Chairman Shelby, Senator Graham, Members of the Committee. I appreciate the opportunity to present INR's view of current and projected threats to the United States, American citizens, and American interests. Happily, the severity of specific threats to our nation, our values, our system of government, and our way of life are low and likely to remain so for the foreseeable future. Unfortunately, that is not the case with respect to threats to individual Americans and other national interests. Indeed, there appears to be a perversely inverse relationship between .the diminution of threats to the United States homeland and the increasing magnitude and variety of threats to American citizens and interests.

The dramatic decline in the mega-threat symbolized by the end of the Cold War and the growing preponderance of our military capabilities make it increasingly difficult and irrational for .any adversary to threaten our national existence. This makes resort to asymmetric threats more tempting. A variety of national and non-state actors are seeking both means and opportunities to achieve their goals by threatening Americans at home and abroad.

Americans abroad (residents, tourists, diplomats, business people, members of our Armed Forces, etc.) are a special target for many groups who oppose us and our values, resent our prosperity and power, or believe that Washington holds the key to achieving their own political, economic, or other goals. We become aware daily of threats to US businesses, military facilities, embassies, and individual citizens. Recent examples include the seizure of an American relief worker in Chechnya (since freed), the execution of an American oil worker seized in Ecuador, and the terrorist attack on the USS Cole.

Unconventional threats are the most worrisome because they are harder to detect, deter, and defend against. Misguided individuals, religious fanatics, self-styled crusaders, and agents of national or rebel groups can -- and do -- operate everywhere and are capable of striking almost anywhere, anytime. Their most common weapons are bullets and bombs, but some in the catchall category of "terrorists" clearly seek to obtain chemical or biological weapons. Others appear capable of inflicting isolated damage through attacks on our information infrastructure. The magnitude of each individual threat is small, but, in aggregate, unconventional threats probably pose a more immediate danger to Americans than do foreign armies, nuclear weapons, long-range missiles, or the proliferation of WMD and delivery systems.

Terrorism. The United States remains a number one target of international terrorism. As in previous years, close to one-third of all incidents worldwide in 2000 were directed against Americans. The most devastating attack was the October 12 bombing of the USS Cole in Yemen that killed 17 sailors and injured many more.

The locus of attacks can be, and increasingly is, far removed from the geographic origin of the threat. Usama bin Ladin (UBL) is based in Afghanistan but his reach extends far beyond the subcontinent. Plausible, if not always credible, threats linked to his organization target Americans and America's friends or interests on almost every continent. His organization remains a leading suspect in the Cole investigation, and he and several members of his organization have been indicted for the 1998 embassy bombings in Kenya and Tanzania. Had it not been for vigilant Jordanian security, UBL operatives would have conducted attacks in that country to disrupt Millennium celebrations. Members of his network and other like-minded radical Mujahedin are active globally. Bin Ladin funds training camps and participates in a loose worldwide terrorist network that includes groups such as the Egyptian Islamic Jihad and the Kashmiri Harakat al Mujahedin. The UBL network is analogous to a multinational corporation. Bin Ladin, as CEO, provides guidance, funding, and logistical support, but his henchmen, like regional directors or affiliates, have broad latitude and sometimes pursue their own agendas.

Some terrorists, including bin Ladin, have evinced interest in acquiring weapons of mass destruction. Thus far, however, only Aum Shinrikyo, the group responsible for the 1995 subway gas attack in Tokyo, has actually used such a weapon. There has been no repetition or credible threat of such an attack in the last five years, but the problem clearly has not gone away. There will be another attack; what we do not, and possibly cannot, know is when, where, by whom, and why.

State sponsorship of terrorism has declined, but it has not disappeared. Iran still supports groups such as the Palestine Islamic Jihad dedicated to the disruption of the Middle East Peace Process. Iraq also harbors terrorists and may be rebuilding its intelligence networks to support terrorism. Afghanistan's Taleban, though not a national government, does provide crucial safe haven to UBL.

Proliferation. The efforts of many nations to develop weapons of mass destruction (WMD) and the missiles to deliver them continue to present a serious potential threat to the safety of US citizens abroad and at home, and to US interests worldwide. It is difficult, however, to characterize the WMD threat without caricature, difficult to raise alarms without drowning out reasons for encouragement.

