Defence industrial policy – a sound security strategy or an economic fallacy?

This article explores whether it makes sense for national governments to employ defence industrial policies – such as offsets and discriminatory procurement practices – to support their domestic defence industries. This question has so far primarily been discussed by economists, who have argued strongly against the use of defence industrial policies. This article maintains that these economists fail to address the often complex motivation behind the introduction of these policies. It illustrates these shortcomings by contrasting their arguments against a case study of Norway, which accounts for the country’s use of defence industrial polices from the early post-Second World War era up until today. The article concludes that, depending on their objectives, defence industrial policies can be seen as either a sound security strategy or an economic fallacy.     

European defence industry consolidation and domestic procurement bias

How have European cross-border defence industrial mergers and acquisitions affected domestic procurement bias among the major EU powers? This article departs from the findings of Andrew Moravcsik more than two decades ago suggesting that major West European states had no ingrained preferences for defence industrial autarchy. When cross-national armament projects were derailed, this could be attributed to political efforts of national defence industrial champions favouring purely domestic projects. As former national champions join pan-European defence groups, their preferences are likely modified. Does this shift procurement towards non-European “off-the-shelf” solutions which, according to Moravcsik, are favoured by defence departments? Or does it give impetus to a stronger preference for European as opposed to domestic systems? In this article, procurement patterns in the aftermath of cross-border defence industry consolidation will be analysed. Procurement bias is assessed in two industry segments characterised by pervasive consolidation.     

The rising unit cost of defence equipment — The reasons and the results

This paper constructs a conceptual model for the selection of defence equipment providing best value for money. It then shows how the unit cost of the chosen equipment increases between one generation of equipment and its successor because of developments in the perceived threat, the available technology and industrial productivity, and demonstrates that unit cost increases can arise from a logical and rational procurement policy and are not necessarily caused by technological chimeras and military vainglory. The resulting persistent rise in unit cost is unlikely to be significantly slowed by any of the counter‐measures yet proposed.

The paper then discusses the policies which nations have adopted to accommodate past increases in unit cost, and the options which confront any nation at the point when it can no longer afford to re‐equip a particular element of its armed forces.     

Corporate performance and military production in South Africa

With the end of the Cold War and apartheid, a process of demilitarisation and dramatic cuts in military spending has marked the transition to democracy in South Africa. Between 1989 and 1997 the South African defence budget was cut by more than 50% in real terms, with most of the cuts coming from the procurement budget, which was cut by nearly 70% in real terms during the same period. These cuts have had a significant impact on the country's defence industrial base. However, there has been surprisingly little research on the changes to defence companies that have taken place since the late 1980s. This paper makes a start at rectifying that deficiency by providing an analysis of the restructuring of the major defence‐dependent companies over the period 1988–97. It uses a number of financial ratios and other measures of corporate performance to compare their experience with non‐defence companies in the rest of the South African economy during the same period.     

NON‐LINEARITY IN THE DEFENCE EXPENDITURE – ECONOMIC GROWTH RELATIONSHIP IN TAIWAN

As we enter the 21st Century, technologies originally developed for defense purposes such as computers and satellite communications appear to have become a driving force behind economic growth in the United States. Paradoxically, almost all previous econometric models suggest that the largely defense‐oriented federal industrial R&;D funding that helped create these technologies had no discernible effect on U.S. industrial productivity growth. This paper addresses this paradox by stressing that defense procurement as well as federal R&;D expenditures were targeted to a few narrowly defined manufacturing sub‐sectors that produced high tech weaponry. Analysis employing data from the NBER Manufacturing Productivity Database and the BEA’ s Input Output tables then demonstrates that defense procurement policies did have significant effects on the productivity performance of disaggregated manufacturing industries because of a process of procurement‐driven technological change.     

Country survey IV: Pakistan

This paper examines the role of the military in Pakistan, particularly in regard to civil‐military relations and defence industrialisation. Pakistan's military expenditure is relatively high, but apart from investment multipliers, little of this spending filters through to the civil sector. Pakistan's defence‐industrial strategy centres on rebuild and Chinese technological collaboration. However, while this ‘capital‐saving’ approach has merit, the strategy has thus far failed to stimulate broader civil development linkages. A conclusion of this paper is that Pakistan is failing to maximise the strategic dual‐use benefits of integrating civil‐military activity.     

France and its allies: A comparative study of defence spending trends since 1985*

Within the EU France devotes to defence the largest financial and human resources although it is not the richest country, nor has it the largest population or labour force. The cost of nuclear weapons accounts for only a small fraction of this abnormally high French defence effort. If France had restructured its military capabilities at the same rate as its principal Allies during the 1985–1994 period, then French defence outlays would be about 20% less than at present. The fundamental reasons for France's excess defence outlay comprise virtual total dependence on French sources for equipment, produced in very small numbers; a military presence outside of Europe; and too many personnel. These deficiencies, and the consequent absence hitherto of a “peace dividend”, indicate a failure to identify the country's real strategic requirements, and a lack of will to reorganise efficiently French defence. The recently announced reform towards an all‐professional force is unlikely to achieve the potential and desirable improvement in cost‐effectiveness.     

