Beating Swords into Ploughshares: Military Conversion in the 1990s

Dr Michael Brzoska is on the research staff of the Bonn International Center for Conversion (BICC). His special fields are the arms trade, arms production, peace and defence economics and development policy. His latest book is Armaments and Warfare (University of South Carolina Press, 1994), written with Fred Pearson of Wayne State University, US.

The 1990s have been a period of massive disarmament. The end of the Cold War facilitated reductions in armaments on a scale comparable only to the end of other “real” major wars. In this century, it was only after the First and Second World Wars that reductions in global military spending exceeded those between the late 1980s and the late 1990s. From their peak in the mid-1980s, global military expenditures have declined by more than 30 per cent. Armed forces have decreased by more than 20 per cent. The number of weapons systems is down by more than 25 per cent. Probably close to ten thousand military facilities have been closed worldwide.¹

 

Obviously, the “decade of disarmament” was not one of peace. Nor was the trend of disarmament uniform. In South Asia, parts of Africa and individual countries throughout the world, armaments were increased. Global arms production, while down to almost half of its highest level in the late 1980s, continues to be a major business. In fact, worldwide arms procurement began to increase again in the late 1990s.

 

Nevertheless, the large-scale disarmament freed a broad range of resources earlier captured by military sectors. The release of these resources for other, civilian, use in the 1990s provided both a challenge and an opportunity. The challenge was to find employment for workers no longer needed in arms production and for ex-soldiers who were retired earlier than planned; to clean up land which armed forces had used with little regard for avoiding contamination; to pay for the destruction of weapons; and to reorient armed forces which had lost their main enemy. The opportunity was to have money available for civilian use that had earlier been spent on the military; to produce civilian goods where weapons were produced before; and to convert military land and infrastructure for civilian use.

 

After a decade of disarmament and much practical experience gained we can firmly conclude that the balance sheet of conversion is positive.² The financial resources available for civilian use have greatly increased: the share of military expenditures in global income decreased from 5.0 per cent in 1989 to 2.3 per cent in 1996.³ Numerous companies have expanded existing civilian production and found new markets for civilian goods. Examples range from high-tech electronics producers, such as the world leader in civilian global positioning satellite systems, Magellan, US, which used to be almost entirely military, to the Ukrainian naval industry, which is now successfully marketing speedboats and yachts. The civilian redevelopment of land and infrastructure, as airports, housing areas, etc., has stimulated economic development in a number of regions.

 

However, in many ways conversion has turned out to be different from what was envisaged by many observers when military downsizing began in earnest in the late 1980s. For instance, most of the “peace dividend” that became available through reduced military spending has been used to cut government debt. It has not been directed at non-military sectors, such as health or education. Also, while companies that seriously tried to convert have generally fared quite well, workers have suffered. Worldwide, only about half of those who used to work in arms production are now producing civilian goods for the same employer, while many have had to seek employment, often less well paid, outside their old companies.⁴ Problems have been especially difficult in the former socialist countries, contrary to the expectations of Soviet planners in the late 1980s.

 

Partly in response to such expectations—which industrial conversion was unable to fulfil—the 1990s have seen a backlash against conversion in some circles. In Russia, but also in Europe and the United States, some observers maintain that industrial conversion mostly creates problems and can boast very few cases of success. However, such views ignore the past and current record of conversion. Conversion, even after a decade of practice, remains a contested term, with ideological connotations and without agreed yardsticks against which to measure success and failure.

 

In the following pages I will discuss in some detail two specific areas of conversion in the 1990s, industrial conversion and base conversion. I will describe main actors and obstacles, failures and successes. I will also ask whether more could have been achieved with better conversion policies.

 

I. INDUSTRIAL CONVERSION

 

When industrial conversion became a major issue towards the end of the Cold War, Soviet leader Mikhail Gorbachev called upon the world to follow his example and initiate an active conversion policy. For a while, he and his advisers seemed to see in industrial conversion a panacea for all economic difficulties in the socialist bloc. Similarly, in some Western countries, there were high expectations of the economic benefits to result from conversion. Such hopes were particularly stimulated by the efforts of workers at Lucas Aerospace in the United Kingdom to find alternative employment by producing useful civilian goods.

