Country Survey Pakistan

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Country survey IV: Pakistan Ron Matthews a a School of Defence Management, Cranfield University, Shrivenham, Wilts, UK Online Publication Date: 01 November 1994

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COUNTRY SURVEY IV: PAKISTAN RON MATTHEWS School of Defence Management, Cranfield University, Shrivenham, Wilts SN6 8LA, UK

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(Received 8 August 1994) This paper examines the role of the military in Pakistan, particularly in regard to civil-military relations and defence industrialisation. Pakistan's military expenditure is relatively high, but apart from investment multipliers, little of this spending filters through to the civil sector. Pakistan's defenceindustrial strategy centres on rebuild and Chinese technological collaboration. However, while this 'capital-saving' approach has merit, the strategy has thus far failed to stimulate broader civil development linkages. A conclusion of this paper is that Pakistan is failing to maximise the strategic dual-use benefits of integrating civil-military activity. KEY WORDS: Defence industry, civil-military relation, dual-use, Pakistan.

INTRODUCTION Pakistan is one of the world's poorest countries. According to the World Bank's 1991 Development Report, Pakistan's GNP per capita was US $370 per annum (measured in 1989 prices), which makes it the World's 24th poorest country. The Report further shows that 30 per cent of the population lie below the poverty line — with the lowest 40 per cent of households accounting for only 19 per cent of national income, 67 per cent of people have no access to safe water and more than 54 per cent have no access to health facilities {WorldDevelopment Report, 1991). During 1990-91, Pakistan spent 2.25 per cent of GNP on education and less than 1 per cent on health {The Muslim, 1991). Yet the country's defence burden is one of the heaviest in the world. At around 7 per cent of GNP in 1992, it is more than twice the burden that India bears. Moreover, while over recent years global defence expenditure has been declining, Pakistan's has been moving in the other direction: from 5.4 per cent of GNP in 1980, it reached 6.8 per cent in 1985 {Times of India, 1992). While the defence spend to GNP ratio has remained about the same, in absolute terms the 1992 defence budget amounted to Rs82 bn in current prices ($3.28 bn), which is an 8.4 per cent increase over the previous year's revised estimates {Times of India, 1992). Defence spending at this level absorbs nearly 40 per cent of government expenditure. It is also over 20 times the annual spend on education and health. Defence expenditure is crippling Pakistan's economy. In the 1992-93 fiscal year the Rs82 bn defence budget combined with the Rs93 bn ($3.72 bn) debt servicing obligation (much of which is as a result of increased borrowings to sustain excessive 315

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defence expenditure) accounted for 98 per cent of government revenue (Pakistan Government Budget Estimates, 1992-93). Provision for other non-development as well as development expenditure mostly derives from government borrowings. This further swells debt obligations, already Rs900 bn ($36 bn, in 1992 prices), of which Rs425 bn ($17 bn) is foreign debt (NIWS, 1992a). The cost of servicing the latter has brought Pakistan dangerously close to a negative aid inflow situation; that is, where more foreign currency is going out in repayments and interest than is coming in, through international aid each year. In fact, if aid is denned not as the amount committed by donors but on the basis of the amount actually received, then negative aid inflow did occur in 1991-2. During that year Pakistan paid out nearly US $50 mn more in repayments and interest than it received in aid (NIWS, 1992a). Increasing government debt and interest charges squeeze still further development expenditure. An indirect impact of this vicious cycle is the slow but inexorable strangulation of Pakistan's private sector. The classic argument that high defence spending contributes to government budget deficits, inflation, raised interest rates and 'crowding out' of civil sector investment is a particularly serious threat in Pakistan, since the government's domestic borrowings have risen sharply in the 1990s. In 1991-2, the government borrowed nearly Rs80 bn from domestic sources (primarily banks), and this would have significantly reduced the amount of credit available to businesses and other non-government borrowers (NIWS, 1992a). The curtailing of commercial investment undermines, of course, the drive for industrialisation. Islamabad recognises this depressing picture. Reducing defence expenditure is not easy however, given the tense strategic stand-off with India. Pakistan justifies the size of its defence budget by arguing that it is written not in Islamabad but New Delhi. When comparing the two countries' defence expenditure in absolute terms, there is an undeniable logic to this argument: for 1991, India's defence spend of US $9 bn was over three times the size of its Islamic neighbour's military budget at US $2.9 bn (SIPRI1992 Yearbook). Pakistan aruges forcefully that its high level of defence spending to GNP is required to defend development, but pressure for reductions in defence spending are increasing. Indeed, Pakistan may now have lost its main justification for maintaining high levels of defence spending: its claim that rises in its defence spending are predicated by increases in India's defence budget was damaged by the latter's decision to reduce defence expenditure by 10 per cent in 1992-3 (NIWS, 1992b). In addition, both Japan (a leading aid donor to Pakistan) and the Paris-based Aid-to-Pakistan Consortium have both indicated that aid disbursements may in the future be linked to reductions in Pakistan's defence budget. The purpose of this paper is to examine the role of the military in Pakistan, particularly in regard to its linkages with the civil sector. The discussion begins with a review of the data on Pakistan's military spending, which acts as the background for examining both the trade-off between 'defence and development' and the subsequent discussion on the macro-economic significance of strategic industries. Moving from theory to practice, a case study of Pakistan is then presented. Defence-industrial development is analysed from the standpoint of: inward technology transfer; underlying civil-military linkages; and broader defence-development issues. The paper closes with a set of policy-oriented conclusions seeking to maximise the synergy between defence and broader industrial development.

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PAKISTAN'S MILITARY SPENDING Since Independence, Pakistan has lived with tension and conflict on its borders. The country has fought three wars (1948,1965 and 1971) with India, and provided political and material support for the Mujadeen's 1980s military struggle against occupying Soviet forces in neighbouring Afghanistan. Even today its army is frequently involved in skirmishes with opposing Indian forces on the world's highest battlefield, the Saichen Glacier. Facing this almost permanently tense security environment has meant that Pakistan's defence expenditure to GNP ratio has consistently been relatively high. Table I shows the trend of Pakistan's defence spending between 1981—91 -1 In constant (1991) prices defence expenditure has more than doubled over the period. A sizeable component of this annual expenditure has been spent abroad, procuring off-the-shelf weapons systems. By contrast, Pakistan's arms exports, have generally been of minimal significance. Table 1 Pakistan: Military Data Year

Military Expenditures (Mn$) Current Constant (1991)

1981 1982

1983 1984 1985 1986 1987 1988 1989 1990 1991

873 1033 1349 1401 1650 1833 1989 2185 2387 2829 2672

Arms Imports (Mn$) Current Constant (1991)

Arms Exports (Mn$) Current Constant (1991)

1303 1452

320

478

40

525

738

20

60 28

1822 1812 2059 2227 2342 2477 2590 2943 2672

430 625 470 310 330 360 500 600 120

581 808 586 377 389 408 542 624 120

300 310 40 5 5 10 10 30 10

405 401 50 6 6 11 11 31 10

Source: World Military Expenditures and Arms Transfers, 1991-92, US Arms Control and Disarmament Agency, 1994.

Pakistan's military spending supports a substantial military establishment. Although smaller in every respect compared to India's military commitment, Pakistan's armed forces are nevertheless substantial. Table 2 shows the comparative military data of India and Pakistan's armed forces. Pakistan's overall military strength numbers 577,000 (compared to 1,265,000 for India), but these forces can be bolstered by 313,000 reserve personnel. The biggest of Pakistan's armed services, the army, has nearly 2,000 main battle tanks (MBTs) at its disposal. The air force has close to 400 combatant aircraft, but no armed helicopters. The 1 Table 1 shows that defence expenditure fell in 1991. This appears to be an aberration, as defence expenditure after 1991 has continued to rise: in 1993/94, actual expenditure was 94 bn rupees, and for 1994/95 it is set to be 102 bn rupees.