The gravity of nuclear proliferation significantly outweighs that of either chemical weapons or biological weapons proliferation. But, although the basic understanding of nuclear weapons physics is widespread, nuclear weapons are, fortunately, the most difficult kind to produce or acquire. Access to fissile material is a critical impediment. The challenges to the international nuclear non-proliferation regime represented by the Indian and Pakistani nuclear tests of 1998 are real but must be seen in the context of decisions earlier in the decade by South Africa, Ukraine, Argentina, Brazil, and others (i.e., Belarus and Kazakhstan) to forgo the nuclear option. The success of diplomatic efforts to extend indefinitely the Non-Proliferation Treaty, to enhance IAEA safeguards, and to win nearly universal membership in the Comprehensive Test Ban Treaty provide evidence that the international community recognizes the nuclear danger and is making progress in providing the means to counter it. Today only a few states appear to be actively seeking to acquire nuclear weapons. The greatest near-term danger remains the potential for shortcuts in the transfer of weapons technology and weapons grade fissile materials to such states from the existing nuclear powers. But, despite fears of "leakage" from stockpiles of the former Soviet Union and sales by North Korea, we have not yet been faced with activities in this area on a scale that has raised significant concerns.

Chemical weapons are more of a tactical threat to US forces and allies than a strategic threat to the homeland. Biological and toxin weapons are more of a terrorist threat to civilian populations than an effective instrument of warfare. Potential CW and BW threats are nonetheless real and increasingly widespread. Despite broad participation in the Chemical Weapons Convention and Biological Weapons Convention, the dual-use nature of the relevant technologies, modest technological prerequisites for development, and the low profile of illicit activities suggest that the potential threat from both state and non-state actors will continue to grow.

Ballistic missiles remain the most feared delivery mode for WMD because of their speed, relative invulnerability to attack (when mobile), and ability to penetrate defenses. There has been a dramatic increase in the aggregate number of short-range ballistic missiles in recent years; this growth will continue. The increase in the number of longer-range missiles has been much slower. International efforts, such as the Missile Technology Control Regime (MTCR) and various bilateral understandings between supplier states, have made it more difficult for states of proliferation concern to develop and deploy ballistic missiles. By adding to the significant technological challenge proliferant states must overcome to develop multi-stage missile systems, these external controls force such states to use covert or less efficient paths of development, increasing the cost and time requirements for system development. As a result, missile proliferation has occurred at a slower rate than predicted by previous estimates. INR assesses that, among states seeking long-range missiles, only North Korea could potentially threaten the US homeland with ballistic missiles in this decade, and only if it abandons its current moratorium on long-range missile flight testing.

The Nuclear Threat. Only Russia has the unqualified capacity to destroy the United States. Indeed, for the foreseeable future, Russia's ability to threaten US territory and overseas interests is greater than that of all other potential adversaries combined. China is the only other country not an ally of the United States that currently has the capacity to strike the US homeland with nuclear weapons. The aggregate nuclear-armed ICBM threat against the United States is declining dramatically, however, as a result of Russian military choices related to START I and START II and the significantly reduced size of the Russian economy (compared with that of the Soviet Union). China's force, however, is in the process of modest expansion. We assess the likelihood of an attack on the United States by either Russia or China to be extremely low and judge that both have effective safeguards against unauthorized or accidental launches.

This situation could change for the worse if Moscow and/or Beijing concluded that the United States was pursuing a course in fundamental conflict with Russian/Chinese interests. Such a perception could trigger decisions that would significantly increase the quantitative threat to the United States. Instead of dramatically reducing their strategic nuclear warheads to some 1500 by 2015, the Russians could halt their decline at or above 2,000 warheads. The size of the Chinese strategic threat to the United States could more than triple by the end of the decade should China decide to MIRV existing ICBMs or deploy new ones. A resumption of nuclear testing by China could lead to smaller warheads and further MIRVing. Should either Russia or China (or both) put their strategic forces on a higher state of alert, the danger of accidental launch would increase. Negative political or economic factors could also erode existing protections against accidental or unauthorized launch.

The growing availability of technical information about nuclear weapons and the increase in well-financed non-state terrorist organizations make the prospect of a threat to the United States from a surreptitious nuclear device -- for example, hidden in a cargo ship -- a significant second-order concern. The difficulty of acquiring sufficient fissile material would be the most important technical factor limiting the ability of nations or terrorist groups to acquire such a capability.

