The Impact of Arms Transfers on Poverty and Development Report, September 2004

The impact of arms transfers on poverty and development Report, September 2004

Mike Bourne Malcolm Chalmers Tim Heath Nick Hooper Mandy Turner Department of Peace Studies

The impact of arms transfers on poverty and development, September 2004

Contents

Acronyms 3

Acknowledgements 4

Executive summary 5

1. Introduction 9 1.1 The Armed Violence and Poverty Initiative 9 1.2 Arms transfers and poverty 9 1.3 Definition and scope 11

2. Impact of arms transfers on military expenditure 14 2.1 Introduction 14 2.2 The impact of military spending 14 2.3 Putting the costs of arms transfers in context 16 2.4 Arms transfers and economic modernisation 17 2.4.1 Offsets 17 2.4.2 Labour markets 18

2.5 The full costs of arms purchases 19 2.5.1 New for old? 19 2.5.2 Off-budget purchases 19 2.5.3 Military aid and financing arrangements 21 2.5.4 Arms transfers and foreign exchange 21 2.6 Are arms imports cheaper than domestic production? 21 2.6.1 Self-sufficiency and arms proliferation 21 2.7 Conclusion 22

3. Impact of arms transfers on internal conflict dynamics 23 3.1 Introduction 23 3.2 Strengthening state capacity to combat crime and non-political violence 24 3.3 Impact of arms transfers on conflict dynamics 24 3.3.1 Deterrence effect? 25 3.3.2 Ensuring peace? 25 3.3.3 Destabilisation? 26 3.3.4 Defeating a rebellion? 26 3.3.5 Ensuring victory? 26 3.3.6 Escalating violence? 27 3.3.7 Forcing governments to negotiate with rebels 29 3.4 Contributing to extent and severity of human rights abuses 29 3.5 The costs of conflict 30 3.5.1 Impact of conflict on development 30 3.5.2 Scale of violence 32 3.6 Leakage and Diversion: Licit to Illicit 32 3.7 Conclusion 33

1 The impact of arms transfers on poverty and development, September 2004

4. Impact of arms transfers on inter-state conflict dynamics 35 4.1 Introduction 35 4.2 Arms transfers and inter-state war 35 4.3 Protection of borders and peacekeeping capacity 36 4.3.1 Dealing with conflict spillover 36 4.3.2 Combating organised crime 36 4.3.3 Enhancing peacekeeping capacity 36 4.4 Arms transfers and belligerent state behaviour 37 4.5 Arms transfers and arms races 37 4.5.1 Ethiopia/Eritrea 38 4.5.2 Taiwan/China 38 4.5.3 South America 38 4.5.4 India/Pakistan 39 4.5.5 The cost of arms races 39 4.6 Inter-state rivalries and the “multiplier effect” 39 4.6.1 Inter-state weaponry 40 4.6.2 Regional multiplier effect of civil wars 40 4.7 Conclusion 41

5. Impact of arms transfers on levels of corruption 42 5.1 Introduction 42 5.2 Corruption in the arms trade 42 5.2.1 What do we mean by corruption? 43 5.2.2 Bribes and commissions 43 5.3 Causes of corruption 43 5.3.1 Supply side – “push” factors 43 5.3.2 Demand side – “pull” factors 44 5.3.3 Do offsets increase potential for corruption? 44 5.3.4 Anti-bribery measures 45 5.4 Corruption and economic growth 46 5.5 Corruption, inappropriate purchases and higher prices 46 5.6 Supporting corrupt regimes 47 5.7 Conclusion 48

6. Arms transfers to developing countries: a balance sheet 49 6.1 Implications for export licensing 49

Bibliography 51

Boxes and Tables

Box 1 £3bn arms package for South Africa 20 Box 2 How transfers to the Philippines are helping to escalate conflict 28 Box 3 Angola 1999 – did arms transfers help end the conflict 31 Box 4 Bofors 1986 – the deal that shocked India 45

Table 1 Top 5 upper middle income arms importers 1997-99 ($) 13 Table 2 Top 4 UMIC arms importers 1999: arms imports as a % of total imports 13

2 The impact of arms transfers on poverty and development, September 2004

Acronyms

AVPI Armed Violence and Poverty Initiative DFID Department for International Development ECOMOG Economic Community of West African States Monitoring Group EU European Union FMLN Farabundo Marti National Liberation GDP Gross Domestic Product GPA Agreement on Government Procurement IDF Indigenous Defensive Fighter IMF International Monetary Fund LIC Low Income Country LMIC Lower-Middle Income Country LTTE Liberation Tigers of Tamil Eelam MILF Moro Islamic Liberation Front NGO Non Governmental Organisation PRGF Poverty Reduction and Growth Facility RUF Revolutionary United Front SA South Africa SALW Small Arms and Light Weapons UK United Kingdom UN United Nations UNAMSIL UN Mission in Sierra Leone UNDP UN Development Programme UNITA Union Nacional por la Independencee Totale do Angola WMEAT World Military Expenditure and Arms Transfers WTO World Trade Organisation

3 The impact of arms transfers on poverty and development, September 2004

Acknowledgements

This report was prepared by the Centre for International Cooperation and Security based in Bradford University’s Department of Peace Studies. It is part of a wider project – the Armed Violence and Poverty Initiative – which is being funded by the UK government’s Department for International Development (DFID). Special thanks to Thom Oommen for helping to prepare this report and to Professor Keith Krause, Professor Ron Smith, Geraldine O’Callaghan, Charlotte Scawen and Richard Haviland for comments on various drafts. Although it has not been possible to incorporate every one of their suggestions, we are deeply indebted to them all for the time and effort they have put into helping to improve the paper. The analysis and opinions expressed in this report are those of the authors and do not necessarily represent the views or policy of DFID or the UK government.

4 The impact of arms transfers on poverty and development, September 2004

Executive summary

This report was prepared by the Centre for International Cooperation and Security based in Bradford University’s Department of Peace Studies. It is part of a wider project, the Armed Violence and Poverty Initiative (AVPI), which is being funded by the UK government’s Department for International Development. There appears to be a close correlation between levels of armed violence and poverty, but to date this has not been fully documented or analysed. The AVPI aims to fill that gap.

The AVPI is made up of four projects: 1) A Briefing Papers series on armed violence and poverty reduction measures in the areas of DDR (Disarmament, Demobilisation and Reintegration), SSR (Security Sector Reform), Conflict Assessment, and Rural Livelihoods. 2) An assessment of the impact of small arms projects on arms availability and poverty. 3) A research project which documents and analyses the circumstances in and processes by which armed violence exacerbates poverty and development. 4) This paper, which is the result of a research project documenting the impact of arms transfers on poverty and development.

This Initiative, which expanded beyond DFID to involve a number of donor agencies and NGOs, grew out of a concern to understand the problems created by arms availability and their violent use, and of the ways in which measures to reduce armed violence can be integrated into poverty reduction work at both policy and programme level. This paper on the impact of arms transfers will be used to encourage and enable DFID country programmes to assess whether a proposed arms transfer is likely to impact negatively on poor people, poverty and poverty reduction programmes.

Further analysis of the interrelationship between the findings of this paper, and those of the AVPI as a whole, can be found in the AVPI Synthesis Report.

In recent years, both governments and civil society organisations have become increasingly concerned at the potentially negative impact of arms transfers on poverty and development.1 Perhaps the clearest indication of this concern has been the European Union’s adoption, in 1998, of a Code of Conduct for Arms Exports. This specifically calls upon member states to assess “the compatibility of an arms export with the technical and economic capacity of the recipient country, taking into account the desirability that states should achieve their legitimate needs of security and defence with the least diversion for armaments of human and economic resources.” This criterion (“Criterion 8”) in turns draws on the UN Charter itself, which refers to the responsibility of its member states to “promote the establishment and maintenance of international peace and security with the least diversion for armaments of the world’s human and economic resources”. The EU Code of Conduct requires Member States to look to “relevant sources such as UNDP, World Bank, IMF and OECD reports” to determine “whether the proposed export would seriously hamper the sustainable development of the recipient country” and to “consider in this context the recipient country's relative levels of military and social expenditure, taking into account also any EU or bilateral aid.”

1 DFID (2000); Control Arms (2004).

5 The impact of arms transfers on poverty and development, September 2004

Yet the potential impacts of arms transfers on poverty and development extend well beyond those covered in Criterion Eight, which is concerned primarily with the opportunity costs that they involve. Crucially, arms transfers can affect the occurrence, nature and outcome of armed conflicts (both intra- and inter-state), which in turn can have a significant impact on levels of poverty. In some cases, arms transfers can contribute to peace and development by deterring rebellion and aggression, strengthening legitimate security functions, and helping governments combat crime and violence. At the same time, arms transfers also have the capacity to directly and indirectly undermine development, by inducing insecurity, contributing to abuses of power, and diverting arms into illegitimate hands. Even in the absence of large-scale armed conflict, arms transfers can affect the capabilities of government security forces, with knock-on consequences (positive and negative) for human security and poverty.

Arms transfers may also contribute to a deepening of corruption in recipient societies, with negative consequences for economic growth and development. Corruption in the arms trade increases recipient costs and undermines the links between arms supplies and legitimate security requirements. The benefits of corruption in the arms trade also tend to be distributed in a highly inequitable fashion.

This paper is therefore based on the assumption that, in order to research and document the impact of arms transfers on poverty, one needs to assess this relationship in all its main dimensions. Accordingly, it is organised around four key impacts:

First, the impact of transfers on military expenditure, and hence on the diversion of resources that could be available for poverty reduction (see Section 2). Second, their impact on the dynamics of internal conflict and violence, which then impacts (either positively or negatively) on development and poverty (see Section 3). Third, their impact on the dynamics of inter-state conflict and violence, which then impacts (either positively or negatively) on development and poverty (see Section 4). Fourth, their impact on the incidence of corruption, which in turn can have wider effects on government expenditure and good governance (see Section 5).

Brief case studies on South Africa, Angola, the Philippines and India are also used to illustrate these impacts.

The report concludes that legal arms transfers can have significant impacts on poverty and development in low and middle-income countries. However, it argues, these impacts are never direct but are refracted through a number of processes: through their effect on military and state expenditure, internal conflict dynamics, inter-state conflict dynamics and corruption.

Through supporting states in meeting their requirements for security, arms transfers can help to create stable conditions for economic growth and development. However, there is an opportunity cost involved in purchasing arms that must be balanced against the gains to welfare from better security. The impact on military and state expenditure is the most obvious impact that arms transfers can have on poverty and development.

The countervailing argument, that military spending leads to economic modernisation, is not convincing. “Offset” agreements are often suggested as a way of facilitating economic development, especially in developing countries (such as India and South

6 The impact of arms transfers on poverty and development, September 2004

Africa) that have significant domestic industrial capacity. Such agreements “offset” the cost of arms whereby military goods are purchased and sellers agree in return, for example, to purchase raw materials or provide infrastructure or training and employment within the recipient country. Another method of mitigating the cost of arms purchases is through cheap financing arrangements or giveaways, which can reduce their impact on development but may encourage unnecessary purchases. Offsets and cheap financing arrangements can influence – often detrimentally – the quality of the procurement decision. In addition, the fact that arms are purchased in foreign currency may lead to serious indebtedness and the sale of natural resources on unfavourable terms. A recent comprehensive study of arms trade offsets concluded that offsets are often more costly than “off-the-shelf” arms purchases, create little by way of new or sustainable employment, and tend not to result in significant technology transfers.2

There are many surreptitious methods that states use to “hide” military spending, for example, through off-budget procurement. Such methods increase the probability of corruption and reduce the possibility for civilian oversight. Fungibility is also a serious issue as donor funding in developing countries may indirectly support the redirection of funds toward arms purchases.

Arms purchases can also have a significant impact – some positive, some negative – on conflict dynamics at both intra-state and inter-state level. At the intra-state level, arms transfers can help deter or defeat a rebellion and ensure peace in a fragile post- conflict environment. Arms transfers to the Angolan government helped them to defeat UNITA, thereby directly leading to an increase in well-being for many poor people, and opening up possibilities for future diversion of resources into pro-poor services.

Alternatively, arms transfers can in some circumstances help destabilise a tense standoff, ensure a victory for the side with access to traded arms, or help escalate violence. Since 9/11, the Philippine government has received vast amounts of military assistance and arms from the US to help crush rebels in Mindanao. This has escalated the violence with devastating effect on the livelihoods of the Mindanao people. Arms transfers can also, despite the best intentions of the seller, be used to repress populations and commit human rights violations, such as the use of UK-produced arms by the Indonesian military in Aceh. Arms are often diffused to proxy groups or militias less accountable than formal security forces and this also can have serious implications for human rights.

Inter-state tensions are also major motivating factors in arms purchases. Acquiring arms can deter other countries from attacking and can be used for defence if and when this fails, but arms build-ups may also be perceived as a threat and thus lead to conflict. For example, states with a military advantage may attack before their rival can acquire the level of arms needed to challenge it. When this does take place, the consequences of conflict for poor people are usually devastating, typically leading to sharp increases in poverty. The impact of arms races on military expenditure is clear in a number of cases, for example Ethiopia/Eritrea, Taiwan/China, South America and India/Pakistan. Arms transfers for inter-state conflict purposes often involve more

2 Brauer and Dunne (2004).

7 The impact of arms transfers on poverty and development, September 2004 sophisticated and therefore expensive weapons systems, which put an increased strain on budgets especially in low and middle-income countries. In addition, life cycle and replacement costs often put added financial pressure on these countries, reducing the resources available for poverty reduction.

Despite these negative impacts, arms transfers may also play a positive role in contributing to the conditions in which poverty reduction is possible. In many parts of the world borders are relatively porous. Transfers of equipment can provide the tools with which to police these areas thus preventing conflict spillover and transnational crime. In addition, a lack of equipment, including arms, has been noted by the UN as a major flaw in peacekeeping operations by developing states. These missions are vital in ensuring that humanitarian aid reaches its targets, that poverty reduction programmes are implemented and that armed groups are disarmed and demobilised.

