Group Title: paradox of national insecurity
Title: The paradox of national insecurity
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Title: The paradox of national insecurity
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Language: English
Creator: Perruci, Gamaliel, 1962-
Copyright Date: 1991
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For Kathleen and my parents


UNIIVEISITY OF FLORIDA LIBRARIES













ACKNOWLEDGMENTS


This Ph.D. dissertation closes the chapter on a long journey in my life

(10 years, to be precise). Since I first came to the United States in 1981 to

pursue my undergraduate studies, so many people have helped me to

mature intellectually and emotionally that it would be impossible to list all of

their names here. I am grateful, though, for their patience and understanding

during my first steps in this "alien" territory, because their friendship

provided the foundation that allowed this work to become a reality.

The task of researching and writing a dissertation is so monumental

that one cannot undertake it without the personal and institutional support

of family and colleagues. I am very grateful for the support provided by Dr.

Steven E. Sanderson in guiding me through the development literature and

in sharpening my argument. His critical mind not only kept me constantly

focused on immediate needs (such as completing the manuscript), but also

forced me to rethink and to defend positions. He has been a true educator.

I also wish to acknowledge the valuable input of other colleagues,

including Goran Hyden, Terry McCoy, Robert McMahon and John Spanier,

who have been involved in the review of this manuscript. While their

insight has greatly enriched the quality of the final product, I take full

responsibility for any errors or omissions that remain. At the research level, I









am thankful to the staff at the ~Jimmy Carter Library (Atlanta, Georgia) who

guided me through countless documents. In Houston, I was able to count on

my father-in-law, Richard K. Siler, who introduced me to many officials of

major defense contractors. In Brazil, Eli Fernandez was extremely helpful in

setting up interviews with company officials and officers of the Armed

Forces.

Throughout this project, my parents, Gamaliel and Areli, were a

constant source of support and inspiration. As professors themselves, they

greatly influenced my interest in academic work. I am especially indebted to

my mother, who made the dream of a college education in the United States

possible. The dream could not have taken form without her unflinching

financial commitment early on.

I am particularly grateful to my wife, Kathleen Siler Perruci, who has

done an outstanding job as supporter, copy-editor and critic. Her patience and

dedication inspired me constantly: If she could endure me during graduate

school, I could endure the trials of writing this dissertation, as well. Finally, I

would like to thank my "almost" two-year-old daughter, Caroline, for not

destroying the disks where I kept this dissertation stored.

















TABLE OF CONTENTS


Pa ye

ACKNOWLEDGMENTS .............................. iii

ABSTRACT ................... ................. viii

CHAPTER

1 INTRODUCTION: DEVE1LOPIMENT-POWER LINKAGES .. .. 1


Economic Development and Power Relations .. .. ... .. .. 11

The Agent-Centered Power Argument . .. . . . .. 16

The Structural Power Argument . .. .. ... ... .. ... 22

The Agent-Structure Debate .. ... .. ... .. .. .. . .. 31

Power and the International Economic System . ... .. . ... 36

Concluding Remarks: The Paradox Revisited .. ... .. .. .. 38

Notes ................... .................. 44

2 MIDDLE POWERS IN TH-E INTERNATIONAL
ARMS MARKET ........................... 52

The Measurement of Arms Trade .. .. .. .. . ... .. ... 54

The Structure of the International Arms Market .. ... .. 62


Military Industrialization: "Catch-Up" Mercantilism? .. . ... 94

The Paradox of National Insecurity ... .. ... . ... .. .. 108

Notes ..................................... 118








CHAPTER Pag;e

3 THE COLD WAR ORDER, 1940s-1950s . ... . .. ... .. 127

Antecedents to Brazil's Cold War Military Cooperation . .. .. 130

The Post-war Doctrine of National Security .. .. .. .. ... 140

The 1952 Military Assistance Agreement .. .. .. .. .. .. .. 148

Concluding Remarks: Dependency and Nationalism . .. .. .. 164

Notes ................... ................. 167

4 THE "GREAT POWER" PROJECT, 1960s-1970s . . .. . 174

Shifts in Brazil's Foreign Policy Direction .. .. .. .. .. .. 177

Economic Growth and Power Perception . ... . .. . 184

Indigenous Arms Production . ... . .. .. . . .. 199

An Assertive Middle Power ... .. .. ... .. .. .. . .. 222

Concluding Remarks: Power and Discord . .. .. .. . 239

Notes ................... .................. 242

5 FACING THE PARADOX, 1980-1985 .. .. . .. .. .. .. 253

Science and Technology in Brazil .. ... .. ... .. .. .. 256

The International System and the Brazilian Arms Industry . .. 273

The 1984 Defense Technology-Transfer Agreement ... .. .. 278

The Aftermath of the 1984 Military Agreement . ... .. . 286

Concluding Remarks: Facing the Paradox .. ... ... . ... 290

Notes ................... ................. 296

6 CONCLUSION: POWER AND NATIONAL SECURITY
POLICY-MAKING ................... ....... 303

Technology and Power Politics: Toward a New
ResearchAgenda .........,..,.,............ 308









Page

Confronting Hidden Agendas .. .. .. . .. . .. . . 311

Geopolitics and Market Relations . .. .. .. . . . 317

Concluding Remarks: A Final Word on the Paradox . .. .. .. 324

Notes ................ ..., ...........,.. 327

REFEREINCES ................... ................. 330

BIOGRAPHIICAL SKETCH ................... ......... 354














Abstract of Dissertation Presented to the Graduate School
of the University of Florida in Partial Fulfillment of the
Requirements for the Degree of Doctor of Philosophy

THE PARADOX OF NATIONAL INSECURITY:
BRAZIL, AS A MIDDLE POWER
IN THE INTERNATIONAL ARMS TRADE SYSTEM



Gamaliel Perruci, Jr.

August 1991


Chairman: Steven E. Sanderson
Major Department: Political Science

The theoretical focus of this study lies in the linkage between power

politics (agency) and market relations at the global level (structure). Power

politics is expressed at the strategic level when nations pursue their "national

interests," such as autonomy and political independence. The constant

jockeying for position in the international system underlines the anarchic

character of international relations. The global market constitutes the

environment under which these actors must operate. Shifts in market

relations help explain changes in conceptions of national security, as state

actors respond to new challenges in the international economic system.

Nonstate actors play a critical role in defining the state response to market

shifts. This study uses the defense industry in both developed and

viii









developing countries as an important sector defining a country's "national

security" interests, separate from the political requirements of power politics.

The dissertation uses U.S.-Brazilian military relations since World War

II as the basis for the study of agency-structure interrelations in the

national-security arena. Three distinct phases are noted. First, under the

politics of "uneven attraction" (1940s-1950s), the United States as the new

global superpower used the emerging post-war structure to shape Brazil's

national security perspective, as embodied in the 1952 military assistance

agreement between the two countries. The second phase (1960s-1970s) points

to the process of "liberation" in Brazil's national-security policy-making.