North Korea's nascent space launch vehicle/ICBM program and presumed nuclear potential are cause for concern and the focus of ongoing diplomatic efforts. Given the credibility of US retaliatory capabilities, however, we assess that, in most circumstances, North Korea could be deterred from launching a nuclear attack on the American homeland, American friends and allies, or against American forces abroad. Nevertheless, the threat is real, and a multifaceted diplomatic effort is under way to reduce or eliminate it. So far, this effort has yielded a freeze on activity at declared North Korean nuclear facilities and a moratorium on space or long-range missile launches for the duration of US-DPRK missile talks.

Missiles and Missile Proliferation. Ballistic missiles are a special concern, particularly when possessed by countries with nuclear, chemical, or biological weapons, because of their ability to strike rapidly and penetrate defenses. The number of countries developing capabilities to produce ballistic missiles and/or space launch vehicles is increasing; the list includes, among others, North Korea, Iran, India, and Pakistan. Their indigenous capabilities have been enhanced by technology transfers from other countries -- principally Russia, China, and North Korea. Foreign assistance has extended the range and improved the accuracy of older-generation missiles and accelerated the development and production of indigenous systems.

That the number of countries with ballistic missiles continues to increase and that the range, payload, and accuracy of such missiles continue to improve are cause for concern. But there is a "good news" story as well. The number of countries possessing or seeking to acquire ballistic missiles remains small and does not appear to be growing from Cold War levels. Most programs appear to be advancing more slowly than anticipated. And, despite leakage of technology and possible violations of commitments, the trend line is toward less rather than more transfers of technology and complete systems. The export of missiles and technology from North Korea remains the biggest proliferation problem. Now and for the next several years, ballistic missiles are unlikely to be used against US territory, but they already pose a real and growing threat to US allies and US forces deployed abroad.

The Conventional Military Threat. The threat of a large-scale conventional military attack against the United States or its allies will remain low for the immediate future. Since the demise of the Warsaw Pact, there has existed no hostile military alliance capable of challenging the United States or NATO, and none is on the horizon. But regional tensions and potential conflicts do threaten US interests abroad. Progress toward Middle East peace remains key to reducing the chances of another major war in that region. Iraq threatens regional security by confronting coalition forces and continues to seek weapons of mass destruction. Saddam Hussein could precipitate major crises at any time.

Trends that could increase the conventional military threat are emerging. US military dominance and economic, cultural, and technological preeminence have sparked resentment among potential rivals who do not share US values and are concerned that the United States will use its global leverage in ways inimical to their interests. This has prompted them to seek ways to constrain Washington. These countries are unlikely to forge formal alliances, but should they perceive US policies as hostile or an impediment to the attainment of their own objectives, they could decide to move beyond rhetorical and political cooperation to military cooperation, including in the sale of weapons and technologies that might otherwise have been kept off the market.

The global spread of conventional military capabilities through international transfers and indigenous defense industrial development continues unabated in the post-Cold War era, powered by a host of mutually reinforcing trends. The worldwide proliferation of conventional military capabilities, particularly irresponsible and illicit arms trafficking to states of concern, sub-national actors, and regions of conflict pose increased risks to international security.

Technology Diffusion. Accelerating technological progress in an increasingly global economy has facilitated the spread of advanced military technologies once restricted to a few industrialized nations. Chemical and biological weapons will pose a growing threat to US forces and interests at home and abroad as the means to produce them become more accessible and affordable. Such weapons are attractive to countries seeking a cheap deterrent and to terrorist groups looking for ways to inflict mass casualties. The critical importance of communications and computer networks to the military and to almost every sector of the civilian economy has increased US vulnerability to a hostile disruption of its information infrastructure. Several countries have active government information warfare (IW) programs, and a number of others are interested in the IW concept. Terrorist groups, disgruntled individuals, or even individual hackers could inflict limited but significant damage to key sectors and regions.

Countries With Global Reach. Russia's ability to project power beyond its borders and to challenge US interests directly has been greatly diminished since the fall of the USSR. Russia is focused on its own domestic problems and increasingly aware of its weaknesses and limitations. Nevertheless, Russia remains a nuclear power with the capability to destroy the United States. It retains the ability to influence foreign and security policy developments in Europe and, to a lesser extent, around the globe. Its interests sometimes coincide with those of the United States and our allies, but often they do not. Regional instability in the former Soviet Union, particularly in the Caucasus or Central Asia, could impinge on US interests, especially if such instability were to tempt external intervention.

