Colloquium 1996 Panel III : Armed Forces and Defence Industry in Transition Economies: The Human Dimension

Defense Conversion for European Employment and Growth: Comparative East-West Assessments with Lessons from 1991-1995 Clark C. Abt Chairman, Abt Associates Inc. Director, Massachusetts Defense Technology Conversion Center Cambridge, MA, USA

Comparative Russian and US Defense Labor Force Reductions Reduced defense expenditures in Russia (according to BICC's Conversion Survey1996), led to a drop from 4.5 million employed by military industry in 1990, to 2.2 million by 1995. Thus, 2-3 million Russian defense workers had become at least temporarily unemployed, yet the official unemployment rate was only 2% or about 1.5 million. This suggests that most unemployment is attributable to defense reductions, and that a quarter to half of those thus disemployed by defense cuts have found jobs. In the US, 3 million defense industry workers in 1990 had been reduced by 20%, to 2.4 million in 1995. US unemployment rose from 5.5% in 1990 to 6.1%, or 8 million in 1995 - an increase of 1.1 million. This is nearly twice as large as the 600,000 reduction in defense workers over the same period, but small in comparison to the five year increase in total employment of 7 million, more than eleven times the defense workforce reduction of 600,000. The Russian labor market was not as fortunate as that of the US in employment impacts of the five year defense spending reductions. It is doubtful that as many, let alone more, jobs were created in the civilian sector of the economy than were lost in the military, although official unemployment remains low. There are tax disincentives to reporting private incomes from jobs in the informal economy, and unemployment insurance payments are derisory. With 50% reduced Russian economic output, compared with the ten-times as large and moderately growing (2-3%) US economy, and a much larger military industry labor force at the start of the transition with much less labor mobility , unemployment insurance and other social supports than the US, the unemployment burdens of reduced arms production and military spending have been much more severe in Russia than in the US. We do not know whether or how the over 2 million disemployed Russian defense workers have become re-employed. Large state owned military enterprises remain difficult to privatize because of few buyers, with little hope of adequate recapitalization or return on investment. Many remain a drain on government budgets, until they wither away or fragment into smaller commercially viable private businesses. To learn to do it for themselves and become self-sufficient, they must stop hoping for government bailouts that become increasingly scarce.

Strategic and Nuclear Weapons Industry Labor Force in Russia and US: Important Special Case The Russian nuclear weapons industrial complex, the Ministry of Atomic Energy or "MINATOM", employs roughly one million people in ten major once-"secret cities" and many smaller sites. Some 30,000 are scientists and engineers, and perhaps another 200,000-400,000 are skilled technicians. An unknown number, but probably only a small fraction, have been 'released' , laid-off, or retired early. Minister Viktor N. Mikhailov stated on June 18, 1993, at the conclusion of the Second Russian-American Entrepreneurial Workshop in Defense Technology Conversion, that he intended to convert 50,000, or half, of the 100,000 nuclear weapons staff (out of a 1 million total) to civilian, non-military work by 1995 (in two years). When conducting the fourth Entrepreneurial Workshop in Moscow in June 1995, this writer could find no indication of that goal having been approached. However, significant progress other than in re-employment, in 'scientific conversion' of Minatom staff was achieved in the intervening two years. Over 100 Russian scientists were given conversion and non-military commercialization training in business plans development. Several started small conversion enterprises as a result, but large scale conversion has not been achieved in either the Russian or the US nuclear weapons complexes. Nevertheless, the mutual Russian-American effort to provide professionally rewarding non-military work to nuclear weapons scientists on both sides has had several cooperative threat-reducing consequences, and could have even more. The lab-to-lab program between the Russian and US nuclear weapons labs continues to build mutual trust and knowledge, and to provide some challenging scientific problems and modest financial support to sometimes unpaid Russian scientists, while both sides learn from each other. There is always a shortage of well trained fine minds to work on the most challenging scientific problems, such as those in molecular biology at the quantum level. Collaborative projects, such as one on biomolecular modeling initiated in the 1995 Entrepreneurial Workshop, combining Russian computational physics with US supercomputing to "convert bomb designers into drug designers" could yield major economic benefits for all countries in future years. To absorb productively and non-militarily most of the surplus scientific labor created by strategic arms reductions, entrepreneurial training of scientists and engineers would have to be replicated on a much larger scale and followed up with foreign and domestic investment in job-creating enterprises producing self-sustaining non-military high-tech businesses. The present small scale of hundreds of small lab-to-lab collaborative R&D projects employing hundreds of scientists in Russia and the US , while useful for non-proliferation, arms control transparency, and scientific cooperation, will not by itself generate significant new non-military employment in either economy. Russia has the world's largest supply of trained scientists and engineers. However, like some of our own government-employed scientists and engineers, many are unfamiliar with the practice of commercial demand-responsive product development, marketing, sales, and finance, and most are unlikely to learn these business skills unless forced to do so by losing their protected research positions. The labor force in the nuclear defense sector in Russia and US is first rate technically, but not business-competent, but many appear willing and able to learn the essentials. In Europe, top