National Endowment for Democracy

# “The Democratic Revolution”

A Conference
Sponsored by the
National Endowment
for Democracy

May 1 & 2, 1989

Washington, D.C.

The first day of **“The Democratic Revolution”** conference will be devoted to regional panel sessions, exploring the quiet but sweeping democratic changes, and pressures for change, taking place throughout the world. Most of the conference panelists are democratic activists supported by the Endowment who are at the cutting edge of this historic development.

Following this world survey, the second and concluding day of the conference will concentrate on reviewing the prospects for democracy and elucidating the democratic ideas that can unite movements from the different countries and regions already discussed. The discussion and debate, it is hoped, will contribute to strengthening the foundation of democratic belief and commitment that will help to sustain the world democratic movement in the years ahead.

This conference is being funded out of private contributions. The National Endowment for Democracy is a tax-exempt, nonprofit corporation as defined in Section 501(c) (3) of the Internal Revenue Code.

## BOARD OF DIRECTORS

William E. Brock, III
Chairman

Charles T. Manatt
Vice Chairman

LeGree Daniels
Secretary

Jay Van Andel
Treasurer

Carl Gershman
President

Polly Baca
Zbigniew Brzezinski
Frank J. Fahrenkopf, Jr.

Dante B. Fascell
Orrin G. Hatch

Lane Kirkland
John Richardson

Olin Robison

Albert Shanker
Sally Shelton-Colby

Charles H. Smith, Jr.

Eddie N. Williams

for Democracy
National Endowment for Democracy
National Endowment for Democracy

"The Democratic Revolution:" A Conference Sponsored by the National Endowment for Democracy

Rayburn House Office Building, Room 2172

Monday, May 1st

8:30 - **Welcoming Remarks**
9:00 a.m. **Congressman Dante B. Fascell and Carl Gershman**

9:00 - **Eastern Europe and the**
10:30 a.m. **Soviet Union**

Moderator:

**John Richardson**

Panelists:

**Vladimir Bukovsky,**
The Center for Democracy,
the Soviet Union

**Janos Kis,** Editor, *Beszelo*, Hungary

**Jacek Kuron,** Advisor to Solidarity,
Poland

**Vilem Precan,** Director,
Czechoslovak Documentation
Center

Commentators:

**Members of Congress**

10:30 a.m. -
12:00 p.m.

**Africa**

Moderator:

**Eddie N. Williams**

Panelists:

**Bona Malwal,** Editor,
*The Sudan Times*

**Nthato Motlana,** Founder,
SOWETO Civic Association,
South Africa

**Jacques Mariel Nzouankeu,**
Director, Center for Pluralistic
Democracy in the Third World,
Senegal

**General Olusegun Obasanjo,**
Chairman, African Leadership
Forum, Nigeria

Commentators:

**Members of Congress**

12:15 - **Luncheon Session**
2:00 p.m. (To be held in Rayburn B 338)

Moderator:

**Jay Van Andel**

Speakers:

**Leopold Berlanger,** President,
Haitian International Institute for
Research and Development

**Roberto Brenes,** Director, The
Panamanian National Civic Crusade

**Violeta Chamorro,** Editor,
*La Prensa*, Nicaragua

**Armando Valladares,** President,
International Coalition for Human
Rights in Cuba

2:15 - **Latin America & the**
3:45 p.m. **Caribbean**

Moderator:

**Sally Shelton-Colby**

Panelists:

**H.E. Eugenia Charles,** Prime
Minister of the Commonwealth of
Dominica

**Hernando de Soto,** President,
Institute for Liberty and Democracy,
Peru

**Patricia Guillermo de Chea,**
Director, Center for Political
Studies, Guatemala

**Mónica Jimenez de Barros,**
Founder, Crusade for Citizen
Participation, Chile

Commentators:

**Members of Congress**

4:00 - **Asia**
5:30 p.m.

Moderator:

**Charles H. Smith, Jr.**

Panelists:

**Liang Heng,** Editor,
*The Chinese Intellectual*

**M.R. Masani,** President, The Leslie
Sawhny Programme, India

**Dette Pascual,** President, Women's
Movement for the Preservation of
Democracy, the Philippines

**Aydin Yalcin,** Editor, *Yeni Forum,*
Turkey

Commentators:

**Members of Congress**

Tuesday, May 2nd

8:30 - **Welcoming Remarks**
9:00 a.m. **Senator John McCain,**
**Senator Lloyd Bentsen,**
and Charles Manatt

9:00 - **The Idea of Democracy**
11:45 a.m.

