INTRODUCTION

Mr. Chairman, as we face a new century, we face a new world. A world where technology, especially information technology, develops and spreads at lightning speed -- and becomes obsolete just as fast. A world of increasing economic integration, where a U.S. company designs a product in Des Moines, makes it in Mumbai, and sells it in Sydney. A world where nation-states remain the most important and powerful players, but where multinational corporations, nongovernment organizations, and even individuals can have a dramatic impact.

This new world harbors the residual effects of the Cold War -- which had frozen many traditional ethnic hatreds and conflicts within the global competition between two superpowers. Over the past 10 years they began to thaw in Africa, the Caucasus, and the Balkans, and we continue to see the results today.

It is against this backdrop that I want to describe the realities of our national security environment in the first year of the 21st century: where technology has enabled, driven, or magnified the threat to us; where age-old resentments threaten to spill-over into open violence; and where a growing perception of our so-called "hegemony" has become a lightning rod for the disaffected. Moreover, this environment of rapid change makes us even more vulnerable to sudden surprise.

TRANSNATIONAL ISSUES

Mr. Chairman, bearing these themes in mind, I would like to start with a survey of those issues that cross national borders. Let me begin with the proliferation of weapons of mass destruction (or WMD) -- an issue of particular concern to this Committee today.

We have witnessed continued missile development in Iran, North Korea, Pakistan, and India. Add to this the broader availability of technologies relevant to biological and chemical warfare, nuclear tests in South Asia, as well as continuing concerns about other nuclear programs and the possibility of shortcuts to acquiring fissile material. We are also worried about the security of Russian WMD materials, increased cooperation among rogue states, more effective efforts by proliferants to conceal illicit activities, and growing interest by terrorists in acquiring WMD capabilities.

Our efforts to halt proliferation are complicated by the fact that most WMD programs are based on dual-use technologies and materials that have civil as well as military applications. In addition, a growing trend toward indigenous production of weapons of mass destruction-related equipment decreases, to some extent, the effectiveness of sanctions, interdictions, and other tools designed to counter proliferation.

Although U.S. intelligence is increasing its emphasis and resources on many of these issues, there is continued and growing risk of surprise. We focus much of our intelligence collection and analysis on some ten states, but even concerning those states, there are important gaps in our knowledge. Our analytical and collection coverage against most of these states is stretched, and many of the trends that I just noted make it harder to track some key developments, even in the states of greatest intelligence focus.

Moreover, we have identified well over 50 states that are of concern as suppliers, conduits, or potential proliferants.

The Missile Threat

Let's look first at the growing missile threat. We are all familiar with Russian and Chinese capabilities to strike at military and civilian targets throughout the United States. To a large degree, we expect our mutual deterrent and diplomacy to help protect us from this, as they have for much of the last century.

Over the next 15 years, however, our cities will face ballistic missile threats from a wider variety of actors -- North Korea, probably Iran, and possibly Iraq. In some cases, this is because of indigenous technological development, and in other cases, because of direct foreign assistance. And while the missile arsenals of these countries will be fewer in number, constrained to smaller payloads, and less reliable than those of the Russians and Chinese, they will still pose a lethal and less predictable threat.

• North Korea already has tested a space launch vehicle, the Taepo Dong-1, which it could theoretically convert into an ICBM capable of delivering a small biological or chemical weapon to the United States, although with significant inaccuracies. It is currently observing a moratorium on such launches, but North Korea has the ability to test its Taepo Dong-2 with little warning; this missile may be capable of delivering a nuclear payload to the United States.

• Most analysts believe that Iran, following the North Korean pattern, could test an ICBM capable of delivering a light payload to the United States in the next few years.

• Given the likelihood that Iraq continues its missile development -- we think it too could develop an ICBM capability sometime in the next decade with the kind of foreign assistance I've already discussed.

The Biological and Chemical Threat

Against the backdrop of this increasing missile threat, the proliferation of biological and chemical weapons takes on more alarming dimensions. Biological and chemical weapons pose, arguably, the most daunting challenge for intelligence collectors and analysts. Conveying to you an understanding of the work we do to combat this threat is best dealt with in closed session, but there are some observations and trends that I can highlight in this unclassified setting.

