and we have condemned 
the attack and warned Cambodia's leaders that political 
violence would jeopardize international support.
    Mr. Chairman, I am planning to go to Cambodia on my way to 
Hong Kong, also to Vietnam, and I will make very clear that it 
is important for them to proceed down the democratic path and 
will be happy to report to you on our return.
    Senator McConnell. Let me go a little further. You may or 
may not be ready to respond or actually know yourself the 
answers to the following questions, but there have been 
accusations made that the second prime minister Hun Sen and the 
Cambodia People's Party were responsible for that particular 
terrorist attack.
    Do you know or your people know if there has been any 
concrete evidence to back the assertions that Hun Sen or any of 
his officials were directly responsible for that attack.
    Secretary Albright. I will have to look that up, Senator. 
We will get back to you.
    Senator McConnell. I wish you would. I am going to be 
interested in the status of the investigation into that matter.
    We just talked about the ASEAN meeting in July in reference 
to Burma. What is the administration's position on Cambodia's 
inclusion in that organization?

                      including cambodia in asean

    Secretary Albright. Well, again I think that our general 
feeling had been that there would not be a problem about them 
coming in, though I gather that what ASEAN wants is to bring 
them in as a group. But I think we need to assess exactly where 
they are as a result of the statements that we have just 
exchanged about what is going on there now.
    I do think that we should all remember what a remarkable 
step forward the Cambodian elections were. I had been to 
Cambodia shortly after those elections, and was proud of the 
great job that the United Nations did in Cambodia where I think 
over 90 percent of the people voted. Nevertheless, it is a 
fragile democracy. We need to do whatever we can to support the 
democratic forces, and if inclusion in ASEAN would assist them 
at this stage, I think that it bears support. But I think we 
have to see what the effect of these most recent problems are 
and also to respond to your question as to who and how the 
violence is sponsored.
    Senator McConnell. Finally, on Cambodia the President 
certified that Cambodia had cooperated fully with the United 
States to meet international counternarcotics performance 
standards. However, the Far Eastern Economic Review ran a 
detailed cover story just recently questioning whether Cambodia 
was the new narcostate in Asia. Specific evidence was presented 
tying senior government officials to heroin traffickers.
    Any observations about that?
    Secretary Albright. I think, Mr. Chairman, we are very 
careful in the way that we do the certifications. If there is 
something different, we will look at it again, but I feel 
fairly confident in the way that we certify.
    Senator McConnell. Senator Leahy?
    Senator Leahy. Thank you, Mr. Chairman.
    I share your concern about Cambodia. I mention the donors' 
meeting in July, to consider World Bank funding for Cambodia. I 
worry that we are going to see them return to civil war and the 
$3 billion we spent there down the drain and the terrible 
killings that are going to take place.
    I would be interested--it does not necessarily have to be 
today, but I would be interested in knowing what the United 
States position is going to be at the donors' meeting in July 
because I think this is probably one of the last real chances 
to send a very good message, a strong, unambiguous message to 
Cambodia.
    Secretary Albright. I do not have a position right now. I 
will get back to you.
    Senator Leahy. I understand. I just throw it out to follow 
along the lines of what the chairman was saying because I think 
it is a serious matter. In fact, I look forward to talking with 
you when you get back from Cambodia, Vietnam, and Hong Kong, 
all areas I have a great deal of interest in. We used the Leahy 
war victims fund in both countries. Both countries have gone 
through an awful lot. I suspect a lot more stability in Vietnam 
now than in Cambodia, but your observations I think will be 
important to all of us.
    Just a couple of other points I want to make. In February 
your very active help on the international family planning vote 
was critical. I suspect we will see more votes on that. I would 
encourage you to keep engaged in it.
    I cannot understand those who want to keep cutting family 
planning funds. It has reduced unwanted pregnancies. We showed 
in one country tens of thousands of abortions were avoided 
because of family planning.
    I am going to keep in touch with your office. If you ever 
hear anything more about Ngawang Choephel, the Tibetan arrested 
by the Chinese--he was a former Fulbright scholar at Middlebury 
College in Vermont. He is in a Chinese prison for making a 
documentary film about traditional Tibetan music and dance. I 
raised his case with President Jiang Zemin and others last fall 
in China. They sentenced him to 18 years. It is ridiculous. I 
pointed out that it was on the 50th anniversary of the 
Fulbright Program which began with a scholarship to China, and 
they sentenced a Fulbright scholar to 18 years. I would urge 
our representatives to continue to raise it at the highest 
levels.
    Last--and this will be a question--we passed a law last 
year that withheld antinarcotics aid to any unit of the 
security forces of a foreign country whose members have been 
implicated in gross violation of human rights unless the 
government has taken steps to bring those people to justice. 
The administration has worked to carry out the letter but the 
spirit of the law, and I applaud you for that.
    I wonder why we should not have the same law on all aid we 
give and not just antinarcotics aid, but if you've got a 
security forces unit of a foreign country implicated in gross 
violation of human rights and the government is not taking 
steps to bring the individuals to justice, why not hold all aid 
to the police unit, or army unit? Would you give thought to 
that?
    Secretary Albright. I will. I have instructed all our posts 
to monitor compliance with your amendment very closely, 
including by seeking out information about suspected human 
rights violations, and we will not be passive. We have put in 
place also protections against the misuse of our funds.
    Senators, you both have asked about Cambodia and some other 
new democracies. What I really see is that the first wave of 
democratization is one of euphoria and we somehow feel that 
many countries have kind of gotten over the hump and we think 
to ourselves, OK, the job is done. What I think we are seeing 
more and more is that this is a very complex process as 
countries emerge from civil wars or from totalitarian 
repression or any number of very difficult periods, and that 
while the United States cannot do everything for everybody and 
it is essential that the parties, whatever the case is, do 
things for themselves, we have to be aware of the very 
important role we can play in getting countries over more than 
the initial hump and the extent to which our funds serve as a 
magnet for the attraction of other international funds.
    That is why I am so grateful to you for everything that has 
happened in terms of trying to get--not preserving our money 
but for once that we have finally taken a step forward. I think 
that American power is vital and we need to know exactly how to 
use it. In this year of the anniversary of the Marshall plan, 
we have a lot to learn about what role America can play in 
putting democracies on their feet and how long a process it is. 
We and the American people are beneficiaries when there are 
stable countries that are good markets and do not support 
narcotrafficking, a whole series of issues. So, I am very 
grateful to you.
    But what I think our questions really are--and you have 
addressed them--is we get a country to a certain level and we 
think that they have achieved something and like Cambodia there 
still continue to be threats.
    Senator McConnell. One final question here before we wrap 
it up. I want to go back to Korea. You touched on Korea in your 
opening statement.
    I have accepted the conventional wisdom that food 
assistance should not be held hostage to a change of direction 
in the North Korean regime. But, it is interesting to note that 
every time the food assistance is offered, nothing happens. It 
is my view--and I suspect it is your view, and I am going to 
ask you to comment on it--that there is no real hope of 
progress there on the peninsula until the North and South speak 
to each other. It will be very, very difficult to impose a 
settlement from outside.
    I wonder where we go from here because nothing we have done 
to date--not that the things we have done to date are 
necessarily a mistake--but nothing we have done to date has 
produced bilateral discussions or, for that matter, four-party 
discussions. Where are we and where do we go from here?
    Secretary Albright. Well, first of all, on the four-party 
talks, interestingly enough I think that there has been 
progress, not definitive, but there has been. As you know, the 
talks were proposed in April 1996 and we offered a joint United 
States-Republic of Korea [ROK] briefing to the DPRK and that 
was held March 5 this year.
    Then on April 16, in response to the joint briefing, the 
DPRK agreed in principle to the four-party talks, but then 
stopped short of agreeing to the practical steps, such as dates 
for the first meeting, and need to realize the talks.
    We, with the ROK, have agreed to continue contacts with the 
goal of beginning the four-party talks as soon as possible. 
Obviously the reason for those is to replace the armistice 
agreement with a permanent agreement. We are doing our best to 
get those back on track.
    We also are doing everything we can to encourage North/
South dialog in itself. I was in Seoul earlier this year. It 
was a major subject of discussion, and we are going to keep 
pressing. But as you know, the situation is difficult in the 
DPRK and the Republic of Korea at this stage is also going 
through an electoral process, but it is something that is very 
much on our minds. We are very concerned about the stability of 
the Korean peninsula and consider it one of our priority items.
    Senator McConnell. Well, thank you very much, Madam 
Secretary, for being here today. I congratulate you again on 
your good work within the administration with regard to the 150 
account request, and Senator Leahy and I are going to do the 
best we can to see to it that when the smoke clears up here, 
the money is still there. [Laughter.]
    Thank you very much.
    Secretary Albright. We are very grateful to you. Thank you 
very much.

                     additional committee questions

    Senator McConnell. There will be some additional questions 
which will be submitted for your response in the record.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]
                     Additional Committee Questions
    Question. There have been accusations made that the Second Prime 
Minister Hun Sen and the Cambodian People's Party were responsible for 
the Easter Sunday grenade attack. I am curious as to whether you or 
your people know if there has been any concrete evidence to back the 
assertions that Hun Sen or any of his officials were directly 
responsible for the attack.
    Answer. The State Department called in the Cambodian Ambassador on 
March 31. We condemned the attack and urged the Cambodian Government to 
take steps now to prevent further political violence and bring to 
justice those responsible. Similar demarches were delivered in Phnom 
Penh to Foreign Minister Ung Huot and to the Co-ministers of the 
Interior. Deputy Secretary of State Strobe Talbott met with Mr. Sam 
Rainsy and his wife on April 9. Mr. Talbott expressed relief that Sam 
Rainsy had escaped without serious injury and outrage that others had 
not. We have called on Cambodia to conduct a speedy credible 
investigation of the incident and to identify and punish the 
perpetrators.
    We do not have concrete evidence indicating who was responsible for 
the attack. The FBI investigation of the incident is still pending.
                                 ______
                                 