Brazil's power leverage vis-8s-vis the United States was enhanced with the

European recovery and the new international division of labor

(internationalization of capital and production). The development of an

indigenous arms industry became viable, thus leading to the unilateral

cancellation by Brazil of the 1952 agreement. During the third phase (1980-85),

Brazil faced the "paradox of national insecurity." In order for its arms

industry to survive financially, it had to import foreign technology, which

again exposed the country to the political requirements of technology

exporters. In the Brazilian case, we see this paradoxical process in the signing

of the 1984 memorandum of understanding with the United States.













CHAPTER 1
INTRODUCTION: DEVELOPMENT-POWER LINKAGES


In recent decades, the emergence of newly industrialized countries

(NICs) as aspiring powers--here, also addressed as "middle powers"--has

provided fertile ground for international relations theorists.l Ironically,

though, little has been done to incorporate NICs into mainstream

international relations theory. The emphasis continues to be on the balance

of powers, with the great powers occupying center stage.2 Because

balance-of-power is a static model, theorists have missed much of the

dynamic change in political and economic relations between established and

emerging industrial powers. 'Even when mobility is considered in the

traditional literature,3 the focus rests on "already emerged" (rather than

emerging) military powers that directly challenge the status quo, such as

Germany in the 1930s.

Interest in the study of middle powers' behavior rose in the 1970s, as

these actors moved away from the tight bipolar international structure that

characterized the early years of the Cold War. Detente in East-West relations

contributed to renewed attention on the behavior of regional powers in Asia,

the Middle East and Latin America. Such attention was narrow in scope,

however, tending to view middle powers as subordinate to great-power








politics. This perspective has become less adequate as East-West tensions

subside and the socialist world diminishes in global importance.

Whether because of the rising importance of middle powers, or because

of the apparent evolution of post-Cold War regionalism, there is a growing

need to incorporate the economic successes of NICs into the study of power

politics. Perhaps more importantly, a "middle power" perspective is wanting

in the literature--a literature that would understand the processes enabling

and conditioning their rise in international status and the impact that rise

has had on international security in general.

A major analytical difficulty dividing the two key dimensions of middle

power emergence (economic ascendance and power politics) has been the

separation between "high" and "low" politics in the traditional international

relations literature.a At the high end, East-West military and strategic issues

have dominated the literature, while at the low end are situated

socio-economic issues particularly related to the North-South trade and

development agenda. Such a distinction, however, has become increasingly

blurred because of the broadening of a national security conception. As this

study will demonstrate, many of the technological and commercial issues

deriving from NICs' presence in the market are viewed by great powers as

national security threats. NICs' acquisition of missile technology, for

instance, has both commercial significance (satellite launching capability) as

well as military application (ballistic missiles)5








This study seeks to bridge the division between "high" and "low"

politics in international relations .by analyzing the economic rise of Third

World middle powers from a national security perspective. Recent research

about declining U.S. competitiveness and industrial performance also links

economic performance to national security issues, in ways that help bridge

the gap between "high" and "low" politics.6 Many of these studies center on

the decline's potential threat to the country's national security. One U.S.

industrialist, for instance, has suggested that the very concept of national

security is changing in this country, from a military emphasis to an economic

one, following the demise of the Cold War.7

Such a "political economy of national security" is a traditionally joint

set of concerns in the developing world. The Third World state has long been

concerned with vulnerability to great power politics (particularly in the area

of economic rewards and sanctions) and to catastrophic shifts in the world

economy such as the Great Depression of the 1930s or the oil shocks of

1973-1979.8 Since World War II, the structure of the international system has

changed due to the proliferation of sovereign states, many of which possess

severely limited national power capabilities and suffer from weak domestic

political systems. "These states," Stephen D. Krasner points out, "cannot

control transnational flows or easily adjust to changes emanating from the

international environment."9 NICs, however, occupy a special Third World

niche because they are not so "exposed to vacillations of an international

system from which they cannot extricate themselves but over which they








have only limited control."l0 Such an assessment of NIC exceptionalism in

the international system may be too optimistic, considering that NICs'

economic growth is closely tied to their integration into the international

economic system--a source of potential vulnerability to rapid changes in

flows of trade, capital, and technology. The growing importance of regional

trade blocs (e.g., The European Economic Comnmunity) has threatened to

close important markets for Third World goods. Capital flight has continued

to be a major drainage source of fresh investments, while U.S. banks

continue to be leery of lending to the Third World because of the current

economic crisis in some of the major debtor countries, such as Brazil.

Technology export controls in developed countries have slowed the flow of

high technology to many Third World recipients. Nevertheless, Krasner calls

our attention to an important point in theorizing about the Third World:

The foreign policies of those states are grounded in a national security

prerogative dominated by vulnerability aversion and control over

international processes.

What is new for both great and small powers is the connection of

national security to an increasingly interdependent world market. National

security becomes a complex function of the local economy's position in the

world market. Industrialization enhances a nation's power attributes--a

major source of security in an anarchic state system. "Security," therefore, is

defined here not only to include the traditional conceptions of balancing

power through productive capability, (e.g., the arms industry) but also the








competitive position of such an industry in the world market. These two

sides, the dissertation argues, have become part of the same security game in

the post-World War II political order. The central thesis of this study is that

Third World countries such as Brazil have found the interrelation between

security and interdependence paradoxical because the former has been

conceptualized as a search for autonomy.

The relevance of middle powers' national security strategy after the war

is found in the theoretical relationship that can be established between rapid

economic development and conceptions of power within an increasingly

interdependent world economy. To the extent that upward mobility and

stability have been addressed in the literature, such as A. F. K. Organski's

"power transition" or Robert Gilpin's hegemonic stability perspective, their

application is limited to the nations already possessing a particular level of

industrial might, which enables them to challenge existing hierarchy.ll Such

was the case of Germany in the two world wars of this century.

Although Organski rejects the balance-of-power perspective, his

conception of power transition is rooted in the politics of great powers, which

is really only a slight reformulation of the balance-of-power argument. In

fact, there is little theoretical depth in either Organski's or Gilpin's discussion

about the way development confers power and security, other than the

simplistic observation that industrialization endows the nation with the

means to wage both economic and military war.








On the other side of the theoretical spectrum, NICs' "success" is

addressed in the context of an expanding world capitalist system, divorced

from the international political trappings that the system of sovereign states

entails.12 In the "semi-periphery," Immanuel Wallerstein assigns a

subordinate role to NICs."3 In the "world-system" conception,

industrialization is part of a global phenomenon, which cannot be analyzed

without clearly defining the interests of a core capitalist class, which, in this

sense, only becomes another way of defining great powers. Unfortunately,

this theoretical focus says little about the national security interests of these

so-called semi-peripheral nations, other than to assert linkages between the

interests of the core and the behavior of the periphery.

