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The economics of the peace dividend.

Introduction

The end of the cold war in 1990 and the associated superpower arms race was followed by disarmament and the expectations of a peace dividend. This dividend has been the focus of myths and optimistic expectations which need to be analysed and critically evaluated. Questions arise about the definition of the peace dividend, its myths and the reality, the response of defence companies and industries to disarmament and the likely magnitude of the peace dividend. Empirical work on some of these issues is illustrated from a case study of UK experience with disarmament. A starting-point is the facts on defence spending.

Data requirements and the stylized facts

Sensible public choices on defence spending and disarmament require a reliable, accurate and comprehensive database. What is known, what is not known and what is it necessary to know for society and policy makers to such choices? Ideally, for the world's nations, data are required on the level and geographical distribution of defence spending, on defence research and development (R&D), on armed forces manpower and on arms imports and exports.

Such a comprehensive database would provide statistical indicators of the burdens of defence spending, especially to developing nations, the possibility of regional arms races, the contribution of the arms trade to regional stability and instability, together with the monitoring of arms control agreements and disarmament. Furthermore, the ideal data set would identify trends in defence R&D which might lead to an arms race, as well as identifying which industries, companies and regions in the world are highly dependent on defence spending and hence especially vulnerable to disarmament. These data would provide a basis for policy actions by national governments, regional groups of nations (e.g. European Union (EU)), international aid agencies and the United Nations (UN). For example, identifying the regions which are highly vulnerable to cuts in defence spending allows governments to formulate appropriate regional policies (e.g. EU's KONVER programme: Hooper and Cox, 1996); international aid agencies would be able to monitor their success in tying the payment of overseas aid to developing countries to reductions in their defence spending; and data on the international arms trade might enable the UN to develop as an effective regulatory agency for international arms transfers. These examples illustrate the potential use of reliable and accurate data.

It is, however, recognized that proposals for an ideal data set are not without their problems. Any data collection exercise needs to be related to objectives: what is a government or international organization trying to achieve; what are the underlying causes of the problem; and which data are appropriate for the purpose? Wars, for example, are the result of a complex set of factors and it does not follow that increased arms exports to a region of the world provide a reliable early warning indicator of a conflict (Pearson and Brzoska, 1994). Nor should economists advocate massive data collection exercises without regard to their benefits and costs. For example, the UN Register of Conventional Arms economizes on transaction costs by providing defence data which participating states might find costly to collect using their own resources. It also provides the transparency which might remove the "prisoners' dilemma" barrier to mutual arms reduction (transparency aims to provide the reliable information that other states are complying, so reducing the incentives to defect).

Further data problems and limitations arise from the use of different national definitions of defence spending which complicates international comparisons. Secrecy means that data might not be available on the level and composition of a nation's defence spending and it is not unknown for research and major new weapons programmes to be concealed as "black programmes" (e.g. US stealth aircraft; Iraq's nuclear and chemical warfare facilities). Nor should inputs of manpower, equipment and annual expenditures (stocks and flows) be used as a measure of output. There are also the difficulties of the valuation of military expenditure (e.g. conscription); of selecting appropriate deflators for measuring real military spending; of choosing the appropriate currency conversions for international comparisons; and of obtaining accurate and reliable price data for international arms transfers (Brzoska, 1995). These various data problems create difficulties for both policy makers and economists seeking to test hypotheses from defence and peace economics (e.g. the impact of defence spending on economic growth: Sandler and Hartley, 1995).

Despite the problems, some data are available on the world's defence spending, military manpower, stocks of equipment, the arms trade and the major defence companies (Brzoska, 1995; Chalmers and Greene, 1995). In 1993, world military spending was estimated at some $868 billion with about 75 per cent undertaken in the developed world, and with North America accounting for 58 per cent of the world total. Developing countries accounted for 25 per cent of world defence spending, but over 70 per cent of the world's military manpower in 1993 (with East Asia accounting for over 30 per cent of the world's armed forces: see Table I). International arms transfers have declined over the period 1983-1993, especially since 1990. In 1993, the developed nations supplied over 90 per cent of the world's arms exports (the USA, UK and Russia accounted for almost 80 per cent of the world total), mainly to the developing nations which bought almost 80 per cent of the world's total arms imports (Saudi Arabia, Egypt, Iran and Turkey bought 37 per cent of world arms imports: Table I).
Table I. World military spending and armed forces 1983-1993

