[Marxism] A note on a quantitative effect of the outsourcing of the military industry

Jurriaan Bendien bendien at tomaatnet.nl
Fri Feb 13 21:18:28 MST 2004


"We can't have it both ways. We can't be both the world's leading
champion of peace and the world's leading supplier of arms."
Former US President Jimmy Carter, presidential campaign, 1976

EXPORT-LED DEVELOPMENT TO OUTSOURCING

World military R&D is, by far, the largest single research pursuit on
earth. Very few researchers however are researching the economics of
the military industry itself. During the 1980s, Elisabeth Sköns notes, world
military expenditure was 10 times higher than in 1925-1938. In 1989,
the USA spent 36% and the USSR 23% of it. Nevertheless, few
governments provide regular and comprehensive information
about their national arms industry. The US government does
not provide any single comprehensive statistical report on
the US arms industry, the largest in the world. I think that
in real terms world military expenditure is in 2004 back to the
same level as 1988 or has exceeded it. SIPRI staff Elisabeth
Sköns, Wuyi Omitoogun,  Petter Stålenheim, Catalina Perdomo,
Eamon Surry, and Natasza Nazet, who crunched the numbers,
suggest by their conclusions must be the case.

I was interested to look at this, since Elisabeth Sköns notes that since
1989
there was a sharp drop in demand for military equipment. The global
stockpile of nuclear warheads peaked in 1986 at 69,490, equal to
an explosive yield of 18 billions tons of TNT, three times the explosive
force used in all of world war 2.

The Pentagon industry claims the defense industry laid off 795,000
American workers between 1992 and 1997. The corporations
responded to this with "export-led development", involving
many offset agreements - incentives provided to
foreign countries in exchange for the purchase of military goods
and services. The weapons industry experienced production cuts,
privatisation, concentration, internationalisation, commercialisation
and intensified competition. More and more weapons are now
produced for export, with government assistance. It keeps
people in jobs, it has a multiplier effect, and it provides national
military capacity should the need arise. About $27 billion
of weapons are exported, three quarters to Asia and the Middle East.
But offset agreements lead to outsourcing as more and more
new players acquire the capacity to produce weapons.

The "biggies" in the arms business are Lockheed Martin,
Boeing, Raytheon, British Aerospace, GEC, Northop
Grumman, Thomson, Thomson CSF, General Dynamics,
TRW, and United Technlogies. But Daimler-Chrysler,
Mitsubishi, Rolls Royce, Tenix, ADI and Lucent
Technologies also produce military equipment.

The programs often include agreements to manufacture
some or all of the products in the purchasing country. So Turkey,
for example, bought 160 F-16s from General Dynamics
in 1987 (for delivery through 1994) for about $4 billion, on
the condition that most of the planes be built in Turkey. In turn,
Israel's military industry won its biggest contract ever, upgrading
Turkey's Patton tanks. Thus, according to the London-based
International Institute for Strategic Studies, while the arms
trade declined in 1985-1995, it grew in real terms by 36
percent between 1995 and 1997 through export-led
development. It is still growing.

CONVENTIONAL ARMS

The five permanent members of the UN Security Council -
the USA, UK, France, Russia, and China - are responsible
for 90% of reported conventional arms exports. The
USA, the UK and France make more money from weapons
sales to developing countries than they give them in aid.
The top 15 countries in terms of military spending account for
over four fifths of total world military spending. Such expenditure
estimates of course do not reflect the actual stock of world military
hardware accumulated over a longer timespan, and the value of that stock.

The total number of small arms, ranging from pistols to shoulder-fired
rocket launchers, in civilian and military hands around the world rose to
639 million in 2001, and the USA accounts for 220 to 230 million of those
(Geneva Graduate Institute of International Studies, 2002). 8 million more
are produced every year. So there's is one firearm for every 10 people on
the planet. According to the UN, of 49 major conflicts in the 1990s, 47 were
waged with small arms as the weapons of choice. Small arms are responsible
for over half a million deaths per year, including 300,000 in armed conflict
(war fatalities) and 200,000 more from homicides and suicides.  That's one
person every minute. This is merely to say that the amount of usable weapons
in the world cannot really be expressed in money terms, you have to look at
actual quantities of specific weapons.