Arms transfers can also have an impact – almost always negative – on the quality of governance through the effects of corruption. Corruption in the official arms trade is commonplace and widespread. According to the NGO Transparency International, of all industries ranked in its 1999 Bribe Payers Index, the arms industry was considered the second most likely to involve bribes.3 Despite accounting for less than 1% of world trade in 1999, estimates from the US Department of Commerce indicate that 50% of all bribe offers relate to defence contracts.4 These bribes and “commissions” are added to the cost of arms thereby increasing the opportunity cost to developing countries. Both the supply and demand side of the transaction are guilty of perpetuating corruption. Corrupt payments also negatively influence the quality of the procurement decision – most of all by encouraging unnecessary purchases. There is also compelling evidence that high levels of corruption are associated with low rates of economic growth. Nepotism and cronyism are entrenched in certain regimes; corruption can help to maintain these regimes in power but this can equally lead to weakened national security and political instability. Despite the anti-bribery measures enacted multilaterally more work needs to be done.

There is a need to coordinate approaches to arms transfer restraint with wider, but country-specific, security and development policies, as well as with policies designed to improve national-level controls on the use and abuse of weapons. Arms transfers can have a substantial, and negative, impact on poverty, and there is a need to scrutinise arms transfers more carefully, usually on a country-by-country basis, in order to identify and avoid such impacts.

This report does not find that all legal arms transfers to developing countries increase poverty. Such a conclusion would have been unsustainable, in the face of the evidence of the continuing justifiable security requirements of developing country governments, and the importance of adequate security to the pursuit of human development and poverty alleviation. At the same time, however, the report points to many circumstances in which arms transfers, even if sought by the governments of recipient governments, are not in the interests of the poor in those states, increasing poverty and potentially reducing the resources available for poverty reduction.

3 The public works and construction industry was ranked first. Courtney (2002), p10. 4 US Department of Commerce (2000), p35.

8 The impact of arms transfers on poverty and development, September 2004

1. Introduction

1.1 The Armed Violence and Poverty Initiative

This report was prepared by the Centre for International Cooperation and Security based in Bradford University's Department of Peace Studies. It is part of a wider project, the Armed Violence and Poverty Initiative (AVPI), which is being funded by the UK government's Department for International Development. There appears to be a close correlation between levels of armed violence and poverty, but to date this has not been fully documented or analysed. The AVPI aims to fill that gap.

The AVPI is made up of four projects:

1) A Briefing Papers series on armed violence and poverty reduction measures in the areas of DDR (Disarmament, Demobilisation and Reintegration), SSR (Security Sector Reform), Conflict Assessment, and Rural Livelihoods.

2) An assessment of the impact of small arms projects on arms availability and poverty.

3) A research project which documents and analyses the circumstances in and processes by which armed violence exacerbates poverty and development.

4) This paper, which is the result of a research project documenting the impact of arms transfers on poverty and development.

Further analysis of the interrelationship between the findings of this paper, and those of the AVPI as a whole, can be found in the AVPI Synthesis Report.

1.2 Arms transfers and poverty

In recent years, both governments and civil society organisations have become increasingly concerned at the potentially negative impact of arms transfers on poverty and development.5

Perhaps the clearest indication of this concern has been the European Union’s adoption, in 1998, of a Code of Conduct for Arms Exports. This specifically calls upon member states to assess “the compatibility of an arms export with the technical and economic capacity of the recipient country, taking into account the desirability that states should achieve their legitimate needs of security and defence with the least diversion for

5 DFID (2000); Control Arms (2004).

9 The impact of arms transfers on poverty and development, September 2004 armaments of human and economic resources.” This criterion (“Criterion 8”) in turns draws on the UN Charter itself, which refers to the responsibility of its member states to “promote the establishment and maintenance of international peace and security with the least diversion for armaments of the world’s human and economic resources”. The EU Code of Conduct requires Member States to look to “relevant sources such as UNDP, World Bank, IMF and OECD reports” to determine “whether the proposed export would seriously hamper the sustainable development of the recipient country” and to “consider in this context the recipient country’s relative levels of military and social expenditure, taking into account also any EU or bilateral aid.”

First, the impact of transfers on military expenditure, and hence on the diversion of resources that could be available for poverty reduction (see Section 2).

Second, their impact on the dynamics of internal conflict and violence, which then impacts (either positively or negatively) on development and poverty (see Section 3).

Third, their impact on the dynamics of inter-state conflict and violence, which then impacts (either positively or negatively) on development and poverty (see Section 4).

Fourth, their impact on the incidence of corruption, which in turn can have wider effects on government expenditure and good governance (see Section 5).

Brief case studies on South Africa, Angola, the Philippines and India are also used to illustrate these impacts.

In order to assess the effect on poverty and development of a particular arms transfer, or set of transfers, it is therefore necessary to draw up a “balance sheet”, comparing costs

10 The impact of arms transfers on poverty and development, September 2004 and benefits for the transfer(s) in question under each of these four headings. This is discussed in the final section of the report.

If one were to assume that (a) transfers always provide some additional security benefit, and that (b) this marginal benefit declines as the cumulative value of transfers during a particular time period increases, then one could (in principle) estimate the cumulative value at which the marginal opportunity cost of transfers exceeds the marginal security benefit. While such a model may have some heuristic value in particular circumstances, however, the assumptions on which it is based are too simplistic for it to accurately represent the nature of the problematic under study. Arms transfers are not a homogenous commodity, and some arms may provide greater security benefits than others of the same monetary value. Moreover, although the existence of demand for arms transfers implies that they are seen to be of benefit to the recipient government or government agency, it cannot be assumed that security benefits for the poor will also result. In many cases, arms transfers may result in negative security consequences for the poor, in which case the “balance sheet” for poverty will be negative even in the absence of significant financial costs. Tempting as such a model might be, therefore, it cannot replace the need for a case-by-case balance sheet of the particular impacts of particular transfers. What can be done is to provide a template of the factors which need to be taken into account in constructing such an assessment. This is the primary purpose of this paper.

1.3 Definitions and Scope

The study takes into account all legally-authorised transfers (authorised by both supplier and recipient) including commercial sales and grant aid. It does not deal with illegal or unmonitored transfers (e.g. through illicit brokers, transnational criminal arms dealers, black or grey markets).

The study is an examination of the impact of all arms imports, rather than those from a particular source. It is therefore not a comprehensive assessment of the potential effectiveness of arms transfers restrictions by individual countries or groups of countries. However, the final section of the paper does include some observations on the implications of the study for policy in major exporting states and donors.

The study uses ‘arms transfers’ to refer to all transfers with a specific military/police utility. This includes: all forms of weapons, ammunition and other security and paramilitary equipment (e.g. for riot control); all associated maintenance, spare parts, upgrades, and other support; training; logistical support; certain kinds of communications equipment; intelligence etc. It does not include dual-use exports, except insofar as these are to military/police customers.

The study does not analyse the impact of domestic arms production, despite the fact that this is a major source of supply in several major developing countries, such as India, China, Brazil and South Africa. In practice, arms transfers and domestic production are often closely linked, for example through transfers of production equipment, licensed production, and other offset arrangements.6 There are potential problems in isolating the impact of arms imports from the impact of domestically manufactured and procured

6 See page 15 for definition of ‘offset’.

11 The impact of arms transfers on poverty and development, September 2004 military / police equipment and domestic military / police spending more generally. Much depends on the assessments made of the extent to which reduced arms imports may lead to a ‘substitution effect’ – e.g. buying from domestic sources, continued use of old weapons, and/or spending more on personnel to achieve the same level of military capability.

Poverty is understood here in a broad sense, as including access to capital/assets for poor people, access to services and opportunities, as well as measures of income poverty.

Because of this, the focus of this paper is the impact of arms transfers on those countries where the bulk of the world’s poor people are, that is in “developing countries”. There is no consistent definition of what this means in the relevant literature. In one of the main sources of global data on arms transfers, produced by the Congressional Research Service, developing nations are defined as all countries except the US, Russia, European nations, Canada, Japan, Australia and New Zealand.7 The World Bank, by contrast, defines “developing countries” as “low and middle- income countries in which most people have a lower standard of living with access to fewer goods and services than do most people in high-income countries.”

In this study, however, we exclude upper-middle income countries from our purview. Since it falls just under the $9,205 per capita lower threshold for ‘high-income’ status, Saudi Arabia would potentially dominate, and distort, statistics on exports to the “developing world” if the Bank’s definition were to be used. As the world’s largest arms importer by a large margin over the past two decades, with more than a quarter of its total imports being arms, and a population of only 21 million, Saudi Arabia is a remarkable case (as Tables 1 and 2 show). As Table 1 shows, however, there are relatively few other upper-middle income countries that feature as major arms recipients. Five of the world’s largest arms importers would also be excluded because of their high-income status (Kuwait, Taiwan, South Korea, Israel and United Arab Emirates). This study, therefore, will focus its attentions on low and lower-middle income countries.

7 Grimmett (2003).

12 The impact of arms transfers on poverty and development, September 2004

Table 1: Top 5 upper-middle income country (UMIC) arms importers 1997- 99 ($)8

Saudi Arabia 27,460m Malaysia 1,925m Venezuela 820m Czech Republic 605m Hungary 390m

Table 2: Top 4 UMIC arms importers 1999: arms imports as a % of total imports9

Saudi Arabia 27.5% Venezuela 2.2% Botswana 1.8% Malaysia 1.4%

8 US State Department (2003), World Military Expenditure and Arms Transfers (WMEAT) 1999-2000. Released in February 2003, this was the latest version of this publication as of September 2004. There are significant margins of error in these estimates, which in most cases extend beyond the neighbouring countries in the rankings. 9 Same source as footnote 8 above.

13 The impact of arms transfers on poverty and development, September 2004

2. Impact of arms transfers on military expenditure

Arms imports may impact upon development through diverting resources from other public and/or private uses that could have helped to combat poverty.

Arms imports are usually cheaper than domestic procurement of similar equipment, and thereby can help reduce the diversion of resources from poverty-reducing expenditure.

The true economic costs of arms imports are often concealed through off-budget purchases, complex “offset” deals, and low procurement costs masking high life cycle costs.

In some circumstances, reducing the supply of arms imports may encourage the development of new sources of supply, thereby contributing to arms proliferation.

2.1 Introduction

This chapter considers the impact of arms transfers on military spending, and thereby on the resources that are potentially available to combat poverty. The extent of this impact depends on whether security requirements are met using the minimum of resources, and how arms transfers impact on that efficiency.

There is little evidence to support the claim that arms transfers pay for themselves by stimulating long-term economic growth through technology transfer and developing industry. Evidence suggests that, while imports can be a cost-effective way of obtaining equipment, the true costs of the equipment are often concealed. This – coupled with pressures from arms companies and their host countries – make it more likely that decisions to purchase inappropriate equipment are made, thereby raising the cost.

2.2 The budgetary impact of military spending

Arms transfers generally have to be financed from government budgets. As the costs of defence spending increase, therefore, governments will have to cut back on spending on other goods such as education, health, or public investment in infrastructure, and/or raise taxes or borrowing (thus reducing private consumption or savings). Yet the extent to which this opportunity cost is directly borne by poor people will vary from case to case, and will depend in part on choices made in relation to the spending items displaced by military purchases. The negative impact of increased military spending on poverty is likely to be much less, for example, if it is financed through cuts in middle-class subsidies than if it is financed from increases in fees for primary education.

Much development assistance (especially, but not exclusively general macroeconomic and budgetary support) is potentially fungible, in that governments can transfer domestic spending away from activities receiving aid, freeing resources for other uses, including the purchase of arms. For example, in Mozambique in the late 1980s the donor community provided aid to support the provision of public goods and social services

14 The impact of arms transfers on poverty and development, September 2004 while government expenditure was diverted to security needs.10 Where budgetary processes are weak and not transparent, the opportunities for such fungibility to occur are greater. Even where fiscal systems are soundly based and publicly accountable, however, fungibility is difficult to avoid.

In recognition of these effects, the donor community has recently pressed for reduced military budgets in aid recipients, apparently with some success. The IMF reports that military spending fell by 0.3% of GDP in 2002 compared with 1999 in countries supported by its Poverty Reduction and Growth Facility (PRGF), while poverty-reducing spending increased by 2.3% of GDP. Moreover, military spending in countries with IMF-supported programmes was lower than the average for all PRGF-eligible countries by 0.2-0.7% of GDP in 2001-2002.11 Even if there are some doubts over the accuracy of the data used in these findings12, they do reflect the current donor consensus that reductions in military spending can contribute to the freeing up of resources for poverty reduction.

Reductions in military spending do not always have such a positive effect, for example in cases where they lead to a redistribution of income towards economic and political elites. In the early 1990’s, for example, deep reductions in defence-related procurement and employment in the former Soviet Union were accompanied by parallel reductions in spending on social services and sharp increases in poverty levels. By contrast, a small minority of Russian citizens benefitted from massive (and often corrupt) economic windfalls from the privatisation of key industries. In this case, therefore, the rundown of military spending was part of a process of regressive income redistribution that has led to sharply increasing levels of poverty. A similar, if less marked, phenomenon can be seen in most of the former communist countries in Central and Eastern Europe which had large indigenous arms industries and/or military establishments. In some cases, concerns at the social impact of more rapid reductions in military personnel numbers have slowed the rate at which defence budgets have been reduced, effectively using the defence budget as a form of social protection. Similarly, processes of demobilisation of combatants in the aftermath of civil war have to be handled with due regard to the impact on the livelihoods of those concerned, and may in some circumstances justify the temporary maintenance of defence personnel establishments that are greater than needed to meet security requirements.

The potentially negative impact on poverty of reductions in domestic arms procurement spending and/or spending on military personnel has important implications for spending on arms imports. For it means that, even if increased arms imports are financed through savings elsewhere in the defence / security budget, the impact on poverty levels may be negative. Thus China, which is both one of the world’s leading military powers and also contains the second largest number of poor people in the world, has simultaneously been reducing the size of its armed forces and spending large amounts on arms imports. The negative impact of increased Chinese defence spending on poverty could therefore be magnified by what may be an increasing proportion of its budget being spent on imported equipment.

