E C A A R – SA
ECONOMISTS ALLIED FOR ARMS REDUCTION

Executive Summary:

The late Oliver Tambo is reported to have described Armscor as a "frankenstein monster which cannot be reformed and must be destroyed." This is an organisation whose history and corporate culture epitomises the depravity of the apartheid era. The Cameron Commission of Inquiry found Armscor to be riddled by both corruption and mismanagement.

Armscor has been stripped of much of the dominance it once held over South Africa’s economic resources, but its corporate culture remains intact. In its efforts to evade the United Nations arms embargo during 1977--1994, Armscor became South Africa’s foremost practitioner and proponent of offsets (also referred to as industrial participations). This history and function is reflected in the Bill in terms of:

4 (1) (a) "defence industrial participation" means the process by which defence acquisition is used to leverage defence industrial and economic benefits for the Republic; and

4 (1) (j) establish a defence industrial participation programme management system.

Offsets are internationally notorious as a scam promoted by the armaments industry to fleece the taxpayers of both recipient and supplier countries. Offsets are incompatible with Section 217 (1) of the Constitution which declares:

When an organ of state in the national, provincial or local sphere o government or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective.

International experience shows that the only function which offsets perform for recipient countries such as South Africa is to provide political legitimisation for large expenditures on armaments by allowing policy-makers to point to apparent but ultimately non-existent economic benefits.

The government succumbed to Armscor’s promotion of offsets to justify the arms deal. It is, consequently, is now ensnared in massive corruption scandals described as "the litmus test of South Africa’s commitment to democracy and good governance."

Having exhausted all remedies through representations to parliamentarians, the executive and the Chapter Nine institutions, ECAAR-SA in November 2001 filed an application for cancellation of the arms deal on the grounds that it is strategically, economically and financially irrational, and thus constitutionally unlawful. We won the preliminary discovery case against the government, and are now preparing for litigation on the matters of substance.

ECAAR-SA urges the Committee to reject the Armscor Bill in its entirety.

The purpose of this bill is said to be:

to provide for the continued existence of the Armaments Corporation of South Africa Limited; to provide for the functions, accountability and finances of the Corporation; and to provide for matters connected therewith.

By contrast, the late Oliver Tambo is reported to have described Armscor as a "frankenstein monster which cannot be reformed and must be destroyed." General Constand Viljoen has admitted that Armscor executives and their political associates controlled South Africa’s economic resources during the 1980s. The journalist Ken Owen has commented:

The evils of apartheid belonged to the civilian leaders; its insanities were entirely the property of the military officer class. It is an irony of our liberation that Afrikaner hegemony might have lasted another half century had the military theorists not diverted the national treasure into strategic undertakings like Mossgas and Sasol, and Armscor and Nufcor that, in the end, achieved nothing for us but bankruptcy and shame.

As revealed at the Truth and Reconciliation Commission hearings, ecstasy, mandrax, thallium, cholera and anthrax – in quantities sufficient to cause epidemics – these are the realities of Armscor and its offshoot, Denel.

The Cape Town synods of the Anglican Church in 1990, 1993 and 1997 have adopted resolutions calling for a constitutionally demilitarised society. The Anglican Church has subsequently drawn attention to the culture of violence that afflicts our country including the proliferation of weapons. At the Cameron Commission of Inquiry into Armscor and elsewhere, it has called for a total prohibition on exports of South African armaments, for the dissolution of both Armscor and Denel and conversion of their facilities to peaceful purposes.

Economists Allied For Arms Reduction -- South Africa (ECAAR-SA) subscribes to these assessments. There should be no place in post-apartheid South Africa for an organisation such as Armscor, an organisation whose history and corporate culture epitomises the depravity of the apartheid era.

Literally the day after the United Nations arms embargo against apartheid South Africa was rescinded in May 1994, Armscor declared that it intended to treble exports of South African armaments "in order to earn foreign exchange and create jobs, and thus to contribute to the Reconstruction and Development Programme."

Armscor’s performance, fortunately, has fallen far short of its ambitions. Exports of armaments amount to less than 0.5% of South Africa’s exports, and less than 0.17% of GDP. Notwithstanding enormous investment of public resources and "hype," the armaments industry remains economically insignificant in South Africa, except in negative terms because of squandered resources.

