Surging global military production

Business Standard, 15 October 2023

The expected Israeli actions in Gaza, layered on top of the war in Ukraine, have given an emphasis on military production in the global discourse. It is important to distinguish between high intensity war, where the protagonists are peer states, versus insurgencies.

Low intensity conflicts

The wars in Vietnam, Afghanistan and Iraq were battling insurgencies. In Vietnam, the US lost about 2500 dead per year. In Afghanistan, the Soviets lost an average of 1500 dead per year. The US lost 240 per year in Afghanistan and 220 per year in Iraq. These are the sorts of costs faced when a competent military faces irregulars or a much weaker opponent.

The conflict in Gaza will resemble these. Gaza has a population of 2 million and a per capita GDP in PPP terms of about $5500, which is even lower than India which is at $7100. There is no meaningful economy or tax base there. Hamas is supported by Iran and Russia, but these countries are weak in their own right, are absorbed with the war in Ukraine, and lack the logistics capacity to send supplies into Gaza which is fully encircled by Israel. Urban fighting will of course be painful, but there is no sense in which this is a war between peers. Hamas is analogous to an LeT, that succeeded on a horrendous terrorist attack. They are not a military force backed by an economy and a state.

High intensity conflicts

What does high intensity war look like? The war in Ukraine is the highest intensity conflict after 1945. The military death rates are roughly 50,000 per year for Ukraine and 80,000 per year for Russia. There is no comparison between this and the conflicts in Vietnam, Afghanistan, Iraq or Gaza.

For these reasons, the military production puzzles of the world are primarily shaped around the war in Ukraine. The requirements of equipment there are posing considerable stress upon production capacity. Ukraine requires about 1.5 million artillery shells and about 0.1 million drones per year. Russia is producing around 2 million shells a year and consuming about 4 million shells a year. Russian artillery barrels have a life of about 2500 rounds and tank barrels have a life of about 500 rounds. An extensive engineering system is required to repair or replace barrels.

Military production for a high intensity conflict

A short war can be managed out of inventories. Long wars are a test of the production capacity of economy. Russia is supported by North Korea and Iran, and has a low productive capacity when compared with Ukraine which is supported by all the advanced economies that add up to about 65% of world GDP.

This is a unique war in which photographs of many kills are in the public domain. At present, these add up to 12,573 pieces of vehicles and equipment on the Russian side and 4,585 on the Ukrainian side. Each of these 17,158 facts is backed by a photograph, is a `visually confirmed kill'. On the Russian side, the kill rate vastly exceeds production rates.

But the translation of the economic might of the advanced economies into defence production has proved to be hard. After 1989, defence production in the advanced economies had wound down. Private persons are wary about investing in new factories which will not be required once the Ukraine war ends in a year or so. Procurement processes in advanced economies have elaborate checks and balances. Hence, in the short run, there has been a scramble to find supplies on both sides.

This is how we have seen remarkable events like North Korean and Iranian supply to Russia, a rumoured Pakistani supply of about $1 billion of equipment to Ukraine, and one Russian ship allegedly getting filled with military equipment in South Africa.

In this setting, there are three implications for defence economics:

  1. All this defence demand will exert an expansionary effect into defence manufacturing firms and their suppliers, potentially all the way to Pakistani makers of 155mm artillery rounds. In the short run, these purchases are expansionary fiscal policy financed by borrowing.
  2. Thinking in macroeconomics, however, there is a tradeoff between producing guns vs. butter. When the USSR collapsed in 1989, the world reaped a peace dividend because productive capacity was moved away from military production to civilian production. With the re-emergence of large scale military production, this will exert an inevitable negative impact upon civilian consumption.
  3. In India, defence hardware is increasingly shifting away from Russian sourcing. There is an opening for Indian defence manufacturing in this global landscape. There are many poor countries who have relied on low cost Russian equipment, who are not able to transition to alternative sources on account of cost and installed base, who face difficulties where Russia is faltering on quantities, prices, and technical advancement. As Vasabjit Banerjee and Benjamin Tkach argued in May 2022, there is an opening for Indian production to obtain economic success and military influence in these markets by replacing their Russian sourcing. This can happen at three stages: First, to provide spares and stores that are plug compatible with Russian standards, then to offer inexpensive upgrades for Russian platforms that outmatch Russian offerings, and finally to transition into NATO standards at Indian-style prices.

Looking forward

So far, the global environment in defence economics is about the Ukraine war. Hamas is a bigger LeT, but not a meaningful state actor. There is a global scramble in defence manufacturing, with the equipment requirements in the Ukraine war. What else might unfold in coming days? Many an ageing strongman is in the situation of Putin in 2022: running out of popularity and running out of time. With right-wing nationalism hobbling the US, many a strongman may choose to initiate a new war. As an example, we should worry about how Xi Jinping's China might attack Taiwan or India. These wars would set off a new stage of complexity in defence production.

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