Between these two theoretical conceptions lies an uncharted analytical

space that NICs have occupied empirically with competitive production and

sale of armaments and used to redefine their traditional military links with

great powers. This dissertation seeks to explore this new ground through a

closer look at the development-power linkages, which are often either taken

for granted or are left unresolved in both traditional and radical international

relations literature.

This study uses the international arms market as an entry point into

this effort for two reasons. First, military capability has traditionally been the

power yardstick in the international relations discussions of "high" politics.14

By examining arms production from a political economy perspective, this

study crosses the divide between high and low politics and reaches for power








conceptions that are expressions of both economic and military concerns.

Arms production in many middle powers has had the dual purpose of

promoting technological transformation and enhancing national security,

the assumption being that a nation with high technological capability is

economically and geopolitically secure. Powerful nations, after all, are

associated with advanced technologies and skills that enhance their market

competitiveness and their ability to manufacture weapons, a critical

component of geopolitical security.l

The second reason for using the international arms market as an entry

point to the study of development-power linkages is that NICs' involvement

in the arms export business in recent years connotes deep changes in the

international economic system itself, which has direct political consequences,

such as the inability of great powers (e.g., the United States) to monopolize

the flow of arms technology across regions and the dependence of Third

World arms producers on export markets and foreign technology. Therefore,

"low" politics also filters into the discussion of the interrelation between

local development and power politics at the global level. Indigenous arms

production is essentially an import-substitution industrialization (ISI)

strategy, insofar as it seeks to reduce the political dependence associated with

arms imports.16 But if the local industry needs to export the bulk of its

production in order to survive (a cost-cutting strategy), ISI and "export-led

growth" become intimately related.l7





Both high and low politics are used in this study to provide new insight

into a "paradox of national insecurity." Growing participation in the

international market helps local arms manufacturers reach economies of

scale and consequently reduce unit costs. Efficient economic performance

enhances the competitiveness of the local product and the prospects of higher

revenues, which may be invested in the development of more sophisticated

products. Regardless, in national security terms, such economic efficiency

leads to an improvement in indigenous military capability--a major factor

insulating the country from simple trade-based reliance on foreign suppliers.

Nevertheless, the fast pace of technological change in the international arms

business requires that local producers quickly innovate in order to remain

competitively

While NICs are busy assimilating new technology, producers from

highly industrialized nations are creating the next generation of military

technology. Unable to innovate fast enough through local means, producers

in developing countries must seek foreign sources of technology. For many

NICs, technology transfers have become the main source of "indigenous

innovation."

The paradox is apparent: In order to realize a national security goal (the

development of an independent local source of armaments), many middle

powers have to substitute foreign ties of technological dependence for

previous dependence on final product. The question is whether this helps

national security or merely replaces one kind of dependence with another.





A closer look at the international arms market reveals the tenuous

character that development-power linkages assume once emerging powers

choose to deepen the local economy's integration into the arms trade system.

More importantly, though, the paradox of national insecurity points to the

importance in conceptualizing power both as a national attribute and as a

structural phenomenon. Power is a product of the enhanced economic

position of a country, but the price of that enhancement is measured in

growing vulnerability to systemic forces shaping its direction. What is

important about this particular case, however, is in identifying the way

power is exercised at both levels: the way nations shape their environments

(the development of indigenous arms production and redefinition of

military alliances), and the particular historical circumstances constraining

and enabling their national security strategy (expansion of the world

economy through foreign direct investment and financial links).

The underlying dynamics of this paradox are found in the way these

nations arrive at any particular national security strategy. The state may seek

to develop an indigenous arms production capability so as to escape the

vagaries of power politics. This is consistent with traditional conceptions of

security in world politics. The Hobbesian dictum regarding human fear of

violent death applies to nations in an anarchic state system. To Hobbes,

security is the overriding human motive, so the attainment of power is the

surest way of deterring the depredations of others.19 As a national security

strategy, therefore, international links are to be minimized whenever they








promote high levels of external dependence. The local arms producer,

however, operates on the basis of profit-motive. Thrust into the vagaries of

the international market, the producer must remain competitive. If such a

compelling dictum necessitates the establishment of external links with

foreign technology suppliers, so be it. We can thus easily see the inherent

potential of conflict between the state and local producers in the formulation

of a national security strategy.

The remainder of this first chapter addresses the growing interest in the

international relations literature in the national security content of economic

issues such as competitiveness. This interest provides the basis from which

two theoretical conceptions of development-power linkages are presented:

agent-centered and structural. The last section of this chapter suggests a

theoretical framework that combines elements of these two conceptions to be

used in the case study of U.S.-Brazilian military relations since World War II.

The central thesis of this study will be that Brazil's arms production program

has suffered from the paradox of national insecurity. While Brazil has been

successful in reducing its dependence on U.S. arms, the Brazilian arms

industry has depended heavily on the international market for defense

technology. Such a dependence has limited Brazil's leverage in security

negotiations with the United States in recent years.








Economic Development and Power Relations

Power as an "essentially contested concept" covers many facets in social

science research.20 While settling this contestation falls beyond the scope of

this study, integrating some diverse elements of power provides additional

insight into the complexity of the issue in hand: the national security

implications of rapid economic growth for middle powers.21

Traditionally, power has been associated with agency, as in the

community studies of the 1960s that focused on decision-making--one actor's

response to another's behavior.22 As a rejection of the elite theory of power,

which rested on a reputational basis,23 the emphasis of Robert A. Dahl's

model was on the control of behavior: "A has power over B to the extent that

he can get B to do something that B would not otherwise do."24

Nevertheless, Dahl's framework came under attack for failing to

address the structural dimension of power, or, in P. Bachrach and M. S.

Baratz' words, the "second face" of power.25 The criticism centered on Dahl's

emphasis on decision-making, which neglected to explore how power was

exercised whenever actors ensured that certain decisions were not made. The

"non-decision-making" aspect of power was manifested through the

mobilization of bias by those in dominant positions. Structure occupied the

central theme in the mobilization of the bias debate because differing levels

of resources were available to actors in the social system. Those actors with

the most resources manipulate the system toward desired outcomes.