                                1983         1990         1993

Military expenditure (Billions $US, 1993 prices)

Developed nations              944.1         925.9        647.6
Developing nations             250.5         244.6        220.8
World                        1,194.6       1,170.5        868.4

Defence share of GNP (%)

Developed nations                5.5           4.5          3.4
Developing nations               6.1           4.4          3.1
World                            5.7           4.4          3.3

Manpower: armed forces (000s)

Developed nations             10,290         9,400        7,041
Developing nations            16,820        18,340       17,570
World                         27,110        27,740       24,610

Armed forces per 1,000 people

Developed nations                9.3           8.1         6.8
Developing nations               4.7           4.5         3.9
World                            5.8           5.3         4.4

World arms imports (Millions $US, 1993 prices)

Developed nations             14,680        11,540        4,810
Developing nations            55,130        38,220        17,190
World                         69,830        49,520        21,960

World arms exports (Millions $US, 1993 prices)

Developed nations             63,590        46,020        20,220
Developing nations             6,481         3,528         1,755
World                         69,830        49,520        21,960

Notes: Developed nations refers to 28 countries including most
members of NATO and the former Warsaw Pact plus Austria, Finland,
Ireland, Sweden, Switzerland, Australia, Japan, New Zealand and
South Africa. All other nations are classed as developing. Figures
are approximations and do not add up exactly

Source: ACDA (1995)




From the end of the cold war in 1990 to 1993, military expenditure in the developed nations fell by some 30 per cent, their defence burdens declined from 4.5 per cent to 3.4 per cent of GNP and their military manpower fell by 25 per cent. These reductions reflect the peace dividend for developed nations, although the estimates have to be adjusted to allow for the costs of peace (see below) and for any reductions which might have occurred without the end of the cold war. For example, the peace dividend for developed nations can be estimated by comparing actual military expenditure for 1990-1993 with alternative linear extrapolations of pre-1990 downward trends. This simple method suggests a peace dividend for the developed nations over the period 1990-1993, with a cumulative present value in 1990 of some $240 billion (discount rate of 5 per cent, 1993 prices). The result is an upper bound estimate which does not allow for the costs of peace (unemployment, under-employment of resources); it is limited to a three-year period; and it is sensitive to the assumptions about extrapolation (i.e. what would have happened if the cold war had not ended in 1990). A similar method applied to military manpower in the developed nations suggests cumulative manpower savings over the period 1990-1993 of some 3.3 million man years.

Similar descriptive statistics for military spending, burdens and manpower for NATO and the former Warsaw Pact are shown in Table II. Both military alliances are likely to be the immediate beneficiaries of any peace dividend following the end of the cold war superpower arms race. The share of both alliances in world real military spending declined over the period 1983-1993: from 77 per cent in 1983 during the cold war, to some 75 per cent in 1990 (end of the cold war) and to 71 per cent in 1993. The response of the alliances to the end of the cold war shows some interesting contrasts both within NATO and between NATO and the former Warsaw Pact. Over the period 1990-1993, real military spending declined by 7 per cent in NATO Europe, by 10 per cent in NATO and by a massive 62 per cent in the former Warsaw Pact, all of which raises interesting questions about the reasons for the substantial differences in the responsiveness of the various groups (e.g. the ability of the military-industrial complex to resist cuts). Once again, using simple extrapolations, it was estimated that the peace dividend for NATO over the period 1990-1993 was a cumulative present value in 1990 of some $50 billion (discount rate of 5 per cent, 1993 prices). However, like many popular economic concepts, the peace dividend is surrounded by myths and optimistic expectations of massive windfall gains, usually with little reference to likely magnitudes. The concept needs to be defined and subject to critical and empirical evaluation.
Table II. NATO and the former Warsaw Pact 1983-1993

                                1983        1990         1993

Military expenditure (Billions $US, 1993 prices)

NATO                            496.1       529.8        480.2
NATO Europe                     178.9       185.0        172.3
USA                             308.8       333.9        297.6
Warsaw Pact (former)            418.7       353.5        133.1

Defence share of GNP (%)

NATO                              4.8         4.2          3.6
NATO Europe                       3.6         3.0          2.7
USA                               6.3         5.5          4.7
Warsaw Pact (former)             12.1         9.8          7.6

Armed forces (000s)

NATO                            5,921       5,777         4,913
NATO Europe                     3,639       3,509         3,022
USA                             2,201       2,181         1,815
Warsaw Pact (former)            5,302       4,397         3,764