                  Questions Submitted by Senator Leahy
                      cambodia-world bank meeting
    Question. I believe that the donors' meeting in July will consider 
the World Bank funding for Cambodia. I worry that we are going to see 
them going right back into civil war and the $3 billion we spent there 
down the drain and the terrible killings that are going to take place.
    I would be interested in knowing what the U.S. position is going to 
be at the donors' meeting in July because I think this is probably one 
of the last clear chances to send a very good message, a strong 
unambiguous message to Cambodia.
    Answer. At the Consultative Group meeting on Cambodia hosted by the 
World Bank in Paris, the United States expressed serious concern about 
lack of progress on election preparations, violence, threats and 
continued human rights abuses. We noted that effective assistance 
programs could not go forward in the face of political polarization and 
fears of a return to violence.
    In an informal political meeting on June 30, the U.S. reiterated 
our core concerns about Cambodia's ability to protect human rights, 
maintain political stability, conduct free and fair elections in 1998, 
and foster economic growth. The U.S. urged all Cambodians to settle 
their differences peacefully and reject violence and intimidation. We 
condemned the March 30 grenade attack on a peaceful political 
demonstration. The U.S. emphasized our policy that senior Khmer Rouge 
leaders should not be brought into the Cambodian government and that 
all those suspected of committing crimes against humanity from 1975-79 
should be brought to justice.
    Other bilateral and multilateral donors expressed similar concerns, 
calling for political stability and emphasizing the importance of free 
and fair elections in 1998.
    Despite this clear message from the international donor community, 
Cambodia was again plunged into violence during the weekend of July 5. 
We have condemned the use of force to overturn the results of the 1993 
elections and called on all parties to resolve their differences 
peacefully. We have unequivocally condemned the execution of FUNCINPEC 
officials and the intimidation of journalists, human rights workers and 
others in the wake of the fighting. The U.S. is actively involved with 
ASEAN and other signatories of the Paris Accords in an attempt to find 
a solution to the crisis.
    The U.S. has suspended assistance to Cambodia for 30 days 
(beginning July 9). During this period our programs will be limited to 
those activities that provide humanitarian assistance or support 
democracy. All programs that provide direct support to the Cambodian 
government are suspended.
                                 ______
                                 
                 Questions Submitted by Senator Bennett
                        expropriation sanctions
    Question. Will you initiate sanctions against U.S. treaty partners 
who expropriate the property of U.S. citizens without appropriate 
compensation, and do you have adequate resources to ensure compliance 
with our treaty partners' obligations in this area?
    Answer. The United States has an active and vigorous policy of 
protecting U.S. citizens' property abroad from unlawful expropriation. 
Under international law, a state may lawfully expropriate the property 
of a foreign national only if it does so for a public purpose, in a 
non-discriminatory manner, affords due process, consistent with its 
other commitments, and provides prompt, adequate, and effective 
compensation for the property. The Department of State will continue to 
press other countries to provide U.S. citizens with treatment that is 
consistent with established principles of customary international law 
and obligations under international agreements.
    Specifically, the Department's expropriation policy has four 
primary elements: (1) active negotiation of Bilateral Investment 
Treaties and other international agreements to help protect the 
interests of U.S. investors; (2) provision of general consular 
assistance to U.S. businesses and property owners abroad; (3) active 
diplomacy emphasizing to foreign governments the importance of 
resolving expropriation claims involving U.S. nationals; and (4) formal 
settlement of claims via government-to-government agreements where all 
other avenues of redress have failed. The steps taken by the Department 
in any particular claim or investment dispute depend upon the 
circumstances and our judgment as to what would be the most effective 
course of action to help resolve the dispute. In addition, Section 527 
of the 1994-1995 Foreign Relations Authorization Acts provides that 
certain types of bilateral assistance shall not be provided to a 
government that has expropriated the property of a U.S. national in 
violation of international law. Section 527 also requires the United 
States to vote against loans by multilateral development banks and 
international financial institutions to those governments unless such 
assistance serves the basic human needs of the citizens of that 
country.
    The State Department and our diplomatic and consular posts closely 
monitor U.S. citizen claims of expropriation and U.S. investor 
disputes, bringing concerns to the attention of foreign governments on 
a regular basis. As part of that effort, the Department annually 
compiles the report required under Section 527(d). We believe that the 
Department has sufficient resources to continue to pursue the 
longstanding policy of protecting U.S. citizens abroad.
                                 ______
                                 
                Questions Submitted by Senator Campbell
                        women in foreign policy
Vital voices: women in democracy
    Question. Madame Secretary, you have gone on record as saying that 
the advancement of women is in the interest of U.S. foreign policy. 
That makes good sense to me, not only from a humanitarian viewpoint, 
but also because women play a key role in building a civil society.
    I've heard about 150 women leaders of formerly communist European 
countries, who are coming to Vienna in July to learn how women in the 
West are dealing with business, law, and politics. This sounds like a 
good idea to me, and it will have a big, long-term payoff in terms of 
building democracy.
    I understand our Embassy in Vienna is putting this event together. 
Can you tell us more about it?
    Answer. This conference, which Ambassador Swanee Hunt has 
organized, will convene women leaders from governmental and private 
sectors of central and eastern Europe, the United States and the 
European Union. Three hundred participants (approximately 75 from the 
U.S.) will explore ways to strengthen the role of women in developing 
open, democratic societies. First Lady Hillary Rodham Clinton will give 
the keynote speech to start the conference. It will run July 9-11 in 
Vienna, Austria.
  --Sponsored by the U.S. and European Union governments, with 
        extensive private sector participation, the conference serves 
        important U.S. foreign policy goals.
  --The ``Vital Voices Conference'' supports President Clinton's and 
        Secretary Albright's commitment to expand the circle of 
        democracy by incorporating themes related to women into the 
        mainstream of American foreign policy.
  --U.S. participation in this conference is one of partnership, an 
        expression of our alliance of common values with the women of 
        central and eastern Europe.
  --The U.S. acknowledges that much progress has been made to date in 
        these countries and that transition is difficult. However, true 
        democracy, which gives women access to the levers of economic 
        and political power, is worth striving for.
  --Civil society, with women as equal participants, needs to take root 
        at all levels of society.
    The conference's objectives are:
  --to define the common challenges women face in the emerging 
        democracies and to explore concrete policy initiatives to meet 
        those challenges;
  --to energize and equip women leaders to assert their influence in 
        their home countries;
  --to establish wider East-West networks of women leaders in support 
        of democracy-building efforts in central and eastern Europe; 
        and
  --to increase public understanding about the economic, political, and 
        social contributions women make to a democratic society.
    There are three tracks of workshops--Law and Leadership, Politics 
and Persuasion, and Business and Beyond. Presentations by high level 
public figures will underscore the priority of empowering women as a 
foreign policy goal.
    The ``Vital Voices'' Conference puts into action many of the ideas 
that came out of the UN Fourth World Conference on Women in Beijing.
    By bringing women under thirty to the conference, we are 
acknowledging the important role the next generation will play in these 
democratic societies.
    U.S. participants are strongly encouraged to explore ways to 
maintain their connections with European participants after the 
conference. ``Vital Voices'' is an event in the process of the 
advancement of women and will generate much follow-up activity.
    The State Department will work with U.S. participants and U.S. 
Embassies in central and eastern Europe on follow-up to the conference.
                                 ______
                                 