Russian scientists and engineers can be recruited to work on Western European engineering projects. They offer advantages of comparatively low travel cost, low labor costs, and low support costs by their retaining their Russian homes while making coordinating visits to Western partners. Some of the billions of dollar-denominated flight capital funds out of Russia might be attracted back to help finance Russian former defense scientists' employment in new non-military high-tech industries where much latent demand and underutilized skilled labor supplies exist, such as in energy, transport, communications, and biomedicals. The CTR/Nunn-Lugar program has accomplished nuclear non-proliferation and arms control cooperation, and is well worth continuing, expanding, and accelerating tenfold for its security-enhancing, defense cost-reducing results. However, at even tenfold expanded levels, the program is unlikely to create conversion jobs for more than one percent of the million-person MINATOM staff or the smaller US nuclear weapons establishment. Conversion job creation is not, and should not be, the main mission of the CTR program, which should not be distracted from serving its first priority of countering nuclear terrorism, for both Western and Russian security, where much has been accomplished but much remains to be done. MINATOM defense labor conversion remains a problem unsolved by the CTR program , which is valuable for arms control but not economic development. CEE and NIS Countries: Unemployment Created by Reduced Defense Spending Large job losses from defense cuts and simultaneous privatization have not yet resulted in recovery of pre-transition employment and GNP, because of disrupted enterprise supply relationships across what are now national boundaries, low labor mobility due to housing shortages and poor transport and communications infrastructure, lack of well-established job advertising, recruiting, personnel search, and corporate and commercial law enterprises. These are evolving, but take years to establish themselves. Macroeconomic reforms alone do not suffice, but should facilitate these microeconomic infrastructure and institutional developments. Replacement of the unemployment created by defense spending reductions, with job-creating conversion products and services enjoying much larger and growing consumer markets than weapons, can be created only slowly by defense industry conversion, and only with much additional investment. Unfortunately, there is no evidence that the last five years of Russian and US efforts in support of Russian conversion to civilian and commercial production, even when occasionally successful, has absorbed or can absorb in the near future more than a tiny fraction - under 5% - of the over two million Russian defense workers disemployed by defense reductions. Government-supported conversion has been more successful in China, although it took a decade to make even half the converted enterprises profitable. US cooperative financing of Russian conversion enterprises on a Public-Private profit-seeking investment partnership basis has not worked. Many in the Pentagon say that "conversion has failed", but unless referring to this particular latest US approach, this is too sweeping, premature and inaccurate. Conversion did not fail in post-WWII Germany, Japan, and America, but there were few results apparent after the first five years - it took 10-15 years to show the impressive results of the German "wirtschaftwunder" and Japan leading East Asia's great economic growth success. It has not failed in contemporary China or US. It is the particular US approach to assisting Russian conversion that has had disappointing results over the last five years, because it was over-ambitious in trying to accomplish military, political, and economic reforms simultaneously to generate political support , and because it was underfunded and assigned to entrepreneurially inexperienced US Defense Department managers ignorant of non-military markets and products. Defense industry conversion is deliberate industrial restructuring, requiring several years' time and years' worth of industry revenues, as in any other major industry that has lost much of its market. The US Defense Department is getting out of the defense conversion business, not because of what it has learned, but because of what it has failed to learn: that it takes more patience, scale, and persistence than the under $1 billion three-year effort to turn around a $300 billion/year Russian defense industry by consolidating and converting profitably without creating much net unemployment. US-government sponsored investment funds intended to invest in Russian defense conversion enterprises have made tiny investments totaling tens of millions of dollars with little effect, and without a competitive return on capital that would attract more private investment. In contrast, more business-competent private foreign investment in Russian private industry continues to grow and some of it - in oil, software, hotels - has attained profitability. Investment in defense conversion enterprises and conversion job creation is attractive from a public policy and international security perspective , but rarely as a private investment. US government attempts to "leverage" small public investments with private investment, or to initially subsidize such private conversion investments to stimulate more of them, have largely failed to accomplish much conversion or investment return. A more successful US government approach has been to finance security-productive arms reduction and control agreements on the basis of a worthwhile national security expense - Perry's "defense by other means" - mostly unconfounded by profit motives . Examples are the HEU deal and the Project Sapphire purchase and removal of fissile materials from Kazakhstan. A more successful private sector approach by US, Finnish and German investors has been to evaluate on a purely business basis candidate investments in Russian defense enterprises and labor units seeking investment for conversion and commercialization. Several such investments have produced self-sustaining profits further financing non-military job creation . But mixing national security and profit objectives in Russian defense conversion investments is likely to compound risks and fail