Defence market Latin America--economic and political pressures force decline. (Complete Guide).

In looking at the various defence marketplaces around the world, perception often clouds reality. For example, there has always been a view that Latin America is one of the great defence markets, arguably that ideal was true thirty years ago but now it is in relative decline. That is not to suggest that military spending is in freefall, it is still at a significant level. However, the ability of the majority of Latin American nations to purchase state-of-the-art military equipment is no longer a major factor in the calculations of most defence equipment suppliers.

The purpose of this article is to look at the current state of the Latin American defence marketplace through focusing on a number of key regional nations. The nations covered are Argentina, Brazil, Chile and Venezuela, traditionally the key defence markets in South America. Apart from looking at the status of their military forces, we will also evaluate their current and future defence plans. In addition, we will also endeavour to look at their political and economic situations to define the pressures that are influencing the evolution of their national military forces.

The past fifty years have seen many dramatic changes in the course of Latin American affairs, yet the legacies of the past, in many cases, unwelcome, still have an impact on the present. Argentina provides an excellent example of the social and economic pressures that have defined the evolution of nation states in Latin America. In the case of Argentina it was an issue of possibilities being squandered.

From the promulgation of the Argentine constitution in 1853 until 1916, the Conservative forces were dominant. After 1916, the Radicals came to power and sought to develop democratic institutions and free and fair elections to expand the political franchise to the growing middle class and to other groups who had been alienated from the government. The Radical Party continued to rule until 1930, when, after a military coup they were deposed and replaced by the Conservatives. Social changes in Argentina, such as the evolution of an urban working class and labour unions, meant that the Conservatives were only able to sustain their rule by electoral fraud and the use of force. Eventually, in 1943, another military coup took place and this ushered in the era of Juan Domingo Peron and Peronism.

As a Colonel in the Army, Peron was one of the leaders of the 1943 coup and dominated the government from his position as Minister of Labour. Peron was able to organize the working class and build a new political power base. He was elected President in 1946 and sought to change Argentina through the imposition of a pseudo-totalitarian political system with an emphasis on mass organizations. This saw a rapid growth in the power of pro-Peron trade unions and the establishment of the General Confederation of Labour (CGT) as the umbrella trade union organization.

Decline And Fall

In 1947, Peron sought to secure his union base and change the nature of the Argentine economy through the nationalisation of key industries and the imposition of a planned economy through five-year plans. Peron, helped by his charismatic wife Eva Duarte de Peron (Evita) was able to win the 1952 presidential election. However, the death of Evita in 1952 and the failure of the planned economy saw Peron removed from power and exiled by the military in 1955. After this civilian and military governments alternated in power through to 1960s, but failed to deal with economic stagnation and increasing social unrest.

Democracy Returns

After ten years without an election, March 1973 saw elections held and although Peron was banned from running, the Peronist political movement led by Dr. Hector Campora won the Presidential and Congressional elections. Campora resigned in July 1973, leading to new elections, which Peron could contest, and in October 1973 he returned to power as President, with Isabel Martinez de Peron, his third wife, as Vice President. Peron died in July 1974 and Isabel Peron took over until she was removed in a military coup on 24 March 1976.

Over the space of twenty-five years, Argentina had gone from being an economic success story to an economy in trouble. Terrorism was now a real threat, with Peronist groups on one side and radical left-wing groups on the other. Under Isabel Peron the terrorist situation worsened and a special executive order was promulgated allowing for the imprisonment without trial of persons deemed a threat to the state. Even so, it was not enough to stop the violence and the military acted to, in their view, save Argentina.

What the Argentine military junta unleashed was 'El Proceso' or the 'Dirty War', which sought to decapitate terrorist organisations and their supporters. As many as 30,000 people are thought to have 'disappeared' during the junta era from 1976 to 1983. The military managed to defeat internal threats to its rule and moved to solidify support by taking on large international loans to put more money into the local economy. This worked to an extent, but corruption came in its wake and then the economy started to decline. To turn attention away from internal issues, the junta sought to play the nationalist card and invaded the Malvinas/Falkland Islands in 1982. Their defeat by Britain removed the stranglehold of the junta on Argentine politics and forced them to restore civil liberties and remove a ban on political parties.