Country survey XI: Defence and the Israeli economy

The literature on economic aspects of defence in Israel is critically reviewed by subject: measuring the defence burden, the determinants of defence spending, the effects of defence spending on the economy, and the military‐industrial complex. An overview of the Israeli economy is provided, and some new econometric findings on the determinants of defence spending are presented. The paper concludes by addressing policy issues in the context of Israel's jubilee.     

Country survey XII: South Africa

This article examines the relationship between defence expenditure and economic performance in South Africa, both prior to and after that country's first fully democratic election in 1994. Prior to 1994 defence expenditure decisions were largely dominated by non‐economic factors; since then defence spending has declined in reaction to, inter alia, the need to address a number of socio‐economic inequities.

After 1975 in particular, military industrialisation in South Africa placed a disproportionately high burden on the country's industrial resources and natural economic and technical capabilities. However, although this suggests that the opportunity cost of domestic arms production has been fairly high, the country's poor economic and development performance since the mid‐1970s is a function of underlying structural deficiencies and institutional constraints rather than the consequence of inordinately high defence spending levels.     

Turkey’s strategic choice: buy or make weapons?

Turkey has been investing in its national defence industrial base since the 1980s. As with other developing countries, Turkey’s motivations for investing in national defence industries can be boiled down to the pursuit of defence autarky, economic benefits and international prestige. However, after 40 years of investment, Turkey is unable to reach the primary goals of defence industrialisation. We argue that three factors are important to understanding Turkey’s persistence in these primary goals. First, Turkey believes that there is an overall improvement in its defence industrial capabilities and the goal of autarky is still reachable. Second, increased defence exports support the belief that Turkish defence industries have become sustainable and the trend will continue in the future. The third reason, perhaps most important of all, has to do with the domestic political gains of defence industrialisation: the AKP uses defence industry and indigenous weapon systems for prestige and, therefore, garners broader support.     

Country survey XVI the defence sector in the economy of a declining superpower: Soviet Union and Russia, 1965-2001

The Soviet Union was able to develop a large military-industrial complex and become the world's second superpower despite deficiencies in its centrally planned economy because defence was given high priority status and special planning, rationing and administrative mechanisms were used to attain national security objectives. However, in the period 1976-85 the effectiveness of priority protection diminished and defence institutions experienced more of the problems typical of the shortage economic system. The heavy defence burden also created growing difficulties for the civilian economy. The attempts by the Gorbachev government to reform the defence sector and improve defence-economic relationships during perestroika (1985-91) uniformly failed. For most of the transition period, the Russian military-industrial complex has been adversely affected by its low priority status, cuts in defence spending, instability of the hybrid politico-economic system, and negative growth of the economy. The armed forces and defence industry have been reduced in size and their outputs of military services and equipment have fallen to low levels. Nevertheless, the Russian armed forces still have over one million troops, significant stocks of sophisticated conventional weapons, and a large nuclear arsenal. The government of President Putin has raised the priority of the defence sector, increased real defence spending, and adopted ambitious plans to revive Russian military power. It is likely, though, that tight resource constraints will hamper efforts to reform the armed forces and to upgrade weapons. By 2010 Russia will be an important, but not dominant, military power in Eurasia.     

ACCRUAL BUDGETING AND DEFENCE FUNDING: THEORY AND SIMULATIONS

This paper explores the impact of moving to accrual budgeting on resources allocation in defence. Standard defence budgeting and investment models are used to assess the theoretical implications of accrual budgeting. In addition, a number of simulations are conducted to assess the long-term implications of moving to accrual accounting and budgeting. The result of the simulations shows that changes to deployed operations and other operational shocks will have manageable impacts on readiness but systematic shocks associated with defence unit prices, procurement policies and defence specific inflation will put considerable strain on the defence department's flexibility.     

Country survey VI: Australia

Australia is a geographically large country, with the world's longest national coastline to defend, but a relatively small economy of some 17.5 million people. Since World War II, Australia has faced the dilemma of how to structure defence policy in the absence of an identifiable threat. Its policy of self‐reliance aims to permit Australia to conduct defensive operations in the event of low/medium level threats without depending immediately on its allies. This is to be achieved through the technological sophistication of defence equipment, a highly professional but small defence force and local industry support.

The burden of defence, measured as the share of defence outlay in GDP declined from about 3% in 1971–72 to about 2.3% in 1993–94. It has been the Government's policy to encourage the development of local defence‐related industry, in particular in areas such as: electronics/optics; communications and information technology; aerospace; shipbuilding and repair, munitions; and land vehicles. However, defence procurement has a small impact on the Australian economy as a whole.     

