August 6th 2011
After our initial “alert”, we had resolved at IMANI not to comment again on the decision by the Ghana Armed Forces to set up a holding company as a mechanism for owning and running commercial enterprises.
It is clear that there has emerged a certain elite consensus about the matter, and till now no one has pointed us to an explicit law or regulation that prohibits the military from engaging in business with profit as the focus (let us not split hairs over the matter, commercial enterprises have profit and monetary reward to shareholders as their cardinal objectives).
What is the point therefore of pushing the debate? Insofar as the political elite and the laws of the land appear united in purpose, all a civil society organisation like ours can do is point to the dangers ahead from an analysis point of view.
We are writing again on the subject because the debate that has arisen in the wake of the military’s announcement has not been rigorous. Our feeling, therefore, is that there is a good deal of factual evidence we can still share on this matter.
In the ultimate analysis, democratic accountability requires informed debate, and where that is lacking, we are called upon as a public interest organisation to comment.
This is not part of a campaign to undermine the aforementioned military industrialisation agenda.
We would have succeeded in our contribution to national progress if the public, as well as the elite, grow more aware of the hard facts and figures when finally they settle on the nuts and bolts of this “Defence Industrial Holding Company” concept.
Going Against Global Trend
One of our colleagues pointed out during a radio interview that Indonesia passed a law in 2004 requiring that the military divest its holdings in commercial enterprises by 2009.
Sadly, in the transcription of the interview “Indonesia” was replaced by “Malaysia”.
But Malaysia is interesting in its own right. The foremost defence-industrial entity in Malaysia is DEFTECH, which is very prominent in the development of military mobility platforms. DEFTECH is not owned by the Malaysian Armed Forces but by DRB-HICOM, a giant Malaysian conglomerate, of which the government of Malaysia holds less than 5.5%.
DEFTECH of course maintains excellent relations with the military. How else can it develop suitable technologies for them? We will return to the issue of military – industrial complexes later on. The primary point is that the military in Malaysia does not own and directly manage the country’s defence industries.
We have listened with growing alarm to a rising chorus suggesting in assertive terms that the plans of the Ghana Armed Forces to enter into industrial financing and management are in keeping with a commonplace trend internationally.
This is not accurate.
Everywhere the military, either on its own accord or through prompting by the civilian elite, is in retreat from commercial ownership and management activity.
The mention of the Chinese experience as one of those supporting the new moves by Ghana’s Armed Forces is especially surprising.
It is common knowledge that as far back as 1998 China embarked on the “Five Mechanisms” reforms that removed supervision over military enterprises from the Central Military Commission and placed same under the State Council.
The Chinese civilian elite have driven the divestiture of several enterprises with a view of removing them from military control. A detailed report for the United States Economic & Security Review Commission by James Mulvenon and Rebecca Tyroler-Cooper in October 2009 assembles the evidence from a diverse array of literary sources to establish how strongly privatisation and divestiture from military ownership and managerial control have emerged as key objects of military transformation in China.
Another country that has been mentioned is Argentina.
Yes, it is true that the military governments that ruled the South American country put in place a massive commercial base between 1941 and 1983, so that by the early 80s they controlled a large swathe of Argentina’s economy, and accounted for as much as 12% of the national budget.
As Miguel Angel Centeno, who is no critic of the military-industrial complex per se, has recorded, by the mid-80s, divestiture of the famous Fabricaciones Militares set in motion a process of military de-coupling from commercial enterprise that reached a climax in the 90s and today has left the military in Argentina largely focussed on its area of primary competence, national defence.
Everywhere you look, in Russia, Spain, Chile (where military corruption in the copper sector became a source of deep worry for some political economists), and even in North Africa, the realisation has dawned that mixing the military and business is not a good idea.
Even Israel, which is in every respect a special case for historical reasons, has taken steps since the 90s to divest many enterprises once controlled by the Israeli Defence Forces to the civilian-state or private sectors. Even the vaunted Israeli Aircraft Industries (IAI) and Raphael Development Agency have been stripped of their erstwhile military control.
At this stage it is best to point out a nuance. “Military Industry” and “Military-controlled industry” does not really mean the same thing.
Military or defence industries develop and produce goods and services used predominantly by the military. Military-controlled industries on the other hand may be involved in a wide range of businesses not all of which may be producing to satisfy military and security needs.
It is perhaps understandable that historically the military has had an interest in military industries, properly described, in view of the perceived sensitivity of these industrial interests.
Indeed, it was the sensitivity attending the development of such items as stealth technology, missile systems, radar and, once upon a time, the internet, that most justified military involvement in commercial enterprise, and not some notion of military discipline, efficiency or uprightness.
When it comes to military control of enterprises in the banking, consumables, and agricultural sector, there is very little by way of sound historical antecedent. Generally, military governments set these up in an effort to develop a domain with limited civilian oversight.
The references that have been made in the recent debate to Nigeria’s defence industries should be seen in this context.
