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Country survey IV: PakistanRon Matthews aa School of Defence Management, Cranfield University, Shrivenham, Wilts, UK

Online Publication Date: 01 November 1994

To cite this Article Matthews, Ron(1994)'Country survey IV: Pakistan',Defence and Peace Economics,5:4,315 338To link to this Article: DOI: 10.1080/10430719408404802URL: http://dx.doi.org/10.1080/10430719408404802

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Defence an d Peace Economics, 1994, Vol. 5, pp. 315-338 1994 Harwood Academic Publishers GmbHReprints available directly from the publisher Printed in MalaysiaPhotocopying perm itted by license only

COUNTRY SURVEY IV: PAKISTANRON M ATTHEWSSchool of Defence Management, Cran field University, Shrivenham,Wilts SN6 8LA, UK(Received 8 August 1994)

Th is paper exam ines the role of the military in Pakistan, particularly in regard to civil-military relationsand defence industrialisation. Pakistan's military expenditure is relatively high, but apart frominvestment multipliers, little of this spending filters through to the civil sector. Pakistan's defence-industrial strategy centres on rebuild and Chinese technological collaboration. However, while this'capital-saving' approach has merit, the strategy has thus far failed to stimulate broader civil develop-men t linkages. A conclusion of this paper is that Pakistan is failing to maximise the strategic dual-usebenefits of integrating civil-military activity.KEY WORDS: Defence industry, civil-military relation, dual-use, Pakistan.

INTRODUCTIONPakistan is one of the world's poorest countries. According to the World Bank's1991 Development Report, Pakistan's GNP per capita was US $370 per annum(measured in 1989 prices), which makes it the World's 24th poorest cou ntry. TheReport further shows that 30 per cent of the population lie below the poverty line with the lowest 40 per cent of households accounting for only 19 per cent ofnationa l incom e, 67 per cent of people have no access to safe water and more th an54 per cent have no access to health facilities {WorldDevelopment Report, 1991).During 1990-91, Pakistan spent 2.25 per cent of GN P on edu cation and less than1 per cent on health {The M uslim, 1991).Yet the country's defence burden is one of the heaviest in the w orld. At around 7per cent of GNP in 1992, it is more than twice the burden that India bears.Moreover, while over recent years global defence expenditure has been declining,Pakistan's has been moving in the other direction: from 5.4 per cent of GNP in1980, it reached 6.8 per cent in 1985 {Times of India, 1992). While the defencespend to GNP ratio has remained about the same, in absolute terms the 1992defence budget amounted to Rs82 bn in current prices ($3.28 bn ), which is an 8.4per cent increase over the previous year's revised estimates {Times of India, 1992).Defence spending at this level absorbs nearly 40 per cent of government ex pendi-ture. It is also over 20 times the annual spend on education and health.Defence ex penditure is crippling Pakistan's economy. In the 19 92-93 fiscal yearthe Rs82 bn defence budget com bined w ith the Rs93 bn ($3.72 bn) debt servicingobligation (much of which is as a result of increased borrowings to sustain excessive

315


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316 R. MATTH EWSdefence expend iture) accounted for 98 per cent of governm ent revenue (PakistanGovernment Budget Estimates, 1992-93). Provision for other non-development aswell as development expenditure mostly derives from government borrowings.Th is further swells debt obligations, already Rs900 bn ($36 bn , in 1992 prices), ofwhich Rs425 bn ($17 b n) is foreign debt (NIWS, 1992a). Th e cost of servicing th elatter has brought Pak istan dangerously close to a negative aid inflow situation ; tha tis, where more foreign currency is going out in repayments and interest than iscoming in, through international aid each year. In fact, if aid is denned not as theamount committed by donors but on the basis of the amount actually received,then negative aid inflow d id occur in 19 91-2.Du ring that year Pakistan paid o ut nearly U S $50 mn mo re in repayments andinterest than it received in aid (NIWS, 1992a). Increasing government debt andinterest charges squeeze still further development expenditure. An indirect impactof this vicious cycle is the slow but inexorable strangulation of Pakistan's privatesector. The classic argument that high defence spend ing contributes to governm entbudget deficits, inflation, raised interest rates and 'crowding out' of civil sectorinvestment is a particularly serious threat in Pakistan, since the government'sdom estic borrowings have risen sharply in the 1990s. In 19 91-2, the governm entborrowed nearly Rs80 bn from dom estic sources (primarily bank s), and this wouldhave significantly reduced the amount of credit available to businesses and othernon-government borrowers (NIWS, 1992a). The curtailing of comm ercial invest-ment un derm ines, of course, the d rive for industrialisation. Islamabad recognisesthis depressing picture. Reducing defence expenditure is not easy however, giventhe tense strategic stand-off with India. Pakistan justifies the size of its defencebudget by arguing that it is written not in Islamabad but New Delhi. Whencomparing the two countries' defence expenditure in absolute terms, there is anundeniable logic to this argument: for 1991 , Ind ia's defence spend of US $9 bn wasover three times the size of its Islamic neighbou r's military budget at US $2.9 bn(SIPRI1992 Yearbook).Pakistan aruges forcefully that its high level of defence spending to GNP isrequired to defend development, but pressure for reductions in defence spendingare increasing. Indeed, Pakistan may now have lost its main justification formaintaining high levels of defence spending: its claim that rises in its defencespending are predicated by increases in India's defence budget was damaged bythe latter's decision to reduce defence expenditure by 10 per cent in 1992-3(NIWS, 1992b). In add ition, both Jap an (a leading aid dono r to Pakistan) and theParis-based Aid-to-Pakistan Consortium have both indicated that aid disburse-ments may in the future be linked to reductions in Pak istan's defence budget.The purpose of this paper is to examine the role of the military in Pakistan,particularly in regard to its linkages with the civil sector. The discussion beginswith a review of the data on Pakistan's military spending, which acts as thebackground for examining both the trade-off between 'defence and development'and the subsequent discussion on the macro-economic significance of strategicindustries. Moving from theory to practice, a case study of Pakistan is thenpresented. Defence-industrial development is analysed from the standpoint of:inward technology transfer; underlying civil-military linkages; and broader de-fence-development issues. The paper closes with a set of policy-oriented conclu-sions seeking to maximise the synergy between defence and broader industrialdevelopment.


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COU NTRY SURVEY IV: PAKISTAN 317PAKISTAN'S MILITARY SPEND INGSince Independence, Pakistan has lived with tension and conflict on its borders.The country has fought three wars (1948 ,1965 and 1971) with India, and providedpolitical and material support for the Mujadeen's 1980s military struggle againstoccupying Soviet forces in neighbouring Afghanistan. Even today its army isfrequently involved in skirmishes with opposing Indian forces on the world'shighest battlefield, the Saichen Glacier. Facing this almost permanently tensesecurity environ ment has meant that Pakistan 's defence expenditure to G N P ra tiohas consistently been relatively high.Table I shows the trend of Pakistan's defence spending between 198191 -1 Inconstant (1991) prices defence expenditure has m ore than doubled over the period.A sizeable comp onent of this annual expenditure has been spent abroad, procuringoff-the-shelf weapons systems. By contrast, Pak istan 's arm s exports, have generallybeen of minim al significance.Table 1 Pakistan: Military D ataYear

198119821 9 8 31 9 8 41 9 8 51 9 8 61 9 8 71 9 8 81 9 8 91 9 9 01 9 9 1

MilitaryE xp en d it ur es ( M n $ )

C u r r e n t

8731033134914011650183319892185238728292672

Constant(1991)130314521 8 2 21 8 1 22 0 5 92 2 2 72 3 4 22 4 7 72 5 9 02 9 4 32 6 7 2

A r m sI mp or ts ( M n $ )

C u r r e n t

320525430625470310330360500600120

C o n s t a n t( 1 9 9 1 )478738581808586377389408542624120

A r m sE x p o r t s ( M n $ )

C u r r e n t

4020300310405510103010

C o n s t a n t( 1 9 9 1 )6028405401506611113110

Source: World M ilitary Expenditures and Arm s Transfers, 1 991-9 2, US Arms Con trol and Disarm ame nt Agency, 1994.