 

These hopes were largely built on two foundations: the post–Second World War experience of industrial conversion and the technological level of arms production.

 

The post–Second World War transition from military to civilian production was relatively smooth and rapid, especially in the United States. Certain war-oriented industries, such as aerospace, experienced declines in sales and employment. However, workers seeking employment were quickly absorbed by other industries in order to meet the hugely increasing demand for automobiles, electrical household appliances, agricultural equipment, industrial machinery and other goods. Conversion success in the United States was facilitated by the increase in demand for goods, such as television sets, which had either not been available in large quantities during the war or which only became so afterwards. Because of wartime savings and a government policy favouring economic expansion, consumers had the money to buy the goods they wanted. Demobilised soldiers received generous support through the GI Bill, not only for training and education, but also in the form of unemployment benefits and loans. In addition, tax policies, public investment and transfer payments were geared towards generating increases in effective demand in line with the Employment Act of 1946, which declared it the responsibility of the government to “promote maximum employment, production and purchasing power”.

 

Also, defence-dependent companies were quick to diversify into new products. Often they were technology leaders, such as the radar-producer Raytheon in microwave oven technology. The massive investment in military technology during the war had important spin‑offs, from jet engines for aircraft to early computers.

 

The Cold War was again marked by a dominance of military research and development efforts. More than 60 per cent of all government money for new technology in the United States and the Soviet Union was devoted to military objectives during the four decades of the Cold War. Unsurprisingly, this yielded numerous scientific breakthroughs, for example in space technology. It was widely believed at the end of the Cold War that arms producers had a technological advantage and would have little difficulty in capturing civilian high-tech markets.

 

Unfortunately, the 1990s have proved to be a harsher environment for industrial conversion than earlier periods, for a number of reasons:

Technology 

By the late 1980s, military technology was no longer cutting-edge in many fields. Electronics provides the most striking example. Most recent advances in electronics have come from civilian applications and then been transferred to military uses, not the other way around. In other areas, where military technology was strong in the past, such as aerospace, civilian and military applications have diverged. Even in a state such as the Soviet Union, where civilian technology development was deliberately put at a disadvantage, the availability of military technology did not automatically put enterprises in a favourable position to produce civilian goods. 

Globalisation

Companies attempting to expand civilian production or market new civilian products often found that markets were already crowded with civilian competitors. While in the past many markets were national, in the 1990s global competition was the norm. For enterprises from the former socialist countries, which had operated in protected markets for decades, the competition from global players who had much more marketing and production experience often proved overwhelming. For companies in Western countries, especially in the United States, on the other hand, the opening up of global markets in the 1990s offered additional opportunities.

Transition

In addition, Eastern converting companies were disadvantaged by the weakness of institutions, legal, financial and political, to support the radical shift in production they had to undertake. Arms-producing companies there not only had to switch products, they had to switch their whole mode of production, from being part of a planned command economy to functioning as independent entities in global markets. Only a few succeeded in mastering this double challenge.

Economic Policy

But Western arms-producing companies also had to cope with a framework less conducive to conversion than that of the late 1940s. There was little government support for job creation or large-scale technology programmes, but rather a general effort to cut government expenditures and to leave employment to companies. The “peace dividend” was real enough, but only a tiny part of it was invested to help companies convert or former arms workers to find new jobs.

Actors and Choices

Because of the general lack of policies to support industrial conversion, company managers automatically became the main decision-making units on conversion (with the exception of the remaining command economies, such as North Korea and, to some extent, China). Company management faced with substantial decreases in orders had a range of options for action, including:

 

• Quitting weapon markets by closing arms production facilities, or selling them to other companies.

 

• Expanding defence-market shares by investing in defence research, buying up arms production facilities, merging with former competitors, increasing exports, etc.

 

• Increasing civilian production by expanding existing civilian activities, introducing new civilian products, or buying up civilian production facilities.

 

These strategies are not exclusive. Companies usually have a mix of production and operate in a number of markets, so a company can decide to leave one defence market, say for radar, try to expand into another, say communications, and at the same time aim to increase civilian production in general. The reaction to downsizing took many forms in the 1990s.