Nonetheless, wherever in the world there is an especially dirty war, human rights activists now expect to find South African weapons. Algeria, Colombia and the countries of central Africa…The guidelines and rationale of the National Conventional Arms Control Committee have, sadly, proved to be an utter sham.

Indeed, the Minister of Defence told this committee last year that should countries [such as Saudi Arabia or Zimbabwe] seek armaments from South Africa, then commercial considerations would take priority over either human rights issues or the rights of South African citizens for information about such transactions.

Members of South African civil society are presently demanding the cancellation of arms contracts for with Britain and the United States that are engaged in an illegal war against Iraq. A march in Cape Town on April 5, 2003 demanding the end of arms sales to the US and UK drew over 15 000 people. The government so far refuses to comply. Minister Kader Asmal claims inexplicably that such exports comply with the NCACC’s principles and rationale.

Similarly, Denel: Somchem’s facility at Somerset West is reportedly working "flat out" to export artillery shells to India, despite the history of wars between India and Pakistan and renewed tensions between them.

Tambo’s description of Armscor was cast aside within months of the transition to democracy. In August 1994 Armscor was caught selling AK-47s and other weapons to Yemen for transshipment to Croatia. The AK-47s had originally been imported from China and supplied to Renamo and Unita as part of the apartheid government’s destabilisation of neighbouring countries.

The resultant Cameron Commission of Inquiry found that Armscor to be riddled by both corruption and mismanagement. Yet instead of disbanding it, the armaments industry was soon being described as the "respository of South Africa’s technological expertise." South Africans were told that irrespective of its apartheid origins, the armaments industry was a national asset that it would be foolish to destroy.

A few faces have changed at Armscor, but the apartheid-era culture remains intact. Sipho Thomo, Armscor’s chief executive officer, declares:

There is nothing wrong with trading in arms. Buying arms is like buying an insurance policy for rainy days. This is not about morality, but there is also a moral obligation to create and protect jobs in the arms industry. South Africa has as much right to manufacture and exports weapons as any other country.

Would Asmal or Thomo dare tell Algerian, Angolan, Congolese, Iraqi or Pakistani parents to their faces that the South African shells that killed their children provided someone with a job? Paragraph 4 (g) of the Bill links Armscor’s functions to the NCAC Act and, in so doing, highlights that NCACC has become a mockery of South Africa’s commitments to human rights..

The "insurance" during the apartheid era in the forms of nuclear bombs, the chemical and biological warfare programme and the destabilisation of neighbouring countries cost hundreds of billions of rands, and an estimated two million lives. The armaments industry argues: "if we don’t sell weapons, someone else will." Yet no government promotes prostitution or drug trafficking as a fasttrack to job creation or economic prosperity.

The armaments industry is capital, not labour-intensive. It is an exceptionally poor creator of jobs. It is also a high skill industry, and thus aggravates South Africa’s shortage of skilled labour. It does virtually nothing for unskilled, unemployed labour except to drain financial resources that could be better used for social upliftment.

Armscor has been stripped of much of the dominance it once held over South Africa’s economic resources. Its manufacturing was hived-off into Denel in 1992. Its control over exports was removed following the fiasco in 1994 that led to the Cameron Commission.

Nonetheless, it continues to occupy test ranges such as Alkantpan and other properties, and to operate its IMT facility in Simon’s Town. Those assets should be redeveloped to the primary benefit, not of property developers, but of neighbouring communities. Simon’s Town is ideally placed for redevelopment as a marine and Antarctic research centre.

The public, even Parliament, continues to be forbidden information about Armscor’s chemical and biological warfare programme. If still functioning even on a limited scale, it should be closed down forthwith before it falls into the hands of political malcontents or international terrorists.

Industrial Participation Programmes (Offsets):

In its efforts to evade the United Nations arms embargo during 1977–1994, Armscor became South Africa’s foremost practitioner and proponent of countertrade (offsets). During the 1980s, Iraq and South Africa collaborated in arms-for-oil trade reported to have amounted to US$4.5 billion. The major South African export to Iraq was G5 artillery whose warheads, it has been suggested, were designed to carry both neutron and biological weapons. AK-47s and other weapons, probably including landmines, were imported from China for distribution to Renamo and Unita against payment in iron ore.