The "weapons of mass destruction" waffle of the neo-conservative Bushites is
just about profits and economics, not about human lives or the actual use of
weapons.

MEASUREMENT ISSUES

SIPRI adopts a definition of "world military expenditure" data as all
current and capital expenditure used on: (a) the armed forces, including
peacekeeping forces; (b) defence ministries and other government agencies
engaged in defence projects; (c) paramilitary forces, when judged to be
trained and equipped for military operations; and (d) military space
activities. The aggregate includes: (a) military as well as civil personnel,
including retirement pensions of military personnel and social services for
personnel; (b) operations and maintenance; (c) procurement; (d) military
research and development; and (e) military aid (in the military expenditure
of the donor country). Excluded are (1) civil defence and current
expenditures
for previous military activities, such as for veterans' benefits,
demobilization, conversion and weapon destruction, (2) military
expenditures by non-state organisations such as armed opposition
groups (more difficult to estimate, also).

On this basis, using CPI deflators, SIPRI calculates world military
expenditure in the calendar year 2002 was $794 billion in 2002 prices,
accounting for 2.5% of world GDP valued at $31.8 trillion, and $128 per head
of the world population. Cuba spends about $30 per Cuban citizen and
the USA $1,010 a year for each American citizen.

I think the SIPRI figure merits a closer look. Why ?

My first reason is that SIPRI figures, as the researchers themselves
emphasise, are different from those reported in the past, because of a
change in the method used to convert the military expenditure of economies
in transition (including Russia) to US dollars.

In the past, these countries' spending was converted using Purchasing Power
Parity exchange rates, whereas now market exchange rates (MERs) are used for
all countries, giving considerably lower dollar figures for the countries in
question. If PPP rates, which better reflect the actual volume of goods and
services that can be purchased in each country with its currency, are used,
then the US remains the top spender by far, but the next three are then
China, India and Russia. This is because MER dollars tend to undervalue the
purchasing power of money in developing countries and economies in
transition. However, lack of reliable PPP dollar data meant that SIPRI chose
to use MER dollars to convert all currencies to US dollars.

My second reason is that world GDP is normally estimated in PPP dollars,
although, as I have discussed on PEN-L previously, the World Bank now uses
an Atlas Method. Let's take a closer look at the SIPRI total. If we just
take the total expenditure of the top 15 countries in military spending, the
discrepancy between MER dollar and PPP dollar valuations is 28.7%, a
difference of $256.6 billion, which bascially means that, in reality,
military expenditures are more than a quarter higher, if adjusted for real
buying power, i.e. more bangs for bucks.

This big discrepancy is for the most part due to the currency differentials
applying to China, Russia and India. In 2002 MER dollars, these countries
spent respectively $31.1 , $11.4 and $12.9, a total of $55.4 billion for
those three countries, but if you convert that to PPP dollars, the figures
come out as $142.9 , $66.5 and $55.4 equivalent a total of $264.8 billion
for the three countries, in other words, then military spending of these
three countries is actually five times higher.

If I estimate SIPRI world military spending in PPP terms, I arrive
at a figure equivalent of about one trillion US dollars, or, given a
world population of 6.2 billion, a military expenditure value per head of
the world population in 2002 which is equivalent to $161 in real terms.
(one trillion is just under a tenth of US GDP).

WORLD ESTIMATE HIGHER

We know that the World Bank estimate of world GDP in 2002 was US$32.3
trillion and world GNI was US$31.5. In that case, it would be more correct
to say that in truth, world military expenditure using SIPRI's definition
is about 3.3% of world GDP, and not 2.5%  as SIPRI suggests
(3.4% of world GNI). In other words, it's about 0.8% higher than
the SIPRI measure suggests. A rather trivial difference you might say,
but in reality it's gigantic, because we're talking about the total new
value
added by world production in 2002, i.e. a value of nearly 260 billion
dollars. The world GDP measure for 2002 implied by SIPRI itself
is actually slightly lower than the World Bank measure, in
which case real expenditure works out at nearly 3.4%.

Let's extrapolate linearly that world GDP for 2004 will be approximately
$33.9 trillion, then we are on pretty safe ground if we estimated that world
military expenditure in 2004 using the SIPRI definition will be around the
$1.1 or $1.2 trillion mark. That's about the same as the total value of
the world oil market, or the same as the combined income of half the
people living on earth.