 

The choice of strategy was shaped by several factors, some more general and some specific to countries or companies. Company managers assessed available assets, including capital resources, technical capabilities, machinery and skills, and researched market expectations, estimating the costs of various different approaches. They did this under pressure from workers, unions and governments to retain as many current employees as possible. Creditors, owners and shareholders, on the other hand, asked them to maximise profits. Consultants were asked for advice and brought in the current range of opinions about optimal company strategies. Governments obviously also had an important role in shaping the environment for conversion—which, however, they either did not want to fulfil, as in the West, or did not have the means to fulfil, as in most transition countries.

 

To a certain extent, regions stepped into the void left by the absence or weakness of policies by central governments. Regions can have a positive effect on conversion for three major reasons. They can help companies seeking to expand civilian production by providing markets over which they have control, such as energy production or health. They can provide important networks for companies to gain access to technology, finance and other supply-side support they may need during conversion. Finally, regions are important for workers made redundant because companies are downsized. Most workers prefer to stay in the economic region where they are settled. If regions can provide new civilian jobs in companies not involved in arms production, they help to “convert” the workers at least.

Outcomes

Very few arms-producing companies were unaffected by the downsizing of the 1990s. Many left the arms business altogether, such as Philips of the Netherlands, EMI of the UK and Motorola of the United States. Some, such as British Aerospace and Lockheed Martin in the United States, concentrated on arms production, trying to push competitors out of the market or to buy them up. The predominant reaction, however, was one of partial conversion and diversification.

 

As a result, there are very few “pure play” defence producers left. Even those that concentrated on arms production usually have sizeable civilian output. In the case of British Aerospace, 26 per cent of total business is civilian. In the case of Lockheed Martin, it is 34 per cent. With some exceptions, the share of civilian business in total turnover has increased in the 1990s. In 1995, for instance, the hundred largest arms-producing companies in Western industrialised countries and the developing world had lost US$11 billion in arms sales since 1990, but had increased civilian business by US$250 billion. For smaller companies, the changes were even more significant.⁵

 

Not all the civilian growth was achieved through conversion of facilities. The image of the factory that once produced tanks but now produces tractors has proved to be too simple in most cases. What generally occurred was a mixture of partial conversion of resources, the acquisition of outside civilian resources and the redundancy of some of the resources no longer needed for arms production. For instance, Krauss-Maffei, the largest German tank producer, greatly reduced its output of tanks. Some employees were retrained to produce plastic-making machinery and others were laid off. New personnel with experience of civilian production and marketing were hired. They ranged from engineers to marketing experts. Buildings were retained, but little of the old production machinery was used for the new civilian production.

 

The success rate of this market-led, piecemeal approach to conversion largely depended on three factors:

 

1. General economic situation. The search for civilian markets is easier in growing than in contracting markets. It is therefore no surprise that conversion worked best in the United States, the Western industrialised country with the highest growth rates in the 1990s, while results have been more mixed in western Europe and generally disappointing in transition countries.

 

2. Competitive economic status. Companies that had technologies new to civilian markets, such as hand-held global positioning systems, or that were close to fast-growing markets, such as that for cellular telephones, had a better chance of success than others. Particularly successful were companies that expanded into civilian “government” markets, where marketing through political lobbying is fairly similar to that in the arms market.

 

3. Management. Conversion generally needs time and patience to succeed, as initial investments in training and new machinery have to pay off. Often, management, under shareholder pressure, became nervous and cut conversion efforts short. However, companies that did follow through have done fairly well, even in narrow business terms, compared to others which gave up earlier.

 

The main losers in partial conversion have been the workers who used to be employed in arms production. Unfortunately, there is only casual empirical evidence about the employment side of conversion. In absolute terms, BICC estimates that global employment in arms production decreased from seventeen million in 1986 to nine million in 1997. For Western industrialised countries, the corresponding figures are 5.2 million in 1986 and 3.1 million in 1997. Of the more than two million arms workers who became redundant in industrialised countries, up to two-thirds remained in arms companies, but they produced civilian goods. The others, between one-third and one-half of those no longer needed in arms production, had to leave their companies.⁶ Obviously, many of these found employment in other, civilian, companies, but we lack even crude statistical evidence about the numbers. It is even more difficult to estimate what happened to workers in transition countries. Generally, civilian production declined in parallel with military production. Still, a rough estimate is that several hundred thousand workers were transferred from military to civilian production lines in transition countries. Even so, these countries experienced a reduction in arms employment of almost five million workers.