Pakistan's military spending supports a substantial military establishment.Although smaller in every respect compared to India's military commitment,Pak istan's arm ed forces are nevertheless substantial. Table 2 shows the com para-tive military da ta of India and P akistan 's armed forces. Pak istan's overall m ilitarystrength numbers 577,000 (compared to 1,265,000 for India), bu t these forces canbe bolstered by 313,000 reserve personnel. The biggest of Pakistan's armedservices, the arm y, has nearly 2,000 main battle tanks (MBTs) at its disposal. Theair force has close to 400 combatant aircraft, but no armed helicopters. The

1 Table 1 shows tha t defence expenditure fell in 1991. This ap pears to be an aberration , as defenceexpend iture after 1991 has continued to rise: in 1993/94, actual expend iture was 94 bn rupees, and for1994/95 it is set to be 102 bn rupees.


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318 R. MATTHEW STable 2 Armed Forces: India and Pakistan

Country

Pakistan:Active

ReservesIndia:

ActiveReserves

Army('000)

51030 0

1,1009501

Air Force('000)

458

110140

Navy('000)

225

5555

Total Armed Forces('000)

57731 3

1,2651,305

Para-Military('000)

2751,432

-Source: Military Balance 1993-1994, IISS, Brassey's (1994).Note : (1) In addition to the 950,000 military reserves, the Military Balance reports around 1.5 mn para-military forces.

smallest armed forces branch, the navy, possesses six submarines and 14 principa lsurface combatant ships. In 1993, six Type-21 frigates were purchased fromBritain.CONCEPTUAL FRAMEWORKThe relationship between defence expenditure and economic growth has beenmuch researched, but as yet the nature of this relationship remains unresolved andtherefore as controversial as ever. The econom ist who first undertook an academicanalysis which drew out the positive aspects of defence expenditure on economicperformance was Emile Benoit (1973). His seminal work in the early 1970sattempted to quantify the relationship between military spending and economicgrowth, leading to the tentative conclusion that heavy defence expenditure doesnot appe ar to be associated w ith lower growth rate s.2 Benoit's work was im portant,not least in attracting academic attention to the subject. Yet it raised morequestions than answers. Frederiksen and Looney (1983), for instance, assert thatdeveloping countries which are resource-constrained (eg. relative lack of foreignexchange and government revenues) will find that defence expenditures siphonfunds away from more productive domestic investments with a subsequent detri-mental effect on grow th. A study by Lim (1983) obtained similar results showingdefence expenditure to be detrime ntal to economic growth. Deger (1985) concurs,arguing that arms expenditure has a serious negative physical resource cost,particularly on education. In a further paper, Deger (1986) concedes that apersuasive argument can be built up regarding the beneficial effects of militaryexpenditure in terms of mobilisation of unused or under-utilised resources, butmakes the point that modernisation is only one of two constraints on the growthprocess; the o ther is resource-based (the lack of savings). The au thor concludes th atthe m ilitary may have stimulating effects on the former but certainly depresses thelatter.

2 To some extent Keynes would have suppo rted B enoit's thesis. Keynes (1930s) saw the advantages ofusing 'inward-d irected' defence expend itures as a mechanism for pump -priming the econom y. Throughmultiplier and accelerator effects, increased defence outlays will stimulate spending and economicactivity. The Korean war, for instance, boosted both the Japanese and American economies.


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320 R. MATTHEWSopposed to a military one. Years ago, even the basic engineering of weaponsplatforms, such as tanks, would not have been too far removed from civil sectorengineering requirements. Today, military engineering skills have advanced, espe-cially in electronics and com puterised gadgetry, but even h ere, civil production hasabsorbed modern technological developments: civil airliners, for example, arepacked almost as full of electronics as fighters.A technique for measuring a country's defence-industrial capacity was devel-oped in 1974 by Professor Gavin Kennedy (1974). He felt there was a closeintegrative relationship between the defence sector and the metal and engineeringsectors. These capital goods industries, he argued, can be regarded as strategicindus tries not only in respect of civil indus trial developm ent bu t defence industria-lisation also. They represent the spectrum of engineering activities, encompassingiron and steel, non-ferrous metals, metal products, non-electrical machinery,electrical machinery and transportation equipment. Professor Kennedy positedthat these industries comprise the 'Potential Defence Capac ity' (PDC ). If this PD Cis compared to total manufacturing capacity, it then becomes possible to assessarms production capability. This can be done either by longitudinal or cross-sectional comparison of PDC ratios (denned as the share of" PD C industrial activityin manufacturing activity).Table 3 illustrates how the PDC ratio is calculated for Pakistan. E ven though theanalysis covers only a narrow span of years, due to data unavailability, it is clearthat the country's capital goods sector was experiencing PDC growth in employ-ment, gross output and value added. However, the level of this capacity is lowcompared to other Asian defence industrialising nations.Table 3 Pakistan 's Potential Defence Capacity (1981, 86)ISIC

371372381382383384

Iron & SteelNon-ferrous metalsMetal productsMachineryElectrical machineryTransport equipmentTotalMfging totalPD C ratio (%)

Employt.('000)18.25.0

10.213.716.722.786.5

451.719.1

1981Output VA(Rs mn)3309

56924

142426562419

1078884289

12.8

114314

30349 1995708

365428692

12.7

Employt.('000)42.8

.48.8

18.717.217.4

105.3506.6

20.8

1986Output VA(Rs mn)9601

301219496551976341

27353171124

16.0

219412

4681340185713847255

5529713.1

Source: Industrial Statistics Yearbook 1985& 1989, vol. 1, Unite d N ations (1987 & 1991).Notes: mfging - manufacturing, V A value added, P DC % is calculated as, for instance, total employme nt of ISIC 37 1 -2 +381-4 as a proportion of total manufacturing employment.

The relatively low share of manufacturing output accounted for by Pakistan'scapital goods industries is clearly shown by reference to Table 4. In the late 1980sPakistan had easily the smallest output-P DC ratio of the countries listed. India hadtwice the PDC, and fellow late-industrialiser, Indonesia, had a PDC ratio about


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COUNTRY SURVEY IV: PAKISTAN 321Table 4 Poten tial Defence C apacity Analysis for Selected A sian Cou ntries

IndiaIndonesiaMalaysia1Pakistan 2

Employt.27.6

3.227.919.1

1976Output

31.917.920.212.8

Percentage (%)VA39.215.822.712.7

Employt.31.311.633.420.8

1986Output

33.620.932.916.0

VA38.322.529.613.1

Source: Industrial Statistics Yearbooks, Vol. 1, Unit ed N ations (Various Years).Note s: (1) For Malaysia, the years of analysis are 1976 and 1988. (2) For Pak istan, the years of analysis are 1981 and 1986.

five percentage points higher. Moreover, the growth of this latter country's capitalgoods sector has been faster than that of Pakistan's. In 1965 Indonesia's share ofmanufacturing in GDP was 8 per cent compared to Pakistan's 14 per cent. Yet,while in 1989 Indonesia's share had jum ped to 17 per cent, Pakistan's had crawledonly two points to 16 per cent (WorldDevelopment Report, 1991). This summaryanalysis suggests that Pakistan's defence-industrial capacity is both shallow andnon-dynamic. Indeed, Pakistan appears firmly entrenched in the initial industria-lisation stage of the technological cycle.In the 1990s, PDC ratios are increasingly being shaped by the growth of thestrategic computer and electronics industries. Not only are these the ultimatedual-use industries, but their innovational flair also sets the frontier for weaponstechnology development. Pakistan's defence industrial base, however, is stillcharacterised by 'smokestack' industrialisation. Similarly, the civil industrialsector has been endeavouring to become self-sufficient in basic capital goodsproduction, and has failed to reach the transition stage to the high technology'dual-use' electronics, telecommunications and computerisation industries. Sinceits inception P akista n's defence industry has also been striving for self-sufficiency,but mostly in isolation from civil capital goods production. The result has beenduplication rather than integration and complementarity of civil-military indus-trial capacity.

