Professional Documents
Culture Documents
To cite this Article Matthews, Ron(1994)'Country survey IV: Pakistan',Defence and Peace Economics,5:4,315 — 338
To link to this Article: DOI: 10.1080/10430719408404802
URL: http://dx.doi.org/10.1080/10430719408404802
This article may be used for research, teaching and private study purposes. Any substantial or
systematic reproduction, re-distribution, re-selling, loan or sub-licensing, systematic supply or
distribution in any form to anyone is expressly forbidden.
The publisher does not give any warranty express or implied or make any representation that the contents
will be complete or accurate or up to date. The accuracy of any instructions, formulae and drug doses
should be independently verified with primary sources. The publisher shall not be liable for any loss,
actions, claims, proceedings, demand or costs or damages whatsoever or howsoever caused arising directly
or indirectly in connection with or arising out of the use of this material.
Defence and Peace Economics, 1994, Vol. 5, pp. 315-338 © 1994 Harwood Academic Publishers GmbH
Reprints available directly from the publisher Printed in Malaysia
Photocopying permitted by license only
This paper examines the role of the military in Pakistan, particularly in regard to civil-military relations
and defence industrialisation. Pakistan's military expenditure is relatively high, but apart from
investment multipliers, little of this spending filters through to the civil sector. Pakistan's defence-
Downloaded By: [INFLIBNET India Order] At: 06:18 12 February 2009
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-
ment linkages. A conclusion of this paper is that Pakistan is failing to maximise the strategic dual-use
benefits of integrating civil-military activity.
INTRODUCTION
Pakistan is one of the world's poorest countries. According to the World Bank's
1991 Development Report, Pakistan's GNP per capita was US $370 per annum
(measured in 1989 prices), which makes it the World's 24th poorest country. The
Report 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 of
national income, 67 per cent of people have no access to safe water and more than
54 per cent have no access to health facilities {WorldDevelopment Report, 1991).
During 1990-91, Pakistan spent 2.25 per cent of GNP on education and less than
1 per cent on health {The Muslim, 1991).
Yet the country's defence burden is one of the heaviest in the world. At around 7
per 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 in
1980, it reached 6.8 per cent in 1985 {Times of India, 1992). While the defence
spend to GNP ratio has remained about the same, in absolute terms the 1992
defence budget amounted to Rs82 bn in current prices ($3.28 bn), which is an 8.4
per 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 expendi-
ture. It is also over 20 times the annual spend on education and health.
Defence expenditure is crippling Pakistan's economy. In the 1992-93 fiscal year
the Rs82 bn defence budget combined with the Rs93 bn ($3.72 bn) debt servicing
obligation (much of which is as a result of increased borrowings to sustain excessive
315
316 R. MATTHEWS
budget deficits, inflation, raised interest rates and 'crowding out' of civil sector
investment is a particularly serious threat in Pakistan, since the government's
domestic borrowings have risen sharply in the 1990s. In 1991-2, the government
borrowed nearly Rs80 bn from domestic sources (primarily banks), and this would
have significantly reduced the amount of credit available to businesses and other
non-government borrowers (NIWS, 1992a). The curtailing of commercial invest-
ment undermines, of course, the drive for industrialisation. Islamabad recognises
this depressing picture. Reducing defence expenditure is not easy however, given
the tense strategic stand-off with India. Pakistan justifies the size of its defence
budget by arguing that it is written not in Islamabad but New Delhi. When
comparing the two countries' defence expenditure in absolute terms, there is an
undeniable logic to this argument: for 1991, India's defence spend of US $9 bn was
over three times the size of its Islamic neighbour's military budget at US $2.9 bn
(SIPRI1992 Yearbook).
Pakistan aruges forcefully that its high level of defence spending to GNP is
required to defend development, but pressure for reductions in defence spending
are increasing. Indeed, Pakistan may now have lost its main justification for
maintaining high levels of defence spending: its claim that rises in its defence
spending are predicated by increases in India's defence budget was damaged by
the latter's decision to reduce defence expenditure by 10 per cent in 1992-3
(NIWS, 1992b). In addition, both Japan (a leading aid donor to Pakistan) and the
Paris-based Aid-to-Pakistan Consortium have both indicated that aid disburse-
ments may in the future be linked to reductions in Pakistan'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 begins
with a review of the data on Pakistan's military spending, which acts as the
background for examining both the trade-off between 'defence and development'
and the subsequent discussion on the macro-economic significance of strategic
industries. Moving from theory to practice, a case study of Pakistan is then
presented. 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 industrial
development.
COUNTRY SURVEY IV: PAKISTAN 317
Since Independence, Pakistan has lived with tension and conflict on its borders.
The country has fought three wars (1948,1965 and 1971) with India, and provided
political and material support for the Mujadeen's 1980s military struggle against
occupying Soviet forces in neighbouring Afghanistan. Even today its army is
frequently involved in skirmishes with opposing Indian forces on the world's
highest battlefield, the Saichen Glacier. Facing this almost permanently tense
security environment has meant that Pakistan's defence expenditure to GNP ratio
has consistently been relatively high.
Table I shows the trend of Pakistan's defence spending between 1981—91 -1 In
constant (1991) prices defence expenditure has more than doubled over the period.