In October 1983, a new election was held and Raul Alfonsin of the Radical Civic Union (UCR) was elected as President for a six-year term. This era saw the government attempt to rebuild democratic institutions, establish civilian control over the armed forces and try to resolve the issue of the disappeared from the 'Dirty War'. Yet, they failed to resolve the economic troubles afflicting Argentina and when the next Presidential elections came around in 1989, the UCR was defeated.

Carlos Menem, the Peronist candidate, was a charismatic individual and realised that reform was necessary in Argentina. One area that was in desperate need of reform was the state sector of the economy. In parallel with economic reforms, Menem negotiated constitutional reforms with the UCR opposition. This allowed him to win the 1995 Presidential elections. There were positive elements to the Menem era, but corruption and a large public sector debt had thrown the economy into turmoil and foreign investors lost confidence in Argentina.

In this difficult environment for Argentina, Fernando de la Rua of the UCR won the 1999 Presidential election. He sought to end corruption and get the financial deficit under control by raising taxes. Political opposition to economic reform hampered the government and their tax increases had the opposite effect to what was intended, they reduced economic growth and worsened the recession. In December 2000, the International Monetary Fund (IMF) put together a stabilisation package for Argentina, but this was not enough.

Throughout 2001, the economy contracted and unemployment rose, leading to a run on the banks. The government attempted to stop depositors removing their money from the banks and this led to riots across Argentina, which forced President de la Rua to resign in December 2001. Adolfo Rodriguez Saa replaced him after a legislative assembly, yet he only lasted seven days and in January 2002, another legislative assembly elected Eduardo Duhalde, a Peronist, as President. Duhalde removed the link between the Argentine peso and the US dollar, which had stood for a decade, and the peso immediately depreciated and inflation increased further.

The Argentine economy has not improved greatly since; the Gross Domestic Product (GDP) in the third quarter of 2002 was 10.1 per cent down on the year before. The government has been forced to rise social spending to diminish the effects of the declining economy and to avoid public disorder. As if this were not enough, the political situation in Argentina is becoming increasingly unstable. A Presidential election is due at the end of April and the Peronists have not yet selected a candidate, President Duhalde wants to stop former President Carlos Menem from becoming the official Peronist candidate and wants his own man in place. In this environment, real action to resolve Argentina's economic problems remains unlikely.

Defence in Argentina

It is hardly surprising that, in this environment, Argentina has not been a major purchaser of defence equipment in recent years. In 2001, the defence budget of 3.3 billion pesos amounted to $ 3.3 billion, as the peso was pegged to the dollar. In 2002, with the removal of the dollar association, the defence budget, which had remained at 3.3 billion pesos, only amounted to $ 940 million.

There are a host of requirements that the Argentine military have developed, including around 30 to 40 new combat aircraft for the Fuerza Aerea Argentina (Air Force), upgrades to existing combat aircraft, tanker and transport aircraft and trainers. Only the latter requirement has been advanced, with twelve AT-63 Pampa aircraft ordered from Lockheed Martin Argentina in June 2000. Today, the Argentine military can only expect to acquire new equipment as surplus from the US or other sources; it simply does not have the funds to achieve anything else. Furthermore, even if the military could obtain more funding from the government, the IMF would step in to block any major procurement, as it requires that Argentina reduce its deficit.

Argentina is unlikely to see real improvements to its economy in the near-term and this inevitably means that defence procurement will be extremely limited. Although the US dollar has weakened across the early part of this year, an exchange rate of 3.16 pesos to the dollar in early February was hardly good news, a year earlier the rate had been 2.02. If we assume that Argentina can stabilise its economy, it will take this and sustained growth before major defence programmes can even be considered. Unlike the past, defence spending is not at the top of the list of government priorities in Argentina.

Brazil

If this article had been written six months ago, Brazil would have stood out against the mainly negative defence procurement trends in Latin America. They had money, they had government support and they had major programmes. Sadly for the Brazilian military, 'had' is the operative word here. The arrival of a new administration has put all of these procurement plans on hold and there could even be real reductions in military spending in Brazil.

Brazil became independent in 1822 and is the largest country in South America in terms of size and population (estimated at over 176 million people). It is also the regional economic superpower, but this cannot hide the fact that there are vast differences in the distribution of wealth and this creates enormous social pressures. As with the majority of Latin American nations, the government of Brazil has fluctuated between military regimes and periods of civilian rule. More recently though, the democratic political process in Brazil has become more entrenched and ought to survive into the long-term. That being said, the failure of the political class to deal with the issues of poverty and job creation represents a major threat to Brazil, although the recently elected administration of President Luiz Inacio da Silva or 'Lula' is committed to addressing and resolving these issues.