Source: ACDA (1995)




The peace dividend: definitions, myths and reality

The economics of the peace dividend has two related dimensions. First, peace itself which means reductions in international tension, threats and fears of war with the associated loss of life and destruction of property and the environment (e.g. nuclear war). As such, peace is a public good viewed as contributing to individual utility levels (quality of life). Second, the peace dividend is the additional output of civil goods and services resulting from a reallocation of resources from the military-industrial-political complex to the civilian economy following disarmament. Typically, focus is on this second interpretation which is often viewed from a public expenditure-taxation perspective rather than a complex real resource reallocation perspective involving costs as well as benefits.

Once it is recognized that factor markets do not clear instantly and are not without cost, and that adjustment to change takes time and involves costs, it is realized that disarmament involves costs as well as benefits. Large-scale disarmament represents a major shock to the military-industrial-political complex. There are reduced demands for military manpower, their bases and facilities; for scientists in defence research establishments, for workers in defence industries and for their plants; as well as a reduced demand for civilians employed by the armed forces and defence ministries. Resources released from the defence sector (supply-side effect) then have to be reallocated to civilian activities, and this takes time and involves costs in the form of unemployment and under-employment of labour, capital, land and other resources, as well as the costs of cleaning up the sites of former military bases and defence plants. Factors will differ in their transferability depending on whether human and physical capital is general or specific. For example, a redundant military transport aircraft pilot is likely to be re-employed by a civil airline, while a redundant tank gunner has no immediate and obvious alternative use value in the civil sector. As a result, disarmament can be analysed and evaluated as an investment process involving short-run costs (e.g. unemployment) and long-run benefits reflected in a greater output of civil goods and services (UN, 1993). In principle, estimates of the social rate of return from disarmament and the size of the peace dividend need to calculate both costs and benefits over, say, a ten to 20-year or more time horizon and express the results in present values[1]. A further distinction might also be made between stocks and flows, with disarmament adding to the stock of factors available to the civil sector as well as affecting future flows by changing market signals. Recognition of the complexities of resource reallocation and of disarmament as an investment process provides a conceptual framework for assessing some of the myths of the peace dividend. There are at least six myths surrounding the peace dividend:

(1) The peace dividend is large and available instantly (we'll be rich; the pot of gold myth). This myth suggests that disarmament leads to a large and immediate peace dividend which will benefit the citizens of the disarming country through lower taxes, or repayment of the national debt, or increased government expenditure on schools, hospitals and roads. In reality, any peace dividend is likely to be small in relation to a nation's GDP (see Table I); and the armed forces will demand a share of the dividend to restructure themselves to provide smaller but better equipped forces capable of meeting new and unknown threats. Moreover, achieving a peace dividend is not simply a matter of transferring money between government budget headings: adjusting to the changes resulting from disarmament involves a complex process of reallocating resources from defence to the civil sector, all of which takes time and involves adjustment costs.

(2) The peace dividend will solve a nation's economic and social problems (the nirvana view). "Solve" suggests that a once-for-all sum will somehow remove economic and social problems which have characterized all economies and societies throughout their existence. In reality, the peace dividend might help to reduce some of these problems, depending on its size and how it is used. It has already been mentioned that any peace dividend is likely to be small in relation to GDP. For example, in NATO Europe, median defence spending in 1993 was 2.3 per cent of GDP, which is the maximum size of the peace dividend assuming the complete abolition of defence spending. Moreover, to reduce a nation's economic and social problems requires that any peace dividend be targeted at measures which will contribute to achieving the desired policy objectives. For example, lower taxes which are then spent on imported consumer goods might contribute to a government's re-election objectives but not to improving the long-run performance of its economy (employment, growth, international competitiveness).

(3) The peace dividend can be used for international aid, contributing to productive activities and promoting economic development in developing countries (disarmament for development: Fontanel, 1995). The reality is that there are many alternative and competing uses for the peace dividend, both nationally and internationally (e.g. UN peace-keeping; assistance to transitional economies: Intriligator, 1996). Using the peace dividend for international aid is only one option among a variety of alternatives, so that vote-conscious governments are faced with the need for difficult choices.

