PRIVATIZATION IN NACC COUNTRIES Defence Industry Experiences and Policies and Related Experiences in Other Fields COLLOQUIUM 1994 ********* COLLOQUE 1994 PRIVATISATION DANS LES PAYS DU CCNA Experiences et politiques des industries de defense et experiences comparables dans d'autres secteurs Colloquium 29-30 June, 1 July 1994 Brussels --------------------------------------------------------- PRIVATIZATION OF DEFENCE INDUSTRIES IN THE FRAMEWORK OF PRIVATIZATION AT LARGE Alexander Kennaway Perhaps the major barrier to successful defence privatization is one of perspective, says Professor Alexander Kenneway. The west should leave aside its macro-economic models and textbook scenarios, and producers in the east must undo themselves of the illusion that production can stay as it is, or soon "return to normal". Practical solutions are the only way forward: the west should be bringing eastern defense industries advice, losts of training and a focus on practical, small-scale economic victories. Alexander Kennaway is professor of Conflict Studies at the Research Department of the Royal Military Academy, Sandhurst, UK, and a Foreign Member of the Ukrainian Academy of transport. First of all, allow me to state one truism on the subject of privatisation. The ownership of a company cannot be an end in itself, except to dogmastics. The issue is - which structure best assists the firm to flourish and to contribute to the well being of the national economy? Why Are some Activities in State Ownership? ------------------------------------------- Some sectors of the national economy of most western industrialised democracies are or have been owned by the State for three basic reasons: 1- A belief that some essential services would not be sufficiently profitable for private ownership and threfore would not be delivered effectively 2- A belief that elements crucial to the security of the nation should be in state ownership and directly under state control. This has applied especially to defence establishments, in research, manufacture and maintenance for the equipment of the armed forces. 3- A basic political belief, that state ownership is more likely to serve the interests of the nation if the main motive of private profit is absent. All three motives have, from time to time, operated in western Europe. The second also prevailed in the USA and to some degree still does. The third governed the policies of those countries under the control of Marxist parties. Marx, who was writing in England during the 1860s on the basis of his researches into the state of English capitalism of the 1830s-50s, was driven by his view that private enterprise exploited the workers and retained too great a share of the proceeds, thus denying them as a source of wealth for the national good. He argued that nothing had intrinsic value, which was created only by labour. The Labour Theory of Value went on to state that the difference between the selling price and the cost of labour was Surplus Value and was appropriated by the capitalists. If the State took the surplus it could finance everything for the benefit of the Nation. It was a corollary of Marxist socialism that competition was wasteful and that central planning would direct resources more efficiently than a free market could. This view was also shared by many Socialists in western Europe. Their acceptance of the Labour Theory of Value allwed them also to slide into a romantic view of industry, namely that only the factory waas a source of wealth, created by the horny-handed proletariat and that everyone else outside it was unnecessary overhead. Cosequently many socialists ignored marketting, product planning and even design for the customer.(1) The case Against State Ownership & Control ------------------------------------------ The reaction against State ownership can be summarised as follows: 1- Centralised planning is more inefficient and less flexible than the sum total of individual business planning carried out by firms concentrating on their own business. Done well, firms will maximise the use of resources; their own business plans must be flexible enough to take acccount of inadequate assessments of the business environment especially of the competition. This as analogous to Von Moltke the Elder who correctly observed "No (military) plan survives contact with the enemy". Failure, naturally leads to a redistribution of the remaining resources of the firm by one means or another open within a free market economy. 2- State ownership usually requires the firm to come to the Treasury, (the Ministry of Finance) to borrow money for expenditure beyond its immediate ability to finance essential investments from its own retained profits. This places the firm under non-commercial restraints dictated by national policy or by the Governmentense of priorities in allocation of its own funds. This restraint severely limits the business performance of State-owned enterprises. 