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Table 2 Armed Forces: India and Pakistan Country Pakistan: Active Reserves India: Active Reserves

Army ('000)

Air Force ('000)

Navy ('000)

Total Armed Forces ('000)

Para-Military ('000)

510 300

45 8

22 5

577 313

275 —

1,100 9501

110 140

55 55

1,265 1,305

1,432 -

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Source: Military Balance 1993-1994, IISS, Brassey's (1994). Note: (1) In addition to the 950,000 military reserves, the Military Balance reports around 1.5 mn para-military forces.

smallest armed forces branch, the navy, possesses six submarines and 14 principal surface combatant ships. In 1993, six Type-21 frigates were purchased from Britain. CONCEPTUAL FRAMEWORK The relationship between defence expenditure and economic growth has been much researched, but as yet the nature of this relationship remains unresolved and therefore as controversial as ever. The economist who first undertook an academic analysis which drew out the positive aspects of defence expenditure on economic performance was Emile Benoit (1973). His seminal work in the early 1970s attempted to quantify the relationship between military spending and economic growth, leading to the tentative conclusion that heavy defence expenditure does not appear to be associated with lower growth rates.2 Benoit's work was important, not least in attracting academic attention to the subject. Yet it raised more questions than answers. Frederiksen and Looney (1983), for instance, assert that developing countries which are resource-constrained (eg. relative lack of foreign exchange and government revenues) will find that defence expenditures siphon funds away from more productive domestic investments with a subsequent detrimental effect on growth. A study by Lim (1983) obtained similar results showing defence expenditure to be detrimental to economic growth. Deger (1985) concurs, arguing that arms expenditure has a serious negative physical resource cost, particularly on education. In a further paper, Deger (1986) concedes that a persuasive argument can be built up regarding the beneficial effects of military expenditure in terms of mobilisation of unused or under-utilised resources, but makes the point that modernisation is only one of two constraints on the growth process; the other is resource-based (the lack of savings). The author concludes that the military may have stimulating effects on the former but certainly depresses the latter. 2 To some extent Keynes would have supported Benoit's thesis. Keynes (1930s) saw the advantages of using 'inward-directed' defence expenditures as a mechanism for pump-priming the economy. Through multiplier and accelerator effects, increased defence outlays will stimulate spending and economic activity. The Korean war, for instance, boosted both the Japanese and American economies.

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The evidence cited either for or against the positive impact of military expenditure is mostly derived from econometric analysis. In this regard, Chan (1985) makes the telling point that:

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...we have probably reached a point of diminishing returns in relying on aggregate cross-national studies to inform us about the economic impact of defence spending ...As analysts have already noted, the search for universal patterns applicable to all places and times is likely to be disappointing. The claims to generality based on the results of such a search tend to entail substantial costs in empirical sensitivity and specificity ...[and that in the future]... research will profit more from discriminating diachronic studies of individual countries.3 While descriptive studies are helpful in identifying and explaining the important defence-development economic processes at work, the existing body of literature is silent on what in the 1990s have become key issues in linking military expenditure to 'industrial' development. Recent work on Japan has demonstrated the significance of strategic 'dual-use' industries, such as machinery, electronics and transport, that industrially cross-thread between the civil and defence sectors.4 There is also a growing awareness that many of the industries upstream of the defence sector are characterised by highly flexible and, as the Japan case shows, technologically sophisticated subcontracting networks. Importantly, the 'Japan model' further highlights the crucial ingredient for a 'successful' defence-development strategy, that of bolting nascent defence production capability onto existing strategic dual-use industries, where technological 'spin-on' (from civil-to-defence) can be emphasised rather than the less likely technological 'spin-off (defence-to-civil). Strategic Industries The literature suggests that there are beneficial attributes of defence industrialisation, particularly industrial modernisation influences and capacity utilisation effects. The fact that government statistical publications do not record 'defence' as a separate manufacturing classification but apportions its output among various civil classifications of economic activity reinforces perceptions concerning the close proximity between civil and defence production. From an engineering standpoint there is little difference between producing, for example, a civil truck as 3 S. Chan (1985), 'The Impact of Defense Spending on Economic Performance: A Survey of Evidence and Problems', Orbis, p. 433. However, the debate continues. See, for instance, J. Brauer (1991), 'Military Investments and Economic Growth in Developing Nations', Economic Development and Cultural Change, 39/4; A. Chowdhury (1991), 'A Causal Analysis of Defence Spending and Economic Growth', Journal of Conflict Resolution, 35/9; M. Pivetti (1992), 'Military Spending as a Burden on Growth: An Underconsumptionist Critique', Cambridge Journal of Economics, vol. 16; R. Looney (1991), 'Defence Expenditures and Economic Performance in South Asia: Tests of Causality and Interdependence', Journal of Conflict, Management and Peace Studies, L. Grobar and R. Porter (1989), 'Benoit Revisited — Defence Spending and Economic Growth in LDCs', Journal of Conflict Resolution, 33/2; and K. Park (1993), 'Pouring New Wine into Fresh Wineskins — Defence Spending and Economic Growth in LDCs with Application to South Korea', Journal of Peace Research, 30/1. 4 Note, for instance, A. Edgar and D. Haglund, 'Japanese Defence Industrialisation' in R. Matthews and K. Matsuyama (eds.) (1993) Japan's Military Renaissance?, Macmillan Press and R. Matthews (1993), 'Indonesian Strategy is Put to Test', Jane's Defence Weekly, March 20.

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opposed to a military one. Years ago, even the basic engineering of weapons platforms, such as tanks, would not have been too far removed from civil sector engineering requirements. Today, military engineering skills have advanced, especially in electronics and computerised gadgetry, but even here, civil production has absorbed modern technological developments: civil airliners, for example, are packed almost as full of electronics as fighters. A technique for measuring a country's defence-industrial capacity was developed in 1974 by Professor Gavin Kennedy (1974). He felt there was a close integrative relationship between the defence sector and the metal and engineering sectors. These capital goods industries, he argued, can be regarded as strategic industries not only in respect of civil industrial development but defence industrialisation also. They represent the spectrum of engineering activities, encompassing iron and steel, non-ferrous metals, metal products, non-electrical machinery, electrical machinery and transportation equipment. Professor Kennedy posited that these industries comprise the 'Potential Defence Capacity' (PDC). If this PDC is compared to total manufacturing capacity, it then becomes possible to assess arms production capability. This can be done either by longitudinal or crosssectional comparison of PDC ratios (denned as the share of" PDC industrial activity in manufacturing activity). Table 3 illustrates how the PDC ratio is calculated for Pakistan. Even though the analysis covers only a narrow span of years, due to data unavailability, it is clear that the country's capital goods sector was experiencing PDC growth in employment, gross output and value added. However, the level of this capacity is low compared to other Asian defence industrialising nations. Table 3 Pakistan's Potential Defence Capacity (1981, 86) ISIC Employt. ('000) 371 372 381 382 383 384

Iron & Steel Non-ferrous metals Metal products Machinery Electrical machinery Transport equipment Total Mfging total PDC ratio (%)

18.2 5.0 10.2 13.7 16.7 22.7 86.5 451.7 19.1

1981 Output VA (Rs mn) 3309 56 924 1424 2656 2419 10788 84289 12.8

1143 14 303 491 995 708 3654 28692 12.7

Employt. ('000) 42.8 .4 8.8 18.7 17.2 17.4 105.3 506.6 20.8

1986 Output VA (Rs mn) 9601 30 1219 4965 5197 6341 27353 171124 16.0

2194 12 468 1340 1857 1384 7255 55297 13.1

Source: Industrial Statistics Yearbook 1985& 1989, vol. 1, United Nations (1987 & 1991). Notes: mfging - manufacturing, VA« value added, PDC% is calculated as, for instance, total employment of ISIC 3 7 1 2 + 381-4 as a proportion of total manufacturing employment.

