Disarmament must be seen as an investment process, with risks of failure as well as success

Paul Dunne, Middlesex University

With a new Government looking likely to rein in arms exports on moral grounds and to undertake further cuts in military spending, the siren calls of economic disaster are to be heard again.

We are told that cuts in exports will lead to job losses and that reductions in military spending will not only cut jobs but decimate our industry and economy. This is a far cry from the expectations of a `peace dividend’, as the economic benefits of cuts in military spending had been termed, which had greeted the end of the cold war. It is also wrong. It ignores the true economic costs of the arms industry, the true potential for further cuts and the possible opportunities presented by a policy to convert the defence industry.

It is important to recognise that the arms industry is declining. Cuts in domestic procurements are reflected world-wide, with few exceptions. This has led to a huge overcapacity in the market and intense competition, fuelled by desperate countries trying to export to maintain their industries. There is also more scope for cuts as military burdens remain high by historical standards. The cuts we have seen so far are only impressive in the context of the cold war.

The UK’s relative success at exporting arms, apart from the rather dubious practices identified in the Scott report, hides another problem. Defence exports may be profitable to the individual companies but they are not profitable to the economy as a whole.

Arms exports are subsidised by the Government. Development costs of weapons are often paid for by the Government rather than the company. In addition, the Government supports arms exports through the Export Credit Guarantees Scheme, provides marketing and other support, and funds the Defence Exports Services Office.

The Campaign Against Arms Trade suggests in Killing Jobs: Arms Trade, Economy and Employment, that if you add up all of these, it represents a subsidy of about £1bn a year to exports of about £3bn. Does it really make sense to subsidise a declining industry?

There are also hidden costs to the economy. Most major arms deals include offsets or counter-trade agreements which can make the contracts look better than they are. These include requirements to purchase other goods from the buyer country, to transfer technology, or to have production take place in the buyer country. These can reduce any positive impact on the exporting economy and create competitors by providing technology.

Most empirical research suggests that military spending has a negative impact on advanced economies, through being at the expense of investment rather than consumption. Cutting military spending should have provided economic opportunities. Instead we have seen job losses in the defence industry and problems for companies and regions.

This is, however, a failure of one approach to conversion, the `hands off’ approach. Its failure suggests that any economic opportunity can only be realised by proactive government policies. The studies using macroeconometric models which assumed a reallocation of military spending in other areas, have found improved economic performance.

What is needed is a more general policy, one which sees conversion as an integral part of a policy of industrial restructuring and regional regeneration. It is important to recognise the contingency of demand and supply. Governments can replace present demands with others and can influence supply responses (in the extreme it could simply ask the companies to produce something that is useless but not dangerous). In addition, structural change will be easier in a growing economy so we should be planning for growth rather than just change.

The wider influences of military spending and militarism on society and technology should also be recognised. Society is affected by militarist ideology, while technology is influenced by the effort and resources put into military research (especially in the UK where almost half of government funded researchers are in military research).

The defence industry is also not a passive actor but part of the Military Industrial Complex. Its success has been based on getting money out of Government and it has become good at it, better than at surviving in civil markets. As a result, governments pushing new programmes might find defence firms hijacking them and treating them in the same way they have treated military problems (overly high-tech and expensive). Care will be needed to prevent this happening and to encourage diversification into civil markets.

Overall, the implications are that conversion has to be seen as a general policy rather than focusing on particular problems. Disarmament must be seen as an investment process, with risks of failure as well as success, and as a long run process. We must have conversion of the economy not just the defence industry. In this way conversion presents an opportunity for improved economic performance rather than just a way of dealing with unpleasant changes. But such policies will require a proactive approach very different from the approach of the previous government. The opportunity remains for the new Labour Government – the question is whether it has the political will to exploit it.

Paul Dunne is professor of economics at Middlesex University Business School.