A sizeable component of this annual expenditure has been spent abroad, procuring
off-the-shelf weapons systems. By contrast, Pakistan's arms exports, have generally
been of minimal significance.
Downloaded By: [INFLIBNET India Order] At: 06:18 12 February 2009
Pakistan:
Active 510 45 22 577 275
Reserves 300 8 5 313 —
India:
Active 1,100 110 55 1,265 1,432
Reserves 9501 140 55 1,305 -
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.
Downloaded By: [INFLIBNET India Order] At: 06:18 12 February 2009
smallest armed forces branch, the navy, possesses six submarines and 14 principal
surface combatant ships. In 1993, six Type-21 frigates were purchased from
Britain.
CONCEPTUAL FRAMEWORK
The relationship between defence expenditure and economic growth has been
much researched, but as yet the nature of this relationship remains unresolved and
therefore as controversial as ever. The economist who first undertook an academic
analysis which drew out the positive aspects of defence expenditure on economic
performance was Emile Benoit (1973). His seminal work in the early 1970s
attempted to quantify the relationship between military spending and economic
growth, leading to the tentative conclusion that heavy defence expenditure does
not appear to be associated with lower growth rates.2 Benoit's work was important,
not least in attracting academic attention to the subject. Yet it raised more
questions than answers. Frederiksen and Looney (1983), for instance, assert that
developing countries which are resource-constrained (eg. relative lack of foreign
exchange and government revenues) will find that defence expenditures siphon
funds away from more productive domestic investments with a subsequent detri-
mental effect on growth. A study by Lim (1983) obtained similar results showing
defence expenditure to be detrimental 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 a
persuasive argument can be built up regarding the beneficial effects of military
expenditure in terms of mobilisation of unused or under-utilised resources, but
makes the point that modernisation is only one of two constraints on the growth
process; the other is resource-based (the lack of savings). The author concludes that
the military may have stimulating effects on the former but certainly depresses the
latter.
2 To some extent Keynes would have supported Benoit's thesis. Keynes (1930s) saw the advantages of
using 'inward-directed' defence expenditures as a mechanism for pump-priming the economy. Through
multiplier and accelerator effects, increased defence outlays will stimulate spending and economic
activity. The Korean war, for instance, boosted both the Japanese and American economies.
COUNTRY SURVEY IV: PAKISTAN 319
The evidence cited either for or against the positive impact of military expendi-
ture is mostly derived from econometric analysis. In this regard, Chan (1985)
makes the telling point that:
...we have probably reached a point of diminishing returns in relying on
aggregate cross-national studies to inform us about the economic impact of defence
spending ...As analysts have already noted, the search for universal patterns
applicable to all places and times is likely to be disappointing. The claims to
generality based on the results of such a search tend to entail substantial costs in
empirical sensitivity and specificity ...[and that in the future]... research will profit
more from discriminating diachronic studies of individual countries.3
While descriptive studies are helpful in identifying and explaining the important
defence-development economic processes at work, the existing body of literature is
silent on what in the 1990s have become key issues in linking military expenditure
to 'industrial' development. Recent work on Japan has demonstrated the signifi-
Downloaded By: [INFLIBNET India Order] At: 06:18 12 February 2009
Strategic Industries
The literature suggests that there are beneficial attributes of defence industrialisa-
tion, particularly industrial modernisation influences and capacity utilisation
effects. The fact that government statistical publications do not record 'defence' as
a separate manufacturing classification but apportions its output among various
civil classifications of economic activity reinforces perceptions concerning the
close proximity between civil and defence production. From an engineering
standpoint there is little difference between producing, for example, a civil truck as
3 S. Chan (1985), 'The Impact of Defense Spending on Economic Performance: A Survey of Evidence
and Problems', Orbis, p. 433. However, the debate continues. See, for instance, J. Brauer (1991),
'Military Investments and Economic Growth in Developing Nations', Economic Development and
Cultural Change, 39/4; A. Chowdhury (1991), 'A Causal Analysis of Defence Spending and Economic
Growth', Journal of Conflict Resolution, 35/9; M. Pivetti (1992), 'Military Spending as a Burden on
Growth: An Underconsumptionist Critique', Cambridge Journal of Economics, vol. 16; R. Looney
(1991), 'Defence Expenditures and Economic Performance in South Asia: Tests of Causality and
Interdependence', Journal of Conflict, Management and Peace Studies, L. Grobar and R. Porter (1989),
'Benoit Revisited — Defence Spending and Economic Growth in LDCs', Journal of Conflict Resolution,
33/2; and K. Park (1993), 'Pouring New Wine into Fresh Wineskins — Defence Spending and Economic
Growth in LDCs with Application to South Korea', Journal of Peace Research, 30/1.
4 Note, for instance, A. Edgar and D. Haglund, 'Japanese Defence Industrialisation' in R. Matthews
and K. Matsuyama (eds.) (1993) Japan's Military Renaissance?, Macmillan Press and R. Matthews
(1993), 'Indonesian Strategy is Put to Test', Jane's Defence Weekly, March 20.