(4) Adjustment problems and costs can be ignored. The reality is that we do not live in a world of magic-wand economics. Some industries, towns and regions which are highly dependent on defence spending will be major losers from disarmament. Examples of European regions with defence industrial and military employment share which were over twice the EC average in 1992 comprised Avon, Gloucestershire, Wiltshire, Cornwall, Devon, Hampshire and the Isle of Wight (UK); Friuli-Venezia-Giulia (Italy); and Provence-Alps-Cote d'Azur (France: EC, 1992). Without adequate arrangements to compensate the potential losers, defence-dependent regions will suffer from disarmament and could form major barriers to change.

(5) Disarmament will have fatal consequences for the economy, resulting in massive unemployment, recession and stagnation. The reality is that economies are not completely dependent on defence spending and defence accounts for a relatively small share of GDP (see Table I). Also previous experience following major wars (e.g. 1945) shows that economies successfully adjusted to disarmament and that governments can pursue counter-cyclical policies to compensate for disarmament.

(6) Defence companies can be converted to produce valuable civil goods and services (swords to ploughshares). This myth takes an engineering and supply-side approach: it assumes that resources of labour, capital and technology which are sometimes highly specific to defence uses with a comparative advantage in defence markets can be transferred instantly into successful civilian firms. It ignores the costs involved in identifying new and potentially profitable civil markets and the costs of retraining managers and workers and of adapting plant and equipment to create a new competitive and efficient civilian business. It does not address the question of who will pay for these conversion costs (private capital markets or the state), nor does it consider the evidence on whether past conversions have been successes or failures (Sandler and Hartley, 1995, ch. 12). Nonetheless, the myths of conversion raise more general issues about the response of defence companies to disarmament.

Defining the defence industrial base

Any analysis of defence industries and companies adjusting to change needs to start by defining the defence industrial base. In countries such as the USA, Russia, the UK and France, the domestic defence industrial base (DIB) is a significant component of the economy through its contribution to output, R&D, exports and employment (Hartley and Hooper, 1995). However, the concept of the DIB has been the victim of various definitions. Examples are the "DIB consists of those industrial assets which provide key elements of military power and national security: such assets demand special consideration by the government" (HCP 518, 1986, p. xxxvii); or the "DIB embraces industrial sectors that unequivocally manufacture military goods (e.g. artillery, missiles, submarines) as well as sectors which produce civil goods" and designation "as a defence industry depends on the destination of the bulk of the industry's output: should most of it be earmarked for defence markets, the industry is classified as a defence industry" (Todd, 1988, pp. 14-15).

Often definitions of the DIB focus on the major prime contractors supplying defence equipment (aircraft, ships, tanks) to the national Defence Department. Such a definition neglects the supply chain and the range of subcontractors; it neglects the suppliers of other goods and services (e.g. construction; clothing) to the Defence Department, to overseas defence ministries and to overseas defence industries; and it neglects exports of defence equipment and services. Some suppliers might not be aware that they are involved in defence production (e.g. manufacturers of ball bearings). Further problems arise because there is usually a lack of an official standard industrial classification heading for the DIB. It is also misleading to refer to the DIB as a single, homogeneous entity. On the supply side, the defence market comprises varying numbers of small to large firms, either privately-owned or publicly-owned, involved in the design, development, production, servicing and support of nuclear and conventional air, land and sea systems and their associated armed forces. Problems of defining the DIB make it difficult to estimate its precise contribution to the national economy and to undertake international comparisons. For example, international comparisons of employment estimates could be based on different definitions of both the DIB and its labour force (i.e. direct, indirect and induced employment impacts of the DIB: Dunne (1995); Hartley (1996)).

A taxonomy for defining and classifying the DIB is shown in Figure 1. This distinguishes between dependence on defence sales and the type of defence product embracing complete weapons systems, sub-systems, components, materials and services. In Figure 1, boxes A and B show two extreme cases. Firms in box A are clearly in the DIB (i.e. completely dependent on defence sales and supplying defence-specific products or services). In contrast, firms in box B are in the civilian economy with zero defence sales and supplying purely civil goods. The problems of classification arise with movements in either direction along illustrative paths [P.sub.1] to [P.sub.3][2]. On this basis, the key question in defining the DIB becomes one of selecting a cut-off point: 50 per cent in both axes seems a reasonable starting-point. However, such an approach omits certain civilian sectors, such as civil airlines and merchant shipping (box B), which can be important components of a nation's DIB during a conflict. Nor does Figure 1 allow for the absolute size of the arms firm as measured by arms sales which is the variable often used to rank the world's leading defence contractors.

