INDUSTRIAL RESTRUCTURING AND DEFENCE CONVERSION

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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

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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
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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.
        
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Copyright 1993 NATO

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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.