320 R. MATTHEWS
opposed to a military one. Years ago, even the basic engineering of weapons
platforms, such as tanks, would not have been too far removed from civil sector
engineering requirements. Today, military engineering skills have advanced, espe-
cially in electronics and computerised gadgetry, but even here, civil production has
absorbed modern technological developments: civil airliners, for example, are
packed 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 close
integrative relationship between the defence sector and the metal and engineering
sectors. These capital goods industries, he argued, can be regarded as strategic
industries not only in respect of civil industrial development but defence industria-
lisation also. They represent the spectrum of engineering activities, encompassing
iron and steel, non-ferrous metals, metal products, non-electrical machinery,
electrical machinery and transportation equipment. Professor Kennedy posited
that these industries comprise the 'Potential Defence Capacity' (PDC). If this PDC
Downloaded By: [INFLIBNET India Order] At: 06:18 12 February 2009
371 Iron & Steel 18.2 3309 1143 42.8 9601 2194
372 Non-ferrous metals 5.0 56 14 .4 30 12
381 Metal products 10.2 924 303 8.8 1219 468
382 Machinery 13.7 1424 491 18.7 4965 1340
383 Electrical machinery 16.7 2656 995 17.2 5197 1857
384 Transport equipment 22.7 2419 708 17.4 6341 1384
Total 86.5 10788 3654 105.3 27353 7255
Mfging total 451.7 84289 28692 506.6 171124 55297
PDC ratio (%) 19.1 12.8 12.7 20.8 16.0 13.1
Source: Industrial Statistics Yearbook 1985& 1989, vol. 1, United Nations (1987 & 1991).
Notes: mfging - manufacturing, VA« value added, PDC% is calculated as, for instance, total employment of ISIC 3 7 1 -
2 + 381-4 as a proportion of total manufacturing employment.
Percentage (%)
1976 1986
Employt. Output VA Employt. Output VA
five percentage points higher. Moreover, the growth of this latter country's capital
Downloaded By: [INFLIBNET India Order] At: 06:18 12 February 2009
goods sector has been faster than that of Pakistan's. In 1965 Indonesia's share of
manufacturing in GDP was 8 per cent compared to Pakistan's 14 per cent. Yet,
while in 1989 Indonesia's share had jumped to 17 per cent, Pakistan's had crawled
only two points to 16 per cent (WorldDevelopment Report, 1991). This summary
analysis suggests that Pakistan's defence-industrial capacity is both shallow and
non-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 the
strategic computer and electronics industries. Not only are these the ultimate
dual-use industries, but their innovational flair also sets the frontier for weapons
technology development. Pakistan's defence industrial base, however, is still
characterised by 'smokestack' industrialisation. Similarly, the civil industrial
sector has been endeavouring to become self-sufficient in basic capital goods
production, and has failed to reach the transition stage to the high technology
'dual-use' electronics, telecommunications and computerisation industries. Since
its inception Pakistan's defence industry has also been striving for self-sufficiency,
but mostly in isolation from civil capital goods production. The result has been
duplication rather than integration and complementarity of civil-military indus-
trial capacity.
The origins of Pakistan's defence industry date back to Independence and the
initial recognition of the importance of military self-sufficiency. The earliest
recorded domestic weapons production was the establishment of a small arms
factory in 1950. Based in Rawalpindi, it produced Lee Enfield Mark VI .303 bolt
action rifles and ammunition on British World War II surplus machinery. Workers
in this facility were optees from the 17 former British arms plants, which, at the
time of partition, were located in India. The Rawalpindi factory was the seed from
which the Pakistan Ordnance Factory (POF) complex took root. Apart from this
isolated development little other defence-industrial investment took place. The
period after the 1948 Indo-Pakistan war was characterised by continued reliance
on foreign suppliers. The 1963 Sino-Indian war and more particularly Pakistan's
322 R. MATTHEWS
1965 war with India, and the resulting arms embargo by the major western
suppliers against both India and Pakistan, abruptly changed that policy stance.
Since then the procurement of military equipment through, wherever possible,
indigenous production, has become a primary objective of the authorities. Defence
manufacturing capability has been developed in land, aerospace and maritime
equipment areas. Save for one or two international collaborative ventures,5 all
Pakistan's defence companies are state owned.
artillery and ammunition. Production began in 1961 and by the early 1990s POF
was Pakistan's biggest company, employing around 40,000 people at the Wah
cantonment (40 km north-west of Islamabad). POF comprises 14 highly vertically
integrated manufacturing units. Licensed production and technology transfer has
occurred through collaborative ventures with China and (both eastern and western)
European countries. For instance, a heavy ammunition plant was established with
Czechoslovakian assistance, and machine guns are being produced under license
from the German company. Heckler and Koch. Located along the road from POF
is the tank production facility at Taxila. Known as Heavy Industries Taxila (HIT),
the facility comprises a tank and gun manufacturing facility and a number of heavy
rebuild factories. HIT began operations in 1971. It license produces Chinese
T-series and US M-series MBTs. Armoured personnel carriers are produced under
license from the US defence contractor, FMC. HIT's goal is indigenisation, but
there is a recognition that progress towards its achievement will not be dramatic.
For example, although production of parts of the power train, crankshaft and heat
treatments for the ageing T-59 tank are undertaken in Pakistan, the gun and
fire-control mechanisms are still imported from China, and while the armour
cutting is undertaken locally, the armour plate is still imported from China.