The Russian political scene in 2000 was dominated by the person of Vladimir Putin. Putin, who took office in his own right after presidential elections in March, moved quickly to bring Russia's far-flung regions under tighter control. He spoke repeatedly of the need for a democratic, . market-oriented approach, including political pluralism and freedom of speech and conscience, and for revitalizing the Russian economy. He has called for reform and pledged to fight crime and corruption. But Putin has a security-services background, makes no secret of his belief in a strong, centralized state that plays a guiding role in the economy, and is enmeshed in a system dominated by a narrow stratum of political and financial elites.

Putin has yet to undertake more than a few halting steps toward systematic and thoroughgoing reform. The high oil prices and economic upswing that characterized Russia in 2000 seem to have reduced both pressures and incentives to reform. Without concerted effort, reform will be thwarted by powerful vested interests. Putin remains at least partially captive to those interests and to omnipresent political intrigue, and has yet to consolidate his own power within the institutions that he officially commands.

Russian foreign and security policies have become both more pragmatic and more assertive. Russia's continuing need for integration into international economic and financial institutions and access to key markets makes a wholesale return to the ideological confrontation and policy collisions of the Cold War unlikely. Nevertheless, deployment of a National Missile Defense and further NATO enlargement almost certainly will spark animated opposition from Moscow. Russia will continue to assert its interests, especially where it perceives US dominance to be inimical to its own long-term objectives. In doing so, Moscow will use whatever diplomatic tools are at its disposal.

China is committed to achieving a multipolar world in which it would have relatively more influence and the United States relatively less. This is not an ideological crusade, but part of a centuries-old quest for national wealth and power. Leaders recognize that, to achieve this goal, they must modernize their economy and expand their markets, neither of which they can do without maintaining good relations with the US. As a result, China has a large incentive to avoid confrontation with the United States, but Beijing will attempt to limit or forestall American unilateral or US-led actions judged adverse to China's own interests because they seem to strengthen and perpetuate a unipolar world. In doing so, Beijing will operate from a position of increasing economic and military strength.

Beijing's determination to prevent de jure Taiwan independence and propensity to misinterpret US actions and intentions together constitute the gravest threat to US- China relations and stability in Northeast Asia. Beijing aspires to regional influence, even dominance, but its military buildup is worrisome primarily in terms of the China-Taiwan-US dynamic. PRC leaders are convinced that they must be able to threaten Taiwan militarily to prevent a unilateral declaration of independence; Taiwan leaders believe they must have the military capability to defend against threats from the Mainland. The PRC might take military action if it perceived that Taiwan, with or without US support, was moving toward independence.

Chinese proliferation behavior is a continuing concern, particularly when it contributes to changes in the regional balance or threatens US interests in other geographic regions. Chinese entities have assisted the missile and nuclear programs of Pakistan, Iran, and others, but China has made progress in adopting and enforcing international control norms in the nuclear area. Last November, China articulated a new missile nonproliferation policy, stating that it would not assist any country, in any way, in the development of MTCR-class ballistic missiles. China also announced that it would enact at an early date a comprehensive missile-related export control system to help enforce that policy. We continue to monitor Chinese behavior on this front.

China faces significant potential for increased instability sparked by economic dislocations, unemployment, official corruption, religious persecution, violation of human rights, and a failure to embrace the development of local governance and democratic choice. Serious social disorder would have a direct impact on US economic interests (trade and investment) and contribute to strategic uncertainty in the region.

Other Countries and Regions of Concern. North Korea appears be changing in positive ways. Tensions on the Korean Peninsula eased last year as a result of the inter-Korean summit, the visit to Washington of Kim Jong Il's special envoy, and Secretary of State Albright's visit to Pyongyang. The DPRK's ability to sustain a conflict has decreased as a consequence of its economic decline, but the North still has the capability to inflict huge damage and casualties in the opening phases of a conflict. It has also not taken sufficient steps to prove it has truly distanced itself from terrorism. The political situation appears stable, with Kim Jong Il apparently having found a firmer footing and beginning to undertake new policy initiatives rather than simply following his father's line.

The DPRK has been unable to reverse a decade-long economic decline. With its agricultural and industrial infrastructure continuing to deteriorate, the country is plagued by severe shortages of food and electricity. Kim Jong Il's recent trip to Shanghai suggests he is considering a managed "Chinese model" opening of the economy. The regime appears to be examining a range of relatively pragmatic solutions to its economic problems; since the New Year, DPRK media have been stressing the need for "new ways of thinking." The North has expanded its diplomatic relations, and Kim Jong Il now seems to relish summit diplomacy. In the wake of last June's inter-Korean summit, Pyongyang has increased political, economic, and cultural contacts with Seoul. Kim Jong Il has said he will visit the ROK sometime this year.