                 Questions Submitted by Senator Harkin
                              child labor
    Question. What kind of plans do you and the Administration have to 
raise this issue of abusive and exploitative child labor? Do you bring 
it up in bi-lateral and multi-lateral talks or do you leave it to the 
Ambassadorial or lower diplomatic levels?
    Answer. We have been and will continue to be very active in both 
multilateral and bilateral meetings--and at every level.
    On the multilateral level, we have urged the World Trade 
Organization (WTO) to establish a working group to study the link 
between labor standards and trade. Last December, at the WTO's 
Ministerial conference in Singapore, we gained an explicitly political 
statement reaffirming WTO members' commitment to observe 
internationally recognized core labor standards. Since there is no ILO 
Convention specifically prohibiting child labor, we have taken the lead 
in the International Labor Organization (ILO) to create one. The new 
Convention, which we are currently working on, will prohibit 
exploitative child labor, and we expect it will be adopted in 1999, 
after a two year-discussion. Our early and substantive contributions to 
this drafting process should yield a Convention that we can recommend 
to the Senate for advice and consent to ratification. We are also key 
participants in the ILO's Working Party on the Social Dimensions of the 
Liberalization of Trade, a policy level group that is designing 
strategies for ensuring that adherence to core labor standards, 
including those applying to child labor, accompanies a country's 
increasing access to international trade. We also provide our views, 
encouragement, and support to work being done on child labor by UNICEF 
and in the OECD.
    In addition to these multilateral forums, U.S. Ambassadors in 
countries where the problem of child labor has been egregious have been 
closely engaged. Our Ambassadors, particularly in Pakistan, Nepal, and 
Bangladesh, have communicated both official U.S. Government concern and 
noted, for local manufacturers and exporters, the adverse reaction of 
American consumers to purchasing goods made by child labor. Our 
Ambassadors' efforts have resulted in programs to turn the problem 
around and have raised public, business, and governmental awareness of 
the issue.
    Work at the ground level is also important. Our labor attaches and 
other mission officers are in contact on a daily basis with host 
country trade unions, NGO's, journalists, and other public opinion 
formers. They are helping raise the awareness and supporting the 
activism of host country citizens--who are equally concerned at the 
waste of their children's future and want to see their countries 
substitute a generation of educated adults for one of illiterates.
    Question. Given your active role in bringing foreign policy to the 
American people, I would like to know if you plan to use the bully 
pulpit to inform American consumers that goods they purchase may have 
been made with abusive and exploitative child labor, such as hand-
knotted carpets and wearing apparel? Do you believe that labeling goods 
made without abusive and exploitative child labor will help American 
consumers make informed decisions?
    Answer. Senator, you may rest assured that I will engage the 
American public on this issue. And I would like to take this 
opportunity to recognize your steadfast leadership and continuing 
efforts to highlight and solve the problem of child labor. Your 
appearance at the child labor labeling and codes of conduct workshop 
that the Department of Labor sponsored at the International Labor 
Conference on June 13 helped focus international attention on this 
promising new approach. My colleagues and I in the State Department 
appreciate the attention you have given this matter. We look forward to 
continuing to work closely with you and other Members of Congress in 
fashioning better responses to this problem.
    Effective voluntary programs to label goods made without child 
labor can be one way to empower consumers, and let them make informed 
choices when they buy a soccer ball for their youngsters or other 
articles for their family's use. Those consumer choices can encourage 
manufacturers to pay adults to work and enable children to attend 
school--if they want their products to be attractive to the American 
consumer.
    With White House encouragement, American businesses, trade unions, 
consumer groups, and NGOs have put together the Apparel Industry 
Partnership. As part of this ``No Sweat'' initiative, that group is now 
grappling with the issues surrounding labeling of goods and monitoring 
of labor conditions by U.S. businesses. I see this effort, which is 
non-governmental and purely voluntary, as an excellent example of the 
importance of Americans being informed and involved on U.S. foreign 
policy. U.S. consumer pressure has helped encourage our businesses to 
engage on child labor and bring home the point that the right of 
workers to fair treatment must be respected.
    Engaging consumers and NGOs in raising awareness about child labor 
and encouraging its elimination is important. We believe that any 
parent would rather see children receive an education, to expand their 
opportunities in life ahead, than to toil now. These are values which 
we hold in the United States and, as consumer and NGO groups are 
demonstrating abroad, they also are values that have universal appeal.
    Question. Does child labor make a difference in our relations with 
other countries? When a country has a large child worker population, 
does the administration take that into account when negotiating trade 
agreements, granting access to our market, granting foreign aid, and in 
working with international organizations, such as the ILO and UNICEF, 
on projects in the region? Do you believe that a rider on foreign aid 
funds linking progress on eradicating child labor to the release of 
funds would be helpful? How would you feel about that? Do you think we 
have the moral and economic strength to raise this issue with 
meaningful effect?
    Answer. In accordance with existing provisions of law, the U.S. 
Government takes basic worker rights factors into account when 
extending or denying preferential trade benefits under the Generalized 
System of Preferences (GSP), the Andean Trade Preference Act, and the 
Caribbean Basin Economic Recovery Act. Several countries have had GSP 
benefits suspended for lack of progress on basic worker rights. The 
Overseas Private Investment Corporation (OPIC) similarly takes basic 
worker rights into account and has suspended coverage in several 
countries on worker rights grounds.
    A key element in our approach to eliminating child labor is to work 
cooperatively with countries around the world that are interested in 
resolving their child labor problems. As you know, strong Congressional 
support has made possible U.S. Government participation in the ILO's 
International Program on the Elimination of Child Labor (IPEC). The 
U.S. Government contributed to IPEC in each of the last three fiscal 
years--a total of $5.1 million. We strongly support maintaining these 
contributions in fiscal year 1998 and fiscal year 1999 authorizations. 
These funds enabled us to support IPEC projects in Bangladesh, the 
Philippines, Brazil, Thailand, and Pakistan and to consider further 
IPEC projects in several other countries. We also support the efforts 
in this area of UNICEF, whose work complements that of the ILO. UNICEF, 
along with the ILO, played a critical role in launching ``Rugmark'' in 
India and Nepal and in signing an agreement with the Bangladesh Garment 
Manufacturers and Exporters Association to phase out child labor from 
the garment industry in that country.
    We believe consumer/industry partnerships, along the model of the 
``No Sweat'' initiative, have enormous promise in harnessing the power 
of the market in behalf of worker rights. Such initiatives have the 
advantage of focusing tightly on worker rights abuses in specific 
countries and industries, can empower activist NGOs that promote worker 
rights abroad, and are flexible enough to increase or decrease public 
pressure in accordance with a targeted industry's demonstrated 
willingness to reform. On the other hand, measures that seek to punish 
countries where child labor persists run the risk of targeting the 
innocent along with the guilty, inflicting pain on disadvantaged groups 
along with those who exploit both children and adult workers.
    Question. Do you think it would be helpful in raising the issue of 
child labor in bilateral talks if you had more statutory authority 
behind the issue of child labor? For instance, do you believe report 
language calling on the Secretary of State to raise the issue of 
abusive and exploitative child labor would aid you in raising this 
issue? Or do you feel you already have enough power or authority to 
raise this issue effectively? Do you believe the laws in other 
countries pertaining to child labor have been effective? Do you believe 
a law banning the importation of goods made with child labor would be 
effective? Do you believe such a law would be bad for U.S. interests?
    Answer. We welcome the participation of Congress, as well as of the 
American public, in devising solutions to foreign policy issues that 
trouble us in common. The persistence of exploitative child labor is 
one such issue. However, regardless of whether or not Congress 
reiterates again its abhorrence, this Administration will continue to 
press for the speedy elimination of child labor wherever it is found. 
As with all human rights issues, we will not be content to evaluate a 
country's performance based solely on a superficial reading of its 
laws. Laws are important in setting a standard. Unfortunately, such 
standards are not always enforced. The bottom line is, and must remain, 
a country's actual performance.
    It is difficult for me to address the matter of changing U.S. law 
in the abstract. While I suspect we could quickly reach agreement on 
basic principles, finding the specific means of implementing those 
principles--without, at the same time, inflicting harm on others--is 
more difficult. Additional statutory requirements could raise questions 
with respect to existing U.S. international obligations and policy in 
other areas. I look forward to working with concerned Members of 
Congress, along with representatives from the business community, 
labor, academia, and other non-governmental organizations on this 
issue.
                                 ______
                                 