Due to its diversified economy with strong primary sectors in agriculture and minerals, added to a significant manufacturing industry and a well-developed services sector, Brazil has been able to fund expansion through the use of international capital markets. However, the taste for investing in emerging markets declined in the 1990s, after the Asian financial collapse of 1997 and the Russian bond default of 1998. This forced the Brazilian government of President Fernando Henrique Cardoso (first elected in 1994 and who took office in January 1995 and was re-elected in October 1998) to go to the IMF for support after promising structural reforms to the economy.

In early 1999, the Brazilian government was forced to remove the peg between the Brazilian real and the dollar, allowing the real to float. The devaluation actually helped and the economy grew by 4.5 per cent in 2000, unfortunately matters got worse in 2001 and economic growth was down to an unacceptable 1.4 per cent, according to figures from the IISS. More recent GDP figures, for the third quarter of 2002 in comparison to those of 2001, show growth of 2.4 per cent. That is hardly satisfying especially as inflation is a growing concern, which has forced the Central Bank to raise interest rates to 25.4 per cent per annum. To compound these problems, unemployment is rapidly becoming a major issue.

The Defence Environment

In 2000 the GDP of Brazil stood at $ 627 billion, in that same year the Cardoso government allocated 2.3 per cent of the GDP to defence expenditure, which amounted to $14.378 billion, or defence expenditure of $ 84 per capita. In real terms this represented a significant increase on defence spending over the fifteen years since 1985, according to IISS figures (all dollar figures are in constant 2000 U.S. dollars). In 1985 Brazil spent 1.8 per cent of its GDP on defence, amounting to $ 5.854 billion, or defence expenditure per capita of $ 43. In 2001, defence expenditure was down to $10.511 billion, or 2.1 per cent of the GDP at a rate of $ 61. Significantly, the Cardoso government increased defence allocations in local currency for 2002, but much of this was absorbed in fixed costs rather than procurement.

For the Brazilian military, the Cardoso era will be seen as one where there was finally recognition at the government level that the vast majority of its equipment was obsolete and that real procurement was needed. Highpoints included the acquisition of the carrier Sao Paulo (the ex-French Navy Foch) from DCN of France to replace the aged Minas Gerais. The Sao Paulo arrived in February 2001, allowing the Minas Gerais to be retired in March of that year. In 1998, to provide the fixed-wing air group for the carrier it was decided to acquire ex-Kuwait Air Force A-4 Skyhawk aircraft, comprising of 20 A-4K and 3 TA-4 models.

The real area of interest in terms of Brazilian defence procurement was the Forca Aerea Brasileira (FAB), an air force that was faced with the situation that the vast majority of its combat aircraft were 30-years old and that years of under-funding had left it short of spares with many aircraft grounded. Although there had been new procurements such as the AMX, AMX-T and AL-X (AT-29) from Embraer, the jewel in the crown of the indigenous aerospace industry, it was recognized that more needed to be done for the FAB.

The first step on this road saw the decision to upgrade the FAB F-5E/F fleet to the F-5BR configuration. In October 1998, Elbit of Israel was selected for the programme, with Embraer to do the work in Brazil, although it took until February 2001 for the first two FAB F-5s to arrive at Embraer to start the prototype phase of the programme. Another contract in 1999, saw the acquisition from US surplus stocks of twelve P-3A/B Orion Maritime Patrol Aircraft. Eight of these aircraft will enter service, with four airframes to be kept for spares; Eads-Casa has been selected to upgrade these aircraft under the P-X programme. The selection of Eads-Casa was announced in November 2002 and the upgraded aircraft will be equipped with the Fits mission system, similar to that used in the Spanish Air Force P-3 upgrade. Estimated value of the P-X upgraded and related work is said to be in the region of $ 300 million.

This was only the overture to a far more ambitious programme for the FAB that was agreed in mid-2000, Plan Phoenix called for $ 3.35 billion to be allocated over eight years to upgrade the capabilities of the air force. A key element of Plan Phoenix was a programme known as F-X to acquire between 12 and 24 modern combat aircraft at a total programme cost of $ 700 million. It was anticipated that the F-X programme could eventually grow in size to over 100 combat aircraft. Inevitably, a procurement of this nature was extremely attractive and US, European and Russian companies flocked to Brazil to fight for a share of F-X.