• First, the preparation and effective use of biological weapons (BW) by both potentially hostile states and by non-state actors, including terrorists, is harder than some popular literature seems to suggest. That said, potential adversaries are pursuing such programs, and the threat that the United States and our allies face is growing in breadth and sophistication.

• Second, we are trying to get ahead of those challenges by increasing the resources devoted to biological and chemical weapons and by forging new partnerships with experts outside the national security community.

• Third, many of our efforts may not have substantial impact on our intelligence capabilities for months or even years. There are, and there will remain, significant gaps in our knowledge. As I have said before, there is continued and growing risk of surprise.

Some countries are pursuing an asymmetric warfare capability and see biological and chemical weapons as a viable means to counter overwhelming U.S. conventional military superiority. Other states are pursuing BW programs for counterinsurgency use and tactical applications in regional conflicts, increasing the probability that such conflicts will be deadly and destabilizing.

Beyond state actors, there are a number of terrorist groups seeking to develop or acquire biological and chemical weapons capabilities. Some such groups -- like Usama bin Ladin's -- have international networks, adding to uncertainty and the danger of a surprise attack. There are fewer constraints on non-state actors than on state actors. Adding to the unpredictability are the "lone militants," or the ad hoc groups here at home and abroad who may try to conduct a biological and chemical weapons attack. Nor should we forget that biological weapons attacks need not be directed only at humans. Plant and animal pathogens may be used against agricultural targets, creating both potential economic devastation and the possibility that a criminal group might seek to exploit such an attack for economic advantage.

One disturbing trend that numbers alone do not reveal is that BW programs in particular are becoming more dangerous in a number of ways.

• First: As deadly as they now are, BW agents could become even more sophisticated. Rapid advances in biotechnology present the prospect of a new array of toxins or live agents that require new detection methods, preventative measures, and treatments. And on the chemical side, there is a growing risk that new and difficult-to-combat agents will become available to hostile countries or sub-national groups.

• Second: BW programs are becoming more self-sufficient, challenging our detection and deterrence efforts, and limiting our interdiction opportunities. Iran, for example -- driven in part by stringent international export controls -- is acquiring the ability to domestically produce raw materials and equipment to support indigenous biological agent production.

• Third: Countries are taking advantage of denial and deception techniques, concealing and protecting BW and CW programs. BW in particular lends itself to concealment because of its overlap with legitimate research and commercial biotechnology. The technologies used to prolong our lives and improve our standard of living can quite easily be adapted to cause mass casualties. Even supposedly "legitimate" facilities can readily conduct clandestine BW research and can convert rapidly to agent production, providing a mobilization or "breakout" capability.

• Fourth: Advances are occurring in dissemination techniques, delivery options, and strategies for BW and CW use. We are concerned that countries are acquiring advanced technologies to design, test, and produce highly effective munitions and sophisticated delivery systems.

Nuclear Proliferation

Turning now to nuclear proliferation, the growing threat is underscored by developments in South Asia, where both India and Pakistan are developing more advanced nuclear weapons and moving towards deployment of significant nuclear arsenals.

Iran also aspires to have nuclear weapons and Iraq probably has not given up its unclear ambitions despite a decade of sanctions and inspections.

Nor dare we assume that North Korea is out of the business just because the Agreed Framework froze Pyongyang's ability to produce additional plutonium at Yongbang.

Nuclear Security and Smuggling

I would like to turn now to a discussion of the problem of nuclear security and smuggling. We are concerned about the potential for states and terrorists to acquire plutonium, highly-enriched uranium, other fissile materials, and even complete nuclear weapons. Acquisition of any of the critical components of a nuclear weapons development program -- weapons technology, engineering know-how, and weapons-usable material -- would seriously shorten the time needed to produce a viable weapon.

The list of potential proliferators with nuclear weapons ambitions is not limited to states, however. Some non-state actors, such as separatist and terrorist groups, have expressed an interest in acquiring nuclear or radiological weapons.

Fortunately, despite press reports claiming numerous instances of nuclear materials trafficking, we have no evidence that any fissile materials have actually been acquired by a terrorist organization. We also have no indication of state-sponsored attempts to arm terrorist organizations with the capability to use any type of nuclear materials in a terrorist attack. That said, there is a high risk that some such transfers could escape detection and we must remain vigilant.