                Questions Submitted by Senator Mikulski
    Question. One of the reasons for NATO's success is that it is a 
true partnership with allies who share our values and interests. There 
are no second class members. And every member is expected to pay his 
way.
    There have been disagreements over what the cost of NATO 
enlargement will be.
    In your discussions with potential new members do they recognize 
that they will have to pay their own way? They will have to upgrade 
their own infrastructure, modernize and restructure their own forces 
and supply them with the necessary equipment.
    Do our current and future NATO allies fully understand that the 
United States will not bear the full cost of NATO enlargement?
    Answer. We are confident that both current and new members will 
bear their fair share of the costs. The Madrid declaration, signed by 
all 16 NATO allies at the recent summit, acknowledges that enlargement 
will entail resource implications but also expresses confidence that 
the costs will be manageable and that the resources necessary to meet 
those costs will be provided.
    As noted in the Madrid Summit declaration, NATO will undertake its 
own costs analysis now that the countries to be invited are known and 
will report its results to NATO ministers at the December North 
Atlantic Council meeting. We expect NATO's report will confirm the 
essential elements of the U.S. government analysis.
    Question. Last week, NATO and Russia reached an agreement on 
Russia's role in NATO. As you have said, Russia will have a voice but 
not a veto in NATO.
    Would you discuss this agreement and how it will strengthen NATO?
    Answer. The NATO-Russia Founding Act provides the basis for an 
enduring and robust partnership between the Alliance and Russia. Under 
the terms of the Act, NATO and Russia will consult and coordinate 
regularly and, where possible and appropriate, act jointly--as they are 
doing in Bosnia now. The Act has five principal sections:
    The preamble notes that NATO and Russia do not consider one another 
adversaries and cites the sweeping transformations in NATO and Russia 
that make possible this new relationship.
    Section I describes the principles governing the relationship, 
e.g., restatement of the norms of international conduct in the UN 
Charter and OSCE Helsinki Final Act and explicit commitments, such as 
respecting the sovereignty, independence and territorial integrity of 
states and settling disputes peacefully.
    Section II creates a new forum, called the NATO-Russia Permanent 
Joint Council, for NATO-Russia meetings and describes how this Council 
will function.
    Section III describes a host of issues that NATO and Russia will 
discuss, including conflict prevention, peacekeeping, prevention of 
weapons proliferation, and exchange of information on security policies 
and defense forces.
    Section IV describes the military dimensions of the relationship. 
In this section, NATO reiterates aspects of its current defense policy 
and strategy; references its March 14 statement concerning how the 
Alliance will carry out its collective defense and other missions; 
recognizes that NATO will require adequate infrastructure on new 
members' territories commensurate with NATO's collective defense and 
other missions, and commits NATO and Russia to work for prompt 
adaptation of the CFE Treaty.
    Section IV also provides mechanisms to foster closer military-to-
military cooperation between NATO and Russian militaries, including 
creating military liaison missions in respective NATO and Russian 
military headquarters.
    Under this agreement, NATO retains its full prerogatives. While 
Russia will work closely with NATO, it will not work within NATO. The 
Act makes clear that Russia has a voice, not a veto in NATO, and that 
the Alliance retains the right to act independently when it so chooses.
                                 cyprus
    Question. Last year, we all expected great progress to be made in 
ending the occupation on Cyprus. But the crisis broke out over the 
island of Imia--and the U.S. had to intervene to prevent an actual war 
in the Aegean.
    There is general agreement among all parties that Cyprus should 
become a federation that is not occupied by any foreign force. But 
still, an agreement eludes us.
    We have another opportunity today. Thanks to your efforts since 
your visit to Cyprus last summer, there has been some progress in 
reducing military overflights of Cyprus.
    In addition, the prospect of possible European Union membership may 
lead to greater moderation.
    What can we do to take advantage of these generally positive 
conditions to reach a peaceful settlement to the issue of Cyprus? What 
can we do to jump start the negotiations?
    Answer. We agree that there are positive factors at play which 
could contribute to the achievement of a Cyprus settlement. Prospective 
EU accession for Cyprus is a particularly promising incentive for an 
agreement. The recent naming of Ambassador Richard Holbrooke as the 
Special Presidential Emissary for Cyprus manifests our strong 
commitment to promoting intercommunal reconciliation. Ambassador 
Holbrooke will be undertaking U.S. efforts toward this end and will 
support the UN Secretary General's mandate to facilitate negotiations 
between the Cypriot parties.
    The first direct talks between the two Cypriot leaders since 1994 
will open in Amenia, New York on July 9, under UN auspices. The session 
will enjoy unprecedented international representation, including that 
of the United States. Nonetheless, the essential requirement for 
success will be no different in 1997 than in previous years: the desire 
of the parties themselves for an agreement. As July 9 nears, we are 
urging flexibility by the parties so we can achieve real progress 
toward a settlement that will be acceptable to all involved. Acting 
Special Cyprus Coordinator Carey Cavanaugh will represent the United 
States in Amenia. Ambassador Holbrooke is meeting with both Cypriot 
leaders while they are in New York.
        israel/u.s. economic, science and technology cooperation
    Question. What can we do to strengthen economic links and 
scientific and technological research and development between the U.S. 
and Israel.
    Answer. The U.S. and Israel have a long and enduring history of 
economic links and science and technology cooperation, and we are 
strongly committed to expanding these ties. The United States-Israel 
Free Trade Area Agreement (FTAA) was signed in 1985 and eliminated all 
duties by January 1, 1995. The agreement eliminated many trade barriers 
between the United States and Israel, substantially liberalizing and 
thus encouraging trade between the United States and Israel. A follow-
on agricultural trade accord, signed in 1996, is providing steady 
improvement in market access for agricultural products as well.
    Exports to and imports from Israel have more than tripled since 
1985 as a result of these agreements. The U.S. is Israel's largest 
single trading partner and Israel is the U.S.'s twentieth most 
important export market. U.S. market penetration in Israel (over 20 
percent of Israel's imports) is the fifth highest of our major markets 
in the world. Only Canada and the UK have more companies traded on Wall 
Street.
    In addition, since the mid-1980's the U.S. and Israel have engaged 
in periodic economic consultations under the auspices of the Joint 
Economic Development Group (JEDG). This group has a mandate to examine 
and discuss Israeli economic policy at a high level, and played a key 
role in shaping the successful 1984 economic stabilization program for 
Israel.
    On the science and technology front, the U.S. and Israel for many 
years have had and will continue to have a very strong cooperative 
relationship in research and development, reflecting the President's 
commitment to sustain and enhance Israel's hi-tech edge. Three 
binational foundations--the Binational Science Foundation (BSF), the 
Binational Industrial Research and Development Foundation (BIRD), and 
the Binational Agricultural Research and Development Foundation 
(BARD)--which each have an endowment of $100-110 million, have been 
funding cooperative projects between Israeli and U.S. scientists for 
the last 15-25 years. Projects supported by BIRD--which funds the 
development and commercialization of joint hi-tech industrial 
projects--have provided measurable economic benefit to both countries 
through increased sales, market access and job creation for 
participating companies. The U.S.-Israel S&T Commission also focuses on 
the private sector by funding support for joint S&T business ventures.
    A number of U.S. technical agencies, including EPA, NOAA, the 
Bureau of Reclamation, U.S. Geological Survey, HHS and NASA, also have 
cooperative agreements with counterpart agencies in Israel to address 
issues of common interest. Recently initiated cooperative activities 
include the National Cancer Institute's efforts working with Israel and 
its neighbors to establish the Middle East Cancer Consortium.
                    international drug interdiction
    Question. Baltimore has the second highest per capita use of heroin 
in the country--second only to San Francisco. Ending this epidemic must 
be a priority of all sectors of our government--and a priority in our 
foreign policy. The Administration is requesting $230 million for its 
international narcotics and crime programs. Could you describe how 
these funds would be used and how the State Department coordinates its 
efforts with the FBI and other federal agencies to combat international 
crime and drugs?
    Answer. The illegal drug trade and growing transnational criminal 
enterprises around the world are among the most serious threats to the 
United States in the post-Cold War era. In response, President Clinton 
has placed combating international narcotics and organized crime high 
on our national security and foreign policy agendas. Within the State 
Department, the Bureau for International Narcotics and Law Enforcement 
Affairs (INL)--established nearly four years ago--has broad 
responsibility for federal law enforcement policy and program 
coordination in the foreign arena.
    The President has directed the Administration to act aggressively 
to neutralize and, where possible, eliminate international drug and 
criminal activities at the source. For drug syndicates and other 
criminal organizations, this means making it impossible for them to 
ship their products, launder money, or carry out any other 
international financial transactions. For the drug producing and 
transit countries, it means eliminating illegal drug crops entirely or 
reducing them to levels consistent with legitimate global medical 
requirements. Programs in Latin America are heavily focussed at coca 
crop reduction in the Andes. Political considerations preclude direct 
engagement with Burma and Afghanistan, the world's largest producers of 
opium poppies. However, bilateral crop eradication efforts are underway 
in Pakistan, and we work through a variety of international and 
regional fora, especially the U.N. Drug Control Program, to tackle the 
heroin problem elsewhere in Asia.
    The State Department and U.S. Embassies are working with all 
federal law enforcement agencies to assure that a variety of criminal 
justice assistance programs (training, technical assistance and non-
lethal equipment) complements overall U.S. Government foreign policy 
interests. The INL-chaired Law Enforcement Inter-Agency Working Group 
(LEIWG) is the mechanism by which all agencies' interests are 
considered. U.S. embassy law enforcement teams ensure that the programs 
offered adequately address the needs of host governments. In fiscal 
year 1997, INL funded $20 million in crime programs to the federal law 
enforcement agencies to conduct coordinated country and regional 
programs. The breakdown is approximately as follows (in thousands): to 
the Department of Justice $12,500, OPDAT/ICITAP $7,500, FBI $4,000, DEA 
$1,000) and to the Department of the Treasury $7,100 (Treasury $2,000, 
ATF $1,500, FLETC $1,000, INS $1,400, IRS $700, USSS $400, USCS $100); 
in addition, $400 is provided to the U.S. Coast Guard. The programs 
focus on criminal justice sector enhancements and confront the threats 
posed by drugs and crime. Particular focus is on alien smuggling, 
firearms trafficking, stolen vehicles, financial crimes and money 
laundering, organized crime and racketeering, and community police 
programs. Much of the criminal justice focus is on regional levels and 
through the International Law Enforcement Academy (ILEA) in Budapest; 
additional such academies are being established in Latin America and in 
Asia.
    INL would expect to provide federal law enforcement agencies with 
approximately the same proportion of funding in fiscal year 1998. 
Additional detail on INL programs and cooperation with U.S. law 
enforcement agencies is contained in State's Congressional Presentation 
Document.
                                 ______
                                 