A Request for Proposals on F-X was issued in the last quarter of 2001 and responses were received from BAE Systems/Saab with the Gripen, Dassault with the Mirage 2000, Lockheed Martin with the F-16C/D and Rosoboronexport with the Sukhoi Su-35. Evaluation criteria in Brazil were to include best performance of the aircraft and related systems, plus technology transfer and local manufacture. In January 2002, Rosoboronexport and Avibras, the local defence company best known for its Astros Multiple Rocket Launcher Systems, announced that they were teaming for F-X and that if selected they would build the Sukhoi Su-35 in Brazil. Four months later, in April, a consortium of Dassault, Snecma, Thales and Embraer said that they were to offer the Mirage 2000BR to the FAB, a Brazilian-specific development of the Mirage 2000-5 Mk 2, and that this would be built by Embraer in Brazil.

The FAB evaluated all of the contenders for F-X in an extremely thorough manner and, as a result, developed a preference for the flying qualities of the Sukhoi Su-35. However, the industrial muscle behind the Mirage 2000BR bid made that an extremely strong contender as well. It is also suggested that the Gripen came out well in the evaluation and also had a strong industrial proposal on the table. All of the contenders for F-X submitted their Best and Final Offers at the end of May 2002 and it had been expected that the winning aircraft would be announced at the end of June 2002. The significance of the programme and its high public profile had made F-X a national issue and it was then decided that it was impossible to proceed with the programme until after the Presidential elections in October 2002.

The victory of 'Lula' and the Partido dos Trabalhadors (PT) or Worker's Party over the incumbent Partido da Social Democracia Brasiliera or Brazilian Social Democracy Party, in the runoff Presidential election on 27 October 2002 changed the face of Brazilian politics. 'Lula', who won 52 million votes, became the first left-wing politician to be elected President of Brazil. His message of attacking poverty, income redistribution, economic development and reducing dependence on foreign loans resonated with the Brazilian public. Bearing in mind his political background, it is hardly likely that 'Lula' will be an enthusiastic supporter of major defence programmes.

The situation that the new administration faces is severe, foreign debt amounts to over $ 200 billion or more than 54.4 per cent of the Brazilian GDP, according to some sources. Previously the opinion of the PT was that debt owed to foreign banks and multinational companies should not be repaid, this changed during the election with 'Lula' saying that Brazil would meet its international obligations. Despite this, both the IMF and the World Bank continue to keep a close eye on Brazil. Should the global economic situation worsen, Brazil might yet need to return to the IMF for support.

Domestically, 'Lula' must deliver to his core constituency. It is estimated that 29.3 per cent of the Brazilian population live in absolute poverty, more than eight per cent of the working population are unemployed (these official figures are said to massively underestimate the true situation) and there are over ten million agricultural workers who are landless and want the land reform promised by the PT. All of this requires massive spending and although 'Lula' has been keen to promote his 'Social Pact' between government, business, non-governmental organizations and civil society to deal with these problems, the government will inevitably have to take a central role.

Dealing with these social and economic issues will require major changes in the Brazilian government and industrial sectors, this will inevitably be disruptive. Therefore, in these circumstances it is difficult to see how Brazil can continue with its plans to upgrade its defence capabilities. Apart from the traditional antipathy of 'Lula' and the PT to the Brazilian military, it is impossible to see how they can meet their social agenda and even consider supporting the modernisation agenda developed by the military and the previous Cardoso administration.

The New Environment

At the time of writing in February 2003, the 'Lula' administration has only been in power for less than two months and great uncertainty remains about what will actually happen, with the Brazilian military being as confused as everybody else. At this point, it is worth looking at programmes that are already in progress and then trying to determine how future procurement requirements might evolve.

Despite the uncertainty in Brazil, Eads has been very fortunate in winning two major contracts, the P-X MPA upgrade (see above) and also the CLX transport aircraft competition. The CLX was designed to replace the C-115 Buffalo aircraft, of which eleven are currently in service. Bids were received from Eads-Casa with the C-295, Lockheed Martin/Alenia with the C-27J and Rosoboronexport and the Ukraine offering the Antonov An-32. In November it was announced that EadsCasa had been selected and that twelve C-295 aircraft would be acquired in a contract valued in the region of $ 270 million. Apart from general transport use, the C-295s will be used in support of the Sistema de Vigilancia da Amazonia (Sivam) programme and to supply aid to remote regions of Brazil.

