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Since the fall of the Berlin Wall in 1989 andthe subsequent breakup of the Soviet Union in1991, the governments of the United States andother Western countries have provided massiveaid to promote a transition to the free market inCentral and Eastern Europe and the formerSoviet Union. But aid for market reforms in theregion has been largely ineffective. Whether pro-vided in the form of technical assistance, grantsto political groups or nongovernmental organi-zations, loans and guarantees to the private sec-tor, or direct financial aid to post-communistgovernments, that aid has been plagued by anumber of problems. The failed $22.6 billionbailout of Russia by the International MonetaryFund in July 1998 only confirmed the flawednature of the aid-for-reform approach.Technical assistance, for example, has oftenbeen used to hire Western consultants whoseadvice is redundant or adds little to the develop-ment process. Aid has become an end in itself,and, in prominent instances, has resulted in con-flicts of interests or self-enrichment of aid-financed advisers. Because providing officialfunds to countries in transition is an inherentlypolitical process, reform efforts often backfirewhen they are perceived to follow an agenda setby Western governments. Those efforts havebeen further discredited by the West’s strategy of supporting specific groups or individuals inRussia whose actions depart from their pur-ported interest in liberal “reform.” The UnitedStates and other donor countries should notcontinue their dubious aid-for-reform approachif they wish to encourage the development of democracy and true market reform.
U.S. ASSISTANCE FOR MARKET REFORMS
Foreign Aid Failures in Russia and the Former Soviet Bloc
by Janine R. Wedel
_____________________________________________________________________________________________________
Janine R. Wedel, author of
Collision and Collusion: The Strange Case of Western Aid to Eastern Europe1989–1998
(St. Martin’s, 1998), is a research professor of anthropology and a research fellow in the Institute of European, Russian, and Eurasian Studies at The George Washington University and an adjunct professor in the Graduate Public Policy Institute at Georgetown University.
Executive Summary
No. 338March 22, 1999
Introduction
When the Communist Eastern Bloc col-lapsed in 1989 and the Soviet Union itself ceased to exist in 1991, it seemed that the West(particularly the United States) finally hadwhat it had always wanted—the opportunityto introduce quick, all-encompassing politicaland economic reform. International lendinginstitutions and the foreign aid community,often working in concert with reform-orientedCentral and Eastern European leaders, pressedgovernments to build market economies byintroducing economic reforms and privat-izing state-owned resources. The United Statesmade aid in support of market reform to assistthe formerly communist countries its chief priority, obligating more dollars to economicrestructuring, including privatization anddevelopment of the private sector, than to anyother single effort.
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Those plans seemed promising, but theirpremise and implementation have been lessthan exemplary. Many U.S. aid efforts have nothelped to support market reform, and somehave even backfired. Those efforts have notnecessarily achieved long-term developmentor security goals by helping to build enduring,nonaligned institutions or fostering friendlyrelations. Russia, once considered the posterchild of reform, is now heading toward melt-down despite billions of dollars in “help” fromWestern governments. As the United Statesconsiders what course of action to take inRussia, as well as in Ukraine,
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(and also contin-ues to assist some Central and EasternEuropean countries), it is critical to take thosefactors into account.Critics of foreign aid often point to cases inwhich development assistance to the ThirdWorld appears to have retarded, rather thanstimulated, economic progress. The record of aid to much of the Second World will likelyconfirm the critics’ skepticism. But even advo-cates of aid must recognize widespread fail-ures of aid to the region. Indeed, under any cir-cumstances, transplanting development assis-tance (including ideas, know-how, and grants)from one context into another is an inherent-ly troublesome process. How donors connectwith recipients—through whom and by whatmeans—and the circumstances under whichboth are operating and their goals criticallyshape the assistance recipients get, how theyrespond to it, and the impact of the aid. Yetthose factors are typically overlooked; littleattention is generally paid to how aid is imple-mented and how it actually works.In the case of U.S. assistance to Central andEastern Europe and the former Soviet Union,discussion among policymakers has typicallycentered on amounts and categories of aid(privatization, private sector, democracy pro-motion, or humanitarian) and sometimes thekind of aid (technical assistance, training,grants, or loans). But rarely has Washingtongiven careful consideration to the agents of the aid on both donor and recipient sides, therelationships formed between those agents,and the implications of that for aid outcomes.Relationships, both between Easterners andWesterners and between fellow Easterners,have shaped the results of nearly all aid strate-gies that the major donors have employed,including technical assistance through per-son-to-person contacts, grants to Central andEastern European political-economic groupsand nongovernmental organizations, andloans to businesses. Although those mecha-nisms differ, each has played a pivotal role inaid outcomes.