The relatively low share of manufacturing output accounted for by Pakistan's capital goods industries is clearly shown by reference to Table 4. In the late 1980s Pakistan had easily the smallest output-PDC ratio of the countries listed. India had twice the PDC, and fellow late-industrialiser, Indonesia, had a PDC ratio about

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Table 4 Potential Defence Capacity Analysis for Selected Asian Countries Percentage (%)

India Indonesia Malaysia1 Pakistan2

Employt.

1976 Output

VA

Employt.

1986 Output

VA

27.6 3.2 27.9 19.1

31.9 17.9 20.2 12.8

39.2 15.8 22.7 12.7

31.3 11.6 33.4 20.8

33.6 20.9 32.9 16.0

38.3 22.5 29.6 13.1

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Source: Industrial Statistics Yearbooks, Vol. 1, United Nations (Various Years). Notes: (1) For Malaysia, the years of analysis are 1976 and 1988. (2) For Pakistan, the years of analysis are 1981 and 1986.

five percentage points higher. Moreover, the growth of this latter country's capital goods sector has been faster than that of Pakistan's. In 1965 Indonesia's share of manufacturing in GDP was 8 per cent compared to Pakistan's 14 per cent. Yet, while in 1989 Indonesia's share had jumped to 17 per cent, Pakistan's had crawled only two points to 16 per cent (WorldDevelopment Report, 1991). This summary analysis suggests that Pakistan's defence-industrial capacity is both shallow and non-dynamic. Indeed, Pakistan appears firmly entrenched in the initial industrialisation stage of the technological cycle. In the 1990s, PDC ratios are increasingly being shaped by the growth of the strategic computer and electronics industries. Not only are these the ultimate dual-use industries, but their innovational flair also sets the frontier for weapons technology development. Pakistan's defence industrial base, however, is still characterised by 'smokestack' industrialisation. Similarly, the civil industrial sector has been endeavouring to become self-sufficient in basic capital goods production, and has failed to reach the transition stage to the high technology 'dual-use' electronics, telecommunications and computerisation industries. Since its inception Pakistan's defence industry has also been striving for self-sufficiency, but mostly in isolation from civil capital goods production. The result has been duplication rather than integration and complementarity of civil-military industrial capacity. EVOLVING DEFENCE-INDUSTRIAL STRUCTURE The origins of Pakistan's defence industry date back to Independence and the initial recognition of the importance of military self-sufficiency. The earliest recorded domestic weapons production was the establishment of a small arms factory in 1950. Based in Rawalpindi, it produced Lee Enfield Mark VI .303 bolt action rifles and ammunition on British World War II surplus machinery. Workers in this facility were optees from the 17 former British arms plants, which, at the time of partition, were located in India. The Rawalpindi factory was the seed from which the Pakistan Ordnance Factory (POF) complex took root. Apart from this isolated development little other defence-industrial investment took place. The period after the 1948 Indo-Pakistan war was characterised by continued reliance on foreign suppliers. The 1963 Sino-Indian war and more particularly Pakistan's

322

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1965 war with India, and the resulting arms embargo by the major western suppliers against both India and Pakistan, abruptly changed that policy stance. Since then the procurement of military equipment through, wherever possible, indigenous production, has become a primary objective of the authorities. Defence manufacturing capability has been developed in land, aerospace and maritime equipment areas. Save for one or two international collaborative ventures,5 all Pakistan's defence companies are state owned.

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PAKISTAN'S DEFENCE-INDUSTRIAL BASE Pakistan's defence sector is built around five principal industrial establishments. Table 5 lists these firms, their main products and employment levels. In the land equipment manufacturing field, POF is the country's biggest producer of guns, artillery and ammunition. Production began in 1961 and by the early 1990s POF was Pakistan's biggest company, employing around 40,000 people at the Wah cantonment (40 km north-west of Islamabad). POF comprises 14 highly vertically integrated manufacturing units. Licensed production and technology transfer has occurred through collaborative ventures with China and (both eastern and western) European countries. For instance, a heavy ammunition plant was established with Czechoslovakian assistance, and machine guns are being produced under license from the German company. Heckler and Koch. Located along the road from POF is the tank production facility at Taxila. Known as Heavy Industries Taxila (HIT), the facility comprises a tank and gun manufacturing facility and a number of heavy rebuild factories. HIT began operations in 1971. It license produces Chinese T-series and US M-series MBTs. Armoured personnel carriers are produced under license from the US defence contractor, FMC. HIT's goal is indigenisation, but there is a recognition that progress towards its achievement will not be dramatic. For example, although production of parts of the power train, crankshaft and heat treatments for the ageing T-59 tank are undertaken in Pakistan, the gun and fire-control mechanisms are still imported from China, and while the armour cutting is undertaken locally, the armour plate is still imported from China. Somewhat further along the same road from POF and HIT is the Pakistan Aeronautical Complex (PAC), Kamra — Pakistan's principal aeronautical establishment. The complex was commissioned in 1972, and currently has four factories, namely: Chinese Rebuild (mostly Shenjang F-6 fighters — an adaption of the Soviet Mig 19); Mirage Rebuild (service, overhaul and rebuild of French Mirage 111 and V Atar 09C engines, and US F-16 F-100 engines); Aircraft Manufacturing (production of parts for Pakistan's Aerospatiale Alouette 111 helicopter and self-sufficient production of the SAAB MFI-17 (Mushshak) light trainer); Avionic and Radar (established in 1957), this factory overhauls all radars, generators and even US and Chinese air-to-surface missiles for Pakistan's Air Force. Finally, Pakistan has two Karachi-based shipyards. The Naval Dockyard, established in 1952, is the major construction, repair and maintenance facility for Pakistan's Navy. Karachi Engineering and Shipyard Works (KSEW), the sister yard, is a 5 An example of these collaborative programmes is POF's ongoing venture with Norway's Nobel Industries. POF holds a 49% management share in Wah Nobel Ltd., which produces both military and commercial explosives.

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COUNTRY SURVEY IV: PAKISTAN Table 5 Pakistan's Defence-Industrial Base (1992) Product Specialism

Employment ('000)

Small arms and ammunition, artillery shells, mortar and aircraft bombs, explosives, rockets, tungsten carbide, plastics, brass, etc. Rebuild of tanks (eg. Chinese T-series, US M-series and local development of the Al-Khalid, Pakistan's MBT 2000 project); Armoured personnel carriers' HIT's Heavy Forge/Foundry facility supplies forging blanks cast iron, aluminium and steel castings to civil and military sectors. Rebuild of fighters (eg. Chinese Shenjang F-6s, French Mirage III and also radars; servicing/ over haul of Chinese A-5 and F-7s, and US F-16s, and various types of radars; and licensed production of the (Swedish-SAAB) Mushshak trainer. Construction of floating docks, tugs, harbour boats, auxiliary craft, target dummy boats, mini-submarines; also a capacity for submarine fitting and rebuild. Construction of medium and small ships; servicing and repair of commercial ships; dry docks; and a range of jobbing expertise, such as overhead cranes, oil refinery and sugar mill equipment, ghee-making machinery and mechanical bridges.

40

Defence Firm Pakistan Ordnance Factories (POF), Wah Heavy Industries Taxila (HIT)

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Pakistan Aeronautical Complex (PAC), Kamra

Pakistan Navy Dockyard Karachi Shipyard and Engineering Works (KSEW)

28

6.5

5 3.8

public sector firm whose production has been diversified into commercial activity. However, the firm has not enjoyed commercial success. KSEW has made a loss every year since 1980, with accumulated losses to 1992 of Rsl bn ($40 mn), which the government has financed.6 Research and Development Pakistan's R&D investment is meagre. Its civil R&D spend amounts to only 0.16 per cent of GNP; that is US $20-30mn per annum (Frontier Post, 1989). The government supplements this through sponsorship of Product-Development Institutes. These are partly funded by government money and partly through the profits of public sector corporations; the annual capital investment and operational costs running to US $5-10 mn and $1-2 mn, respectively.7 However, the engineering talent to support product development and innovation is sparse. According to the Pakistan Engineering Council Report for 1987-8 there were only 33,215 graduate engineers registered with the Council; of these'only 2,024 were in electronics, 7,417 in electrical-, 7,284 in mechanical- and 11,444 in civil engineering (Frontier Post, 1989). 6Interviewwith Admiral J. Ali, Managing Director of KSEW (August 1992). 7 Interview with Mr Taliq Mustafa, Secretary of Industrial Production, August 1992.

