The Politics and Economics of Defence Industries

Efraim Inbar, Benzion Zilberfarb, Efraim Inbar, Benzion Zilberfarb

• Publisher: Routledge
• Year: 2013
• eBook ISBN: 9781135227012
• Topic: History
• Subtopic: Military & Maritime History
• Index: History

This volume provides a policy-relevant analysis of the complex web of contemporary economic trends, political developments and strategic considerations that are shaping the contours of the new post-Cold War world market for weaponry.

1

Politics and Economics of Defence Industries in a Changing World

Ian Anthony

Introduction

Prior to the end of the Cold War in 1989–90, the defence budgets of major powers were already under pressure. In the United States, military expenditure peaked in real terms in 1985, while within the NATO alliance as a whole, expenditure peaked in 1987. The economic capabilities of the Soviet Union were completely stretched in the 1980s – a factor which many consider to have contributed to President Mikhail Gorbachev’s decision to initiate a reform programme after 1985. With the end of the Cold War there has been an enormous reduction in the levels of military effort by the major powers. This reduction in effort has in turn been reflected in the diminished demand for military equipment. While there is no single indicator that captures the scale of this change, sales and employment figures for the largest defence companies are perhaps indicative. Arms sales by the hundred largest arms producing companies in the OECD (Organization for Economic Cooperation and Development) and developing countries fell by 15 per cent between 1991 and 1994.¹ According to the Bonn International Centre for Conversion, worldwide employment in the arms industry has fallen from 17.5 million workers in 1987 to 11.1 million in 1995. More than 90 per cent of the reductions have occurred in member countries of NATO and the former Warsaw Treaty Organization.²

If the current environment in which the defence industries of the major powers must operate has changed dramatically, there is still uncertainty about the precise nature of the future demand for military equipment – reflecting the deeper uncertainties of political, technological and economic conditions in the major centres of arms production. In these major centres – North America, Europe, and the former Soviet Union – there is still a broad consensus that armed forces are required to deter an attack on national territory, or should deterrence fail, defeat the enemy. In the present environment of threat, however, existing forces are sufficient for the purpose of territorial defence.

Whether the armed forces will be required to do more than defend national territory and, if so, where and under what conditions military operations will be performed is still an open question. The period 1991–95 has seen the deployment of large multinational military formations for very different purposes. The coalition which expelled Iraqi forces from Kuwait represented an enormous concentration of offensive power. The coalition of forces participating in the IFOR under the framework of the Dayton Peace Agreement has an entirely different composition and mandate.

The armed forces of at least some states are expected to be flexible and capable enough to achieve a variety of objectives. Similarly, a defence industrial policy will have to provide the equipment necessary to carry out these tasks at minimum cost.

In several parts of the world, states remain unable to regulate their relations by peaceful means. In China, on the Korean peninsula, and, not least, in the Middle East, the risk of conflict remains a constant factor in inter-state relations. In certain countries in the Middle East and Southeast Asia, military expenditure is increasing, in contrast to the global trend. However, demand from these relatively small states cannot compensate industry for lost markets among the major powers. On a global basis, therefore, the central issue for the ‘traditional’ defence industries – manufacturers of conventional arms, delivery systems and platforms – is how to reduce production capacities in line with the reduction in demand.

At the same time, there is interest among many states in raising the technological sophistication of their armed forces and adding new technical capabilities. Therefore, it may be that demand is not depressed for all equipment types, despite shrinking global military expenditures.

The ‘defence industry’ is by no means homogeneous.³ While sectoral industrial classifications are usually based on the characteristics of the product, adopting this approach in the defence area confines the sector to items specifically designed, developed, and produced for military purposes and which have no alternative use. This creates a discrete sector of arms and munitions along with a small number of dedicated delivery platforms and target acquisition systems, but it excludes many products that are of growing importance to military capability. The alternative is to classify the sector by the nature of the customer and the end-use to which a product is put. However, many producers sell the same or similar products in both civil and defence markets. These definitional problems contribute to the fact that defence-related trade and production have never been disaggregated in national and international economic data according to standard procedures.

A cash-rich producer of digital telecommunications equipment that is part of a global private sector corporation has a different environment from a heavily indebted producer of mortar bombs. Clearly, a broad brush approach cannot do justice to all of the issues involved in the micro-economic environment of any company. This paper will attempt to identify broad trends shaping the environment in which the defence industry has to work. Specific questions related to individual products and companies are not addressed.

The defence market is determined by government, and therefore this is essentially a demand-side approach. Defence equipment producers have to consider at least the following issues (most of which are closely inter-related):

• Trends in defence planning and force posture
• Trends in public expenditure and, within that, trends in military expenditure
• Trends in military technology development
• Prospects for successful exports

The remainder of this chapter will look at each of these sets of issues in turn and offer a brief summary of different responses by industry.

Trends in Defence Planning and Force Posture

Following the end of the Cold War, arms procurement and the impact of political and military changes on the defence industry have not been a high priority in the discussion of international security. Governments have centred their attention on broad issues of security and defence policy and assumed that appropriate procurement choices will flow logically from the outcome of those debates. At the international level, discussions have focused on the future shape of the international system. At the national level, the debate has focused more on how to shape a new ‘grand strategy’ for the new international conditions than on defence industrial issues.

Even within the national debate on narrower defence issues, equipment has not been a dominant issue. Defence down-sizing has required manpower reductions and the relocation of large numbers of military units and personnel. Many military bases have been closed.⁴ Several countries have discussed whether they will retain conscription as the basis for their armed forces or try to establish smaller armed forces with fully professional personnel.