Figure 2 provides a more comprehensive classification framework by incorporating product specificity, defence dependency and the size of arms firm into a cube whose surfaces represent the three variables. Box A now embraces a complete size range of small and large defence contractors which are highly dependent on defence sales supplying a defence-specific product or service. The lower bound of box A is determined by a minimum size of firm constraint. The next task is to operationalize Figures 1 and 2.

The world's top 12 defence companies in 1993 are shown in Table III. Nine of the top 12 are US companies; all are in the aerospace and electronics industries; and the degree of defence dependency varied between 5 per cent and 94 per cent. If subsidiaries are included, only six of the 14 leading arms companies shown in Table III were 50 per cent or more defence dependent and only one was over 90 per cent defence dependent. The size advantage of the leading US defence companies compared with their European rivals enables the US firms to benefit from economies of scale, learning and scope.

More disaggregated data are available for some countries. In the UK, for example, in 1993-1994, the top six industries supplying the Ministry of Defence [TABULAR DATA FOR TABLE III OMITTED] (MoD) were aerospace, electronics, construction, shipbuilding, motor vehicles and ordnance which together accounted for about 65 per cent of MoD defence expenditure in the UK. Also, in 1993-1994, there were over 500 UK-based contractors paid [pounds]1 million or more by the MoD; but MoD payments are concentrated on a small group of contractors:

* The top ten UK-based contractors accounted for over 50 per cent of the total MoD payments.

* Eight contractors were paid over [pounds]250 million, including British Aerospace, Devonport Management, GEC, Hunting, Rolls-Royce and VSEL.

* Under 10 per cent of the total MoD payments were awarded to over 350 UK contractors (Hartley and Hooper, 1995).

During disarmament, the defence firms which are largely or wholly dependent on defence sales are likely to encounter the greatest adjustment problems. Table IV identifies the firms in the top 100 in the OECD and Third-World countries which in 1993 depended on defence for 90 per cent or more of their business. Two points emerge. First, shipbuilding and ordnance are defence-dependent sectors. Second, a total of 18 firms were identified as defence dependent (90-100 per cent defence sales), with a total employment exceeding 150,000. This figure is surprisingly small, but it excludes defence-dependent firms in the rest of the [TABULAR DATA FOR TABLE IV OMITTED] world (e.g. China; Russia) and it is restricted to the top 100, thereby excluding smaller firms especially suppliers.

Adjusting to disarmament

Defence ministries are major, and sometimes monopsony, buyers of defence equipment which enables them to influence the size, structure, conduct, location, ownership and performance of their national defence industries. Disarmament has resulted in cancellations, fewer new projects, the stretching of programmes, smaller orders and shorter production runs, delays in ordering and a reduced demand for spares and support.

Economic theory predicts that a firm's response to disarmament will be affected by its objectives and will differ between the short run and long run, with adjustment constrained by fixities and contractual commitments and by costs and time. Exit from defence markets and entry into new markets involves transaction costs in such forms as the costs of changing existing contractual commitments (e.g. to labour and capital), the costs of searching for new profitable markets and the associated entry costs. This transaction and adjustment process is not instantaneous, takes time and is likely to be associated with a complete change in the culture of the defence company.

Unexpected and large-scale disarmament is a shock to defence companies and for private firms; this "shock effect" is likely to result in a change from nonprofit to profit-maximizing objectives. Managers can no longer operate in a "culture of dependency", relying on orders from their national defence ministry which specify their requirements in detail, fund R&D and award cost-based contracts. Instead, civil markets are characterized by a "culture of enterprise" based on rivalry, with entrepreneurs taking risks with private funds in a world of uncertainty about future consumer demands and where private capital markets are required to fund R&D. In the private enterprise culture of competitive civil markets, there is no state guarantor providing an automatic "bail-out" for any bankrupt firm (Liston-Heyes, 1995). A defence firm entering new civil markets has to embrace a completely new framework of transaction costs.

Empirical studies of the response of defence companies to disarmament confirm the general predictions of economic theory. In the short-run, firms have responded to defence cuts by seeking work for their plant and workforce; or, faced with the need to adjust factor inputs, labour usually bore most of the short-run adjustment costs through short-time working and job losses among unskilled manual production workers. In the long-run, companies have responded by seeking completely new military or civil markets at home and overseas, often using acquisitions to enter new markets. Some acquisitions represented efforts by defence companies to maintain or increase their share of a declining defence market. Examples include the mergers in the US aerospace industry (e.g. Lockheed-Martin Marietta and Loral; Northrop-Grumman) and, in the UK, the GEC (defence electronics) acquisition of VSEL (submarines). Interestingly, some empirical work found that typically, in responding to disarmament, defence companies required an adjustment period of up to five years (Hooper and Hartley, 1993).