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Pakistan's defence R&D expenditure is also low, currently at 0.4 per cent of the defence budget (Mulcaly and Capps, 1990). None of the major defence units has an R&D budget allocation. Formal defence R&D work is conducted at the Defence Science and Technology Organisation (DESTO). This comprises a complex of three applied scientific laboratories located at Rawalpindi, Karachi and Islamabad. DESTO's work embraces propulsion, ballistics, aerodynamics, electronics, propellants and metallurgy. DESTO's R&D effort has been described as sub-critical: there is no proper funding (the allocation was only Rs72 mn for 1990-1); little staff motivation; and no fresh induction of staff from universities, which is vital in this area (the organisation's total staff is 1,600, but of these only 130 are scientists, and only 12 hold PhDs: Nation, 1991a).8

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PAKISTAN'S DEFENCE TECHNOLOGY MODEL Pakistan is a poor country plagued by resource scarcity. The defence budget accounts for a relatively high proportion of available resources, but in absolute terms is insufficient generally to finance large-scale procurement of sophisticated western weapons systems. Thus, as a consequence of hard economics and the capricious foreign policies of western arms suppliers, Pakistan has been obliged to pursue a 'second-best' approach to military-related technological development. In the event, however, this approach has merit. Based on a twin-track production model of emphasising firstly, production collaboration with China (a comparatively low technology arms platform manufacturer) and secondly, a rebuild philosophy, Pakistan has followed a rational and appropriate defence technology strategy that is capital-saving in character. Technology Transfer: The Chinese Connection China has supported Pakistan's defence effort since the 1965 Indo-Pakistan war when Beijing agreed to establish an ordnance factory for the production of Chinese rifles and ammunition at Ghazipur9 (Hussain, 1993). It is estimated that between the years 1966-80 China accounted for around a third of Pakistan's weapons import bill (Bates-Gill, 1992). The financial value of the Sino-Pakistan arms trading relationship was the greater because of the 'friendship' prices at which the weapons were sold. This period of defence cooperation has witnessed China transfer to Pakistan some 1,500 tanks, 350 fighter aircraft and 30 naval vessels (Bates-Gill, 1992). China has not only transferred the final goods technology, but also the processes to locally produce and upgrade the platforms and integrated electronics packages. The transfer programme is a 'two-way street': Pakistan's defence industry employees, service technicians and subcontracting staff visit Chinese arms plants for training, while Chinese advisors are seconded to Pakistan's 8 Note in this context, the activities of the College of Electrical and Mechanical Engineering, Rawalpindi, where development work is being conducted on the Haft I and II, 80 and 300 km missiles, respectively, and the ANZA Surface-to-Air missile, which is probably a derivative of the Chinese SA-7 Grail. 9 Ghazipur is located in Bangladesh, formerly East Pakistan.

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defence establishments. This has been a feature of all the cooperative contracts between the two countries, but the 1986 joint design and development Karakoram-8 trainer aircraft programme, which by 1992 had reached the prototype stage, appears to provide an aberration to the norm. The Karakoram-8 aircraft is seen as a replacement for the ageing US-supplied T-33 trainer. Islamabad has invested US $6 mn into the aircraft's design, but nearly all this money has been absorbed into China's development effort with only minimal work on the aircraft being undertaken in Pakistan.l0 Perhaps indicative of this asymmetry in investment effort is that while only 14 Pakistani aeronautical engineers have been sent to the CATIC factory, China, the Chinese have over 2000 workers employed on the K-8 project.11 This investment imbalance on the input side is now more likely to be counterbalanced by commercial considerations when output is taken up by Pakistan. The fact is that while China is still a close defence partner with Pakistan, friendship prices today are decidedly less friendly than they were in the 1960s. The Sino-Pakistan arms trading relationship has gone through three stages: 1. To begin (1965 — early 70s), China gave outright aid and grants to Pakistan's defence sector in return for international political support. This was valued by the Chinese because at that time they were isolated from the international community. 2. The second stage (1970s-1980s) saw the Chinese, particularly after Mao's demise, begin to show greater awareness of resource costs. This led to concessionary loans replacing grants, although there was an expectation on the Pakistani side that these low interest loans, in which repayment would not fall due for 20 yers, would simply be written off by the Chinese. 3. The final stage (late 1980s-) was a period when arms transfers were conducted on strict commercial terms, with payments in 'hard' currency. In practice this means US dollars (or Chinese Yuan). Chinese trade and industrial assistance to Pakistan transcends military boundaries. Islamabad has received valuable economic assistance from Peking. Between 1971 and the mid-1980s, Chinese assistance amounted to over US $500 mn {Pakistan Times, 1989a). Generally this would have represented loans and credits on softer terms than those offered by other countries. China has also supported the development of key industries in Pakistan. For example, a contract was finalised in 1991 for the export of a 300 MW nuclear power plant. Less controversial is the Chinese-constructed copper producing turnkey plant at Saindak, Baluchistan, which is the first metal processing project in Pakistan. On completion, in the latter half of the 1990s, the plant will be capable of producing 18,000 metric tons of blister copper and gold. A Chinese foreign exchange loan of $84 mn towards the construction cost is to be repaid in kind through shipment of the copper output when it comes on stream (Pakistan Times, 1989a). This is a one-off arrangment, and is in addition to the Sino-Pakistan Barter Trade Protocol which was extended in 1990.

10 Interview with General (retired) Talat Masood (August 1992), former Secretary of Defence Production and ex-Chairman of POF. 11 Ibid.

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The 'Rebuild' Strategy

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Rebuild is a core element of Pakistan's defence production approach. The refurbishment of weapons platforms and their internal electronic organs is driven by the need for cost-savings in the continuous but expensive requirement to modernise military equipment. The rebuild programme is integrated into the progressive plan for military technology development. This is best illustrated by reference to the T-series upgradation, coproduction and indigenisation strategy (Burki, 1991). The development plant proceeds through sequential stages: 1. Components for 500 of the basic T-59 tanks to be upgraded into the T-69 IIMP version, will be 50 per cent sourced from replacement T-59 spares and 50 per cent from new design. 2. The development of the T-85 tank will use 20 per cent of the T-59 components, 30 per cent of the T-69 IIMP version and the remaining 50 per cent from new design. 3. The MBT 2000, AlKhalid, will have 55 per cent bespoke components, with the remainder sourced from predecessor tanks. There are several cost savings associated with the production of these 'polyglot' tanks. These include learning effects, standardisation, commonality and scale economies.12 Rebuild programmes are also to be found in the naval area. For example, it is planned that the naval dockyard will begin submarine rebuilds. Rebuild projects have also been a common feature of the aerospace sector. At Kamra, technologies are available to rebuild all the Air Force's different types of fighters, and, indeed, many of them have been rebuilt. Again, however, the strategy is not just about replacing technologies but developing them. The Mushshak trainer is a case in point. Through local design effort, the aircraft's take-off has been contained to 300 metres, and its handling capability has been improved by adapting it to Pakistan's more trying atmospheric conditions {Pakistan Times, 1989b). These modifications have involved a change of engine and accompanying changes in the aircraft's structure. Significantly, PAC Kamra is also an approved vendor to the US F-16 manufacturer. Indeed, through competitive bidding PAC was awarded a machining contract in 1991.13 For Pakistan, whether it be air, land or sea modernisation programmes, rebuild is the guiding principle rather than ab initio manufacture. This production strategy is based on a systems augmentation of existing weapons platforms instead of competing in the economically suicidal arms race for foreign 'off-the-shelf sophisticated versions. 12 India's tank production programme has been more ambitious. Its Main Battle Tank, Arjun, was first sanctioned in 1974, but has still not been deployed. The prototype has proved to be a 60 ton monster. Meant to be completely swadeshi (indigenous), Arjun's subsystems are imported. Except for the hull and turret, the imported components include practically every major item: engine, transmission, tracks, suspension, gun, and fire control assemblies. Integration is also poor. For instance, the French auxiliary power unit would not fit into the tank, and the tank itself is too heavy to be transported by train. Sanctioned at a cost of Rs. 15 crore per unit, it touched Rs. 28 crore in 1987. 13 Interview with Group Captain Jalal-ud-Din Sadiq. PAC, Kamra, December 1992. This General Dynamics contract was not in breach of the 1990 Pressler Amendment, which banned the supply of US military equipment 'to' Pakistan.