 

While insufficient to counter the laying off of arms workers, the number of workers who were “converted” is quite high. More than a million people who used to produce weapons and other military goods are now making civilian products, ranging from mountain-bikes manufactured out of materials once used for missiles and warplanes, to components for television sets.

 

In addition, many more people found employment in civilian industries that had never produced weapons. These industries benefited from the decrease in resource-use by the military, the “peace dividend”. Economists of all persuasions, from neo-classical to Keynesian and Marxist, generally agree that without the reduction in military expenditures, economic performance would have been worse than it was in the 1990s. Besides partial conversion, therefore, there was also indirect conversion through general growth effects.

Government Support

Would conversion have been more successful if it had enjoyed more government support? The answer is probably yes. At least, both some empirical evidence and some theoretical considerations point in this direction.

 

The empirical evidence comes mostly from Eastern countries. So far, nothing has been said about the country with the world’s largest arms industry, China. A country with a market economy under selective government control, China has had a strong national conversion policy for two decades. On the face of it, the results are overwhelmingly positive, as official Chinese statements are quick to point out. Main factors in this success have been high levels of protection from competition in Chinese markets, as well as the government’s willingness to absorb losses. While one has to be highly sceptical as to whether conversion would continue under more natural market conditions, China still provides evidence of a different path to conversion, although it does not prove that extensive conversion support is good policy.

 

Some evidence also comes from the Russian case, or rather, the period of end of the Soviet Union. Conversion “Gorbachev-style”, with extensive planning and government support, was more successful in terms of civilian output and reshuffling of employment than at any time later in Russia. Again, it is difficult to judge whether it would have made sense to continue with this kind of support in a more market-oriented economic environment.

 

The more theoretical considerations focus on differences between the extent of conversion left to markets and that seen as optimal in the longer term. Purely company-based conversion is likely to produce too little conversion for the following reasons:

 

• Lack of investment capital. The change in production and markets generally needs heavy investment which the company may lack.

 

• Short investment horizon. Changes in production and markets usually take some time before break-even points are reached and profits are made. Company managements may not be willing to take such long-term risks.

 

• Economic depression or recession. In a booming economy where all types of companies are expanding production, company-based conversion is easier than in a depressed economy where markets are shrinking. Re-employment of resources is more difficult when an oversupply of resources already exists. These will, however, be needed again in the next boom phase.

 

• Specific barriers within companies. Management, but also employees, may reject change because it disturbs established ways of doing business. Such specific attitudes hostile to conversion can be expected to be especially strong in companies where the changes required are extensive because of limited experience with civilian markets or a pronounced earlier separation between civilian and military production.

 

• Differences in goals. Company managements are hired to maximise profits or shareholder values, but generally not to maximise employment. Nor is it usually their concern to provide for technology transfer and the production of socially useful goods, or to ensure the existence of a certain defence industrial base.

 

Such factors seem to justify intervention in the conversion process by governments, central and regional. However, as the above-mentioned examples of China and the Soviet Union/Russia indicate, the optimum balance between markets and governments in arms industry conversion is a difficult question which cannot be based on abstract principles. Still, the lack of consistent and effective industrial conversion policies hampered conversion efforts in the 1990s.

 

II. BASE CLOSURE AND REDEVELOPMENT

 

One important aspect of military downsizing and conversion has been land use. Our knowledge of base closure and redevelopment largely derives from Europe and North America, where thousands of military facilities have been closed. Many US bases located overseas have also been closed. Little effort has so far been made to collect data on base closure worldwide, but it is likely that it has also occurred in many other parts of the globe.⁷

 

Size, location, the extent and layout of infrastructure, environmental contamination and employment effects differ from base to base, greatly influencing whether redevelopment is a boon or a burden for an economy. Generally, in growing economies with a lack of land and infrastructure, civilian reuse and redevelopment have been a stimulus to regional development. Examples range from the United States to Germany and the Philippines. On the other hand, many vacated bases remain idle in countries with economic difficulties, for instance transition countries in eastern Europe.