3- State ownership in many countries, even within a free-market economy, has led to management and workers alike adopting attitudes which ignore all the fundamental tests and criteria of efficient business. They have grown up with the assumption that the Government has a duty to subsidise them and also, often enough, to support unchanged their activities as they have become. As State employees they tend toward the view that change, however inevitable, is a threat to their way of life. Measurement of performance by any test of competitive market economics is also regarded as an unpleasant intrusion. This has even been true when such enterprises, such as coal mining, although a monopoly supplier of coal, faced technical competition from gas, electricity and other sources of energy. It is not difficult to see why many, not just on the right wing of politics, have concluded that the State is not competent to direct specialist services delivered to the market, trade and manufacturing industry and furthermore it should seek to interfere as little as possible in directing those sectors. Some British Experiences ------------------------ The issue of ownership and control can, however, especially in theory, be separated. In Great Britain the State sometimes held a so-called Golden Share in nationalised firms; this enabled it to veto decisions of the otherwise independent Board which it considered to be against the national interest. One such firm was British Petroleum, now fully privately owned. This form could be regarded as a first, modest step toward privatisation. My experience as a Director of a British nationalised industry suggests that it is by no means axiomatic that State-owned firms must be directed and managed less well than private firms. The competence to perform in business depends upon the culture of the firm and this in turn depends on the ability and vision of the Board to set the strategy, to motivate and lead the people to perform to ever better standards in serving their market. If the organisation has been run by State employees, the chances are that much will have to be done to change the culture to one that can become excellent in a competitive market. The ability to generate at least as much income as is spent is an indispensable discipline, especially to those who previously regarded the aim of the work to provide a service but one that was never subject to such a criterion of performance. British experience shows that it is essential to make these changes, to improve the business competence of a firm before it is privatised. One may instance British Airways, British Gas, British Steel. The lesson for Eastern Europe and the former Soviet Union is that this process took years even when it took place within a well established market economy with all the legal, financial and governmental structures in place and when it was possible to invite successful businessmen from the private sector to become directors and managers to run them. There is no major issue of privatising British defence contractors, which have almost all been in private hands since their inception.(2) The problems that they face are those due to contraction of military orders. Some firms have dual purpose subsidiaries, whereas others are often separately managed. The value of this arrangement is to try to divorce the two cultures - military and civil. Defence contractors rarely understand marketing to civilian customers since their close collaboration with the Military results in the latter performing many of the marketing functions. Secondly, defence contractors are nowhere renowned for cost-effective and competitive products. This is partly due to the need to respond to complex, many would argue, unnecessarily so, specifications and bureaucratic procedures and partly because cost has not traditionally been a high priority in weaponry. Restructuring the main defence contractors is proving to be very difficult, partly for these reasons. It is also not cost-effective to adapt factories dedicated to things like tanks, submarines and warships to making civilian products. The same is true of dedicated yards for servicing nuclear-powered submarines. The down turn in orders for shipping as well as for other marine structures such as oil well platforms has been accompanied by effective competition from Korea and other countries. Consequently there are bound to be closures in both shipyards and dockyards. However the resulting social problems are fewer than has been the case with the closure of many "smokestack" industries. American experience is also somewhat harsh. Major Government-owned naval yards and other facilities, such as aircraft repair bases have been closed and turned over to completely different uses. Prime defence contractors such as General Dynamics have also closed some of their major plants rather than attempt to convert them to civilian uses. This was in spite of the fact that the plants were of the highest standard; modern, well laid-out, well managed and manned by people living within an entrepreneurial environment. Sub-contractors were always more diversified, selling into civilian and military markets. In the field of electronics reports suggest that civilian products were superior to those destined for defence purposes in design, advanced technology and in value for money. Consequently firms in the business suffered hardly at all from the contraction in defence orders. American industry, it would appear, is readjusting itself to this new situation as it has done to previous reductions in orders from a specific sector of the market. Furthermore, according to the Office of Technology Assesment, which reports on Congress, local organisations scheduled to close can rely upon the legal requirements to provide federal funds and skilled advice to assist them to perform other functions locally after the closure. Furthermore, individuals scheduled for redundancy also have legally funded help with retaining and counselling to find new jobs. Some Other remarks