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DEFENCE-DEVELOPMENT NEXUS? Pakistan has no explicit government policy for promoting the relationship between defence activity and civil development effort. Nevertheless, linkages have emerged.14 For example, the military possesses the country's finest hospitals. There is a 600 bed hospital at Wah, and one of similar size at Taxila, and these are available for both military and civilian personnel.15 A modern military hospital in Rawalpindi is also open for civilian treatment. A further defence-development linkage has regard to education and training. The military cantonment authorities, especially those of Wah, Taxila and Kamra, take pride in their human investment policies. The norm is for education to be universally available for workers' children, and at low cost. At POF, Wah, education forms part of the military budget. POF boasts a 100 per cent literacy rate for every child who lives in Wah. Tens of thousands of children receive education at the 23 schools on payment of only nominal fees, which means, in effect, that education is free.16 POF also has a tertiary educational sector. Wah has three colleges, all offering courses to degree standard. Moreover, vocational training is taken seriously by the defence-industrial authorities. There is a spectrum of approaches. At POF, shopfloor trainees are employed after passing 10th class matriculation at high school. When unemployment is high (as it was in the early 1990s), educational entrance standards rise. Around 300 entrants are inducted annually into in-house training programmes. These apprenticeships last for three years and include both tuition at college and on-the-job training. At the supervisory level, additional training courses of up to two years are offered, while for management, regular short training courses are available. Also, selected graduate engineers are sent abroad for intensive postgraduate instruction. On return to Pakistan, many of these highly trained technical staff are absorbed into technology transfer programmes, particularly with the Chinese. Unlike POF, the majority of staff at PAC, Kamra, are serving air force engineers. Many of these would have already graduated from Pakistan's College of Aeronautical Engineering. The remaining air force workers, mostly tradesmen and technicians skilled in working on engines, air frames and avionics, receive various forms of specialist training. The civilians, by contrast, are inducted into in-house courses. Each Kamra factory has on-the-job training programmes where basic skills are cultivated. Here, workers are provided with one year courses in activities such as welding and testing procedures. Selected civilian workers as sponsored at local polytechnics, where they read for engineering degrees. Vocational training has also been promoted in the shipbuilding industry. At Independence, there was no specialist engineering training available for naval engineers. The only option was for rudimentary training at a technical college at Lahore. Circumstances improved in the 1950s when the authorities, with German 14 Of peripheral interest is the role of military farms. These have long been a feature of Pakistan's agricultural sector, and, as with those in India and the former Soviet Union, engage in dairy, arable and stud farming. Pakistani farms are mostly owned by the Quarter Master General (QMG), although some of the military land and cantonments are controlled through welfare trusts. The dairy farms in particular, produce mainly for the military establishment, but surpluses are sold to the civil sector on payment. It is customary that senior officers on retirement are allocated land for farming purposes. 15 Note that civilian workers also enjoy subsidised housing, and on retirement, a pension. 16 Interview with Mr A. Abidi, Commercial Director, POF, Wah, July 1992.

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assistance, introduced graduate, marine and trade apprentice schemes. However, since that time, difficulties have been experienced, partly because of the low utilisation of maritime industrial capacity. The graduate apprentices scheme was, in fact, abandoned in the 1960s and the marine apprentices programme followed suit in 1984-5. 17 Both of these four year apprenticeship courses were called into question; firstly, because there was no assurance of a job after completion of training and, secondly, because even if one could be found, the graduates, attracted by the higher rates of pay, would often prefer to become seafarers. Thus, by the 1990s, only the basic trade apprentices scheme continued to run. These training linkages should be viewed with caution, however. The in-house training programme may not really be a linkage unless many of these trained personnel leave for the civil sector, taking with them skills that would not have been available in the absence of the defence contractors' training programmes. Indeed, if the defence sector is a net absorber of trained personnel, then the linkage to the civil sector is a negative one. 'Dual-Use' Infrastructure and Transportation Initiatives Several developing countries as a matter of policy ensure that their military contributes toward economic development. Indonesia's armed forces (ABRI), for example, perceive defence and development as a seamless, inseparable responsibility. The Indonesian military has, since the guerilla struggle which led to Independence, equated itself with the people, and thus assists with harvesting, irrigation and roadbuilding. The Jamaican Army, too, has established a development focus through the establishment of a specialist civil engineering brigade. Its objective is to construct roads, bridges, dams and other infrastructural projects in the civil sector. India, similarly, pursues civil-military interaction. Partly because of strategic, but also developmental reasons, its defence enterprises have been variously located across the Indian Subcontinent. Some factories, such as the plants manufacturing infantry combat vehicles at Medak, Andhra Pradesh, and the high-calibre ammunition factory at Bolangir, Orissa, were deliberately located in the 'notified industrially backward areas' of these states. In such cases, defence plants provide employment opportunities both, directly, and also often, indirectly, through the stimulation of upstream industrial development. Importantly, the establishment of defence plants in backward regions often also necessitates improvements in the transportation infrastructure. For civil-military application, India's military has undertaken several formidable projects. The semi-military Indian Border Road Organisation, for example, was responsible for the construction of the Sikkim Road, running up to the Himalayas crest in the North-East, while in the NorthWest, it built the Hindustan-Tibet Road, winding its way to the border with China. In Pakistan, two quasi-military organisations operate at the defence-development, infrastructural interface. The first of these is called the Frontier Works Organisation (FWO).18 The creation of the FWO stemmed from the 1965 IndoPakistan conflict, which signalled to Pakistan's military authorities the urgent need for a land supply route between Pakistan and its staunch ally, China. The FWO was 17 Interview with Admiral J. Ali, M.D. of KSEW, August 1992. 18 Details about FWO gained through an interview with FWO Head, General Naseer, Rawalpindi, December 1992.

