The Politics and Economics of Arms Sales

I have been doing a lot of thinking lately about the nexus between the politics and the economics of arms sales.  It is a question that lies at the heart of my dissertation, but one which is mostly inadequately appreciated by both economists and political scientists.  I had my class (Politics of Arms in International Relations) read some pieces this week which relate to this decision-making nexus and it has brought some of these issues back to the forefront in my own thinking.

First off is a great quote from Smith, Dunn, and Fontanel (1985) about the problems of politics in the transfer of arms [1]. (Emphasis is mine)

"Although arms transfers comprise a significant component of world trade, they have received little attention from mainstream economists.  This partly reflects the data difficulties which inhibit accurate estimation and quantification, and partly the contamination of the topic by political and strategic elements beyond the economists' expertise."

The idea that an issue is contaminated by political and strategic elements is an interesting perspective of political science.  It is refreshing to see economists admit that there may be something that is beyond their expertise as well!

Smith et al (1985) argue that there are three primary reasons for states to wish to sell weapons:

1.     Strategic: governments wish to maintain an indigenous arms industry ins order to ensure weapons designed exactly to their requirements, national independence of supply, and access to the latest military technology. There is an incentive to export, even if exports are below the average cost. (242-3)
2.     Political leverage in foreign policy: nation can assist their "friends" by strengthening their military position while at the same time having potential to influence their behavior (Kinsella tie-in) or that there is a prohibition that weapons not used aggressively or for internal repression (tie-in with Blanton). (243)
3.     Economic benefits: these include technological spin-offs, employment benefits, economic momentum (243-44)

Caverley and Kapstein [2] look at similar arguments in the case of the United States arms production. They argue that the US lost its advantage in arms exports because of the domestic demands of the pentagon.  The penchant for the US military to ask for the nicest, highest spec equipment means that the finished product is priced out of range for non-domestic buyers.  They give the example of the F-35, which was designed to be a low-cost high tech fighter that would be good enough for most missions and which would be eminently exportable.  The rising costs of that aircraft have meant that many staunch allies have reduced or cancelled orders for the aircraft. The increased design specifications have made the aircraft less suitable for the domestic role that it was originally meant to fill.

This is an interesting dilemma.  The world's superpower which has the advantage of a strong domestic market is being squeezed out because of the unrealistic demands of that same market. This echoes the findings of Smith and colleagues in the case of decreased military spending by Britain, GDR, and the US means fewer exports, while the opposite was true for France and Italy.  They note that it was the civilian oversight of the procurement process in those states - with an eye toward exports - that caused this result.

I had some articles in my newsfeed about aircraft sales that made me think of these arguments today.

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Links

First F-35 built in Europe goes for its maiden Flight: LINK

Making F-35s more quickly can lead to problems: LINK

Kuwait is buying the Eurofighter.  LINK

Brazil is buying a Swedish fighter: LINK  LINK2

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REFERENCES

[1] Smith, Ron, Anthony Humm, and Jacques Fontanel. 1985. “The Economics of Exporting Arms.” Journal of Peace Research 22(3): 239–47.
[2] Caverley, Jonathan, and Ethan B. Kapstein. 2012. “Arms Away.” Foreign Affairs 91(5): 125–32.

Russia's Internal Arms Consumption

Russia is trying to re-equip its own army (LINK).  This has been going on for awhile.  P.M. Medvedev announced recently that the goal for new equipment in the Russian military is being raised to 75 percent new equipment by 2020.

There are a few implications for this, both internally and externally.  The first is that this is a move that is both about the military and about the militarized economy.  One of my favorite books about the subject of Russia's military economy is by Gaddy and Ickes (2002) [1].  This book talks about the distortions caused by the Soviet Union's militarized economy.  Russia's economy is still riding the oil and gas boom, but employment in those sectors is still small.  There are numerous factory towns (large and larger) whose existence and employment base was dependent on the militarized economy.

