| <<< | speeches |
|
Arms and the market economy I was originally asked to talk about the strengths and weaknesses of the economic case for the arms industry. But if you are any kind of market economist you do not have to make a case for or against particular industries. This is best left to the market. Government attempts to decide which industries should expand or which should contract have been uniformly disastrous, whether Gosplan in the former Soviet Union or the lesser attempts of European countries to 'pick winners'. But every sensible market economist should accept that the market must operate within a framework of law and moral convention. Investment bankers are not permitted to finance firms that sell poison to children (or even adults) and there are strong constraints for example on the emission of lead into rivers or on pollutants into the chain of foodstuffs. Above all we do not subsidise businesses to engage in these harmful activities. When these rules break down there is an understandable outcry. My contention simply is that exports of arms to dubious regimes should come within the sphere of what is out of bounds. Ideally, such moves should be internationally co-ordinated. But there is no case for moving at the pace of the slowest. When the British slave trade was prohibited early in the 19th century or children were prohibited from working in the mines, it was said that other countries would take the trade away. That was also said about the export of opium to China. What the economic observer can point out is that the cost of following the moral course is not enormous and does not require great heroism on the part of our leaders. There may be some people who would like to stop all arms production or all exports. But so long as we believe in having armed forces and belonging to alliances such as Nato then we need an arms industry. Indeed, there is too little specialisation inside Nato because of the desire to protect domestic interests; and many of the overspill gains now supposed to obtain from arms exports to dubious regimes could be reaped instead by greater specialisation within Nato. All that those of us who are pacific rather than pacifist should aim to halt is the sale of arms to governments or places likely to use them for external aggression or internal repression. Rampant fallacies I first became interested in the weakness of the economic case for supporting arms sales at the time of the British Arms for Iraq scandal. The main justification offered for stretching the law to encourage arms sales was the jobs and export arguments. These were the very same arguments used to keep open uneconomic coalmines and to protect manufacturing industry, which has been in a long term decline as a proportion of national income in most western countries. The difference is that it is mostly left-wing political parties that want to support manufacturing and mining while it is right-wing parties that want to support agriculture and arms. But it is equally nonsensical in both cases. The basic fallacy is what has sometimes been called the lump of labour fallacy. This supposes that there is a specific list of jobs to be done and that, if employment declines in one sector, the workers and other resources will just waste away. It ignores one of the key assumptions of economics: that there is normally a circular flow of income in which money spent equals incomes earned and that, apart from special conditions of slump or boom purchasing power is conserved; and that when spending falls in one area it rises in another. Those who believe in the lump of labour idea can hardly explain how it is that other jobs arose to take the place of the handloom weavers or the drivers of horse drawn carts - or for that matter the replacement of pack asses by wheeled traffic at the dawn of history. Nor can it explain how it is that with the multiplication of population and the multiple rise of productivity in the last two centuries most people who want them still have jobs. I returned to the subject when the jobs argument was trotted out against the idea of a foreign policy with an ethical dimension, by those who wanted to undermine it instead of strengthen it. Towards the end of 1999 I gave a lecture on ethics and foreign policy. I came to the conclusion that there was no moral or logical argument for limiting concern about human rights to one’s own country. But in practice intervention often made matters worse rather than better. I could be much more definite on the undesirability of sending arms to dubious regimes, quite apart from the fact that they could end up being used against the countries that sold them. On March 28, 2001, I gave a fairly comprehensive talk (not all of which I had time to deliver!) to the Royal Society of Arts in London on the ethics and economics of arms exports. In that lecture I outlined, as far as I was able, the steps that the British Government has taken to limit the sale of arms to dubious regimes for dubious purposes. Many of these efforts have of course an international dimension and fulfil various international undertakings. I also cited the criticisms of non-governmental organisations (NGOs) as far as I found them plausible, that the government had not gone far enough. To take one obvious instance, there has been a continued British sale of Hawk parts to Zimbabwe. There are many other such instances. Apparently the UK is still selling military aircraft to India despite that country’s recent nuclear tests. The only reason why there are no such sales to Pakistan is because of the military coup in that country. Yet the Indian sub-continent is probably the part of the world most subject to the risk of nuclear conflagration. I was facing in two directions. On the one hand I was urging governments to go much further in their arms curbs; but on the other I was trying to defend the efforts already made. You only have to look at some of the noises coming out of Washington, or from the British Conservatives, to see that rollback is a real danger. I then went on to suggest that the dangers to jobs or national balance of payments from losing some export orders were highly exaggerated. In many cases there would be a gain from removing taxpayers’ subsidies. Here I felt much more on my home ground and I gave a resume of the various mercantilist arguments for saying that the government had to promote a favourable balance of payments by any means with which it could get away. The heyday of mercantilism was in the 16th and 17th century. It was succeeded in the late 18th and 19th centuries by an increasing freedom of both trade and capital movements, and a reliance on automatic market mechanisms to look after the balance of payments. Under the influence of the Great Depression and two world wars there was a retreat back to the mercantilist view. I am unfortunately old enough to remember slogans such as 'The Dollar Drive' or 'Export or Die'. Indeed there are numerous legacies of this period still with us in Britain - for instance the Queen’s Award for Industry, the use of royal visits to promote overseas sales, the export promotion activities of the DTI and the defence department and, above all, the government sponsored export credit department. Finally I quoted some industrial studies on the impact of a cut of a third in British arms exports, which suggested that they should have a minuscule effect on the national economy, much smaller than many industrial adjustments to which we have already gone in manufacturing, the coalmines and many other places. I can supply copies of the full lecture to anyone who is interested; and there will ultimately be copies on my web site as well as a reprint in the RSA journal. But rather than try to go beyond the summary