Similarly, we have no evidence that large, organized crime groups with established structures and international connections are -- as yet -- involved in the smuggling of nuclear materials. It is the potential that such involvement may occur, or may be ongoing -- yet undetected -- that continues to be a concern.

Suppliers Of WMD Technology

Let us now look at the countries who are the suppliers of WMD-related weapons technology.

Russian and Chinese assistance to proliferant countries has merited particular attention for several years. Last year, Russia announced new controls on transfers of missile-related technology. There have been some positive signs in Russia's performance, especially in regard to transfers of missile technology to Iran. Still, expertise and materiel from Russia has continued to assist the progress of several states.

The China story is a mixed picture. China has taken steps to improve its nonproliferation posture over the last few years through its commitments to multilateral arms control regimes and promulgation of export controls, but it remains a key supplier of WMD-related technologies to developing countries.

There is little positive that can be said about North Korea, the third major global proliferator, whose incentive to engage in such behavior increases as its economy continues to decline. Successes in the control of missile technology -- for example, through the Missile Technology Control Regime -- have created a market for countries like North Korea to exploit illicit avenues for conducting sales activities in this area. Missiles, and related technology and know-how, are North Korean products for which there is a real market. North Korea's sales of such products over the years have dramatically heightened the missile capabilities of countries such as Iran and Pakistan.

While Russia, China, and North Korea continue to be the main suppliers of ballistic missiles and related technology, long-standing recipients -- such as Iran -- might become suppliers in their own right as they develop domestic production capabilities. Other countries that today import missile-related technology, such as Syria and Iraq, also may emerge in the next few years as suppliers.

Over the near term, we expect that most of their exports will be of shorter range ballistic missile-related equipment, components, and materials. But, as their domestic infrastructures and expertise develop, they will be able to offer a broader range of technologies that could include longer-range missiles and related technology.

Mr. Chairman, the problem may not be limited to missile sales; we also remain very concerned that new or nontraditional nuclear suppliers could emerge from this same pool.

Potential for Surprise

This brings me to a new area of discussion: that more than ever we risk substantial surprise. This is not for a lack of effort on the part of the Intelligence Community; it results from significant effort on the part of proliferators.

There are four main reasons.

• First and most important, proliferators are showing greater proficiency in the use of denial and deception.

• Second, the growing availability of dual-use technologies is making it easier for proliferators to obtain the materials they need.

• Third, the potential for surprise is exacerbated by the growing capacity of countries seeking WMD to import talent that can help them make dramatic leaps on things like new chemical and biological agents and delivery systems. In short, they can buy the expertise that confers the advantage of technological surprise.
  Scientists with transferable know-how continue to leave the former Soviet Union, some potentially for destinations of proliferation concern.
  As you know, plugging this "brain drain" and helping provide alternative work for the former Soviet Union's WMD infrastructure and key scientists are key goals of US nonproliferation policy, as well as a variety of US and international cooperation programs with Russia and other former Soviet states.

• Finally, the accelerating pace of technological progress makes information and technology easier to obtain and in more advanced forms than when the weapons were initially developed.

We are making progress against these problems, Mr. Chairman, but I must tell you that the hill is getting steeper every year.

TERRORISM

Let me now turn to another threat with worldwide reach -- terrorism.

Since July 1998, working with foreign governments worldwide, we have helped to render more than two dozen terrorists to justice. More than half were associates of Usama Bin Ladin's Al-Qa'ida organization. These renditions have shattered terrorist cells and networks, thwarted terrorist plans, and in some cases even prevented attacks from occurring.

Although 1999 did not witness the dramatic terrorist attacks that punctuated 1998, our profile in the world and thus our attraction as a terrorist target will not diminish any time soon.

We are learning more about the perpetrators every day, Mr. Chairman, and I can tell you that they are a diverse lot motivated by many causes.

