The Arms Trade, Security and Conflict
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The Arms Trade, Security and Conflict

Paul Levine, Ron Smith, Paul Levine, Ron Smith

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The Arms Trade, Security and Conflict

Paul Levine, Ron Smith, Paul Levine, Ron Smith

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About This Book

The Arms Industry is an area that is of huge concern to many people around the world. The economics of this hugely important industry are a vital strand that needs to be understood. This volume brings together contributors from all over the globe, such as Todd Sandler and Keith Hartley, and focuses on the important issues surrounding the Arms Trade

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Publisher
Routledge
Year
2003
ISBN
9781134401550
Edition
1

1 Introduction

Paul Levine and Ron Smith

The arms trade is interesting because it is where foreign policy concerns such as security, human rights and international order interact most directly with economic concerns such as trade, jobs and profits. The control of arms exports remains a matter of policy concern both within countries and within multilateral organisations. This Conference Volume contains a set of papers presented at the June 1999 Conference at Middlesex University Business School on the Arms Trade Security and Conflict. The Conference marked the end of a 4-year ESRC-funded project on the Arms Trade. A full description of the project and other papers produced are available at http://carecon.org.uk/Armsproduction.
One can imagine supplier governments determining their levels of arms exports in the light of their economic and security objectives subject to the support of their allies; the constraints of the market; and the nature of the demand for arms by buyer governments. The constraints of the market may include either competition from other suppliers or various forms of cooperation including arms exports controls, agreements between suppliers to restrict sales to particular destinations. The nature of the demand by buyer governments will reflect their security objectives, alliances, budget constraints and alternative sources of arms, in particular, the possibility of domestic production. The chapters in this volume examine various aspects of this process at both the empirical and theoretical levels. Part I presents chapters looking at the supply-side and Part II at the demand-side. Todd Sandler was rapporteur at the Conference and his chapter, the final one in the volume, pulls together the themes discussed at the Conference as examples of collective action problems.
Part I on the supply-side deals with arms exports and production. Keith Hartley and Stephen Martin present the stylised facts of the UK arms trade and examine the costs and benefits of arms exports, the economic impact of limiting arms exports and employment behaviour in the export sector. This opening chapter sets the scene for the rest of the book by demonstrating the opportunities for analytical and empirical work in the emotive area of the arms trade. Jurgen Brauer looks at the evidence on the capability to produce arms and actual production in developing countries. MarĂ­a GarcĂ­a-Alonso and Keith Hartley consider controls on dual-use products and the potential for multiple equilibria in the market. Fotis Mouzakis, Paul Levine and Ron Smith examine how the possibility of domestic production by importing nations changes the effectiveness of arms export controls. Ian Jackson looks at the supply-side implications of the arms trade, with an emphasis on the United Kingdom and its role in the restructuring of the European industry. The final chapter in Part I, by Ron Smith and Bernard Udis, reviews the institutional structure of arms export regulations and the practical difficulties such regulation faces.
Part II examines the demand-side: wars, alliances and arms races. The ultimate driver of demand for arms is war or the fear of war. Paul Levine and Francisco Moraiz examine possible rational actor models of the decision to go to war based on imperfect information. The demand for arms is often a joint decision in combination with allies. Todd Sandler examines alliance formation, alliance expansion using the concept of the core to explain the process. The next three chapters use arms race models to provide empirical analyses of the demand for military expenditure. Sylvie Matelly looks at the determination of US military expenditures in the context of an arms race with the Soviet Union and considers why US military expenditure did not drop in tandem with Russian military expenditure. Paul Dunne, Eftychia Nikolaidou and Ron Smith examine the interaction of Greek–Turkish and India–Pakistan military expenditures in the context of arms race models. Their results are very different for the two dyads. India and Pakistan show well-determined Richardson-type reaction functions, Greece and Turkey do not. Vasilis Zervos examines the government demand for military and space expenditures in the United States and former Soviet Union, and finds evidence that there has been a space race similar in nature to arms races examined in previous chapters of the book.
This collection indicates the range of interesting issues that defence economists have been analysing and suggests a range of issues that will be on the future research agenda.

Part I
Arms exports and arms production

2 The economics of UK arms exports

Keith Hartley and Stephen Martin


Introduction: the policy issues

Although the UK arms trade involves both exports and imports of defence equipment and services, the focus is usually on arms exports. This is an area dominated by myths, emotion and special pleading. Critics refer to an ‘ethical foreign policy’, to the immorality of a nation exporting ‘weapons of death’, to the human rights record of some countries to which the United Kingdom exports defence equipment and the costs to the taxpayer of UK arms exports. Supporters of UK arms exports point to its economic benefits in the form of jobs, export earnings and maintenance of the UK defence industrial base (Towle 1998; Webb 1998). Such diversity of views show the scope for independent analytical and empirical work and for critical evaluation of the UK’s arms exports. There are extensive opportunities for applying economic theory, for empirical testing and for the critical evaluation of policy options. Questions arise about what is known, what is not known and what is necessary to know for sensible, informed debates and public choices on the UK’s arms exports.
This chapter examines several economic aspects of UK arms exports including their benefits and costs, the economic impacts of limiting arms exports and employment behaviour in the export sector. Three issues are examined in more detail, namely, trade externalities, a case study of the problems and costs of maintaining a UK defence industrial base without exports and a comparative study of employment behaviour in UK export markets compared with the home market. The chapter starts by presenting the ‘stylised facts’ and then considers the importance of government in any analysis of UK arms exports.