The structural component of power is linked to the relationship

between dependency and vulnerability. Structure calls attention to the locus

of power, as concerning freedom: "who can control whom?"26 Countries

avoid external dependency, not because it embodies a link to another

country, but rather because dependency contains a vulnerability--a capacity to

be hurt should that link be broken. Albert O. Hirschman in his classic study

of the interrelation of power and trade, National Power and the Structure of

Foreign Trade, argues that it is the concentration of external ties (rather than

the magnitude of those ties per se) that counts in assessing power relations in

the international trade system.27

From these two conceptual frameworks (decision-making and

non-decision-making ) there has been in recent deca des a growing interest t in

the nature of power relations in social theory. For instance, Steven Lukes's

Power: A Radical View extended that debate to include three dimensions to

power analysis. Apart from behavioral and non-decision-making aspects,

Lukes added the conception of hegemony as an overarching dimension of

power relations. Anthony Giddens has taken up the dialectics of agency and

structure found in Lukes' work and transformed it into a dualism under

which the two components become part of a single conception of power.28

Both Giddens and Michel Foucault treat power as a highly generalized

capacity to produce effects that would not otherwise have occurred.29 The

advantage of this conception for the present study lies in regarding

compliance of others as a special case of an actor's "transformative capacity"









in achieving outcomes. This fundamental link between action and power

dissociates the latter from any inherent connection with conflict and clashing

interests, a common proposition in international relations studies of power

relations.30 Giddens and Foucault's view challenges the notion that power is

necessarily coercive, always involving the imposition of sanctions in order to

overcome resistance.31

Giddens' view of power, in particular, is a "power to" conception, of

which the behavioral treatment of "power over" is only one component

among many. Dennis H. Wrong agrees with Giddens that power is action

that deploys means in order to achieve outcomes. Power should not be

regarded as a resource; but instead as the mobilization by an actor of resources

to produce effects. "Since these resources are unequally distributed," Wrong

argues, "individuals and groups are unequal in their power although equal

in their ability to act in a generically human way."32 Inequality of power

resulting from inequalities of the resources that make possible the exercise of

power is a distributive rather than a relational phenomenon. As such,

development carries as its central component distributive changes (e.g.,

creation of an indigenous advanced technological capability) through which

power may be exercised (e.g., the enhanced position of local producers in the

international market).

The linkage between development and power can be established at

these two power levels (agent and structural). At the agent micro level,

power becomes the deployment of resources (industrialization) so as to








achieve security in an anarchic international system. As nations develop,

they achieve higher levels of economic capability through which political

goals may be secured. Development strategies call to our attention a

conception of agency that resembles Max Weber's own view of power, which

stresses the element of intention, or "will."33 Weber defined power as the

probability of carrying out one's will despite the resistance of others in a

social relationship. NICs' own developmental policies have been placed in a

setting that evoked resistance from already industrialized nations. Much of

the literature about NICs' trade conflicts centers on this aspect.

In an asymmetrical environment, however, it is misleading to assume,

as some realists do, that all politics (including development politics) is a

struggle for power.34 As Wrong correctly points out, "Politics includes both a

struggle for power and a struggle to limit, resist and escape from power."35 A

central issue in power asymmetry is not only the dependence relation it may

create, but also the potential "liberating" force it unleashes. The pursuit of

economic and political autonomy became a driving national security

perspective for many aspiring powers as they broke away from the Cold War

order. Hirschman's argument that great powers often take advantage of the

trading system to forge ties of domination with weaker nations is well taken.

However, Hirschman's National Power--a pioneer work on the relationship

between trade politics and dependence--missed the liberating dynamics that

trade dependence unleashes at the domestic level, a point the author later

recognized.36 In his conception of national power and the international





structure, the distribution of power remains relatively unchanged over time.

Hirschman's notion of dependence does not include the lesser powers'

pursuit of "liberation," which is inherent in any industrialization policy.

The struggle to escape from power is undertaken at the structural level,

as nations attempt to redefine their subordinate position in the power

hierarchy. While development may lead to increased power in the

international system by virtue of enhanced economic capability, power

cannot be analytically understood unless placed within a specific historical

context in relation to other actors in the system. Such a context is found at the

macro level, structural power, which works as a "hidden hand" molding the

very preferences actors assume. While development widens the actor's

alternatives and ability to transform the environment, developmental

policies are never formulated in a vacuum. The context of developmental

choices lies in the placement of actors in the international system, with each

exhibiting different resource capabilities.

Before we propose a framework for incorporating both agent and

structural elements in the study of development-power linkages, it would be

helpful to gain some notion as to the way each has been used in the

international relations literature. While some analysts have focused their

attention on power as an agent attribute (level 1), others have uncovered the

power dynamics operating at the structural plain (level 2).








The Ag~ent-Centered Power Argument

The agent-centered power argument focuses on the direct implication of

development on an actor's increased capability to pursue foreign policy

interests separate from the contextual structural demands. The development

of a naval industry, for instance, allows a country to expand its maritime

links without depending on others for transportation services. The linkage is

established in the following sequence: Development leads to an actor's

increased power in the international system, thus promoting national

security. Development, therefore, confers power by deploying the means

(naval industry) through which a nation enhances national security

(self-reliance in maritime transportation). This sequence is a classic

representation of such international relations studies that focus on the

domestic components of mobility in the international system.

Proponents of this argument see the state as a dominant figure in the

establishment of development/power linkages. As the motor of internal

economic and military change, the state plays a central role in the

transformation of the local economy. The agent-centered argument sees the

actions of individual nation-states (agents) as defining international

structure. Unlike structuralists, who see the international system as defining

and constraining the character and possibilities of the agents (either

dominant or subordinate actors), the agent-centered proponents assign

greater freedom to actors in their effort; to change the structure of the

international system.





Systemic transformation comes from domestic industrialization. In this

view, power is derived primarily from domestic attributes. Natural resources,

population size, and arms production are often cited as the components of a

state's position in the international system. This view of the

development-power linkage poses state agency as the defining element in

international structure. Changes in an individual country's capability (e.g.,

development of an indigenous arms industry) lead to an improvement in its

position in the power hierarchy.

In the 1960s, Organski provided a standard agent-centered

interpretation, which found its way to contemporary studies of war and

peace.37 His "power transition" concept fits within the argument that

internal attributes determine the nature of national power, which in turn

shapes the character of international relations. Organski identifies two major

determinants of power: national (geography, resources, and population) and

social (economic and political development, and national morale). Political

development is particularly crucial, because, as he suggests,

it is largely through governmental direction that the
human and material resources of a nation are mobilized to
influence the behavior of other nations. Political
development increases internal unity, stimulates economic
development with all its important consequences for power,
and organizes men and material into effective fighting
forces.3


In evaluating the determinants of power, Organski ranks the three most

important elements of power: population, political development, and








economic development. The indicator of power capability is closely related to

industrialization. As Organski argues, "The most powerful nations in the

world today are all politically modern and industrial. The established leaders

are those who industrialized first, and those who challenge them for

leadership are nations that have industrialized more recently. This is not an

accident."39 Organski believes there are three stages of power transition: 1)

potential power (small industrial output, although a nation in this stage may

benefit from expectation of future world power status); 2) transitional growth

in power (growth in industry and productivity, with nationalism running

high and sometimes aggressive action toward the outside); and 3) power

maturity (fully industrialized with high economic efficiency, but relative

power declines because other nations are entering the second stage of

transitional growth).40 The gap between nations in the second and third

stages often closes in sprints, as industrializing powers challenge the

dominance of those in stage three. As Organski argues,41

It is these sudden sprints that keep upsetting the
distribution of power in the world, threatening the
established order of the moment and disturbing world
peace. It is the differential spread of industrialization
throughout the world and the resulting power transition,
not some automatic balancing process, that provides the
framework of modern international politics.