Usama Bin Ladin is still foremost among these terrorists, because of the immediacy and seriousness of the threat he poses. The connections between Bin Ladin and the threats uncovered in Jordan, Canada and the United States during the holidays are still being investigated, but everything we have learned recently confirms our conviction that he wants to strike further blows against America. Despite these and other well-publicized disruptions, we believe he could still strike without additional warning. Indeed, Usama Bin Ladin's organization and other terrorist groups are placing increased emphasis on developing surrogates to carry out attacks in an effort to avoid detection. For example, the Egyptian Islamic Jihad (EIJ) is linked closely to Bin Ladin's organization and has operatives located around the world -- including in Europe, Yemen, Pakistan, Lebanon, and Afghanistan. And, there is now an intricate web of alliances among Sunni extremists worldwide, including North Africans, radical Palestinians, Pakistanis, and Central Asians.

I am also very concerned about the continued threat Islamic extremist groups pose to the Middle East Peace Process. The Palestinian rejectionist groups, HAMAS (Islamic Resistance Movement) and PIJ (Palestine Islamic Jihad), as well as Lebanese Hizballah continue to plan attacks against Israel aimed at blocking progress in the negotiations. HAMAS and PIJ have been weakened by Israeli and Palestinian Authority crackdowns, but remain capable of conducting large scale attacks. Recent Israeli arrests of HAMAS terrorist operatives revealed that the group had plans under way for major operations inside Israel.

Some of these terrorist groups are actively sponsored by national governments that harbor great antipathy toward the United States. Although we have seen some dramatic public pressure for liberalization in Iran, which I will address later, and even some public criticism of the security apparatus, the fact remains we have yet to find evidence that the use of terrorism as a political tool by official Iranian organs has changed since President Khatami took office in August 1997.

Mr. Chairman, we remain concerned that terrorist groups worldwide continue to explore how rapidly evolving and spreading technologies might enhance the lethality of their operations. Although terrorists we've preempted still appear to be relying on conventional weapons, we know that a number of these groups are seeking chemical, biological, radiological, or nuclear (CBRN) agents. We are aware of several instances in which terrorists have contemplated using these materials.

• Among them is Bin Ladin, who has shown a strong interest in chemical weapons. His operatives have trained to conduct attacks with toxic chemicals or biological toxins.

• HAMAS is also pursuing a capability to conduct attacks with toxic chemicals.

Terrorists also are embracing the opportunities offered by recent leaps in information technology. To a greater and greater degree, terrorist groups, including Hizballah, HAMAS, the Abu Nidal organization, and Bin Ladin's al Qa'ida organization are using computerized files, e-mail, and encryption to support their operations.

Mr. Chairman, to sum up this part of my briefing, we have had our share of successes, but I must be frank in saying that this has only succeeded in buying time against an increasingly dangerous threat. The difficulty in destroying this threat lies in the fact that our efforts will not be enough to overcome the fundamental causes of the phenomenon -- poverty, alienation, disaffection, and ethnic hatreds deeply rooted in history. In the meantime, constant vigilance and timely intelligence are our best weapons.

REGIONAL ISSUES

At this point, Mr. Chairman, I'd like to leave the transnational issues and turn briefly to some of the regions and critical states in the world.

China

Mr. Chairman, let us begin with China, which has entered the new century as the world's fastest rising power.

The leadership there is continuing its bold, 20-year-old effort to propel the nation's economy into the modem world, shedding the constraints of the old Communist central command system. The economy is the engine by which China seeks world prestige, global economic clout, and the funding for new military strength, thereby redressing what it often proclaims as a hundred years of humiliation at the hands of Western powers. Domestically, it also was the engine that Deng Xiaoping and his successors calculated would enable the Party to deliver on its unspoken social contract with the Chinese people: monopoly of political power in exchange for a strong China with a higher standard of living for its citizens.

But events conspired last year to tarnish Beijing's achievements and to make the leadership generally ill-at-ease:

• China put on an impressive display of military might at its 50th anniversary parade in Beijing, but the leadership today sees a growing technological gap with the West.

• Inside China, the image of domestic tranquillity was tarnished by last April's appearance of the Falungong spiritual movement. Their audacious, surprise demonstration outside the leadership compound called into question the Communist Party's ability to keep all "unapproved" civic organizations at bay.