                 Questions Submitted by Senator Murray
                                 china
    Question. I was recently in China. And one of my observations from 
the trip continues to disturb me. And that was the message America 
projects by our presence in that country. Our facilities are totally 
inadequate--it's my understanding that we occupy space that was 
abandoned by the Pakistani's.
    In my mind, our relationship with China is among our most 
important. We need to project an image in that country consistent with 
the image of the United States. I also think our China facilities are 
discouraging some of our best foreign service officers--particularly 
those with young families--from seeking to serve in China.
    What is the State Department going to do to address this clear 
deficiency?
    Answer. We agree that our facilities in China are in many ways 
substandard and we are taking steps to rectify the problem. During 
fiscal years 1994-96 the Department provided about $95.5 million in 
direct support of facility requirements there. We are completing a 
proposal to construct a cleared American Annex and refurbish the 
Chancery in Beijing. Numerous projects related to fire and workplace 
safety, including asbestos removal, have been undertaken in the 
building. Some of our residential units in Beijing will be upgraded at 
a cost of $30,000 each, and land has been purchased for construction of 
a housing compound. Other projects in China include refurbishing the 
Consulate Office buildings and upgrading the communications systems in 
Shenyang and Hong Kong. We are striving to establish a family-friendly 
infrastructure in China that will allow our officers to pursue their 
professional interests without undue personal sacrifice to themselves 
or family members.
    Question. I also came away from China with the impression that we 
do not have enough personnel fluent in Mandarin. Do we also have a 
language deficiency in China?
    Answer. A 1996 review of our worldwide language requirements 
indicated that, of the 77 occupied positions which had been designated 
as requiring full professional competence in Chinese, 62 were filled by 
individuals at or above the required level of competence. Of the 15 
incumbents who fell short of the mark, most were close to the desired 
proficiency, and all had achieved minimal professional competence. The 
fact that 80 percent of the incumbents had fully satisfied our language 
requirements makes our performance in Chinese consistent with the 
worldwide average for all officers assigned to language designated 
positions.
    In citing the above statistics, however, I do not intend to imply 
that the Department is satisfied with the level and distribution of 
Chinese language expertise in the Foreign Service Officer corps. We 
readily acknowledge that we face problems in filling our positions, and 
that we are especially concerned by the lack of Chinese language 
expertise in our senior ranks. Living and health conditions in the 
People's Republic of China further complicate the situation, especially 
with respect to more senior officers. As officers progress through 
their careers, medical conditions and family concerns are more likely 
to preclude service in China, even though the officer is language 
qualified and would otherwise be willing to serve. Improving living 
conditions for our personnel will alleviate this situation to a certain 
extent, but the unique challenges of life in China will continue to be 
a problem as we seek to fill positions there.
    Question. What does the State Department plan to do to address this 
language deficiency? I am wondering if the State Department's 
recruitment process is adequately meeting your needs for Chinese 
language speakers?
    Answer. We are working to build a cadre of Chinese speakers at the 
lower to middle ranks who will continue to use their language skills as 
they rise to senior positions. Our goal is to increase the number of 
Chinese speakers at the junior levels to increase the chances of repeat 
tours and to guarantee there will be a larger base of qualified senior 
officers to fill key leadership roles in our mission. Our career 
counselors are on the lookout for bright, flexible and linguistically 
gifted officers who can make a contribution to our efforts in China. 
Such prospects may be specially urged to consider vacancies at Chinese-
speaking posts. We have also recognized that our existing Language 
Incentive program, which was established to encourage officers to 
acquire, use and reuse skills in critical languages such as Chinese, 
has not been fully effective. We are undertaking a review of the 
program to make it more effective in terms of cost and results.
    Our recruiting materials note that officer candidates with a 
demonstrated proficiency in foreign languages are awarded ``bonus 
points'' which give them an advantage with respect to their position on 
the hiring register. We are also examining ways to better utilize the 
linguistic skills of entering officers by more carefully matching these 
skills with their first or second assignment. As business opportunities 
increase in China, we face increasing competition from the private 
sector in recruiting qualified linguists. Almost all of our most recent 
entering classes of Foreign Service Officer candidates have included at 
least one Mandarin speaker, and several classes have had two or three. 
Even when these individuals require additional language training, 
experience has shown their prior knowledge is a significant advantage 
both to themselves and to the Department.
    Question. I am also concerned that a number of key Asia posts at 
the State Department and the Administration remain unfilled. When can 
we expect to see a nominee for the Assistant Secretary for Asia post? 
And when might we expect to see the Administration move to fill vacant 
ambassadorial posts in Korea and Tokyo. These are all key posts and 
they need to be filled as soon as possible.
    Answer. We share your concern that these key positions be filled. 
The White House has announced the President's intent to nominate 
Stanley Roth for the position of Assistant Secretary for East Asian 
Affairs. Once appropriate clearances are completed, the selectees for 
the Tokyo and Seoul posts will also be announced and nominated by the 
White House. I hope we can work together to ensure these candidates 
receive swift and favorable consideration by the Senate so they are 
able to begin their official duties.
                             pacific salmon
    Question. I understand that the government-to-government talks on 
the Pacific Salmon Treaty broke down with Canada earlier this week. 
Where does this leave things? Where do we go from here?
    Answer. At this point the U.S. has publicly stressed our 
commitment, despite lack of an agreement, to restrained and responsible 
fisheries in 1997. We hope Canada will exercise similar restraint, 
although recent Canadian pronouncements on its planned Canadian fishing 
activity indicate the intention to fish heavily on the Fraser River 
stocks. Canadian Foreign Minister Axworthy has proposed binding 
arbitration. We are considering our response, but have made clear to 
Canada that this option has previously been rejected. We have also made 
clear to Canada that we continue to believe the stakeholder talks offer 
the most likely avenue for progress on these difficult issues.
    Question. I am concerned about the Canadians once again escalating 
this issue with dramatic actions such as the transit fees of 1994. Are 
we prepared to respond to these type of actions? If so, how?
    Answer. We are exploring our options for responding, should Canada 
take aggressive action. A number of options are under consideration. 
Foreign Minister Axworthy has stressed this week that Pacific salmon 
problems should not be linked to other issues. We hope that this 
attitude will prevail within the Canadian Government.
    Question. I am interested in ways we can continue at the 
government-to-government level the progress made by the stakeholders 
process. Does the State Department know what the next step might be?
    Answer. The stakeholders developed creative and far-reaching 
proposals. We hope that the two nations can find a way to re-invigorate 
the stakeholders process or at least to build on the contributions made 
by the stakeholders. The earliest the stakeholder groups could 
reconvene, however, would be in September after the summer fishing 
season. Meanwhile we are remaining in contact with both the 
stakeholders and the Pacific Salmon Commission as we discuss how to 
proceed.

                         conclusion of hearings

    Senator McConnell. That concludes our hearings, the 
subcommittee will stand in recess subject to the call of the 
Chair.
    [Whereupon, at 12:28 p.m., Thursday, May 22 the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]



      FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS 
                  APPROPRIATIONS FOR FISCAL YEAR 1998

                              ----------                              

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.

                       NONDEPARTMENTAL WITNESSES

    [Clerk's note.--The subcommittee was unable to hold 
hearings on nondepartmental witnesses, the statements and 
letters of those submitting written testimony are as follows.]
    [The statements and letters follow:]

                Prepared Statement of Amoco Corporation

    Amoco Corporation is pleased to submit this statement for the 
record to highlight the strategic importance of the Caspian Sea region, 
specifically Azerbaijan, for U.S. commercial and national security 
reasons.
    Amoco Corporation ranks as one of the largest U.S. industrial 
companies based on total assets. Domestically, we are a leading 
producer of crude oil and natural gas and the nation's leading gasoline 
retail marketer. The corporation, which is based in Chicago, oversees 
and coordinates worldwide operations of its business groups. Its core 
business segments are Exploration and Production, Petroleum Products, 
and Chemicals. A subsidiary, Amoco Eurasia Petroleum Company, together 
with its affiliates, is active in the Newly Independent States (NIS), 
specifically, Azerbaijan, Kazakstan and Russia, with its most 
significant investments in Azerbaijan.
    Because of the importance of the Caspian Region to the economic and 
political interests of the United States, Amoco requests that Congress 
lift restrictions on aid to Azerbaijan, currently imposed by Section 
907 of the Freedom Support Act.
    Mr. Chairman, we urge you to consider the facts below in your 
fiscal year 1998 Appropriations deliberations, and in any changes or 
amendments to the Freedom Support Act or related legislation which may 
impact (1) the viability of U.S. firms competing in the region, (2) the 
ability to export the vast oil resources out of the Caspian region, (3) 
peace and stability in the region, (4) resolution of the Nagorno-
Karabakh conflict; or (5) the political and economic independence of 
Azerbaijan.
    Over the last twenty years it has become clear that the United 
States has a national interest in developing diversified sources of 
energy outside of the volatile Persian Gulf region. We believe that 
investment opportunities in Azerbaijan and the Caspian Region will 
allow the United States such an opportunity for diversification. 
Development of the Caspian reserves will also bring substantial and 
desperately needed economic growth to the states in the Caucasus and 
promote the transition to democratic, market-based economies. 
Azerbaijan is aspiring to market-based principles and is the only state 
in the Caspian region without a Russian military presence.
    Since the breakup of the former Soviet Union and the turmoil that 
followed with the war between Armenia and Azerbaijan, Russia and Iran 
continue to inflict political and economic pressure on the Caspian 
region. The resulting instability requires increased involvement by the 
United States Government to encourage and support U.S. companies 
proceeding with critically needed investments.
    Unfortunately, America's ability to act is impeded by Section 907 
of the Freedom Support Act, which denies humanitarian aid to Azerbaijan 
and prevents participation in the region by government agencies such as 
OPIC and the ExIm Bank. Section 907 also hurts the U.S. ability to act 
as an honest broker in the OSCE process for peace in the region. 
Restrictions also hinder Azerbaijan's evolution into a full free market 
economy by curbing essential U.S. technical and financial assistance. 
Section 907 puts U.S. businesses at a distinct competitive disadvantage 
and contradicts the strategic interests of the United States. Foreign 
competition is high for Caspian resources and foreign governments are 
supporting their national companies to the hilt. Aggressive U.S. 
Government support of American investments in the region would greatly 
enhance U.S. industry's competitive position. But without changes in 
current U.S. policies toward Azerbaijan, American economic interest 
will ultimately lose to foreign competition.
    Strengthened U.S. Government support for American investment in the 
Caspian area, including Azerbaijan, would also contribute to 
stabilizing the potentially volatile political environment of the 
region. This would further encourage U.S. investments and provide an 
opportunity to increase U.S. exports of technology, equipment and 
services. An increase in exports will translate to an increase in jobs 
for Americans.
    Amoco's first contract in Azerbaijan was finalized and approved in 
late 1994, under which the Azerbaijan International Operating Company 
(AIOC) operates and develops the Azeri--Chirag Fields and deep water 
portion of Gunashli Field in the Caspian Sea. Amoco is one of ten oil 
companies that make up the multi-national consortium working with the 
State Oil Company of Azerbaijan (SOCAR) on this project. Amoco is the 
leading United States participant with a 17.01 percent interest in the 
production sharing contract, and total American share amounts to 40 
percent. The full field development will require approximately $8 
billion investment to produce the projected 4 billion barrels of oil 
reserves. Peak production of the fields is expected to be greater than 
700,000 barrels a day which is equivalent to 10 percent of today's U.S. 
imports.
    Since the signing of the first contract, Azerbaijan has taken an 
aggressive approach to attracting foreign investment and initially was 
very receptive to U.S. business. Four additional contracts have been 
signed on exploration prospects. One of these contracts involved the 
Ashrafi and Dan Ulduzu structures in the Azerbaijan Sector of the 
Caspian Sea with Amoco at 30 percent ownership and Unocal at 25.5 
percent ownership, giving American business a 55.5 percent total share. 
However, participation by non-U.S. companies has increased 
significantly in other contracts to approximately 80 percent. This drop 
in the American share is due to an increase in competition from 
British, Japanese, Italian, Norwegian and French companies who enjoy 
the aggressive support of their governments. Despite Azerbaijan's clear 
preference for American participation, U.S. business interests have 
been hurt due to the Azerbaijani's perception that the United States 
has been unfair in singling out Azerbaijan as the only country 
precluded by Congressional mandate from receiving direct humanitarian 
assistance (Section 907 of the Freedom Support Act).
    Export of Caspian Sea resources is a key issue with many countries 
in the region vying for control over, or participation in, the 
pipelines to be built. Enormous investments will be needed to bring 
these resources to world markets. Achieving export solutions that 
ensure American access to the resources and enhance regional stability 
and prosperity will be a great challenge. Azerbaijan, as one of the 
greatest resource countries, will play a central role in this process. 
Constructive American policies toward Azerbaijan, and the whole Caspian 
region, are essential to achieving success.
    Mr. Chairman and members of the Subcommittee: Amoco hopes that, 
upon consideration of the facts brought forth above, you will agree 
that Section 907 of the Freedom Support Act serves neither American 
national interests nor the interests of peace and prosperity in Central 
Asia. We hope you will agree that it is time to repeal section 907.
                                 ______
                                 