Another element of the Sivam programme entered service with the FAB in July 2002, with the arrival of the first two Embraer EMB-145SA (R-99A) aircraft and a single EMB-145RS (R-99B) aircraft at Anapolis air Force Base. The EMB-145SA (R-99A) is an Airborne Early Warning and Control (AEW&C) aircraft with the Ericsson Erieye radar as its primary sensor; a total of five of these aircraft will be acquired. The EMB-145RS (R-99B) is a remote sensing platform designed to monitor ground and river traffic with a Synthetic Aperture Radar (Sar); three of these are to be acquired. The Sivam is designed to give the FAB the ability to control the airspace over the Amazon region and provide border security, as well as to assist efforts to halt illegal logging, smuggling and narcotics trafficking.

Another domestic programme linked to the Sivam programme is the acquisition of the ALX aircraft, a version of the Embraer Super Tucano. In August 2001, a contract was awarded valued at $ 380 million for 25 A-29 single-seat attack aircraft, with Elbit avionics, and 51 AT-29 twin-seat armed trainers (to replace the old MB.326 Xavante), as well as options on a further 23 aircraft. There is also a helicopter programme with a linkage to the Sivam in the form of CHX which calls for the acquisition of four heavy lift helicopters with options from Boeing, Mil and Sikorsky under consideration.

Other significant FAB programmes include the acquisition of 15 ex-Swiss Air Force F-5E/F aircraft. With the F-X programme seemingly doomed, the FAB has a problem in that its 14 Mirage IIIE (F-103E) and 4 Mirage IIID (F-103D) will not be airworthy beyond 2004. This had been considered in the context of the F-X programme with the intention being to lease up to 24 secondhand combat aircraft prior to the arrival of F-X. In the new circumstances it is vital for the FAB to arrange a lease deal as soon as possible to cover the retirement of the Mirage fleet. It has been suggested that IAI Malat will supply twelve Kfir C-10 fighters under a $ 92 million offer, although more recently Lockheed Martin is said to have offered 18 F-16s for $120 million.

Although the FAB and the Brazilian Navy have had some notable equipment acquisitions in recent years, things have not been so good for the Brazilian Army. Matters did look set to improve after official sanction was given for a $ 670 million budget for new equipment acquisition through 2005, the emphasis was on upgrading C3I capabilities with plans to purchase new logistic support vehicles. The long-term sustainability of this budgetary commitment must now be in doubt.

Chile Experiences Difficulties

After Brazil and Argentina, Chile has traditionally been the third largest defence market in South America. Bearing in mind the troubles of both Brazil and Argentina, we now go on to look at the situation in Chile. Despite often being credited with the most efficient economy in South America, even Chile is not immune to the chill winds of economic reality spreading over the region. This is especially true if one considers the major export markets for Chile, the European Union (EU) accounts for 25 per cent of Chilean exports, the US for 18 per cent and Japan 15. With all of these areas experiencing limited growth, demand for Chilean products has been affected. This can be offset to an extent by the decline in value of the Chilean peso against the dollar, but in the long-term the requirement is for traditional export markets to resume a growth path and to develop new export markets, particularly in Asia.

The trends in Chilean defence expenditure are significantly different to those of Argentina and Brazil. According to IISS figures, defence expenditure in Chile amounted to $ 2.428 billion in 1985, amounting to 10.6 per cent of the GDP or a per capita rate of $ 201. By 2000, defence expenditure had risen to $ 3.158 billion, a per capita rate of $ 204, amounting to 4.2 per cent of the GDE In 2001, defence expenditure declined to $ 2.841 billion, a per capita rate of $181, and 4.4 per cent of the GDE Between 1985 and 2001, the numbers of personnel in the Chilean military also declined from 101,000 to 87,500. Of the major countries in South America, Chile has consistently spent a larger proportion of its GDP on defence.

During the period of the Pinochet dictatorship from the coup in September 1973 to the election of Patricio Aylwin, a Christian Democrat, in 1989, Chile was isolated and unable to meet significant areas of its defence needs. Once free and fair elections were held, the international community was far more willing to deal with Chilean defence needs. Under the administration of President Eduardo Frei Ruiz-Tagle, elected in December 1993 and inaugurated in March 1994, Chile was able once again to openly purchase equipment from Britain, France, Germany, Spain and the United States, while still retaining its links with long-term suppliers such as Israel and South Africa.