10 Brück (2001). 11 ‘As military spending stabilizes, antipoverty outlays increase’, IMF Survey (2002). 12 Omitoogun (2003).

15 The impact of arms transfers on poverty and development, September 2004

2.3 Putting the costs of arms transfers in context

For the developing world as a whole, arms transfers in 1999 are estimated to have totalled $22.2 billion, around 9% of total defence expenditure of $245 billion.13 In Africa as a whole, arms imports constituted a similar proportion: $1.9 billion imports compared with $20 billion. While the opportunity costs involved in arms transfers may be greater than these proportions suggest, because of the foreign exchange loss involved, these figures do emphasise the importance of other components (personnel, maintenance, domestic procurement) of the defence budget. In most cases, their opportunity costs and economic effects are likely to be greater than those of arms imports.

The proportional impact of an arms transfer on a country clearly differs depending on the size of the economy of the recipient country. While China and India are relatively large arms importers (see Table 3), they are also the two largest economies in the developing world, and so the share of their total imports taken by arms is relatively low (at 0.4% and 1.6% respectively).

The proportion of total imports taken up by arms is a better aggregate indicator of the proportional impact of arms transfers. On this measure, as Table 4 shows, six of the top ten importers were in sub-Saharan Africa. This is extremely important in assessing the opportunity cost of the arms transfer and therefore its potential impact on poverty. For example, an arms transfer that cost £5m would be more likely to have a greater proportional impact on the budget of a country with a small economy than one with a large economy.

Table 3: Top 10 low income country(LIC)/lower-middle income country (LMIC) arms importers 1997-99 ($)14

Turkey 6190m Egypt 3240m Pakistan 2115m India 1855m China 1810m Thailand 1435m Iran 1415m Indonesia 1210m Algeria 1210m Brazil 980m

In addition, importers that acquire similar amounts of arms, and have similar levels of national income per capita, may have very different arms transfer burdens as a result of different population sizes. For example, during the period covered by Table 3, Ethiopia and Eritrea were in conflict. While the scale of their imports was broadly similar in absolute terms, in per capita terms Eritrea’s imports were significantly larger. This has the potential to cause significant variation in the proportional development impacts of arms transfers.

13 WMEAT (2004). The definition of ‘developing country’ used here is different from those used by other agencies, for example including Saudi Arabia but excluding South Africa. for more details, see Ibid, p.194. 14 WMEAT (2003). See footnote 8 for a discussion of this source.

16 The impact of arms transfers on poverty and development, September 2004

Table 4: Top 10 LIC/LMIC arms importers 1999: arms imports as a % of total imports15

As % of arms imports Eritrea 33.5% Ethiopia 20.5% Sierra Leone 12.3% Rwanda 11.9% Pakistan 9.7% Congo 8.9% Turkey 7.9% Angola 7.3% Bosnia 6.2% Syria 5.5%

It is also important to note that some of the impacts of arms transfers depend on what is transferred, rather than the value of transfers. For example, the relatively low proportion of arms imports taken by the Democratic Republic of the Congo probably does not imply that arms transfers were not a significant element in the conflict. A high proportion of arms for this conflict could, perhaps, have been obtained illicitly. Alternatively, it may reflect the particular form of warfare in that country, with extensive use of small arms and light weapons (SALW) rather than conventional weapons used in Eritrea/Ethiopia or Angola.

2.4 Arms transfers and economic modernisation

While arms purchases inevitably involve a short-term opportunity cost, it is sometimes argued that they may increase national income by stimulating demand and contributing to economic modernisation through the introduction of technology. Over time, it is argued, this increases the resources available for poverty reduction.16 Yet the same economic demand can be created by other forms of government or private spending. Indeed, in the case of arms imports, less domestic demand will typically be produced than for spending on most other public services (or on military personnel), and therefore less employment and other benefits. At the same time, imported equipment can stimulate some domestic industrial capability in order to support and maintain it, especially in countries (such as India or South Africa), which already have significant manufacturing sectors.

2.4.1 Offsets Offsets are arrangements for the purchase of goods (military and non-military) from recipient country suppliers in order to “offset” the foreign exchange cost of an arms import deal. They take a variety of forms, including co-production, licensed production, sub-contractor production, overseas investment, and counter-trade (barter, counterpurchase, buy-back). 17

15 WMEAT (2003). 16 Galvin (2003). 17 See Brauer and Dunne (2002).

17 The impact of arms transfers on poverty and development, September 2004

“Offset” agreements are often suggested as a way of facilitating economic development, especially in developing countries (such as India and South Africa) that have significant domestic industrial capacity. Such agreements “offset” the cost of arms whereby military goods are purchased and sellers agree in return, for example, to purchase raw materials or provide infrastructure or training and employment within the recipient country.

Thus, for example, the US Department of Commerce reports that from, 1993 to 1998, US military contractors reported 279 new offset agreements valued at $21bn. These offsets were in support of $38.5bn in export contracts.18 By transferring technology to the purchasing country, the resources diverted abroad in payment for the arms can be recycled to the benefit of the purchaser. For example, when India bought 20 ATR aircraft from France in 1987, Aerospatiale was required to counter-purchase raw materials equivalent to half the value of the aircraft. Sometimes the promised value of offsets can even exceed the initial cost of the military procurement programme. In the case of South Africa, a proposed R30bn purchase of weaponry attracted offset promises amounting to R110bn (See box 1).

Yet there is little evidence that such indirect investment is economically efficient. Arms purchased under offset deals are typically more expensive than they would be in a straight transfer. Promised employment benefits are, in the absence of legally-binding agreements, often exaggerated. For example, the UK-Saudi Arabia Al-Yamamah deal, worth £20bn, was supposed to create 75,000 jobs in Saudi Arabia. Yet it resulted in just 1,600 jobs, of which 1,300 were for expatriates and only 300 for Saudi citizens.19 Perhaps most damagingly, by dangling the carrot of investment, offset deals increase the likelihood of countries buying unnecessary or inappropriate equipment. The fact that arms are purchased in foreign currency may lead to serious indebtedness and the sale of natural resources on unfavourable terms. A recent comprehensive study of arms trade offsets concluded that offsets tend to be more costly than ‘off-the-shelf’ arms purchases, create little by way of new or sustainable employment, and tend not to result in significant technology transfers.20 In other words, offset investments are economically inefficient, requiring subsidies or complementary investments in order to make them viable.21

The potential economic damage caused by offsets has been recognised in civilian trade negotiations since 1981, when the first multilateral Agreement on Government Procurement (GPA) entered into force. Subsequently incorporated as one of the “plurilateral” Agreements included in Annex 4 of the Agreement Establishing the World Trade Organisation (WTO) in 1996, the GPA’s members now include the US, Canada, EU, Japan, Korea and Israel. The use of offsets is explicitly prohibited in the Agreement, but governments are allowed to make an exception on the grounds of national security interest, which has effectively excluded all military trade from its provisions.22

2.4.2 Labour markets Importing military equipment can contribute to enhancing skills in the armed forces, who can subsequently (given the turnover of personnel) use their skills in the civil

18 US Department of Commerce, (BXA), 2001. 19 Crawford-Browne (Aug 2002). 20 Brauer and Dunne (2004). 21 Brauer (2003). 22 World Trade Organisation (2004).

18 The impact of arms transfers on poverty and development, September 2004 economy. This spin-off benefit needs to be set against the effects of using scarce personnel in the defence sector, and thus depriving the civil sector of their expertise and skills. For example, a study of military expenditure in South Africa during the last three decades found that the military sector did train workers but that this also diverted skilled labour from civil uses.23

2.5 The full costs of arms purchases

Other contextual factors also help determine the full economic cost of arms purchases.

2.5.1 New for old? The full cost of imported arms depends on whether they are being used to supplement or replace existing weapons. When defence equipment is to be used in addition to existing capabilities, it will typically require additional investments in new personnel, spare parts, infrastructure (bases, maintenance workshops, etc) and training, which together will often double or triple the initially quoted purchase price. Where new equipment is replacing existing equipment, however, the net effect on operational costs will typically be more modest.

2.5.2 Off-budget purchases Official defence budgets are often not a reliable guide to the amounts being spent on arms purchases. Governments frequently use off-budget sources of funding for arms imports, including funds generated from military business activities, special funds or war levies, foreign military assistance, and natural resource rents.24 In Indonesia, for example, an estimated 75% of military financing is provided by military-owned businesses which enjoy charitable status and are exempt from taxes. Revenue generated from sales by military-controlled business is used for military expenditure rather than investment or taxes. Such financing does not appear in the budget.25 Such opaque procedures also perpetuate poor budgetary control and lack of transparency, thereby increasing opportunities for corruption. Also, where the military make decisions over the use of funds this can enhance their position and makes their oversight by civil institutions more difficult. For example, in Chile, 10% of revenues from the state-owned copper company COLDECO are allocated for arms procurement, but these do not require congressional approval.26 Such allocations distort the decision-making process and reduce resources for development.

This is part of a wider problem regarding the reliability of military spending data in many parts of the developing world. For example, until 2002 Ethiopia did not include details on arms procurement in its budget breakdown.27 Some countries, such as Uganda and Zimbabwe, finance parts of their defence budget from the budgets of other ministries. For example, a 1999 inquiry into corruption in the Ugandan Police Force discovered that funds meant for the military were allocated to the police, who then transferred the funds back to the military. According to Ugandan officials, such “creative accounting” was undertaken to avoid the scrutiny of donors.28 Such practices make it difficult to work out the level of military expenditure.

23 Dunne and Birdi (2002). 24 Hendrickson and Ball (2002). 25 Hendrickson and Ball (2002). 26 Pattillo, et al (2002). 27 Omitoogun (2003), p273. 28 Omitoogun (2004), p119.

19 The impact of arms transfers on poverty and development, September 2004

Box 1: £3bn arms package for South Africa

The deal In 1999, the South Africa (SA) government decided to buy warships and military aircraft from the UK’s BAE Systems, France’s Thales (formerly Thomson CSF), Germany’s Thyssen and Ferostaal, Italy’s Agusta, and Sweden’s SAAB. The package had a total cost just under 30bn rand (£3bn), but its balance of payments cost was offset by significant commitments to buy SA products in return (offsets), in line with SA government policy for all its overseas purchases.

Pros of the deal The deal offered offsets worth more than twice the value of the purchases. This would take the form of purchases from SA suppliers and capital sums to be invested in both military and civil industry. The deal would increase SA’s military capabilities and allow it to play an increasing role in regional peacekeeping, as well as providing investment in its ailing military industry. The offsets were worth a promised R110bn and would create 65,000 jobs (Haines, 2002). In addition to these attractions, the stated function of the ships was fishery protection. Undisclosed “highly favourable” low-interest loans were granted by European banks and supported by the export credit guarantee departments of the exporting countries involved. The availability of finance was an important factor in SA’s choice of suppliers.

Cons of the deal The successful BAE-SAAB joint bid to supply trainer jets was $720m more expensive than that made by Italian rivals Aermacchi. Even the offsets are not as good as initially envisaged. According to BAE Systems, only 30% of the offset investment had to come from abroad. Much has been sourced locally (Wrigley, 2003). The flagship non-arms project – the Coega Industrial Development Zone – will require up to R5bn of additional government infrastructure development to make it viable. The initial plan for a $1bn stainless steel plant as an offset for the purchase of three German submarines has also been cancelled, given excess capacity in the world steel industry (Crawford- Browne, 2002). So the planned positive development impacts are in doubt. There were also charges of cronyism and corruption, which included the former SA minister of defence, Joe Modise and former chief whip of the ANC, Tony Yengeni (the latter was sentenced to four years in prison for corruption), (Courtney, 2002).

Possible links to poverty Despite being a middle-income country, in 2000-2001, 14.5% of the population of SA earn less than $2 a day, 14% are without clean water and the infant mortality rate (per 1,000 live births) is 56 (UNDP, 2003). In response, the ANC-led Government that took power in 1994 set ambitious targets for the provision of social services. During 1994-99, they were able to finance these programmes in part through a reduction in military expenditure, but this trend in military spending did not continue after 1999, in part because of the new arms-buying programme.

Sources: Courtney (2002); Crawford-Browne (Aug, 2002), (Nov 2002); Engelbrecht (2001); Haines (2002); McEwan (2002); Wrigley (2003); Roeber (2004); UNDP (2003).

20 The impact of arms transfers on poverty and development, September 2004

2.5.3 Military aid and financing arrangements One of the key determinants of the economic impact of arms transfers is the price paid. The terms on which arms are supplied vary considerably, and often include extended credit periods and cheap, guaranteed loans. Some defence exports are even provided free or at greatly reduced cost, such as the US’s “excess defence articles” programme. Excess defence articles constitute older equipment given away by the US at little or no cost. 29 For example, the US supplied four patrol boats to Ghana, two of which were free and two at a nominal cost.30 Some developing country imports are also financed through military aid, substantially reducing their initial cost.

Such terms of procurement reduce the costs for recipients and therefore are likely to have a reduced impact on opportunity costs and thus development. However, military assistance and loan packages may make arms imports attractive and thus encourage unnecessary purchases. Moreover, once equipment has been acquired, importing governments may subsequently find themselves facing substantial costs for repair, maintenance and spare parts. These costs need to be taken fully into account when analysing the cost-effectiveness for particular purchases.

2.5.4 Arms transfers and foreign exchange Arms imports have to be purchased in foreign currency. Where imports are undertaken in response to short-term military emergencies, this can often involve the sale of natural resources on unfavourable terms. For example, Liberia traded timber, iron ore and agricultural products for SALW and military training; Rwanda used future tea revenues as security for weapons from Egypt; and Angola exploited its diamond mines to finance military operations.31 Arms purchases have also helped to fuel developing country debt. For example, in September 1998 the Indonesian government admitted that, because of its financial problems, it could not repay the debt of £280m for its 1996 Hawk aircraft purchase. By February 1999, this debt had risen (with interest) to £362m.32

2.6 Are arms imports cheaper than domestic production?

Imports of equipment are likely to be cheaper than small-scale domestic production. For major weapons systems, countries with no indigenous capacity could face significant R&D (research and development) and start-up costs. Second-hand equipment can also often be bought at a fraction of the cost of new. For example, the UK offered to sell four redundant (but brand-new) Upholder submarines to South Africa for only £200m, although their UK procurement cost was £930m.33 However, while cheaper lower- capability weapons may often be suitable for developing nations, some, such as Malaysia, will not purchase what they perceive to be old technology.