Somewhat further along the same road from POF and HIT is the Pakistan
Aeronautical Complex (PAC), Kamra — Pakistan'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 the
Soviet Mig 19); Mirage Rebuild (service, overhaul and rebuild of French Mirage
111 and V Atar 09C engines, and US F-16 F-100 engines); Aircraft Manufacturing
(production of parts for Pakistan's Aerospatiale Alouette 111 helicopter and
self-sufficient production of the SAAB MFI-17 (Mushshak) light trainer); Avionic
and Radar (established in 1957), this factory overhauls all radars, generators and
even US and Chinese air-to-surface missiles for Pakistan's Air Force. Finally,
Pakistan has two Karachi-based shipyards. The Naval Dockyard, established in
1952, is the major construction, repair and maintenance facility for Pakistan's
Navy. 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 Nobel
Industries. POF holds a 49% management share in Wah Nobel Ltd., which produces both military and
commercial explosives.
COUNTRY SURVEY IV: PAKISTAN 323
public sector firm whose production has been diversified into commercial activity.
However, the firm has not enjoyed commercial success. KSEW has made a loss
every year since 1980, with accumulated losses to 1992 of Rsl bn ($40 mn), which
the government has financed.6
Pakistan's defence R&D expenditure is also low, currently at 0.4 per cent of the
defence budget (Mulcaly and Capps, 1990). None of the major defence units has an
R&D budget allocation. Formal defence R&D work is conducted at the Defence
Science and Technology Organisation (DESTO). This comprises a complex of
three applied scientific laboratories located at Rawalpindi, Karachi and Islamabad.
DESTO's work embraces propulsion, ballistics, aerodynamics, electronics, propel-
lants and metallurgy. DESTO's R&D effort has been described as sub-critical: there
is no proper funding (the allocation was only Rs72 mn for 1990-1); little staff
motivation; and no fresh induction of staff from universities, which is vital in this
area (the organisation's total staff is 1,600, but of these only 130 are scientists, and
only 12 hold PhDs: Nation, 1991a).8
8 Note in this context, the activities of the College of Electrical and Mechanical Engineering,
Rawalpindi, where development work is being conducted on the Haft I and II, 80 and 300 km missiles,
respectively, and the ANZA Surface-to-Air missile, which is probably a derivative of the Chinese SA-7
Grail.
9 Ghazipur is located in Bangladesh, formerly East Pakistan.
COUNTRY SURVEY IV: PAKISTAN 325
defence establishments. This has been a feature of all the cooperative contracts
between the two countries, but the 1986 joint design and development Karako-
ram-8 trainer aircraft programme, which by 1992 had reached the prototype stage,
appears to provide an aberration to the norm.
The Karakoram-8 aircraft is seen as a replacement for the ageing US-supplied
T-33 trainer. Islamabad has invested US $6 mn into the aircraft's design, but
nearly all this money has been absorbed into China's development effort with only
minimal work on the aircraft being undertaken in Pakistan.l0 Perhaps indicative of
this asymmetry in investment effort is that while only 14 Pakistani aeronautical
engineers have been sent to the CATIC factory, China, the Chinese have over 2000
workers employed on the K-8 project.11 This investment imbalance on the input
side is now more likely to be counterbalanced by commercial considerations when
output is taken up by Pakistan. The fact is that while China is still a close defence
partner with Pakistan, friendship prices today are decidedly less friendly than they
were in the 1960s.
Downloaded By: [INFLIBNET India Order] At: 06:18 12 February 2009
The Sino-Pakistan arms trading relationship has gone through three stages:
1. To begin (1965 — early 70s), China gave outright aid and grants to Pakistan's
defence sector in return for international political support. This was valued by the
Chinese because at that time they were isolated from the international community.
2. The second stage (1970s-1980s) saw the Chinese, particularly after Mao's
demise, begin to show greater awareness of resource costs. This led to concession-
ary loans replacing grants, although there was an expectation on the Pakistani side
that these low interest loans, in which repayment would not fall due for 20 yers,
would simply be written off by the Chinese.
3. The final stage (late 1980s-) was a period when arms transfers were conducted
on strict commercial terms, with payments in 'hard' currency. In practice this
means US dollars (or Chinese Yuan).
Chinese trade and industrial assistance to Pakistan transcends military bound-
aries. Islamabad has received valuable economic assistance from Peking. Between
1971 and the mid-1980s, Chinese assistance amounted to over US $500 mn
{Pakistan Times, 1989a). Generally this would have represented loans and credits
on softer terms than those offered by other countries. China has also supported the
development of key industries in Pakistan. For example, a contract was finalised in
1991 for the export of a 300 MW nuclear power plant. Less controversial is the
Chinese-constructed copper producing turnkey plant at Saindak, Baluchistan,
which is the first metal processing project in Pakistan. On completion, in the latter
half of the 1990s, the plant will be capable of producing 18,000 metric tons of
blister copper and gold. A Chinese foreign exchange loan of $84 mn towards the
construction cost is to be repaid in kind through shipment of the copper output
when 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 extended
in 1990.
10 Interview with General (retired) Talat Masood (August 1992), former Secretary of Defence
Production and ex-Chairman of POF.
11 Ibid.
326 R. MATTHEWS
new design.