EVOLVING DEFENCE-INDUSTRIAL STRUC TUREThe origins of Pakistan's defence industry date back to Independence and theinitial recognition of the importance of military self-sufficiency. The earliestrecorded domestic weapons production was the establishment of a small armsfactory in 1950. Based in Raw alpindi, it produced Lee Enfield M ark VI .303 boltaction rifles and am m unition on British W orld W ar II surplus m achinery. Workersin this facility were optees from the 17 former British arms plants, which, at thetime of partit ion , were located in India. The Rawalp indi factory was the seed fromwhich the Pakistan Ordnance Factory (POF) complex took root. Apart from thisisolated development little other defence-industrial investment took place. Theperiod after the 1948 Indo-Pakistan war was characterised by continued relianceon foreign suppliers. The 1963 Sino-Indian war and more particularly Pakistan's


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322 R. MATTHEW S1965 war with India, and the resulting arms embargo by the major westernsuppliers against both India and Pakistan, abruptly changed that policy stance.Since then the procurement of military equipment through, wherever possible,indigenous produc tion, has become a primary objective of the authorities. Defencemanufacturing capability has been developed in land, aerospace and maritimeequipment areas. Save for one or two international collaborative ventures, 5 allPakistan 's defence com panies are state owned.

PAKISTAN'S DEFENCE-INDUSTRIAL BASEPakistan's defence sector is built around five principal industrial establishments.Table 5 lists these firms, their main products and employment levels. In the landequipment manufacturing field, POF is the country's biggest producer of guns,artillery and ammunition. Production began in 1961 and by the early 1990s POFwas Pakistan's biggest company, employing around 40,000 people at the Wahcanto nm ent (40 km north-west of Islamabad). PO F comprises 14 highly verticallyintegrated manufacturing units. Licensed production and technology transfer hasoccurred through collaborative v entures with China and (both eastern and western)Europ ean countries. For instance, a heavy amm unition plant was established w ithCzechoslovakian assistance, and machine guns are being produced under licensefrom the German company. Heckler and Koch. Located along the road from POFis the tank produc tion facility at Taxila. Known as Heavy Industries Taxila (HIT),the facility com prises a tank and gun manufacturing facility and a nu m ber of heavyrebuild factories. HIT began operations in 1971. It license produces ChineseT-series and U S M -series MB Ts. Arm oured personnel carriers are produced underlicense from the US defence contractor, FMC. HIT's goal is indigenisation, butthere is a recognition that progress towards its achievement will not be dramatic.Fo r example, although produc tion of parts of the power train, crankshaft and heattreatments for the ageing T-59 tank are undertaken in Pakistan, the gun andfire-control mechanisms are still imported from China, and while the armourcutting is undertaken locally, the armour plate is still imported from China.Somewhat further along the same road from POF and HIT is the PakistanAeronautical Complex (PAC), Kam ra Pak istan's principal aeronautical estab-lishment. The complex was commissioned in 1972, and currently has four facto-ries, namely: Chinese Rebuild (mostly Shenjang F-6 fighters an adaption of theSoviet Mig 19); Mirage Rebuild (service, overhaul and rebuild of French Mirage111 and V A tar 09C engines, and U S F-16 F-100 engines); Aircraft M anufacturing(production of parts for Pakistan's Aerospatiale Alouette 111 helicopter andself-sufficient prod uc tion of the SAAB M FI-17 (Mushshak) light trainer); Avionicand R ad ar (established in 1957), this factory overhauls all rada rs, generators an deven US and Chinese air-to-surface missiles for Pakistan's Air Force. Finally,Pakistan has two Karachi-based shipyards. The Naval Dockyard, established in1952, is the major construction, repair and maintenance facility for Pakistan'sNavy. Karachi Engineering and Shipyard Works (KSEW), the sister yard, is a

5 An example of these collaborative programmes is POF's ongoing venture with Norway's NobelIndustries. POF holds a 49% m anagement share in Wah Nobel L td., which produces both military andcomm ercial explosives.


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COU NTR Y SURVEY IV: PAKISTAN 323Table 5 Pak istan's Defence-Industrial Base (1992)Defence F irm ProductSpecialism Employment('000)Pakistan OrdnanceFactories (POF), WahHeavy IndustriesTaxila (HIT)

Pakistan AeronauticalComplex (PAC), Kam ra

Pakistan Navy Dockyard

Karachi Shipyard andEngineering W orks (KSEW)

Small arms and am mu nition, artillery shells, mo rtar 40and aircraft bombs, explosives, rockets, tungstencarbide, plastics, brass, etc.Rebuild of tanks (eg. Chinese T-series, US 28M-series and local development of the Al-Khalid,Pakistan's MBT 2000 project); Armouredpersonnel carriers' HIT 's Heavy Forge/Foundryfacility supplies forging blanks cast iron, aluminiumand steel castings to civil and military sectors.Rebuild of fighte rs (eg. Chinese Shenjang F-6s, French 6.5Mirage III and also radars; servicing/ over haul of Chi-nese A-5 and F-7s, and US F-16s, and v arious types ofradars ; and licensed production of the(Swedish-SAAB) Mushshak trainer. -Construction of floating docks, tugs, harbour boats, 5auxiliary craft, target dumm y boa ts, mini-subm arines;also a capacity for subm arine fitting and rebuild.Construction of med ium and small ships; servicing 3.8and rep air of commercial ships; dry docks; and arange of jobbing expertise, such as overhead cranes,oil refinery and sugar mill equipment, ghee-makingmachinery and mechanical bridges.

public sector firm whose produ ction has been diversified into com mercial activity.However, the firm has not enjoyed commercial success. KSEW has made a lossevery year since 1980, with accum ulated losses to 1992 of Rsl bn ($40 m n), whichthe government has financed.6

Research and DevelopmentPak istan's R& D investm ent is meagre. Its civil R& D spend am ounts to only 0.16per cent of GNP; that is US $20-30mn per annum (Frontier Post, 1989). Thegovernment supplements this through sponsorship of Product-Developmen t Insti-tutes. These are partly funded by governm ent m oney and pa rtly through the profitsof public sector corporations; the annu al capital investment and operational costsrunning to US $5-10 mn and $1-2 mn, respectively. 7 However, the engineeringtalent to support product development an d innovation is sparse. According to thePakistan Engineering Counc il Report for 1987 -8 there were only 33,215 graduateengineers registered with the Council; of these'only 2,024 were in electronics, 7,417in electrical-, 7,284 in m echanica l- and 11,444 in civil engineering (Frontier Post,1989).

6Interviewwith A dmiral J. Ali, Managing Director of KSEW (August 1992).7 Interview with Mr Taliq M ustafa, Secretary of Industrial Produ ction, August 1992.


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324 R. MATTHEWSPak istan's defence R &D expenditure is also low, currently at 0.4 per cent of thedefence budget (Mulcaly and C apps , 1990). None of the major defence un its has anR&D budget allocation. Formal defence R&D work is conducted at the DefenceScience and Technology Organisation (DESTO). This comprises a complex ofthree applied scientific laboratories located at R awa lpindi, Karachi and Islamabad.DE STO 's work em braces propulsion, ballistics, aerodynam ics, electronics, propel-lants and metallurgy. DE STO's R &D effort ha s been described as sub-critical: thereis no proper funding (the allocation was only Rs72 m n for 1990-1); little staffmotivation; and no fresh induction of staff from universities, which is vital in thisarea (the o rganisa tion's tota l staff is 1,600, but of these only 130 are scientists, andonly 12 hold PhD s: Nation, 1991a).8

PAKISTAN'S DEFENCE TECHNOLOG Y MOD ELPakistan is a poor country plagued by resource scarcity. The defence budgetaccounts for a relatively high proportion of available resources, but in absoluteterms is insufficient generally to finance large-scale procurement of sophisticatedwestern weapons systems. Thus, as a consequence of hard economics and thecapricious foreign policies of western a rms suppliers, Pak istan has been obliged topursue a 'second-best' ap proach to military-related technological developm ent. Inthe event, however, this approach has merit. Based on a twin-track productionmodel of emphasising firstly, production collaboration with China (a compara-tively low technology arm s platform manufacturer) and secondly, a rebuild philos-ophy, Pakistan has followed a ra tiona l and appropriate defence technology strategythat is capital-saving in character.TechnologyTransfer: The Chinese ConnectionChina has supported Pakistan's defence effort since the 1965 Indo-Pakistan warwhen Beijing agreed to establish an ordnance factory for the prod uctio n of Chineserifles and ammunition at Ghazipur9 (Hussain, 1993). It is estimated that betweenthe years 1966-80 China accounted for around a third of Pakistan's weaponsimport bill (Bates-Gill, 1992). The financial value of the Sino-Pakistan armstrading relationship was the greater because of the 'friendship' prices at which theweapons were sold. This period of defence cooperation has witnessed Chinatransfer to Pakistan some 1,500 tanks, 350 fighter aircraft and 30 naval vessels(Bates-Gill, 1992). China has not only transferred the final goods technology, butalso the processes to locally produce and upgrade the platforms and integratedelectronics packages. The transfer programme is a 'two-way street': Pakistan'sdefence industry employees, service technicians and subcontracting staff visitChinese arms plants for training, while Chinese advisors are seconded to Pak istan's

8 Note in this context, the activities of the College of Electrical and Mechanical Engineering,Raw alpindi, where development w ork is being conducted on the Haft I and II, 80 and 300 km m issiles,respectively, and the ANZA Surface-to-Air missile, which is probably a d erivative of the Chinese SA-7Grail.9 Ghazipur is located in Bangladesh, formerly East Pakistan .