• Even the return of Macau in late December -- the fall of another symbol of a divided China -- was overshadowed by the actions of Taiwan President Lee Tenghui and the continuing controversy over his assertion that his island's relations with the mainland should be conducted under the rubric of "state to state" rather than "one China".

Lee's statement led China to worry that Taiwan's return to Beijing rule is less likely than before and Beijing remains unwilling to renounce the use of force.

As you know, last Saturday Chen Shui-bian was elected President on Taiwan in a closely fought contest. Beijing issued a White Paper a month before the election to press the new President into retreating from Lee's statement and return to a mutually agreeable consensus on one-China. The Chinese also wanted to try to warn him against extending the political distance from reunification. So far Beijing's reaction has been restrained. Chinese leaders have stated since Chen's election that they have a "wait and see" attitude and both sides have traded public statements regarding their own views of the basis for resuming the cross-strait dialogue.

Although Beijing today still lacks the air and sealift capability to successfully invade Taiwan:

• China has been increasing the size and sophistication of its forces arrayed along the Strait, most notably by deploying short-range ballistic missiles.

• China received the first of two modern, Russian-built Sovremennyy destroyers last month. The ship joined the East Sea Fleet, which regularly conducts operations near Taiwan.

In the coming year, we expect to see an uncertain Chinese leadership launching the nation deeper into the uncharted waters of economic reform while trying to retain tight political control. Thus far, Beijing's approach has largely succeeded. But the question remains open whether, in the long run, a market economy and an authoritarian regime can co-exist successfully.

India-Pakistan

Mr. Chairman, let us now move from the China-Taiwan rivalry to the deep-seated competition between India and Pakistan. Mr. Chairman, last spring, the two countries narrowly averted a full-scale war in Kashmir, which could have escalated to the nuclear level.

Since then, changes in government in both countries have added new tensions to the picture.

• The October coup in Pakistan that brought to power Gen. Musharraf -- who served as Army chief during the Kargil conflict with India last summer -- has reinforced New Delhi's suspicion about Islamabad's intentions.

• Pakistanis are equally suspicious of India's newly elected coalition government in which Hindu nationalists hold significant sway.

• Clearly, the dispute over Kashmir remains a potential flashpoint.
  We are particularly concerned that heavy fighting continued through the winter, unlike in the past.
  Both sides are postured in a way that could lead to more intense engagements later this year.

Thus, Mr. Chairman, our concern persists that antagonisms in South Asia could still produce a more dangerous conflict on the subcontinent.

Russia

Now moving to Russia: as you know, we are now in the post-Yeltsin era, and difficult choices loom for the new president Russians will choose on Sunday (26 March):

He will face three fundamental questions:

• First, will he keep Russia moving toward further consolidation of its new democracy or will growing public sentiment in favor of a strong hand and a yearning for order tempt him to Slow down or even reverse course?

• Second, will he try to build a consensus on quickening the pace of economic reform and expanding efforts to integrate into global markets -- some Russian officials favor this -- or will he rely on heavy state intervention to advance economic goals?

• Finally, will Moscow give priority to a cooperative relationship with the West or will anti-US sentiments take root, leading to a Russia that is isolated, frustrated, and hostile? This would increase the risk of an unintended confrontation, which would be particularly dangerous as Russia increasingly relies on nuclear weapons for its defense -- an emphasis reflected most recently in its new national security concept.

As these questions indicate, a new Russian President will inherit a country in which much has been accomplished -- but in which much still needs to be done to fully transform its economy, ensure that democracy is deeply rooted, and establish a clear future direction for it in the world outside Russia.

Russian polls suggest that Acting President Putin will win the 26 March election; the only possible wrinkle is voter turnout, since a 50 percent turnout is needed to validate the election. Putin appears tough and pragmatic, but it is far from clear what he would do as president. If he can continue to consolidate elite and popular support, as president he may gain political capital that he could choose to spend on moving Russia further along the path toward economic recovery and democratic stability.

At least two factors will be pivotal in determining Russia's near-term trajectory:

• The conflict in Chechnya: Even though public support for the war remains high, a protracted guerrilla war could diminish Putin's popularity over time, and further complicate relations with the US and Europe.