 

Over time and "refinement," countertrade has been renamed offsets and, in turn, "industrial participation." This history and function is reflected in the Bill in terms of:

4 (1) (a) "defence industrial participation" means the process by which defence acquisition is used to leverage defence industrial and economic benefits for the Republic; and

4 (1) (j) establish a defence industrial participation programme management system.

Offsets are internationally notorious as a scam promoted by the armaments industry to fleece the taxpayers of both recipient and supplier countries. Armscor declared in 1995 that countertrade worth R4.8 billion in respect of four Spanish corvettes to be purchased for the SA Navy for R1.7 billion would create 23 000 jobs. Neither Armscor nor the SA Navy was able to quantify the magic formula which, patently, was merely a sop to win public approval.

Analysis by showed that roughly half of the countertrade offer related to Spanish imports of coal and, at best, might create 600 jobs. Analysis by the SA Deep Sea Trawling Industry Association regarding the fishing proposals found that instead of job creation, the countertrade proposals would actually have destroyed South Africa’s fishing industry which employs about 85 000 people.

The purchase of the corvettes was "suspended" in 1995 because of public opposition that demanded delivery of socio-economic priorities such as housing before expenditures on warships. Temporarily thwarted, Armscor in conjunction with the Department of Trade and Industry then succeeded in the adoption in 1997 of the "Industrial Participation Programme" as the basis of South Africa’s economic policies.

As a result, all government foreign procurements in excess of US$10 million are now subject to Defence Industrial Participations (DIPS) and National Industrial Participations (NIPS), the stated intention being to use government procurements to leverage foreign investments into South Africa’s industrial development.

This is the background to the government’s decision in 1999 to spend R29 billion on warships and warplanes from Germany, Britain, Sweden and Italy against the economically absurd proposition that the European armaments industry would then provide offsets worth R110 billion to create 64 165 jobs.

The Coalition for Defence Alternatives, of which ECAAR-SA is a member, repeatedly warned cabinet ministers and parliamentarians of the consequences. Letters to President Nelson Mandela and Deputy President Thabo Mbeki are attached. Unfortunately, such warnings were ignored.

Armscor’s chairman, Ron Haywood repeatedly declared that the Europeans were so caught up in offsets and "Madiba magic" that they would pay back R4 for every R1 spent on armaments. "What businessman," Haywood would say, "could turn down such a deal." It is appalling that our government officials and ministers were so gullible.

International experience shows that the only function which offsets perform for recipient countries such as South Africa is to provide political legitimisation for large expenditures on armaments by allowing policy-makers to point to apparent but ultimately non-existent economic benefits.

The government is, consequently, now ensnared in massive corruption scandals described as "the litmus test of South Africa’s commitment to democracy and good governance." The former chair of the Joint Standing Committee on Defence has been sentenced to four years’ imprisonment.

Having exhausted all remedies through representations to parliamentarians, the executive and the Chapter Nine institutions, ECAAR-SA in November 2001 filed an application for cancellation of the arms deal on the grounds that it is strategically, economically and financially irrational, and thus constitutionally unlawful. We won the preliminary discovery case against the government, and are now preparing for litigation on the matters of substance.

Amongst our contentions is that offsets are incompatible with Section 217 (1) of the Constitution which declares:

When an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective.

Despite the arms deal scandals, Armscor continues to wield undue influence over government policy-makers and cabinet ministers. It continues to promote industrial participations (offsets) as one of its core functions. As the following extracts reveal, international experiences find offsets to be totally inappropriate either for military procurements or for economic development. Offsets are, instead, notorious for corruption and economic malpractices.

A. Transparency International UK declares:

The unusual nature of the arms markets is also illustrated by the prevalence of offsets, or industrial participation agreements, where the sale is conditional on foreign investment by the bidding company either in local enterprises that will manufacture components for the deal or in unrelated enterprises. Such agreements are outlawed in all other government procurement by Article XVI of the WTO Plurilateral Agreement on Government Procurement but offsets are often the deciding factor in defence contracts. This was true in the South African purchase where the more expensive BAe Hawk was considered a better option because of the accompanying offset deals.