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COUN TRY SURVEY IV: PAKISTAN 325defence establishments. This has been a feature of all the cooperative contractsbetween the two countries, but the 1986 join t design and developm ent K arako-ram-8 trainer aircraft program me, which by 1992 had reached the prototype stage,appears to provide an aberration to the no rm.The Karakoram-8 aircraft is seen as a replacement for the ageing US-suppliedT-33 trainer. Islamabad has invested U S $6 mn into the aircraft's design, butnearly all this money has been absorbed into China's development effort with onlyminimal work on the aircraft being undertaken in Pa kista n. l0 Perhap s indicative ofthis asymmetry in investment effort is that while only 14 Pakistani aeronauticalengineers have been sent to the CATIC factory, Ch ina, the Chinese have over 2000workers employed on the K-8 project.11 This investment imbalance on the inputside is now m ore likely to be counterbalanced by com mercial considerations w henoutput is taken up by Pakistan. The fact is that while China is still a close defencepartner with Pakistan, friendship prices today are decidedly less friendly than theywere in the 1960s.The Sino-Pakistan arm s trading relationship has gone through three stages:

1. To begin (1965 early 70s), Ch ina gave outright aid and grants to Pakistan 'sdefence sector in return for intern ational political suppo rt. This was valued by theChinese because at that tim e they were isolated from the interna tional com mu nity.2. The second stage (1970s-1980s) saw the Chinese, particularly after Mao'sdemise, begin to show greater awareness of resource costs. This led to concession-ary loans replacing gran ts, although there was an expectation on the Pakistani sidethat these low interest loans, in which repayment would not fall due for 20 yers,would simply be written off by the Chinese.3. Th e final stage (late 1980s-) was a period when arms transfers were conductedon strict commercial terms, with payments in 'hard' currency. In practice thismeans US dollars (or Chinese Yu an).Chinese trade and industrial assistance to Pakistan transcends military bound-aries. Islamabad has received valuable economic assistance from Peking. Between1971 and the m id-1980s, Chinese assistance am ounted to over U S $500 m n{Pakistan Times, 1989a). Generally this would have represented loans an d creditson softer terms than those offered by other countries. China has also supported the

developm ent of key industries in Pakistan. For exam ple, a contract was finalised in1991 for the export of a 300 MW nuclear power plant. Less controversial is theChinese-constructed copper producing turnkey plant at Saindak, Baluchistan,which is the first metal processing project in Pakistan. On com pletion, in the latterhalf of the 1990s, the plant will be capable of producing 18,000 metric tons ofblister copper and gold. A Chinese foreign exchange loan of $84 mn towards theconstruction cost is to be repaid in kind through shipment of the copper outputwhen it comes on stream (Pakistan Times, 1989a). This is a one-off arrangment,and is in addition to the Sino-Pakistan Barter Trade Protocol which was extendedin 1990.

10 Interview with General (retired) Talat Masood (August 1992), former Secretary of DefenceProduction and ex-Chairman of POF .11 Ibid.


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326 R. MATTHEWSThe 'Rebuild' StrategyRebuild is a core element of Pakistan's defence production approach. The refur-bishm ent of weapons p latforms and their internal electronic organs is driven by theneed for cost-savings in the continuous but expensive requirement to modernisemilitary equipm ent. The rebuild program me is integrated into the progressive planfor military technology development. This is best illustrated by reference to theT-series upg radation, co production and indigenisation strategy (Burki, 1991). Th edevelopm ent plant proceeds through sequential stages:

1. Components for 500 of the basic T-59 tanks to be upgraded into the T-69IIM P version, will be 50 per cent sourced from replacement T-59 spares and 50 percent from new design.2. The development of the T-85 tank will use 20 per cent of the T-59 compo-nents, 30 per cent of the T-69 IIMP version and the remaining 50 per cent fromnew design.3. The MBT 2000, AlKhalid, will have 55 per cent bespoke com ponents, withthe remaind er sourced from predecessor tank s.

There are several cost savings associated with the production of these 'polyglot'tanks. These include learning effects, standardisation, commonality and scaleeconomies.12Rebuild program mes are also to be found in the naval area. For example, it isplanned that the naval dockyard will begin submarine rebuilds. Rebuild projectshave also been a comm on feature of the aerospace sector. At Kam ra, technologiesare available to rebuild all the A ir Force's different types of fighters, and , indeed,many of them have been rebuilt. Again, however, the strategy is not just aboutreplacing technologies but developing them. The Mushshak trainer is a case inpo int. Through local design effort, the aircraft's take-off has been con tained to 300metres, and its handling capability has been improved by adapting it to Pakistan'smo re trying atmospheric conditions {Pakistan Times, 1989b). These modificationshave involved a change of engine and accompanying changes in the aircraft'sstructure. Significantly, PAC Kamra is also an approved vendor to the US F-16manufacturer. Indeed, through competitive bidding PAC was awarded a machin-ing contract in 1991.1 3For Pak istan, whether it be air, land o r sea modernisation program mes, rebuildis the guiding principle rather th an ab initio man ufacture. This production strategyis based on a systems augmentation of existing weapons platforms instead ofcom peting in the economically suicidal arms race for foreign 'off-the-shelf sophis-ticated versions.12 India's tank production programme has been more ambitious. Its Main Battle Tank, Arjun, was firstsanctioned in 1974, but has still not been deployed. The prototype has proved to be a 60 ton monster.M eant to be completely swadeshi (indigenous), Arjun's subsystems are impo rted. Except for the hull andturret, the imported components include practically every major item: engine, transmission, tracks,

suspension, gun, and fire control assemblies. Integration is also poor. For instanc e, the French auxiliarypower unit would not fit into the tank, and the tank itself is too heavy to be transported by train.Sanctioned at a cost of Rs. 15 crore per unit, it touched Rs. 28 crore in 1987.13 Interview with Group Captain Jalal-ud-Din Sadiq. PAC, Kamra, December 1992. This GeneralDynamics con tract was not in breach of the 1990 Pressler Am endm ent, which banned the supply of USmilitary equipment 't o' Pakistan.


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COUN TRY SURVEY IV: PAKISTAN 327DEFENCE-DEVELOPMENT NEXUS?Pakistan has no explicit governm ent policy for prom oting the relationship betweendefence activity and civil development effort. Nevertheless, linkages haveemerged.14 For exam ple, the m ilitary possesses the co untry's finest hospitals. Thereis a 600 bed hospital at Wah, and one of similar size at Taxila, and these areavailable for both military and civilian personne l.15 A modern military hospital inRaw alpindi is also open for civilian treatm ent.A further defence-development linkage has regard to education and training.The military cantonment authorities, especially those of Wah, Taxila and Kamra,take pride in their human investment policies. The norm is for education to beuniversally available for workers' children, and at low cost. At POF, Wah,education forms part of the m ilitary budget. PO F boasts a 100 per cent literacy ratefor every child w ho lives in W ah. Tens of thousa nds of children receive educ ationat the 23 schools on payment of only nominal fees, which means, in effect, thateducation is free.16 POF also has a tertiary educational sector. Wah has threecolleges, all offering courses to degree standard. Moreover, vocational training istaken seriously by the defence-industrial authorities. There is a spectrum ofapproaches. At POF, shopfloor trainees are employed after passing 10th classmatriculation at high school. When unemployment is high (as it was in the early1990s), educational entrance standards rise. Around 300 entrants are inductedannually into in-house training programmes. These apprenticeships last for threeyears and include both tuition at college and on-the-job training. At the supervisorylevel, add ition al train ing courses of up to two years are offered, while for manage-m ent, regular short train ing courses are available. Also, selected graduate engineersare sent abroad for intensive postgraduate instruction. On return to Pakistan,many of these highly trained technical staff are absorbed into technology transferprogrammes, particularly with the Chinese.Unlike P O F, the m ajority of staff at PAC , Kam ra, are serving air force engineers.Many of these would have already graduated from Pak istan's College of Aeronau -tical Engineering. The remaining a ir force w orkers, mostly tradesmen and techni-cians skilled in working on engines, air frames and avionics, receive various formsof specialist training. Th e civilians, by contrast, are inducted into in-house courses.Each Kamra factory has on-the-job training programmes where basic skills arecultivated. H ere, workers are provided with one year courses in activities such aswelding and testing procedures. Selected civilian workers as sponsored at localpolytechnics, where they read for engineering degrees.Vocational training has also been promoted in the shipbuilding industry. AtIndependence, there was no specialist engineering training available for navalengineers. The only option was for rudimentary training at a technical college atLahore. Circumstances improved in the 1950s when the authorities, with Ge rman