Moderator:

**Zbigniew Brzezinski**

Panelists:

**Milovan Djilas,** Author, Yugoslavia

**Leszek Kolakowski,** Representative
of the Committee for Independent
Culture, Poland

**Octavio Paz,** Editor, *Vuelta*, Mexico

**Jean-Francois Revel,** Author,
France

Commentator:

**Larry Diamond,** Stanford University

APR - 5 1989

**Conference on "The Democratic Revolution"**

May 1-2, 1989

☐ I will attend

☐ I will not attend

If you are not able to be at all of the sessions, please indicate those you plan to attend:

☐ Eastern Europe and the Soviet Union

☐ Latin America & the Caribbean

☐ Africa

☐ Asia

☐ Luncheon

☐ The Idea of Democracy

Name

Telephone number

Please return in enclosed envelope by April 17

The National Endowment for
Democracy's conference on "The
Democratic Revolution," will culminate
in an Award Luncheon on Tuesday,
May 2nd at which the Endowment's
"Democracy Award," will be presented.
We are proud to pay tribute to two
individuals who have made vital
contributions, both individually and
as part of larger movements, to the
democratic cause in Poland and Chile,
two countries where the Endowment
has been deeply involved and where
the democratic struggle assumes
global importance.

Mónica Jimenez de Barros founded
and directed the Crusade for Citizen
Participation in Chile, a nonpartisan
civic movement that registered and
mobilized millions of Chileans to
participate in the historic plebiscite

of October 5, 1988. Her devotion to
nonviolent political participation and
democratic values helped preserve
social peace and advance democracy
at a decisive moment in her country's
history.

Jacek Kuron, a key advisor to the
Polish trade union Solidarity and one
of Poland's most respected political
activists, helped conceive and
implement the strategy of peacefully
transforming a totalitarian system
through the patient construction of the
institutions of civil society. Repeatedly
jailed and persecuted for his activities,
Mr. Kuron has exemplified the personal
courage and political conviction that
characterize the Polish democratic
movement of which he is such an
important part.

[L.C.]

participate in the historic plebiscite mobilized millions of Chileans to civic movement that registered and Participation in Chile, a nonpartisan and directed the Crusade for Citizen Monica Jimenez de Barros founded

global importance.
the democratic struggle assumes
bar been deeply involved and where
two countries where the Endowment
democratic cause in Poland and Chile,
as part of larger movements, to the
contributions, both individually and
individuals who have made vital
We are proud to pay tribute to two
"Democracy Award," will be presented
May 2nd at rubich the Endowment's
in an Award Launch on Tuesday,
Democratic Revolution," will annihilate
Democracy's conference on "The
The National Endowment for

important part.
movement of which he is such an
characterize the Polish democratic
courage and political conviction that
Mr. Kowron has exemplified the personal
jailed and persecuted for his activities,
institution of civil society. Repeatedly,
through the patient construction of the
transforming a totalitarian system
implement the strategy of peacefully
activists, helped conceive and
of Poland's most respected political
Polish trade union Solidarity and one
Jacek Kowron, a key advisor to the
history.

at a decisive moment in her country's
social peace and advance democracy
democratic values helped preserve
nonviolent political participation and
of October 5, 1988. Her devotion to

Center for
International
Private
Enterprise

CIPE

1615 H Street, N.W.
Washington, D.C.
20062
(202) 463-5901
TELEX: 277559-CIPE UR
TELEFAX: 202-463-5836

March 17, 1989

MAR 21 1989

The Honorable Henry Kissinger
Center for Strategic and
International Studies
1800 K Street, N.W.
Washington, D.C. 20006

Dear Dr. Kissinger:

The House Foreign Affairs Committee recently issued the Hamilton/Gilman Task Force Report on Foreign Assistance. The report marks the beginning of the legislative process to restructure the foreign assistance program.

As a follow-up to the report, the committee has been holding hearings to review the findings and recommendations of the task force. On February 28, the committee organized panels to speak on the four main foreign economic policy objectives of the report: growth, environmental sustainability, poverty alleviation and pluralism. The committee invited me to testify on the pluralism panel; my testimony and attachments are enclosed.

The centerpiece of the testimony was the summary of the results of CIPE's recent conference on Market-Oriented Trends towards Economic Growth, a copy of which is attached.

Rep. Mervyn Dymally, who chaired the hearing during my testimony, reacted positively to CIPE's policy of working directly with local business groups in developing countries to strengthen their involvement in economic policy-making to contribute to pluralism.

If you have any comments on the testimony or on the policy recommendations in the summary of findings, I would appreciate hearing from you.

cc: Carl Gershman

Enclosures

EXECUTIVE SUMMARY

On February 15, 1989 the Center for International Private Enterprise (CIPE), sponsored a conference to examine accomplishments in market-oriented approaches to economic growth in the developing world. The heart of the conference was a series of regional breakout sessions. Significant findings include:

*   **Africa** - Some reform has taken place in agriculture, but the economies are so controlled that it will take years to put meaningful reform packages into place.

*   **Latin America** - Trends toward democracy in Latin America are promising yet economic reforms have been more rhetoric than reality due to "stop and go" implementation.

