Testimony of Marc I. Holtzman

Before the Joint Economic Committee

The Economy in the 21st Century:

A Perspective from Eastern Europe and the Commonwealth of Independent States

June 12, 1995

Mr. Chairman, Members of the Committee, thank you for this opportunity to share my views and perspectives from Eastern Europe and the new nations of the Commonwealth of Independent States (CIS). As an American living and working in the region since mid- 1989, I have had the privilege of witnessing, first hand, economically tumultuous and historically unprecedented changes. In spite of frequent setbacks and frustrations, these countries have made considerable and impressive progress as we move toward the 21st century.

America's role in the 21st century economy of Eastern Europe and the CIS is still uncertain. Actions and policies pursued today will have considerable influence over whether American commercial and trade interests will potentially play a dominant role in the development of these dynamic economies. The economic outlook for the region is still unclear. More importantly, if American policy and the American private sector fail to aggressively inspire and solidify the development of free market economies, it is unlikely that anyone else will.

The opportunities in this part of the world are enormous. Let us look at Russia first, as it is the most dominant country in the region. Despite Chechnia and other setbacks, tremendous progress has been realized on the road to free market economy. Thanks to visionary policies (first launched by the Czech's) under now Prime Minister Vaclav Klaus and later used as the model for Russia's initial reform effort, today almost seventy-five percent of Russians work in the private sector. The market capitalization of all Russian industry is valued as little more than $20 billion. This compares with Exxon which has a market capitalization of more than $75 billion. Much more needs to be done for Russia's emerging capital markets to attract the necessary investment capital. When you consider the value of Russia's natural resources alone, it does not make sense that assets should be priced so inexpensively in an equity market. The opportunities are incredible! Of course, there are many frustrations and challenges to doing business in Russia, but the rewards can be very satisfying.

In spite of the forward movement, we are at a pivotal crossroad. This is perhaps the most delicate time in Russia's transition. The reforms and privatization efforts launched in 1993 have done much to set Russia on a course toward a market economy. However, there is still much to be done. The population needs to see more tangible results of this effort. The new wealth being created is still not as evenly distributed as it should to maintain popular support. Events unfolding today will in large part determine the shape of the first part of the next century. Will this part of the world grow, proper and become an important producer and consumer in the 21st century? Or, will this become the next battleground for political instability and economic chaos? Our actions today are likely to significantly influence the outcome.

There are two strong arguments for dramatically increasing and encouraging the American private sector's economic presence in Eastern Europe and the CIS. The first case can be expressed in term of morality. It is the right thing to do. The American ideal is overwhelmingly the cultural, social and economic model for the peoples of this region. An economically more secure and prosperous society in the next century will inevitably mean that our world will be a safer place.

However, from a practical point of view, commercial and consumer relationships being forged and built today will determine the shape of the economic landscape of the next century. Two years ago, a thirty second nationwide television commercial in Russia cost approximately $2,000. Today the cost has creased by more than ten times. A similar commercial in the United States can cost more than $100,000. Proctor and Gamble, Mars and other farsighted American companies realize that this is a once in a lifetime opportunity to establish brand loyalty and a customer base at a relatively low cost. One tenth of the population of the Earth live in the nations of Eastern Europe and the CIS. They comprise one of the largest potential consumer groups in the world.

American participation, to date, has been painfully inadequate. Since no other force in the world is capable of leading the way, we must do more. The role we play today will determine how these nations evolve. One way or another, the result will leave a major imprint on the economy of the next region. Economic growth, trade development and peace would give way to violence stagnation and a significant threat to our own security.

What could the 21st century look like if we do the right thing today? Like some other developing nations, the countries of Eastern Europe and the CIS are an emerging market, but these countries are not a developing society. While democratic institutions and ideas may be new, in many respects, these are highly developed societies. Educational standards are high; literacy rates exceed those of Great Britain.

Imagine if Eastern Europe and the CIS follow Poland's example. The Economist recently called Poland "Europe's Tiger". GDP has been growing at least 5% per annum since 1993. All the key economic indications point toward healthy and sustained growth.

In order to fully appreciate the earth shaking changes occurring in the region, it is important to appreciate that there are actually three economies operating together. First, you have the state sector. Many parts of the state sector have been successfully privatized. Banks, factories, shops and restaurants, across the board, have been privatized and restructured and are healthy economic forces today. The key is to put these businesses in the hands of the private sector. there is still much ahead to be privatized, including utilities, telecoms and other large companies. What is left will be partly comprised of dinosaur type, antiquated companies with little chance of a bright future.

The second sector is the underground economy. This includes the unreported economy and is more of a transitional phenomenon. The third sector, and most vital, is the newly emerging private economy. This is the hope of the future.

Our work is almost entirely focused on the private sector. My colleagues and I take great pride in having raised more than $100 million in investment and having created thousands of new jobs.

Mr. Chairman, America is the model and the example of hope for these people. I constantly encounter people who look at us with great admiration. It makes one proud, but also mindful of the responsibility we have.

Change is so ever present, that it is the order of the day. Most importantly, attitudes are improving. Nothing can better express how the mindset has changed than the closing paragraph from an article about Lenin's tomb from the front page two weeks ago of Argumenty I Fakty, the largest circulation newspaper in Russia.

"But what is to be done with the mausoleum? Closing the tomb wouldn't do any good and burying the body is not enough. The only way, according to Christian rules for Satanism, is to burn his body and all the books he wrote. Perhaps then Russia would be freed of suffering."

This challenge is more than a once in a century opportunity. The seismic shifts changing our world will make this era as historically important as the Renaissance or event the industrial revolution. We are blessed to be alive in this fascinating time. I pray that we have the collective insight and will to rise to the challenge.

Thank you.