Any nation undergoing power transition may upset the existing order

by becoming a challenger. As Organski suggests, "World peace has coincided

with periods of unchallenged supremacy of power, whereas the periods of








approximate balance have been the periods of war. .. Wars occur when a

great power in a secondary position challenges the top nation and its allies for

control."42 For nations undergoing power transition, the rise in power

capability induces the nation to seek a greater share of the benefits the

existing order provides. Satisfaction, therefore, is related to the response a

challenger receives from the top of the hierarchy:43

Industrialization is the source of much of the international
trouble of the present period, for it expands the inspirations
of men and helps to make them dissatisfied with their lot,
while at the same time it increases their power to do
something about their dissatisfaction, that is, to wrest a
greater share of the good things of life from those who
currently control them.


Another recent agent-centered interpretation of the linkages between

industrialization and international power is found in Guatam Sen's The

Military Origins of Industrialization and International Trade Rivalry, which

tries to explain the roots of international trade disputes in manufactures.44

Existing theories, Sen argues, are unable to explain the systematic pattern of

such disputes. The author finds a more persuasive interpretive schema in

the division of the international political system into competitive

nation-states. His notion of national security, which is closely related to the

conception pursued in this dissertation, is derived from this competitive

environment. As he suggests,45

The insecurity of existence in an international political
system, characterized by the competitive relations of
nation-state actors, prompts latecomer countries to pursue
the goal of industrial transformation once the distribution








of power has been dramatically altered by the concurrence of
industrialisation in firstcomer countries; military capability,
on which the distribution of power and the status of
countries is predicated, being heavily dependent on the
level of industrialisation.


Sen suggests that competitive relations between countries in the

international political system lead each government to play "a crucial role in

fostering and maintaining .. a self-sufficient industrial structure."46 The

author's thesis rests on the premise that the desire for such economic

autonomy is ultimately "a function of perceived national security

imperatives."47

Such a pattern of state intervention was seen in the 19th century as

Britain became the "firstcomer" in the process of industrialization.

"Latecomers" followed British footsteps in two waves: in the first round

came countries such as the United States, Japan, and several of the Western

European nations; the second round of "latecomers" arrived after World

War II in the form of NICs (including Brazil). Along with the arrival of each

"generation," Sen suggests, came greater tensions over international

manufacturing. Sen reflected much of earlier views on waves of

development, as expressed in the development economic literature. The

economic historian Alexander Gerschenkron, for instance, provided a classic

study about latecomers in which he argued about the "advantages of

backwardness."48 Drawing on past experience, particularly in the area of

science and technology, developing countries have achieved sustained

development at a shorter time span.








The existence of a group of strategic industries (i.e., from steel to

semiconductors) leads Sen to reject the Heckscher-Ohlin theorem of trade

specialization by stressing "self-reliance" as the key issue in a country's trade

policy. Self-reliance is crucial in Sen's analysis, because he not only relates the

role of the state in the national economy, but also the relationship between

national defense and strategic industries--a proposition Stanley E. Hilton

makes in presenting the role of the Brazilian military in trade policy in the

1930s.49 The Brazilian military was particularly interested in the possibility of

Germany supplying military technology in exchange for raw materials. Sen

establishes a linkage between national defense and economic policymaking:50

Whatever the constitutive structure of the international
political system, barring universal empire which would
transcend the system of territorial states, the dominant
reality is rivalry and competition between national actors,
and the currency of transaction between them is power; and
the highest denomination of this currency of power is
military capability.


The agent-centered argument makes a contribution in viewing the state

as an important actor shaping the process of international change. The

dynamics of trade rivalry among nation-states in the post-World War II

period has led scholars to explore a new area of research called strategic trade

policy. Robert Gilpin defines it as "an attempt by a state to change the

international strategic environment in ways that give advantage to the home

country's oligopolistic firms."51 In essence, strategic trade policy has been

used, as Gilpin suggests, in two main forms: "industrial preemption"








(blocking access to domestic markets so as to develop one's domestic

industrial capability); and "import protection for export promotion" (the use

of entry barriers to allow domestic firms to acquire advantages, such as

economies of scale, in order to enable them, in turn, to dominate world

markets).

Aspiring powers have taken advantage particularly of the first form

("industrial preemption") as a way of developing domestic industries.

Subsequently, however, many of these industries have become competitive

in world markets and have increased a country's export potential. Middle

powers have been careful to promote a strategic trade policy that addresses its

national security concerns. Several heavy industrial sectors have been

targeted as "critical" (e.g., steel). The arms industry, however, has become a

source of intense import substitution, while some middle powers such as

Brazil and South Korea have turned it into a profitable export sector. This

interrelation between strategic economic imperatives and national

security policy-making has become a central issue in the development/power

linkage literature as addressed in the agent-centered argument.



The Structural Power Arg~ument

The structuralist argument finds in the distribution of capability the

essence of an actor's national security perspective. The existing structure

shapes and constrains the developmental possibilities of each actor. In this

study, the literature on structuralism will be divided into three camps:








realism, revisionism, and postrevisionism. While some might argue that

each camp does not reflect a progression from the other, they do present

different analytical directions that are important in international relations

theory-building. The first camp draws on the classical realist tradition of the

1940s and 1950s when scholars such as Hans Morgenthau conceptualized the

emerging bipolar international order. Realism, however, did not gain a

structuralist bent until the 1970s, when interdependence and neorealist

schools formally integrated realist premises into a structuralist model.