*   **East Asia** - East Asia leads the world in economic growth, but in many cases it was due to well-planned government direction of the private sector. The greatest threat is the potential for increased protectionism in industrialized countries.

*   **South Asia** - Reforms in South Asia have had only a marginal impact and face opposition from powerful industrial interests that rely on governmental protection.

Selected recommendations include:

*   Channel resources through and directly to private sector organizations, and not just from government to government.

*   Concentrate on outputs and not just processes for change within the U.S. foreign assistance program.

*   Pay more attention to the sequences of long-term policy reform packages. Precede privatization by other reforms, especially deregulation, removal of exchange and price controls, and various stabilization measures.

*   Develop expertise on forming constituencies for sound economic policy in developing countries. Large informal sectors and the poor constitute unorganized yet potentially influential constituencies for change.

*   Establish a set of conditions for new funds, including U.S. foreign assistance funds and Treasury Department interventions, that are based on market oriented economics.

*   Recognize that a complex and iterative relationship exists between political and economic reforms, which are not necessarily sequential processes.

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If "what's past is prologue," then much can be learned from
attempts to engender economic growth through market-oriented
economic policy reforms during the 1980s.

On February 15, 1989 the Center for International Private
Enterprise (CIPE), a U.S. Chamber of Commerce affiliate,
sponsored a one day conference to examine accomplishments or lack
thereof in market-oriented approaches to economic growth in the
developing world.

The onset of the debt crisis in 1982 confirmed the failure
of state centered approaches to economic development and gave
rise to a new emphasis on market-oriented economics.
Privatization, deregulation, fiscal policy reforms, and private
enterprise represent new approaches to economic growth in the
developing world. Coupled with the resurgence of democracy, the
new trends have the potential to create a revolution in state-
craft.

Countries as diverse as India, Turkey, Bolivia, and the
Philippines have sought to deregulate, privatize, and stimulate
entrepreneurship. In other cases, reforms have been required by
the International Monetary Fund and private creditors as
conditions for reschedulings and access to new funds. Finally, a
number of foreign assistance programs, most notably, the U.S.
Agency for International Development, have placed new emphasis on
market economics, democratic institutions, and the private sector
in their funding strategies.

While the rhetoric of market-oriented approaches dominates
foreign assistance programs, debt reschedulings, and developing
country statements, it is time to determine whether the rhetoric
describes reality or is simply a way to gain backing for existing
practices. It is essential to determine the extent to which
reforms are taking hold and generating economic growth.

The CIPE sponsored conference probed the actual record of
accomplishments by framing the following questions:

* To what extent have specific market oriented approaches been implemented in various regions of the world?

* What effect have these approaches had on economic growth?

* Can the democracies of the developing world pursue market-oriented reform packages without risking political turmoil?

* What role should industrialized nations play in fostering market-oriented reforms and economic growth, and what role should international organizations play?

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REGIONAL TRENDS

The heart of the conference was a series of breakout sessions covering Africa, Latin America, East Asia, and South Asia. Participants in these sessions, listed on page 14, were asked to address the issues raised by the conference. The following section summarizes their views on the trends toward market oriented reforms by region. Following this section is a summary of their recommendations on the role of the industrial countries in supporting and encouraging reform efforts.

AFRICA

According to the World Bank, some 30 out of 52 Sub-Saharan African countries have implemented reform programs in recent years. While it is difficult to ascertain the scope of these reforms given the lack of reliable data, it appears that reforms have been concentrated in a few areas including exchange rate adjustments, governmental deficit reduction, the liberalizing of agricultural markets, (limited) tax reforms, and some reduction of import quotas. Such efforts tend to be the simpler types of reforms leaving the more difficult areas such as deregulation of financial and other markets, privatization, export promotion, and other reforms for the future.

Participants in the breakout session agreed that most reform efforts were driven by external factors including IMF and World Bank conditionality and the rapid decline of commodity prices rather than by genuine commitment to market oriented economic policy as a tool for growth. Indeed, there continues to be great political resistance to market reforms and a deep suspicion of the utility of markets among African political leaders and entrenched interest groups (the military, the urban labor force, government employees, and students).

Despite the fact that such economic reforms as have been implemented have resulted in immediate improvements in economic performance, the overall economic conditions facing the continent are quite adverse. In 1989, it is expected that per capita incomes will be 25 to 30 percent below 1980 levels.

The future viability of market oriented economic reforms in Africa may well depend on the success of the Nigerian Structural Adjustment Program. Nigeria is Sub-Saharan Africa's largest economy and most populated country. Having implemented most of the standard reforms, Nigeria's economic performance is being closely watched by other African governments. If Nigeria succeeds in reversing its economic decline, other governments will be under great pressure to follow suit. Should Nigeria fail to restore economic growth, others may well conclude that market oriented liberalization programs simply won't work in Africa given the continent's marginal role in the world economy and heavy dependence on single commodity exports.

