Latin America's market: the recent economic chaos in Argentina and the ongoing guerrilla war in Colombia illustrate that Latin America remains a problematic area of the world. Despite all this, it still has tremendous economic potential and conditions should improve if the global economy starts to grow. (Complete Guide).

Latin American states are still important defence markets and there are a number of current and future acquisition programmes worthy of consideration.

Chile presents an interesting study in how Latin American countries must balance a number of factors as they seek to modernize their military forces. New equipment acquisition is financed by an allocation of money from Codelco, the state-owned copper company. This arrangement was introduced in the 1950s, but it was in the Pinochet period (1973 to 1990) that it was given a legal framework, under which the military gets ten per cent of Codelco's export returns at a minimum of $225 million. If the copper price raises, so much the better for the military, in 1995 the `copper fund' provided the military with $341 million, although last year it only amounted to $235 million.

The problem for Chile was that during the period of military rule under General Pinochet, the nation became a pariah state and was unable to important defence equipment easily. This saw the military experience the threat of bloc obsolescence in many of its weapon systems. By the mid-1990s, the international climate had changed and Chile was once again able to purchase equipment. In 1997, this saw the Chilean Navy order two DCN/Izar Scorpene submarines in a contract valued at some $481 million. The next step in the naval modernization programme was to be the Tridente programme to acquire four frigates. This competition was won by Blohm + Voss with the Meko A-200, with one unit to be built in Germany and the other three at the Asmar yard in Chile.

With a change of government in 2000, new priorities came into focus. President Ricardo Lagos wants to use the copper fund to finance social programmes, but this will take a great deal of time. Another change was that the Air Force was able to get an increased priority for its fighter programme, which was originally to be decided in 1998. Suddenly, the Tridente programme was in trouble. Tridente and the payments for the Scorpene submarines would have used up the copper fund for more than 15 years, thus the government decided to halt progress on the frigate programme earlier this year.

In its stead, the Lagos government decided to support the purchase of ten Lockheed Martin F-16 Block 50 aircraft in a contract worth $ 660 million, which will account for the majority of the copper fund through to 2009. This leaves the navy with a major problem, its prime surface units are the three 1950s vintage ex-British County class destroyers and its three Condell class frigates (British Leander class) are only marginally more modern. The navy cannot operate these units forever and is now seeking to acquire second-hand ships from Europe. It is understood that Chile has had discussions with Britain about acquiring a Type 23 and two Type 22 frigates from the Royal Navy. The Netherlands is also seen as a possible source of frigates and there have been talks with Spain about the acquisition of its FFG-7 class.

In Brazil, the Air Force is to receive a new combat aircraft and be modernised under Plan Phoenix, which was approved by the Brazilian government in July 2000. This set aside $3.35 billion to be spent over eight years, of this sum $700 million is to be devoted to the F-X programme to acquire between 12 and 24 combat aircraft. An official Request for Proposals was issued in October 2001 for the F-X and BAE Systems/ Saab, Boeing, Dassault, Eurofighter, Lockheed Martin, RSK MiG and Sukhoi have shown interest.

Offset will be an important part of the F-X procurement and direct offset will inevitably go to the Brazilian aerospace industry in the form of Embraer. This presents an interesting set of difficulties for some of the contenders as Dassault, leading a French industry consortium, has taken a 20 per cent stake in Embraer. Bearing in mind the fact that $ 700 million is available for F-X, this must indicate that only twelve aircraft are in prospect. It also reduces the contenders to Embraer and Dassault with the Mirage 2000BR, Lockheed Martin with the F-16C/D, RSK MiG with the MiG-29 and Sukhoi with the Su-30 series.

As this look at Chile and Brazil indicates there is major procurement activity in Latin America. However, budgets are not at the levels to support fully-fledged modernisation programmes even in the richest countries. Venezuela will continue to leverage its oil wealth on defence spending, but it is difficult to see Ecuador or Peru being able to continue their military build-up of the 1990s. One country to watch is Columbia, upcoming elections could see a new government committed to ending the Farc insurgency and this will require a significant increase in defence spending.

Defence Markets--An Overview

This review has, thus far, focused on the overall status in major areas of the world with regard to defence spending, and it is no surprise that we have a mixed picture. At the top of the tree sits the United States, and its defence budgetary environment is improving as the current administration seeks to upgrade existing capabilities and begin a process of military transformation. More domestic spending will also strengthen the US defence industry and increase its ability to compete in world markets.

In Europe the picture is very different, despite commitments to the ERRF and a desire to have a more active global role, defence spending continues to decline in real terms. It is difficult to see any significant increases in defence spending in the major European nations, as the political will to do so does not exist. There are certainly major acquisition programmes afoot, but the concern must be how these nations intend to fit them into already stretched budgets. This would indicate that there will be a need to further stretch acquisition programmes, therefore one can also expect more political horse trading in collaborative projects such as that which has occurred, and is still occurring, in the A400M transport programme.