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formed to build this supply link. Set up in the same year as the war, the FWO possessed a labour force of 4,000 civil and military workers. Work on the Pakistan-China 'Karakoram' Highway formally began in 1966. This 700 km road, in essence the 'old silk route', wound its way along some of the northern region's most inhospitable terrain and took 12 years to complete. However, the FWO was not then disbanded. It continued to operate, but henceforth on a self-financing basis. The organisation's remit was to build roads and related infrastructural projects in strategic and inaccessible areas. Since 1978 a further 2,000 kms of roads have been built in mostly remote areas, where it would prove difficult for private sector contractors to operate. In addition, extensive construction of both civil and military airfields has been undertaken. Ten new airfields have been built and twelve existing airfield runways have been re-carpeted. The FWO is also heavily involved in mass earthworks, such as the building of canals and dams. Expertise in explosives for blasting purposes is a specialism of particular value for this type of work. Recently, the FWO has employed its concreting skills to good effect in the construction of thermal power stations at Jamshedpur, Sind and Multon. Although the FWO is headed by a general, it comes under the jurisdiction of the Ministry of Communications. The work force has grown to 10,000, comprising mainly military personnel. Two hundred of these men are officers, who are qualified civil engineers. They oversee some 2,000 pieces of plant and equipment, including cranes, diggers and other earth-moving equipment. The FWO has a training centre in Islamabad. Civil employees, the majority of whom already possess basic engineering skills, are sent to this centre to acquire supplementary operator and associated skills. Costs are born by the FWO. Labour is employed on a contract basis for the big government contracts won through competitive tender. Profits on these contracts are channelled to the government. However, not all FWO contracts to date have proved profitable. In such cases, the government absorbs the losses. The FWO's first overseas contract was won in the early 1990s. Kuwait awarded the organisation a $96 mn contract for minefield and general debris clearance. The second formal defence-development organisation straddling Pakistan's civil-military divide is known as the National Logistics Cell (NLC).19 As with the FWO, the NLC grew out of strategic necessity. In this case, however, the potential threat was internal instability. The problems began in the 1970s. The Bhutto government was elected to power on a platform espousing the universitality of 'Roti-Kepra-Malkan' (food-clothing-housing). In reality, little progress was sustained in reducing scarcity of these goods. Agriculture, in particular, was neglected, and in April 1978 the Central Wheat Reserve controlled by the Ministry of Food and Agriculture showed a net shortfall of 2 mn tonnes. Wheat in Pakistan is a staple commodity, both subsidised and rationed by the authorities. There was thus an urgent need for Pakistan to import wheat or face famine and civil disturbance. To compound the difficulties, Pakistan's major international port, Karachi, was clogged, causing a 60-day waiting period. In June 1978, the NLC was established, its sole objective being to create the logistical framework to import and distribute wheat supplies to central stores and thence to provincial government godowns. The task was urgent, signified by the fact that at one point in the summer of 1978 only three days of wheat remained at the central store of the northern city of Rawal19 Information on NLC gained through an interview with former NLC Head, General Qadir, Islamabad, July 1992.

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pindi. The NLC set about its task with a Rs30 crores budget and forces drawn from the Directorates of Supply and Transport, and Logistics. Some five hundred trucks were deployed to move the wheat from, the 'militarised' Karachi port. The NLC's logistical organisation proved a success, overcoming the wheat crisis, and instead of disbandment was allowed to continue as a commercially-oriented operation. Executive control of the NLC remains with a General, and ultimately the Army QMG. In the 1990s, the NLC Board was given civil Directors, coming under the authority of the Ministry of Planning, and Pakistan's Minister of Planning became the Chairman. The Rs30 crores investment was treated by the government as a grant. The NLC evolved from a crisis body to one that was geared towards development. Nevertheless, although it has become involved in agricultural infrastructural improvement, such as the building of silos, the NLC reverts to its emergency role during times of crisis. This has occurred for instance during periodic sugar shortages, when rapid distribution becomes paramount. The NLC employs around 3-4,000 workers, operating 2,200 vehicles. The drivers are now primarily civilian, including retired army drivers. Technical training, where relevant, is provided. One year courses are offered in basic engineering, vehicle mechanics, electrics, and design work. As a mainly transportation business, the NLC is a profitable concern. It competes with the railways to transport salt and rice. The NLC also ships oil, which is produced in relatively small quantities right across Pakistan. Recently, bigger fields have been discovered in Sindh Province and in the north. To handle expected increased oil shipments, the NLC is raising its transport capacity to 500 bowsers, each able to carry 30,000 litres of oil. The Civil Subcontracting Network: Survey Results A claimed benefit of defence industrialisation is the upstream mobilisation of civil industrial resources, generated through inputs into defence production. There are of course both strategic and security concerns in the contractorisation of the vertical processes of defence output. Corporate objectives, for instance, call into question military component production when it becomes unprofitable.20 Armaments self-sufficiency is then undermined. Moreover, from an internal security angle, the private sector will not likely be allowed to produce military-related items, which, were they to fall in the wrong hands could undermine law and order. Whilst such issues require to be addressed by the authorities, of more industrial concern is whether the civil sector has the technological capability and capacity to assume contractual responsibility, and thus form the private sector pillar of a militaryindustrial complex. In the Pakistan case, the local literature is replete with references stating that hundreds of vendors service the industrial requirements of the public sector defence industries. The Secretary of Defence Production argues that the majority of the subcontractors serve the Taxila plants, with around 70-80 supplying POF. Only a few vendors supply PAC, Kamra, which undertakes little original equip20 A classic case here is the decision by Britain's Royal Ordnance Company to cease production of 9mm ammunition. The MoD was forced to make alternative procurement arrangements. A consignment of Indian 9 mm ammunition was associated with several in-barrel explosions in Northern Ireland. This ammunition had finally to be dumped at sea.

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ment manufacture, and only a handful of pre-qualified vendors serve KSEW. Of the hundreds of local companies which are registered subcontractors, the major vendors number not more than 10, accounting for about 30-50 per cent of total output (excluding items like clothes and tents), which in value terms amounts to around $ 10 mn {Nation, 1989). It is reported that at the Taxila complex T-59 tanks are built from some 10,000 separate components, of which some 1,000 are imported from China, and of the rest, 50 per cent are farmed out to different companies in the private sector {Nation, 1989). Most of the locally sourced components are low value-added, simple technology items, like nuts, bolts and springs. To assess the subcontractor's contribution to the output of Pakistan's defence industries a survey was conducted in the summer of 1992. Information was obtained from some of the major defence vendors. The key findings are detailed in Table 6 below. One immediate judgement to be drawn is that as all but one of the firms listed commenced operations on or before 1981, it is evident that minimal scope and perhaps incentive exist for small firms to enter the defence market. Only two suppliers indicated that they entered the defence market as a result of the Indo-Pakistan conflict. Significantly, this was the 1965 war when the major arms suppliers imposed the arms embargo on Pakistan. This abatement of foreign supply appears to have had limited effect on raising demand for local defence components from the civil sector. Table 6 Pakistan's Defence Industrial Subcontracting Base FIRMS:

1

2

3

4

5

6

7

Year firm 1963 1978 1981 1964 1978 1980 1953 started Employees 128 15 45 28 70 200 200 Age of 10 1-13 2-10 15 8-10 8-20 20 Machinery (yrs) Defence 80 25 40 75 100 25 5 output to Total (%) Capacity 40 50 60 35 50 10 80 Util. (%)

8

9

10

11

12

13

14

1989 1947 1965 1950 1967 1956 1958 10 4000 172 100 60 4 8-40 15 20 10-12

45 250 10 15

-

5

35

62

-

65

80

70

10

5 5-10

50 Full

Full

Source: 1992 Vendor Survey, Pakistan. Note: From the commercial sector, 10 defence subcontractors were visited and a further 30 firms were sent a questionnaire. The overall response rate was 32%. The population represented 44 firms, sourced from POF and HIT lists of registered subcontractors.

Only a handful of the 'hundreds' of registered vendors were major suppliers; the remainder being small engineering workshops edging into the informal sector. The firms surveyed produce a disparate array of materials, components and subassemblies. The list includes rubber components, alloys, pipes, metal parts, a broad variety of diesel engines, fuzes, primer cartridges, high explosive metal containers and a myriad of smaller items like nuts, washers, springs, gaskets and so on. The vendors also supplied process equipment such as injection moulding machinery and machine tools. One firm sold final goods (target drones) to the defence industry.