Evidence suggests that, while imports can be a cost-effective way of obtaining equipment, the true costs of the equipment are often not fully taken into account. That is, the procurement decision needs to takes into account life-cycle costs, i.e. all the costs associated with owning, maintaining and using the equipment over its life-time. In addition, pressures from arms companies and their host countries make it more

29 For example, Israel benefited from such a system after the first Gulf War. Turner (2002), p12. 30 Only three of the four boats were delivered. Aning (2004). 31 Nadir (1999). 32 Hansard (23 February 1999). 33 Wrigley (2003), p8.

21 The impact of arms transfers on poverty and development, September 2004 likely that decisions to purchase inappropriate equipment are made, thereby raising the cost.

2.6.1 Self-sufficiency and arms proliferation Given the continued demand for arms by importing nations, if supply is curtailed by some arms exporting nations through, for example, an embargo, some form of substitution may be expected, either through finding new suppliers or through developing indigenous production. Countries pursue domestic maintenance and supply capabilities for a number of, often interconnected, reasons: to reduce the cost of arms; to develop indigenous defence industries; and to achieve self-sufficiency against sanction or control. For example, in the 1980s, the US refused to sell F16s to Taiwan leading it to develop the Indigenous Defensive Fighter (IDF) and several missile systems, resulting in the creation of a significant aerospace capability. Taiwan therefore became an arms producing nation, with concomitant pressures to enter the export business itself. Yet its efforts to build its export business proved unsuccessful, with overseas defence sales totalling less than $15m annually (mainly small arms and ammunition). As a consequence, the Taiwanese defence industry suffers from significant over-capacity, inefficient production and declining demand, and relies heavily for its survival on continuing government subsidy.34

2.7 Conclusion

The provision of security can contribute to economic growth and poverty reduction. But the provision of security requires the diversion of resources from alternative uses, including those – such as social services and infrastructure provision for the poor – that would have directly contributed to poverty reduction.

For example, if increased arms transfers are financed through increases in primary school fees or cuts in food-for-work programmes, then poor peoples’ access to education and adequate nutrition is reduced as a direct consequence of an arms transfer taking place. By contrast, if reductions in arms transfers lead directly to a particular government spending more on rural maternity services for poor women, then poverty (measured in this case by high infant and maternal mortality) is reduced as a direct consequence of cuts in arms transfers.

Against these net costs or benefits to poor people, however, must be set the possible security costs or benefits that might accrue to poor people as a result of arms purchases. The circumstances in which these might occur are discussed in the next two chapters. Where spending on arms imports does not provide significant additional security benefits, it can, and often does, have a negative impact on development. 35

34 Bitzinger (2003), pp 58-62. 35 Collier and Hoeffler (2002).

22 The impact of arms transfers on poverty and development, September 2004

3. Impact of arms transfers on internal conflict dynamics

Arms transfers can strengthen the capacity of security and police forces to protect the state and its citizens from conflict and crime, and thus help create the conditions under which poverty is reduced.

Arms transfers can spark conflict and/or destabilise post-conflict situations, in turn endangering the lives and livelihoods of poor people.

Arms transfers can help accelerate victory for government forces in civil wars, thereby directly reducing risks to the lives and livelihoods of poor people and making possible the diversion of resources into poverty reduction activities.

Arms transfers can contribute to the extent and severity of human rights abuses, thereby strengthening repressive governments and preventing democratisation processes that, in most cases, have been shown to be associated with lower levels of poverty.

3.1 Introduction

This chapter examines the impact of arms transfers on the nature and probability of internal conflict, and how these then impact on poverty. It argues that both positive and negative impacts are possible, depending on the context. Arms transfers allow for the protection of the state and its population against crime and conflict, and thus help create the conditions within which poor people can secure and strengthen their livelihoods. At the same time, arms procurement ostensibly pursued for justifiable security needs may be excessive and/or the arms inappropriately used, thereby helping the state to repress dissent and commit human rights abuses, reducing the ability of poor people to defend their political rights and economic interests. For any given income level, democratic governments are more likely to secure the well-being of the poor than repressive ones.36 In cases where arms transfers help governments increase repression and avoid democratisation, therefore, they will be playing an indirect role in the perpetuation of poverty.

Some types of weapons have a particular impact on internal security while playing little role in inter-state conflict. These include non-military/police weapons, so-called “non- lethal” weapon (such as electric-shock weapons, pepper sprays and CS gas) and riot- control equipment. Another central concern of this chapter is the transfer and use of SALW, which became a key issue in the mid-1990s. Interest in this issue was fuelled by the growing attention to intra-state conflicts, which were predominantly fought with these weapons, and the burdens they placed on the countries concerned and the international community. During conflicts characterised by the use of SALW, supplies of ammunition are particularly important to the maintenance of military capacity.

A key factor affecting the impact of legal arms transfers to governments is the character of the end-users within the recipient state. These end-users include state and authorised

36 Siegle et al. (2004).

23 The impact of arms transfers on poverty and development, September 2004 non-state actors – such as regular military forces, presidential guards, police forces, border guards and customs services, state sponsored or authorised paramilitary forces, civil defence forces and militia, and private security companies – who provide internal security for the state and its citizens. Whether arms transfers are used to defend or repress a population – with its concomitant impact on their livelihoods – will depend on the type of and legitimacy of the state and its security forces.

3.2 Strengthening state capacity to combat crime and non-political violence

Combating crime and ensuring public order is a key aspect of human security and is crucial for sustainable development. Endemic criminality can increase poverty through negative impacts on tourism, investment, infrastructure, as well as human resources and social capital. Organised crime – both national and international – may also have significant impacts on poverty and sustainable development. The emergence of criminal economies diverts resources to unproductive uses, and can contribute to corruption and poor governance. It does so by raising the costs of the delivery of basic services, diminishing human resources, deterring investment and, in cases of the illicit exploitation of natural resources, robbing the state of a revenue base.

The impact of arms on police capacity to provide security can be demonstrated in cases where a lack of weaponry has contributed to increased crime. For example, in many developing countries, criminals are often better armed than the police.37 This can lead to the creation of police “no-go” areas, as has happened in parts of Kingston, Johannesburg, Rio de Janeiro and other cities.38 In these circumstances, appropriate arms transfers can increase police capacity to combat crime, particularly when combined with training in the proportional use of force and community policing. Similarly, police, customs, and other security forces, require a range of weapons, training, communications equipment, transport, body armour and night-vision equipment to effectively combat organised crime.

3.3 Impact of arms transfers on conflict dynamics

Conflict has a devastating impact on poverty and human development.39 The development costs of conflict are immense and extend well beyond the immediate casualties of soldiers and civilians to the disruption of public services and trade, the destruction of livelihoods and heightened military expenditure.40 On average, civil war has been estimated to increase military spending from an average of 2.8% of GDP to 5% of GDP.41 For this reason, it is important to assess the effect of arms transfers on conflict

37 Small Arms Survey (2001), p 220. 38 Fitzpatrick (2004). 39 Also see Section 3.5. 40 Academic studies suggest that fatalities constitute only a small proportion of the total health costs of most conflicts (Ghobarah et al, 2003). In addition to increased mortality during the conflict itself, civil war often has a strongly negative effect on public health in other ways, most notably through increased incidence of infectious diseases such as malaria and tuberculosis, widespread mental health problems as a result of post-traumatic stress, increased road accidents and increased violent criminality. The World Health Organisation has estimated that 269,000 deaths and 8.44 million disability-adjusted life-years (DALYs) were incurred in 1999 as direct and immediate effects of all wars, civil and international. A recent academic study estimates that a further 8.01 million DALY’s were lost in 1999 as a result of the delayed effects of previous civil wars. (Ghobarah et al , 2003, p.189) 41 Collier (2003), p14.

24 The impact of arms transfers on poverty and development, September 2004 dynamics. Depending on the circumstances, arms transfers may contribute to the deterrence, initiation, continuation or end of conflict.

3.3.1 Deterrence effect? While it is unlikely that arms acquisitions alone will deter rebellion or intra-state conflict42, a state with poor military capacity could give the opposition a greater incentive to rebel. For example, the overthrow of the Haiti government in February 2004 was facilitated by a prior reduction in government coercive capacity. The Haitian military and military-led police had been abolished in 1995, and the remaining National Police – a poorly armed force of around 4,000 – was unable to deter violence by relatively small rebel forces (who were themselves drawn in large measure from former military personnel). Moreover, the President’s personal security force (drawn largely from a US-based private security company) was run down in the period immediately preceding the crisis, and the police force had reportedly been reduced. Attempts to bolster the President’s guards during the crisis with further arms and personnel were reportedly blocked, and a South African transfer of small arms, ammunition and body-armour for the National Police did not arrive.43 This lack of government capacity contributed to the rapidity with which rebel forces overran much of the country. Since the beginning of the armed rebellion, poverty in Haiti has worsened, despite the deployment of US and UN peacekeeping troops. At the time of writing, the prospects for economic recovery remain heavily dependent on a stabilisation of security conditions, which in turn is likely to require a rebuilding of state security forces in some form.

3.3.2 Ensuring peace? Civil wars such as those in Angola and Liberia are commonly characterised, not by prolonged periods of unremitting violence, but by intermittent cycles of conflict, fragile and partial peace accords, and reversions to war. Indeed, one study argues that the risk of civil war appears significantly greater in the “start of peace” period than on the eve of the original conflict.44 In Afghanistan, for example, the strengthening of the national army’s military capability, vis-à-vis forces controlled by regional warlords, is widely recognised as being essential to long-term security and poverty reduction. Imported equipment may sometimes play a role in this process, for example in improving the Afghan National Army’s ability to deploy rapidly to trouble spots (as occurred in early 2004). On the other hand, this is a stage at which the risks of diversion from government stocks to rebel hands is often very high, not least because of the uncertain loyalties of new recruits to government security forces, some of whom may have come from former rebel armies. These problems are especially likely to be felt in relation to SALW, and additional transfers of SALW are therefore less likely to have such a stabilising effect. Transfers of military and police equipment designed to improve the command, control, communications and mobility of government security forces, by contrast, may often be less likely to be at risk of substantial diversion, and more likely to facilitate their effectiveness in support of peace settlements. Even here, however, a case-by-case judgement needs to be made as to whether government has the authority and commitment to ensure that its security forces fulfil their roles in a responsible way.

42 In fact, one study found that in conflict-prone conditions, high military spending had no deterrent effect on rebellion. Collier, et al (1999). 43 Tamayo (2004); SAPA (2004). 44 Collier et al (2003), p 83.

25 The impact of arms transfers on poverty and development, September 2004

3.3.3 Destabilisation? If a state, which is in conflict with a rebel group, is importing arms, this may be perceived by the rebel group as an indication that the state is preparing for offensive action. At the same time, the availability of imported arms can lower the costs of resorting to violence by state institutions, making it more likely that the crisis escalates into armed conflict. (See Box 2 on the Philippines.) In turn, repressive violence prior to and in the early stages of conflict may legitimise a rebel group and help to expand its recruiting base, as occurred in Liberia.45 In cases where arms imports make conflict more likely, this is likely in turn to contribute to increased human misery, destruction of economic assets, and deepening poverty.

Some analysts have also argued that arms transfers strengthen the political position of military forces at the expense of civilian institutions and thereby contribute to the risk of coups and the length of military rule.46 However, the evidence for this is inconclusive.

3.3.4 Defeating a rebellion? Most rebel groups at the start of conflict are clearly outmatched by the state in terms of personnel and equipment. However, this can change as the conflict develops, particularly if they are faced with a badly trained and poorly equipped military. For example, when the Revolutionary United Front (RUF) crossed into Sierra Leone from Liberia in March 1991 they were little more than a small and poorly-armed band of dissidents. However, the Sierra Leone military was weak, under-resourced, and poorly equipped. Thus, the RUF faced little effective military opposition and rapidly gained territory from which they could recruit, train and arm.47 Although by July 1991 the RUF had been pushed back into southern and eastern fringes of the country (by a newly expanded but poorly disciplined military), they had gained a strategic foothold that allowed them to recruit fighters in areas long excluded from government patronage.48 The period of instability and intermittent conflict that ensued over the next decade had severe consequences for Sierra Leone’s economic development. Between 1990 and 2000-2001, Sierra Leone’s GDP per capita declined at an average rate of 5.9% per annum.49 By 2002, Sierra Leone was estimated to have the lowest Human Development Index in the world, as calculated by the UN Development Programme’s Human Development Report.50

3.3.5 Ensuring victory? Arms transfers may have an impact on the resolution of conflicts, but this impact is usually indirect.51 Because arms transfers contribute to the intensity of conflict, and to the military balance between the opposing forces, the continuation (or withdrawal) of this source of weaponry can have a number of different impacts, depending upon the situation. For example, in the case of Angola a major government weapons-buying programme in 1999 possibly assisted its military to regain control of over 90% of its territory and helped bring the conflict to an end in 2002.52 In the two years since the end of the war, over 4 million refugees and internally-displaced persons returned home (out

45 Messari (2002), p 423. 46 Wang (1998), p 661. 47 The Economist (1998); Reno (1997). 48 The Economist (1998); Reno (1997). 49 UNDP (2004), Table 13. 50 Ibid, Sierra Leone Country Fact Sheet. 51 Sislin and Pearson (2001), pp117 – 140. 52 Project Ploughshares (2003).