The impact of these budgetary problems on the European defence industry will not be positive. However, amalgamation and consolidation will allow demand to be managed to avoid too many peaks and troughs in work. For the European industry, the need will be to exploit as many export opportunities as possible to balance the inconsistent workflow of domestic demand. This is more easily said than done, but it is critical that programmes such as Rafale and Eurofighter go on to achieve significant export sales.

In Russia, much work remains to be done to modernise the military, but at least there appears to be more political stability and the economic situation is now under better control. In export markets Russian industry will continue to be a major player, exploiting its cost advantages where necessary and being able to supply a range of unique solutions. Asia will remain a vital market area for the Russians. As to the other states, such as the Ukraine and Belarus, they will remain economically and politically unstable, but they will continue to be relatively successful in terms of defence exports.

Turning to the other states in Eastern Europe, defence spending is not one of their major priorities. The Czech Republic, Hungary and Poland are under the Nato umbrella and they, like other regional states, will hope to benefit from eventual European Union membership. In this environment, increased defence spending is unlikely, although many of these states will seek to exploit the capabilities of their defence industries in export markets.

Turkey, despite its economic problems, will continue to be a major defence equipment marketplace. Its defence industry will also look to expand its horizons and one potential market, Central Asia, is right on its doorstep. Countries around the Caspian Basin such as Azerbaijan, Georgia and Kazakhstan are either sitting on vast amounts of oil or are likely to benefit from new pipelines crossing their territory. This is a defence market for the future. Other Central Asian states such as Uzbekistan and Turkmenistan are also growing in importance due to their strategic position; for example, US troops are now stationed on Uzbek territory.

The Middle Eastern market in terms of the six GCC states can never be ignored as a defence market, although it remains difficult to see how much more equipment they can truly absorb. As to the regional pariah states, Iran and Iraq, Iran will continue to spend significant sums on defence with Russia and China well positioned to benefit. Iraq, should sanctions ever be removed, remains a potentially vast defence market. Israel and Egypt will mainly rely on US military assistance programme funding, as will Jordan, with the other Arab states not in a position to spend real money on defence. Put simply, although conditions remain unstable in the Middle East, it will continue to be a major defence equipment marketplace.

Exports out of the Middle East are more significant than might be imagined. For many years Israel has been one of the top ten defence equipment exporters in the world and, according to the IISS, they exported $ 300 million worth of equipment in 2000. Key markets for Israel include India and other Asian countries, although they are strong in Latin America and Europe as well as making significant inroads in the US defence market. Iran is also exporting defence equipment, although this is primarily based on ideological considerations. Egypt has a capable defence industrial base but has failed to make much headway in export markets.

The growth market for defence equipment will be in Asia, by which is meant from Pakistan in the West to Australia in the South and China and Japan in the North. Economic growth in recent years has supported increased defence spending and the levels of competition between regional states show no signs of abating. It would, therefore, be fair to assume that the demand for more sophisticated equipment will continue to rise. On the other hand, the ruinous potential for conflict in this region should not be underrated, there are four nuclear weapon states in the region, China, India, Pakistan, North Korea and many more have access to chemical and biological weapons.

Defence exports remain an important goal for many Asian countries. According to the IISS, China achieved exports of $ 500 million in 2000, but Singapore is rapidly developing into a niche exporter through the supply of equipment and services. Korea has ambitions to be a major exporter, its KTX-1 turboprop trainer is being offered to Singapore and its T-50/A-50 Golden Eagle advanced jet trainer/ light attack aircraft, developed in association with Lockheed Martin, is also seen as having tremendous potential. Finally, one should not ignore the activities of North Korea, particularly in the field of missile proliferation.

Africa is unlikely to become a major defence equipment marketplace, although there will be exceptions, due to the failure of most African states. On the export front, the internationalisation of South African industry ought to retain that country its niche player position. In areas such as artillery, South Africa occupies an extremely strong position and key programmes such as the potential supply of towed and self-propelled guns, charges and ammunition to India are within reach.

Latin America presents a mixed picture, with certain nations being able to support significant defence programmes whilst others cannot, but that situation has always been weighted to one side. Brazil will continue to command a significant presence in the export market through the activities of Embraer and high-profile products such as the AEW&C version of the EMB-145 using the Saab Erieye phased-array radar. Another important product will be the EMB-314 Super Tucano, an advanced turboprop trainer and light attack aircraft. Avibras will also be a player in export markets through interest in its Multiple Rocket Launcher (MRL) system. However, Latin American defence industries (mainly Brazil and Chile) will be very lucky to repeat the success they enjoyed in the 1980s.