DETERMINING THE DEFENCE INDUSTRIAL BASE

This paper models the determination of the defence industrial base – the number of different military systems a country decides to maintain. High R&D costs means that few countries can afford to produce major weapons systems and the producers also import systems. Non‐producers rely on imports and we assume their demand is driven by regional arms races. Military capability is determined by the number of systems and the quantity and quality of each. We examine how the defence industrial base is influenced by military expenditures, R&D costs, export controls, the nature of regional arms races and a variety of other factors.     

The Serbian defence institution: the need for clear policy guidance to improve the Serbian defence planning,management, and command processes

ABSTRACT

The uncritical layering of western liberal defence governance norms and concepts on top of existing legacy concepts has impeded achieving coherent military capabilities and capacities when Serbia’s political and military leadership tried to reform the defence system using Western benchmarking principles and Western countries’ best practices. The process of this change has been more valuable than its actual output, as defined by increased capabilities. Such outcomes should be reflective of policy guidance, and can be thought of as closing the trinity loop of a defence planning system: plans, money and execution. This article addresses two key functional areas of the Serbian defence institution. First, it assesses the current state of defence planning to discern its strengths and weaknesses to ascertain if plans are tied to financial decision-making. Second, a full examination of current Serbian defence management is conducted to discern whether weaknesses exist that distract from producing operational capabilities. Both areas are analyzed thoroughly and some solutions for change are proposed. Also, the article analyzes the appearance of two negative phenomena in the planning process – economization and managerialism.     

The impact of defence expenditures on Arab industrial development

The purpose of this paper is to examine the role of military expenditures in affecting the pattern of Arab industrial development. In doing so, it attempts to determine whether military expenditures have stimulated increased levels of industrial output, or whether, through diverting resources away from industrial activity, they have depressed the expansion of the region's industrial diversification.

By the use of factor and regression analysis, the main finding of the study is that defence expenditures in the Arab world have been somewhat neutral in impacting on industrial output. In contrast, the study found that non‐defence expenditures have tended to retard the region's industrial diversification efforts.

These findings suggest that analysis of the relative skill intensities of civilian and defence expenditures might be a fruitful area for further research into the process of Arab industrialization.     

Country survey: military expenditure and defence policy in Norway 1970–2013

This article examines military expenditure and defence policy in Norway from 1970 to 2013. Until 1990 Norwegian military expenditure remained between 2.5 and 3.0 per cent of Gross Domestic Product (GDP). Despite constant GDP shares, the military expenditure could not sustain a large and properly armed mobilization army. The constant nominal defence budgets of the 1990s accentuated the Norwegian Armed Forces' underlying imbalance between tasks, structure and budget. Around year 2000, large organizational reforms were effectuated, in which costs, the number of man-years, and underlying imbalances between tasks, structure and budget were reduced. Military expenditure increased in nominal terms between 2003 and 2013, while real military expenditure remained practically constant.     

COUNTRY SURVEY XX: DEFENCE SPENDING AND PEACEKEEPING IN URUGUAY

Uruguay is a country with a very unusual profile, since it has just 3.4 million inhabitants but is among the top ten troop contributors to the UN PKO (Peace Keeping Operations) and is the first contributor per capita. In 2002 and 2003 it was the seventh troop contributor to the UN, and by the end of 2005 it was eighth in the UN ranking. Uruguay has never had any imminent external threat to its security after its independence in 1828, and it has had no internal threat since the end of the urban guerrillas’ actions in the 1970s. The country has no defence industry, and has always had an all‐volunteer military service, which presently involves almost 1% of the total population, and about 2% of the labour force. The empirical evidence presented in this paper shows that, in the past decades, Uruguayan defence spending has been influenced mainly by internal factors, most of them of an economic nature. The high participation in PKO has not increased military expenditure and it has produced a positive impact on the country’s economy.     

Defence and firm performance in the UK

The UK Ministry of Defence is British industry's largest single customer and a number of firms and industries are highly dependent on defence sales. Various hypotheses have been proposed about the impact of defence procurement on firms and these are investigated using four performance indicators: financial structure, investment, productivity and profitability. With regard to the borrowing ratio, capital investment and the rate of return, there is no statistically significant difference between the mean financial ratios for low and high dependence firms. However, non‐dependents appear to have a higher level and rate of growth of labour productivity than dependents.     

A PRODUCTIVITY AND EFFICIENCY ANALYSIS OF THE SECURITY AND DEFENCE TECHNOLOGICAL AND INDUSTRIAL BASE IN SPAIN

This study analyses the performance of the productivity of the main industrial subsectors composing the security and defence technological and industrial base (SDTIB) in Spain from 1996 to 2009. Accordingly, we have used the non-parametric data envelopment analysis and bootstrapping techniques to compute Malmquist productivity indexes that allow us to split productivity growth into efficiency change and technical progress. The results obtained show productivity improvement in the SDTIB as a whole due mainly to advances in technology and to a lesser extent to the contribution of technical efficiency. The bootstrap approach yields further evidence, as for many cases, productivity growth or decline, is not statistically significant. This is the first time a study of this kind has been carried out on the production process of this sector in Spain.