The most significant means of funding new acquisitions in Chile was the 'copper fund', under which a percentage of the earnings of Codelco, the state-owned copper company, are allocated to the military. This process began in the 1950s, but it was under the Pinochet government that the copper fund was given a proper legal framework. It was established that ten per cent of the export earnings of Codelco would be devoted to the military for acquisition purposes. For example, in 1995 the copper fund provided $ 341 million for new acquisitions. However, as the price of copper fluctuates, the funding for the military will fluctuate in turn. In 2001, the copper fund only provided the military with $ 235 million.

During the 1990s, supported by a growing domestic economy and strong copper prices, Chile embarked on a number of ambitious programmes to modernize the Chilean Navy and Air Force. For the navy, the most significant purchase was the 1997 acquisition of two Scorpene class submarines from Armaris/Izar in a contract valued at some $ 481 million. In November 2002, the Izar yard at Cartagena shipped the stern section of the O'Higgins, the first Scorpene for Chile, to the Armaris yard at Cherbourg for integration and completion. The O'Higgins is due to be delivered this year, with the second submarine to be delivered in 2005.

The navy had hoped to follow the submarine acquisition with a major surface ship programme known as Tridente. Under this programme Chile was to acquire four Blohm + Voss Meko A-200 frigates, the first unit was to be built in Germany and the remaining three by the Asmar yard in Chile. The cost of the Tridente programme, added to that of the submarine acquisition, would have absorbed the projected earnings of the copper fund to 2017 and this was considered unacceptable. The Chilean Air Force was trying to fund a fighter programme and was therefore lobbying to halt Tridente to support its own requirements.

In the midst of this internecine battle in the military, the political landscape changed in Chile. The presidential election of 12 December 1999 had six candidates but not one was able to obtain the required majority. This led to a new election on 16 January 2000, after which Ricardo Lagos Escobar of the Socialist Party was elected with 51.32 per cent of the votes cast for a six-year term. When President Lagos was sworn in on 11 March 2000, it marked a major change is post-Pinochet civilian politics. This would in turn have a significant impact on military modernisation planning in Chile.

President Lagos wants to reform defence procurement in Chile and remove the automatic linkage between the copper fund and equipment acquisition. He would actually prefer to use the copper fund to support social spending and other domestic programmes rather than use it to fund the military. Achieving these goals has not proved easy and developing a new defence budgeting model has thus far not been successful.

The arrival of the Lagos administration saw the Chilean Air Force obtain official sanction for the acquisition of ten Lockheed Martin F-16C/D Block 50 aircraft in a contract valued at $ 660 million in 2000. It should be noted that the F-16 acquisition would account for the copper fund through 2009. The air force had originally developed an operational requirement for 24 aircraft, but funding constraints reduced this down to the ten purchased. The air force would like to continue with the fighter programme and is looking at having a second fighter competition from 2006 on. However, much will depend on the state of the economy at that time and on who is in political power.

If the Chilean Air Force was disappointed to only be able to acquire ten combat aircraft, they were considerably happier than the Chilean Navy who, in early 2002, saw the Tridente programme essentially cancelled. The Navy still needs to replace the three ex-British Royal Navy County class destroyers, two Prat class and a single Blanco Encalada, which, although they have been modernised, are reaching the end of their useful lives. There is also a requirement to replace the three Condell (British Leander) class frigates. In the wake of the Tridente cancellation, the navy looked to acquire second-hand ships from the British with a single Type 23 and two Type 22 frigates under discussion. There was no progress in this regard and then Chile went on to have discussions with Spain on second-hand FFG-7 frigates and with the Netherlands. Neither of these options has made any progress.

Within the framework of the current economic environment, it is quite difficult to envision Chile as being able to embark on any major procurement programmes in the near future. Despite the fact that the military modernisation process is by no means complete, the Lagos administration does not seem disposed to support new spending initiatives. The future will only become clear once a new defence budgetary model is in place and its funding elements visible. Until that time, any future Chilean defence plans will remain only speculation.

Confusion in Venezuela

With its oil wealth, many would expect Venezuela to be immune from the economic difficulties in South America. Unfortunately, this is not the case. Arguably the reason for this rests in the person of the President of Venezuela Hugo Chavez Frias and his attempts to change the political structure in Venezuela to be, in his view, more representative of the people.