• The economy: The devalued ruble, increased world oil prices, and a favorable trade balance fueled by steeply reduced import levels have allowed Moscow to actually show some economic growth in the wake of the August 1998 financial crash. Nonetheless, Russia faces $8 billion in foreign debt coming due this year. Absent a new IMF deal to reschedule, Moscow would have to redirect recent gains from economic growth to pay it down, or run the risk of default.

Over the longer term, the new Russian president must be able to stabilize the political situation sufficiently to address structural problems in the Russian economy. He must also be willing to take on the crime and corruption problem-both of which impede foreign investment.

In the foreign policy arena, US-Russian relations will be tested on a number of fronts. Most immediately, Western criticism of the Chechen war has heightened Russian suspicions about US and Western activity in neighboring areas, be it energy pipeline decisions involving the Caucasus and Central Asia, NATO's continuing role in the Balkans, or NATO's relations with the Baltic states. Moscow's ties to Iran also will continue to complicate US-Russian relations, as will Russian objections to US plans for a National Missile Defense. There are, nonetheless, some issues that could move things in a more positive direction.

• For example, Putin and others have voiced support for finalizing the START II agreement and moving toward further arms cuts in START III -- though the Russians will want US reaffirmation of the 1972 ABM treaty in return for start endorsements.

• Similarly, many Russian officials express a desire to more deeply integrate Russia into the world economy. The recent deal with the London Club on Soviet-era debt suggests Putin wants to keep Russia engaged with key international financial institutions.

One of my biggest concerns -- regardless of the path that Russia chooses -- remains the security of its nuclear weapons and materials. Moscow appears to recognize some of its vulnerabilities; indeed, security seemed to have been tightened somewhat during the Chechen conflict. But economic difficulties and pervasive criminality and corruption throughout Russia potentially weaken the reliability of nuclear personnel.

With regard to its nuclear weapons, Moscow appears to be maintaining adequate security and control, but we remain concerned by reports of lax discipline, labor strikes, poor morale, and criminal activities.

With regard to its nuclear material: Russia's nuclear material is dispersed among many facilities involved in the nuclear fuel cycle -- more than 700 buildings at more than 100 known facilities. Its physical security and personnel reliability vary greatly Security at weapons production facilities is better than at most research laboratories and buildings at fuel fabrication facilities that have not received physical security upgrades.

Iran

Turning now to Iran -- the recent landslide victory for reformers in parliamentary elections, Mr. Chairman, tell us that further change in Iran is inevitable. The election of President Khatami in 1997 was the first dramatic sign of the popular desire for change in Iran. Khatami has used this mandate to put Iran on a path to a more open society. This path will be volatile at times as the factions struggle to control the pace and direction of political change.

A key indicator that the battle over change is heating up came last July when student protests erupted in 18 Iranian cities for several days. The coming year promises to be just as contentious with a new pro-reform Majles (Parliament) convening in late May or early June.

• The first round of the Majles elections in February gave resounding endorsement to the reformists who gained an absolute majority of the 148 seats in the 290 seat Majles, with 65 more seats to be decided in April runoffs. Many Iranians, particularly the large cohort of restive youth, will demand that the reformers carry out their mandate for change.

• The reformists' success in advancing their agenda will depend on their ability to keep their center-left coalition together and to maintain party discipline in the Majles; historically, Iranian parties have tended to splinter and dissipate their strength.

• The course of political change in Iran will also depend on what lessons the Iranian conservatives take from their electoral defeat. Some claim to have gotten the message that they must change with the times, but the recent assassination attempt on a prominent reformist politician in Tehran suggests some elements are still wedded to the politics of terror.

• We worry that conservatives also might try to reverse their losses by invalidating some election results. In fact, they have already done so in three cities already. The isolated protests that this caused suggests that any further effort to overturn the Majles elections nationwide would be sure to send people into the streets.

With control of the Majles and a mandate for change, the reformists are likely to introduce an ambitious slate of reform legislation. But all legislation must be approved by the conservative-dominated Council of Guardians before it can become law, providing hardliners an opportunity to water down many of the reforms. Supreme Leader Khamenei and key institutions such as the Revolutionary Guard Corps and the large parastatal foundations also are outside the authority of the Majles and in a position to fight a stubborn rearguard against political change.