Russia in particular has seen massive upheavals in its military environment. During the Cold War, large numbers of Soviet forces were deployed far forward, in support of the prevailing doctrine. By the end of 1995, Russia had withdrawn more than 700,000 men and women and 45,000 pieces of equipment from the Baltic States and Central Europe. Nevertheless, a large number of Russian troops, and infrastructure to support them, remain stationed outside the territory of Russia. Each of the major branches of the Russian armed forces (Ground Force, Air Force, Air Defence Force, Navy, and Strategic Rocket Force) has drawn up a development plan that sets objectives for fundamental reform and reorganization to be achieved by the early years of the next century. None of these plans is yet final and several key variables are not yet known.⁵ However, one objective is the implementation of the military doctrine approved in 1993, which includes among its objectives the capacity to conduct defensive and offensive operations under the conditions of massive use of present and future weapons.⁶

Within NATO, the main preoccupation of member governments was the elaboration and implementation of the new Alliance Strategic Concept approved in late 1991. Subsequently, the dominant issues within the alliance have concerned the establishment of new relationships with both former adversaries and European neutral and non-aligned countries.

The United States, Canada, and most Western European countries take many of their most important decisions about strategy and force structure in the framework of NATO. The new Alliance Strategic Concept provided a framework for subsequent decisions about a new NATO force structure that is not based on the defence of a fixed front in Central Europe. These decisions began to be implemented in 1994 and were being completed in early 1996.⁷

The new structure is built around the idea that participating members contribute discrete units – divisions or brigades – to larger multinational formations. The goal of these changes is to allow members maximum flexibility in their decision-making. Not only the United States, but also the larger European countries are still trying to retain the widest possible range of independent military capabilities. For this reason they prefer to avoid creating interdependence in key operational tasks. Such interdependence could make it difficult or impossible for one government to use force without the consent of another, or alternatively, may create pressures to assent to the use of force at the request of a partner.

Outside the framework of NATO, the same approach underpins the Franco-German Eurocorps established after May 1992. This force is intended to form the core of a future European Security and Defence Identity and was joined by Belgium and Spain in 1993. Belgium will also contribute a discrete unit – a mechanized brigade – to the force, as will Spain – a mechanized brigade that will be upgraded to a mechanized division in 1998.

In January 1994 NATO approved the concept of combined joint task forces. These forces deployed self-contained elements of existing national forces, in ‘packages’ tailored to specific scenarios. However, the task forces might include non-NATO forces. The further discussion of details regarding these task forces has become an important element of the NATO Partnership for Peace initiative.

In January 1994 NATO heads of government also approved the idea of enlarging the alliance by admitting new members. Managing this enlargement has now become one of the central issues facing NATO governments. In particular, since this process of enlargement has been strongly opposed by Russia, it has been necessary to think through and discuss the future implications of enlargement for relations with Moscow and the impact on the security of countries that do not join the alliance.

From the perspective of defence industries in Europe, an additional factor to be considered is the process of political union taking place in the framework of the European Union. While the evolution of a common foreign and security policy in the framework of the EU has potentially important long-term implications, thus far moves by government to establish new practices for arms procurement have been very tentative. Decisions of this kind are currently still taken at the national level in all countries.

The idea of a European Armaments Agency able to take collective decisions on arms procurement was approved as a long-term objective of the European Union in a declaration on the Western European Union (WEU) annexed to the Maastricht Treaty.⁸ Clearly, such a step would have very important implications for the defence industry. However, no such agency has been established so far and government discussions have been limited to harmonizing national requirements for any given system and combining certain administrative aspects of project management where a system is to be jointly procured. Efforts of this kind have a long history within NATO.⁹

For European defence industries – including those in countries considered to be export-oriented – the most important single line of communication remains that with the domestic ministry of defence or armed forces procurement agency. The close ties that have developed over many years, between national producers on the one hand and their ministries of defence and armed forces on the other, still offer a channel for information exchange about future requirements that allows industry to tailor products to the needs of the customer.¹⁰ In order to improve their access to information and to decision-makers, many companies have established teaming arrangements with foreign partners through whom they tend to market their products. In some cases companies may also share technology with a foreign partner or share the financial risks involved in developing new products together. However, for the most part these remain arrangements for cooperation between independent companies. The major cross-border rationalization of the European defence industry anticipated in the early 1990s does not appear to be taking place, and there remain significant political and legal obstacles to international take-overs in the defence sectors.¹¹

Elsewhere in Europe, the dissolution of the Warsaw Treaty Organization and the end of the Cold War also transformed the strategic landscape for former member states. The need to counter a putative threat from NATO disappeared – the focus of defence planning for nearly four decades – taking with it the central rationale for maintaining enormous defence establishments. The defence planning problems are now of an entirely different character: eliminating surplus military equipment, ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Notes on Contributors
• Introduction
• 1. Politics and Economics of Defence Industries in a Changing World
• 2. The Economics of Defence Conversion
• 3. The Post-Cold War American Defence Industry: Options, Policies and Probable Outcomes
• 4. Too Small to Vanish, too Large to Flourish: Dilemmas and Practices of Defence Industry Restructuring in West European Countries
• 5. UK Defence Industries
• 6. Adapting to a Shrinking Market: The Israeli Case
• 7. Conversion and Diversion: The Politics of China’s Military Industry after Mao
• 8. The Military Industries of the Arab World in the 1990s
• 9. The Rise and Fall of Arms Industries in Argentina and Brazil
• Index