Property Values

Military bases include a variety of facilities. Some of these facilities have direct civilian applications that improve the site’s redevelopment potential. Other facilities, such as weapon storage and testing areas, have no civilian use. Often too expensive to demolish, these useless facilities usually remain as reminders of the site’s military origins. The closed Hahn Air Base in Germany illustrates the mix of infrastructure found on most bases: the warehouse bordering the airstrip on one side and a rail dock on the other are one of the site’s most attractive features—ideal for a civilian air cargo centre. Several yards away, however, are twenty-four hardened F-16 hangars. Without windows and too small for commercial planes, the hangars have no practical civilian use.

 

Location in relation to demand for real estate and infrastructure is generally a crucial factor in determining a site’s commercial value. Some sites have very desirable locations, such as the closed Presidio base in downtown San Francisco, but most bases are less attractively sited, such as Wurtsmith Air Base in Michigan’s upper peninsula. How closely base location matches civilian real estate demand varies according to military strategy, type of base and origin. Military bases are often in border areas, or have been deliberately sited in remote areas where large pieces of land were available. However, the military also owns land and infrastructure in or near cities, for instance to house command or administrative centres.

 

Military bases have a similar look and feel all over the world. Some countries build better bases or maintain them better than others, but these differences are minor compared to those found in non-military infrastructure. Military bases in the United States and western Europe usually require significant modification to meet civilian standards. Few civilians, for instance, are interested in renting a room in an army barracks, and family housing on bases usually resembles government-subsidised housing projects more than private homes.

 

Similar considerations apply to other base facilities, such as administrative offices and recreational centres. While the relatively poor quality of the buildings and facilities poses marketing problems in stable, industrialised nations, the exact opposite is true in many transitional and developing countries with chronic housing shortages. Although military bases tend to meet a uniform level of quality and style, the standard of civilian infrastructure varies significantly between nations. Multi-family housing units from Fort Kobbe in Panama would probably seem plain in the United States, but these homes would represent a step up for the majority of Panamanians. This is also true of domestic bases in developing countries since their militaries often enjoy a privileged position in society.

Environmental Pollution

Few military bases are completely free of environmental contamination. The US Department of Defense has detected about 27,000 potentially contaminated areas on 9,700 of its domestic sites. The necessary environmental clean-up can be costly and delay economic recovery. It is, at least in Western industrialised countries, often the greatest obstacle to using closed bases productively. Petroleum and lubricants are the most common sources of contamination, and unexploded ammunition is often the most dangerous. Although the party responsible for such contamination is usually clear, it is harder to determine responsibility for the clean-up. For instance, although the US Department of Defense assumes responsibility to a certain extent for decontaminating domestic sites, it often leaves the clean-up of its foreign bases to the host country. The Russian troops which left eastern Europe did no clean-up at all. In return, however, host countries received the land and its superstructures for free.

Employment Effects

Local communities are often opposed to base closures and fight them because bases provide income and employment. Soldiers stationed on bases buy goods in local markets, rent houses and spend their money locally in other ways. Bases also often provide direct employment for locals, as guards, cleaners and so on. Some bases are the mainstay of local economies.

 

However, research in the United States and other countries has shown that the effects of base closures are generally not as serious for local economies as often feared, and that successful base conversion can, after a period of time, even provide more income and employment than a base. The US General Accounting Office, for example, published a report in 1996 showing that only two per cent of civilian workers became unemployed in all closures of major military depots. More than offsetting this loss, communities were successfully replacing the jobs from the former bases. Another investigation, by the US president’s Economic Advisory Committee in 1993, showed that over a long period of time communities had created two new jobs for every one civilian job lost on closed bases.

Successful Redevelopment

Successful base reuse and redevelopment can be found in many parts of the world. Where environmental contamination is low, location and condition of base suitable and land or superstructure in demand, redevelopment will almost occur by itself, or, put differently, can be left to the market. In most cases, however, public investment is needed before private investors will consider redevelopment.