Based on British Experience ---------------------------------------------- If nationalised firms became competent to compete, why, it may be asked, was it necessary to privatise them? Leaving aside political dogma, a powerful argument is to be found in the separation of financial authority from the State and the ability to raise money in the open market without limitation of the Public sector Borrowing Fund. I was not alone amongst directors of nationalised firms to find in the British Treasury a certain lack of understanding of practicalities in matters of investment as well as lack of mental flexibility. Added to this was an inadequate grasp of all issues, many of them highly technical and indeed scientifically difficult, by the civil servants, let alone Ministers in the departments of State to which one was responsible. It could not be otherwise; they were basically generalist administrators, perhaps advised by people wo once had some experience of those matters. A competent Board is composed of people who, together, command all the necessary skills and experience and know how to call upon their own as well as outside advisers for specialist detail and who are able to make profesional assessments of that device. This is rare ability amongst Government administrators. They are too removed from the realities of a fast-changing business to remain competent, if they ever were, to assess and set broad commercial policies, determine the right investments paths for capital investment and innovation and generally to perform as effective leaders even at a non-executive, supervisory level. Another problem with a State-owned firm is that, generally speaking, the employees have more rights of tenure than is the case in private firms. It is therefore more difficult to persuade them to learn new attitudes and skills and indeed to move them either within the firm or to find new careers outside when it is found they are no longer required. Some French Experiences ----------------------- This is also the case in france, where the state currently has problems with Air France. With its integrated and foward-looking planning system, basic concensus between the political parties and homogenously and well educate elite, France appears to have had fewer problems with national planning, with its energy, infrastructure of telecommunications, railways and roads than some other west European countries. All of these are currently still in public ownership. The government has had fewer problems with the necessary reductions in its nationally-owned defence industries. From the outside at least, firms like Dassault appear to have been well managed. They have been clever in anticipating the downturn of military orders. The French, under the slogan, "smaller body, bigger brain", are in the company of all major military powers who see the folly of creating and maintaining dinosaur armed forces. Dassault has over the past few years delegated more manufacturer to contractors, retaining its R & D and design skills. The inevitable loss of jobs is planned to be accomplished through natural wastage and retirements. The Case of Germany ------------------- Privatisation of the property of the former DDR presents an instructive lesson for both easterners and westerners. The West German Government expected to be able to attract western firms to invest in the factories of the DDR and were surprised when the facts did not fulfil their hopes. The degeneration of traditional German work values came as a shock; so did the conclusion of West German industry that it was more profitable to sell goods from their existing factories than to buy soviet-style factories and make things there. An excellent report on the workings of the Treuhand appears in the Autumn number of the McKinsey Review for 1993. This report shows that privatisation has not been the success expected by its proponents. The economy of the former DDR is still very far behind that of the western Lnder; it is supported at great cost to the West German economy and, let it be said, to other west European states. Conclusions from the Western Experience --------------------------------------- 1- There are many models of a free market economy, with different patterns of ownership and control. 2- Many western countries still retain some of their essential industries and services, including primary defence contractors, in State ownership. 3- British experience, in particular, shows that it is essential to prepare firms for private ownership and that the process of improving its business performance through transformation of its business culture and competence takes a very long time. 4- American experience suggests that restructuring primary defence contractors is unprofitable and that they are better closed. However, the American economy, as well as those of other NATO countries, can afford these closures, contractions and restructuring. This is because the defence industries occupy a very small part of the total manufacturing base of these countries. It is also true that their civilian technology at least matches and sometimes surpasses that dedicated to military purposes. 