14 Of peripheral interest is the role of military farms. These have long been a feature of Pakistan'sagricultural sector, and, as with those in Ind ia and the former Soviet Union , engage in dairy, arable andstud farming. Pakistani farms are mostly owned by the Qua rter Master General (QMG ), although someof the military land and cantonments are controlled through welfare trusts. The dairy farms inparticular, produce mainly for the military establishment, but surpluses are sold to the civil sector onpaym ent. It is customary that senior officers on retiremen t are allocated land for farming pu rposes.15 No te that civilian workers also enjoy subsidised housing, and on retirem ent, a pension.16 Interview with Mr A. Abidi, Commercial Director, POF , Wah, July 1992.


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328 R. MATTHEWSassistance, introduced graduate, marine and trade apprentice schemes. However,since that time, difficulties have been experienced, partly because of the lowutilisation of maritime industrial capacity. The graduate apprentices scheme was,in fact, abandoned in the 1960s and the marine apprentices programme followedsuit in 1984-5.17 Both of these four year apprenticeship courses were called intoquestion; firstly, because there was no assurance of a job after completion oftraining and , secondly, because even if one could be found, the graduates, attractedby the higher rates of pay, would often prefer to become seafarers. Thus, by the1990s, only the basic trade apprentices scheme continued to run.These training linkages should be viewed with caution, however. The in-housetraining programme may not really be a linkage unless many of these trainedpersonnel leave for the civil sector, taking with them skills that would not havebeen available in the absence of the defence contractors' training programmes.Indeed, if the defence sector is a net absorber of trained personnel, then the linkageto the civil sector is a negative one .'Dual-Use' Infrastructure and Transportation InitiativesSeveral developing countries as a matter of policy ensure that their militarycontributes toward economic development. Indonesia's armed forces (ABRI), forexam ple, perceive defence and deve lopm ent as a seamless, inseparable responsibil-ity. The Indonesian military has, since the guerilla struggle which led to Indepen-dence, equated itself with the people, and thus assists with harvesting, irrigationand roadbuilding. The Jamaican Army, too, has established a development focusthrough the establishment of a specialist civil engineering brigade. Its objective isto construct roads, bridges, dams and other infrastructural projects in the civilsector. India, similarly, pursues civil-military interaction. Partly because of strate-gic, but also developmental reasons, its defence enterprises have been variouslylocated across the Indian Subcontinent. Some factories, such as the plants manu-facturing infantry com bat vehicles at Medak, A ndhra Pradesh, and the high-calibreammunition factory at Bolangir, Orissa, were deliberately located in the 'notifiedindustrially backward areas' of these states. In such cases, defence plants provideemployment opportunities both, directly, and also often, indirectly, through thestimulation of upstream industrial development. Im portantly, the establishment ofdefence plants in backward regions often also necessitates improvements in thetransportation infrastructure. For civil-military application, India's military hasundertaken several formidable projects. The semi-military Indian Border RoadOrganisation, for example, was responsible for the construction of the SikkimRoad, running up to the Himalayas crest in the North-East, while in the North-West, it built the Hindu stan-Tibet Road, winding its way to the border w ith C hina.In Pakistan, two quasi-military organisations operate at the defence-develop-ment, infrastructural interface. The first of these is called the Frontier WorksOrganisation (FWO).18 The creation of the FWO stemmed from the 1965 Indo-Pak istan conflict, which signalled to Pak istan's m ilitary authorities the urgent needfor a land supply route between Pakistan and its staunch ally, China. The FWO was

17 Interview with Adm iral J. Ali, M.D . of KSEW, August 1992.18 Details about FWO gained through an interview with FWO Head, General Naseer, Rawalpindi,December 1992.


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COUN TRY SURVEY IV: PAKISTAN 329formed to build this supply link. Set up in the same year as the war, the FWOpossessed a labour force of 4,000 civil and military workers. Work on thePakistan-China 'Karakoram' Highway formally began in 1966. This 700 km road,in essence the 'old silk route ', wound its way along some of the northern region'smost inhospitable terrain and took 12 years to complete. How ever, the FW O wasnot then disbanded. It continued to operate, but henceforth on a self-financingbasis. The organisation's remit was to build roads and related infrastructuralprojects in strategic and inaccessible areas. Since 1978 a further 2,000 kms of road shave been built in mostly remote areas, where it would prove difficult for privatesector contractors to operate. In add ition, extensive construction of both civil andmilitary airfields has been undertaken. Ten new airfields have been built and twelveexisting airfield runways have been re-carpeted. Th e FW O is also heavily involvedin mass earthworks, such as the building of canals and dams. Expertise inexplosives for blasting purposes is a specialism of particular value for this type ofwork. Recently, the FWO has employed its concreting skills to good effect in theconstruction of thermal power stations at Jam shedpur, Sind and Multon. Althoughthe FW O is headed by a general, it comes under the jurisdiction of the M inistry ofCommunications. The work force has grown to 10,000, comprising mainly mili-tary personnel. Two hundred of these men are officers, who are qualified civilengineers. They oversee some 2,000 pieces of plant and equipment, includingcranes, diggers and other earth-moving equ ipment. Th e FW O has a training cen trein Islamabad. Civil employees, the majority of whom already possess basicengineering skills, are sent to this centre to acquire supplementary operator andassociated skills. Costs are born by the FWO. Labour is employed on a contractbasis for the big governm ent co ntracts won through com petitive tender. Profits onthese contracts are channelled to the government. However, not all FW O contractsto date have proved profitable. In such cases, the governm ent absorbs the losses.The FW O's first overseas contract was won in the early 1990s. Kuw ait awarded theorganisation a $96 mn contract for minefield and general debris clearance.

The second formal defence-development organisation straddling Pakistan'scivil-military divide is know n as the Nation al Logistics Cell (NLC ).19 As with theFWO, the NLC grew out of strategic necessity. In this case, however, the potentialthreat was internal instability. The problems began in the 1970s. The Bhuttogovernment was elected to power on a platform espousing the universitality of'Roti-Kepra-Malkan' (food-clothing-housing). In reality, little progress was sus-tained in reducing scarcity of these goods. Agriculture, in particu lar, was neglected,and in A pril 1978 the C entral Wheat Reserve controlled by the M inistry of Foodand Agriculture showed a net shortfall of 2 mn tonnes. Wheat in Pakistan is a staplecommodity, both subsidised and rationed by the authorities. There was thus anurgent need for Pakistan to im port w heat or face famine and civil disturbance. Tocompound the difficulties, Pakistan's major international port, Karachi, wasclogged, causing a 60-day waiting period. In J un e 1978, the N LC was established,its sole objective being to create the logistical framework to import and distributewheat supplies to central stores and thence to prov incial governm ent godowns. Thetask was urgent, signified by the fact that at one point in the summer of 1978 onlythree days of wheat remained at the central store of the northern city of Rawal-19 Information on NLC gained through an interview with former NLC Head, General Qadir,Islamabad, July 1992.