                 Prepared Statement of Pennzoil Company

    Pennzoil Company (``Pennzoil'') is an integrated oil and gas 
company, headquartered in Houston, Texas. Its core business segments 
are engaged in the exploration and production of oil and gas, the 
refining/processing and marketing of motor oil and other refined 
products and in quick lube operations, both domestically and abroad. 
The oil and gas subsidiary, in addition to its domestic activity, is 
actively engaged in several petroleum ventures in the Former Soviet 
Union/Newly Independent States (FSU/NIS). The comments submitted in 
connection with the appropriations deliberations reflect our 
substantial investments in oil/gas production sharing arrangements in 
the Caspian Sea region, particularly in the Republic of Azerbaijan and 
the Azerbaijani sector of the Caspian Sea offshore Baku.
    In particular, we would like to urge the committee, in the context 
of the upcoming appropriations deliberations, to thoughtfully consider 
any amendments/requests for changes in the Freedom Support Act or 
related legislation, particularly as these measures affect Azerbaijan 
or United States-Azerbaijani bilateral arrangements/relations to 
determine the potential impact of such actions on the republic's 
sovereignty, its territorial integrity and ability to govern, the 
related implications for settlement of the Nagorno-Karabakh conflict 
(consistent with international norms) and the promotion of regional 
peace and stability, as well as the impacts of such amendments on 
existing and prospective U.S. investments in the region and the effects 
on regional energy and infrastructure development to move those 
supplies to market.
    Pennzoil Company has been involved in energy projects in Azerbaijan 
since the early 1990s, first in connection with the Gas Utilization 
Project (GUP) and more recently with the signing of production sharing 
agreements (PSAs) aimed at developing the Azeri-Chirag-Guneshli (ACG) 
structures and the Karabakh prospect. The Caspian region is thought to 
contain as much as 200 billion barrels of recoverable reserves, ranking 
it comparable to the largest middle east producers. The timely 
development of these Caspian energy supplies will concurrently support 
the continued independence and economic development of the various 
Caspian republics and significantly contribute to world-wide non-OPEC 
energy supplies. The economic and infrastructure improvements 
coincident with the development of these resources will bring benefits 
to the entire region and can be used to further the goals of regional 
peace and stability. In fact, in addition to the vast energy potential 
of the region, Baku's strategic importance is becoming increasingly 
evident as a key transit point in the emerging Eurasian Transit 
Corridor (ETC) that will ultimately link central Asia with the west.
    From a U.S. foreign policy perspective, the success of these 
ventures with American participation will serve multiple objectives, 
including the fostering of improved ties to the new republics, the 
diversification of (non-OPEC) energy sources, the reduced reliance on 
oil imports from the Persian Gulf and the identification of regional 
gas supplies as an alternative to Iranian sources.
    American energy companies, including Pennzoil, Amoco, Unocal and 
Exxon currently comprise some 40 percent of the international AIOC 
consortium engaged in the development of the ACG block. This consortium 
expects to expend between $8-10 billion (U.S.) over the life of the 
project. In addition, American firms are also participating in various 
other (multi-billion dollar) exploration/development ventures in 
Azerbaijan (e.g., Karabakh, Ashrafi-Dan Ulduzu) and American suppliers 
and service companies stand ready to assist these and other development 
efforts. Notwithstanding these substantial investments in Caspian oil 
development ventures, the restrictions placed on the provision of 
direct U.S. bilateral aid to Azerbaijan by Section 907 of the Freedom 
Support Act (adopted by Congress in 1992 over the objections of the 
Bush Administration and opposed by the Clinton Administration) have 
adversely affected U.S. activity in the region. From a strictly 
commercial standpoint, having the United States as the only western 
entity applying sanctions/restrictions on aid to Azerbaijan has clearly 
had a dampening effect on American companies' ability to compete 
against other foreign investors, whose host government policies are 
more conducive to bilateral relations with Baku. And on a diplomatic 
level, the 907 restrictions have adversely affected the U.S. 
government's ability to serve as an honest broker to advance the peace 
talks between Armenia and Azerbaijan. In addition, the restrictions 
have precluded the United States from providing technical and financial 
advisory assistance to Azerbaijan, competencies which would facilitate 
Baku's ability to transform their economy and enter the international 
marketplace. Democracy building assistance has also been restricted by 
the 907 provisions.
    Beyond the 907 issue, however, Pennzoil and other similarly 
situated American companies operating or desiring to operate in 
Azerbaijan have also been hamstrung by persistent efforts to complicate 
or undermine the peace and investment opportunities by introducing 
legislation aimed at redirecting U.S. policy to advantage specific 
regional players. Our experience and observations of these misguided 
efforts, regardless of their intentions appears only to produce a net 
result of driving regional players further apart, making subsequent 
efforts at peace even more elusive and difficult. We respectfully 
suggest that efforts such as the Porter amendment to last year's 
(fiscal year 1997) appropriations bill (which had the laudable 
objective of providing humanitarian assistance to needy individuals in 
the enclave of Nagorno-Karabakh, but overstepped by attempting to carve 
out a special status for the region) and the recently-adopted Pallone 
amendment to H.R. 1486 (a non-binding resolution calling for the 
Administration to promote a specific Caspian pipeline route running 
from Azerbaijan to Turkey via Armenia) are two such examples of 
``remedies'' that need to be avoided in order to preserve the viability 
of the patient.
    Mr. Chairman, Pennzoil remains foresquare behind governmental 
efforts (whether legislative or administrative) aimed at promoting 
peace and stability in the Caucasus and supporting the independence and 
economic prosperity of the various republics contained therein. We urge 
the Congress and the Administration to take all available actions to 
promote improved ties between the United States and Azerbaijan and 
Armenia and to support efforts to promote regional peace and a 
sustainable solution to the Nagorno-Karabakh conflict. At the same 
time, however, we would urge our government to promote and protect 
strategic American investments in the region and to work with the 
private sector and qualified NGOs to advance bona fide commercial and 
diplomatic objectives and positive regional relationships. We would 
further recommend that as a significant first step, Congress repeal the 
onerous restrictions imposed by Section 907 of the FSA, a recognized 
impediment to our ability to affect positive change in the region in an 
unbiased and even-handed manner.
                                 ______
                                 

     Prepared Statement of Father Julio Giulietti, S.J., Director, 
    Georgetown University's Center for Intercultural Education and 
            Development [CIED], and Father Bill George, S.J.