5- It is, regrettably, also true that military research and its resulting technology, whether in products or in production processes, is rarely adaptable to profitable civilian uses, in spite of the many attempts. The Former Soviet Union and Their Former Partners in Eastern Europe ---------------------------------------------------- Backed by some western advisers, the reformers in these countries have pursued their objectives primarily by liberalising most prices, allowing relatively free exchange between their own currencies and hard currencies and by other macro-economic policies such as the promotion of privatisation. These measures, however, have not been thoroughly thought out, consequently there is no firm legal, fiscal, financial basis which businessmen whether local or foreign can confidently rely on in order to be able to plan their business for even a year ahead. Some governments, including the Russian, Ukrainian and Belarussian, have imposed such crippling regimes of taxation, disposition of earned foreign currency that they have effectively forced businessmen into a grey or even black economy. The Governments have criminalised what could have been honest business. Other Governments, such as those of Kazakhstan and Azerbaijan, set out to attract foreign investment in their oil and gas fields, but have failed to allow the foreign partners with whom they initialled agreements as long ago as two or three years back, to begin to implement these agreements, essential for the support of the local economies. It was, of course, too much to expect from the Republics subsidiary to Russia to throw up leaders capable of creating coherent, sensible government since the locals had, till their independence, been subservient to Russian orders which went into immense detail as well as setting what passed for strategy and economic policy.(3) However, the Russian Government itself has proved to be no better at creating a reasonable structure and framework within which the economy, whether private or state owned, can develop. Since the collapse of the USSR in 1991, the economy of the entire region has worsened and at an accelerating pace. In the interests of space I shall concentrate on the three Slav republics and Lithuania. The problems, situation and prospects for these countries are applicable to others, especially east and south of the Slav republics. Central and eastern European States, although they inherited, and still suffer from, the monolithic, integrated nature of the Soviet economic system as well as from the mentality of Homo Sovieticus show some significant differences. Albania is making sincere efforts to move toward a market economy and to apply intelligently western aid to create a good infrastructure. Estonia is strongly supported by the Scandinavians and Latvia is making progress, tying its currency to the Deutschmark. Romania was alone in not integrating its defence industry with that of Russia. Whereas there are many varieties of a market economy there was only one model of a Communist Command economy in areas controlled by and in alliance with the CPSU(b).4 On this basis it is possible to make general remarks, mainly based on the Slav Republics which are broadly applicable across the region. The Communist Past ------------------ It was a centrally controlled economy aimed primarily at building the military capability of the State. The priorities of all industrial development were aimed at this goal. It is still not possible to establish with any degree of reliability the proportion of GDP devoted to defence and related activities such as space but it was probably around 30%. It also employed about 65% of all scientists and engineers.(5) One can truthfully say that the technical intelligentsia were never allowed to contribute to the improvement of the civilian infrastructure or the quality of life of the ordinary people. These remained backward by comparison with those of industrially developed countries. The regime was also extremely inefficient. The Communist Party, its Nomenklatura and party appointees to the Soviets had no idea of running an efficient production and distribution system. Their aim was to fulfil the Plan, in output terms, regardless of the consequences. They interfered with the managerial and technical decisions of their competent people, even in the military sphere. The drive to militarisation was pressed forward regardless of the costs. The system wasted all the material human and financial resources of the nation. Many of its factories were and still are value subtractors. That is to say that the materials and energy used could sell for more than the products in an open competitive market. The USSR traditionally exported raw materials, such as timber, minerals and gold and imported production equipment, turnkey factories and latterly consumer goods and food. Weaponry was bartered with the Socialist third world for cotton, sugar and once even for sweets! Soviet weaponry is indeed functionally effective but much of it, such as tanks, ships and aircraft, suffers, amongst other things, from a lack of safety for its crews. By the time of Brezhnevegime, the health of the people was deteriorating fast and the infrastructure crumbling. Agriculture yields were, in critical areas such as grain and potatoes, about a fifth of those of the USA and UK, in spite of massive investment in equipment, much of which was inappropriate to local conditions. On a per capita basis agriculture employs about 20 times more people than does the UK. Communist propaganda boasted about its successes in science, high technology and superior weaponry. It is true that Soviet education did educate people well in science and engineering theory. The best of them are superb, especially in mathematics, computing software and physics. The fundamental