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330 R. MATTHEWSpind i. The NLC set about its task with a Rs30 crores budget and forces draw n fromthe Directorates of Supply and Transport, an d Logistics. Some five hundre d truckswere deployed to move the wheat from, the 'm ilitarised' Karachi port. The NL C'slogistical organisation proved a success, overcoming the wheat crisis, and insteadof disbandment was allowed to continue as a commercially-oriented operation.Executive control of the NLC remains with a General, and ultimately the ArmyQMG.In the 1990s, the NLC Board was given civil Directors, coming under theauthority of the M inistry of Planning , and Pa kistan's M inister of Planning becamethe Chairman. The Rs30 crores investment was treated by the government as agrant. The NLC evolved from a crisis body to one that was geared towardsdevelopment. Nevertheless, although it has become involved in agricultural infra-structural improvement, such as the building of silos, the NLC reverts to itsemergency role during times of crisis. This has occurred for instance duringperiodic sugar shortages, when rapid distribution becomes param oun t. Th e N LCemploys around 3-4,000 workers, operating 2,200 vehicles. The drivers are nowprimarily civilian, including retired army drivers. Technical training, where rele-vant, is provided. One year courses are offered in basic engineering, vehiclemechanics, electrics, and design work. As a mainly transportation business, theNLC is a profitable concern. It competes with the railways to transport salt andrice. The NLC also ships oil, which is produced in relatively small quantities rightacross Pakistan. Recently, bigger fields have been discovered in Sindh Provinceand in the north. To handle expected increased oil shipments, the NLC is raising itstransport capacity to 500 bowsers, each able to carry 30,000 litres of oil.The Civil Subcon tracting Netwo rk: Survey ResultsA claimed benefit of defence ind ustrialisation is the ups tream mobilisation of civilindustrial resources, generated through inputs into defence production. There areof course both strategic and security concerns in the contractorisation of thevertical processes of defence output. Corporate objectives, for instance, call intoquestion military component production when it becomes unprofitable.20 Arma-ments self-sufficiency is then un derm ined. M oreover, from an internal securityangle, the private sector will not likely be allowed to pro duce m ilitary-related items ,which, were they to fall in the wrong hands could und erm ine law and order. W hilstsuch issues require to be addressed by the au thorities, of more industrial concern iswhether the civil sector has the technological capability and capacity to assumecontractual responsibility, and thus form the private sector pillar of a military-industrial complex.In the Pakistan case, the local literature is replete with references stating thathundreds of vendors service the industrial requirements of the public sectordefence industries. The Secretary of Defence Production argues that the majorityof the subcontractors serve the Taxila plants, with around 70-80 supplying POF.Only a few vendors supply PAC, Kamra, which undertakes little original equip-

20 A classic case here is the decision by Britain's Royal Ordnance Company to cease production of9mm ammunition. The MoD was forced to make alternative procurement arrangements. A consign-men t of Indian 9 mm am mu nition was associated with several in-barrel explosions in No rthern Ireland.This amm unition had finally to be dumped at sea.


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COUN TRY SURVEY IV: PAKISTAN 331ment manufacture, and only a handful of pre-qualified vendors serve KSEW. Ofthe hundreds of local companies which are registered subcontractors, the majorvendors number not more than 10, accounting for about 30-50 per cent of totaloutput (excluding items like clothes and tents), which in value terms amounts toaround $ 10 mn {Nation, 1989). It is reported that at the Taxila complex T-59 tanksare built from some 10,000 separate components, of which some 1,000 areimported from China, and of the rest, 50 per cent are farmed out to differentcompanies in the private sector {Nation, 1989). Most of the locally sourcedcomponents are low value-added, simple technology items, like nuts, bolts andsprings.To assess the subcontractor's contribution to the output of Pakistan's defenceindustries a survey was conducted in the summer of 1992. Information wasobtained from some of the major defence vendors. The key findings are detailed inTable 6 below. One im mediate judgem ent to be drawn is that as all but one of thefirms listed com menced operations on or before 1981, it is evident that minimalscope and perh aps incentive exist for small firms to enter the defence marke t. Onlytwo suppliers indicated that they entered the defence market as a result of theIndo-Pakistan conflict. Significantly, this was the 1965 war when the major armssuppliers imposed the arms embargo on Pakistan. This abatement of foreignsupply appears to have had limited effect on raising demand for local defencecomponents from the civil sector.Table 6 Pak istan's Defence Industrial Subcontracting BaseFIRMS: 1 2 3 4 5 6 7 8 9 10 11 12 13 14Year firm 1963 1978 1981 1964 1978 1980 1953 1989 1947 1965 1950 1967 1956 1958startedEmployees 128 15 45 28 70 200 200 10 4000 172 100 60 45 250Age of 10 1-13 2-1 0 15 8-10 8-20 20 4 8-40 15 20 10-12 10 15Machinery (yrs)Defence 80 25 40 75 100 25 5 - 5 10 5 5-10 35 62output toTotal (%)Capacity 40 50 60 35 50 10 80 - 65 50 Full Full 80 70Util. (%)Source: 1992 Vendor Survey, Pakistan.Note: From the commercial sector, 10 defence subcontractors were visited and a further 30 firms were sent a questionnaire.The overall response rate was 32%. The pop ulation represented 44 firms, sourced from PO F and H IT lists of registeredsubcontractors.

Only a handful of the 'h un dre ds ' of registered vendors were major suppliers; theremainder being small engineering workshops edging into the informal sector. Thefirms surveyed produce a disparate array of materials, components and sub-assemblies. The list includes rubber com ponents, alloys, pipes, metal pa rts, a broadvariety of diesel engines, fuzes, primer cartridges, high explosive metal containersand a myriad of smaller items like nuts , washers, springs, gaskets and so on. Thevendors also supplied process equipment such as injection moulding machineryand machine tools. One firm sold final goods (target drones) to the defenceindustry.


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332 R. MATTHEWSPakistan disallows private firms from handling gunpowder. In fact, with onlyone or two exceptions, such as the local private sector firm producing the entireChinese-designed auxiliary pow er unit for T-59 tanks, little of the subco ntractors'output could be classified as solely applicable to the defence sector. Rather,potential efficiencies and synergies were eviden t in the cross-threading of civil anddefence manufacturing activities by subcontractors. At the mundane level, itemslike rubber hose and basic engineering parts were being produced. One of thesmaller firms had progressed from this stage and was producing bespoke compo-nen ts not only for locally produ ced Massey Fergusson tractors an d Suzuki cars butalso the metal and rubber skirts and periscopic front headrests for T-59 tanks.Another firm produced rubber hoses and bicycle tyres for civil customers andmo ulded rubber goods for the military sector. Yet another, produ ced parts for thegas, motorcycle and tobacco industries. Shoemakers hav e diversified into m akingleather seals for certain defence com pon ents, and a firm which m anufactures partsfor watches had transferred skills and capacity to making delicate parts for mortarfuses. Furthermore, the bigger companies were manufacturing machine tools,diesel engines, pumps and electric motors. Except for the parts tailor-made fordefence indus try use, all these items are , of course, dual-use.The average age of the respondent firms' machine tools was around 13 years.This is vintage by any standard. These machine tools fell into three categories:Chinese; British (mostly second-hand or recond itioned); and Pak istani. The majorinfluence on d emand was cost. The P akistani m achines were not generally sourcedfrom formal sector manufacturers, which were felt to be too high-cost. Rather they

were purchased from machine tool producers in the informal sector. Although nosingle reason accounts for the low level of capital investment, shrivelling demandwas a primary factor. Capacity utilisation in both the civil and military vendorplants averaged arou nd 50 per cent in m id-1992. (This mirrors the generally poorcapacity utilisation levels in the defence sector itself: while for PAC, Kamra, it was80 per cent, for POF it was 60 per cent and for Taxila, 50 per cent). One vendorsupplying rubber components to POF as well as rubberised road wheels for thetanks produced at HIT, complained that 90 per cent of his company's defencecapacity lay idle. There were other problems restraining vendors' willingness toinvest and feel committed to the defence sector. One such problem related to thedelays and high costs of obtaining impo rted ma terials, such as high speed steel. Akey limiting factor here was the short produ ction runs of the items being procuredby the big public sector defence firms. Th is raises the subcontractors' cost structure,not simply because of scale effects but also because of the higher costs associatedwith procuring minimum order quantities from foreign suppliers in excess of thedefence customers' purchase order. Higher procurement costs are then built intothe defence contract price. However, even with this particular problem , the o utpu tflexibility and cost structure of Pakistan 's vendors placed them in a stronglycompetitive position. This point is illustrated by the case of the T-59 right-handsteering levers produced by a vendor in Rawalpindi. These levels could beimported from China at a cost of Rs2,500 per unit, with a m inimum order quantityof 1,000. By comparison, the local firm's unit cost was Rs350, with a minimumorder quantity of 160.21