3. The MBT 2000, AlKhalid, will have 55 per cent bespoke components, with
the remainder sourced from predecessor tanks.
There are several cost savings associated with the production of these 'polyglot'
tanks. These include learning effects, standardisation, commonality and scale
economies.12
Rebuild programmes are also to be found in the naval area. For example, it is
planned that the naval dockyard will begin submarine rebuilds. Rebuild projects
have also been a common feature of the aerospace sector. At Kamra, technologies
are available to rebuild all the Air Force's different types of fighters, and, indeed,
many of them have been rebuilt. Again, however, the strategy is not just about
replacing technologies but developing them. The Mushshak trainer is a case in
point. Through local design effort, the aircraft's take-off has been contained to 300
metres, and its handling capability has been improved by adapting it to Pakistan's
more trying atmospheric conditions {Pakistan Times, 1989b). These modifications
have involved a change of engine and accompanying changes in the aircraft's
structure. Significantly, PAC Kamra is also an approved vendor to the US F-16
manufacturer. Indeed, through competitive bidding PAC was awarded a machin-
ing contract in 1991.13
For Pakistan, whether it be air, land or sea modernisation programmes, rebuild
is the guiding principle rather than ab initio manufacture. This production strategy
is based on a systems augmentation of existing weapons platforms instead of
competing 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 first
sanctioned in 1974, but has still not been deployed. The prototype has proved to be a 60 ton monster.
Meant to be completely swadeshi (indigenous), Arjun's subsystems are imported. Except for the hull and
turret, the imported components include practically every major item: engine, transmission, tracks,
suspension, gun, and fire control assemblies. Integration is also poor. For instance, the French auxiliary
power 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 General
Dynamics contract was not in breach of the 1990 Pressler Amendment, which banned the supply of US
military equipment 'to' Pakistan.
COUNTRY SURVEY IV: PAKISTAN 327
DEFENCE-DEVELOPMENT NEXUS?
Pakistan has no explicit government policy for promoting the relationship between
defence activity and civil development effort. Nevertheless, linkages have
emerged.14 For example, the military possesses the country's finest hospitals. There
is a 600 bed hospital at Wah, and one of similar size at Taxila, and these are
available for both military and civilian personnel.15 A modern military hospital in
Rawalpindi is also open for civilian treatment.
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 be
universally available for workers' children, and at low cost. At POF, Wah,
education forms part of the military budget. POF boasts a 100 per cent literacy rate
for every child who lives in Wah. Tens of thousands of children receive education
Downloaded By: [INFLIBNET India Order] At: 06:18 12 February 2009
at the 23 schools on payment of only nominal fees, which means, in effect, that
education is free.16 POF also has a tertiary educational sector. Wah has three
colleges, all offering courses to degree standard. Moreover, vocational training is
taken seriously by the defence-industrial authorities. There is a spectrum of
approaches. At POF, shopfloor trainees are employed after passing 10th class
matriculation at high school. When unemployment is high (as it was in the early
1990s), educational entrance standards rise. Around 300 entrants are inducted
annually into in-house training programmes. These apprenticeships last for three
years and include both tuition at college and on-the-job training. At the supervisory
level, additional training courses of up to two years are offered, while for manage-
ment, regular short training courses are available. Also, selected graduate engineers
are sent abroad for intensive postgraduate instruction. On return to Pakistan,
many of these highly trained technical staff are absorbed into technology transfer
programmes, particularly with the Chinese.
Unlike POF, the majority of staff at PAC, Kamra, are serving air force engineers.
Many of these would have already graduated from Pakistan's College of Aeronau-
tical Engineering. The remaining air force workers, mostly tradesmen and techni-
cians skilled in working on engines, air frames and avionics, receive various forms
of specialist training. The civilians, by contrast, are inducted into in-house courses.
Each Kamra factory has on-the-job training programmes where basic skills are
cultivated. Here, workers are provided with one year courses in activities such as
welding and testing procedures. Selected civilian workers as sponsored at local
polytechnics, where they read for engineering degrees.
Vocational training has also been promoted in the shipbuilding industry. At
Independence, there was no specialist engineering training available for naval
engineers. The only option was for rudimentary training at a technical college at
Lahore. Circumstances improved in the 1950s when the authorities, with German
14 Of peripheral interest is the role of military farms. These have long been a feature of Pakistan's
agricultural sector, and, as with those in India and the former Soviet Union, engage in dairy, arable and
stud farming. Pakistani farms are mostly owned by the Quarter Master General (QMG), although some
of the military land and cantonments are controlled through welfare trusts. The dairy farms in
particular, produce mainly for the military establishment, but surpluses are sold to the civil sector on
payment. It is customary that senior officers on retirement are allocated land for farming purposes.