26 The impact of arms transfers on poverty and development, September 2004 of a total of 13 million), and GDP growth resumed – 3.5% in 2003 and a projected 10% in 2004. (See Box 3 below for further analysis). By creating conditions for the relatively safe return of many citizens to their homes, the end of the war has already contributed to the improvement of the welfare of a large part of Angola’s poorest population. Further progress will depend on the government’s willingness to direct additional resources to pro-poor social services, together with its level of commitment to supporting economic development through the limitation of corruption and the development of much-needed infrastructure. While an increased commitment of resources and energy to poverty reduction is by no means guaranteed, the end of the war has at least opened up the possibility for such a commitment. Military spending is more likely to be reduced, now that the main security requirement for such expenditure no longer exists; and some of the resources thus released could be spent on poverty reduction. The transition to peace may also be opening up possibilities for increases in government transparency, albeit so far on a modest scale, that may in turn allow more oil revenues to be devoted to poverty reduction. In essence, therefore, the end of the war in Angola – as in other cases – not only has a direct impact on poverty reduction, by removing a major factor contributing to human insecurity, it also opens up possibilities for releasing resources into poverty- reducing spending that previously did not exist.

The Angolan case does illustrate the general lesson that arms transfers can sometimes hasten the end of conflict by giving one side an overwhelming military advantage, and that the end of conflict in turn can open up possibilities for human betterment and poverty alleviation. In other circumstances, however, arms transfers have hindered the resolution of conflict by giving the government misplaced faith in the potential for victory. For example, in the case of Rwanda, one of the few recent civil wars where rebels have overthrown the government, hefty government arms purchases in the early 1990’s may have contributed to its failure to negotiate more seriously during the earlier, and less deadly, phases of the conflict, before the descent into genocide in 1994.

3.3.6 Escalating violence? What some of the above cases make clear is that the availability, or not, of arms transfers during a conflict can have a significant impact on its trajectory and outcome. This can also be seen in the case of Sri Lanka, for example, but with an opposite outcome. The Sri Lankan government made significant territorial gains in Jaffna after an offensive in 1995, gains that were facilitated by a rapid increase in arms imports in 1994 and 1995. Sri Lankan imports in 1994 as $120m and in 1995 as $181m in constant 1999 US dollars.53 This is compared with the previous five years cumulative imports of $139m. Nevertheless, this did not lead to outright victory over LTTE rebels, but merely escalated the violence.

53 WMEAT (1999-2000).

27 The impact of arms transfers on poverty and development, September 2004

Box 2: How transfers to the Philippines are helping to escalate conflict

The transfers In 2001 and 2002 the US gave the Philippines government approximately $100m in training, financial aid, and arms and equipment. Furthermore, US IMET (International Military Exercise and Training Program) military aid increased by 67% to US$964,000; and Foreign Military Financing (direct grants or loans) increased by over 900% to over $18m between 2001 and 2003 (FAS, 2003). In addition to military aid, grant assistance through USAID to the conflict-affected region of Mindanao increased: totalling $108.2m between 2001 and 2003 (USAID 2004). Weapons transferred as Excess Defense Articles in 2002 and 2003 have included: 30,000 M-16 rifles, 8 UH-1H Huey helicopters, a C130 transport aircraft, and a naval patrol vessel (JUSMAG, 2003). Defence spending remained at around 1% of GDP, but increased in real terms from $1.1bn in 2001 to $1.6bn in 2002 (IISS, 2003).

Impact on internal security dynamics The Philippines government has been fighting against numerous rebel, terrorist, and criminal groups for many years. These conflicts have been characterised by fluctuating levels of violence and faltering peace processes. However, they have escalated significantly in recent years, with government offensives encouraged by military aid – including arms transfers. For instance, peace talks between the Moro Islamic Liberation Front (MILF) in Mindanao and the government have faltered several times since a ceasefire was agreed in August 2001, in part, as a result of continued government offensives. However, the Philippine government believes that MILF had links with the regional terrorist network Jemaah Islamiyah – believed responsible for the 2002 Bali bombings. US military aid and other arms transfers have arguably encouraged the escalation of conflicts in the Philippines. Arguments in favour of these transfers are those related to the “war on terror”, in the wake of the 9/11 al-Qaida attack rather than any potential positive development impacts. Negative development impacts are clear at both the macro and micro levels.

Poverty impacts Although the Philippines is a country with medium human development, there are vast disparities in development – with conflict-affected areas having the lowest levels of human and economic development. Military spending is only 1% of GDP compared with education at 4.2% and health at 1.5% (UNDP 2003). However, overall, the incidence of poverty – measured as the proportion of the population below the poverty line – worsened between 2000 and 2002, approaching 40% of the total population, and 54% in rural areas (US State Department, 2001, 2002). These conflicts have had significant impacts on livelihoods. For instance, fighting in Central Mindanao has damaged agricultural production on which 70% of families rely for their livelihoods. By April 2003 crops had been destroyed by troop movements and fighting on 37,000 acres of prime agricultural land – causing an estimated $10m of losses in the agricultural sector and displacing 70,000 civilians (Catholic Relief Service, 2003). There have also been significant opportunity costs to heightened conflict in the Philippines. For instance, planned military restructuring and force reductions – that could have had important positive impacts on development – have been stalled.

Sources: Amnesty International (2004); Catholic Relief Service (2003); FAS (2003); IISS (2003); Joint United States Military Assistance Group (2003); Project Ploughshares (2003); UNDP (2003); US State Department (2001), (2002); USAID (2004).

28 The impact of arms transfers on poverty and development, September 2004

3.3.7 Forcing governments to negotiate with rebels There are examples where embargoes and reductions in arms transfers have forced governments to the negotiating table. Cuts in military aid – particularly in situations of a sole or predominant supplier-client relationship – have had similar effects. For example, cuts in military aid (particularly arms) to Nicaragua and El Salvador were seen to be key factors in bringing those governments to negotiate peace agreements with the Contra rebels and the FMLN respectively. Alternatively, arms transfers to warring parties could create a stalemate situation by balancing military capacities, thereby encouraging parties to the negotiating table. For example, in the early 1990s, arms transfers to the governments of Croatia and Bosnia (which flouted a UN arms embargo that had benefited Serbia by virtue of its greater existing stocks of arms) began to turn the tide of the conflict against Bosnian Serbs and the Belgrade regime. This helped to push Serbia towards signing up to the Dayton settlement.54

3.4 Contributing to extent and severity of human rights abuses

Arms transfers can enhance the capacity of the state for repressive violence and thus contribute to the extent and severity of human rights abuses. Such abuses, in turn, contribute to a climate in which it becomes more difficult to ensure the economic and political reforms that are necessary to promote poverty reduction and equitable development. Human rights organisations have documented the use of arms acquired from external sources in systematic human rights abuses, both in counter-insurgency operations and during peace. During the 1990s, for example, tanks, helicopters, and small arms imported by the Turkish Government were reportedly used by its forces in repressive violence, attacks on civilians in counter-insurgency operations, and extrajudicial killings.55 More recently the UK government was criticised by Campaign Against Arms Trade and TAPOL, the Indonesia human rights campaign, for relaxing the conditions under which licences to Indonesia are granted. This is despite evidence that UK-supplied Hawk jets, Scorpion tanks and Saracen armoured personnel carriers had been used in Indonesia’s military offensive in Aceh, which has claimed over 3,000 lives since it began in May 2003.56

Arms transfers may also affect the particular character of human rights abuses by making it possible to resort to methods of abuse that would otherwise be impossible, or at least more difficult, to carry out. Some types of weapons, equipment and training may have a particular utility in repression, torture, and human rights abuses. For instance, electric-shock weapons have been used as tools of torture. Similarly other types of non- lethal weapons, such as CS gas, have been used in Zimbabwe to repress opposition and abuse human rights. According to Amnesty International, in 2001 Zimbabwean police used CS gas canisters against students’ halls of residence, and beat students that tried to escape the fumes.57 Human rights abuses may also arise because of inappropriate arming of security forces tasked with internal security and policing. For instance, if the security forces tasked with policing roles use arms, equipment and training designed for inter- state war or counter-insurgency, this is likely to help crank up the level of force. In these circumstances, the retraining of security forces in methods more appropriate to internal security (e.g. lethal force as a last resort, operating within civil law) can reduce the extent

54 Magas and Zanic (2001), p 254 & 296. 55 Gabelnick, Tamar (1999). 56 CAAT and TAPOL (2004) 57 Amnesty International (2003).

29 The impact of arms transfers on poverty and development, September 2004 of abuse; and related equipment transfers may be an appropriate element in supporting such a reorientation.

The nature of the end-user within the recipient state is also important. For instance, some states arm civil defence forces and other militia, which are often less accountable than regular security forces. The provision of arms to actors such as these increases the potential for human rights abuses. For example, Civil Defence Forces in Sierra Leone have been accused of human rights abuses including torture,58 and pro-government (and government-armed) militia in Zimbabwe reportedly carried out assaults and acts of sexual violence.59

Nevertheless, arms do not by themselves commit human rights abuses. And the potential to substitute one form of abuse or torture by another means that the instruments used are likely to be only a minor element in determining the level of suffering caused. The all- important determinant is the policies of the state concerned. Arms transfers merely provide regimes with the means by which to carry out repressive policies.

3.5 The costs of conflict

The development costs of conflict are immense and extend well beyond immediate casualties, of soldiers and civilians, in combat. In fact, the impacts of conflict have been succinctly summarised as “development in reverse”.60 Although the relationship between arms transfers and conflict is unclear what is clear is that the developmental impact of conflict, potentially fuelled by arms transfers, is enormous.

3.5.1 Impact of conflict on development The destruction caused by civil war and the costs of conducting conflict may include: o Death, injury and displacement, both directly as a result of violence and indirectly as a result of social dislocation. Cumulatively, the human costs of armed violence are considerable. o Disruption and disintegration of public services. o Destruction of household, industrial and business assets, and transport and communications infrastructure. o Interference with trade, capital flight and deterrence of investment and tourism. o Emergence/strengthening of illicit war economies, illegal resource extraction; mortgaging of resources. o Partial or complete state collapse. o Heightened military expenditure. Earlier on in the section a study was quoted that estimated that, on average, civil war increases military spending from an average of 2.8% of GDP to 5% of GDP.61 This is likely to siphon off state resources which could otherwise be used for poverty alleviation and development.

58 Amnesty International (2002a) 59 Amnesty International (2002b) 60 Collier (2003), p83. 61 Collier (2003), p14.

30 The impact of arms transfers on poverty and development, September 2004

Box 3: Angola 1999 - did arms transfers help end the conflict?

The arms transfers In 1998 the Angolan Government (AG) imported US$142m worth of arms, an increase of almost 55% on the previous – peaceful – year. This figure increased by over 246% in 1999 at a cost of $350m (WMEAT, 2002). In 1999 alone arms deliveries included 265 battle tanks; 140 large calibre artillery systems; 26 combat aircraft; 93 armoured combat vehicles, and 3 attack helicopters. These were transferred by Belarus, Bulgaria, Kazakhstan, Slovakia, and Ukraine (UN Register of Conventional Arms). These transfers increased Angola’s number of battle tanks by over 70% and combat aircraft by over 30% (UN Register of Conventional Arms).

Impact on internal conflict dynamics Arms transfers contributed to the military capacity of the AG to defeat the UNITA rebels. Although peace talks did not resume until after the death of UNITA leader Jonas Savimbi in February 2002, the military situation – in part facilitated by these purchases – may have been instrumental in the collapse of UNITA and its subsequent surrender. However, the human costs of heightened violence in this period were huge. The death toll rose from over 1,000 in 1998 to over 10,000 in 1999 (SIPRI, 2000). Nevertheless, insofar as arms transfers may have helped to end the war, they may have had positive effect. Since the war ended in 2002, GNI per capita has risen from $530 in 2001 to $710 in 2002 (World Development Indicators). By January 2004 most displaced persons had returned to their homes. However, it is arguable that the death of Savimbi was more important to ending the conflict than arms transfers.

Possible links to poverty Arms imports as a proportion of all imports rose from 3.6% in 1998 to 7.3% in 1999 (WMEAT, 2004). Angola’s average annual arms transfers between 1998 and 2002 per capita, were $15.4. (These figures are the aggregate 1998-2002 imports divided by aggregated population figures for these five years. Population data was taken from the World Development Indicators.) This was significantly higher than all other low-income countries except for Eritrea. In 2001, Angola had one of the lowest HDI ranks – 164th out of 175. Life expectancy was 40.2, and official spending on defence was 3.1% of GDP, outstripping health (2.0%) and education (2.7%). During renewed fighting a further 1.3 million people were displaced, bringing the total to 4.1 million (IDP Project, 2004) Many of the arms purchases, such as the import of combat aircraft from Slovakia, were underwritten by loans backed with oil concessions – thus mortgaging key natural resources. The destruction of economic infrastructure was significant. UNITA rebels destroyed an oil well in the north-west and attacks on diamond mines led DeBeers to suspend diamond exploration in some areas. Government officials, traditional authorities and aid workers were also targeted thereby undermining key elements of governance and humanitarian relief; 70% of all humanitarian aid had to be delivered by air rather than by road (Human Rights Watch 2001).

Sources: Human Rights Watch (2001); IISS (2003); IDP Project (2004); World Development Indicators; WMEAT, (2002).

31 The impact of arms transfers on poverty and development, September 2004

3.5.2 Scale of violence Violence – and particularly violence against civilians – often does not confine itself to the two (or more) major protagonists of conflict, but is often diffused by the distribution of arms to proxy militia and civil defence forces. Governments engaged in conflict often arm militia (usually with small arms) as part of their counterinsurgency strategies. The end-result is some loss of control over the use of force and the sowing of criminal and political violence against civilians during the conflict and for many years after. This is clearly the case, for example, in the current conflict in Darfur, where the Sudanese government armed the Janjaweed militia, and where this armament is now a significant obstacle to the success of peace efforts.

The cost of conflict in the post-conflict period may also be influenced by arms transfers. For instance, landmines, cluster bombs and other unexploded ordnance and remnants of war – transferred by international suppliers during conflict – may continue to inflict civilian casualties and deny access to land and infrastructure for many years after conflict. In addition, post-conflict societies commonly experience increases in criminal violence, often facilitated by the diffusion of SALW during conflict.