The North's development of long-range ballistic missiles and efforts to sell missile technology to countries in the Middle East and South Asia threaten US friends, troops, and interests. North Korea has recognized that it must address this concern to improve relations with the United States. It has kept its promise not to launch a satellite or long-range missile while US-DPRK missile talks continue. Pyongyang has offered to restrain its long-range missile program in return for other countries launching its satellites; this offer has yet to be translated into an agreement. On the question of missile sales, however, the North has said only that it would be willing to halt sales under the right circumstances, a formulation that awaits clarification.

Despite some moderation in its rhetoric toward the US and the West, Iran still seeks WMD and continues to support terrorism. In its search for indigenous WMD capabilities, Iran relies heavily on outside assistance. Russia alone cooperates with Iran's nuclear program. Deep-seated hostility to the Middle East Peace Process, particularly within conservative circles of the Tehran regime, plays a major role in the government's willingness to support terrorist groups and their attacks against Israel and/or other parties involved in the process. Although we believe Iranian factions and leaders are not unanimous in their support for the use of terror to achieve political ends, so far any disunity has not resulted in a discernible change in Iran's behavior.

How best to deal with the challenges posed by Iran is a continuing source of disagreement with other important countries, including some of our closest allies. Tehran is well aware of these differences and attempts to exploit them to erode the effectiveness of US sanctions.

Current tensions in the Middle East have shifted the paradigm for Iraq. Saddam Hussein has cloaked himself in the Palestinian cause and blurred the differences between support for the Palestinian Intifada and support for Iraqi efforts to escape sanctions. He has exploited Arab frustration over Washington's perceived bias toward Israel to place additional pressure on our allies in the region by painting them as "lackeys" of the US and Zionism. With this strategy, Saddam is reasserting himself as a regional player, undercutting support for UNSC resolutions on Iraq, and strengthening his domestic position.

Iraq continues to reject UNSCR 1284 and to evince little interest in allowing UN inspectors back into the country. Iraq's isolation and support for sanctions are eroding, but Saddam's ability to acquire arms, unrelenting pursuit of WMD and missile programs, and use of economic blandishments continues to be limited by continued UN control over the bulk of Iraqi oil revenues.

South Asia. The volatile South Asian region could become embroiled in serious conflict. Tension over Kashmir is endemic in the Indo-Pakistani relationship and could erupt into a full-blown crisis with minimal warning. Pakistan's close relationship with the Taleban, which trains many who fight in Kashmir, is becoming a destructive partnership in the region. Such a crisis would risk a wider, and ultimately much more destructive, war between India and Pakistan. Desperation or miscalculation by either side could result in the use of nuclear weapons.

Possession of nuclear weapons by these two adversaries will be a part of the landscape for the foreseeable future. Indeed, such weapons will become more entrenched in these countries as they develop military doctrine and command and control procedures for their use. Both India and Pakistan have made clear that they will continue to develop their nuclear weapons and missiles to deliver them. We expect both to conduct more ballistic missile tests, but a key will lie in either's decision to deploy such missiles. Both states have said that they do not need to conduct additional nuclear tests, but another round is possible. If pressures in India prompted another nuclear test, Pakistan has said it will reciprocate. An added concern is the prospect that Pakistan and/or India might provide technology to other countries seeking nuclear and missile capabilities.

Other regional dangers. Africa's political, economic, and HIV/AIDS crises frequently threaten US efforts to promote 'democratization, human rights, the rule of law, and economic development. Poverty and instability provide fertile ground for HIV/AIDS, crime, terrorism, and arms trafficking. Appeals for the United States to assist humanitarian relief programs and peacekeeping operations are strong and growing. Unpredictable developments can create unexpected demands on US resources. They can also endanger US citizens.

The civil war in the Democratic Republic of the Congo remains the most destabilizing conflict in Africa. During 2000, implementation of the August 1999 Lusaka Accord stalled. In late 2000, fighting resumed in southeastern and northwestern Congo. More than 500,000 are internally displaced persons and 130,000-150,000 have become refugees .in neighboring countries. The January 2001 assassination of President Laurent Kabila and the succession of his son, Joseph, could either open opportunities for peace or spark intensified conflict.