15 Note that civilian workers also enjoy subsidised housing, and on retirement, a pension.
16 Interview with Mr A. Abidi, Commercial Director, POF, Wah, July 1992.
328 R. MATTHEWS
formed to build this supply link. Set up in the same year as the war, the FWO
possessed a labour force of 4,000 civil and military workers. Work on the
Pakistan-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's
most inhospitable terrain and took 12 years to complete. However, the FWO was
not then disbanded. It continued to operate, but henceforth on a self-financing
basis. The organisation's remit was to build roads and related infrastructural
projects in strategic and inaccessible areas. Since 1978 a further 2,000 kms of roads
have been built in mostly remote areas, where it would prove difficult for private
sector contractors to operate. In addition, extensive construction of both civil and
military airfields has been undertaken. Ten new airfields have been built and twelve
existing airfield runways have been re-carpeted. The FWO is also heavily involved
in mass earthworks, such as the building of canals and dams. Expertise in
explosives for blasting purposes is a specialism of particular value for this type of
work. Recently, the FWO has employed its concreting skills to good effect in the
Downloaded By: [INFLIBNET India Order] At: 06:18 12 February 2009
19 Information on NLC gained through an interview with former NLC Head, General Qadir,
Islamabad, July 1992.
330 R. MATTHEWS
pindi. The NLC set about its task with a Rs30 crores budget and forces drawn from
the Directorates of Supply and Transport, and Logistics. Some five hundred trucks
were deployed to move the wheat from, the 'militarised' Karachi port. The NLC's
logistical organisation proved a success, overcoming the wheat crisis, and instead
of disbandment was allowed to continue as a commercially-oriented operation.
Executive control of the NLC remains with a General, and ultimately the Army
QMG.
In the 1990s, the NLC Board was given civil Directors, coming under the
authority of the Ministry of Planning, and Pakistan's Minister of Planning became
the Chairman. The Rs30 crores investment was treated by the government as a
grant. The NLC evolved from a crisis body to one that was geared towards
development. Nevertheless, although it has become involved in agricultural infra-
structural improvement, such as the building of silos, the NLC reverts to its
emergency role during times of crisis. This has occurred for instance during
periodic sugar shortages, when rapid distribution becomes paramount. The NLC
Downloaded By: [INFLIBNET India Order] At: 06:18 12 February 2009
employs around 3-4,000 workers, operating 2,200 vehicles. The drivers are now
primarily civilian, including retired army drivers. Technical training, where rele-
vant, is provided. One year courses are offered in basic engineering, vehicle
mechanics, electrics, and design work. As a mainly transportation business, the
NLC is a profitable concern. It competes with the railways to transport salt and
rice. The NLC also ships oil, which is produced in relatively small quantities right
across Pakistan. Recently, bigger fields have been discovered in Sindh Province
and in the north. To handle expected increased oil shipments, the NLC is raising its
transport capacity to 500 bowsers, each able to carry 30,000 litres of oil.
scope and perhaps incentive exist for small firms to enter the defence market. Only
two suppliers indicated that they entered the defence market as a result of the
Indo-Pakistan conflict. Significantly, this was the 1965 war when the major arms
suppliers imposed the arms embargo on Pakistan. This abatement of foreign
supply appears to have had limited effect on raising demand for local defence
components from the civil sector.
FIRMS: 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Year firm 1963 1978 1981 1964 1978 1980 1953 1989 1947 1965 1950 1967 1956 1958
started
Employees 128 15 45 28 70 200 200 10 4000 172 100 60 45 250
Age of 10 1-13 2-10 15 8-10 8-20 20 4 8-40 15 20 10-12 10 15
Machinery (yrs)
Defence 80 25 40 75 100 25 5 - 5 10 5 5-10 35 62
output to
Total (%)
Capacity 40 50 60 35 50 10 80 - 65 50 Full Full 80 70
Util. (%)
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 population represented 44 firms, sourced from POF and HIT lists of registered
subcontractors.
Only a handful of the 'hundreds' of registered vendors were major suppliers; the
remainder being small engineering workshops edging into the informal sector. The
firms surveyed produce a disparate array of materials, components and sub-
assemblies. The list includes rubber components, alloys, pipes, metal parts, a broad
variety of diesel engines, fuzes, primer cartridges, high explosive metal containers
and a myriad of smaller items like nuts, washers, springs, gaskets and so on. The
vendors also supplied process equipment such as injection moulding machinery
and machine tools. One firm sold final goods (target drones) to the defence
industry.
332 R. MATTHEWS
Pakistan disallows private firms from handling gunpowder. In fact, with only
one or two exceptions, such as the local private sector firm producing the entire
Chinese-designed auxiliary power unit for T-59 tanks, little of the subcontractors'
output could be classified as solely applicable to the defence sector. Rather,
potential efficiencies and synergies were evident in the cross-threading of civil and
defence manufacturing activities by subcontractors. At the mundane level, items
like rubber hose and basic engineering parts were being produced. One of the
smaller firms had progressed from this stage and was producing bespoke compo-
nents not only for locally produced Massey Fergusson tractors and Suzuki cars but
also the metal and rubber skirts and periscopic front headrests for T-59 tanks.