weakness lies in the very abstraction of this education. Only in the military sphere were good scientists and engineers able to work closely with the users of their output as well as with the workshops making the prototypes and manufacturing the products delivered to the armed forces. The most highly integrated of the defence industries was the aircraft sector. In spite of this, soviet military aircraft engines were always well behind those of the west. As a result of the concentration on military engines with their need for after-burners required for rapid acceleration, the Soviets never developed fuel-efficient, high by-pass engines and therefore their civil aircraft are about 30% more fuel hungry than those of the west. Soviet air defence industry also exhibits the weakness mentioned above of the Western defence industry in its difficulty in perceiving market needs and satisfying them. They are now making great efforts to penetrate the worldivil aircraft market but will not succeed without western participation in market intelligence, design, engines and avionics. Strangely enough, electronics, the essence of high technology as many people understand that term, provides the weakest section of Soviet weaponry and hence also of civilian radio-technical goods. The efforts spent on genetics and biology still resulted in seed of poor quality delivered to farms.(8) I started to work in Soviet research institutes in 1958 under the exchange agreement between the Royal Society and the USSR Academy of Sciences. It was exhilarating to work with the outstanding physicists and mathematicians of an older generation than I. But it was sad to see the cautionary approach of these people to their own work, which was frequently misunderstood by the Party dogmatists and might lead to loss of support, status and even liberty. It was plain then that a high proportion of inventionsed more thorough analysis and fewer of those offered will be commercialisable. It is also essential to realise that factories may well be inadequately supported by scientists in academic institutes when it comes to profitable activity. The basic orientation of Russian university education needs to move away from pure theory to a system allowing a close link between theory, practice and in a commercial environment.(9) Manufacturing Industry in the Former Soviet Union ------------------------------------------------- The purpose of production was always to satisfy the plan not the needs and wants of the market, except that of the military. The emphasis was on output; there were and still are no means of determining the amount of materials, energy or labour used, no means for determining costs of extraction of minerals, transporting them or processing them into goods. Transfer prices between enterprises are arbitrary, costs and prices bear no relation to fact and one cannot therefore make any sensible commercial decisions on profitability or on the worth of one investment opportunity versus another. There is no market in real estate. On this basis therefore, it is not possible to determine the current value of an enterprise, although many people who work in the system will assert that the production equipment, together with the experience and skills of the work force and scientists, especially in the defence industries, represent the wealth of the country and must therefore be kept together. Small wonder however that westerners find it hard to establish a basis for investment. They are accustomed to determining the worth of an investment by calculating the potential profit that it will generate. Most productive facilities and transport suffer from neglect and misuse. Most factories are poorly laid out and are inefficient users of resources. Contemporary civilian products are rarely competitive in western markets, they do not answer the requirements of international standards and would require considerable attention to detail in design and in provision of product support to satisfy western distributors. Soviet factories are organised purely as manufacturing organisations, as well as providers of social services to the work force. They lack every other element of a western firm based on manufacture such as marketing in the full sense of business planning, finance, R & D, design, technical service, sales, quality assurance, safety and environmental control. One must add to these deficiencies those at government level discussed above. These provide extra sources of anxiety concerning continuity of the conditions likely to allow a proper return on investment. The possibility of an authoritarian Government taking power again in the near future cannot be excluded and provides a political risk. It has to be noted that in every country of the region recent elections have returned to power former Communists, or their Agrarian allies, supported by the leaders of the military industrial complex and by nationalists. Consequently prudence suggests that foreign investments will be restricted to those areas that are calculated to return the investment very quickly. Such areas include investment in extraction and transport of oil, gas, other minerals and metals, timber, precious stones such as diamonds and semi precious stones. These can be exported and sold on the world market to the mutual benefit of investors whether foreign or native. When there is a high local demand for a product such as cigarettes, western firms buy into or acquire totally existing plants and