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## LATIN AMERICA AND THE CARIBBEAN

Recent trends toward democracy in Latin America have led many to believe that the region is making substantial progress. However, a closer look shows that the corresponding economic reforms necessary to sustain growth and development have been more rhetoric than real. Further, political trends have turned toward populist figures as seen most recently in Jamaica, Mexico, and Venezuela with the potential for similar results in Brazil and Argentina. These populist figures, however, express a more market oriented position than they had in earlier years. Perhaps experience can be a powerful antidote.

Despite the general trends, participants agreed that significant reforms were present in some countries. Chile has shown the strongest commitment to reform through deregulation, privatization, capital market development, encouragement of foreign direct investment, and its debt-equity swap scheme. Mexico has also made some recent gains that, while far short of Chile's success, are significant. These include opening markets to imports, joining the GATT, limited privatization, liberal treatment of foreign investment, and lowering inflation. Colombia is the one country that has serviced its foreign debt as a result of sound policies in some areas including consistent foreign exchange controls and relatively sound monetary and tax policy. Bolivia and Jamaica complete the list of countries that have shown some commitment to reform which, especially in Bolivia, have turned the economy around.

With the exception of these five countries, reform in the rest of the Hemisphere has been rhetorical with little effort shown to institutionalize policy change. The "stop and go" nature of reforms that are announced one day and abrogated shortly thereafter, however, may simply be the first phase of the reform process.

A variety of obstacles were cited by participants to the implementation of reforms in Latin American countries. Brief political terms of office, for example, result in a short term outlook. Conditions for new funds from the IMF and others have fostered rhetoric and, in some cases, reforms that have damaged market performance. Further, the lack of a constituency for market-oriented reforms coupled with strong centralized governments and the lack of access to appeal before the law have rendered such reforms as have been made excessively fragile.

## EAST ASIA

The East Asian region clearly leads the world in economic growth with the newly industrializing economies of Hong Kong, Singapore, South Korea, and Taiwan (the four tigers) registering very high, sustained growth rates. In addition, Thailand is moving toward the same status having achieved an 11 percent

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growth rate last year. The economies of The Philippines, Malaysia, and, to a lesser extent, Indonesia have also demonstrated impressive gains in recent years. Even the People's Republic of China presents a real sense of progress following the liberalization measures of recent years.

Participants in the break-out session disagreed to some extent about the degree to which market oriented reforms were responsible for these impressive gains versus central government planning and direction of the economy. South Korea, Singapore, and Taiwan all benefitted from very well planned government direction of the private sector based on incentives, export promotion policies, and especially in the case of South Korea, government industrial targeting. In these countries, the state-owned enterprises became quite profitable having been run along commercial lines with a minimum of political involvement unlike the experience in most other developing countries.

At the same time, the four tigers also followed some market oriented norms in the areas of tax, interest and exchange rate policies, incentives, and, to a large extent, competitive markets outside of the targeted industrial areas.

Thailand and Hong Kong, however, have been following a pattern much closer to the pure market oriented model. While the Thai economy has registered lower rates of growth than the tigers, most observers doubt that the Thai government had the administrative capability or cohesive socio-political system to follow the South Korean model. The Philippines and, to a much lesser extent, Indonesia are now pursuing many of these same market oriented reforms including breaking up the monopolies, abolition of restrictive licensing agreements, liberalization of foreign exchange rates, and the like. In all three cases, strong economic growth has followed.

Today, there is greater movement toward market oriented reform throughout the region as even the four tigers begin to adopt more open market type policies in order to maintain the achievements of recent years. The greatest danger to sustained economic growth is the potential for increased protectionism in the U.S. and European markets and the need to reduce trade barriers in Japan. As trading nations, the Pacific Rim countries require continued access to large open markets in order to sustain their remarkable success stories.

## SOUTH ASIA

Although the five nations of the South Asian region have been pursuing some market oriented reform measures in recent years, these reforms have had only a marginal impact on the overall statist thrust of the their economies. The single exception was Sri Lanka's quite successful liberalizations which, however, have been overtaken by the surge in ethnic violence. For the most part, the reforms that have been implemented,

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particularly in India, primarily affect deregulation of licensing
arrangements, import controls, and removal of some barriers
affecting domestic entry into markets. In effect, a license or
permit that used to take two years to obtain, can now be obtained
in one year but it still requires the cultivation and active
cooperation of the bureaucracy. The slow pace of reform is
further emphasized by the continued emigration of South Asians to
other parts of the world once they have completed their training
and education.

For the most part, market reforms face daunting obstacles in
the South Asian region, particularly in India and Pakistan. The
strong central planning and import-substitution policies have
created large numbers of quite powerful industrial interests that
rely on governmental protection for their existence. These
entrenched interests, combined with a subsidized agricultural
sector, have managed to slow the pace of reform with the
assistance of mid-level governmental authorities.

