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

The often slow, bureaucracy-laden EU, which, in contrast to the United States, channeled its aid to governments, was not prepared to start up a substantial business-aid program so quickly. However, in time, the EU’s PHARE program introduced an innovative concept conceived by Polish specialists. Beginning in 1993, as the EU broadened its portfolio to include small- and medium-sized enterprises and infrastructure support, it launched the “Struder” program for development in selected regions of Poland. Largely designed by Poles with EU support, Struder was administered by the Polish Agency for Regional Development, a government agency established in 1993 to support regional development. Struder was to spur development in six (later, under Struder II, fourteen) voivodships (provinces) that suffered from the costs of economic restructuring but were deemed to have significant growth potential. The program provided grants, equity capital, guarantees, training, and advisory services in an effort to stimulate profitable investments and infrastructure development.17 By the end of 1997, when Struder was phased out, the EU had provided 76.7 million ECU (about $85 million18) to the program. Other small EU-funded programs followed (primarily for infrastructure, with limited resources available for technical assistance and training), bringing the figure up to more than 100 million ECU in 2000.19 However, largely a local invention, Struder never expanded into other countries.

Other donors and programs also launched business-development programs: a host of mostly small initiatives, such as microcredit lending, was funded by Western foundations, governments, or some combination thereof. Still, the U.S. Enterprise Funds were held up as a model, especially among some European donors that worked solely through governments and felt constrained by that practice. The funds were relatively unencumbered by government regulation on the donor side, and, in some recipient countries, on the recipient side as well. One independent evaluation of the funds noted that “Other donor agencies in the region were envious of the speed with which the funds became operational, and the flexibility and independence allowed in the programs.”20

Yet nearly all business-support programs faced daily dilemmas that reflected a larger trade-off: to what extent to impose donor standards of paper trails and accountability and to what extent to take into account the knowledge and business conditions of the hosts.

MISSION AND MOTIVATIONS

The U.S. Enterprise Funds appear to have had differing answers to that question, depending largely on the context in which a specific fund was operating and the leadership of that fund. The major challenge facing the Enterprise Funds was an inherent conflict between “aid” and “business” orientations—an identity crisis typical of some development banks. Should they support risky business activities that could produce big results or less risky activities that would demonstrate “success,” especially to the U.S. Congress? And was their mission to give aid liberally or to make sound business decisions using stringent Western loan criteria? And so this fundamental—and probably unavoidable—dilemma enveloped their mission: were they in the aid business or were they in business?

The question arose forcefully in Central Europe where the Enterprise Funds got off to a rough start. Central Europeans often were introduced to the Enterprise Funds through publicity surrounding the visits of President George Bush and other American dignitaries who announced their launch. The Enterprise Funds fell into the rhapsodic phase of Triumphalism. A USAID-commissioned report notes that

The funds became one of the most visible manifestations of the U.S. pledge to support the transformation. As such, they have brought considerable political good-will to the United States.21

However, the phase of Disillusionment was not far behind. The same report goes on to say that

this political dimension created two serious problems. First the announcement of the funds created an avalanche of requests for money from would-be business owners, putting a great strain on the funds during their start-up phase. Second, there was a great deal of disappointment and negative publicity in the countries when people discovered that the funds were requiring repayment of the capital with interest.22

Indeed, the high profile of the Enterprise Funds helped to raise peoples’ expectations—expectations that were greatly out-of-step with the funds’ possibilities for delivery. In the first weeks and months following the launching of a fund, the local offices—which often at the time had only skeleton staffs—received hundreds of applications, which often were little more than handwritten requests for money. The Polish Fund, for example, was announced before it was up and running, creating a huge backlog of applications that led to frustration and resentment.23

Greatly contributing to the problem was the fact that Central and Eastern Europeans generally had little background for understanding just what fund managers expected by way of documentation and collateral. They had scant understanding of the necessity of a business plan, let alone how to put one together. Further, there had been little clarification explaining that the funds would not be disbursed in the form of grants, but were loans that had to be repaid—and with interest. Former Czechoslovak aid coordinator Zdeněk Drábek said that people had understood that the funds would consist of grants to small businesses. “[There was] a lot of disappointment,” he said, “when they [people] discovered that money was not to be given away freely.”24

There was also a perception among some recipient officials that the needs of Central and Eastern European business were not necessarily foremost among the concerns of the Enterprise Fund managers. Each fund was a private, nonprofit corporation. Boards were headed by prominent financiers and venture capitalists, and board members, such as AFL-CIO president Lane Kirkland and former national security adviser Zbigniew Brzezinski, donated their time. The funds embarked on a three-pronged investment strategy: (1) direct investments involving equity or debt-equity combinations to joint ventures or privatized enterprises; (2) joint bank lending programs designed to direct credit in the range of $20,000 to $200,000 to small businesses; and (3) small-loan programs for small businesses and lending programs to specific industries.25

Funds operating in Central Europe generally took a conservative approach to lending money, to achieve the goal of self-sufficiency. They did not dispense monies easily or quickly, requiring loan applicants to produce much of the same kind of financial documentation that typically was required for loans in the United States. For most businesspeople in the former communist countries this was nearly impossible at least in the immediate postcommunist aftermath: they lacked a paper trail and credit track record (audited financial statements and tax returns were typically unavailable) and were unaccustomed to Western loan-application procedures. Further, as the managing director of the Hungarian-American Enterprise Fund, Charles Huebner, related, given their lack of such experience under communism, Hungarians had little sense of obligation to pay back loans. As stealing from the state had been a key survival strategy under communism, why should repaying a banking institution be expected?26 However, within a few years Central European businessmen had generally become familiar with acceptable Western business practices.

More often than not, Enterprise Fund managers opted to devote their efforts not to the small businesses requiring just a little capital that typified the region, but to big, visible deals and joint ventures that promised rewards in prestige and cash. Joint ventures, which the SEED legislation listed as an option,27 were easy to create, lucrative, yielded incentive funds for the partners, and looked good to Congress because they helped U.S. business—even though smaller, indigenous businesses were the ostensible primary targets of the funds’ attentions.