In Burundi, ethnic tensions remain high despite the signing of a peace accord at Arusha last August. The threat to foreigners, including American citizens, has increased. Recent weeks have seen some positive developments, but renewed genocide in Burundi and neighboring Rwanda is possible.

HIV infection rates in sub-Saharan Africa appear on the rise, exceeding 20% of adults in nine countries. While the ultimate consequences of this mounting toll are unknown, they may well adversely affect many US interests and goals in Africa.

The situation in West Africa also is of great concern. The instability fomented by Liberian President Taylor is spilling into Guinea where, late last year, government forces fought off incursions by the Revolutionary United Front (RUF) and Guinean dissidents armed by Liberia. Guinea already hosts some 300,000 refugees. RUF aggression inside Sierra Leone has been constrained by the expansion of the United Nations Mission in Sierra Leone (UNAMSIL) and training provided to the Sierra Leone Army by the United Kingdom. The potential for renewed violence remains high, however.

The unsettled situation in Cote d'Ivoire highlights the challenges of political and economic reform and the threat inherent in corruption and exclusion of regional, tribal, and religious groups from the political process. A further deterioration in Cote d'Ivoire, home to many migrant workers, could have a destabilizing impact on much of West Africa. The governments of Liberia and Burkina Faso have provided support to rebel groups in Sierra Leone and, perhaps, Cote d'Ivoire.

In Angola, the civil war continues. Rebel forces have been weakened, but they retain the capability to conduct prolonged low-intensity conflict. Fighting could continue to involve neighboring Namibia and Zambia.

Sudan remains a haven for terrorists. There has been virtually no progress in negotiating an end to the 17-year-old civil war. Government bombings of civilian targets continue to add to the number of internally displaced persons, now estimated at 4 million, and to the already more than 400,000 refugees.

After renewed fighting in May and June 2000, Ethiopia and Eritrea signed a peace agreement brokered by the Organization of African Unity (with US assistance) in December. The United Nations has interposed peacekeepers and observers (the United Nations Mission to Ethiopia and Eritrea--UNMEE) along the disputed border. Achieving a lasting peace will be difficult, but there is reason for optimism that this conflict might end without renewal of the World War I-like carnage that characterized its most violent phase.

A decade into the democracy and market revolution, the vast majority of Latin Americans have experienced little or no improvement in living conditions. Recent economic troubles have fueled unemployment, crime, and poverty, undermining the commitment of many Latin Americans to free-market economic liberalization. Latin Americans are committed in principle to democracy, but many question the efficiency of democracy in their own countries because progress in alleviating wide social inequities and curbing corruption has been very slow. These concerns have raised fears among some observers that disillusioned Latin Americans will turn to authoritarian governments to improve their economic situations and reduce crime. It could happen, but it is neither inevitable nor likely.

That said, Latin American democracies have proved resilient in the face of economic crises, and all ideological alternatives to democratic government remain discredited. Fragile democratic institutions in countries such as Ecuador and Paraguay remain under great pressure to respond to legitimate mass needs, but few consider military rule a feasible alternative. Latin American militaries know that overt intervention risks international opprobrium and sanctions. They will, therefore, favor solutions that maintain at least a semblance of constitutional legitimacy. To date, popular support has sustained President Chavez's political revolution in Venezuela, but the swift, dramatic fall of former Peruvian President Fujimori indicates that there are limits to the appeal of populist authoritarians. The OAS-managed hemispheric reaction to suspect elections in Peru in mid-2000 underscored the strength of the prevailing pro-democracy consensus.

In none of the other major countries of Latin America-- Argentina, Brazil, Chile, Colombia, and Mexico-- is democracy threatened in the short or medium term. Indeed, the election of Vicente Fox to the Mexican presidency, ending peacefully the long reign of the Institutional Revolutionary Party, is a major step forward for democracy in Mexico and throughout the hemisphere.

In Cuba, an aging Fidel Castro refuses to make concessions toward a more open political system, and Cuba's overall human rights record remains the worst in the hemisphere. There is little sign of significant economic reform, and the departure of refugees seeking relief from repressive conditions continues. With no real provision for succession--beyond more of the same, with Raul Castro at the helm--the departure of Fidel could usher in a period of greater instability under a less charismatic leader, possibly leading to further mass migration and internal violence.