The value of offsets is certainly questionable and most exporters are opposed to them. Offsets are designed to generate the foreign exchange necessary to make the purchase. However, problems and delays occur as co-ordination between the officials responsible for implementation and the contracting companies is often lacking, there are no penalty clauses in the case of non-fulfillment and the lack of technological infrastructure has often prevented successful absorption of technology by any but the largest companies. In the non-comparable, non- transparent arrangements that surround them, the potential for corrupt manoeuvres is extensive. Companies use offsets as an alternative to reducing prices. Equally,

importing governments can use them as alternative justification for awarding the contract to the more expensive bidder. The combination of these factors can create situations where offset arrangements conceal hefty commissions.

Recommendation: The UK should work with other exporters within the WTO to outlaw offsets in defence procurement.

  1. Anthony Sampson is a leading international author who has a particular interest in South Africa. His work includes the authorised biography of Nelson Mandela, and his book entitled The Arms Bazaar remains a definitive account of the corruption and malpractices prevalent in the international armaments industry. He states:

SOUTH AFRICAN ARMS DEAL

From the evidence I have seen and heard over the last two years the arms deal between the South African government and several European companies showed clear signs of excessive pressure from both companies and foreign governments, which the South African government did not effectively withstand. It resulted in an agreement which has not been shown to be in the best interests of South Africa, or to correspond with its realistic defence needs.

I must stress that it in my experience of investigating and covering the arms trade, this deal follows a familiar pattern of pressure and corruption, originating with foreign companies and apparently condoned, if not supported, by their home governments. In particular the marketing methods of BAe Systems (formerly British Aerospace) have frequently been questioned elsewhere, most notably in the securing of the huge Al-Yamamah arms deal in Saudi Arabia in the 1980s, when there were allegations of huge commissions being paid to middle-men close to the Saudi Royal Family. The details of these and many other payments have been concealed by the exceptional secrecy which surrounds arms companies. But when reliable evidence has emerged, as in the hearings of the US Senate in the 1970s, it has shown the relentless pressure of competing arms companies in the developing world, including the payment of bribes, commissions and other incentives to ensure the support of the local government. There have also been recurring cases of companies promising ‘offset’ agreements, to invest in other industries in client countries, which have made exaggerated claims, and proved much less substantial than promised, as in the Saudi arms deal.

In this historical perspective, the South African arms deal is not unique in its shortcomings; and the blame must be shared by both foreign companies and governments for exploiting their financial leverage. But I believe the South African government should have been aware of the dangers of corruption and excessive pressure in this deal, particularly in the light of the extensive corruption in arms dealing under previous apartheid regimes. And the evidence I have seen suggests there is a strong basis for invalidating and renegotiating the agreement.

Anthony Sampson London July 30 2002.

C. Robert Neil Cooper is Principal Lecturer, Department of Politics and International Relations at the University of Plymouth, England, and is internationally recognised as one of the leading academic authorities on offsets. He notes:

1. The use of offsets in contract negotiations means that contracts may not necessarily be won by the best equipment, as judged on price, performance and reliability. From the perspective of organisations such as the World Trade Organisation, the IMF and World Bank, which traditionally preach a neo-liberal approach to the global economy, offsets are therefore problematic because they are market distorting, inefficient and often designed (particularly in developing countries) to avoid the fundamental reform of economic structures necessary to generate growth.

2. Any costs incurred by arms companies as a result of offset deals negotiated on defence sales are simply passed onto the recipient by raising the contract price of the equipment sold. In other words, whilst some transfer of jobs and technology may well occur this is factored into the original contract price by defence companies. This is particularly the case where penalties are written into the contract for failure to meet offset obligations. Contractors will invariably attempt to include the cost of such penalties in the original price of the defence equipment they are selling, effectively insuring themselves against the costs of non-compliance. Contractors may then decide later on that it is cheaper to pay any fines arising from a penalty clause than it is to meet their offset obligations. Alternatively, the reputational costs involved for both parties in admitting failure to achieve the offset requirements may encourage them to subsequently amend the original contract requirements by, for instance, extending the timeframe in which the offsets have to be delivered or by loosening the contract in other ways.