modernise them, frequently using their own brand names which are fashionable in fSU. There is a considerable industry based on western magazines, financial houses and joint chambers of commerce which attempts to persuade potential western investors to move into fSU and other countries with excellent prospects. The facts show that the sum total of foreign investment is far below the claims and many investments are in quite modest amounts in small firms. The dinosaur factories are correctly seen by western firms as unattractive purchases for foreigners. Some westerners conclude that the region is successfully moving toward a market economy because they see so many small, privately owned shops filled with western goods. In practice very few local people can afford them; purchasers are usually the rich, many of whom are criminals. A recent estimate in Russia estimated that 40% of all trade is inthe hands of the Mafia. The flight of capital continuesapace; some estimates put deposits abroad at over $80bn. In 1993 Russian tourists took abroad $1.5bn whilst incoming tourists brought only $800-1000 million. Most internal privatisation of significant firms has been carried out through the voucher system where every citizen was issued with one that could be traded for a share in a commercial or industrial property on the occasion of its privatisation. But this is not privatisation which has a chance of improving the success of the factories. This is because the directors and managers have bought blocks of shares which sometimes give them control. Added to this the work force which also subscribed has been persuaded to give the directors first refusal on purchase of their shares. The old directors with all their deficiencies are thus ensconced in power. Provided they can continue to get government subsidies to support their hidden unemployment the firm will not be liquidated. Furthermore there are no sources of alternative, more competent directors, as there are in a market economy. The defence factories are the best of manufacturing enterprises. The countries cannot afford to have them go bankrupt, they form the most important segment of the industrial base. It is essential that they be successfully restructured to serve the national economy as well as retaining a sufficiency for national defence needs. I have set out my own view as an experienced engineer and industrialist how this may be done in practice.(10) Privatisation appears later rather than earlier in the essential steps. I would wish that these views would be embraced by the present Governments. Some of the defence factories have excellent, very up-to-date, mostly imported equipment. Most, however, have equipment which is about 10-30 years out of date and are poorly laid out. They are untidy in ramshackle and unsuitable multi-storey buildings which are costly to heat and in which it is almost impossible to set out efficient materials handling between operations. Their worst feature is the obsolete nature of the management style and system. These are discussed briefly above and at some length in my paper which is based on considerable personal experience in electronic and mechanical engineering factories across the region. Their directors have often repeated a theme "our defence factories have very cheap laour, highly skilled workers, the best educated scientists and engineers and very high technology and therefore why does the West not invest in joint ventures in them?" The answers briefly are these:the labour may be badly paid but their productivity is very low; rejects are many times greater than in the western or even Pacific Rim countries; the engineers and managers are not attuned to conditions of a marked economy and are very slow to understand the proper work attitudes and methods, let alone to apply them; the manufacturing technology is rarely of high quality and is often poorly managed and maintained; and the product technology in civilian goods is primitive. Cosequently, investment is unattractive. In the last year or so one has heard this can plaint less often; some people are beginning to realise that they have to learn to do what is needed by themselves. However there is a dangerous undertone to this sense of reality. It is coupled with the following "We are a proud people with a long history, foreign intervention in Russia has always led to disaster. We can manage alone yet again, as we did against the Intervention and in the Great Patriotic War. You do not understand us, you bring, with a sense of superiority, your prescriptions for success which may or may not have been successful abroad but take no account of our history traditions and current circumstances. Western advice has reduced the Russian people to beggary and is responsible for our current decline". There is, sadly much truth in the last phrase. As a result the West is again being demonised and seen as hostile. The West must revise the content, manner and level of advice if it is to be helpful. Current Russian policies toward the defence industries are moving back to the aims and methods of the old Command Economy. Understandably the Government does not wish them to fall into the hands of the Mafia, foreigners or others who might be judged not to have the interests of the country at heart. To these sentiments are added the hope of selling arms abroad in sufficient quantities to provide a significant hard currency income, at least to the Government and perhaps also to the factories. However, as Marshal of Aviation Shaposhnikov stated frankly in his article in Izvestia of May 11th 1994, the USSR never sold arms abroad and has no experience of competing withwestern arms manufacturers. As to the sums often quoted for the value of such sales, he admitted that it was rare for the customer to pay for them. Current sales of between $1-2 bn/annum are unlikely to return to the levels of 1988 when the claimed value was over $20bn. This policy is unlikely either to save the Russian economy nor to provide enough work for the estimated 6 million workers in the defence industry.