The stylised facts of the UK arms trade

Evidence on the UK export and import of defence equipment over the period 1975–97 is shown in Table 2.1. The UK aerospace industry has dominated defence equipment exports, accounting for some 70 per cent of arms exports over the years 1975–85, rising to 86 per cent in 1990 and about 91 per cent in 1997 (i.e. military aircraft, missiles and aerospace equipment). Table 2.1 also shows the changing international competitiveness of the rest of the UK defence industrial base.

Table 2.1 UK arms trade (ÂŁ million: current prices)

Ammunition exports declined dramatically in the 1990s; similarly with warship exports in 1985 and 1990, but these rose over the years 1995–7. Most of the UK’s arms exports were to the Middle East (e.g. Saudi Arabia), NATO and Europe.
The UK arms imports are also dominated by aerospace equipment, especially during the 1990s, with most of the aerospace equipment imported from the United States of America. Overall, for the period 1975–97, the UK defence industry achieved a substantial balance of trade surplus for defence equipment. Whilst there are economic determinants of both arms exports and imports, the trade in arms is greatly affected by political factors and the role of governments.

The importance of government

Governments have both a direct and indirect role in understanding UK arms exports. Most UK arms exports are of equipment that was originally designed, developed and produced for the UK’s Armed Forces. As a result, national demands determine the operational requirements, the technology and the unit costs of UK defence equipment (in some instances, possible export prospects might have entered into the criteria for procurement choices). There are few examples of genuine private venture projects designed specially for export markets (examples include the BAe Hawk and some Vickers tanks).
Governments have a further role in arms exports through the award of export licences approving the export sale and the associated policing and monitoring of the licence system (Scott 1996). They can also agree not to impose any R&D levies on arms exports and can offer other forms of support, such as favourable loans, overseas aid, military support (e.g. with training) and assistance with offset requirements (Webb 1998).
The importance of government means that public choice models and analysis are relevant to understanding arms exports. As a result, UK arms export policy will be influenced by interest groups that are likely to benefit from such exports. There will be lobbying by major defence contractors seeking export orders, supported by trade unions and professional associations concerned about their future employment and income prospects. Industry will commission management consultants to provide ‘independent’ estimates of the benefits to the UK economy of allowing arms exports. The Ministry of Defence (MoD) and the Department of Trade and Industry, as budget-maximising departments likely to benefit from arms exports, will focus on the benefits for the UK defence industrial base and for the UK economy, tending to ignore or underestimate the costs of arms exports. Opposition to UK arms exports comes from interest groups such as the Campaign Against the Arms Trade, Saferworld and the World Development Movement.

Evaluating UK arms exports: a benefit–cost framework


Benefits of arms exports

A benefit–cost analysis provides both an analytical and empirical framework for assessing UK arms exports. The approach is illustrative rather than comprehensive. Benefits include employment, a contribution to the balance of payments, support for the UK defence industrial base (e.g. providing security of supply in a crisis), savings on MoD procurement spending, possible trade externalities and other intangible benefits (e.g. world power status; influencing friends and allies). Table 2.2 provides evidence on the magnitude of some of these benefits, particularly those for which data are available in the public domain. It can be seen that between 1980 and 1998, defence exports have become an increasingly important element of the UK defence industrial base. Employment from defence exports as a share of total UK defence industry employment rose from under 20 per cent in 1980 to 26 per cent in 1990–1 and 37 per cent in 1997–8. The increasing export proportion in the 1990s reflected the UK industry’s response to the end of the Cold War and the reduction in UK defence spending (UK defence spending fell by over 20 per cent in real terms during the 1990s: MoD 1999). In fact, between 1994 and 1997, the United Kingdom increased its share of a declining world market for defence exports from 16 to 23 per cent and by 1997 was the world’s second largest defence exporter after the United States of America (HCP 1999).

Table 2.2 Benefits to the United Kingdom

Further benefits from UK defence exports include savings on MoD procurement expenditure embracing both development and production costs. The commercial exploitation levy on export sales is designed to recover MoD’s contribution to development costs and further financial benefits accrue to MoD where export sales lead to the spreading of overhead costs on production. Lower unit production costs through learning economies are also possible if the MoD orders additional equipment after export sales (e.g. Hawk trainers). Over the 5-year period 1992–8, the export levy averaged some £50 million per annum and the spreading of company overheads saved MoD some £350 million in 1997–8 (HCP 147 1999; Martin 1999). Exports might also provide the UK defence industry with a competitive stimulus that is then reflected in the industry’s efficiency and prices paid by MoD; the competition effect might be reinforced if exports enable some contractors to remain in the industry, thus increasing rivalry for future MoD contracts.
The remaining benefits include trade externalities where UK arms exports to a specific country have favourable impacts on the UK exports of civil goods and services to that country; and other intangible benefits, some of which might contribute to the UK’s security (e.g. influencing friends and allies). Of course, some of these benefits are extremely difficult to measure. Even where measurement is possible, there remains the task of converting diverse performance indicators into monetary valuations, where such valuations allow policy-makers opportunities for ‘discretionary behaviour’ (e.g. vote-maximisation).

Costs of arms exports

Arms exports involve costs as well as benefits; often, the cost side of the equation is ignored. Costs include the alternative-use value of UK resources involved in arms exports, any public subsidies, the costs of the Defence Exports Services Organisation (DESO) and other costs, including any externalities. In 1997–8, UK defence exports employed 130,000 personnel, together with land and capital, giving a total value of resources of £6.7 billion allocated to UK arms exports (based on the value of arms exports: MoD 1999). Questions next arise about the alternative-use value of these resources. Here, there is a scope for further research into the operation of factor markets, distinguishing between short-and long-run adjustment processes and recognising the role of ot...

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