DSEi: the tip of the subsidy iceberg

Paul Ingram

The Defence Systems Equipment International (DSEi) is the highly-visible tip of a very large murky iceberg of UK government financial support for arms exports. Two years ago, in July 2001, the Oxford Research Group teamed up with Saferworld to publish The Subsidy Trap, which outlined how £420m of taxpayers' money was being used directly and indirectly annually to support the export of arms from Britain. That amounted to £4,600 for every job supported in defence exports.
Soon afterwards, in December 2001,senior MoD economists published with external academics their own cost-benefitanalysis of a reduction in arms exports. They suggested that the economic costsof reducing defence exports are relatively small and largely one-off.
Secondly, as a consequence, they suggest that the balance of argument aboutdefence exports should depend mainly on non-economic considerations. In his state-ment to the House of Lords on the matter the following month, Lord Bach, Ministerfor Defence Procurement, denied, despite the evidence, that there were any subsi-dies, but argued that in any case the prime reason for government support layin foreign policy considerations. It looked as if we had the government on the runover their claim that arms exports benefit jobs and the British economy.
Since then, as well as our own lobbying of government officials, the issue has beentaken up by CAAT in their "Shelling Out" campaign and by the Speak Outstudent activist group. Journalist and public awareness on the issue has risensignificantly. Previously the general assumption had been that although armstrading was frequently immoral, it was largely beneficial to the UK economy.Now, despite government denials, this has switched: it is immoral, has littlebenefit to the economy, but can be useful for foreign policy reasons. But this hardlyspeaks to the electorate, who frequently see such foreign adventures as the con-cerns of big business and the elite, the result of an unhealthy relationshipbetween New Labour and business.

Clear and unambiguous support

British government officials support military exports to anyone who will buy them--as long as they pass through the licensing system. True, licensing has beentightened recently with the Arms Export Control Act of 2002, but there remainmany holes. Even so, the use of taxpayers' money to promote exports, be it througharms fairs, official visits, promotional material, diplomatic lobbying or demon-stration must surely come under the microscope if the benefits to the economyare negligible or even negative. And this subsidy of promotion drives the cost ofweapons around the world down, enabling many to purchase weapons thatwould otherwise be out of their league. Our tax pounds go to driving armsexports and conflict.

Direct UK subsidies	£million
DESO Explicit support within the MoD, charged with promoting arms exports. It receives some fees from exporters, but its net cost is a clear subsidy	16
MoD Personnell Personnel are frequently used to demonstrate equipment to potential buyers (there are units devoted to such tasks); they will be there at DSEi!	10
Use of diplomats Diplomats and defence attaches spend significant time and resources promoting UK defence exports; increasingly the Foreign Office sees its role of promoting exports as central, and the defence sector receives particular attention	23
Official visits Visits by senior government officials, ministers and the royal family are frequently driven by the need to promote a particular arms deal.	20
Commissions and bribes Because of its secrecy, links with the heart of government and the value of individual contracts, arms dealing is particularly prone to corruption. Commissions and bribes, while destructive of good governance, are also tax-free. The figure given for the subsidy is the lost tax	64
ECGD Export credits, essentially insurance that exporters will receive their payments at the end of the contract, are provided to exporters by ECGD.	227
MoD procurement MoD frequently pays over the odds for British equipment, often with inappropriate features, in order that such equipment can be sold abroad.	60
TOTAL	420

Export credits

While much of the government's support is direct and clear, much is also complex,involving hidden subsidies. The British government's Export Credit GuaranteeDepartment's (ECGD) support for arms exports makes up more than half of thedirect subsidies. ECGD's very existence depends upon an ideological commitmentto financially supporting UK exports abroad, despite a lack of support for such policies from economists. ECGD is amechanism which enables the government to support favoured industries bysupplying insurance for overseas contracts at a premium level below the market rate.
Although they account for less than2% of all UK exports, arms make up between a third and a half of ECGD sup-port. Our subsidy calculations are based on the difference between the ECGD andthe market premium rates. If the government indeed had the market advantagesit claims it has to justify its involvement through ECGD, then it would be prof-itable for it to engage in bond market speculation, and could reduce our taxesaccordingly! ECGD's risk exposure is carried by the government's balance sheet.

MoD procurement

One of the key justifications for supporting exports is that Ministry of Defence militarypurchases from UK companies are correspondingly cheaper (as costs are spread overa larger production run). While there is some truth to this, many of the benefits areoverstated. Also, there is some evidence, not least in the recent purchase of outdatedHawk aircraft by the RAF, that purchasing is distorted by the desire to market equip-ment to overseas purchasers.
Not only this, but it is the policies ofstates like Britain, France and Sweden to support their own defence industries thatdrives the export of arms (their own defence market not being large enough tosupport the economies of scale required). It is not only the size of defence budgetswe should be challenging, but the favouritism extended to a small numberof domestic producers.

Internationally

The story is the same for arms exporting countries around the world. The trans-parency and the mechanisms used by governments to support its defence exportersmay vary, though some, notably export credits, are common to all. The latest studyin the US on subsidies across government was published in 1996. William Hartungof the World Policy Inistitute estimated that annual US government subsidies toarms exports amounted to almost $8 billion. This reflects its superpower status andthe more explicit use of military transfers to support allies such as Israel and Egypt.

Conclusion

Efforts to change the culture and assumptions of officials and the general publicinevitably take time. Whilst many within government circles accept that there aresignificant subsidies involved, they still believe that they are necessary to protect adomestic defence industry and Britain's standing in the world.
Ultimately, significant change will only happen when the public and officialsrecognise that maintaining Britain's position alongside the US through heavydefence spending--and the support of our domestic defence industry--comes at asignificant price, to both us and to those who buy our weapons, and, of course, tothose on their receiving end.

Paul Ingram is a Senior Researcher for the Oxford Research Group.
Oxford Research Group, 51 Plantation Road, Oxford OX2 6JE, Britain (+44 1865 242819; fax 794652; email org@oxfordresearchgroup.org.uk; http://www.oxfordresearchgroup.org.uk ).