21 Interview with vendor company owner.


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COUN TRY SURVEY IV: PAKISTAN 333Yet, life has been difficult for Pakistan's defence subcontractors. The govern-ment has no development policy for them, nor is institutional financial supportavailable. In the past the defence industry has provided ad hoc loans on acase-by-case basis, but this is far from a comprehensive, long-term strategy

required to prom ote the defence subcontracting base. Pakistan 's defence industryis suffering from negligible technology transfer, bo th from the in put and th e o utpu tside, and is.thus effectively quarantined from the 'civil' industrial economy. Anexample of one of the few linkages that has occurred relates to the small cottageengineering enterprise in M ultan, which began defence work by producing spares,repairing small components and building jigs to specification for engineeringofficers at a nearby Arm oured Division base. Th e civil workshop owners developedclose working relationships w ith the engineering officers, w ho, when posted to H IT ,Taxila, began networking additional co ntracts to his civil firm, and d em and grew.Several of the subcontractors interviewed catalogued a number of factors theysaw as retarding corporate growth and developm ent. The p rovision of loan financeon soft terms featured highly as did the requirement that the defence industryneeds to speed-up its payment cycle. The sequence of supply-to-payment oftentakes 5-6 months, seriously sapping supplier liquidity. Also, although it wasrecognised tha t qua lity standards n eeded to be high for defence work, it was widelyfelt that the series of 100 per cent checks was over-rigorous, and , indeed, on e of th ecauses of the extended paym ents cycle. On intern ational tra de, liberalisation of theven dors' ability to im port machinery was requested, coinciding with calls to adjustupwards imp ort duties to protect local vendors. Th e vendors further suggested tha tthe government should establish a stockpile of 'strategic' materials as a means ofovercoming supply unpredictabilities a nd thu s price fluctuations in th e ma rkets.DEFENCE COMM ERCIALISATION A ND COOPERATIONAfter decades of import substitution, high levels of industrial protection andsupport of bureau cratic public sector enterprises, the Pakistani autho rities du ringthe early 1990s began to introduce m arket liberalisation initiatives as a means ofimproving the performance of Pakistan's civil economy. The government wascommitted to commercialisation, particularly privatisation. By August 1992, 22out of a total of 76 public sector civil enterprises had been p rivatised. 2 The m arketforces doctrine had even begun to impact on the defence industry. Economicreforms leading to greater emphasis on commercialisation were being promoted.Th is is a significant policy developm ent because a com petitive environ ment withappropriate market incentives provides the right stimulus for cost efficiency,investment and a faster pace of industrialisation. To gain the widest possiblebenefits from civil sector liberalisation policies requires that th e defence indu stry'sisolation from the civil sector be remedied. A starting point for achieving this goalwould be to reduce the horizontal distribution of defence work. Rather th an P O F,HIT and Kamra undertaking the majority of manufacturing, the level of subcon-tracting work given to the private sector and other specialist public sector firmsshould be raised to lower both vertical integration and productive inefficiencies.

22 Op.cit., Mr Taliq Mustafa.


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334 R. MATTHEW SThis policy would also ensure cross-flow of civil-defence technologies therebyaccelerating industrialisation.Although the Directorate General of Munitions Production is responsible forthe upgrading of vendors through an 'indigenisation' programme little practicalprogress appears to have been effected. How ever, responding to the need to supportthe developm ent of a defence subcontracting base, the government has since 1993begun to p rovide start-up loans to the private sector of up to 95 per cent of relevantinvestment costs. Moreover, there is now open debate as to whether the m onolithicdefence production establishments should be commercialised. POF, for instance,receives funds from central government on a vote basis, bu t is a possible contenderfor transformation into a 100 per cent government-owned company. This is anorganisational half-way house to full-privatisation. It allows the company latitudein pricing, marketing as well as the opportunity to earn profit.Defence industrial liberalisation is a precursor to autonomy (partly throughgradual reduction of governm ent subsidies) and hence to international marketingand export promotion. Pakistan has already begun to increase its arms tradingprofile. From an historical low level of arms exports, POF, the principal export-biased defence manufacturer, now exports arms to over 40 countries, sellingUS $30 mn w orth of arms in the financial year ending 30 June 1992 (NIWS,1992c). This was a 250 per cent increase over the previous three year period,making POF the biggest exporter of engineering products in Pakistan (NIWS,1992c). Arms w ere sold to Sri Lanka, Greece (where the M G-3 is also produced),the Em irates, African countries, and Islamic states in general. Some weapons havealso been sold to F rance and other European custom ers, including a consignmentof guns to the U K police force.23 In addition, because Heckler and Koch n o longerproduce the MG-3 in Germany, POF supplies its licensor with spares for the gunwhich are then resold to Heckler and Koch's own customer base. Ne ither H IT norKam ra export arm s, although the latter does export spares of its Mushshak trainer(MFI-17) to the Swedish licensor, SAAB. Th is is because SAAB no longer producesthe aircraft and thus buys spares from Pakistan for onward sale to the approxi-mately 20 countries continuing to use the plane. Kam ra has also begun to export itsservicing and rebuilding capacility. In 1988, against Belgian, French and Greekcompetition it was awarded a Rs66 m n contract from the Un ited Arab Em irates torebuild 26 Mirage fighters.24 In the maritime area, KSEW has, in addition to itssales of ships to foreign customers, exported several sugar mill machinery com-plexes to Bangladesh. Finally, several defence subcontractors have entered theexport market, including one firm exporting fin-stabilisers for fin-stabilised artilleryrounds. How ever, opportunities for developing the subcontracting base are some-times hampered by export constraints. For example, the Pakistani authoritiesabandoned a project to produce batteries for aircraft and g round use, when the USmultinational, Marathon Batteries, refused to transfer technology unless Pakistanagreed to a restriction o n the export of batteries produced .25

An effective means of promoting foreign investment is defence countertrade,but this has been a neglected trading and technology transfer mechanism inPakistan. In the 1990s nearly all developing countries when signing big arms

23 Interview with Mr Abid i, op.cit.24 JalaI-ud-Din Sadiq, op.cit.25 Ibid., interview.


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COUNTR Y SURVEY IV: PAKISTAN 335contracts demand and obtain counterpurchase as well as both direct and indirecttechnology offsets from arms suppliers. In the contemporary buyers' market, armssellers have no choice but to export both product and process technologies,otherwise they will lose custom to competitors that are prepared to engage incountertrade. For reasons that are unclear, Pakistan has not generally extractedcountertrade obligations from its arms suppliers (save for China). The most likelyexplanation for this, is strategic urgency: the military imperative outweighing thedemand for industrial development. The opportunity cost of lost technologytransfer has been severe. For instance, the procurement of French Mirage aircraftand the 1982 purchase of 40 F-16s (A and B versions) were both off-the-shelfcontracts. In the case of the F -16s, Pakistan's urgency to p rocure these fighters meantthat the U S$40 mn worth of technology transfer un der negotiation was sidelined.26Thus, although Pakistan did benefit from the General Dynamics contract throughits provision for local training, including the ability to service the F-16 Pratt andWhitney F-100 engine, the opportunities to engage in important manufacturingactivities, such as local production of reinforced plastics, electrical harnessses,weapons pylons, and precision m anufacture of structural parts were lost.Pakistan is now reviewing its military procurement policies to incorporatetechnology transfer requirements. Since the late 1980s the authorities have alsobeen seeking to expand technology-sharing activities beyond those with China.Turkey and Pakis tan, for exam ple, have signed a series of Technology Transfer andDefence Cooperation Agreements since 1987, which lay down the framework forexchange of classified information and the establishment of joint reciprocal pro-duction, research, and development projects. The idea is that defence itemsproduced in Turkey will not be produced in Pakistan, and vice versa, therebyavoiding duplication. Also, what has been termed a 'defence production coopera-tion' deal, was agreed in 1989 between Iran and P akistan, with th e latter receivingpayment in crude oil for the supply of defence technology and related services andmaterial (Times of India, 1989). As it stands, this arrangement is not cooperative,bu t it could provide the starting point for future technology-sharing program mes,given tha t both countries have voracious appetites for Chinese defence technology.