3. The level of job creation and technology transfer over and above that which would have occurred without offsets may well be minimal.

4. A further complaint about offset-related work is that it is often of a basic

nature – often referred to in the defence industry as ‘metal bashing’ work.

5. Even where offset work is placed with companies in a recipient state it may

simply disappear at the conclusion of an offset obligation as it is moved

elsewhere to satisfy the offset requirements demanded by a new customer.

Consequently, not only do recipients pay more and get substantially fewer

economic benefits than claimed but many of these benefits may be short-term

and fleeting. In this context it may be more sensible for recipients to either

abandon offsets as a condition of contract and use the resultant savings in

purchase price to generate domestic growth internally (e.g. through

government investment). If however, purchasers insist on offsets as a condition

of contract then the optimum strategy is probably one that requires a relatively

low level of offsets (as a percentage of the contract) but which insists that

these are of high quality.

    1. In developed countries which posses a wide range of civil industries and an
    2. extensive and sophisticated defence industrial base, the problems noted above can sometimes be ameliorated as it may be relatively easy to identify clear investments that would make commercial sense. In developing countries which often posses relatively smaller and less mature civil industries, poorer infrastructure and a less sophisticated and less extensive defence industrial base the problems noted above can be particularly apparent. Indeed, defence contractors often complain that failure to meet offset obligations does not reflect a lack of commitment on their part, but a lack of identifiable investment opportunities in the recipient state.

    3. In cases where procurement decisions have been made as a result of
    4. corruption offsets also represent a potentially useful tool for the provision of illicit rewards (e.g. by the provision of an offset contract to the relative or associate of a key government official).

    5. Offsets can also provide apparent legitimisation for high levels of
    6. expenditure on prestige defence projects, which might otherwise not be authorised on the grounds of cost. In this context it should be noted that there is now a substantial literature on the economics of military expenditure and much of it (though not all) suggests that high levels of defence expenditure have a negative effect on general economic growth. Any economic benefits derived from offsets therefore, also have to be judged against the potential costs to economic growth resulting from the additional defence expenditure incurred as a result of purchasing the defence equipment in the first place.

    7. Of course, recipients may derive non-economic security benefits from the

offsets relationship, in particular the creation of an autonomous defence industrial base which frees national security strategy from the constraints arising from dependence on overseas arms suppliers. Even this proposition can be questioned however. First, given the rising costs of military equipment and the globalisation of the defence industry it is debatable whether any country now has the necessary combination of resources, technological capability and will to maintain the kind of wide-ranging defence industrial base necessary to attain complete autonomy. Even the US is becoming increasingly dependent on overseas suppliers, particularly for the supply of sub-components. At best, states can only hope to attain relative autonomy by avoiding dependence on overseas suppliers for key items of military equipment considered essential to national security. Second, some commentators have argued that, despite the cold war buyers market, suppliers are still able to retain their control of cutting edge technology. Consequently, states attempting to use offsets as means to build up their defence industries will, nevertheless, be forever dependent on the major arms exporters for access to key elements of both present day and next generation military technology.

D. Lloyd J Dumas, Professor of Political Economy at the University of Texas at Dallas attests:

Even with offsets, the South African arms deal is clearly economically irrational on the following grounds:

  1. The definition of rational activity in economics is activity that accomplishes the goals for which that activity is undertaken. If the goal of the arms deal is to improve SA’s strategic security, and there is no plausible foreign military threat to SA that can be addressed by the acquisition of such equipment, the arms deal is irrational in economic terms. In that case, the issue of offsets is wholly irrelevant, even if they were real.
  2. If the goal of the arms deal is to improve SA’s economic situation, then economic rationality requires that the economic benefits of alternative expenditures of equivalent resources be compared to those of the arms deal, and the expenditures that achieves the greatest net economic benefit must be chosen.
  3. If the criterion of economic benefit is to be the number of jobs created, there have been many studies in many places that have repeatedly shown that military expenditures generate fewer jobs than almost all alternative forms of government expenditure. That was long ago well established.
  4. The idea that offsets will more than make up for the lesser job creation of military expenditures relies on the contention that these offsets can be guaranteed, that they will not be cancelled or even sharply reduced. This is an extremely risky business. What means can be provided that would guarantee this, in the face of unpredictably changing economic and political realities in the countries that are offering the offsets or in their economic and political allies?
  5. More importantly, if the criterion of economic well being is to be the furtherance of SA’s economic development, who will get the jobs that might be created? This will determine the distributional effects of any economic benefit. If those who will benefit are primarily those who are already amongst the best off economically, then the arms deal will merely extend or exacerbate distributional inequities, and therefore cannot be considered a contribution to real economic development.
  6. Alternative expenditures on badly need infrastructural development, health care, housing, education could be carried out in ways that provide double development-oriented economic benefits: Taking care of pressing human needs AND providing for job creation that will target the part of the population that is economically disadvantaged. Whatever the distribution of the jobs created might be, alternative expenditures of equivalent resources would be likely to provide more benefit, both in terms of the short-term alleviation of economic suffering and the long-term development of the SA economy. The economic case against arms expenditures and in favor of alternative resource use is overwhelming at this last and most basic level.

E. Paul Dunne and Richard Haines, respectively of the Centre for Applied Research in Economics at Middlesex University Business School in England and of the Development Studies Group at the University of Port Elizabeth have jointly in October 2001 written a paper entitled Defence Procurement and Regional Industrial Development in South Africa: A Case Study of the Eastern Cape.

Offsets or industrial participation have become an increasingly important part of arms procurement with the promise of economic benefits often being an important justification of spending large amounts of public funds. This is certainly the case in South Africa where a recent procurement package promises considerable economic benefits. These benefits are, however, open to question and the limited but growing research on the subject does tend to cast doubt on the net value of defence offsets to national economies. An important aspect of any offset agreement is its impact on industrial and economic development at sub-national level, but this has often been ignored in the literature. This paper contributes to the continuing debate by undertaking a case study of the South African experience, focusing on the Eastern Cape and, in particular, the Nelson Mandela metropolitan region. It finds that, while not wholly without merit in attracting and focusing investment, industrial participation schemes can deform efforts at more integrated development at sub national levels and further fragment the terrain for industrial policy conceptualization. As a result they seem to offer little that might challenge the existing inequalities in South Africa’s space economy. Overall, the paper finds that, while the scheme is still in its early stages, its present and future impact at national and local levels is likely to be more problematic than is often recognised.

F. Patrick Bond: Unsustainable South Africa, University of Natal Press, Pietermaritzburg, August 2002

Two days before leaving office, the former Minister of Defence Joe Modise initialed the purchase of three German submarines, the primary offset for which was declared to be the construction of a US$1 billion stainless plant at Coega, some 25 kilometres from Port Elizabeth. According to media statements at the time, 16 251 jobs were to have been created as offsets for the submarine purchases.

Construction of a deep water harbour and metallurgical centre at Coega ranks as the flagship offset project associated with the arms procurement package. The German steel conglomerate Ferrostaal was to construct the stainless steel plant, and to produce steel for export to Germany. The world steel industry has however, been in deep depression for many years. Despite heavily subsidized electricity and water as inducements to locate at Coega, the scheme has now been abandoned as financially unviable.

To replace the Ferrostaal stainless steel plant, a French company Pechiney is now being sought for construction of a US$1.6 billion aluminium smelter at Coega. South African taxpayers are expected to subscribe 50% of the construction capital, and consumers are then expected to subsidise the smelter’s massive electricity consumption. There is very considerable surplus aluminium smelting capacity internationally, with 70 plants around the world now reported to be operating at losses. Although Pechiney had nothing to do with the arms deal, the smelter will apparently qualify as an "offset" because the points are transferable.