One of the anomalies of the Indian scene is the rapid growth
of the small scale sector. In the period since 1980, there has
been an increase of seven percent in industrial production while
the small scale sector has grown by eleven percent. The puzzling
factor is that the Indian government spent some twenty years
encouraging the growth of small enterprises with limited success.
Once deregulation, albeit of a marginal nature, began to be put
into place to encourage industrial growth, the small scale sector
began to take-off.

In the sub-continent, participants emphasized, market
oriented reforms must have local sponsorship in order to succeed.
There is a deep set resistance to the type of conditionality
packages being sponsored by the IMF or the donor agencies. This
may explain some of the successes the Japanese have had in recent
years since their tied aid and mixed credits programs accept the
existing policy environment as long as the recipient governments
prove amenable to purchase of Japanese goods and welcome some
Japanese investments. Given this environment, market oriented
reforms will take far longer to catch-on in the South Asian
region than in other parts of the developing world.

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# SUMMARY OF RECOMMENDATIONS

One of the questions posed to participants during the CIPE sponsored conference was: "What role should industrialized nations play in fostering market-oriented reforms and economic growth, and what role should international organizations play?" The participants views are summarized below and are grouped under major headings for ease of presentation. When possible, many of the recommendations were combined into a single statement given their similar natures.

## FOREIGN ASSISTANCE STRATEGIES

In designing a new foreign assistance program, the Task Force Report emphasized the need for "provision of greater flexibility in the implementation of foreign assistance programs, provisions of more effective accountability focusing on results rather than on allocations alone, and improving coordination with other U.S. international economic policies, with other donors, and within country programs." The following recommendations contain some approaches to these extremely important ends.

1. Channel resources through and directly to private sector organizations, and not just from government to government. Non-governmental organizations, business associations, think tanks and businesses may be more efficient and productive implementers on both the U.S. and host country sides.

2. Concentrate on outputs and not just processes for change within the U.S. foreign assistance program. More information is required on the beneficiaries of assistance and how it changes their lives.

a. Establish an index of economic freedoms to be used in analyzing results of the pluralism goal.

b. Develop a central data bank on the degree to which countries implement market oriented reforms as a means of tracking progress on a sustained basis.

c. Encourage the development of local research organizations capable of providing economic statistics and other information useful in helping to evaluate the success of reform programs.

3. Use international institutions or non-Western nations as a role model. Where nationalist pressures render advice from the developed countries suspect and indigenous support for reform is weak, engage institutions or nations to which the countries can relate. In the case of South Asia, for

8

instance, experts and policy makers from Thailand or Malaysia might be more effective than U.S. experts in promoting policy reform.

4. Enlist the aid of expatriates around the world who have an interest in the economic progress in their countries and can provide insight into how to handle indigenous bureaucracies.

5. Ensure coordination between the public and private sectors in attaining U.S. foreign assistance goals. Coordination between the public and private sectors has often been given only passing notice in the foreign assistance bureaucracy, particularly at the mission level. One model worth looking at is the U.S. Advisory Commission on Public Diplomacy which provides a similar function for USIA. To be effective, however, the mechanism must be mandated by law and must not be made up exclusively of firms doing business with the new foreign assistance agency.

6. Provide greater flexibility in the recruitment of permanent and short-term employees into mid and upper career level positions. It will be essential, as pointed out in the Task Force Report, to attract talented and experienced individuals into the foreign assistance program. Moreover, this must explicitly include recruitment of private sector personnel with a strong background in market economics and hands-on business experience.

7. Provide indepth training and education programs for U.S. and multilateral development institutions on market economics, business principles, and business organizations. While there are outstanding career personnel with extensive backgrounds, implementation of the foreign assistance program's private enterprise directive has been hampered by the lack of a sufficient number of trained personnel to accomplish the objectives.

## TECHNIQUES FOR POLICY REFORM

As noted in the preceding regional summaries, there has been far more rhetoric than reality in the trends toward market oriented reform in the developing world. Given the pressures resulting from the debt crisis, declining standards of living, and rise of populist leaders in many countries, time may be running out for efforts to restore economic growth in the developing world. If the U.S. foreign assistance program is to be of assistance to developing countries, the subject of policy reform must be treated with sophistication and expertise. The following recommendations suggest areas in which greater effort is needed.

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of the linkages between the Task Force Report's goals of
pluralism, economic growth, and poverty alleviation.

13. Shift donor attention away from exclusively policy oriented activities to an approach that emphasizes capacity building and dialogue as well as policy. There needs to be movement towards second-order issues that emphasize institutional structures such as legal systems and governmental institutions. This will involve providing technical assistance on reforming investment codes, labor laws, and other legal codes that facilitate private sector activity.

14. Support efforts to increase developing country government's economic reporting and analysis functions. Much of the statistical reporting from developing countries is unreliable or deliberately distorted. Not only does this affect business activity within a country but it reduces the foreign assistance agencies' ability to support reform efforts.