Furthermore, the ‘peace dividend’ of reduced military spending is seldom realised in the initial post-conflict period as high levels of military spending (on average 4.5% of GDP compared with 5% during conflict, but only 2.8% before conflict) typify post- conflict periods.62 This is explained, in part, by the continued influence of military institutions coupled with the high risks of a return to conflict. In large part, however, the persistence of high military spending reflects the need for restructuring, retraining and re-equipping the security forces. Security-building as part of peacebuilding may not immediately yield impacts on development, but it may still be an essential condition for development to be sustained.

3.6 Leakage and Diversion: licit to illicit

Varying degrees of commitment to the effective implementation of export control regimes and adherence to arms embargoes, as well as inadequate controls by legitimate recipient states, illegal activities by traffickers and brokers, and the illicit transfer of weapons to non-state actors, mean that arms which were originally transferred legally can often end up circulating in the illicit market.

Perhaps the most common source of such diversion, especially in relation to SALW, is from the security forces to rebel groups. In conflicts as varied as Nepal, Chechnya, Sri Lanka and the Mano River complex, this is a major source of armaments for rebel groups. Nor are international peacekeepers exempt from being a source of such leakage. Thus, for example, Eric Berman points to the corrupt practices of some of the African peacekeeping contingents intervening in West Africa, as well as the seizure in battle of weaponry by opposition groups from peacekeeping forces.63 The Revolutionary Front of Uganda (RUF) seized weaponry from Nigerian and Guinean ECOMOG forces in Sierra Leone, and there are allegations that ECOMOG and UNAMSIL-contributing contingents also sold their weapons to the RUF and government or ex-government forces in Liberia and Sierra Leone. UNAMSIL have

62 Collier (2003), p20 & 86. 63 Berman (2000), pp18-20.

32 The impact of arms transfers on poverty and development, September 2004 attempted to recover weapons its contingents have lost, but the extent to which this has been successful is unclear. Whilst in most cases there has been an effort to monitor the use of the weapons supplied under the peacekeeping capacity-building programmes, and in some cases weapons have been withheld on the basis of the questionable human rights records of would-be recipients or their direct involvement in conflict, there are clearly risks involved in supplying weapons to these militaries.

3.7 Conclusion

The potential impact of arms transfers upon internal security and conflict is context specific. The impact can either be positive or negative. However, the positive and negative impacts are not mutually exclusive. Indeed, even if made to the same country, two arms transfers may have opposing impacts, depending on the end-user and characteristics of the weapon. Some of these impacts include: • In pre-conflict/non-conflict contexts, arms transfers may contribute to enhanced security for both the state and its citizens. However, they may also contribute to poor human rights conditions by providing the tools of repression. In general, arms transfers are much more likely to make a positive contribution to security (and thus to development and poverty reduction) when the recipient government has security policies that are appropriate to its circumstances, and where its security forces are subject to effective control by political leaders committed to avoiding abuse and repression. • In a conflict-prone situation, arms transfers may reduce the risk of conflict, through a deterrent effect, or they might contribute indirectly to the outbreak of violence. Transfers are more likely to have a positive, and deterrent, effect on the possibility of inter-state conflict when the recipient government’s aims are clearly defensive, and this is reflected in its military posture. In the case of possible deterrence of intra-state conflict, transfers are more likely to be positive in their effect when they take place in the context of government policies that seek to address the structural causes of internal conflict, such as perceived exclusion of particular communities from economic and political power. If they do contribute to conflict prevention in this regard, they also reduce a major risk factor that, if realised, would lead to increased poverty. • During conflict, arms transfers can help accelerate victory for government forces in civil war, reduce incentives for negotiated settlements in civil wars by maintaining the military viability of continued conflict, and increase the scale and severity of destruction (physical and human). In these circumstances, the primary consideration is whether the transfers in question are likely to accelerate the ending of the conflict, since the cessation of conflict can make an immediate impact of the livelihoods of poor people. If there is not a clear case to be made that they will do so, then arms transfers during conflict will generally have negative consequences for poverty. • In post-conflict periods, arms transfers may contribute to the consolidation of security, or may be a factor in the destabilisation of an unstable peace. The primary consideration in determining whether the effect of arms transfers is positive or negative is whether they support wider peace processes that are judged to be key to the prevention of future conflict, with the increased poverty than conflict typically brings. • In all these scenarios, a key consideration in judging the effects of arms transfers must be an assessment of the risk of substantial diversion from authorised end-

33 The impact of arms transfers on poverty and development, September 2004

users to others. The higher such a risk is seen to be, the greater the probability that transfers will enhance the combat power of both parties to a conflict, potentially contributing to escalating destructiveness, increased loss of human life, and increased poverty.

In all settings, therefore, contextual factors influence whether the impact of arms transfers on poverty is positive or negative. Yet this does not mean that arms transfers have no impact. Transfers of particular types of arms, equipment, training, or transfers to particular recipients within a state, often have a clear and direct impact on the direction and nature of internal conflicts. They can also often have important indirect impacts on internal security and conflict, through their relationship with the other key variables discussed in the other three parts of this paper.

34 The impact of arms transfers on poverty and development, September 2004

4. Impact of arms transfers on inter-state conflict dynamics

Arms transfers can contribute to the deterrence of wars between states, making war (with all its consequences for economic development) less likely.

Arms transfers can contribute to the protection of borders and improve capacity of states to take part in peacekeeping operations.

Arms transfers can help increase the belligerence of states and contribute to the risk of war.

Arms transfers can fuel emulative arms purchases by neighbours, thus sparking an arms race, which can divert substantial resources from poverty reduction.

4.1 Introduction

This chapter considers the impact of arms transfers on inter-state dynamics, and the ‘knock-on’ effects that these dynamics could have on poverty and development. Arms transfers to developing countries, as to all countries, have the potential to serve a number of positive functions, such as: the deterrence of inter-state war; the policing of borders to counter non-state threats to economic and political security; and the enhanced capacity of developing countries to engage in peacekeeping operations. These functions clearly have the potential to produce positive spillovers among developing states, which can have beneficial effects on poverty reduction and sustainable development.

However, arms transfers can also have negative impacts, in that they can help to increase the belligerence of a state and the potential for pre-emptive strike; and they can encourage emulative arms procurement in other states, thus creating an arms race. Arms races, which compound and reinforce inter-state tensions, absorb huge quantities of resources, which is likely to have a negative impact on development because it sucks up state resources, thus having an opportunity cost for other sectors of public spending, as outlined in chapter two.

4.2 Arms transfers and inter-state war

While intra-state conflict has become the predominant concern in many developing countries, inter-state tensions and conflict remain major drivers of weapons acquisitions, as can be seen for example in the cases of India and Pakistan, the Horn of Africa, and much of the Middle East. In fact, in the case of Egypt and Israel, both states are major factors in the other’s defence planning, and have been so since the 1950s. States acquire weapons in order to counteract threats, real or perceived, of other states to undermine or threaten its interests, such as physical and economic security, political autonomy and the well-being of its citizens. For example, it is argued that Singapore maintains a high level of military capability because it is surrounded by larger, and potentially unstable, states.

35 The impact of arms transfers on poverty and development, September 2004

Arms imports can help deter aggressive actions by other states and, when deterrence fails, can provide the means to repel attack. The corollary, however, is that the acquisition of arms can, in itself, be threatening to other states. For it is unusual (albeit possible) to design military postures and capabilities that are effective for defence that do not also provide offensive options.

4.3 Protection of borders and peacekeeping capacity

Arms transfers can assist governments in deterring and acting against non-state cross- border challenges to security – such as the infiltration of rebel groups across borders, spillover of conflict from neighbouring countries, and organised crime and illegal exploitation of natural resources – all of which can undermine economic development. In the Horn of Africa in the late 1990s, for example, Ethiopia, Yemen and Sudan supported the Alliance of Eritrean National Forces; Ethiopia supported the Somali Reconciliation and Restoration Council; Eritrea aided the Oromo Liberation Front in Ethiopia and the National Democratic Alliance in Sudan; Sudan supported the Lord’s Resistance Army in Uganda and the Eritrean Islamic Jihad; and Uganda supported the Sudan People’s Liberation Movement/Army (SPLA). 64

4.3.1 Dealing with conflict spillover Internal conflicts often spill over into other countries, though an influx of refugees, through economic instability, the spread of ethnic tensions, and so forth. Colombia’s internal strife, for example, is perceived as presenting a threat to Brazil, which has invested in a satellite system to monitor its economic resources, its airspace and to maintain military surveillance of its borders.65 The acquisition of equipment that supports the ability of the state to protect its borders can safeguard security, internal stability, and foster economic prosperity.

4.3.2 Combating organised crime Imported arms may be used to counter other trans-border challenges such as organised crime, trafficking of people, arms, narcotics and smuggling, and the illegal exploitation of natural resources such as offshore fisheries, by outside actors. Bangladesh’s recent acquisition of coastal patrol vessels from the UK Royal Navy to deal with the massive problem of piracy in its waters demonstrates the potential for imports of military equipment to directly benefit economic security.66

4.3.3 Enhancing peacekeeping capacity Inadequate equipment has been cited by various quarters, such as the UN’s Brahimi Report on UN Peacekeeping Operations, as one of the flaws of UN peacekeeping operations over the past decade.67 Subsequently, there has been a trend towards including lethal military equipment in capacity-building programmes in recognition that a robust capacity is necessary for African peacekeepers to be effective.68

64 Durch (2000), p67. 65 Hagelin et al. (2003), p.453. 66 ‘Patrol vessel handed over to Bangladesh’, Navy News (2002). Bangladesh was second only to Indonesia in the number of piracy incidents recorded by the International Maritime Bureau in 2003. ‘Sea piracy reaches record high’, CNN.com (2004). 67 UN (2000). 68 Berman (2003), p200.

36 The impact of arms transfers on poverty and development, September 2004

For example, South Africa had peacekeepers or monitors deployed in the DRC, Burundi, Comoros, Liberia, and along the Ethiopian-Eritrean border. The intervention of well- equipped, robustly-mandated and professional peacekeepers can do much to stabilise zones of conflict, providing an environment in which humanitarian aid can reach the most vulnerable, tensions can begin to de-escalate, warring factions can lay down their arms, and opportunities for poverty reduction and improvements to the lives of ordinary people can be seized upon where war had denied them.

However, the diversion of arms from peacekeepers to rebels has also been identified as a potential source of destabilization in some cases.69 For example, the RUF seized weaponry from Nigerian and Guinean ECOMOG forces in Sierra Leone, and there are allegations that ECOMOG and UNAMSIL-contributing contingents sold their weapons to the RUF and government or ex-government forces in Liberia and Sierra Leone.

4.4 Arms transfers and belligerent state behaviour

The ability (and right) to import modern sophisticated weaponry is commonly equated with high status in the regional and international environment.70 However, where a state perceives arms procurement by its rival as a signal of aggressive tendencies, or as a growing impediment to its ability to succeed in any future military adventure, there may be an incentive for it to launch a pre-emptive attack before its rival gains sufficient military capability to launch or to defend against an attack. Referred to as deterrence dynamics, one school of thought considers a clear superiority gap in military capabilities between states as being more conducive to stability, while the other sees a balanced capability as the best deterrence against inter-state war. There is no consensus on the relative abilities of either of these models to adequately explain the real world. For example, Iraq’s initiation of war against Iran in the early 1980s was, in part, a response to perceptions of a closing window of opportunity as it watched the arms build-up by its more economically powerful rival.

Further, in a situation where a state is unable to match an opponent’s conventional arms capability, it may respond in other ways, such as through investing in WMD and terrorism, increasing its numbers of military personnel, increasingly aggressive public statements, or by promoting uncertainties over its intentions through secrecy in arms procurement and reduced transparency and cooperation, e.g. North Korea.

4.5 Arms transfers and arms races

Pursuing deterrence against threats from other states through the acquisition of arms comes at a cost. In particular, the acquisition of arms by one state can represent a threat to other states who may respond by investing in weapons to counter that threat thus creating an arms race.71 This type of behaviour can be seen to varying degrees amongst developing states today, such as in the context of Ethiopia/Eritrea, Taiwan/China, South America, and India/Pakistan.

69 Berman (2000) points to the corrupt practices of some African peacekeeping contingents intervening in West Africa, as well as the seizure in battle of weaponry by opposition groups from peacekeeping forces. pp18-20. 70 Chalmers (1996), p125. 71 See Nutter (1994), pp29-54 for a useful discussion of ‘threat’.

37 The impact of arms transfers on poverty and development, September 2004

4.5.1 Ethiopia/Eritrea The Ethiopia-Eritrea case provides a clear (and deadly) example of the negative impacts of an arms race. The border conflict between 1998 and 2000 was preceded and accompanied by huge investments in imported arms on both sides, with Israel, Russia and China, amongst others, supplying weaponry, such as combat helicopters, fighter jets, missiles, tanks, artillery guns, and SALW and ammunition. The two countries were reportedly spending as much as $1m on the war every day at its height.72 This was estimated to have depleted Eritrea’s foreign currency reserves from the equivalent of seven months of imports before the war to approximately three months by April 1999. The fighting also severely disrupted transport and trade links and foreign investment.73 In addition, the effects of the famine put up to nine million people at risk across the two countries.74 The war is said to have left a legacy of military spending significantly above international norms (7% of GDP in Ethiopia, and 24% in Eritrea).75 This diverted resources from other potential uses, public and private, that could potentially have been used for poverty reduction.