Kenneth Waltz has become the most outspoken defender of structural

realism.52 The behavior of state-actors--regardless of individual

characteristics--can be understood by looking at the structural arrangement

under which each actor finds itself. Therefore, U.S. containment policy can be

explained not as a holy crusade of capitalism against communism, but the

natural behavior of superpowers balancing each other in a bipolar structural

arrangement. Waltz's focus on realism differs from that in Sen's military

rivalry conception because Waltz does not account for the changes the

international system undergoes once nations acquire new power capability--a

contribution Sen's work makes. After all, a consideration of development as

a domestic phenomenon would violate the structuralist integrity of Waltz's

theory. As a result, structural realism has been criticized as static and giving

little attention to the dynamic nature of international relations.53

Another shortcoming in Waltz' structural realism is its sole emphasis

on symmetrical relations--a concern with balance-of-power in the post-war





East-West military confrontation. Such a focus neglects the importance of

asymmetry ih~ international relations, a concern that the revisionist literature

examines in the context of North-South economic relations. The revisionist

camp, which became popular in the 1970s, addressed structural patterns of

dependence between center and periphery. Although this literature has come

to be known as dependency theory, "revisionism" seems to be a more

appropriate term in this dissertation because it places the literature in the

context of an evolving progression in international political economy

studies. Revisionists did not necessarily break away from structural realism,

but they did challenge the conventional thinking of their time by bringing

the North-South dimension to the forefront of international relations.

Like the conventional theorists, revisionists also suffered from the

same predilection for a static view of international relations. By dividing the

world into center-periphery, there was little room for overlap. Just like the

conventional view of structure as defining the character of individual action,

revisionists also saw the center-periphery as establishing rigorous norms of

dominance and subservience. Conceptualizing development, therefore, was a

difficult exercise if it meant a transformation in power relations.

The revisionist camp--as a structuralist argument--sees domestic

development as part of a global phenomenon. The individual power of a

nation-state can only be ascertained in relation to how its local economy is

integrated into the international system (either as a dominant or as a

subordinated economy).54 While development transforms the local









economy, it does not necessarily change the character of the international

system. Consequently, the power of newly developed nation-states may

continue to be limited by a constraining structure, if their subordinate role

persists.55 Further, development may simply be the expansion of a

system whose control is found in only a few dominant nations. As a result,

development in weaker nations may become a tool of imperialism by

dominant nations.5

Fernando Henrique Cardoso and Enzo Faletto conceptualize the

development-power linkages in those revisionist structural terms.57 They

see a close association between local and international dominant classes in

shaping the developmental process of a local economy. By viewing

capitalism as an evolving system with global reach, Cardoso and Faletto

suggest that domestic class relations are closely related to the economic

processes taking place at the international level. The transformation of the

international economic system leads to changes at the domestic level, with

new class interests emerging. Such a transformation took place in Brazil at

the turn of the 20th century, as a merchant and urban bourgeoisie replaced a

landed aristocracy at the onset of Brazil's Industrial Revolution.

Even if a country experiences development, revisionists argue, a nation

is not necessarily moving upward in the international power hierarchy.

Immanuel Wallerstein's "world-system theory" does not discount the

possibility of a peripheral country moving up in the structural hierarchy and

becoming a core nation.58 The debate about mobility in Wallerstein's








conception, nevertheless, has remained predominantly functionalist in

character, with these aspiring powers becoming part of a sub-imperialist

"semi-periphery," functioning as enforcers of core interests and rules within

the periphery.59 In describing the function of Southern Europe in the

world-system, Wallerstein asserts that "Suddenly it became of interest to the

core states to have Southern Europe play a strong semiperipheral role in the

world-economy, especially if they could be closely linked to the core in

political and ideological terms."60 This simplistic view of development

reflects a bias toward viewing peripheral transformation only as a function of

external processes.

Revisionists argue that conditions of dependency often persist, as local

dominant classes serve the interests of international forces. As a result, the

nation finds itself trapped in the world capitalist order in a subservient role.

Nationalism and populism do constitute social and political forces of

development, according to Cardoso and Faletto, but they participate in the

phase of domestic market consolidation, under which the developmentalistt

state" prepares the ground for the internationalization of the domestic

market.61 The new nature of dependence linked "the production sector

oriented toward the domestic market to dominant external economies."62

Such a link reveals the structural limits on the process of national

industrialization with the opening of domestic markets to external control.

As Cardoso and Faletto suggest, "The peripheral economies were linked to

the international market at the time when the center of capitalism no longer








acted solely through control of the import-export system, but acted also

through direct industrial investment in the new national markets."63

Therefore, the direct participation of foreign enterprise cast a new structural

arrangement for the development of industries in the periphery.

In this new form of development, which Cardoso and F~aletto call

"dependent development," the public sector also plays a dominant role in

local economic transformation. Peter Evans has made an important

contribution in the conceptualization of "dependent development" by

viewing the structural relations in post-1964 Brazil as a triple alliance: public

sector, the multinational corporation, and the modern capitalist sector of the

national economy."4 The "tripod," in Evans' term, is the result of a careful

balance among diverse interests. The state enterprise is incorporated into the

network of international capital, while the participation of multinationals is

carefully negotiated.65 A nationalist state continuously attempts to pull the

multinationals more deeply into the process of local accumulation, while the

latter pursues a globalist strategy.6

The emergence of NICs in the 1970s placed the revisionists in the

tenuous position of having to explain the economic success of those

countries in the context of peripheral capitalism. While "dependent

development" constituted a viable analytical direction, revisionists found

themselves more and more concerned with explaining exceptional cases

even as late as the mid-1980s, such as the East Asian NICs' successful entry in

the trade system. Hyun-Chin Lim, for instance, in looking at dependent









development in South Korea, makes the common assumption in the

revisionist perspective: a country's structural position in the world capitalist

system is a main determinant of development and underdevelopment.67

An area that came to dominate the discussion in the late 1970s through

the 1980s involved the apparent increase in political strength of governments

in the "periphery" in negotiating foreign direct investment terms that

conformed to strict local guidelines (e.g., export requirements, labor laws, use

of local components and management). Studies about bargaining power

between multinational corporations and "host" states moved the literature

in the 1980s from revisionism to a "postrevisionist" camp. The focus of these

studies centered on the relative bargaining strength of the two parties (the

transnational corporations, or TNCs, and the state) with specific attention to

the latter's capacity to break away from structural constraints and to become

an "autonomous actor" in the developmental process (e.g., the ability of state

managers to successfully pursue policies that might be in conflict with TNCs

and local capital interests). Douglas C. Bennett and Kenneth E. Sharpe, for

instance, observe that "the experience of Mexico shows that interests of the

auto TNCs often led them to pursue courses of action that were detrimental

to Mexican welfare, but it also shows that the state was able to alter their

behavior to make them contribute more to industrialization and economic

growth."68

Evans himself has questioned his "dependent development" approach

in a recent study of Brazil's computer policy.69 The author argues that








technological change offers certain "moments of transition" that may

provide Third World states with the opportunity to preempt policy

initiatives. "At moments of transition," Evans suggests, "when the interests

of local capital are still undefined and international capital may be caught off

balance, state action may be decisive."70 Such an interpretation leads Evans

to consider the importance of a "state-centered model" to explain the crucial

moment of an industry's origin, during which the state plays an

entrepreneurial role. The use of such a model produces an effective

argument for the interrelation between structural constraints and state

"autonomous" action: "States cannot make industrial policy as they choose,

but neither must they accept local industrial structures as exogenously

determined."7 The slow revisionist conversion, however, has not dissolved

its static center-periphery roots. Evans, for instance, while granting some state

"autonomy" during the developmental process, has called attention to the

way dependency has been "transformed" rather than "overcome."72

Postrevisionismn has emerged as a competing conception of Third

World development within the dynamic of international capitalism.