The various responses of defence companies to the changes arising from disarmament can be represented in a structure-conduct-performance framework, as shown in Table V. For nations with a sizeable DIB, downsizing has created a "trade-off" between the search for a peace dividend and the desire to maintain a DIB. As a result, some governments have been willing to allocate limited production contracts or to award technology demonstrator contracts to firms which are regarded as key components of the DIB (e.g. strategic bombers, tanks and nuclear-powered submarines in the USA: Hartley, 1996). Once again, debates about the DIB are dominated by myths, emotion and special pleading and they lack independent, critical and empirical evaluation. What are the costs and benefits of alternative methods of maintaining a DIB of varying sizes? For example, what is the minimum size of design team needed to maintain major capabilities in air, land and sea systems; and how quickly and at what cost can such capabilities be recreated; and what are the relative costs of mothballing defence plants compared with maintaining a capability through either technology demonstrators or minimum production orders? As a contribution to the debate about the benefits of a DIB, some evidence is reviewed on the relative performance of defence industries.
Table V. Adjusting to change

Industry variable   Examples of firm responses

Size                Downsizing: job losses; plant closures
                    State support for maintaining a minimum DIB

Structure           Mergers: national; international; alliances
                    Exits: - prime contractors becoming
                             subcontractors

                           - leaving defence for civil markets,
                             including conversion

                           - constraints via state support for
                             national champions

                    Entry: budget pressures leading to greater
                           willingness to buy overseas (imports)

Conduct             More private-venture R&D
                    Greater lobbying to obtain fewer contracts

Performance         Greater competition for contracts

                    Reduced profitability in short run [implies]
                    monopoly profits in long run?

                    Reduced innovation and spin-offs owing to less
                    defence R&D




The performance of defence industries

Defence industries have the economic characteristics of strategic industries as developed in strategic trade theory. They are characterized by imperfect competition (monopoly and oligopoly), decreasing costs reflecting scale and learning economies, high technology and spin-offs, with strategic behaviour between companies and governments both within and between nations (e.g. aerospace; nuclear power). In addition, defence industries provide military benefits in the form of independence, re-supply and industrial back-up to the armed forces (Dunne, 1995; Hartley and Suckling, 1996; Sandler and Hartley, 1995, ch. 7).

As part of any economic evaluation of a nation's defence industries, it has to be asked whether these are successful industries, or whether the resources allocated to the DIB would be better used elsewhere in the economy? Such an evaluation involves two stages. First, the identification of a set of economic indicators for assessing the performance of defence industries. Examples include exports, the balance of trade, wages and salaries per employee, value-added per employee, R&D, investment and profitability. Second, the performance of a nation's defence industries needs to be assessed over time and in comparison with other industries within the same nation and with defence industries in other nations.

A limited study of the relative performance of defence industries has been undertaken for the UK (Hartley et al., 1996). The performance of three UK defence-dependent industries, namely ordnance, shipbuilding and aerospace, was compared with a control group of other industries. The results are shown in Table VI. Compared with the median for the group of civil industries, all three UK defence industries had a superior performance on the trade balance and import penetration ratio; two of the three defence industries were superior on productivity and the export sales ratio; but all three defence industries had an inferior profitability record. Within the defence group, the UK aerospace industry had the best performance for three of the five indicators[3], while shipbuilding had the worst performance for three of the five indicators. However, within the civil sector, the UK pharmaceutical industry exceeded the median for four of the five indicators and was superior to defence on productivity and profitability. These results suggest that, in terms of performance, there are successful sectors in both UK defence and civil industries. The contribution of the peace dividend to improving the performance of the UK economy will depend initially on its likely magnitude.

[TABULAR DATA FOR TABLE VI OMITTED]

Estimating the UK peace dividend

This section provides broad estimates of the resources released by disarmament in the UK. The focus is on the "supply side" effects, especially for manpower: no estimates are provided of how quickly redundant labour is re-employed, in which sectors of the economy, and the resulting wage levels[4]. Nor is much consideration given to the capital and land released by the armed forces and defence companies and any associated environmental clean-up costs. However, in relation to debates about conversion, the UK government of the early 1990s took the view that defence companies were the best judges of their future market prospects and profit opportunities and that decisions about conversion and diversification into civil markets were matters of commercial judgement for the companies: "it is not for the Government to seek to influence such decisions" (Cmnd 1559-1, 1991, p. 63).