15. Encourage the adoption of mechanisms for feedback from the public into the governmental policy process. Feedback mechanisms such as freedom of access to governmental information, sunset laws, comment and notice periods, regulatory hearings, cost/benefit analyses, environmental impact statements, and other common practices of government in developed countries are largely missing in the developing world. Such governance practices should be included in the policy dialogue and policy reform programs advocated by the U.S. foreign assistance program.

## BUILDING CONSTITUENCIES FOR ECONOMIC CHANGE

To sustain market economic reforms, much greater attention must be paid to building indigenous support for the reform process. A large natural constituency for economic reform already exists in the developing world. This constituency is made up of informal entrepreneurs, small businesses and the poor who stand to gain the most from economic reform. This is an idea that goes against the grain of current developmentalist wisdom, which seems to assume that economic reform worsens the plight of the poor.

The challenge is to organize and activate this constituency. In part this will be a by-product of the correct implementation of the sequences of reforms as mentioned above (#9). As the immediate beneficiaries become more aware of how reforms can be in their own economic interest (i.e. farmers receiving market prices as a result of elimination of marketing boards), active support for reform will increase. However, in most cases, the business elites who benefit from the status quo and oppose structural reform are well organized, while the true beneficiaries remain unorganized. This underscores the

11

importance of efforts to coalesce and activate the constituency
as a positive force for policy reform.

16. Develop expertise on forming constituencies for sound economic policy in developing countries. Too often foreign assistance agencies advocate policies for which no local support groups exist; without them, long-term shifts toward market-oriented policies cannot be sustained. Developing the appropriate expertise will require greater sensitivity to the public policy process and to the role of local, private sector constituency groups.

17. Achieve political consensus on reforms based on an open national debate. Recipient governments should be encouraged to encourage debate and the formation of a national consensus on reforms so that they have support from local groups that ultimately will be affected by the policies.

18. Include freedom of the press, especially the business press, as a key element in reform packages. Without a free media, it is much more difficult for those outside of government to gain access to information, debate the wisdom of economic policy, or conduct business based on reliable information. Efforts to improve reporting of economic issues should also be included through economic education programs for reporters and editors.

19. Increase funding and support for private sector organizations that advocate market oriented economics and the development of pluralism. The work of think tanks like the Institute for Liberty and Democracy in Peru has shown that a constituency for market oriented economic reform exists if properly approached. Governments should encourage the active participation of the private sector in the economic policy-making process through think-tanks, chambers of commerce, and small business organizations.

20. Promote indigenous education at a basic level on private enterprise and economics. In many countries, there is lack of knowledge in the basic principles of economics and a common feeling that free markets cannot work. Basic education in these areas, could have considerable impact. In light of the many obstacles to reform and the long term nature of the development process, it is vital to increase access to information.

21. Provide increased educational and training programs for disciplines such as political economists. Do not train just the scientists who will become frustrated by the "backwardness" of their home countries, but train political economists who can encourage a new way of thinking about reform and have the skills needed to develop indigenous reform programs.

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22. Make an effort to find, enhance, and boost responsible private sector leaders. As the local private sector emerges and demonstrates a degree of sophistication and concern for the country's progress, there will be less identification in the public's mind with foreign intrusion. (Note: existing USIA and AID training and exchange programs pay far too little attention to the private business sector to the detriment of both the U.S. and the host country.)

TRADE AND INVESTMENT PROMOTION

Over the last several decades there has been tremendous
resistance to foreign investment among host governments and a
feeling on the part of many in the U.S. government that business
promotion was not an appropriate function for diplomatic and
foreign assistance personnel. As a result of the Third World
debt crisis and the U.S. balance of trade deficit, both sides are
taking a fresh look at the role of trade and investment in
promoting economic growth and development. The recently released
report from U.S. A.I.D. entitled "Development in the National
Interest" makes a strong case that U.S. firms operating abroad
carry out an important economic growth function in developing
societies. The following recommendations reflect that belief.

23. Expand programs like the Trade and Development Program (TDP) to fund some of the costs of industries entering developing nations to explore opportunities. The up-front costs to an investor of entering a developing country, creating a scheme and executing it are tremendous. Foreign assistance funds could be used to encourage private sector development in a competitive way.

24. Establish a mixed credits and tied aid program within the new foreign assistance agency with the teeth to force compliance on a par with the existing practices of the other OECD nations. Studies by the GAO and the Ex-Im bank that are due to be released will verify that most OECD countries are using between 17 and 45 percent of their aid funds for capital projects involving their national firms. Clearly the U.S. government's negotiating strategy has not worked and should be replaced with a more assertive policy.

25. Require U.S. Embassies to develop a functional working relationship with the indigenous bureaucracies and to facilitate the entry of U.S. firms into these markets. To do business in many parts of the developing world, it is imperative that foreign investors have the sponsorship of the indigenous bureaucracies and understand the systems within which they are operating. The "flexibility" is there, if outside actors are persistent and know how to make it work.