"Postimperialism" has become the main theoretical contribution found in

postrevisionism. The concept of postimperialism grew out of two bodies of

thought: political theories of the modern business corporation and class

analyses of political power in the Third World. As a theory of international

oligopoly, postimperialism stresses the move toward a transculturall









bourgeois class coalescence"--the transnational class domination of the world

as a whole.7

Transnational enterprise is not viewed as a new form of imperialism,

tailored to suit the postcolonial era--the "core" imposing structures of control

on the "periphery." Rather, in an increasingly global market, transnational

firms find it in their self-interest to include localization of labor and

management. Whenever corporate policy deviates, the local state effectively

imposes indigenization. The conception of state autonomy goes much

further than the revisionist position, while at the same time separating the

transnational firms from any particular "core" country. This perspective fits

well within the recent interest on the internationalization of production and

the evolving international division of labor.74 Postrevisionism poses

challenging questions about the interrelation between the state system (with

its developmental state) and the global economic system (with an ever

expanding capitalist class). In fact, the postrevisionist position destroys

geographical parameters (East-West, North-South) in favor of a single global

view of market processes, regardless of the stage of development of local

economies.

Postrevisionism includes some elements of the agent-centered

argument (the power of the state to break away from structural constraints),

while retaining the importance of structural processes in defining the context

of economic development. These combined elements (state power and the

context of development) are part of an increasing interest reflected in the









postrevisionist literature with the evolving international division of labor,

which will be more closely discussed in the last section of this chapter. With

the breakdown of the old relations of industrial and "backward" worlds and

the emergence of NICs in the global market, there is a new analytical

direction toward unraveling the intricacies of state autonomy and market

processes. Before we delve into this topic, the following section will provide a

summary view of the agent-structure debate, drawing from the last two

sections.



The Agent-Structure Debate

What the previous discussion on agent-centered and structural

arguments suggests is that each side makes its own contribution, but in

different analytical domains. The agent-centered conception of

development-power linkages concentrates on the causal aspect of power

relations. By capitalizing on resources accrued from development, actors can

improve their power performance in the international system. The structural

argument, however, focuses on the constraining character of structures in

defining the parameters of an agent's freedom. The power of a structure lies

in shaping the developmental alternatives for aspiring actors.

The two domains are often perceived as in opposition--a dialectic

producing an unresolved dualism.75 This study, however, seeks to

incorporate both perspectives into a single framework exploring both the

voluntarism found. in agency-centered arguments and the determinism of









structuralism. The interconnections between the various power conceptions,

as reviewed earlier in this chapter, provide the basis from which to explore

the impact of development at the agency and structure levels. Agency

produces structures that simultaneously serve as the conditions for

reproduction of agency in a continuing process.76 In other words, agency and

structure can be viewed as interpenetated.

A central problem in social theory, which is directly applicable to this

study, lies in adopting a balance between voluntarism and determinism.

While the former stresses agency as creative and knowledgeable, the latter

concentrates on the constraints surrounding social action. One way of

overcoming such a problem is to expand our conception of structure so as to

capture agency's voluntarism. The "enabling" character of structure provides

such a perspective. The mechanical view of social action--as something

externally caused--stresses reproduction of social action, while enablement

focuses on production, which is the key to understanding structural

transformation Structure is both the medium, and the outcome of the

re reduction of social practices. Structures both constrain and enable social

Practices, while practices both embody and modify structures.78 In other

words, structure and action presuppose one another. Structure is often

pictured as the anatomy of a social organism or the girders of a social edifice.

Such images suggest that structure is rigid and static, as in Waltz's and

Wallerstein's conceptions of the international system. But, in truth, it exists

only in action, and action always has place and time.7









Equally, action should not be conceived apart from structure. Although

every society has a structure of domination, all actors draw on it and bend it

to their own use. Thus structure (rules and resources, organized as properties

of social systems) and system (reproduced relations between actors or

collectivities, organized as regular social practices) are two sides of a unifying

concept, dubbed by Giddens as "structuration."80 Actors draw on structures to

produce systems. Gidden's subjectivist ontology widens the concept of power

to include all interaction as involving the use of power---drawing on

resources in order to affect and order the environment.8

Giddens has had his share of critics because of his stress on agency

voluntarism, an "illusory freedom of the constituting subject."82 Actors

remain at the center stage of his theory, therefore, compromising the

perceived interpenetration, or "duality," of agency and structure.83 We

notice this theoretical bias toward voluntarism particularly in his conception

of domination.

Giddens sees dominant actors as benefiting from the "enabling"

character of structure. Those in power establish a structure of domination

through their own enabling process of resource deployment. This

domination, in turn, constrains those over whom power is exercised.

Giddens pays little attention to the ways in which the structure of

domination may constraint the dominant actors themselves. This is an

important point because the source of constraint may constitute in itself an

"enabling" factor for weaker actors in their own process of liberation. In other








words, weaker actors may use the existing structure to liberate themselves

from the existing order, thus, helping transform the social system.

The "enabling" character of structure is particularly important in the

study of middle-power politics, because it elucidates the way through which

weaker states have used the existing world order to transform their position

in the international system. What this dissertation seeks to show is that

although the United States--as the post-war hegemon--established new rules

in the international economic system (e.g., the General Agreement on Tariffs

and Trade, the International Monetary Fund, and the World Bank), this

system had a dynamic of its own as part of a centuries-old world capitalist

system. To say that the United States established the capitalist system after

World War II is ludicrous. It is fair to argue that the hegemon reshaped the

rules of the game so as to benefit itself and dominate others. However, the

United States was not able to retain its dominant position, as the world

capitalist system moved toward an internationalized network of production

and the continuing diffusion of technology across borders.

A careful understanding of "enablement" is required as one defines the

limitations of dominant powers. Structurationists have become harsh critics

of structural theorizing, particularly neo-realism, because structuralists tend

to neglect the agent's ability to bring about structural transformation.