• Moreover, even as the Iranians digest the results of the Majles elections, the factions will begin preliminary maneuvering for the presidential election scheduled for mid-2001, which is almost certain to keep the domestic political scene unsettled.

• The conservatives will have to be careful, however, because if they overplay their hand they run a risk of radicalizing young Iranians already impatient at the pace of political and social change.

Iraq

With regard to Iraq, Saddam faced a difficult start in 1999 -- including the most serious Shia unrest since 1991 and significant economic difficulties.

Saddam has, however, shown himself to be politically agile enough to weather these challenges. He brutally suppressed the Shia uprisings of last spring and early summer. The regime is still gaining some revenue from illegal oil sales. Increased access to food and medical supplies through the oil for food program has improved living conditions in Baghdad.

A major worry is Iraqi repair of facilities damaged during Operation Desert Fox that could be associated with WMD programs. Without inspections, it is harder to gauge Saddam's programs, but we assume he continues to attach high priority to preserving a WMD infrastructure. And Iraq's conventional military remains one of the largest in the Middle East, even though it is now less than half the size during the Gulf War.

In sum, to the extent that Saddam has had any successes in the last year, they have been largely tactical. In a strategic sense, he is still on a downward path. His economic infrastructure continues to deteriorate, the Kurdish-inhabited northern tier remains outside the grip of his army, and although many governments are sympathetic to the plight of the Iraqi people, few if any are willing to call Saddam an ally.

The Balkans

Mr. Chairman, looking briefly at the Balkans --

There are a few signs of positive long-term change are beginning to emerge there as a new, more liberal government takes the reins of power in Croatia. Political alternatives to the dominant ethnic parties in Bosnia also are beginning to develop, capitalizing on the vulnerability of old-line leaders to charges of corruption and economic mismanagement. Despite this progress, there is still a long way to go before the Balkans move beyond the ethnic hatreds and depressed economies that have produced so much turmoil and tragedy. Of the many threats to peace and stability in the-year ahead, the greatest remains Slobodan Milosevic -- the world's only sitting president indicted for crimes against humanity.

Unfortunately, Mr. Chairman, I must tell you that Milosevic's hold on power has not been seriously shaken in the past few months. He retains control of the security forces, military commands, and an effective media machine. His inner circle remains loyal or at least cowed. The political opposition has not yet developed a strategy to capitalize on public anger with Milosevic.

Milosevic is still struggling, however, with serious economic problems. The Serbian economy is in a virtual state of collapse, and Serbia is now the poorest country in Europe. Inflation and unemployment are rising, and the country is struggling to repair the damage to its infrastructure from NATO air strikes. The average wage is only $48 a month and even these salaries typically are several months in arrears. Basic subsistence is guaranteed only by unofficial economic activity and the traditional lifeline between urban dwellers and their relatives on the farms.

Tensions are escalating, meanwhile, between Milosevic and Montenegrin President Djukanovic, who has taken a variety of steps that break ties to the federal government. Milosevic has used Yugoslav forces to block Djukanovic's actions and to implement a strategy of gradual economic strangulation, cutting off many of Montenegro's trading routes to Serbia and the outside world, with the aim of forcing Djukanovic to back down or take confrontational action that would justify FRY military intervention.

As you know, Mr. Chairman, Milosevic wants to crush Djukanovic because he serves as an important symbol to the democratic opposition in Serbia and to the Serbian people that the regime can be successfully challenged. Djukanovic controls the largest independent media operation in Yugoslavia, which has strongly criticized the Milosevic regime over the past several years for the Kosovo conflict, political repression and official corruption. Both Milosevic and Djukanovic will try to avoid serious confrontation for now, but a final showdown will be difficult to avoid.

Kosovo

Regarding Kosovo, Mr. Chairman, the international presence has managed to restore a semblance of peace, but it is brittle. The UN Mission in Kosovo and KFOR accomplished much but have been unable to stop daily small-scale attacks, mostly by Kosovar Albanians against ethnic Serbs. This chronic violence has caused most of the remaining 80,000-100,000 Serbs to congregate in enclaves in northern and eastern Kosovo, and they are organizing self defense forces.