 

A good example of successful base redevelopment comes from the Philippines. Subic Bay was once a major US naval base. It was closed by decision of the Philippine Senate in 1991, although it had been a major employer for the region. By the time the facility was turned over to the Philippines a year later, a redevelopment plan had been compiled, environmental clear-up had started, a 60,000-hectare Subic Bay Freeport Zone had been established and the Subic Bay Metropolitan Authority had been placed in charge of managing the site and implementing the plan. Thus, a solid environment for foreign investment and local entrepreneurial development was created through the actions of the Philippine government and local players. Enthusiasm, leadership and well-designed incentives combined with world-class, well-placed port infrastructure have succeeded in creating one of the most successful base conversion projects in the world. As of early 1999, more than two hundred firms had invested over US$2 billion in the former base and created thirty-six thousand full-time jobs.

 

Such success is not the norm, but neither is it unique. Especially in the United States and western Europe, base redevelopment has been the economically most rewarding form of conversion. In eastern Europe and elsewhere, much former military land still lies idle. As in the case of industrial conversion, economic difficulties and government inability to deal with all the problems of transition prevent the reuse of former military resources.

Government Policies

Government support for base conversion is important in most cases, for the clean-up of bases, the initial planning stages and often for first investment. However, after the ground has been laid, governments will make money from selling the land and infrastructure, though income from the stimulation of local economies is generally more important. Most Western industrialised countries possess a variety of instruments to support base conversion, some of which are specific while others are generic to local development. The state of Rhineland-Palatinate in Germany, for example, invested heavily in developing the former US Air Force base at Hahn into a new civilian airport. Communities in the United States which experience major base closures receive US$1 million to plan for reuse along with additional federal grants for implementing the plan. For member countries of the European Union, the Konver programmes, which allocated more than US$1 billion to conversion activities, have provided important financial support for base conversion.

 

Government support has been more forthcoming and successful in base redevelopment than in industrial conversion. One reason is that smaller amounts of money can make a bigger difference in base redevelopment than in industrial conversion. But more important is that different ideologies about the proper role of government and private capital prevailed in these two issue areas of conversion. While it was not seen as proper in many countries to interfere, or even shape, private decision making on industrial matters, environmental clean-up and local infrastructure development were generally more acceptable as government functions.

 

CONCLUSION

 

The balance sheet of conversion in the 1990s is mixed, with success in some parts of the world and with some types of military resources, and disappointing results in other parts of the world and with other military resources. Certainly, not all expectations that existed in the late 1980s were fulfilled, especially in the transition countries.

 

However, the record of conversion in the 1990s, a decade which provided a particularly difficult framework, makes it abundantly clear that conversion can work and actually has worked in many cases. To some extent, conversion success can be shaped by individual actors and government policies. However, the extent of the legacy of military use and the general economic situation in which conversion is undertaken are often overwhelmingly important factors.

 

The conversion record demonstrates that decisions on arms procurements and downsizing of armed forces or arms exports need not be influenced by economic fears about incomes and jobs. The civilian sector generally has the capability to take care of the economic drawbacks of such decisions if conversion to civilian activities is properly supported. In the longer run, the shift of resources to civilian use will in all likelihood yield economic benefits that are larger than the initial costs of downsizing.

Endnotes

1. Factual information in this text is documented in the yearbooks of the Bonn International Center for Conversion, the BICC Conversion Surveys, published by Oxford University Press between 1996 and 1998, and by Nomos Publishers in 1999.

 

2. For more discussion of this point see Michael Brzoska, “Military Conversion: A Balance Sheet”, Journal of Peace Research 36, no. 2 (1999), pp. 131–40.

 

3. International Monetary Fund, World Economic Outlook (Washington, D.C.: IMF, October 1997), p. 147.

 

4. See BICC Conversion Survey 1998: Global Disarmament, Defense Industry Consolidation and Conversion (Oxford: Oxford University Press, 1998), pp. 200–4.

 

5. Ibid., pp. 197–8.

 

6. Ibid., pp. 203–4.

 

7. The most intensive research in this area has been done by Keith Cunningham, formerly of BICC. The author is indebted to his work on the subject of base closure and conversion, which can, for instance, be found in the BICC Conversion Surveys, 1996 to 1999.