Another firm produced rubber hoses and bicycle tyres for civil customers and
moulded rubber goods for the military sector. Yet another, produced parts for the
gas, motorcycle and tobacco industries. Shoemakers have diversified into making
leather seals for certain defence components, and a firm which manufactures parts
for watches had transferred skills and capacity to making delicate parts for mortar
Downloaded By: [INFLIBNET India Order] At: 06:18 12 February 2009
Yet, life has been difficult for Pakistan's defence subcontractors. The govern-
ment has no development policy for them, nor is institutional financial support
available. In the past the defence industry has provided ad hoc loans on a
case-by-case basis, but this is far from a comprehensive, long-term strategy
required to promote the defence subcontracting base. Pakistan's defence industry
is suffering from negligible technology transfer, both from the input and the output
side, and is.thus effectively quarantined from the 'civil' industrial economy. An
example of one of the few linkages that has occurred relates to the small cottage
engineering enterprise in Multan, which began defence work by producing spares,
repairing small components and building jigs to specification for engineering
officers at a nearby Armoured Division base. The civil workshop owners developed
close working relationships with the engineering officers, who, when posted to HIT,
Taxila, began networking additional contracts to his civil firm, and demand grew.
Several of the subcontractors interviewed catalogued a number of factors they
saw as retarding corporate growth and development. The provision of loan finance
Downloaded By: [INFLIBNET India Order] At: 06:18 12 February 2009
on soft terms featured highly as did the requirement that the defence industry
needs to speed-up its payment cycle. The sequence of supply-to-payment often
takes 5-6 months, seriously sapping supplier liquidity. Also, although it was
recognised that quality standards needed to be high for defence work, it was widely
felt that the series of 100 per cent checks was over-rigorous, and, indeed, one of the
causes of the extended payments cycle. On international trade, liberalisation of the
vendors' ability to import machinery was requested, coinciding with calls to adjust
upwards import duties to protect local vendors. The vendors further suggested that
the government should establish a stockpile of 'strategic' materials as a means of
overcoming supply unpredictabilities and thus price fluctuations in the markets.
and export promotion. Pakistan has already begun to increase its arms trading
profile. From an historical low level of arms exports, POF, the principal export-
biased defence manufacturer, now exports arms to over 40 countries, selling
US$30 mn worth 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 were sold to Sri Lanka, Greece (where the MG-3 is also produced),
the Emirates, African countries, and Islamic states in general. Some weapons have
also been sold to France and other European customers, including a consignment
of guns to the UK police force.23 In addition, because Heckler and Koch no longer
produce the MG-3 in Germany, POF supplies its licensor with spares for the gun
which are then resold to Heckler and Koch's own customer base. Neither HIT nor
Kamra export arms, although the latter does export spares of its Mushshak trainer
(MFI-17) to the Swedish licensor, SAAB. This is because SAAB no longer produces
the aircraft and thus buys spares from Pakistan for onward sale to the approxi-
mately 20 countries continuing to use the plane. Kamra has also begun to export its
servicing and rebuilding capacility. In 1988, against Belgian, French and Greek
competition it was awarded a Rs66 mn contract from the United Arab Emirates to
rebuild 26 Mirage fighters.24 In the maritime area, KSEW has, in addition to its
sales of ships to foreign customers, exported several sugar mill machinery com-
plexes to Bangladesh. Finally, several defence subcontractors have entered the
export market, including one firm exporting fin-stabilisers for fin-stabilised artillery
rounds. However, opportunities for developing the subcontracting base are some-
times hampered by export constraints. For example, the Pakistani authorities
abandoned a project to produce batteries for aircraft and ground use, when the US
multinational, Marathon Batteries, refused to transfer technology unless Pakistan
agreed to a restriction on 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 in
Pakistan. In the 1990s nearly all developing countries when signing big arms
contracts demand and obtain counterpurchase as well as both direct and indirect
technology offsets from arms suppliers. In the contemporary buyers' market, arms
sellers have no choice but to export both product and process technologies,
otherwise they will lose custom to competitors that are prepared to engage in
countertrade. For reasons that are unclear, Pakistan has not generally extracted
countertrade obligations from its arms suppliers (save for China). The most likely
explanation for this, is strategic urgency: the military imperative outweighing the
demand for industrial development. The opportunity cost of lost technology
transfer has been severe. For instance, the procurement of French Mirage aircraft
and the 1982 purchase of 40 F-16s (A and B versions) were both off-the-shelf
contracts. In the case of the F-16s, Pakistan's urgency to procure these fighters meant
that the US$40 mn worth of technology transfer under negotiation was sidelined.26
Thus, although Pakistan did benefit from the General Dynamics contract through
its provision for local training, including the ability to service the F-16 Pratt and
Whitney F-100 engine, the opportunities to engage in important manufacturing
Downloaded By: [INFLIBNET India Order] At: 06:18 12 February 2009
CONCLUSIONS
The aim of this study has not been to justify the continuing high levels of defence
expenditure in Third World countries. Rather it accepts these as given, moving the
discussion on to explore the existing and potential development linkages defence
26 Notwithstanding this delay in Pakistan coming to terms with the opportunities that offsets present,
PAC's Aircraft Manufacturing Factory did achieve vendor status with General Dynamics (now
Lockheed, Forth Worth) in 1991. The US company verified the PAC's facilities and quality control
procedures and a contract for 11 line items was awarded on the basis of competitive bidding. The
programme nonetheless came to a halt as the demand for F-16 parts fell. (Correspondence with PAC
Kamra 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 generic
problem facing international defence cooperation is that of synchronising countries' military procure-
ment programmes.