The campaign to disarm and disband the former Kosovo Liberation Army has had success, but both sides continue to cache small arms and other ordnance. There is even a chance that fighting between 'Belgrade's security forces and ethnic Albanians will reignite should Belgrade continue to harass and intimidate the Albanian minority in southern Serbia, and should Kosovo Albanian extremists attempt to launch an insurgency aimed at annexing southern Serbia into a greater Kosovo.

North Korea

Mr. Chairman, let me now turn to North Korea. North Korea's propaganda declares 1999 the "year of the great turnaround." This is a view not supported by my analysts, however. Indeed, we see a North Korea continuing to suffer from serious economic problems, and we see a population, perhaps now including the elite, that is losing confidence in the regime. Mr. Chairman, sudden, radical, and possibly dangerous change remains a real possibility in North Korea, and that change could come at any time.

The North Korean economy is in dire straits. Industrial operations remain low. The future outlook is clouded by industrial facilities that are nearly beyond repair after years of underinvestment, spare parts shortages, and poor maintenance.

• This year's harvest is more than 1 million tons short of minimum grain needs. International food aid has again been critical in meeting the population's minimum food needs.

• Trade is also down. Exports to Japan -- the North's most important market -- fell by 17 percent from $111 million to $92 million. Trade with China -- the North's largest source of imports -- declined from nearly $200 million to about $160 million, primarily because China delivered less grain.

Kim Chong-il does not appear to have an effective long-term strategy for reversing his country's economic fortunes. Kim's inability to meet the basic needs of his people and his reliance on coercion makes his regime more brittle because even minor instances of defiance have greater potential to snowball into wider anti-regime actions.

• Instead of real reform, North Korea's strategy is to garner as much aid as possible from overseas, and the North has reenergized its global diplomacy to this end. It is negotiating for a high-level visit to reciprocate Dr. Perry's trip to P'yongyang. It has agreed to diplomatic talks with Japan for the first time in several years. It has unprecedented commercial contacts with South Korea, including a tourism deal with a South Korean firm that will provide almost $1 billion over six years.

• But P'yongyang's maneuvering room will be constrained by Kim's perception that openness threatens his control and by the contradictions inherent in his overall strategy -- a strategy based on hinting at concessions on the very weapons programs that he has increasingly come to depend on for leverage in the international arena.

Squaring these circles will require more diplomatic agility than Kim has yet to demonstrate in either the domestic or international arenas.

Colombia

Mr. Chairman, let me now return to our own hemisphere to discuss one final area: Colombia.

Of President Pastrana's many challenges, one of the most daunting is how to end the decades- old war with the FARC insurgents. There is some good news here. The FARC lacks the military strength and popular support needed to topple the government. And since last year, the Colombian armed forces have begun to improve their performance, making better use of air power to foil large-scale insurgent attacks.

Meanwhile, the long-standing pattern in which Colombian guerrillas both talk and fight is continuing.

• The peace process with the FARC -- to which the Pastrana government is firmly committed -- is proceeding, albeit slowly. The two sides recently agreed on a negotiating agenda, but most observers expect progress to be difficult. The FARC has refused to disarm or halt its attacks while negotiations are underway.

• Pastrana must also contend with other armed groups, such as the smaller ELN insurgency and illegal paramilitary groups. Each of these insist on a role in any final settlement. A dialogue with the ELN appears to be setting the stage for substantive talks, but the government continues to refuse to negotiate with the paramilitaries.

Colombia is starting to recover from an economic recession -- its worst ever -- but still suffers from record unemployment and a fiscal deficit that constrains spending on the military and development programs aimed at pacifying the countryside and weaning farmers from coca cultivation. Opinion polls indicate that the Colombian public worries most about the economy and disapproves of the government's austerity program.

CONCLUSION

Mr. Chairman, this has been a long briefing, and I'd like to get to your specific questions on these and other subjects. Before doing so, I would just sum it up this way: the fact that we are arguably the world's most powerful nation does not bestow invulnerability; in fact, it may make us a larger target for those who don't share our interests, values, or beliefs. We must take care to be on guard, watching our every step, and looking far ahead. Let me assure you that our Intelligence Community is well prepared to do that.

Thank you, Mr. Chairman. Now, I'd welcome any questions from you and your colleagues.