DISAGGREGATE ANALYSIS

SIPRI says the USA in 2002 accounted for 43% of world military expenditure
in MER terms. The  USA, Japan, the UK, France and China in MER terms
accounted for 62% of the world total, and the top 15 countries account for
82%.

But let's now look at the disaggregate MER dollar values SIPRI calculated
for world military expenditure in 2002 (billions of MER dollars):

USA $335.7 (the 2002 defence budget was $343.2 billion, $400 billion in
2004)
Canada $8.3
UK $36
France $33.6
Germany $27.7
Italy $21.1
Other Western Europe $10.5
China 31.1 (PPP $142.9)
Japan $46.7
South Korea $13.5
Other East Asia $30.7
Saudi Arabia $21.6
Iran $17.5
Turkey $10.1
Israel $9.8
Other Middle East $21.1
Russia $11.4 (PPP $66.5)
Other Eastern European countries $10
Central America $3.3
Brazil $10
Other South America $11.1
India $12.9 (PPP $55.4)
Other South Asia $4.4
Oceania $7.4
Whole of Africa $9.6

US military spending exceeds the combined spending of the next top
twenty nations on the list. If I add up the MER values provided by SIPRI,
I get a $755.1 billion current price estimate for total world military
expenditure in 2002. The official SIPRI world total is $38.9 higher,
possibly due in part to rounding (?). If I substitute the PPP dollar values
for China, Russia and India only, then the total 2002 expenditure is bumped
up to $964.5 billion, which as you can see is also pretty close to a
trillion US dollars in current prices. In that case, US military expenditure
would represent only 34.8 percent of the world military expenditure, i.e.
about a third, in real terms. The military spending of the USA plus close
allies (NATO countries, Australia, Japan and South Korea) spend
more than the rest of the world combined, i.e. two thirds of all
military spending and approximately  57 times more than the
seven "rogue states" included in Bush's "axis of evil".

ADD-ONS

My third reason for questioning the SIPRI 2002 total is, that various items
are not included. As the researchers themselves indicate, in their
calculations the value of veterans' benefits paid out and demobilization
costs (regarded as transfers in GDP),  conversion costs (partly included and
partly excluded from GDP) and weapons destruction costs (partly included and
partly excluded in GDP) are excluded in the SIPRI world total for military
expenditure, because they are expenditures in respect of military
activities that took place in the past. Yet it is "military expenditure".
Elisabeth Sköns admits that military expenditure should be a measure
of the total cost of maintaining a defence establishment, but that in
reality
government data only cover part of those costs. Private armies and
opposition movements are not yet included in the figures.

Another issue however concerns procurement of military equipment
(ranging from weapons and weapons systems
to vehicles, clothing, support services and the like - arms procurement
usually accounts for only 20-30% of the military budgets of the larger
arms-purchasing countries, while the largest portion is normally spent on
operations, maintenance and personnel; world arms sales are only about
$20-25 billion, it is the military apparatus that consumes the big money).
Government money spent on obtaining weaponry and weapons systems
doesn't really adequately represent the value of the net output of GDP
defined industries producing military equipment. So, by just striking a
ratio between government military expenditures and GDP, we
probably understate the real economic significance of military
industries.

Jurriaan

Note: SIPRI comments: "Planned increases by the USA are likely to ensure a
continuing rise in world military expenditure over the next few years, with
other major powers also seeming inclined to raise spending to try to keep
pace. However, increases in most parts of the world are likely to remain on
a smaller scale than those in the US." One of the few American economists
dealing with the economics of arms reduction is Kenneth Arrow.

Some useful sources on this issue:

http://projects.sipri.se/milex/aprod/transparency.html

http://www.unu.edu/millennium/skons.pdf

http://www.africansecurity.org/conference%20papers/defbudget/skoens.pdf

http://www.crp.cornell.edu/peps/Journal/Vol6-No3/Rsr-Arrow.pdf

http://cns.miis.edu/pubs/npr/vol04/42/keith42.pdf

http://disarmament.un.org:8080/cab/salw.html

http://www.worldpolicy.org/projects/arms/reports/smallarms.htm










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