The Defence Industries Corporation (DICON) of Nigeria, begun with a focus on producing small arms and ammunition, an objective very much in keeping with the historical justification provided in preceding paragraphs. The entire technological base of DICON was imported from West Germany, and an initial team of West German technologists was brought in to develop the company’s technical competence.
By 1972 (8 years after it was set up), DICON had been declared officially bankrupt, and its general manager declared a wanted man. Nigeria was importing nearly a $1 billion worth of arms in the 70s and $1.5 billion in the 80s whilst DICON was justifying its restructuring and survival on its production of underutilised rural water systems.
Today, there is universal acceptance that the DICON model has been a failure, its factories more noted as sites for industrial accidents rather than ground-breaking innovations. In May 2011, the Defence Minister, Prince Kayode, hinted of the Nigerian government’s intention to embrace sound commercial principles in the running of the moribund DICON.
It is curious that Nigeria’s DICON is being cited in Ghana as an example to emulate.
Dinosaurs
We don’t deny that there are still some countries where what the Ghana Armed Forces is promoting remains somewhat still in vogue. Iran, Cuba, Vietnam and North Korea are the best examples of countries that have until recently defied the military de-commercialisation trend.
All these countries for historical reasons have another reason to support military industrialisation. Persistent sanctions and/or antagonism with the West have shut their military from global procurement chains.
There is also a socialist heritage to take into account in the case of the Asian and Latin American military-industrialisation, as Andrew Scobell points out in his 2000 paper.
As soon as these historical constraints eased, however, some of these “recalcitrant” countries embarked on a process of military de-commercialisation too.
In January 2007, the Central Committee of the Vietnamese Communist Party passed a resolution at its fourth plenum ordering the Vietnamese military to divest itself of all commercial enterprises. The reforms began almost immediately. The Central Committee cited a continuing incompatibility between the ethos of a national military and a focus on success in the commercial marketplace.
The Global Trend
There is no denying the fact that in every country the military exerts some economic influence through the military budget. Where defence spending is low there is a corresponding weakness in the military’s economic influence.
The most durable and sustainable approach to civil – military economic relations globally however has been through the procurement and R&D mechanisms.
The United States Military, for instance, has a budget of $700 billion. The US is responsible for nearly half of global arms spending.
The Research & Development (R&D) and procurement budget alone exceeds $220 billion. The rest of the money goes into operations, maintenance and personnel welfare and salaries.
Clearly, through its research activities, procurement and general spending in the economy, the US Military is likely to exert a strong influence on many industries and could, through intelligent spending decisions, spur growth in whole sectors.
Using procurement and R&D the military is frequently able to influence the direction of private enterprises. The investment decisions and search for ideas undertaken by such private enterprises align with military expenditure patterns for good or ill.
Military R&D (whether it is the internet, radar or GPS) is conventionally spun off to either the civilian-state or private sector for mass deployment or commercialisation.
Several federal regulations are in place to further ensure that small business in the US benefit from the military budget.
All this notwithstanding, the United States Military does not develop and operate commercial ventures.
The United Kingdom’s military-industrial complex follows a similar logic. The military exerts influence through its R&D and procurement functions and leaves the private sector to handle production, management and finance. Indeed the 2005 Defence Industrial Strategy of the United Kingdom’s Ministry of Defence explicitly mentions Research and procurement as the main levers for influencing the growth of the complex and positively impacting the national economy.
This is indeed the thinking across the developed and middle-income world.
Convention explicitly proscribes the engagement of the armed forces in commercial activity in much of the democratic world.
Why is this the case though?
Why the Military Should Steer Clear of Business
Ayesha Siddiqa points out in his insightful “Military Inc” monograph that military engagement in business disrupts discipline by creating an avenue for senior military officers to focus on material gain through their interaction with civilian contractors and financiers rather on “force cohesion”. Using copious examples from Pakistan, Indonesia, and Egypt it is amply demonstrated that corruption is an inevitable canker when a regimental institution is invited to sample the profit motive. There is a complete clash of values.
This was in fact amply evident in Ghana during the military rule years when military officers were put in charge of the chit system, and asked to oversee the distribution of so-called “essential commodities”. The infamous “fa wo to begye gulf” syndrome emerged as a direct outcome of this practice.
In Egypt and Thailand, corruption in the military has often reached an extent where state security itself was threatened. Using the “non-disclosure of classified secrets” guise, workers in Egyptian army controlled factories, such as the grand “99”, are prevented from striking, managers are forced to cook books and civilian oversight is rebuffed with impunity.
In Pakistan, parliamentary concerns about military businesses are routinely ignored by an emboldened officer caste.
Dr. Siddiqa, who has studied the subject of military involvement in business extensively, concludes emphatically that in states where institutions are young and still forming, military involvement in business necessarily leads, over time, to a predatory attitude, in which “security sensitivity” is used undermine accountability, civilian oversight and fair competition in the marketplace.
An avenue is created for military officers and others in the defence establishment to be directly exposed to the darker underbellies of business, something their training makes them inadequate to properly navigate.