4.5.2 Taiwan/China In the case of Taiwan and China, full-scale war remains a possibility, with Chinese leaders threatening to use force in response to further significant moves towards Taiwanese independence. U.S. policy has been to provide military aid to Taiwan in order to balance China’s weapons acquisitions and missile deployments ranged against Taiwan. China has in turn stated that its missile deployments are designed to counter Taiwan’s U.S.-supplied arms. It also seems likely that China’s order for Russian-built submarines is a response to the U.S.’s offer of eight submarines to Taiwan in 2001. China’s recent announcement of a near 12% increase in its military budget to support improved combat-readiness, in the context of the 2004 Presidential elections in Taiwan, is likely to be reflected in new arms orders by other countries fearful of growing Chinese regional hegemony. 76

4.5.3 South America In the case of Peru and Ecuador, a border dispute, which resulted in a short war between the two countries in 1995, led to spiraling expenditures on weapons. President Fujimori of Peru said the border conflict had forced his government to buy “absurd” arms, such as 18 MiG-29 fighter jets bought from Belarus in 1996. Since de-escalation it has been calculated that the peace dividend will save Peru $3bn over the coming three years.77

Confidence-building measures have recently improved cooperation in South America and have largely allowed the region to avoid inter-state hostilities and costly interactive arms acquisitions. Chile and Argentina have even developed a joint methodology for calculating defence expenditures, following years of mutual suspicion which had been a major driver for expenditure on arms. In this region at least, expenditure on arms in recent years has been driven primarily by modernisation programmes, facilitated, until the recent economic downturn, by rising GDPs, and aimed more at the protection of valuable marine economic zones from illegal fishing and smuggling.

72 Last (1999). 73 Last (1999); International Crisis Group (2003). 74 The Independent, April 12 2000. 75 Collier and Hoeffler (2002). 76 BBC Online, 6th March 2004. 77 Federation of American Scientists (2004). The Peruvian gross national income is $52bn a year, so $3bn is around 2% of gross national income each year, thus the saving made from reduced military expenditure.

38 The impact of arms transfers on poverty and development, September 2004

4.5.4 India/Pakistan The India-Pakistan rivalry is commonly seen as the best contemporary example of the classic arms race involving two states, and it is clear that the history of their tensions and strategic uncertainties, particularly over Kashmir, are a major if not the primary influence on their arms acquisitions policies and huge military expenditures. These two countries have repeatedly been at the top of low-income developing country arms importers in terms of total arms imports (though not arms imports as a percentage of total imports). These consume resources that could otherwise be available for other purposes, including poverty reduction.

But, in fact, even the India-Pakistan relationship is far more complex, implying that developmental impacts go beyond a simple two-state model of arms acquisition interactions and knock-on effects. In this case, the reality is that Pakistan is chasing India in terms of military capability, while India also views China as its principal “peer competitor” and as a source of threat to its strategic interests in the wider region. China perceives itself as sitting within a higher-level security complex involving, amongst others, the U.S. This means that U.S. capability levels can indirectly influence Pakistan’s spending on arms, and hence, however indirectly, have an impact on Pakistan’s poverty reduction.78

It is, however, at the regional level where one can observe the most direct interactions between states, particularly where states are contiguous, as it is factors associated with geographical proximity that usually present the most obvious and immediate threats to the vital interests of states (particularly territorial security), especially when combined with a historical legacy of tensions or recent separation.79 Kashmir, both the DRC and the Republic of Congo, Ethiopia-Eritrea, East Timor, Iraq-Kuwait, and the conflicts of the former Soviet Union provide a few examples.

4.5.5 The cost of arms races Arms races involving developing states have the potential to absorb significant quantities of scarce public funds. Broadly speaking, inter-state wars tend to involve more sophisticated weapons, cost more to fund per day and involve a much higher daily rate of casualties. On the other hand, and partly because of their intensity, inter- state conflict often last a much shorter period of time (with the significant recent exception of the Iran/Iraq war). Internal conflicts, by contrast, tend to involve smaller and cheaper weapons, and last much longer. A recent analysis of the costs of arms races in developing countries found that the largest increases to military expenditures came as a result of involvement in international war, which raised spending by 2.5 percentage points (as opposed to civil war which sees spending increased by around 1.8 percentage points).80

4.6 Inter-state rivalries and the “multiplier effect” The nature of inter-state threats and ambitions requires the procurement of certain types of weapons systems, such as aircraft carriers, long-range submarines, bomber aircraft and offensive missile systems. Sophisticated technologies such as these have

78 States tend to exist in multi-dimensional security relationships, which are sometimes described as a “security web”. In this context, arms imports aimed at one set of threats could have a negative impact on other security relationships. 79 Many of the inter-state and regionalised conflicts witnessed in recent years may be understood, in part at least, as products of the process of state consolidation following independence from colonial rule, and the often arbitrary drawing of borders which cut across historical territories and ethnic groupings. 80 Collier and Hoeffler (2002).

39 The impact of arms transfers on poverty and development, September 2004 an important demonstration effect and as such can be highly influential in terms of inter-state deterrence calculations, threat perceptions and reciprocal acquisitions. Even the acquisition of supposedly ‘defensive’ technology affects power balances, and as a result can precipitate or escalate arms races. In addition, the like-for-like replacement of ageing equipment may also be perceived as hostile by others, and may also precipitate competitive inter-state arms races.

4.6.1 Inter-state war weaponry Competitive inter-state arms acquisitions are a high-cost endeavour. The external threat-orientated types of equipment described above tend to be the most expensive, whereas internal security concerns tend to be met with more labour-intensive relatively lightly-armed forces, which in low-wage societies tend to be financially cheaper than in advanced industrial economies. These distinctions are not always the case, however, as demonstrated by the use of increasingly sophisticated helicopters and jet aircraft for counter-insurgency operations, in Sudan and Indonesia for example. The life-cycle costs of major equipment systems are generally much higher than for lower-tech hardware. Put together, one sees that inter-state arms competitions involving developing states have the potential to absorb significant quantities of scarce public funds.

4.6.2 Regional multiplier effect of civil wars In addition to the economic impact of increased diversion of public expenditure to military expenditures, civil war reduces not only the growth rate of the country in which it occurs but can have an impact across an entire region, acting as a major multiplier of the economic cost of conflict.81 A recent World Bank study found that civil war impacts on the military spending of neighbouring states. “On average, if civil war leads a government with two neighbours to raise its military expenditure by 2.0 percentage points of GDP, by the time the arms race is back to equilibrium, the neighbouring countries will each have increased their spending by around 0.7 percentage points”.82 It then goes on to further highlight the ways in which civil wars spillover and impact upon development. These include the regional and global economic impacts of hosting refugees, such as the burden and destabilising effect to Pakistan of hosting two million Afghan refugees, disruption to trade and inward investment, and the health and social impacts of the spread of infectious diseases and HIV/AIDS associated with conflict and displacement.83

The trans-border spillovers of conflict may, in addition, produce global security threats and associated costs. States weakened by war, porous borders and the general instability associated with zones of conflict, are easy prey to the activities of terrorists, drugs production, the exploitation and trading of “conflict commodities” such as coltan, timber and diamonds, and the trafficking of drugs, people and arms, which has impacts far beyond the borders of the country concerned.84

81 Murdoch and Sandler (2001), p36. 82 Collier and Hoeffler (2003), p34. 83 Collier et al (2003), chapter 2. 84 Mass and Mepham (2003); UN (2002).

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4.7 Conclusion

Arms imports have the potential to help prevent war through deterring the use of force by neighbouring states. They can help to improve the ability of developing country peacekeeping contingents to stabilise conflict within their own neighbourhoods, and can also serve to bolster the abilities of states to counter sub-state threats in the form of insurgencies, cross-border criminal activity, and the illegal exploitation of economic resources. However, the decision to import arms and the increased threat they may represent, can also signal hostility to other states, and hence contribute to rising inter-state tensions and an increased likelihood of the outbreak of war. The multiplier effect of emulative arms acquisitions on regional military expenditures represents a major drain on the scarce funds available for poverty reduction in countries that decide to engage in competitive behaviour.

The regional and international political environment in which arms transfers take place clearly requires context-specific analysis in order to determine the balance of impact in any particular case. The key point in this chapter is that arms transfers to one country can have negative regional impacts by compounding insecurity and perpetuating higher levels of military expenditures. High levels of militarization as a response to regional tensions can divert significant human resources which could otherwise be engaged in production, and the uncertainties associated with inter-state arms build-ups impact on trade, inward investment, livelihoods and so forth.

41 The impact of arms transfers on poverty and development, September 2004

5. Impact of arms transfers on levels of corruption

High levels of corruption in developing countries discourage investment, reduce economic growth and contribute to increased poverty.

Corruption may encourage purchases that are inappropriate to requirement and are more expensive than is necessary, thus diverting resources from other uses.

Corrupt practices, which are particularly prevalent in the arms trade, support and help to maintain systems of corrupt politics.

5.1 Introduction

This chapter explores how corruption in the arms trade can affect development and standards of governance in developing countries. It argues that the main impacts lie in the potential for corrupt practices to encourage expensive and inappropriate purchases, to discourage investment, and to feed into and support a system of patrimonial politics which has implications for that society, particularly in terms of the impact of corruption levels on growth and poverty levels.

The evidence suggests that the arms trade suffers from higher levels of corruption than most other sectors of international trade due to the structure of the arms industry, its lack of transparency and the existence of off-budget spending. The highly secretive nature of the sector means that corrupt practices may be “hidden” in the use of commissions, agents or complicated offset packages. These factors are discussed in the first two sections of this chapter in order to facilitate a better understanding of the forms of corruption in the international arms trade and the “push” and “pull” factors that make it widespread. The section then moves on to consider the main impacts of these corrupt practices on developing countries.

5.2 Corruption in the arms trade

Corrupt practices in arms transfers are widespread and commonplace. According to the NGO Transparency International, of all industries ranked in its 1999 Bribe Payers Index, the arms industry was considered the second most likely to involve bribes.85 Despite accounting for less than 1% of world trade in 1999, estimates from the US Department of Commerce indicate that 50% of all bribe offers relate to defence contracts.86 In Pakistan alone, a former chief of the now defunct Accountability Bureau claimed in 2000 that $1bn had been paid to senior military officials in kickbacks in eight defence deals.87

85 The public works and construction industry was ranked first. Courtney (2002), p10. 86 US Department of Commerce (2000), p35. 87 Courtney (2002), p10.

42 The impact of arms transfers on poverty and development, September 2004

5.2.1 What do we mean by corruption? There are many different ways in which corruption can be understood, and there are a number of differences between the forms assumed in developing countries as compared to developed countries.88 However, it is widely accepted that “political corruption involves the abuse or misuse of public office, public resources or some public obligation or duty for the purposes of private (personal, group or sectional) gain”.89

5.2.2 Bribes and commissions In addition to straightforward bribes, the anti-corruption NGO Transparency International considers the use of commissions and agents90 (which are legal practices and widespread in arms transfers) in its report on corruption in the official arms trade. This report argues that corrupt practices may be “hidden” in the use of commissions, agents or complicated offset packages.91 Indeed, a 1997 report by the UK Control Risks Group found that 56% of European companies and 70% of US companies “occasionally used middlemen such as agents, joint venture partners or subsidiaries to make corrupt payments”.92 These practices have a clear opportunity cost, since arms companies are likely to include the price of any commission or corrupt payment in the price of the equipment, thus making the equipment more expensive, which has an impact on the purchasing country.93

5.3 Causes of corruption

5.3.1 Supply side – “push” factors Most countries support their domestic arms industry citing reasons of self-sufficiency and issues of national defence. For example, OECD countries continue to give official support to their military exports, often through hefty subsidies.94 Because arms contracts are often high in monetary value, securing a particular deal becomes extremely important, often making the difference between bankruptcy and financial solvency for a company.95 The competition to secure large contracts is characterised by companies frequently accusing each other of corrupt practices. For example, the US government, after receiving reports from the CIA and two US arms companies, accused BAE Systems of corrupt practices in its £1bn Gripen deal with the Czech Republic in 2001.96 At the same time, it is important to inject a word of caution:

88 For a discussion of these differences see Doig & Riley (1998); Robinson (2002). 89 Szeftel (2000a), p298. 90 Courtney (2002), p24. 91 For example, the recent claims by a former employee of BAE Systems that the company had a £20m slush fund to finance prostitutes, gambling trips, yachts, sports cars, and more for the Saudi royal family and their intermediaries. The Guardian, 11 September 2003. 92 Hawley (December 2003), p17. 93 Transparency International (25 April 2002). In November 2003, the UK Export Credit Guarantees Department, which uses taxpayers money to insure domestic companies doing business abroad against risks such as the company not being paid or the project collapsing, provided cover to BAE Systems despite BAE’s refusal to provide details and evidence of agents and commission payments made relating to a defence contract with Saudi Arabia. 94 Fitzgerald in Stewart et al (2001), p211. 95 Roeber (2003), p3. 96 The Guardian (12 June 2003).

43 The impact of arms transfers on poverty and development, September 2004 companies can often overstate the faults of their competitors in order to undermine them. It is very difficult to get solid evidence of illegal or corrupt activities.

The secrecy that shrouds arms deals makes the industry more susceptible to corrupt practices. Defence contracts are often excluded from freedom of information legislation.97 Arms companies – and governments – can therefore, to a certain extent, operate outside the realm of normal public scrutiny. Even the UK government, which promised (and to a large extent delivered) greater transparency by introducing annual reports on UK arms transfers after 1997,98 refuses to publish a 1992 National Audit Office report into the Al-Yamamah deal with Saudi Arabia. Such actions highlight the secrecy surrounding the industry and convince arms companies and corrupt officials that their actions will be concealed from public gaze.

5.3.2 Demand side - ‘pull’ factors In many developing countries the state is based on patrimonial politics in which political support is exchanged for “favours”.99 Corruption is often rife in these regimes as it provides a source of rewards for political support.100 For example, in Zaire, Mobutu bought allegiance by shuffling lucrative positions within his regime and providing cash handouts.101 In patrimonial regimes (which are based on factional competition and rivalry) access to the fruits of corruption may benefit particular factions or ethnic groups, and, as a result, exacerbate tension.102 The economic crises and restructurings which many African states have undergone since the 1980s have intensified factional competition and rivalry. In turn, this has led to an increase in corruption, an increase in criminal activity, an increase in state repression, or the wholesale collapse of the state.103 World Bank research shows that corruption increases when foreign firms work in corrupt environments.104

5.3.3 Do offsets increase the potential for corruption? Another potential avenue for corrupt practices is through “offsets”. Earlier, in chapter 2, the role of offsets was considered in terms of the impact of arms transfers on military expenditure. But it is important to also consider whether offset packages can help conceal large bribes or commissions, or whether they unduly influence a country’s decision when procuring weapons. Offset packages “have a reputation for raising the cost of a deal by around one-fifth; being difficult to monitor; failing to bring the benefits promised at the time of sale; and contributing to corruption”.105 Offsets can also help feed into domestic corruption relationships as contracts can be channelled through local firms chosen for their political connections. In the South African deal, subcontracts with local firms allowed further opportunities for officials to line their pockets.106 (See Box 1 for more on the South Africa deal.)