With the removal of the dictatorship led by General Marcos Perez Jimenez in 1958, democracy returned to Venezuela and the military removed itself from the civil political process. For the next forty years the Democratic Action and Christian Democratic parties were the dominant forces in Venezuelan politics at a national and local level. Generally, Venezuela had one of the healthiest democracies in South America, but the illusion of calm was damaged in 1989. The then President of Venezuela Carlos Andres Perez had instituted an economic austerity programme and this was hugely unpopular, as a consequence riots took place leading to the deaths of 200 people in a series of events that became known as the 'Caracazo'.

Matters worsened and in February 1992 there was an attempted military coup by Army lieutenant colonels led by future President Hugo Chavez. This coup failed, as did a second attempt in November 1992. In 1993, the Venezuelan Congress impeached President Perez for corruption. These events showed that the traditional political parties had lost legitimacy and that there was a desire for change in Venezuela. The real problems of corruption, the fact that nearly 80 per cent of the population live below the poverty line and the country's dependence on the oil industry with its fluctuating prices were not tackled.

The collapse of oil prices in the 1997/98 timeframe set the scene for political change in Venezuela. With oil exports providing 80 per cent of export earnings and over half of central government expenditure, the decrease in oil revenues led to a recession. In this environment Hugo Chavez stood for President in the December 1998 elections and took power in February 1999. The main themes of the Chavez campaign were reform, ending corruption and constitutional change. The latter issue was tackled by the National Constituent Assembly (ANC) of 131 elected persons, the majority of whom were supporters of President Chavez, who commenced rewriting the Constitution in August 1999. In December 1999 the ANC draft Constitution was accepted in a referendum.

The Chavez administration also worked to get the national economy back on track. The decline in oil prices in 1997-98 had put the Venezuelan economy into recession; in 1998/99 there was a 7.2 per cent reduction in GDP. Major rises in oil prices in 2000 allowed the government to expand its spending by 42 per cent and this led to a 3.2 per cent rise in GDE In addition, the government was able to reduce external debt from $ 21.1 billion in 1999 to $ 20.2 in 2000. Unfortunately, President Chavez and what he describes as his 'Bolivarian Revolution' has managed to alienate the middle class, elements of the military, the trade unions and private industry and his supporters have brought political violence to the streets of Venezuela.

In February 2003, a two-month strike by banks and private sector businesses against the government came to an end, but oil workers continued to strike. The economic impact of these strikes is estimated at four billion dollars, leading to predictions that the Venezuelan economy will contract by 25 per cent this year, on top of an 8 per cent decline in 2002. We have already stressed the importance of oil to the Venezuelan economy, oil production which was at 3 million barrels per day (bpd) had collapsed to less than 200,000 in December. Currently oil production is 1.5 million bpd and unlikely to rise.

These problems in the oil industry are a potential sword of Damocles over the Venezuelan economy. Petroleos de Venezuela (PDVSA), the state-oil company, was forced to hand over the majority of its revenues to President Chavez, the cost of this is that investment in the oil industry was neglected. President Chavez also appointed many of his own supporters to run PDVSA. The problem here is that to extract Venezuelan oil is a complex process and it requires constant investment to keep it flowing. This means that achieving the 3 million bpd target remains unlikely unless billions of dollars are invested. All of which is impossible in an environment where Tobias Nobrega, the Venezuelan Finance Minister, announced earlier this year that the PDVSA budget was being cut by $ 2.7 billion, or one-third, to make up for the fall in oil revenues. Worse could be on the horizon, should the situation in Iraq be resolved, oil prices will fall and this will further damage Venezuela.

Despite all of this, President Chavez still controls the levers of power in Venezuela and he was elected to a six-year term. To retain power, Chavez must keep the military on his side, put more pressure on his political opposition and keep his supporters amongst the poor and landless energised. This will not be easy to achieve.

In the context of the military, figures from the IISS show a number of interesting trends. In 1985, defence spending was $1.246 billion or $ 72 per capita, amounting to 2.1 per cent of the GDE In 2000, defence spending had risen to $1.397 billion or $ 64 per capita, amounting to 1.2 per cent. In 2001, defence spending increased again to $1.896 billion or $ 77 per capita, amounting to 1.5 per cent of the GDP. It should also be noted that the number of armed forces personnel has also increased significantly, according to the IISS, in 1985 it amounted to 49,000, by 2001 it had risen to 82,300.