Estimating the economic impact of disarmament also raises a variety of questions and hypotheses about the response of the Ministry of Defence and the armed forces to budget cuts. Insights can be obtained into the allocation of cuts between labour and capital, between each of the services, between different types of equipment, and between service personnel and civilians: such choices provide evidence on the preferences of bureaucracies and their role as interest groups seeking to protect their preferred force structures (Sandler and Hartley, 1995).

An overview of the impact of disarmament on the UK's armed forces and defence industries is shown in Table VII. Following the end of the cold war, the UK's new defence policy, known as Options for Change, was introduced in 19901991 and completed by 1995. Table VII also shows data for 1985-1986 which marked the end of the UK's commitment to NATO to raise defence spending by 3 per cent per annum. Interestingly, over the period 1990-1996, defence expenditure, service personnel and MoD civilians were each reduced by an almost identical amount, namely, 20-22 per cent; and during this same period of defence cuts, both personnel and equipment maintained or increased their shares of the defence budget at the expense of other items. Interestingly, over the period 1990-1995, the total quantity of UK land held by MoD and the armed forces fell by under 1 per cent although, within the total, land held for R&D use fell by some 20 per cent and the land holdings of the air force fell by 4 per cent (MoD, 1995).

Estimates of the UK resources released by disarmament were based on simple extrapolations of linear trends for the period 1985-1990. This method provided broad illustrative orders of magnitude which need to be refined through the estimation of more appropriate economic models of defence expenditure and manpower. The results are summarized in Table VIII. Over the period 1990-1996, there were cumulative savings of almost [pounds]3.5 billion of defence expenditure (savings in 1995-1996 were equivalent to some 0.25 per cent of GDP); manpower savings of over 50,000 service personnel in 1995; and over 100,000 defence industry jobs in 1993-1994[5].

Conclusion

The peace dividend provides a rich research agenda for economists with extensive opportunities for theoretical and empirical work, policy analysis and evaluation. There are research questions about the operation of labour markets for redundant service personnel and defence industry workers; questions about the alternative uses for redundant defence facilities and the possibilities of conversion for defence plants; and questions about the results of various policy [TABULAR DATA FOR TABLE VII OMITTED] initiatives. For example, what actually happens to redundant service personnel: how transferable are their skills and what is their job and earnings experience in the civilian economy? The inevitable data problems mean that much of the empirical work will need to be based on questionnaire and case study material rather than on sophisticated econometric models, all of which represents another challenge for the economics profession.
Table VIII. The UK peace dividend

Item                         Estimated savings

Defence expenditure          [pounds]3.4 billion (cumulative,
                             1990-1996)

Service personnel            51,400 in 1995

Defence industry employment  130,000 in 1993-1994

Note: Savings in defence expenditure are the cumulative total for
1990-1996, expressed as present values in 1993-1994 prices




Notes

1. The time horizon might be based on the average age of redundant labour from the defence sector and hence their remaining working life.

2. Paths [P.sub.1] and [P.sub.3] could be linear, parallel to the axes with right angles at the 100 per cent points.

3. Over the period 1982-1986, the UK aerospace industry ranked nineteenth out of 133 industries in terms of growth of multi-factor productivity (Oulton and O'Mahony, 1994).

4. In correspondence, the UK Department of Employment in August 1993 estimated that 25 per cent of the people joining the unemployment count leave it after one month, 33 per cent after three months and 50 per cent have left the count after six months.

5. The estimated defence expenditure savings did not emerge until 1992-1993 and were based on the mid-point of alternative estimates. A discount rate of 5 per cent applied from 1992 onwards. The manpower savings are not cumulative but are for the specified year only (compared with the estimated trend).

References

ACDA (1995), World Military Expenditures and Arms Transfers, 1993-1994, US Arms Control and Disarmament Agency, US Government Printing Office, Washington, DC.

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Title Annotation:Essays in Honour of Clement Allan Tisdell, part 2
Author:Hartley, Keith
Publication:International Journal of Social Economics
Date:Jan 1, 1997
Words:6508
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