File: eco93.13 ========================================================== NATO ECONOMIC Colloqium, 30 June, 1 and 2 July 1993, Brussels ECONOMIC DEVELOPMENTS IN COOPERATION PARTNER COUNTRIES FROM A SECTORAL PERSPECTIVE EVOLUTION DE LA SITUATION ECONOMIQUE DANS LES PAYS PARTENAIRES DE LA COOPERATION DU POINT DE VUE SECTORIEL ========================================================== PANEL III Industrial Restructuring and Defence Conversion Chair: Reiner Weichhardt, Deputy Director NATO Economics Directorate Panelists: Julian Cooper Panelists: Youri Stsepinsky Panelists: Igor Kosir Panelists: Dragos Negrescu Panelists: Erik Dirksen ---------------------------------------------------------- INDUSTRIAL RESTRUCTURING AND DEFENCE CONVERSION Julian Cooper I. Introduction: Some Issues for DiscussionProfessor Cooper explained that the legacy of socialism and central planning has created the problem facing Cooperation Partner countries. He stated that his outline for Panel III's discussion, which follows, related above all to states of the Former Soviet Union, in particular Russia, which may be regarded as an extreme exemplification of the general case. Economic structures characterised by: - "Overindustrialisation". - Hypertrophied development of heavy industry and defence industry. - Dominance of large-scale enterprises (with proviso that data on size of facilities are inadequate). - Weak development of small and middle-size enterprises (SME). - Monopolisation. - Underdevelopment of specialist subcontracting. - High levels of energy and materials intensiveness. - An uneven, but by international standards generally non-competitive, technological level. - The existence of negative value added sectors (at world prices) (shown by work of Hughes, Hare and Senik-Leygonie). - Limited foreign capital involvement. - Extensive enterprise-based social provision. - An extremely negative environmental legacy. II.Constraints on Restructuring - Price distortions - partial price liberalisation; influence of monopolies; limited external liberalisation. - Continuing softness of budget constraints. - Lack of sources of investment (state/private/foreign). - General weakness of market institutions. - Imperfections and instability of tax regime. - Weakness of central state administration. - Uneven development of regionalisation. - Entrenched traditions of rent-seeking behaviour. - Strong corporatist tendencies in political life. - Constraints on labour mobility. III. Spontaneous Restructuring and its Costs In the absence of government policies for industrial restructuring (or in circumstances when agreed policies cannot be implemented), restructuring is taking place on a spontaneous basis. This "Darwinian" process of natural selection is not entirely without merit, but does pose problems: - Action is being taken on the basis of distorted price signals at a time of limited and somewhat arbitrary externalliberalisation. - Controls on energy prices remain. - Criteria for allocating budget finance for investment are inadequate - bureaucratic pressure still important. - Mechanisms and criteria for granting credits are totally inadequate; credits often used for wage payments rather that rest ructuring; new commercial banks not adequate to requirements of restructuring. - Budget constraints remain soft; unwillingness to accept large-scale unemployment both at enterprise level, and also, tacitly at least, at central government level. IV. Solutions and Policy Options - Privatisation and restructuring - problems of, including predominance of insider ownership and control. - Role of the new private sector - SMEs. - Anti-monopoly policies. - Break-up of large enterprises. - State programmes of restructuring and their problems. - Policy instruments for selective restructuring. - Regional initiatives. - Social policies for the promotion of restructuring. - Foreign involvement and aid for restructuring. V. Conversion - as Particular Type of Industrial Restructuring - Specific problems of defence industry restructuring. - Need for policy on future defence industry base. - Policies for civil-military integration? - Privatisation and conversion. - Regional initiatives. VI. Potential for Negative Outcomes - Generalised subsidisation and budget deficit. - Inflation and delayed/timid restructuring. - Fear of future social costs. - Real social costs and retreats. - Danger of subsidies and privileges for bankrupt state sector crippling emergent private sector. - Protection. VII. Conclusion - No quick, or low-cost, solutions. - Likely to be pragmatic, trail-and-error process. - Danger will remain that scale and costs of restructuring will induce political reaction leading to retreat from transformation. - From now on restructuring likely to remain the central task of the transformation process. ----------------------------------------------------------- Copyright 1993 NATO All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic tape, mechanical, photocopying, recording or otherwise, without permission in writing from the copyright holders. Authorization may be requested for redistribution of the text on a non commercial base by research and educational services. Requests should be addressed to the Economics Directorate, NATO, via e-mail 'scheurweghs@hq.nato.int'. First edition 1993 ISBN 92-845-0079-6 This is the latest in a series bringing together papers presented at the NATO colloquia organised by the NATO Economics Directorate and Office of Information and Press on economic issues in the former USSR and Central and East European countries. For further information please write to the Director, Office of Information and Press, 1110 Brussels, Belgium. The articles contained in this volume represent the views of the authors and do not necessarily reflect the official opinion or policy of member governments or NATO.