I have already given it might be more interesting for you, and certainly for me, to offer a few further reflections of a more informal kind. Incentives to corruption First, on the connection between bribery and arms sales. The Stockholm Report rightly makes a great deal of the incentives on the side of arms buyers to look for various side payments and on the exporting firms to offer them. The key element emerging from it seems to be the concentration of decisions, especially in emerging countries, in the hands of a few officials who are very poorly paid in relation to the very large sums in which they deal. One might also add the relative insignificance of these bribes to equipment manufacturers who can offer very attractive kickbacks which amount to only a small proportion of their turnover. In all these aspects the situation is remarkably similar to the markets for heavily capital intensive development projects such as dams and other expensive developments. Indeed the companies involved are often the same. So are the financing sources. And so is the bad argument: that if one government does not quietly subsidise its own suppliers another country will get the business. I would like to concentrate on another analogy, that with the drugs trade. This applies particularly to illegal or semi-legal exports of arms, e.g. to countries on banned lists or for purposes which have been concealed in the export permit applications. The analogy with drugs lies in the very heavy element of risk involved. There is the risk of detection, involving in extreme cases the threat of jail. There is the aggravated risk of non-payment. There are the personal risks of violence and untimely deaths inflicted by the domestic opponents of those receiving the arms. One of the few nearly incontrovertible principles of economics is the tendency to comparable packages of rewards for those engaged in alternative activities. Somebody making or buying refrigerators will be satisfied with the normal going rate of return, although he would obviously hope for more. Those engaged in selling or buying drugs or arms will need extra cash rewards to offset the risks. Thus I do not see any early end to corruption other than measures to reduce the size of the trade by operating on the side of either demand or supply, or preferably both. Small arms This leads me to one thing I have learned in the course of my investigations which goes beyond the generalities of free trade theory. It is the contrast between the evil effects of small arms exports and those of heavy equipment, including aircraft. As usual there is no sharp dividing line, but the extremes are easy enough to outline. I have been particularly struck by the fact that a number of thoughtful observers in the academic world, among commentators and even among industrialists, who make a reasoned case for supporting some sales of military equipment are fiercely opposed to a proliferation of small arms exports, which they readily agree has led to the deaths of many millions of people in Africa and elsewhere. Small arms sales cannot be controlled just by limiting export credit subsidies. Many of these sales come from former Communist countries which have large stocks surplus to domestic requirements and which easily get to the hands of unscrupulous people. The direct culpability of western governments is limited to their encouragement of small arms sales to governments that they regard as legitimate rather than rebels. The obvious riposte is that some legitimate governments will do pretty nasty things with these arms, which in any case can easily fall in the hands of so-called rebels. But beyond urging a tightening up of controls, there is something that western governments can do. Most of the governments concerned value their economic relations with the West. They receive aid from organisations such as the IMF, the World Bank or the EBRD. In addition many of them are negotiating to enter the European Union. If a clampdown on the export of Kalashnikov rifles and similar weapons were made a condition both of aid, and of admission to, the EU we might see much more forceful action. As far as I know, the topic was not even mentioned in the various IMF negotiations for loans to Russia, or in discussions with the Ukraine, which is a more important source of small arms. (Kazakhstan?) Equipment and credit When we come to large and heavy equipment and aircraft the issues are fairly well known. The elimination of official aid for export credits could cut out a great deal of the most objectionable items and we would be left with trade with other Nato countries, and other allies such as Australia and New Zealand. The argument that the US or Britain needs to export Tornado fighters to countries Saudi Arabia is extremely weak. Even if it were advisable to keep the present regime in existence, surely the history of neighbouring Iran and Iraq - to go no further - shows the very strong possibility that this military aid will not work and that the aircraft and rockets will end up in the hands of hostile regimes. (Death of a Princess). As for the argument about oil supplies, I have never seen why the US, Britain and France cannot - like other western countries - buy their oil on the international market, remembering that Middle Eastern countries often need to sell the oil even more urgently than we need to buy it. It is very interesting that this so-called argument of economic strategy usually comes from foreign ministries rather than ministries of finance or economics. Why size matters There is one aspect of the argument that I still need to explain more fully. That is the relationship of the a priori argument about the circular flow of income and the automatic adjustment of the balance of payments to numerical estimates of the size of the sector involved. I have cited studies to show that arms exports account for about 120,000 workers and for some half per cent of UK exports. A cut of approximately a third would eliminate the most dubious items and affect about 40,000 jobs in the first place while many of the workers involved would soon find other jobs. But suppose we were talking about 50 per cent of total exports or four or five million workers? Would this affect the argument? The answer is mainly in the time dimension. Any change in the pattern of demand leads to some adjustment problem. If the adjustment is large care has to be taken by monetary and fiscal policy to maintain total demand; special efforts have to go into retraining; and there is a case for phasing out the change, if at all possible, to give those concerned time to adjust. But when we are talking about a modest fraction of a small and declining industry these adjustment problems are second order. Obviously a few constituencies are involved; but the change is much less than the normal adjustments which take place in a typical year through economic circumstances without any change of policy. Finally, I come to a question that I am often asked by friends in government circles. What additional measures will you like to see taken? Those who know more about the details of the arms trade than I do are best placed to advise on the specifics. But let me end with a few suggestions nevertheless. It goes without saying that full support should be given to the forthcoming UN Conferencece on small arms exports. But what else can an individual government do. I hope conference members will excuse me if I couch my recommendations in terms of British policy and leave others to adapt them, to the circumstances of their own countries.
* I am indebted to another speaker at the Cambridge
Conference for these two suggestions | |
| <<< | speeches |
| Site designed and managed by Andrew Heavens - andrew.heavens@ft.com | |