An Army of Advisers
The major way that Western donors assist-ed the former communist countries in their“transition” to a market economy was through“technical assistance” in the form of consul-tants sent to the region.
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Although the consul-tants were initially welcomed by their hosts,within a short time after their arrival, the Poleshad coined a derisive term for them—the“Marriott Brigade,” after their penchant forstaying in Warsaw’s Marriott and other luxuryhotels.
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Whether in Poland, or farther south oreast, within a matter of a year or so of its
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Little attention isgenerally paid tohow aid is imple-mented and howit actually works.
arrival, the Marriott Brigade had alienatedmany of the people it was trying to help. Polishaid official Marek Kozak even suggested thatthe main benefit derived from the MarriottBrigade was not the expertise they providedbut the hard currency they contributed to thelocal economy.
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In 1993 then Czech primeminister Václav Klaus added, “What we reallyneed—instead of aid—is exchange. . . . We donot need one-way transfers because they tendto be misused, misdirected, or misplaced. Theyare usually not taken seriously by either side. Ihave in mind financial aid, gifts, technicalassistance, and consulting.”
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One problem was that the majority of those consultants were “fly-in, fly-out” advis-ers who visited the region for a short time,developed weak links with recipients, andknew little of the countries they were trying tohelp. The U.S. General Accounting Office con-firmed Polish officials’ reports that “early tech-nical assistance in the banking sector resultedin many consultants coming to Warsaw forone- or two-week stays, interviewing officials,and producing reports that merely repeatedwhat they had been told.”
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As a result, the con-sultants’ ostensible clients—the recipients—often considered the consultants redundantand even meddlesome. As a Slovak aid officialput it, “The Western consultants collect infor-mation, get the picture, then they go home.. . . We are solving the West’s unemployment inthis way. . . . We get calls from ministries thatreceive consultants from all over asking if aidcan be reduced.”
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What went wrong?
Ad Hoc Privatization Aid
U.S. privatization aid to Central Europe,which was to be directed to “private” entities,often circumvented the host government bod-ies responsible for privatization. Privatizationaid was set up to be ad hoc, and it was largelystructured to work around, rather than incoordination with, the privatization processesit was supposed to help.That problem was compounded by the wayin which the U.S. Agency for InternationalDevelopment’s Indefinite Quantity Contracts(IQC) program structured aid to the region.Three consulting consortia led by Big Sixaccounting firms (Coopers & Lybrand, KPMGPeat Marwick, and Deloitte & Touche) formedthe cornerstone of the U.S. privatization assis-tance to Central and Eastern Europe.
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The IQC program worked especially poorlywhen consultants worked directly with anenterprise, because they functioned largelyindependently of the ministries responsiblefor privatization. Although each governmentin the region had set up an office to plan andmanage privatization, U.S. AID did notrequire or necessarily even encourage U.S. con-tractors to work with those offices. Instead,consultants saw themselves as working for thedonor agencies that paid them—rather thanon behalf of the recipient enterprises and min-istries that ostensibly needed their services.Recipient officials found they had littleauthority to assess the work of U.S. AID–paidconsultants, determine schedules, or termi-nate a contract for nonperformance or poorperformance. Some consultants’ reports evenwere addressed to U.S. AID in Washington,not to the local officials who supposedly werethe beneficiaries. Polish Ministry of Industryofficial Marek Krawczuk said that this was like“a surgeon who comes, does his work withouttalking with the patient, and leaves withoutchecking to see whether the operation wassuccessful.”
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Another major problem with U.S. privati-zation aid to Central Europe was that itappeared to be an end in itself and often didnot lead to competition among firms or othercrucial market activity. According to donors, amajor advantage of hiring consultants fromthe Big Six accounting firms was that they hadcontacts with potential Western investors. Yetthe link between technical assistance andinvestment was often missing; there was a dis-connect between consultants’ activities at theenterprise level and activities that might haveled to investment. Central and EasternEuropean officials frequently complained thatlittle concrete investment activity followedfrom consultants’ reports. The Slovak Privatization Ministry hoped that one report,produced by Deloitte & Touche and funded by
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U.S. privatizationaid to CentralEurope appearedto be an end initself and often didnot lead to compe-tition among firmsor other crucialmarket activity.
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