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CONDITIONALITY

With the onset of the debt crisis some seven years ago, the practice of setting conditions for new borrowings and/or grants became wide spread as the IMF and other public and private sources attempted to prod governments into stabilization programs. However, conditionality has a mixed record since many of the market oriented reforms that are announced by debtors, particularly those in Latin America, have a very short life span. While conditionality is not popular with the target governments and populations, participants felt that they were essential in many cases and offered some recommendations for improving the use of this tool. Although many of the recommendations are directed at the IMF and the World Bank, the U.S. foreign assistance program would be able to make some use of conditionality if the Task Force's recommendations regarding the Economic Support Fund and a general increase in flexibility in use of aid are followed.

26. Establish a set of conditions for new funds, including U.S. foreign assistance funds and Treasury Department interventions, that are based on market oriented economics. Set clear performance markers before aid is disbursed. If these are not met, then discontinue it.

27. Use conditionality judiciously with an awareness of mutual needs and of the political realities within developing countries.

28. There cannot be debt relief without conditionality. Without conditionality, there is no reason for governments to make permanent reforms. Without them, the same poor conditions will exist that were present before these countries became indebted.

29. Require that IMF, World Bank, and other donor conditions for new funding and/or debt relief be available to the public within the country in question. This would include both the original donor/lender conditions and the subsequent negotiations and options available. Public debate will lead greater understanding and support for the final package and lessen the oft repeated charges of imperialism.

The U.S. Chamber of Commerce is the world's largest federation of business companies and associations and is the principal spokesman for the American business community. It represents nearly 180,000 businesses and organizations, such as local/state chambers of commerce and trade/professional associations.

More than 92 percent of the Chamber's members are small business firms with fewer than 100 employees, 59 percent with fewer than 10 employees. Yet, virtually all of the nation's largest companies are also active members. We are particularly cognizant of the problems of smaller businesses, as well as issues facing the business community at large.

Besides representing a cross section of the American business community in terms of number of employees, the Chamber represents a wide management spectrum by type of business and location. Each major classification of American business—manufacturing, retailing, services, construction, wholesaling, and finance—numbers more than 10,000 members. Yet no one group constitutes as much as 32 percent of the total membership. Further, the Chamber has substantial membership in all 50 states.

The Chamber's international reach is substantial as well. It believes that global interdependence provides an opportunity, not a threat. In addition to the 59 American Chambers of Commerce Abroad, an increasing number of members are engaged in the export and import of both goods and services and have ongoing investment activities. The Chamber favors strengthened international competitiveness and opposes artificial U.S. and foreign barriers to international business.

Positions on national issues are developed by a cross section of its members serving on committees, subcommittees and task forces. Currently, some 1,800 business people participate in this process.

**Statement of Cash Flows** - The Endowment has adopted implementation of the Financial Accounting Standards Board Statement No. 95 - Statement of Cash Flows using the indirect method for purposes of presenting its 1988 financial statements. The statement of changes in financial position for the year ended September 30, 1987 has been restated to conform to the current year statement of cash flow presentation.

### 3. PROPERTY

Property less accumulated depreciation and amortization as of September 30, 1988 and 1987, is as follows:

<table><thead><tr><th></th><th>1988</th><th>1987</th></tr></thead><tbody><tr><td>Furniture and equipment</td><td>$219,771</td><td>$160,186</td></tr><tr><td>Equipment under capital lease</td><td>110,219</td><td>109,164</td></tr><tr><td>Total</td><td>329,990</td><td>269,350</td></tr><tr><td>Less accumulated depreciation and amortization</td><td>(99,732)</td><td>(53,526)</td></tr><tr><td>Property, net</td><td>$230,258</td><td>$215,824</td></tr></tbody></table>

### 4. GRANTS RECEIVABLE

Grants receivable from the U.S. Government represent unexpended balances of Federal Reserve Letters of Credit established to fund USIA and USAID grant agreements.

The Endowment collects U.S. Government funds by presenting payment vouchers against such letters of credit when it disburses cash for program grants and administrative costs. The Endowment requests cash to fund its operations as needed.

### 5. GRANTS PAYABLE

Grants payable represent the undisbursed balances of funds obligated to the Endowment's grantees. Grantee organizations are entitled to collect grant funds as needed by presenting requests for funds to the Endowment.