CONCLUSIONSThe aim of this study has not been to justify the continuing high levels of defenceexpenditure in Third World coun tries. Rather it accepts these as given, moving thediscussion on to explore the existing and potential development linkages defence

26 Notw ithstanding this delay in Pakistan com ing to term s with the oppo rtunities that offsets present,PAC's Aircraft Manufacturing Factory did achieve vendor status with General Dynamics (nowLockheed, Forth Worth) in 1991. The US company verified the PAC's facilities and quality controlprocedures and a contract for 11 line items was awarded on the basis of competitive bidding. Theprogramme nonetheless came to a halt as the demand for F-16 parts fell. (Correspondence with PACKamra official).27 However, there may be a religious constraint on defence cooperation between Pakistan and Iran:while the former is a Sunni Moslem dominated country, Iran is predominantly Shiite. A more genericproblem facing international defence cooperation is that of synchronising countries' military procure-ment programmes.


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336 R. MATTHEW Swide gam ut of civil-military activites. Th e n ature and extent of the civil-militaryinterface in the developing country context is an under-researched topic. This issurprising considering the twin-emphasis placed by developing countries on pro-moting industrialisation and military self-sufficiency, including arms productioncapability. Pakistan has been taken as a case study for examining this issue, notleast because little is known of its defence industrial effort. While the Pakistaniauthorities naturally view defence as a sensitive issue, they have now begun toadopt a more open and questioning attitude towards its economic burden. Ques-tions are beginning to be asked as to whether: there is value-for-money from thedefence budget; there are spin-offs from defence to d evelopm ent; there is evidenceof spin-ons from the civil to the defence sector; and, finally, the extent of anymo dernisation influences. These and other questions provide d the departure pointfor this study's analysis of Pakistan 's defence-development nexus.Appraisal of the results of prev ious stud ies suggests that no universal laws can bedrawn o n the trade-off between defence expenditure and economic growth. Thereis, however, the sense of a close positive relationship between the defence sectorand industrial production. The PDC analysis is premised on the assumption thatthe strategic capital goods industries play a crucial role in creating arm s produ ctioncapability. Over time , though, the na ture of these strategic industries has evolved.De-industrialisation h as led to the eroding impo rtance of traditional heavy indus-tries. The emergence of the electronics and other high technology activities havereplaced the 'smoke-stack' ind ustries as economic growth poles. Th e point shouldnot be lost, however, that both traditional and modern strategic industries aredual-use, civil-military technology ac tivities.

Pak istan's defence-industrial mode l has a numb er of features ap propria te to theeconomic circumstances of developing countries. It is firstly capital-saving innature. The model does not emphasise procurement of costly foreign weaponssystems unless strategic necessity demands this course of action. Instead, techno-logical collaboration with other 'South' arms producers, particularly China, hasbeen fostered. Rebuild has additionally been a feature of Pakistan's defenceindustrial model. This drive to extend the life of existing weapons systems is alsocapital-saving; an approach which some advanced countries are now emulating.Through both collaboration and rebuild a local defence industrial base has evolved.As yet, it is still at a ru dim entary technological level, bu t there is no discountingthat progress has been registered. In ordnance, small arms and basic militaryequip me nt near self-reliance ha s been achieved. PO F, for example, is not only thecountry's biggest employer, but also its biggest exporter of engineering goods.Whilst of course accepting that even more employment and exports might havebeen generated by civil engineering investment rather than military, the fragilestate of Pakistan's strategic environment has left little alternative but to concen-trate on the latter. The extent of defence-industrial investment has created asubstantial reservoir of engineering talent, but with very low turnover in themilitary factories and workshops little of this expertise is filtering into civilindustry. Combine this with the defence sector's neglected and technologicallyimmature civil subcontracting network and it is clear that defence-industrialdevelopment linkages are weak. Government financial support for vendors, theeradication of bureaucracy and the implementation of policies to force foreignfirms winning big defence contracts to engage in defence offsetting investment aremeasures which would strengthen defence interaction.


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COUN TRY SURVEY IV: PAKISTAN 337The FWO and NLC civil-military operations represent far-sighted initiatives.Nevertheless, these organisations may not have reached a point in their develop-ment where improvements in efficiency through privatisation make economicsense. A liberated markets philosophy, oriented towards greater economy, effi-ciency and effectiveness in the defence sector is required. In the defence-industrialarea, competition through contractorisation is an important first step. Completeprivatisation of defence industries is too ambitious. Their strategic sensitivitysuggests that complete decentralisation is unlikely, especially given Pakistan'snatural desire to maintain central control. An alternative commercially-drivenpolicy approach would be for the government to modify the organisational status ofthe public sector defence industries, transforming them into 100 per cent govern-ment-owned companies. POF, HIT and PAC could then develop a corporatestrategy, possibly including: rationalisation; diversification into civil engineeringoperations; contracting-out to competitive civil vendors; and, importantly, maxi-misation of profit the u ltima te indicato r of econom ic efficiency. For this to beachieved a marketing effort to raise revenue will be required, but profits will bemaximised only if costs are also reduced . This will best be secured by in ternatio naldefence cooperation in research and production. From the humanitarian andlong-run economic perspectives, it is of course preferable that Pakistan's militaryspending is reduced dramatically. This calls for a regional political solution that isas yet not even on the ho rizon. In the absence of an Indo-Pak istan reconciliation, asecond-best policy prescription is for Pakistan to maximise the defence-develop-ment relation through dual-use, civil-military linkages within a liberated, compet-itive economic environment.

AcknowledgementAcknowledgement is gratefully given to the ESRC (ref. R000 23 3913) for thefunding of this project. The fieldwork was undertaken over the Summer 1992,whilst the auth or was a Visiting Research Fellow at the In stitute of Strategic Studies(ISS), Islamabad. Appreciation is expressed to all those who assisted in theresearch, in particular, G eneral (retired) S. Zak ir Aliz Zaid i, Direc tor G eneral, ISS,Mr T. Mustafa (Secretary, Industrial Production), General (retired) T. Masood(ex-Chairman, POF), Admiral J. Ali (M.D., KSEW), Group Captain Jalal-ud-DinSadiq (PAC Kam ra) and M r A. Abidi (Com mercial Director, PO F). Acknowledge-ment is also made to Keith Hartley and an anonymous referee for helpfulcom men ts on an earlier draft of this paper.

REFERENCESBates-Gill, R. (1992) 'Curbing Beijing's Arms Sales', Orbis, vol. 36, No . 3, 386.Benoit, E. (1973) Defence and Econonic Growth in Developing Countries, D.L. Heath & Co., Lexington,

Mass.Burki, Gene ral F. (1991) 'A Big Step Towards Self Reliance', Defence Journal, vol. 6-7, 35.Ch an, S. (1985) 'The Im pact of Defense Spending on Econom ic Performance: A Survey of Evidence andProblems, Orbis, 433.Deger, S. (1985) 'Hum an Resources, Governm ent Ed ucation Expenditure and the M ilitary Burden inLess Developed Countries', The Journal of DevelopingAreas, 47.


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338 R. MATTHEW SDeger, S. (1986) 'Economic Development and Defense Expenditure', Economic Development andCultural Change,vol .35 , 194.Frederiksen, P.C. and Looney, R.E. (Summer 1993) 'Defence Expenditures and Economic Growth inDeveloping C ountries', Armed Forces and Society, vol. 9, No. 4, 63 3-4 5.FrontierPost, (1989), May 6.Hussain, M. (1993) 'Pakistan-China Defense Coop eration', International Defense Review, February,

108.Kennedy, G. (1974) 'The Military in the Third World',DuckworthLim, D. (1983) 'Another Look at Growth and Defense in Less Developed Countries', EconomicDevelopment and Cultural Change, vol. 31 , No. 2 , 384.Mulcaly, M and Capps, A.P. (1990) 'Pak istan's Defense Forces', Defence Journal,vol. 16, No. 10, 15.The M uslim newspaper (1991), November 19.The Nation newspaper (1991), February 4.The Nation newspaper (1989), September 25 .NIWS (1992a), May 19.NIWS (1992b), May 14.NIWS (1992c), November 27.Pakistan Government Budget Estimates (1992-3), official Government publication, Islamabad.Pakistan Times (1989a), March 7.Pakistan Times (1989b), March 30.Times of India (1992), May 15.Times of India (1989), April 11.WorldArmaments and Disarmament (1992), SIPRI, OU P, Stockholm.World Development Report (1991), Oxford University Press (World Development Indicators Section).

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