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

But other decisionmakers thought that the Russian fund should speculate in vouchers, buy into investment funds, and invest in American companies doing business in Russia. When Towbin resigned over this difference of opinion, many of the commitments he had made were simply dropped and some funding that had been promised never provided. In any case, operating in Russia was far from easy, especially given the amount of corruption in Russian business (including banks), as shown in chapter 4. The Russian fund, generally operating under much more difficult conditions than those in Central Europe, walked a perpetual tightrope between making conservative and risky judgments.

Some business-support programs failed both to make profit and take risks, as the Czech and Slovak Fund demonstrates. A USAID-commissioned evaluation wrote that the fund “is failing to achieve either commercial success or development impact. The investments are suffering major losses, and are generally marginal both in market and in development terms.”47 A member of the fund’s board, which was encouraged to resign following a scandal involving its director,48 emphasized the ambiguity of the funds’ mission. “They are neither fish nor fowl,” he said.49

LOCUS OF LOANS

The tension between the stated mission of the Enterprise Funds and the disbursement of loans also appeared in the geographical concentration of monies. The funds tended to focus on the most developed areas of the recipient countries, where investment already was concentrated, rather than underdeveloped ones. Yet the greater need was often in the latter, where there was little investment.

For example, the Czech Republic experienced “an emerging regional polarisation along the east-west axis,” according to sociologist Michael Illner. Regions with the highest developmental potential were those with higher levels of private business and foreign capital investment and also with many trans-border linkages. The two largest urban centers of Prague and Brno enjoyed especially favorable developmental potential.50

Likewise, in Poland, very low unemployment and a high degree of private-sector development, privatization, and investment characterized a few favored regions. High unemployment, a virtual stalemate in privatization and the development of business infrastructure, and scant foreign investment all were concentrated in certain other regions.51 The Warsaw province accounted for about 41 percent of all foreign capital invested in Poland and about 33 percent of the total number of joint-venture companies in March 1993.52 The pattern of regional disparities (of weak and strong regions) was much the same at the turn of the century.53

This trend holds across the landscape of Central and Eastern Europe: diversity characterizes not only individual countries of the region, but also communities and regions within each country. Summing up a volume of work dealing, in part, with the increasing accentuation of regional, ethnic, and other historical differences after 1989, anthropologists Frances Pine and Sue Bridger state:

The economic prospects of villagers living in beautiful mountain areas near western borders may be very different from those of industrial workers in areas highly polluted by crumbling and archaic factories. For the former, the new order may open opportunities for local developments such as tourism and cross-border trade; for the latter, unemployment and increasing privation has been a more common experience.54

Jacek Szlachta, a specialist in regional development, has a similar assessment: “The leaders of the transformation are the capitals and western portions of countries. The problem areas are the eastern and rural areas. This means efficiency and also means there are areas like Appalachia.”55

Two important experiments designed to narrow this gap were attempted in Poland as the period of Adjustment came into its own: a microlending program under the Enterprise Fund and the EU’s Struder program. These programs had as their goal to provide small loans and/or capital-equity grant support in underdeveloped areas.

The microlending program, a subsidiary of the Polish American Enterprise Fund, funded by the U.S. Congress, got under way in 1995 with a fraction of the operating budget of its parent fund. The program was distinctive in that it served clients with little or no access to bank lending. It provided loans to very small businesses: the average size of its loans was only 7,000 złoty —roughly $2,88756—and the average number of employees in the businesses funded was one to five people. Most firms supported were involved in trading, services (hair dressers, plumbers, construction services, repair shops), and production (bicycles, car parts, toys). As of mid-2000, the program had given more than 34,000 loans, operating through 30 branch centers in Poland.57

The microlending program was designed mostly by Poles familiar with the record of microlending programs elsewhere. The program’s design was an innovative combination of features adapted from other contexts to the Polish environment and grounded in knowledge of Polish cultural practices. For example, prospective recipients of loans first had to find other firms that also needed loans. A system of interdependencies with these firms, building on models tried in Bolivia and Bangladesh, was then established to ensure loan repayment.58 The microlending program has been seen by many as contributing valuable support to Poland’s small businesses.59

The Struder program also made headway toward the goal of supporting small businesses in problem areas. Struder funds sustained some regional institutions and operations, including support for investment projects that created new jobs in the small-business sector. Funds also were provided for the development of small infrastructure projects that were deemed of direct benefit to small and medium-sized enterprises. These programs for regional development were within the framework of Poland’s accession to the EU.60

Fluctuating business conditions in the recipient countries also meant that needs for dollar-denominated loans would change over time and place. The need for Enterprise Funds in the host countries had to be periodically reconsidered due to changing financial conditions. Whereas, for example, in the early 1990s in Poland there was demand for loans under the Enterprise Fund, demand later diminished due to the fact that the fund’s dollar-denominated loans lost attractiveness to borrowers as the Polish inflation rate went down and bank interest rates in złoty declined accordingly. Businesses generally preferred to take credit in local currency. In addition, the Polish banks became increasingly reluctant to refer credit-worthy borrowers to the fund’s program as the banks became more experienced in credit analysis and risk assessment. By 1994, the banks began extending loans to those borrowers themselves.

Thus, to be useful in a given business environment, funds needed to constantly adapt themselves to the vagaries of that environment.61 A USAID-commissioned evaluation concluded that the “Funds must establish an investment philosophy based on a clear understanding of the host country’s business, legal, and policy environments and not simply mirror the approach of other funds.”62 USAID Enterprise Fund adviser Timothy Knowlton put it simply: “Before you start lending money and investing, you should know where you are.”63

LOCAL ADAPTATION, LEADERSHIP, AND THE LIMITS OF WALL STREET

The quality of leadership was a critical factor that determined the demand for, and effectiveness of, the development funds in a given setting. Many fund principals exhibited problems noted earlier with consultants: lack of long-term commitment to their jobs and lack of knowledge about and interest in the realities and business conditions of the countries in which they were operating. As with the consultants discussed in chapter 2, those fund leaders who made extended commitments, grounded themselves in the conditions in which they were working, and developed good working relationships with local people tended to be effective. The tenures of those who did not show respect for the region were often short. Indeed, the funds became noted for a tremendous amount of turnover in leadership.