Professor Patrick Bond’s recently-published book entitled Unsustainable South Africa includes a substantial chapter on the negative financial and environmental consequences of Coega. It declares:

Environmentally, the costs of the Coega projects in water consumption, air pollution, electricity usage and marine impacts are potentially immense. The scale of the pro-corporate infrastructure to be constructed by the state from scratch is nearly unprecedented in Africa. Many other long-standing environmental concerns remains unaddressed. At a time global warming is under investigation, the proposed aluminium smelter would be a brutal attack on the world’s environment.

G. The Spanish corvettes 1994/1995:

In 1994/1995 the South African Navy proposed to buy four Spanish corvettes at a cost of R1.7 billion. The proposal was suspended in June 1995 because of public opposition. In return for purchases costing R1.7 billion, the Spaniards were to provide offsets valued at R4.8 billion which, it was claimed, would create 23 000 jobs. Neither Armscor nor the SA Navy was able to quantify the job formula.

In addition to increasing Spanish purchases of coal, the offsets focused on the development of South Africa’s fishing industry amongst underprivileged communities. Essentially, Spain proposed to build 30 fishing trawlers and to fund them with low interest foreign currency loans. Two massive fish processing factories would be built on the Cape West Coast, and exports to Spain were to be guaranteed.

Fishing industry analysis of the offsets calculated that the annual harvest of hake required by the two factories would have to increase from 140 000 to 250 000 tons. The consequence of such overfishing would however, have been the final collapse of the South African fishing industry which employs about 85 000 people.

Only very narrowly and because of public protest did South Africa gain a four year respite from the Spanish corvette proposals, and the 23 000 jobs they were supposed to create. The case illustrates the unintended consequences of offsets promoted by the armaments industry and bureaucrats of the Department of Trade and Industry. The former Minister of Defence, Joe Modise in August 1995 acknowledged the validity of the fishing industry analysis.

Despite this experience, in 1997 Armscor combined with the Department of Trade and Industry to establish the Industrial Participation Programme (offsets) as compulsory government policy. Members of the military establishment have subsequently conceded that unsubstantiated but glowing benefits of offsets were promised to overcome public opposition to the rearmament programme.

H. ANC opinion survey:

In a report entitled "Can South Africa’s democracy survive its history and political culture?" commissioned by the Helen Suzman Foundation and released in July 2002, Professor Laurence Schlemmer found that 62% of ANC voters want the arms deal cancelled, 19% wanted it cut, and only 12% support it.

I. Economists Allied For Arms Reduction held a conference in Cape Town during September 25 - 27, 2002, and entitled Defence Offsets and Economic Development. The conference is believed to have been the first of its kind anywhere in the world to examine the application of offsets as a contributor to the international proliferation of armaments. About 35 international and local academics attended, and all papers presented agreed that offsets are economically irrational and inappropriate as government policy to promote economic development. A statement issued by Professor Geoff Harris of the University of Natal noted:

The R30 billion arms purchase agreements signed with a number of European arms producers in late 1999 relied heavily on offsets which are common in international arms contracts.

These offsets, which provide some return benefits to South Africa, took three forms. The most obvious is direct offsets, where local firms are contracted to produce components for the vessels and aircraft. Indirect offsets occur where European producers agree to purchase other (non-military) goods from South African producers. The third type is new foreign direct investment in South Africa by European arms producers or associated companies.

Together, these offsets were estimated by the Department of Trade and Industry to result in R104 billion in net economic benefits to South Africa and 65 000 additional jobs, and these figures were crucial in cabinet decision to approve the arms purchases.

An international conference held in Cape Town, sponsored by the US-based

Economists Allied For Arms Reduction, examined the links between offsets and South Africa’s development.

Professor Jurgen Brauer pointed out there are many actors and interest groups involved in an arms deal. He argued that the role of the economist is to represent the interests of society as a whole, rather than any one group. In economic terms, this means estimating the value of the various estimated benefits from offset arrangements and then deducting the costs of the arms purchases in order to estimate the net effect on society – the net social benefit.

So an important question is why didn’t the South African government simply buy "off the shelf" and pay a lower price? The answer is that it believed that the estimated benefits of the offsets outweighed the higher costs. New foreign investment and jobs have been mentioned, to which may be added technological transfer. That is, by being involved in the production of components, and through new foreign investment, South Africa would keep abreast of technological advances elsewhere. In addition, some people would argue that it is important to maintain a South African defence industry for strategic reasons.