97 Gupta et al ( 2001), p2. 98 The Annual Report on Strategic Exports is published by the Department of Trade and Industry. The first was published in spring 1999 and covered 1997, the second in autumn 1999 covering 1998. They have been issued annually since. DTI Strategic Export Controls Annual Reports, The Stationery Office. 99 Szeftel (1998); Reno (1995). 100 Colombatto (2003); Szeftel (2000a), (2000b). 101 Le Billon (2003), p416. 102 See Le Billon (2003); Szeftel (2000a); Doig & Riley (1998). 103 Le Billon (2003); Allen (1999); Szeftel (1998). 104 Hellman, et al (August 2002), p.12. 105 Hawley (December 2003), p18. 106 Courtney (2002), pp12-13.

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Box 4: Bofors 1986 – the deal that shocked India

The deal In March 1986, the Indian government signed a deal worth Rs 1437 crore ($1.3bn) with Bofors of Sweden for howitzers and accessories against stiff competition from Sofma of France, International Military Services of the UK, and Voest Alpine of Austria (Brask & Jonsson, 2002). The new howitzers were intended to meet pressing operational needs, particularly in relation to Sri Lanka and on the border with Pakistan.

Corruption charges In the first round of evaluations during 1983-5, the Sofma howitzer was the preferred option of the Indian army. It passed more evaluations than the others. But this preference was reversed on the arrival of a new army chief, General Sundarji, in favour of the Bofors bid (Bhushan, 1990). In April 1987 it was revealed that the Bofors deal had been tainted with bribes and “consultancy fees” to ensure the contract, and that politicians had put pressure on the army to choose Bofors. India’s Central Bureau of Investigations (CBI), who investigated the allegations, later traced these “fees” to a number of Swiss bank accounts. The scandal created a political uproar in India. It tarnished the image of the Prime Minister Rajiv Gandhi and led to his party’s defeat in the 1989 general election (Singh, 1997).

The main links to poverty It made the equipment more expensive: The actual loss caused to the government in the Bofors scam was over Rs 100 crore ($90m). This sum, said the CBI, provided for commissions worth 8.24% of the deal to accused Hinduja brothers, Win Chadha and Ottavio Quattrocchi for their alleged role in getting the deal awarded to the Swedish arms manufacturers (Ram, 1999). This loss from commissions represents 4% of public expenditure on education in 1986, and 1% of total military expenditure in 1986 (Sivard, 1989).

It had a negative impact on public expenditure: the Bofors deal constituted 17% of Indian’s total military expenditure for 1986 (Sivard, 1989). In the same year, India ranked 13th in terms of total military expenditure – which was 3.5% of GNP. This compares with spending on education at 3.4% of GNP but compares unfavourably with the 0.9% of GNP spent on health (Sivard, 1989). From 1986-7 overall external assistance to India (including loans and grants) was Rs 6159.5 crore (AAAD, 2002-3). Although external assistance cannot be used for military spending, this aid is fungible (see pg 11 for a description of this). The Bofors deal, therefore, would have constituted 23% of this external assistance.

Sources: Bhushan (1990); Brask & Jonsson (2002); Mayadas (1999); Roeber (2004); Ram (1999); Singh (1997), Aid Accounts and Audit Division, 2002-2003; Sivard (1989).

5.3.4 Anti-bribery measures The OECD 1997 convention on “Combating the Bribery of Foreign Public Officials in International Business Transactions” outlaws corrupt payment. Offenders face heavy fines and up to seven years’ imprisonment. However, no company in any OECD country (apart from in the US) has been prosecuted for or convicted of bribery since the

45 The impact of arms transfers on poverty and development, September 2004 convention was introduced.107 In addition, the convention only covers straightforward bribes; but, as argued by Transparency International and other NGOs there is a case for extending what is defined as corruption to cover commissions and the use of agents.108

Transparency International also considers the charge that states with huge international political clout such as the UK and the US do not have to revert to corrupt practices. Indeed, political pressure through diplomacy is often used to promote the cause of domestic arms companies. This is not corruption, of course, but if we are considering how arms transfers affect development, then it is important to acknowledge the legal ways in which pressure is applied to developing countries to procure weapons. 109

5.4 Corruption and economic growth

Corruption is not just a problem in developing countries.110 However, it is generally accepted that the effects of corruption on the developing world are potentially far more devastating. In fact, there is a broad consensus amongst academics and policymakers on “the deleterious impact of corruption on economic growth, equitable wealth distribution, and the legitimacy and efficiency of governing institutions”.111 There is considerable evidence that high levels of corruption are associated with low rates of economic growth. One recent study, for example, estimates that a one-point improvement in a country’s Transparency International corruption score increases productivity by 4% of GDP and increases net annual capital inflows by 0.5% of GDP.112 Since the benefits of corruption tend to be distributed in a highly inequitable fashion, the impact of reduced corruption on poverty levels may be even more dramatic. External policies and actions that significantly increase (or reduce) levels of corruption, therefore, are also likely to have a significant effect on levels of poverty.

5.5 Corruption encourages inappropriate purchases and higher prices

Corrupt practices encourage governments to spend more on defence, which in turn impacts on the economy by depleting foreign exchange, causing trade deficits and encouraging governments to get into debt in order to pay for the purchases.113 While this was dealt with at greater length in chapter 2, corrupt practices in the arms trade play a specific and important role in encouraging governments to increase spending. For example, in 2002, Ishola Williams, a retired Nigerian army major-general, blamed corruption for the decision to hire expensive private planes to fly Nigerian troops to Liberia when Nigeria’s own planes only needed a few spares.114 This is a clear example of where corruption has had a negative impact on the quality of the procurement decision. And in Uganda huge payments made to key members of the Ugandan military throughout the 1990s ensured a steady stream of purchases (some faulty) at grossly inflated prices. (It is alleged that $50m was paid to an Israeli businessman based in

107 Hawley (December 2003), p17. 108 Hawley, (December 2003), p20. 109 Courtney (2002), p22. 110 Britain, Germany, Israel and France, have all had very recent high impact corruption scandals, many of which involved bribes or kickbacks on arms exports. 111 Le Billon (2003), p413. Also see Robinson, (2002); and Heymans & Lipiez, (1999). 112 Lambsdorff (2003), quoted in Rose-Ackerman (2004). 113 For a discussion of these issues see Willett (1999); and Gupta, et al (2001). 114 Courtney (2002), p11.

46 The impact of arms transfers on poverty and development, September 2004

Kampala for four MIG-21s, a more reasonable price was estimated to be $10m.)115 Corrupt practices help to skew government spending, diverting resources away from poverty-reduction priorities.

5.6 Supporting corrupt regimes

By providing opportunities for some individuals to line their pockets, corrupt practices in arms transfers help to create powerful vested interests in utilising government expenditure for arms purchases. For example, in India, the 2001 “Tehelka tapes” scandal, where journalists posed as arms salesmen and offered bribes to Indian officials, helped to reveal the intricate nexus of middlemen, politicians, military officers and civilian counterparts who benefit from bribes.116 This did little to convince the Indian public that times had changed since the Bofors corruption scandal that rocked India in the 1990s. (See Box 4.)

In the case of Uganda, as in many other countries, corrupt practices help to maintain the regime in power by guaranteeing the support of key members of the military, who have been accused of intimidating opposition supporters.117 Ugandan government ministers were also able to convince their parliament that an investigation into allegations of widespread corruption in military procurement throughout the 1990s, involving high- level military figures, would jeopardise national security by divulging sensitive information.118 All of this acts as a block on movements towards good governance and could create obstacles to security sector reform. The partisanship that evolved in the case of Uganda hindered the development of a professional national army.119 Corruption generally helps to weaken the ethics of security forces so that they begin to act in terms of personal and corporate interests rather than fulfilling their security functions.120 For example, in India it has been suggested that corruption has undermined the efficiency and legitimacy of the military.

Corruption scandals also tend to help erode belief in the legitimacy of the political system, which can help encourage political instability.121 For example, excessive military spending by the Shah of Iran during the 1970s, encouraged by corrupt payments, was a significant factor in the 1979 revolution. And, according to Transparency International, investigations and prosecutions of several heads of government in south-east Asia in 2001, linked to corruption in military procurement, were accompanied by widespread political unrest.122

115 Tangri & Mwenda (2003), p541-2. 116 Courtney (2002), p10. The tapes also allege that an agent for BAE Systems made “corrupt approaches” to a party treasurer linked to the Indian defence minister, George Fernandes The Guardian, 14 June 2003. 117 Tangri & Mwenda (2003), pp548-549. 118 Tangri & Mwenda (2003), p547. 119 Tangri & Mwenda (2003), p540. 120 For example, according to Krause (1996), “The Syrian military has institutionalized economic corruption to satisfy the demands of the armed forces for resources, and has hindered the emergence of an independent economic or technocratic elite.” p186. 121 See Seligson (2002). 122 Courtney (2002), p16.

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5.7 Conclusion

Corruption in the arms industry is widespread and leads to significant costs to developing countries: it can help increase the costs of appropriate purchases, persuade government officials to make inappropriate purchases, and discourage investment. In addition, corrupt practices can help to prop up corrupt regimes, thereby having a negative impact on governance. Overall, the evidence is clear that corrupt practices in the official arms trade help to deprive countries of the resources to promote growth and poverty reduction, as well as contributing to the undermining of standards of governance in many recipient states.

48 The impact of arms transfers on poverty and development, September 2004

6. Arms transfers to developing countries: a balance sheet

This paper has examined the impact of arms transfers on development and poverty under four headings: military expenditure and resource diversion, internal security and conflict, inter-state security and conflict, and corruption. Perhaps the most important part of this assessment has related to the impact of arms transfers on the likelihood, extent and depth of conflict at both an intra-state and inter-state conflict. In some cases, arms transfers can contribute to peace (and therefore the possibilities for poverty reduction) by deterring rebellion and aggression, strengthening legitimate security functions, and helping governments combat crime and violence. Yet arms transfers also have the capacity to directly and indirectly increase poverty, by inducing insecurity, contributing to abuses of power, and diverting arms into illegitimate hands.

While the impact of arms transfers on conflict vary considerably, and can be negative or positive depending on context, the impact of corruption and resource diversion are, in almost all cases, negative in their impact on levels of poverty. Corruption in the arms trade characteristically increases recipient costs and undermines the links between arms supplies and justifiable security requirements. Arms transfers also have opportunity costs, with little evidence of net economic benefits, thereby reducing the resources potentially available for combating poverty.

Assessment of the net impact of arms transfers on poverty and development thus requires an understanding of the potential use, as well as cost, of the arms in question. This is not an easy task, not least because of the difficulty involved in isolating the impact of arms transfers from other factors, such as the dynamics of security and development, of which arms often form a significant part.

6.1 Implications for export licensing

Although this report is not intended to be an analysis of possible methodologies for assessing export licence applications, it does suggest certain lessons that might be relevant in that context:123

First, it reinforces the argument in favour of case-by-case consideration of the potential impact on poverty of arms exports for which licences are being sought. This does not imply, however, that there should be a presumption to grant a licence unless a compelling case is made not to do so. Where the general conditions in a country are of sufficient concern (e.g. in relation to its human rights record or the lack of accountability of its security forces), a presumption of denial might be more appropriate, to be overturned only when a clearly positive ‘balance sheet’ can be demonstrated.

123 These comments are necessarily brief in nature, and do not attempt a full analysis of the complex relationships between arms transfers and licencing. Nor do they propose how licencing methodologies might be amended in order to take account of the analysis undertaken in this paper. For detailed proposals for the development of a methodology for assessing the impact of proposed arms transfers on sustainable development, see the parallel project reported in Control Arms (2004), pp. 55-84. Several of the authors of this report made significant contributions to advising on the development of the Control Arms methodology.

49 The impact of arms transfers on poverty and development, September 2004

Second, given the necessary complexity of the judgements that are needed in order to assess the impact of a particular arms transfer on poverty, it will probably be more efficient to focus scarce government licensing resources on those transfers that are more likely to have a substantial impact on poverty. One possible means of doing this might be a minimum value threshold, below which less detailed consideration would be given to the poverty effects of an export. Exceptions might be made where a proposed transfer was judged likely to have effects on the nature and probability of conflict that were disproportionate to its estimated value.

Third, it suggests that consideration of the potential impact of an arms export on poverty and development cannot be limited to its financial cost. The potential impact of a proposed transfer on the intensity, duration and probability of conflict will often be of greater significance than its monetary value might suggest. In the case of SALW, the potential for diversion from intended end-users to other groups may be of particular relevance in this regard.

Fourth, proper examination of the poverty impact of arms transfers requires an assessment of whether, and to what extent, the transfers in question add to the security of the recipient country, and of its poorest citizens in particular. Such an assessment often requires more information than recipient governments may initially be willing to give. Yet examining the rationale for procurement decisions in this way is a necessary part of a balanced assessment of poverty impact.

Finally, the analysis in the paper reinforces the argument that export licensing can only be one of the policy instruments used to limit and reduce the negative consequences of arms transfers for poverty. Licensing needs to be coordinated with wider, but country- specific, security and development policies, as well as with policies designed to support the improvement of recipient controls on the use and abuse of weapons (for example, technical assistance in stockpile control). Arms transfer restraint is more likely to be effective if coordinated with programmes of development assistance, governance reform and conflict prevention that can help reduce the factors leading to demand for arms. The promotion of regional security arrangements can also play an important role in reducing demand, both by reducing concerns over direct inter-state conflict and by using increased inter-state cooperation to tackle cross-border sub-state threats.

50 The impact of arms transfers on poverty and development, September 2004

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