Vladimir Putin has elevated arms sales to the same level of state enterprise as the oil and gas industries.  The reasons for this are plentiful. One reason is that arms still are symbolically important.  The more states that use Russia's weapons, the greater Russia's perception of its own uniqueness and importance.  A second reason is hinted at above - Putin needs to employ individuals.  One way to do that is to continue to ride the distortions of the Soviet economy (to a lesser scale) by emphasizing the military industrial complex.

There have been some reports that Russian firms are unable to produce arms sufficiently to meet their obligations to external customers, let alone to fulfill such an ambitious rearmament agenda.  However, by emphasizing internal purchasing of weapons the Kremlin is sending a strong signal that these industries will have the continued support of the state - and that may goad them into ramping up production through hiring, streamlining processes, etc.

This will be an interesting phenomenon to keep an eye on.  To what degree will the Russian military re-arm itself in the coming years?[2]
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[1] Gaddy, Clifford G., and Barry W. Ickes. 2002. Russia’s Virtual Economy. Washington  D.C.: Brookings Institution Press.

[2] I did not tackle the issue of corruption in this post. I have addressed it earlier (here and here). That will be an even bigger issue as more funds are funneled into the defense sector.

Note: It has been a while since I've posted anything here.  This is not a widely-read forum in general (and for now I'm okay with that), and has been more of a way for me to keep my thoughts together and to have a little fun doing side projects.  I have finished my dissertation and am in the process of moving to a visiting professor position at UNLV.  I may not be writing much over the summer either.

Odds and Ends: Russian Foreign Policy

I recommend all of Karaganov's columns for concise and clear analysis of Russian politics and for interesting policy prescriptions.  His latest article is no exception.  You can read the entire article by following the link below.

Russia's Luck Has Run Out Sergey Karaganov Russia has been unbelievably lucky in its relations with foreign powers over the past 12 years. But despite positive trends, things are looking less rosy on the country's domestic political front. Read more >

One item that Karaganov picks up on is one that is echoed in a column from Dmitri Trenin.  Karagonov writes: 

In terms of economic development, it is crucial that Russia link itself more closely to the Asian economic powers. This can be accomplished by developing Siberia and the Far East. Russia needs to attract huge foreign investment in the region's infrastructure, raw materials processing and timber. In return, Russia would need to provide highly favorable tax incentives and legal guarantees. 

To boost these efforts, the Kremlin should consider moving part of its functions to a major city in Siberia or the Far East — a "second capital" of sorts. For Russia to have any hope of rivaling Asia's spectacular rise, it would need a modern-day project on a par with the construction in the early 1700s of St. Petersburg, Peter the Great's "window to Europe." 

 Trenin writes (link to article here):

The chief new element in the relationship is easy to see. It is the historical role reversal. In 1979, China's gross domestic product was a mere 40 per cent of that of the Russian republic within the Soviet Union. Nowadays, China's GDP is between four and five times bigger than Russia's. At the heyday of the Sino-Soviet confrontation, the Soviet Union was a military superpower and the People's Liberation Army was essentially preparing for a "people's war". Today, China's defense budget is the world's second largest, way ahead of the 5th-placed Russia. Even more importantly, China's research and development budget dwarfs Russia's. Ultimately - Russians, who heretofore have never lived with a strong China, need to adjust to the new reality. 

For the Russians, of course, having refused in a previous era a junior partnership arrangement with the US, to run now into China's embrace would be not only bitter irony - but supreme folly. Right now, Moscow is busy to craft an Asia policy that is more than a China one. They are already reaching out to Japan, are strengthening relations with South Korea, and are revamping their long-time strategic bonds with India - by now much frayed. They are also seeking economic and security integration with Central Asia, which the Chinese are increasingly viewing as their own backyard.

The irony of Russia's focus on the west and missile shields and problems in Europe is that conflict with another state is more likely to come in one of the Central Asian republics with interference from China.  In terms of what I usually think about on this blog - how will these shifting alliances and economic development change the way that arms are sold throughout the world, and throughout this region?