According to free trade principles espoused by the World Trade Organisation, offsets are a bad idea. They result, Professor Ann Markusen argued, in both microeconomic and macroeconomic distortions. Professor Paul Dunne believes that most offset deals have involved big overestimates of the benefits in fact received by the arms purchasing country. While they remain common in arms purchase agreements, it is worth noting that a number of countries have decided not to be involved with them. That is, they prefer to buy "off the shelf" and forgo the potential benefits of offsets. The reason they give is that the potential offsets have not been forthcoming.

Is South Africa reaping the hoped-for benefits from its arms purchase agreement? The jury is still out on this but there are some worrying signs that some European arms manufacturers are, in effect, reneging on their commitments and claiming offset credits for benefits which would have happened in any case. Paul Dunne argues, for example, that the joining of British Aerospace and Thomson-CSF with South Africa’s Denel would almost certainly have occurred without the arms deal, given the clear benefits these foreign firms received from such a linkage.

Research led by Professor Richard Haines of the University of Port Elizabeth has found that the flagship non-arms project – the Coega Industrial Development Zone – will require as much as R5 billion of additional government infrastructure development to make it viable. The initial plan of a US$1 billion stainless steel plant as an offset for the purchase of three German submarines has been cancelled, given excess capacity in the world steel industry. Every time this sort of thing happens, the net social benefits of the arms deal are reduced.

The conference reached three conclusions of relevance for countries such as South Africa. First, a domestic arms industry will inevitable require heavy government subsidies and this has to be weighed up against its strategic value. Second, arms purchases must be justifiable in defence terms and never in economic terms. Third, if offset arrangement are entered into, it is most important that they closely complement national industrial strategy. Finally, it will be a long time before the final verdict on these offsets will be made known. Foreign arms producers have up to eleven years to fulfill their offset obligations.

The papers are now posted on the ECAAR website. The papers are also to be published in book form which will available later in the year.

The Bill brings into question Armscor’s very existence. Unfortunately, nine years have been squandered during which time Armscor has been responsible for massive economic and political damage to South Africa’s credibility. It is however, not too late to take cogniscence of Oliver Tambo’s wisdom.

One might suggest, not totally tongue-in-cheek, that Armscor’s massive headquarters building in Pretoria should be publicly imploded as a symbolic burial of the ghosts of the apartheid era. Oliver Tambo was right. Armscor is a frankenstein monster that cannot be reformed and must be destroyed.

ECAAR-SA urges the committee to reject the Armscor bill in its entirety, and to initiate Armscor’s disbandment.

 

Terry Crawford-Browne

April 2003

Patrons ECAAR -- South Africa

Rhoda Kadalie 3B Alpine Mews, Box 60542

Human Rights Activist High Cape, Cape Town 8001

Njongonkulu Ndungane Tel: +27-21-465-7423

Archbishop of Cape Town e-mail: ecaar@icon.co.za

website: ecaar.org/za

Chair

Terry Crawford-Browne

Written submission to the Parliamentary

Portfolio Committee on Defence

Trustees ECAAR--USA

*Oscar Arias

*Kenneth J. Arrow

William J. Baumol

Barbara Bergmann

John Kenneth Galbraith THE ARMSCOR BILL B18 -- 2003

Robert Heilbroner

Walter Isard

*Lawrence R. Klein

Robert S. McNamara

*Franco Modigliani

*Douglass C. North

Robert Reich

Robert J. Schwartz Terry Crawford-Browne

*Amartya Sen April 7, 2003

*Robert M. Solow

*Joseph Stiglitz

*James Tobin

* Denotes Nobel Laureate

Affiliate Chairs

Yoginder Alagh, India

J. Paul Dunne, United Kingdom

Jaques Fontanel, France

James K. Galbraith, United States

Akira Hattori, Japan

Kanta Marwah, Canada

Stanislav Menshikov, Russia

Alex Mintz, Israel

Aedil Suarex, Chile

Piet Terhal, Belgium/Netherlands

David Throsby, Australia