The fragility of peace and stability in southeastern Europe remains the paramount "threat" on that continent. The fall of Milosevic removed the principal threat to stability in the region, but removing a major obstacle is only the first step toward building a durable peace. President Kostunica has pledged to seek a negotiated solution to Serbia's conflicts with both Montenegro and Kosovo. Serbia and Montenegro still have important but unresolved differences about their rights and relationship under the federal constitution. Any Montenegrin move for independence would exacerbate tensions, but both sides appear to desire a non-violent solution.

In Belgrade, the Kostunica government has proclaimed its desire to negotiate differences with ethnic Albanians in Kosovo and southern Serbia, but the growing frustration of Albanians in the Presevo Valley makes this a potential flashpoint for a new military confrontation. US troops in KFOR could be put at greater risk. The incomplete inclusion of Albanians in the political and economic life of the FYROM (Macedonia) is a longer-term threat to regional stability.

West European leaders remain concerned about the "threat" to existing arms control regimes and deterrence strategies which they fear could result from US deployment of a National Missile Defense. Europeans are asserting foreign policy positions in the Middle East and Asia which at times diverge from those of the US. Most European leaders are increasingly uncomfortable with the continuation of UN Security Council sanctions against Iraq. Most EU members are interested in developing a European Security and Defense Policy independent of, but not in competition with, NATO, which remains their most fundamental transatlantic tie.

Continuing unrest in parts of Indonesia and challenges to the democratic process in that country are another source of concern. The potential for increased friction will increase as the central government attempts to devolve more authority to local and regional bodies. Violence in Aceh, Irian Jaya, and the islands of Eastern Indonesia has generated thousands of displaced persons and loss of life and property. Increased lawlessness threatens American citizens, as it does the people of Indonesia, and undermines the willingness of foreign investors to reengage.

Economic Threats. Slowing growth in the US and continuing signs of weakness in Japan's recovery suggest a less favorable climate for growth in 2001. Forecasts for world economic output in 2001 have been revised downward from earlier projections of around 4 percent to approximately 3 percent, and may fall even lower.

EU growth is expected to be approximately 3 percent this year, slightly lower than last year's but still the highest two-year performance in more than a decade. A hard landing in the US, a significant rebound in oil prices, and substantial further appreciation of the euro against the dollar and yen could threaten both individual economies and the health of global marketplaces.

The impressive rebound from the economic turmoil of 1997-98 notwithstanding, the emerging Asian economies remain vulnerable to new disruptions. Southeast Asia's fragile export-led recovery would be hurt by a slowdown in the US and other key export markets, higher oil prices, increasing competition from China, and, for some countries, increasing political uncertainty. Countries in the region must look increasingly to domestic demand to maintain growth. Indonesia, Thailand, and the Philippines, which registered 4-5% growth in 2000, will be unable to sustain that rate this year.

Indonesia and Thailand are most vulnerable to external shocks because they have been slow to implement painful corporate debt rescheduling critical to reviving corporate loans and domestic demand. The recovery of confidence in the currencies and financial markets of Southeast Asia and South Korea remains fragile. Their banking systems still require significant restructuring. Overall, a more cautious and sophisticated approach of foreign investors, an increase in transparency of financial information, and the region's dramatic reduction in reliance on short-term debt have decreased Asia's susceptibility to a financial panic triggered by the economic problems of one country.

China's export growth this year is expected to slip significantly from last year's blistering pace as demand softens in major markets, especially the United States. We anticipate that Beijing's efforts to stimulate increases in domestic investment and consumption will remain ineffective. Problems with unemployment, underemployment, and sagging household incomes in rural areas are likely to worsen. Accession to the WTO would overlay and obscure a difficult domestic economic situation with an image of excited foreign interest and news of plans for significant increases in direct foreign investment, but WTO membership would not likely buoy growth prospects in the near term.

Latin America should achieve 3.7 percent overall 2001 growth. An economic slowdown in the US will affect Mexico the most but could adversely affect other capital dependent countries if credit flows dry up. Argentina remains the most vulnerable to potential default, despite a $30 billion international rescue package. Brazil and Chile have made difficult policy adjustments that leave them better positioned to weather external developments. Latin American governments generally remain publicly committed to fiscal austerity, trade liberalization, and low inflation, but income inequality and the failure to dent high poverty levels could decrease stability in countries where growth lags.

