Janine Wedel - Collision and Collusion - The Strange Case of Western Aid to Eastern Europe

Throughout the 1990s, Poland saw an explosion of new businesses. Most of these were domestic or household enterprises: in 1992, the average number of employees in new businesses was 1.7, including owners, according to a World Bank study.4

The family as a unit of business was not a new invention. Under the informal economies that flourished with communism, the family was the focus of work and consumption and the starting point for the exchange of information, which at that time was critical to the success of many activities. The family was the survival unit of pooled scarce goods and services.5 Trust was essential in informal economies: it simply did not make sense in most cases to hire outside of one’s social circle. Although such behavior may appear irrational to outsiders, family relationships facilitated certain understandings that did not require legal contracts. Being outside on one’s own—without networks—was like being on a sinking ship without a life jacket. Both trust and the use of family networks figured prominently in the evolution of biznes in the 1990s.

The idea of formal labor markets—in which employers advertise jobs and people apply for them—was problematic when applied to Central and Eastern Europe. Polish employers of new businesses, for example, seldom hired in a meritocratic way; instead, they chose workers from the ranks of those already in their networks. Someone working at the university would receive a call from a member of his social circle now in public office who was “looking for someone from our circle” to head up a project in the government civil service. A study by sociologist Barbara Heyns found that the use of such friendship and family networks to find jobs persisted even when factors that typically predicted employment in the private sector (such as being male, young, urban, and educated) were taken into account,6 although, in Central Europe, the trend, at least among some groups and the younger generation, appears to be toward professionalization and the adaptation of Western “professional standards.”

Another important dynamic of the emergent private sector (and one that casts doubt on some Western models) involved the relationship of two spheres of activity and employment: state and private. Some economists studying household strategies tended to assume that the two spheres were separate and distinct.7 Yet, in reality, they may not be so easily separable. Household strategies and patterns defied the neat ideological categories of planned versus market economy and state versus private sector.

In fact, some evidence suggests that families throughout the region tended to pursue diversified choices.8 In a common pattern, one member of the family would be employed in the more stable state sector while another would work in the private sector, which provided more opportunities but at greater risk. In Tula, Russia, men worked at reduced salaries in munitions factories, the main industry in a city with a population of about 600,000, while their wives traveled to Moscow to buy goods to sell in the Tula bazaars. When trading became too risky, families could fall back on the low but reliable salaries and benefits provided by state jobs, which included “side earnings”—trading or additional work opportunities available by virtue of the job. This was an insurance strategy: families pursued reasonable options in the context of the constraints and the enabling features of their environment. Their behavior was logical, not ideological.

It was also typical throughout the region, especially among certain groups, for a member or members of the family to work in both the state and private sectors. In Central Europe, as well as in Russia and Ukraine, many scholars on leave from the academies of science (which continued to provide long-term guarantees and some benefits) also were employed by Western-funded organizations. Many people with their own private consulting firms kept one foot in the government sector, thus staying on government payrolls. In Central Europe circa 1990-91 (but rarely much later) as well as further east quite consistently, visitors who interviewed officials in their official capacities frequently were offered “private” business cards from the officials’ side businesses, which sometimes had business dealings with the ministries for which they worked. This indicated that the host officials were looking for other opportunities. Such other opportunities would introduce, by many Western standards, a “conflict of interest” or potential conflict of interest with their government jobs. However, one of the few advantages of working at low-wage civil-service jobs was the opportunity for Western contacts and contracts that the jobs sometimes could provide. Thus, someone from the region might see a fringe benefit where an outsider saw a conflict of interest. One government official in Kiev gave the author three business cards: two for his own private consulting firms and one for his state job as an adviser to the president.

These 1990s relationships between “private” biznes activities and “state” sectors were deeply rooted in socialism. Given that such patterns were likely to continue to influence business development, what were the needs of the evolving business sectors, and where could foreign aid programs play a useful role?

PROGRAMS

The United States was among the first of the donors to begin to find out. Authorized under the SEED Act in 1989,9 the U.S. Enterprise Funds were designed to promote the development of Central and Eastern European private sectors, including loans, equity investments, grants, technical assistance, and joint ventures. Although the SEED legislation provided an overall framework for the funds, it allowed them substantial latitude in how they actually would operate.10 This portfolio was deemed so important that the $240 million authorized for the Polish-American Enterprise Fund and the $60 million for the Hungarian-American Enterprise Fund—the first to get under way in 1990—consumed a substantial portion of the initial U.S. aid package.11 Enterprise Funds accounted for some 28 percent of the SEED assistance for the region between fiscal years 1990 and 1993.12 The funds received considerable publicity, both at home and in the recipient countries. A USAID-commissioned evaluation affirms that “The funds became one of the most visible manifestations of the U.S. pledge to support the transformation.”13

From the perspective of the aid community, the hallmark of the funds was their independence of operation and the limited government oversight to which they were subject. As originally structured, they were accountable only to their boards of directors. In 1993, however, Congress charged USAID with greater oversight responsibility but maintained USAID’s very limited approval authority over program decisions.14 With little competition from other donors for loans or grants to support Central and Eastern European business, the Enterprise Funds were seen by many as a premier assistance program, and one that constituted a new kind of public-private partnership: a less-regulated type of foreign aid that would encourage private enterprise mainly through loans and direct investments rather than traditional grants. The management of the Polish-American Enterprise Fund described it as a “bold experiment—a new way for the U.S. government to deliver economic assistance to Poland, tapping into private sector expertise unencumbered by the bureaucratic constraints normally associated with governmental organizations.”15 The funds often were cited as an aid “success story” and held up by the U.S. Congress and critics of traditional aid programs as a template for future aid. In 1995, the funds had disbursed nearly $270 million in investments to 3,305 companies. By 2000, the funds had obligated more than $1 billion to 18 countries in Central and Eastern Europe and the former Soviet Union.16