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Pakistan disallows private firms from handling gunpowder. In fact, with only one or two exceptions, such as the local private sector firm producing the entire Chinese-designed auxiliary power unit for T-59 tanks, little of the subcontractors' output could be classified as solely applicable to the defence sector. Rather, potential efficiencies and synergies were evident in the cross-threading of civil and defence manufacturing activities by subcontractors. At the mundane level, items like rubber hose and basic engineering parts were being produced. One of the smaller firms had progressed from this stage and was producing bespoke components not only for locally produced Massey Fergusson tractors and Suzuki cars but also the metal and rubber skirts and periscopic front headrests for T-59 tanks. Another firm produced rubber hoses and bicycle tyres for civil customers and moulded rubber goods for the military sector. Yet another, produced parts for the gas, motorcycle and tobacco industries. Shoemakers have diversified into making leather seals for certain defence components, and a firm which manufactures parts for watches had transferred skills and capacity to making delicate parts for mortar fuses. Furthermore, the bigger companies were manufacturing machine tools, diesel engines, pumps and electric motors. Except for the parts tailor-made for defence industry use, all these items are, of course, dual-use. The average age of the respondent firms' machine tools was around 13 years. This is vintage by any standard. These machine tools fell into three categories: Chinese; British (mostly second-hand or reconditioned); and Pakistani. The major influence on demand was cost. The Pakistani machines were not generally sourced from formal sector manufacturers, which were felt to be too high-cost. Rather they were purchased from machine tool producers in the informal sector. Although no single reason accounts for the low level of capital investment, shrivelling demand was a primary factor. Capacity utilisation in both the civil and military vendor plants averaged around 50 per cent in mid-1992. (This mirrors the generally poor capacity utilisation levels in the defence sector itself: while for PAC, Kamra, it was 80 per cent, for POF it was 60 per cent and for Taxila, 50 per cent). One vendor supplying rubber components to POF as well as rubberised road wheels for the tanks produced at HIT, complained that 90 per cent of his company's defence capacity lay idle. There were other problems restraining vendors' willingness to invest and feel committed to the defence sector. One such problem related to the delays and high costs of obtaining imported materials, such as high speed steel. A key limiting factor here was the short production runs of the items being procured by the big public sector defence firms. This raises the subcontractors' cost structure, not simply because of scale effects but also because of the higher costs associated with procuring minimum order quantities from foreign suppliers in excess of the defence customers' purchase order. Higher procurement costs are then built into the defence contract price. However, even with this particular problem, the output flexibility and cost structure of Pakistan's vendors placed them in a strongly competitive position. This point is illustrated by the case of the T-59 right-hand steering levers produced by a vendor in Rawalpindi. These levels could be imported from China at a cost of Rs2,500 per unit, with a minimum order quantity of 1,000. By comparison, the local firm's unit cost was Rs350, with a minimum order quantity of 160.21 21 Interview with vendor company owner.

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Yet, life has been difficult for Pakistan's defence subcontractors. The government has no development policy for them, nor is institutional financial support available. In the past the defence industry has provided ad hoc loans on a case-by-case basis, but this is far from a comprehensive, long-term strategy required to promote the defence subcontracting base. Pakistan's defence industry is suffering from negligible technology transfer, both from the input and the output side, and is.thus effectively quarantined from the 'civil' industrial economy. An example of one of the few linkages that has occurred relates to the small cottage engineering enterprise in Multan, which began defence work by producing spares, repairing small components and building jigs to specification for engineering officers at a nearby Armoured Division base. The civil workshop owners developed close working relationships with the engineering officers, who, when posted to HIT, Taxila, began networking additional contracts to his civil firm, and demand grew. Several of the subcontractors interviewed catalogued a number of factors they saw as retarding corporate growth and development. The provision of loan finance on soft terms featured highly as did the requirement that the defence industry needs to speed-up its payment cycle. The sequence of supply-to-payment often takes 5-6 months, seriously sapping supplier liquidity. Also, although it was recognised that quality standards needed to be high for defence work, it was widely felt that the series of 100 per cent checks was over-rigorous, and, indeed, one of the causes of the extended payments cycle. On international trade, liberalisation of the vendors' ability to import machinery was requested, coinciding with calls to adjust upwards import duties to protect local vendors. The vendors further suggested that the government should establish a stockpile of 'strategic' materials as a means of overcoming supply unpredictabilities and thus price fluctuations in the markets.

DEFENCE COMMERCIALISATION AND COOPERATION After decades of import substitution, high levels of industrial protection and support of bureaucratic public sector enterprises, the Pakistani authorities during the early 1990s began to introduce market liberalisation initiatives as a means of improving the performance of Pakistan's civil economy. The government was committed to commercialisation, particularly privatisation. By August 1992, 22 out of a total of 76 public sector civil enterprises had been privatised. 2 The market forces doctrine had even begun to impact on the defence industry. Economic reforms leading to greater emphasis on commercialisation were being promoted. This is a significant policy development because a competitive environment with appropriate market incentives provides the right stimulus for cost efficiency, investment and a faster pace of industrialisation. To gain the widest possible benefits from civil sector liberalisation policies requires that the defence industry's isolation from the civil sector be remedied. A starting point for achieving this goal would be to reduce the horizontal distribution of defence work. Rather than POF, HIT and Kamra undertaking the majority of manufacturing, the level of subcontracting work given to the private sector and other specialist public sector firms should be raised to lower both vertical integration and productive inefficiencies. 22 Op.cit., Mr Taliq Mustafa.

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This policy would also ensure cross-flow of civil-defence technologies thereby accelerating industrialisation. Although the Directorate General of Munitions Production is responsible for the upgrading of vendors through an 'indigenisation' programme little practical progress appears to have been effected. However, responding to the need to support the development of a defence subcontracting base, the government has since 1993 begun to provide start-up loans to the private sector of up to 95 per cent of relevant investment costs. Moreover, there is now open debate as to whether the monolithic defence production establishments should be commercialised. POF, for instance, receives funds from central government on a vote basis, but is a possible contender for transformation into a 100 per cent government-owned company. This is an organisational half-way house to full-privatisation. It allows the company latitude in pricing, marketing as well as the opportunity to earn profit. Defence industrial liberalisation is a precursor to autonomy (partly through gradual reduction of government subsidies) and hence to international marketing and export promotion. Pakistan has already begun to increase its arms trading profile. From an historical low level of arms exports, POF, the principal exportbiased defence manufacturer, now exports arms to over 40 countries, selling US$30 mn worth of arms in the financial year ending 30 June 1992 (NIWS, 1992c). This was a 250 per cent increase over the previous three year period, making POF the biggest exporter of engineering products in Pakistan (NIWS, 1992c). Arms were sold to Sri Lanka, Greece (where the MG-3 is also produced), the Emirates, African countries, and Islamic states in general. Some weapons have also been sold to France and other European customers, including a consignment of guns to the UK police force.23 In addition, because Heckler and Koch no longer produce the MG-3 in Germany, POF supplies its licensor with spares for the gun which are then resold to Heckler and Koch's own customer base. Neither HIT nor Kamra export arms, although the latter does export spares of its Mushshak trainer (MFI-17) to the Swedish licensor, SAAB. This is because SAAB no longer produces the aircraft and thus buys spares from Pakistan for onward sale to the approximately 20 countries continuing to use the plane. Kamra has also begun to export its servicing and rebuilding capacility. In 1988, against Belgian, French and Greek competition it was awarded a Rs66 mn contract from the United Arab Emirates to rebuild 26 Mirage fighters.24 In the maritime area, KSEW has, in addition to its sales of ships to foreign customers, exported several sugar mill machinery complexes to Bangladesh. Finally, several defence subcontractors have entered the export market, including one firm exporting fin-stabilisers for fin-stabilised artillery rounds. However, opportunities for developing the subcontracting base are sometimes hampered by export constraints. For example, the Pakistani authorities abandoned a project to produce batteries for aircraft and ground use, when the US multinational, Marathon Batteries, refused to transfer technology unless Pakistan agreed to a restriction on the export of batteries produced.25 An effective means of promoting foreign investment is defence countertrade, but this has been a neglected trading and technology transfer mechanism in Pakistan. In the 1990s nearly all developing countries when signing big arms 23 Interview with Mr Abidi, op.cit. 24 JalaI-ud-Din Sadiq, op.cit. 25 Ibid., interview.