336 R. MATTHEWS
wide gamut of civil-military activites. The nature and extent of the civil-military
interface in the developing country context is an under-researched topic. This is
surprising considering the twin-emphasis placed by developing countries on pro-
moting industrialisation and military self-sufficiency, including arms production
capability. Pakistan has been taken as a case study for examining this issue, not
least because little is known of its defence industrial effort. While the Pakistani
authorities naturally view defence as a sensitive issue, they have now begun to
adopt 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 the
defence budget; there are spin-offs from defence to development; there is evidence
of spin-ons from the civil to the defence sector; and, finally, the extent of any
modernisation influences. These and other questions provided the departure point
for this study's analysis of Pakistan's defence-development nexus.
Appraisal of the results of previous studies suggests that no universal laws can be
drawn on the trade-off between defence expenditure and economic growth. There
Downloaded By: [INFLIBNET India Order] At: 06:18 12 February 2009
is, however, the sense of a close positive relationship between the defence sector
and industrial production. The PDC analysis is premised on the assumption that
the strategic capital goods industries play a crucial role in creating arms production
capability. Over time, though, the nature of these strategic industries has evolved.
De-industrialisation has led to the eroding importance of traditional heavy indus-
tries. The emergence of the electronics and other high technology activities have
replaced the 'smoke-stack' industries as economic growth poles. The point should
not be lost, however, that both traditional and modern strategic industries are
dual-use, civil-military technology activities.
Pakistan's defence-industrial model has a number of features appropriate to the
economic circumstances of developing countries. It is firstly capital-saving in
nature. The model does not emphasise procurement of costly foreign weapons
systems unless strategic necessity demands this course of action. Instead, techno-
logical collaboration with other 'South' arms producers, particularly China, has
been fostered. Rebuild has additionally been a feature of Pakistan's defence
industrial model. This drive to extend the life of existing weapons systems is also
capital-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 rudimentary technological level, but there is no discounting
that progress has been registered. In ordnance, small arms and basic military
equipment near self-reliance has been achieved. POF, for example, is not only the
country's biggest employer, but also its biggest exporter of engineering goods.
Whilst of course accepting that even more employment and exports might have
been generated by civil engineering investment rather than military, the fragile
state of Pakistan's strategic environment has left little alternative but to concen-
trate on the latter. The extent of defence-industrial investment has created a
substantial reservoir of engineering talent, but with very low turnover in the
military factories and workshops little of this expertise is filtering into civil
industry. Combine this with the defence sector's neglected and technologically
immature civil subcontracting network and it is clear that defence-industrial
development linkages are weak. Government financial support for vendors, the
eradication of bureaucracy and the implementation of policies to force foreign
firms winning big defence contracts to engage in defence offsetting investment are
measures which would strengthen defence interaction.
COUNTRY SURVEY IV: PAKISTAN 337
achieved a marketing effort to raise revenue will be required, but profits will be
maximised only if costs are also reduced. This will best be secured by international
defence cooperation in research and production. From the humanitarian and
long-run economic perspectives, it is of course preferable that Pakistan's military
spending is reduced dramatically. This calls for a regional political solution that is
as yet not even on the horizon. In the absence of an Indo-Pakistan reconciliation, a
second-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.
Acknowledgement
Acknowledgement is gratefully given to the ESRC (ref. R000 23 3913) for the
funding of this project. The fieldwork was undertaken over the Summer 1992,
whilst the author was a Visiting Research Fellow at the Institute of Strategic Studies
(ISS), Islamabad. Appreciation is expressed to all those who assisted in the
research, in particular, General (retired) S. Zakir Aliz Zaidi, Director General, ISS,
Mr T. Mustafa (Secretary, Industrial Production), General (retired) T. Masood
(ex-Chairman, POF), Admiral J. Ali (M.D., KSEW), Group Captain Jalal-ud-Din
Sadiq (PAC Kamra) and Mr A. Abidi (Commercial Director, POF). Acknowledge-
ment is also made to Keith Hartley and an anonymous referee for helpful
comments on an earlier draft of this paper.
REFERENCES
Bates-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, General F. (1991) 'A Big Step Towards Self Reliance', Defence Journal, vol. 6-7, 35.
Chan, S. (1985) 'The Impact of Defense Spending on Economic Performance: A Survey of Evidence and
Problems, Orbis, 433.
Deger, S. (1985) 'Human Resources, Government Education Expenditure and the Military Burden in
Less Developed Countries', The Journal of Developing Areas, 47.
338 R. MATTHEWS
Deger, S. (1986) 'Economic Development and Defense Expenditure', Economic Development and
Cultural Change,v o l .35, 194.
Frederiksen, P.C. and Looney, R.E. (Summer 1993) 'Defence Expenditures and Economic Growth in
Developing Countries', Armed Forces and Society, vol. 9, No. 4, 633-45.
Frontier Post, (1989), May 6.
Hussain, M. (1993) 'Pakistan-China Defense Cooperation', International Defense Review, February,
108.
Kennedy, G. (1974) 'The Military in the Third World', Duckworth
Lim, D. (1983) 'Another Look at Growth and Defense in Less Developed Countries', Economic
Development and Cultural Change, vol. 31, No. 2, 384.
Mulcaly, M and Capps, A.P. (1990) 'Pakistan's Defense Forces', Defence Journal, vol. 16, No. 10, 15.
The Muslim 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.
Downloaded By: [INFLIBNET India Order] At: 06:18 12 February 2009