    Mr. Chairman and Members of the Subcommittee: We are Father Julio 
Giulietti, SJ., Director of Georgetown University's Center for 
Intercultural Education and Development (CIED), and Father Bill George, 
S.J. We appreciate the opportunity to testify before this Subcommittee 
on the following topics: (1) The Cooperative Association of States for 
Scholarships (CASS); and, (2) The East Central European Scholarship 
Program (ECESP).
    Thank you and your Subcommittee for your generous support for the 
cost-sharing program, the Cooperative Association of States for 
Scholarships (CASS). We would also like to thank you for your 
encouragement to the East Central European Scholarship Program (ECESP) 
which provides scholarships for Poland, Hungary, the Czech Republic and 
Slovakia.
    We are grateful to the Subcommittee for its support of $13.75 
million for Central America and the Caribbean and $2.75 million for 
East Central Europe. We request of the Subcommittee that you recommend 
the same amount of funding for fiscal year 1998.
     (1) cooperative association of states for scholarships (cass)
    Under a Cooperative Agreement with USAID, Georgetown University 
administers CASS. The University's mission in fulfilling the will of 
Congress is to provide peace scholarships to capable, economically 
disadvantaged students from Central America and the Caribbean who 
attend United States community-based institutions for academic 
education and technical training.
    CASS has been designed to contribute to the formation of more 
effective work force resources and to foster the leadership and 
technical skills required to meet social, economic, and democratic 
needs in Central America and the Caribbean. CASS works closely with in-
country experts, support network members, United States PVOs, USAID 
Missions and USAID Washington to determine which fields of study can 
best support strategic objectives and contribute to the economies of 
participating countries.
    United States community-based institutions then develop or adapt 
programs to provide students with the technical skills and experience 
that are in demand in the region. Needs analysis and follow-up studies 
of alumni are conducted periodically to modify course offerings based 
on current and projected economic realities in the region.
    ``Experience America'' is an essential phase of the program. Its 
three major components--academic training, experiential opportunities, 
and personal and professional development--reinforce self-reliance, 
self-responsibility, and commitment. Living with American families and 
studying at community-based institutions, peace scholars develop an 
understanding of U.S. culture and values, and our democratic processes. 
These students in turn have a positive impact on their host 
communities, heightening cultural awareness, geographical knowledge, 
and political and personal insights about the Americas. The result is 
the formation of lasting social, economic, and cultural links between 
the United States and future leaders of Central America and the 
Caribbean.
    In 1991, 179 CASS participants arrived to begin two-year programs 
of study. Eighty-five percent of these students successfully completed 
their program and returned to their home countries in 1993. The 
uncertain situation in Haiti had a direct impact on our success with 
scholars from that nation. CASS' successful completion rate in 1993 for 
non-Haitian CASS students is 92 percent.
    In 1992, 311 CASS participants arrived in the U.S. to begin two-
year programs of study. Ninety-one percent of these students (284) 
successfully completed their program and returned to their home 
countries in 1994. This is a 6 percent improvement over the previous 
year.
    In 1993, 325 CASS participants came to the U.S. for two years of 
technical training. Eighty-seven percent of these students (285) 
graduated and returned to their home countries in 1995.
    In 1994, 305 CASS participants arrived in the U.S. for two-year 
training programs. 91.8 percent successfully completed their program of 
study and returned home in 1996. It was the most successful of the 
seven CASS cycles since 1989.
    Today, 511 CASS participants in Cycles 95 and 96 are enrolled at 22 
community-based institutions in 15 states. An additional 3 participants 
are earning bachelor degrees under a cost-sharing program with 
participating colleges in the State of Florida.
    In 1997, 323 students will participate in CASS programs. 224 
participants will begin two years of study at 14 community-based 
institutions in the U.S. In addition, 30 more CASS participants from 
Haiti will come to the U.S. for six-month programs in the fields of 
health and education administration. Another 18 participants from 
Central America and the Dominican Republic already arrived in the U.S. 
in January for a special six-month program for strengthening of math 
and science teachers. An additional 51 NPSP participants will be 
selected as a part of Cycle 97 for a total of 323 CASS and NPSP 
participants to be trained for Cycle 97.
    In Nicaragua, CASS designed the Nicaragua Peace Scholarship Program 
(NPSP). NPSP is an innovative program designed to teach young adults 
who, because of social and/or economic circumstances, could not 
complete secondary school educations during the past decade of civil 
strife in Nicaragua. A small number of veterans from both sides of the 
conflict are included in the target population. Training is focused to 
equip Nicaraguan youth with technical and democratic leadership skills 
so that they may increase their opportunities to be productive in their 
communities upon return. Today a total of 96 NPSP participants are in 
the U.S. studying English as a Second Language, courses leading to the 
GED, and technical courses in public health, X-ray technology, solid 
waste management, food science, industrial manufacturing management, 
and electronic communication technology. They are placed at four 
community-based institutions in four states.
    Prior to U.S. studies, a three-month Academic Upgrading program is 
conducted in Nicaragua emphasizing not only basic math and Spanish 
skills, but personal development, self-esteem enhancement, leadership 
practice and practice to participate in a culture of peace rather than 
a culture of war. Two hundred twenty-five NPSP graduates returned home 
between 1992 and 1996. Fifty Cycle 96 NPSP participants initiated their 
18-month technical training in January 1997 and 46 Cycle 95 
participants will complete studies and return home in June 1997.
    It is noteworthy that in 1996, CASS and NPSP trained 64 
participants in programs at Historically Black Colleges and 
Universities (HBCUs), namely Harris-Stowe State College in St. Louis, 
Kentucky State University in Frankfort, and St. Philip's College in San 
Antonio. This is an increase of 25 percent over 1995.
    Federal funds for CASS are being supplemented by states and private 
sector contributions, increasing the total number of students served. 
After an intensive effort in the first two years of CASS to identify a 
model for cost-sharing funds to maximize the federal dollars allocated 
to the program, we learned that no one policy or plan for state or 
regional support of the program will evolve. Each participating CASS 
state has its own funding formula for higher education which simply 
means no one legislative approach can be applied to all states. 
Colleges in our network are effective partners in providing significant 
cost-sharing resources for CASS. We require all participating colleges 
to contribute 25 percent of the total costs of the program. Colleges 
are exceeding this goal. From 1990 through September 1996, we have 
received $21.4 million (40 percent) cost-sharing from our colleges in 
the form of tuition waivers, indirect cost waivers, and the funding of 
other program components. The program has also received over $430,000 
of in-kind support from private donors in the countries in which CASS 
operates.
    This year's follow-up survey of alumni activities solidly 
demonstrates the success of the CASS program through sustainable 
employment levels, continuance of education in-country and community 
service. Data collected over the last three years shows that between 91 
percent and 92 percent of all CASS alumni in the 8 participating 
Central American and Caribbean countries are employed in their 
countries. This figure is in stark contrast to the massive unemployment 
in the region. One in ten CASS graduates owns his or her own business. 
Of the 225 NPSP alumni, 94 percent are occupied as mid-level 
technicians and managers and/or studying in a national economy where 56 
percent of the working population are unemployed.
    CASS has pioneered training opportunities for economically 
disadvantaged disabled persons and is achieving impressive results. In 
1990, CASS began a pilot program to offer computer business 
applications training to hearing impaired students from Central America 
and the Caribbean. Seventy-six percent of the CASS deaf alumni are 
employed in their countries. Twenty-six percent of the deaf alumni 
continue their studies; 73 percent are involved in community service 
activities.
    Since 1990, CASS has negotiated 19 credit transfer agreements for 
CASS alumni with universities in Central America and the Dominican 
Republic. This year, 23 percent of CASS alumni reported they are 
currently continuing their studies, most working full-time and studying 
concurrently. This is up 10 percent from last year.
    Finally, 65 percent of all CASS alumni responded that in addition 
to their work and/or studies, they continue to actively participate in 
community leadership and service activities. This is up seven percent 
(7 percent) from last year.
                   georgetown cass distance education
    The Cooperative Association of States for Scholars (CASS) delivered 
an innovative international distance education business program via the 
Internet in 1996. Designed in 1995, the results of this creative 
application of Internet technologies to education and training has been 
a catalyst for providing continuing professional and personal 
development opportunities to large numbers of people who because of 
their employment, economic, or geographic location in Central America 
do not have access to traditional classes. The program is called 
``Tecnicas en Soluciones Empresariales'' (TSE).
    The TSE program is offered to companies and organizations in 
Central America who are employers of CASS graduates. Participants do 
not have to leave the workplace to go to a classroom or university; 
instead, they access class lectures and group discussions from their 
computers at work. In 1996, the TSE course in business solution 
techniques targeted mid-level managers and technicians to solve chronic 
problems in real time. In 1997, the target was expanded to include 
their supervisors. These new work groups, incorporating supervisors, 
more effectively implement quality management strategies in the work 
place.
    Georgetown University administers TSE in Guatemala, Nicaragua, El 
Salvador and Panama. In 1996, forty-four companies and 88 students 
received 9-month training in Guatemala, Panama, and Nicaragua. In 1997, 
TSE will have 150 participants, expanded to El Salvador and has 
lengthened the training period to twelve months. The new 12-month TSE 
program comprises three modules. Employers have input into the training 
and a clearly defined responsibility to work with students to ensure 
that training is applicable to their jobs. In addition to theory, 
students are required to select topics for study and solution from 
among chronic job-related issues that impact their performance as 
employees and supervisors as well as the achievement of company goals. 
Each project team is responsible for defining and researching the 
selected project, recommending the solution and leading it's 
implementation.
    Instruction is delivered through the Internet, written books and 
publications. It is supported by local instruction teams. Students 
access class lectures and assignments from the Internet and use 
ListServes for group discussions among participants in the four 
countries. E-mail is the primary vehicle of communication between TSE 
teams and participants.
    Administered by Georgetown University and funded by the U.S. Agency 
for International Development, CASS is now among the first to combine 
training and Internet technologies, having devoted eleven years to the 
invention and successful conduct of traditionally-managed technical and 
leadership training for thousands of disadvantaged Central American and 
Caribbean young adults.
       (2) the east central european scholarship program (ecesp)
    Founded in response to the rapid political, social and economic 
changes in post-communist Visegrad countries, the East Central European 
Scholarship Program (ECESP) became the first educational/training 
program to be funded and implemented under a 1989 initiative of the 
United States Congress to support democratization and privatization in 
the Czech Republic, Hungary, Poland and Slovakia.
    The goal of the program is to educate a core group of public 
administrators and experts in regional/rural development, marketing, 
trade, finance, banking and health care administration, who are 
dedicated to accelerating the processes of democratization and 
privatization in their native countries. Over the past years, these 
experts have included: administrators of central institutions (high 
ranking civil servants from the Ministry of Finance, Privatization, 
Agriculture, Health, Environment, and Labor/Social Services, and from 
State Property Agencies); members of provincial and local self 
governments (governors, councilmen and councilwomen, as well as mayors 
and vice-mayors); administrators of key state and private sector 
financial institutions; managers and administrators of non-government 
and non-profit institutions, including institutions of higher 
education; educators involved in educational reform and planning, 
curriculum evaluation, teacher training, minority and disability 
education; and faculty from universities, colleges, and professional 
schools working to introduce new courses into the curriculum of their 
schools. In an effort to meet the ever-changing needs of the four 
participating countries, ECESP introduced in 1995 a health care policy 
and administration program designed to aid the processes of privatizing 
and reforming the health care sector. In 1996, ECESP initiated a short 
term training program for the National Bank of Poland with the aim of 
building a stronger and more transparent banking industry in Poland. 
The program cooperates with the U.S. Federal Reserve and the Office of 
the Comptroller of Currency.
    ECESP hopes that as a result of its education and training, the 
four participating countries will reap the benefits of a more open and 
structured policy-making process, an increased number of civic-minded 
citizens, a better educated and skilled body of government officials, 
and a pattern of cooperation between civil society and government in 
solving key social, political and economic problems.
    Since its founding in 1990, ECESP has sponsored 543 Czech, 
Hungarian, Polish and Slovak participants. An additional 110 
participants are scheduled for training in 1997.
    On behalf of our President, the Reverend Leo J. O'Donovan, S.J., we 
thank you for your support and leadership in the development of these 
innovative programs.
 participating institutions by state cooperative association of states 
           for scholarships (cass) including nicaragua peace
Scholarship Program (NPSP)
    California: Kings River Community College, Modesto Junior College.
    Florida: Florida Community College at Jacksonville; Santa Fe 
Community College St. Petersburg; and Junior College.
    Iowa: Iowa Western Community College; Kirkwood Community College; 
and Scott Community College.
    Kansas: Coffeyville Community College and Hesston College.
    Kentucky: Kentucky State University (HBCU).\1\
---------------------------------------------------------------------------
    \1\ (HBCU) Historically Black College/University.
---------------------------------------------------------------------------
    Massachusetts: Berkshire Community College.
    Missouri: Harris-Stowe State College (HBCU); \1\ and St. Louis 
Community College.
    New York: Broome Community College.
    Ohio: Hocking Technical College.
    Oregon: Mt. Hood Community College.
    Pennsylvania: Mount Aloysius College.
    South Carolina: University of South Carolina at Sumter.
    Texas: Alamo Community College and District with St. Philip's 
College (HBCU).\1\
    Utah: Utah Valley State College.
    Wisconsin: Fox Valley Technical College; Northcentral Technical 
College; and University of Wisconsin Center-Marinette County.
    Washington: Edmonds Community College.
East Central European Scholarship Program (ECESP)
    Kentucky: University of Kentucky and Eastern Kentucky University.
    Wisconsin: University of Wisconsin (La Crosse) and University of 
Wisconsin (River Falls).
    New York: Rensselaer Polytechnic Institute and State University of 
New York (Syracuse).
    Washington DC: George Washington University and Georgetown 
University.
                                 ______
                                 