(11) Almost every pronouncement, publication and discussion, especially in the military press, in Russia about the defence industries insists that they must be retained in their present form and size and that further conversion would be a crime. Conclusions for the fSU and for Eastern and Central Europe --------------------------------------------------------- 1- Plainly the defence industries in Russia at least, which operated about 80% of the total defence industry of the fSU, are, understandably, a very sensitive issue and must be treated as a special case but at the same time must be assisted to a new and more supportive structure for the national economy. In this sense the defence industries should be considered as part of the essential restructuring of the entire resources of the fSU and of the region if they are to move toward a future of progress toward a better life for their people. 2- The other republics face similar problems but in a sense they are less able to analyse them properly. This is because their military leaders, just like their industrial directors, were accustomed to fitting in with the strategic requirements set from Moscow. Consequently few of them have the experience or indeed the ability to formulate correctly the threats facing their country, the required structure and size of the armed forces and what they need in terms of equipment. We see the same reluctance as in Russia to scale down their armed forces, coupled with a desire to retain their defence industries partly with the declared hope of aligning their standards with those of NATO and selling to the NATO nati onal armed forces military products. At the same time some of these countries wish to build old fashioned armies designed to make threats non existent in the foreseeable future. If these intentions are carried the probable result will be yet another economic bankruptcy. 3- It is practical as well as essential for the defence industries of eastern Europe to be restructured. Some, as in the west, will face closure because there are inadequate markets for anything they could make. Help with retraining and finding other jobs will be essential. It is unfortunate that so little has been done since perestroika in these directions. Other factories must be rearranged, using their core skills to make things for their own civilian markets as well as for some export. This step will need detailed professional help from experienced practitioners working in the factories alongside their directors. Some of their present activities, especially the secondary ones, should be spun off and eventually formed into small competing sub-contractors serving the locality, as is done in Japan and in the West. Both such moves may logically result in private ownership. 4- The likelihood is that dual purpose workshops and those dedicated to arms development and production will remain in State hands for the near future. But their people will also have to learn, just as State employees have in the West, to be fully competitive on the world markets. If experience in the West and of the past seven years in the fSU is a guide, this will take a long time, probably some decades. However let it be remembered that in Britain we have not yet privatised the Post Office or the railways even after 15 years of a Conservative Government. 5- Privatisation at large is generally limited to trading, much of it in the hands of criminals. Their foreign earnings are sent abroad and cannot help the national economy. Their activities worry not only the decent ordinary citizens of the region but increasingly the Governments of western Europe and USA. It is a dangerous illusion to imagine that trade without viable manufacture can form the basis of a sound market economy. FOOTNOTES {1} As recently as the last Labour Government in Great Britain a Minister of State expressed his irritation to me, appointed to enquire into the failure of a firm into which his department had poured millions, when I told him that the businessman whom he had supported had merely assumed he could sell his product into an already over supplied market. He said the problem with consultants was that they always talked about the market and marketting. {2} Rolls Royce was briefly nationalised, by a Conservative Government when it was feared that its innovative venture into the RB211 engine would force it into bankruptcy. In the view of some specialists in the aero engine business, this fear was wrong and the action was precipitate. {3} It was Havel, then President of Czechoslovakia, who said Toward a rational philosophy for science and engineering in the fSU is available in both English and Russian from CSRC. RMA Sandhurst, Camberley, Surrey, England. --------------------------------------------------------- Copyright 1994 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 1994 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.