Economic espionage against the United States is a backhanded tribute to our economic prowess. In particular industries and for particular companies, especially in vital high-tech sectors, economic espionage can threaten profits and fruits of innovation.

Narcotics. The expanding reach of international drug trafficking organizations poses an indirect but insidious threat to the United States. Illicit drugs contribute to crime and social problems in every corner of our country. Abroad, criminal drug gangs suborn officials at all levels, threaten the rule of law, and distort economies. These malevolent influences undercut democracy, stifle development, and reduce the benefits of legitimate investment and commerce.

Despite anti-narcotics successes, notably in Bolivia and Peru, illicit drugs from Latin America still constitute the primary drug threat to the United States. Colombia remains the focus of the cocaine and heroin supply threat from the region. Drugs help fund insurgent groups warring against the Colombian government as well as right-wing para- militaries guilty of human rights violations. US support for Plan Colombia promises to reduce the production and export of drugs to the United States, but it could, and probably will, further increase the already serious threat to Americans in that violence-wracked country.

Colombia and Mexico have the largest share of the US heroin market, but opium poppy cultivation in Asia is increasing, particularly in Burma and Afghanistan. In Afghanistan, production of opium and heroin is a major source of revenue for the ruling Taleban and a political instrument endorsed by bin Ladin to "corrupt" the West. Whether the Taleban will enforce an opium ban declared in 2000 remains to be seen.

Crime. The activities of international criminals threaten Americans, our businesses, and our financial institutions at home and abroad. Organized crime has capitalized on economic liberalization and technological advances to penetrate the world's financial, banking, and payment systems. It has become increasingly sophisticated in high-tech computer crime, complex financial fraud, and theft of intellectual property. The cost to US citizens, businesses, and government programs is in the billions of dollars annually.

International criminal gangs trade in materials for WMD, sensitive American technology, and banned or dangerous substances. They also traffic in women and children, and in illegal visas and immigration. Organized crime groups exploit systemic weaknesses in fledgling democracies and economies in transition from Central Europe to Southeast Asia.

Nontraditional Threats. Illegal migration and alien smuggling continue to threaten American interests and institutions. The US faces its most direct immigration pressures from Mexico, Central America, and the Caribbean. Economic privation and both manmade and natural disasters in the countries of this region, including Colombia and Venezuela, pose the most direct threat to US efforts at immigration control. They also threaten to increase political friction between the US and the sending countries Cuba and perhaps other governments will be tempted to use the threat of mass migration as leverage in bilateral relations or to relieve domestic pressures.

Environmental threats range from toxic spills to global climate change. Environmental contamination can cause severe local problems, as we have seen most recently in the Galapagos Islands and in coastal regions of southern Europe. Global warming would result in broader and unpredictable weather fluctuations, altered agricultural production, and rising sea levels. Each of these regional problems would affect national economic production, food exports and imports, and even international relations. Increasingly resilient bacteria and viruses, which can take advantage of global transport linkages, poor sanitation, and urban congestion can spread quickly across continents. Nowhere is more than a few hours by air from the United States.

Populations in poor regions continue to grow, even as birthrates decline. This demographic lag ensures that in many poor countries over the next few decades a growing cohort of young people will be stymied by the lack of economic opportunities, inadequate health care and schools, and crowded living conditions. They may be inclined to act violently against their governments or be swayed by extremists touting anti-Western nostrums. The safety of both overseas and domestic Americans could be harmed by growing populations with dim prospects directing anger at those perceived to have too much.

Thanks to our military preparedness, preventive diplomacy, and manifold intelligence capabilities, we enjoy the benefits of early warning and the power to mitigate, if not prevent, the realization of many conventional threats. However, those threats inherent in the proliferation of weapons of mass destruction and delivery systems, and emanating from terrorists, ethno-cultural conflicts within and among states, from traffickers in narcotics and human beings, international organized crime syndicates, environmental degradation and natural disasters, and pandemics are numerous and dispersed. Many will remain outside our ability to forecast or forestall.

Mr. Chairman, members of the Committee: The world remains enormously complex, much of it beyond the reach of American or Western democratic antidotes or treatments. Intelligence will not provide answers to or prior warning of all threats. The most prevalent and immediate threats are located beyond our borders, with the potential to harm our citizens working or traveling abroad, our diplomats and men and women in uniform serving overseas, and our economic partners and military allies. Early warning, informed analysis, preventive engagement, and prudent application of power are key to success in dealing with the wide array of threats we face.