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contracts demand and obtain counterpurchase as well as both direct and indirect technology offsets from arms suppliers. In the contemporary buyers' market, arms sellers have no choice but to export both product and process technologies, otherwise they will lose custom to competitors that are prepared to engage in countertrade. For reasons that are unclear, Pakistan has not generally extracted countertrade obligations from its arms suppliers (save for China). The most likely explanation for this, is strategic urgency: the military imperative outweighing the demand for industrial development. The opportunity cost of lost technology transfer has been severe. For instance, the procurement of French Mirage aircraft and the 1982 purchase of 40 F-16s (A and B versions) were both off-the-shelf contracts. In the case of the F-16s, Pakistan's urgency to procure these fighters meant that the US$40 mn worth of technology transfer under negotiation was sidelined.26 Thus, although Pakistan did benefit from the General Dynamics contract through its provision for local training, including the ability to service the F-16 Pratt and Whitney F-100 engine, the opportunities to engage in important manufacturing activities, such as local production of reinforced plastics, electrical harnessses, weapons pylons, and precision manufacture of structural parts were lost. Pakistan is now reviewing its military procurement policies to incorporate technology transfer requirements. Since the late 1980s the authorities have also been seeking to expand technology-sharing activities beyond those with China. Turkey and Pakistan, for example, have signed a series of Technology Transfer and Defence Cooperation Agreements since 1987, which lay down the framework for exchange of classified information and the establishment of joint reciprocal production, research, and development projects. The idea is that defence items produced in Turkey will not be produced in Pakistan, and vice versa, thereby avoiding duplication. Also, what has been termed a 'defence production cooperation' deal, was agreed in 1989 between Iran and Pakistan, with the latter receiving payment in crude oil for the supply of defence technology and related services and material (Times of India, 1989). As it stands, this arrangement is not cooperative, but it could provide the starting point for future technology-sharing programmes, given that both countries have voracious appetites for Chinese defence technology.

CONCLUSIONS The aim of this study has not been to justify the continuing high levels of defence expenditure in Third World countries. Rather it accepts these as given, moving the discussion on to explore the existing and potential development linkages defence 26 Notwithstanding this delay in Pakistan coming to terms with the opportunities that offsets present, PAC's Aircraft Manufacturing Factory did achieve vendor status with General Dynamics (now Lockheed, Forth Worth) in 1991. The US company verified the PAC's facilities and quality control procedures and a contract for 11 line items was awarded on the basis of competitive bidding. The programme nonetheless came to a halt as the demand for F-16 parts fell. (Correspondence with PAC Kamra official). 27 However, there may be a religious constraint on defence cooperation between Pakistan and Iran: while the former is a Sunni Moslem dominated country, Iran is predominantly Shiite. A more generic problem facing international defence cooperation is that of synchronising countries' military procurement programmes.

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wide gamut of civil-military activites. The nature and extent of the civil-military interface in the developing country context is an under-researched topic. This is surprising considering the twin-emphasis placed by developing countries on promoting industrialisation and military self-sufficiency, including arms production capability. Pakistan has been taken as a case study for examining this issue, not least because little is known of its defence industrial effort. While the Pakistani authorities naturally view defence as a sensitive issue, they have now begun to adopt a more open and questioning attitude towards its economic burden. Questions are beginning to be asked as to whether: there is value-for-money from the defence budget; there are spin-offs from defence to development; there is evidence of spin-ons from the civil to the defence sector; and, finally, the extent of any modernisation influences. These and other questions provided the departure point for this study's analysis of Pakistan's defence-development nexus. Appraisal of the results of previous studies suggests that no universal laws can be drawn on the trade-off between defence expenditure and economic growth. There is, however, the sense of a close positive relationship between the defence sector and industrial production. The PDC analysis is premised on the assumption that the strategic capital goods industries play a crucial role in creating arms production capability. Over time, though, the nature of these strategic industries has evolved. De-industrialisation has led to the eroding importance of traditional heavy industries. The emergence of the electronics and other high technology activities have replaced the 'smoke-stack' industries as economic growth poles. The point should not be lost, however, that both traditional and modern strategic industries are dual-use, civil-military technology activities. Pakistan's defence-industrial model has a number of features appropriate to the economic circumstances of developing countries. It is firstly capital-saving in nature. The model does not emphasise procurement of costly foreign weapons systems unless strategic necessity demands this course of action. Instead, technological collaboration with other 'South' arms producers, particularly China, has been fostered. Rebuild has additionally been a feature of Pakistan's defence industrial model. This drive to extend the life of existing weapons systems is also capital-saving; an approach which some advanced countries are now emulating. Through both collaboration and rebuild a local defence industrial base has evolved. As yet, it is still at a rudimentary technological level, but there is no discounting that progress has been registered. In ordnance, small arms and basic military equipment near self-reliance has been achieved. POF, for example, is not only the country's biggest employer, but also its biggest exporter of engineering goods. Whilst of course accepting that even more employment and exports might have been generated by civil engineering investment rather than military, the fragile state of Pakistan's strategic environment has left little alternative but to concentrate on the latter. The extent of defence-industrial investment has created a substantial reservoir of engineering talent, but with very low turnover in the military factories and workshops little of this expertise is filtering into civil industry. Combine this with the defence sector's neglected and technologically immature civil subcontracting network and it is clear that defence-industrial development linkages are weak. Government financial support for vendors, the eradication of bureaucracy and the implementation of policies to force foreign firms winning big defence contracts to engage in defence offsetting investment are measures which would strengthen defence interaction.

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The FWO and NLC civil-military operations represent far-sighted initiatives. Nevertheless, these organisations may not have reached a point in their development where improvements in efficiency through privatisation make economic sense. A liberated markets philosophy, oriented towards greater economy, efficiency and effectiveness in the defence sector is required. In the defence-industrial area, competition through contractorisation is an important first step. Complete privatisation of defence industries is too ambitious. Their strategic sensitivity suggests that complete decentralisation is unlikely, especially given Pakistan's natural desire to maintain central control. An alternative commercially-driven policy approach would be for the government to modify the organisational status of the public sector defence industries, transforming them into 100 per cent government-owned companies. POF, HIT and PAC could then develop a corporate strategy, possibly including: rationalisation; diversification into civil engineering operations; contracting-out to competitive civil vendors; and, importantly, maximisation of profit — the ultimate indicator of economic efficiency. For this to be achieved a marketing effort to raise revenue will be required, but profits will be maximised only if costs are also reduced. This will best be secured by international defence cooperation in research and production. From the humanitarian and long-run economic perspectives, it is of course preferable that Pakistan's military spending is reduced dramatically. This calls for a regional political solution that is as yet not even on the horizon. In the absence of an Indo-Pakistan reconciliation, a second-best policy prescription is for Pakistan to maximise the defence-development relation through dual-use, civil-military linkages within a liberated, competitive economic environment. Acknowledgement Acknowledgement is gratefully given to the ESRC (ref. R000 23 3913) for the funding of this project. The fieldwork was undertaken over the Summer 1992, whilst the author was a Visiting Research Fellow at the Institute of Strategic Studies (ISS), Islamabad. Appreciation is expressed to all those who assisted in the research, in particular, General (retired) S. Zakir Aliz Zaidi, Director General, ISS, Mr T. Mustafa (Secretary, Industrial Production), General (retired) T. Masood (ex-Chairman, POF), Admiral J. Ali (M.D., KSEW), Group Captain Jalal-ud-Din Sadiq (PAC Kamra) and Mr A. Abidi (Commercial Director, POF). Acknowledgement is also made to Keith Hartley and an anonymous referee for helpful comments on an earlier draft of this paper.

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