to achieve either of the two objectives, which are pursued more effectively and efficiently independently. Lessons Learned from the 1991-1995 East-West Experiences of Defense Conversion The social and human costs of conversion can be measured in every country vs. its social and human benefits by its net changes with/without conversion in: lost employment and job security, lost income and income security, lost welfare and living standards, lost GNP and output growth, lost labor and capital productivity The benefits of conversion are consistently positive and unrelated to whether an economy is command or market, but all successful conversions are market-responsive - even in the most communist or militarist countries. The social and human costs of conversion are greater and longer-lasting in the most heavily militarized, suddenly decentralized countries (Russia, Ukraine), where net benefits come more slowly but may be greater in the long term. The social and human costs of conversion are greater and longer-lasting when defense reform, economic reform, and political reform are attempted simultaneously (as in Russia). Lesson: don't try to do everything at once. The social and human net benefits of conversion are strongest in growth of employment and per capita real income in the high growth cities of China, Russia, and the US - where labor mobility and adaptability are greatest. The greatest hidden human capital cost of incomplete conversion is defense industries hoarding and delayed adaptation to civilian and commercial work of scientists and engineers in the countries that have the world's largest supply of them - Russia and US. Russian and US defense scientists converted to store clerks is a waste of human capital investment in education. Conversion to high-tech entrepreneurs is not, but requires investment in business retraining. There is strong demand for entrepreneurial education of scientists and engineers in Russia, but under 10% of demand has been financed and supplied. Defense Conversion Responses to Changes in the Threat to NATO, US, and Russia The threat to the West has changed. The main nuclear threat has changed from attack by countries against countries to attack of all countries by sub- national terrorists and rogue nations. The nuclear threat to West and East has grown from a military-technological to an economic, human delivery system. The new nuclear threat is unsecured Russian nuclear weapons and fissile materials enough for 100,000 nuclear weapons - combined with internal Russian political instability, socio-economic conflict, income loss, unemployment, and breakdown of law and order and border control against smuggling and migration. The new nuclear threat interacts with the new economic threat, which in turn increases it. Effective responses to both also mutually reinforce. The new economic threat to Russia of reduced technology employment and incomes increases the new nuclear threat by increasing incentives to criminal or rogue regime proliferation of atomic, biological, and chemical weapons technologies for economic or political gain. The new nuclear threat of theft of Russian fissile materials and terrorist attack creates new economic threats. Thousands of nuclear and environmental refugees could disrupt, depress and disemploy targeted and downwind areas, leading to more social and political conflict in Western destinations for Eastern economic, nuclear, environmental refugees. To avoid this vicious eco-nuclear circle, East-West cooperative threat reduction is succeeding in reducing these new nuclear-economic threats, but much more disaster prevention remains to be done, with 10-year tenfold budgeted effort increases. Conversion of US-FSU nuclear weapons technology and materials is the largest economic conversion success to date. The first half-decade of Russian economic transition has cut output in half, impoverished a quarter of Russia's population, unemployed millions, and created much suffering and doubt among the Russian people about their prospects in a more demilitarized, democratic market economy integrated with the Western world. In a January 1996 survey of a scientific sample of 2000 Russians, 36% said their "miserable situation can't be tolerated anymore", 51% described their family's economic situation as "bad or very bad", 64% had their salary delayed during the last year, 52% believe "the worst times for Russia lie ahead", 33% of families often had to do without food in the last year, 73% are most worried about inflation, 63% about crime, 51% about unemployment, 49% about economic crisis and decline of industry (vs. 43% about armed conflicts at Russia's border), and 77% believe that for Russia now order is more important than democracy (vs.9% the converse), but are opposed by 66% to 34% to the statement "dictatorship is the only way out of our current situation." ("The views of Rank and File Russians", p. 57, The American Enterprise, July /August 1996). US and allies have learned from 5 years experience, that massive economic aid plus investment for Russia, Ukraine, and Belarus, plus training and technical assistance create not enough, not fast enough, Russian/CIS economic recovery to satisfy millions of under-employed potential economic refugeee. The US, France, Germany have learned that public and private investment in development assistance to nearby countries with large potential economic refugee populations helps stem the tide. It costs less to create jobs and income in labor-exporting lands than domestic job creation and social services essential for politically acceptable integration of their millions of economic refugees. The West has learned that cooperative threat reduction works mainly against the nuclear threat, but not the economic threat of further decline and its political-military repercussions. US-Russian cooperative threat reduction has reduced the Eastern nuclear military threat to NATO by thousands of weapons. It is mostly western private investment, not government economic aid, that has reduced (but not nearly eliminated) economic threats to Russia and Europe and potential economic refugee flows. Defense industry conversion to economic development is a productive long-term investment in real growth and job creation, but conversion takes much more investment of money, time, and cultural capital skills to produce positive