The declining value of the Venezuelan bolivar against the dollar will have a major impact on defence spending, in February 2002 there were 770 bolivars to the dollar; a year later there were 1922. With government spending restricted due to the strikes and declining oil production, it is difficult to see how the Venezuelan government can find foreign currency to fund defence acquisition programmes. Even so, defence procurement programmes continue. In December 2002, a contract was signed with Embraer for the delivery of twelve AMX-T aircraft for training and tactical support missions, with first deliveries in 2005. This new contract supersedes a 1999 contract for eight AMX-T aircraft which, although awarded, never progressed.

Venezuela also seems likely to expand its list of potential suppliers if the Chavez administration remains in power. From the mid-1990s on, Brazil, France, Israel, Italy, Poland, Singapore, Spain, Sweden, the US and the Republic of Korea all obtained significant contracts from Venezuela. The government is now interested in expanding its ties and is looking at the potential of acquiring equipment from non-traditional sources such as Russia and China.

A Market Overview

This look at the four major powers in terms of defence spending in South America demonstrates that economic problems added to political uncertainty have created a dramatic contraction of this once significant defence marketplace. Using IISS figures, the decline of the defence marketplace in Latin America can be rapidly defined. In constant 2001 dollars, arms deliveries to Latin America between 1994 and 1997 amounted to $ 4.643 billion. Between 1998 and 2001 the value of arms deliveries to Latin America had declined to $ 2.716 billion--a straight reduction of over 40 per cent.

These IISS figures also provide a useful guide to the suppliers of Latin American defence needs. Between 1994 and 1997, the U.S. with deliveries of $1.743 billion was the major supplier, between 1998 and 2001 its level of deliveries had declined to $116 million. In the same period, Russia went from only supplying equipment worth $ 200 million between 1994 and 1997, to becoming the major supplier to the market with sales of $ 600 million between 1998 and 2001. Other major supplying nations also experienced a decline in sales. France saw its $ 300 million share in 1994-1997 reduced to $ 200 million between 1998 and 2001. Britain went from $ 400 million down to $100 million, while Germany went from $ 200 million to zero.

Those who improved their position in the Latin American market included China from $100 million to $ 300 million and Italy from nothing to $100 million. Other European nations, Spain and Sweden for example, saw their deliveries decline from $ 1.1 billion in the 19941997 timeframe to $ 300 million between 1998 and 2001. Other suppliers, including Israel, Korea, Singapore and South Africa, saw their market share expand from $ 600 million from 1994 to 1997 and to $1 billion between 1998 and 2001.

Taking South America as a whole, IISS figures on defence spending seem to indicate that defence is not in as bad a shape as the previous figures would indicate. Adding together the defence expenditure of the twelve countries in South America (Argentina, Bolivia, Brazil, Chile, Columbia, Ecuador, Guyana, Paraguay, Peru, Suriname, Uruguay and Venezuela) between 1985 and 2001 provides some interesting data. Utilising constant 2000 dollars defence spending in 1985 was $17.746 billion; in 2000 it amounted to $ 28.763 billion. The significance of the $ 28.763 billion figure is that $14.378 billion was provided by Brazil. In 2001, South American defence spending had fallen to $ 24.513 billion, with Brazil responsible for $10.511 billion of the overall amount.

If Brazil had kept to its military modernization agenda, the South American defence market would have remained viable and would have had significant long-term growth potential. With the new Brazilian government putting more emphasis on its social agenda than military spending, there would seem to be more evidence for continued contraction rather than growth in the South American defence marketplace. With the four main regional defence equipment purchasing nations focusing on domestic issues and attempting to stabilise their economies, it is inevitable that defence spending would suffer.

Of course, this generally negative picture could change if the global economy crawls out of recession. Increasing demand in the US and Europe would be extremely helpful to South American economies, as would increased foreign direct investment. However, the majority of South American governments still have to confront an enormous debt burden and must attempt to reform their economies to deal with the implications of globalisation. Equally as important is the need to tackle poverty and the ludicrously unequal distribution of wealth in many South American countries. South America, as we have seen, has vast social and economic challenges to confront over the next few years.

Beam and Bullet Bucks

According to the International Institute of Strategic Studies (IISS), Argentine defence expenditure amounted to 3.8 per cent of GDP in 1985; by 2001 it was down to 1.7 per cent. Another noteworthy comparison from IISS data is that in 1985, armed forces personnel amounted to 108,000 soldiers, sailors and airmen; by 2001 it had been reduced to only 70,100.