### 6. DEFERRED GRANT REVENUE

The following summarizes the changes in deferred grant revenue for the years ended September 30, 1988 and 1987:

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<table><thead><tr><th></th><th>1988</th><th>1987</th></tr></thead><tbody><tr><td>Balances, beginning of year</td><td>$ 1,614,318</td><td>$ 211,866</td></tr><tr><td>Additions:</td><td></td><td></td></tr><tr><td>Agency for International<br>Development</td><td>500,000</td><td>1,605,000</td></tr><tr><td>Deductions:</td><td></td><td></td></tr><tr><td>Obligations</td><td>(1,440,895)</td><td>(202,548)</td></tr><tr><td>Balances, end of year</td><td>$ 673,423</td><td>$1,614,318</td></tr></tbody></table>

Included in the deferred revenue balance at September 30, 1988 and 1987 are grant funds awarded to the Endowment by USAID of $500,000 and $605,000, respectively. USAID has restricted the use of these funds to provide support for a program to build Democratic Institutions in South Africa. Also included in the September 30, 1987 balance is a $1,000,000 grant from USAID for support of The Independent Polish trade union "Solidarity." Deferred revenue at September 30, 1987 was recognized as revenue in fiscal year 1988 when the Endowment incurred an obligation to a grantee for these funds. The deferred revenue at September 30, 1988 will be recognized as revenue when the Endowment incurs valid obligations in accordance with the purposes set forth in the grant agreement.

## 7. RELATED PARTIES

The Endowment awards grants to various organizations to be used for programs which the Board of Directors determines are consistent with the purposes of the Act. Some of the organizations which submit proposals and are awarded funds have members of their Board of Directors represented on the Board of Directors of the Endowment.

Article VI, Section V of the Endowment's bylaws provides that any board member who is an officer or director of an organization seeking to receive grants from the Endowment must abstain from considering and voting on such grant. This provision shall not prevent any director from supplying factual information the Board requests.

## 8. COMMITMENTS

Minimum future payments under capital leases and purchase agreements of equipment as of September 30, 1988 are as follows:

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Year ending September 30

<table><tbody><tr><td>1989</td><td style="text-align: right;">$ 27,305</td></tr><tr><td>1990</td><td style="text-align: right;">23,579</td></tr><tr><td>1991</td><td style="text-align: right;">20,649</td></tr><tr><td>1992</td><td style="text-align: right;">20,649</td></tr><tr><td>1993</td><td style="text-align: right; border-bottom: 1px solid black;">17,208</td></tr><tr><td>Total minimum lease payments</td><td style="text-align: right;">109,390</td></tr><tr><td>Less amounts representing interest</td><td style="text-align: right; border-bottom: 1px solid black;">(23,899)</td></tr><tr><td>Total obligations under capital lease</td><td style="text-align: right;">85,491</td></tr><tr><td>Less current portion of obligations</td><td style="text-align: right; border-bottom: 1px solid black;">(17,820)</td></tr><tr><td>Long-term obligations</td><td style="text-align: right; border-bottom: 3px double black;">$ 67,671</td></tr></tbody></table>

The endowment has a noncancelable operating lease for office space which expires in 1990. Lease expense was approximately $122,000 and $101,000 for the year ended September 30, 1988 and 1987, respectively. Future obligations for fiscal year 1989 and 1990 under this lease are $128,643 and $44,133, respectively. In addition, the lease includes a provision for rent escalations to compensate for increases in operating costs.

## 9. INCOME TAXES

The Endowment is exempt from federal income taxes under Section 501(c)(3) of the U.S. Internal Revenue Code and has been classified as an organization that is not a private foundation under Section 509(a).

## 10. RETIREMENT PLAN

The Endowment has a defined contribution annuity plan for all its employees under which the Endowment contributes a percentage of eligible employees' annual earnings to individually owned tax-deferred annuity contracts. The Endowment's contribution to the plan is based on 10% of an eligible employee's annual earnings. Costs of the plan for the years ended September 30, 1988 and 1987 were approximately $44,645 and $41,900, respectively.

## 11. RESTRICTED CASH

The cash balance at September 30, 1988 includes $1,260,750 of restricted cash from USAID appropriations for use in Poland and Chile.

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## National Endowment for Democracy

### Staff and Consultants

#### Office of the President

Carl Gershman, President

Diane M. Bettge, Director of Public Affairs

Tess Condor, Secretary to the President

Kim McBee, Staff Assistant

#### Program Section

Marc F. Plattner, Director of Program

Barbara E. Haig, Deputy Director of Program

Adelina Reyes-Gavilan, Senior Program Officer,
Latin America

Nadia Diuk, Senior Program Officer, Eastern Europe
and the Soviet Union

Susan Johnson, Senior Program Officer

Kate Kauffman, Program Officer

Dave Peterson, Program Officer

Sarah K. Schneewind, Program Administrator

Luis Aguilar, Consultant, Latin America

Steven MacDonald, Consultant, Africa

Carrington Cunningham, Program Assistant

Mimi McDaid, Program Secretary

Silvia Gonzalez, Program Secretary

Will Pyle, Intern

#### Finance Section

Joseph Cooper, Jr., Comptroller

Diane Merchant, Internal Auditor

Rosa Canales, Accountant

Kae Guthrie, Assistant to the Comptroller

Mazie Taylor, Finance Secretary

#### Corporation Counsel

Ross, Dixon and Masback

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