results in 5-10 years in transition economies without growth. In transition economies with weak private capital markets, conversion success requires more than the current five years' Russian and Ukrainian effort - probably at least 10 years of sustained public investment (as in China) . Russian conversion has discouraged private investment by failing to produce profits within a five-year period. If more private foreign investment had been encouraged by faster and more effective reforms of commercial law, social services, management and labor, Russian economic recovery could have been hastened into an economic and real estate boom still ahead . In growing economies - China, US - the temporary 1-4 year unemployment caused by arms reduction and defense industry contraction is compensated by expanded employment opportunities for the laid-off labor in new jobs created by diversification and commercialization of defense industries and technologies. 600,000 defense jobs were lost in the US while 8 million new non-defense jobs were created. Conversion of defense industry employment to non-military government, industrial and commercial employment is most successful in the US and China. Both a capitalist and a socialist market economy accomplished conversion with non- military job creation in growth industries much greater than military industry job destruction from arms reduction and disarmament. In transition economies and slow-or-no-growth economies with high unemployment the West has not yet learned how to mobilize the public investment essential for exploiting the job creation potential of defense technology conversion and commercialization and thus increase growth and reduce unemployment. Russian defense industry re-employment by US and Russian-government-sponsored conversion programs has not worked. US and European private investment in Russian for-profit joint ventures has created a few thousand legal jobs - with better results than government programs, but not good enough for recovery. Conversion of the 2-3 million lost Russian and Ukrainian defense jobs to legal productive civilian jobs remains an unsolved social problem with high political, economic, and security costs. Conversion of specifically nuclear weapons industry surplus employment to productive non-military work remains an unsolved but not insoluble problem, if.... the nuclear proliferation-resistant solution for Minatom to become economically self-supporting can be found in its becoming a cheap clean electrical energy exporter to Russia's energy-importing neighbors - China, India, Pakistan, Eastern and Central Europe - by converting its nuclear materials and weapons technology surplus to many nuclear-electric power plants and low-loss transmission lines along the Trans-Siberian railroad This clean cheap energy project and others creating an electric vehicle industry and Siberian development infrastructure could attract enough investment to employ a large fraction of Minatom's million-person workforce and the two million Russian former defense workers made redundant by arms reductions. The above 'solutions' to Russian military job conversion and civilian job creation are based on conclusions concerning disposal of surplus nuclear weapons materials: The most proliferation-resistant place to store surplus Russian nuclear bomb material is in blended-down fuel rods of Russian nuclear power plants. The safest place to store Russian surplus nuclear bomb material against criminal and environmental risks, is in old and new Russian nuclear power plants. The most economical place to store Russian surplus nuclear bomb material is in old and new Russian nuclear power plants, - safe and secure storage costs are paid for by domestic and export revenues from the sale of the electricity produced. Electric vehicles will have good growing markets in countries offering plentiful electric fuel cheaper than fossil fuels (now France, Norway, Switzerland, - in future Italy, Spain, Russia, Germany, China) Human capital opportunity costs of over-skilled defense workers working underskilled, underpaid jobs in the informal sector can be mitigated by earlier and more effective conversion planning and government assistance in financing and retraining for new ventures, as in China. Wherever cheaper than simple shutdowns, large state-owned military enterprises should be reorganized and consolidated or disaggregated to maintain their skill base, where they are adjacent to populated areas with growth markets and labor mobility. Where they are in isolated towns lacking adjacent growth industries, the alternatives are facilitating labor mobility to higher growth areas by relocation allowances (as in the US) and infrastructure development, or planting a new growth industry exploiting physical locational advantages (such as cheap energy for energy-intensive industries such as aluminum refining) in the otherwise dying town whose (defense) industry is shrinking and cannot be converted with modest investment. Germany and France can guard against migration of many of Russia's, Belarus's, and Ukraine's several million un- or underemployed former defense workers by investing in Russian and Ukrainian defense conversion job creation projects in those countries, where investment costs of creating jobs in the Russian and Ukranian economy may be less than creating them in Western Europe. Migration of highly qualified Russian nuclear weapons scientists to hostile countries turned out not to be the main threat. The most important nuclear threat is nuclear 'leakage' of fissile materials smuggled out of Russia. Training workshop resources could develop security technology to minimize nuclear leakage risk, also building up security technology businesses for Russia and export - now one of the fast-growing job categories in Russia - with technology transferred from weapons labs. Migration of highly qualified Russian nuclear weapons scientists to hostile countries turned out not to be the main threat. The most important nuclear threat is nuclear 'leakage' of fissile materials smuggled out of Russia. Training workshop resources could develop security technology to minimize nuclear leakage risk, also building up security technology businesses for Russia and export - now one of the fast-growing job categories in Russia - with technology transferred from weapons labs.