    Prepared Statement of Claudine Schneider on Behalf of the U.S. 
                           Committee for UNDP

    Thank you for the opportunity to submit this testimony. My name is 
Claudine Schneider and I am a former Republican member of Congress from 
the Second District of Rhode Island, which I represented for ten years, 
from 1980-1990. I submit these comments today as a founding member of 
the U.S. Committee for UNDP--the United Nations Development Program. 
But I also speak as an American citizen who is concerned about the 
direction of U.S. development assistance and about U.S. standing in the 
international community.
    With this testimony, I would like to explain to the Senate 
Appropriations Committee's Subcommittee on Foreign Operations why UNDP 
is uniquely positioned to serve both the world's poor and American 
interests in a way that no other organization or agency can, and how 
agreeing to the President's request level of $100 million for UNDP will 
not only go to help the world's poor, but will translate into real 
returns for the United States in terms of investment and trade. It will 
also save money that might otherwise be spent dealing with crises that 
can be prevented.
    I would like to start by pointing out that while a contribution of 
$100 million to UNDP from the United States represents less than 10 
percent of UNDP's total budget, that same $100 million has resulted in 
purchases of American goods and services by the UNDP equivalent to 
twice that amount. In simple financial terms, UNDP represents a very 
good investment for the United States.
    It is also important to note that UNDP is an independent agency of 
the United Nations, which--since its inception in 1966--has always been 
headed by an American. Traditionally, the United States has been the 
largest of all the donors supporting UNDP. While this has changed 
recently, and the United States slipped to seventh place last year, we 
still have tremendous influence in UNDP and in the UN. Support for the 
$100 million request will help to insure continued American leadership 
of UNDP, and will support the critical role UNDP is expected to play in 
a reformed United Nations. This testimony will explain how.
    First, UNDP's mandate is to support sustainable human development 
globally. This means helping countries--especially the poorest 
countries--help themselves. UNDP does this by working with countries to 
build indigenous capacities, enabling them to achieve important 
development goals. These goals include: reducing the scourge of 
poverty, creating jobs, regenerating and protecting the environment, 
empowering women, instituting the rule of law, establishing systems of 
accountable governance, and other democratic practices. Within the UN 
system, UNDP is leading the effort to eradicate poverty throughout the 
developing world, in particular by channeling 90 percent of its 
resources to countries with a per capita income of less than $750 a 
year. UNDP's role at the country level emphasizes the design and 
implementation of national strategies based upon sustainable economic 
growth, working at the country level to address the root causes of 
poverty, and making extensive use of other UN agencies and 
international and local NGOs to carry out these strategies.
    UNDP brings this multi-sectoral approach to a system where the UNDP 
representative serves simultaneously as UN Resident Coordinator. 
Through the support of UNDP, the UN Resident Coordinator works 
tirelessly to bring the various UN funds, programs and specialized 
agencies together around the table, making it possible to design a 
coordinated response to a country's development needs, while building 
on the strengths of these agencies in fields like health, child 
survival, food production, food security, and employment generation. 
This is consistent with efforts currently underway by the new UN 
Secretary-General to rationalize and consolidate the development 
operations which the United Nations undertakes at the country level, 
thereby avoiding duplication and inefficiency. UNDP can be seen as the 
``glue'' which holds the system together. Hence an investment by the 
United States in UNDP should be seen not simply as an investment in 
UNDP per se, but rather as an investment which can reap benefits in 
terms of a more effective and efficient United Nations presence in all 
the countries which UNDP serves.
    Second, the vast majority of developing countries, including the 
countries of the former Soviet Union, have embraced democratic 
institutions and free market principles, and UNDP is at the forefront 
of the drive to help these countries deal with the transition from a 
command to a market economy. UNDP has provided technical assistance to 
some 70 developing countries to hold free and fair elections. This has 
been followed by UNDP support to establish and strengthen executive, 
legislative, judicial, and electoral institutions; in short, ``the 
deepening of democracy.'' UNDP gives special attention to establishing 
the ``rule of law'', which as we know is a ``sine qua non'' for 
increasing foreign direct investment--including U.S. investment--in 
those countries.
    From the Baltics to Southeast Asia, in countries as diverse as 
Latvia and Viet Nam, for example, UNDP is helping to strengthen 
democratic institutions and promote democracy, while creating jobs and 
employment opportunities. For example, UNDP is strengthening the 
National Assembly, the Supreme Court, and the Ministry of Justice in 
Viet Nam, rendering them more effective and transparent, while 
sustaining the economic reform process. Also, UNDP has been at the 
forefront of helping countries to ``reinvent government'' by 
streamlining often bloated bureaucracies and introducing modern 
management practices, thereby reducing the possibilities for corruption 
and facilitating private investment. All these things are vital to U.S. 
strategic and economic interests.
    Third, UNDP plays an active, coordinating role in countries such as 
Guatemala, Cambodia, and Rwanda, countries which are only now emerging 
from years--and in some cases decades--of civil strife. While other UN 
agencies like the UN Refugee Program and the World Food Program provide 
the necessary humanitarian and emergency relief to these countries, 
UNDP takes the lead in building viable and sustainable societies and 
moving them along the road to self-reliance.
    What truly distinguishes UNDP from the other agencies in the UN 
system is that UNDP was created to approach development problems from a 
broad-based, multi-sectoral, coordinated perspective; hence, UNDP is 
not a ``single theme'' agency. It is uniquely placed, through its 
worldwide network of 136 offices, to bring greater coherence to the UN 
system at the country level. Striking examples of this role can be 
found in Central America and the Middle East, where UNDP has 
coordinated a broad-based, UN and bilateral effort, moving beyond 
peacemaking and humanitarian relief to development which is 
economically, financially and environmentally sustainable.
    Finally, it is important to recognize that the United States and 
UNDP have common objectives on issues such as democratization, 
promotion of free market economies, the advancement of ``good 
governance'' and of an environmentally sustainable world. Hence, for a 
fairly modest investment, the U.S. can find in UNDP a trusted and 
valued partner which serves to advance American values and interests 
abroad. All of this has recently been confirmed by a GAO report on UNDP 
which was released on May 1st of this year, which I commend to the 
attention of all the members of the committee. ``In sum,'' reads that 
report: ``UNDP is a cost-effective tool in our development arsenal. 
Full funding of UNDP by the United States is the best way of stretching 
our development dollar to promote U.S. interests.''
                                 ______
                                 

    Prepared Statement of the International Education and Training 
                               Coalition

                              introduction
    The International Education and Training Coalition represents over 
50 organizations with interests in areas such as child development, 
basic education, literacy, higher education, vocational education and 
work force training. The members of the Coalition include non-profit 
organizations, commercial organizations, universities, and associations 
with thousands of members throughout the United St