It is already evident in the discussion that has happened so far on the airwaves. The civilian elite feels restrained from asking critical questions about the technical and financial cogency of the proposed DIHOC program. Will they be inclined to subject military-run enterprises to scrutiny when they are actually up and running and yielding benefits for the powerful officer class? Which political party will have the audacity to risk being labelled anti-military?
At any rate, financial autonomy for the military is in and of itself a dangerous thing. One of the mechanisms through which the civilian administration exercises oversight over the armed forces is via control of the military budget. Any attempt to provide resources “off-budget” to the armed forces can only erode that level of oversight and command control.
Already, the signs are ominous. No hint of this DIHOC concept was provided in the 2011 budget and supplement, and a public relations officer of the Armed Forces was quick to hint, darkly, that parliamentary scrutiny of the finances of DIHOC shall be unnecessary.
The other concern is that senior military officers cannot be distracted from more fundamental duties. There are only so many officers available. Requiring that military officers or others in the defence establishment oversee civilian administrators and managers is requiring that they spend less time on military planning and logistics, training, and on the welfare of the troops. This has severe and adverse implications for “combat readiness”.
As Scobell recounts in his 2000 paper, a Chinese Artillery division in Nanjing was, prior to the reforms, so heavily involved in commercial pursuits that absenteeism nearly hit the 50%. This is an authoritarian communist country. Indeed, growing intolerance for growing attitudinal decay within the People’s Liberation Army was one of the main driver for the 1998 reforms.
If military officers in Ghana were to be distracted by personal and group ambitions of succeeding in business, skilfully competing and/or collaborating with civilian counterparts, there is absolutely no doubt that the combat readiness of our troops shall suffer.
If on the other hand the vast majority of the tasks are to be left in the hands of civilian administrations, then what is the point of military involvement in the first place?
This raises the question of competence.
In many parts of the world, the experience clearly shows that the same things that make the military such an efficient fighting force makes it an inefficient innovator and manager. The ability to tolerate deviancy, so crucial to creativity and innovation, and the open-mindedness to learn from subordinates and empower juniors, are all usually missing even within the modern armed forces.
Already, some of the decisions being taken with respect to DIHOC are suspect.
The first strategic partner they have named has neither the technical nor financial track record required to capitalise and run the first enterprise they have identified, the shoe factory. As we have said before there are only two companies that bears the name of that strategic partner in the Czech Republic. One is owned by the Chinese and has only $18,000 registration capital to its name, while the other is owned by a respected naturalised Ghanaian academic and his wife. Our understanding is that it is the latter that the military has engaged.
While the involvement of the Ghanaian academic is somewhat reassuring the company itself is only now building capacity in commercial engineering and has for most of its existence been grossly undercapitalised ($6000 during its first decade after incorporation).
We have no doubt that the involvement of the company’s founder is helpful and it is encouraging that the company has now increased its registration capital to nearly $900,000, even if that still leaves its balance sheet less than robust. What is worrying is that the fund-raising strategy that has been adopted is vague (and therefore unlikely to excite investors) and weak. And the secrecy is not helping matters. But that of course is the issue: the military is not known for transparency.
Why is Ghana rushing to embrace a concept – that of military ownership and management of commercial ventures – when most countries are fleeing from this practice?
If we had any influence on Ghana’s military planners, we would have argued instead for a renewed military focus on reducing its reliance on foreign experts and specialists in the maintenance of its existing plant and equipment.
There is a line item in the defence budget of nearly $9 million that goes to “defence advisors”. Our defence attaches in overseas missions are, as we know, primarily focussed on securing technical assistance for our armed forces. That is an area that can be radically improved through enhanced procurement and the development of an R&D culture within the armed forces. These are the priorities.
Some will say that the “procurement” dimension is already evident in the shoe factory strategy since the factory shall be supplying boots for the security services. This however is wrong-headed.
Even if the armed forces were to follow the international norm of 3 boots per trooper per year, the 20,000 annual boots’ requirement would be woefully inadequate to support the sales expectations of a $6 million plus factory. Even if all security forces in this country were to be mandated to source from this factory, it is unlikely that sales from those quarters would amount to 50,000, simply because the clothing needs of our security forces are not being met to international standards.
That means military procurement, in that very narrow sense is completely inadequate to revitalise the operations of the shoe factory. The factory’s survival will be completely determined by its capacity to compete in the open market. In that regard, military ownership does not provide any especial advantage. Which is the point exactly.
From what we have been told, there is very little reassurance that the military is entering industries for which it has certain clear advantages or competences because of its procurement experience, core mandate or research potential. So what is the point?
Rather than conceiving the concept of “public-private partnership” within the context of establishing commercial, for-profit, enterprises, the military should look at enhancing its technical capacity through collaboration with the private sector, and gradually using its procurement and maintenance functions to drive that collaboration towards positive economic outcomes for the country.
As we have said already, we are not embarking on a public campaign to discredit DIHOC or to incite public opinion against the project. In fact we hope, notwithstanding all the evidence against DIHOC that this new experiment in our industrialisation journey shall work to the benefit of our troops and the ordinary people of this country.
Once again we wish the proponents luck.
Credit: IMANI Ghana (syndicated through www.Africanliberty.org)