Structuralism insists on viewing structures as constraining the choices of

pre-existing state actors, while failing to account for the enabling character of

structures.84








David Dessler's "transformational model," for instance, suggests that

structures are "media through which action becomes possible and which

action itself reproduces and transforms."85 While structuralists have tended

to see structures as an environment or "container," Dessler offers structure as

a means to social action: "An office building, in this view, is not so much a

setting for the activities of workers as it is an enabling structure that workers

make use of to get their jobs done."8

Dessler, however, does not examine how "workers" come to be

employed in the office building in the first place. NICs, as new "employees"

in the building, are integrated into the workforce through a complex process

of "workload expansion" (the internationalization of production). Although

one might argue that U.S. employment status in the building may be much

hi her than that of NICs, the United States iS nevertheless only an

employee--subject to the same labor laws that encircle all office occupants.

The laws operate at the market level under which efficiency and

cost-effectiveness are supreme.

Powerful states may attempt to bend the rules because of national

security requirements, but ultimately local producers respond to market

signals, rather than nationalist demands. Much of the current debate about

the decline in U.S. competitiveness focuses on the painful realization that

the country is only one employee among many in an increasingly crowded

office building.








Power and the International Economic System

What the previous discussion suggests is that one has to look at changes

in the international economic system in order to understand the evolving

power relations in world politics. After all, Brazil could not seek an end to its

military alliance with the United States unless it felt secure in its position as

an arms producer. Such security, however, is grounded in Brazil's deepening

integration in the world capitalist system--ground that is not always firm.

This section outlines the context of aspiring powers' development policies,

with particular attention to the role of technology in the promotion of

industrial capability.

The post-war rise in foreign direct investment (FDI) gave a new

impetus to capital accumulation in underdeveloped societies. The advent of

worldwide industrial production led to the flow of commodities between

plants of the same company. These "world market factories" drew on cheap

labor in the creation of industrial enclaves in underdeveloped regions. The

new conditions for the valorization and accumulation of capital generated a

world market for production sites and labor, which included the use of both

traditional industrialized and underdeveloped countries. Therefore, the

emerging system destroyed the traditional division of labor under which

underdeveloped economies supplied raw materials to industrialized

countries, while the latter supplied manufactured products.

Foker Frabel, Jilrgen Heinrichs and Otto Kreye use the term "the new

international division of labor" to designate that tendency that:8





(a) undermines the traditional bisection of the world into a
few industrialized countries on one hand, and a great
majority of developing countries integrated into the world
economy solely as raw material producers on the other, and
(b) compels the increasing subdivision of manufacturing
processes into a number of partial operations at different
industrial sites throughout the world.


The authors see NIDL as an "institutional" innovation of capital itself.

It is a consequence, rather than a cause, of the new conditions that emerged

after World War II (e.g., the requirements of the world market for industrial

sites), prompting countries and companies to tailor their policies and

profit-maximizing strategies to these new conditions. For aspiring powers,

the evolving international economic system presented itself as an

opportunity to promote fast industrialization, import substitution, and

export promotion. The economic transformation, in turn, set the stage for the

development of indigenous arms industries with a proliferation of suppliers

in the international arms market.88

Technology transfer has occupied a central place in this sequence of

developments, as multinational corporations sold technology to aspiring

countries as a way of establishing a foothold in the new market.89 As a means

to perform a particular activity, technology has been identified not only as a

process, but also as a national asset. As such, it becomes a critical part of

economic policy-making with far-reaching implications to world trade.90

Those nations with high technological capability enjoy greater prestige in the

international arena, while the ones that fall behind in the technological race









find themselves downgraded in the power hierarchy. Technology transfers

are thus used to close the gap.

Third World nations, however, are ambivalent about the transfer of

technology from advanced industrial centers. On the one hand, it promotes

domestic economic transformation and improves the competitive position of

national companies in the international market. On the other hand, reliance

on foreign technology leads to a dependent position that national security

policy-makers find difficult to accept. Brazil's solution was to diversify the

sources of technology so as to avoid excessive concentration from a single

country. At the same time, the government promoted indigenous research

and development. Such a strategy reflects what postrevisionists have

theoretized as the combined elements of state autonomy and the context

of development (transnational capital and technology) in a continuing

interpenetration at the global level.



Concluding Remarks: The Paradox Revisited

National security policy-making in the post-World War II order has to

take into account both the increasing importance of high technology in

weapons production and, at the same time, the internationalization of

production, which encourages the diffusion of technology. Because of

competition in the international market, suppliers are not always eager to

transfer technology.91 The state often imposes technology export controls

under national-security prerogatives (e.g., fear of advanced arms technology








proliferation in the Third World). As a result, the level of technology

available for exports is under tight scrutiny.92

Control over technology exports, coupled with weaker powers'

insufficient domestic technological capability, has led some scholars to view a

well-defined division of labor in the international arms market, "in which

the advanced suppliers specialize in sophisticated systems and the

developing country suppliers emphasize manufacture of older generation

military systems, often under license or coproduction arrangements."93

Helena Ttiomi and Raimo Viiyrynen have made a similar argument,

viewing the NIDL as the expansion of "northern" transnational corporations

(TNCs) worldwide.94 The authors argue that the present international

economic system increases aspiring producers' dependence on northern

technology.

These authors present a contradictory conception of NIDL by making a

geographical argument ("northern" technology), while stressing the

autonomy of the arms industry in an internationalized production process.

Rivalry among U.S. and Western European producers has become in recent

decades a major factor in the continuing transfer of sophisticated technology,

regardless of the geographical destination. This factor (rivalry among

technology suppliers) constitutes an "enabling" power resource for NICs in

their effort to remain competitive in the world market. By threatening to

change suppliers, NICs are able to extract technology-transfer agreements

from unwilling trade partners.








The argument used in this study does not take the same "voluntarist"

road as in Giddens ontology by arguing that NICs are free to rearrange the

international trade system so as to dominate the market. There are limits to

NICs' developmental goals. Changes in the technology--particularly in the

arms business-are so rapid that such a search for foreign suppliers becomes a

continuing developmental priority. "Indigenous innovation" has to depend

on external sources of technological change. This dependency is clearly a

paradox in the state's national security strategy, given its interest in severing

those dependent ties. Even if local producers diversify their sources of

technology, they do not set the pace of innovation. They are technology

takers. Such a dependecy only invites fears of catastrophic events, such as the

withholding of critical technology by a hostile foreign government in the

middle of a national-security crisis. This possibility, in fact, was witnessed

during the Falklands War in 1982, when the European Community cut

technology transfers to Argentina, crippling its defense industry.

Such a paradox does not constitute a drawback for local producers. As

long as they remain competitive in the global market, the source of

technology is of no interest. For the state in aspiring powers, though, there is

always the possibility of subordinating political interests for the sake of

economic ones. This dissertation explores such a case in Brazil's decision to

sign a new military agreement with the United States in 1984, despite the

former's proclaimed "independence" in the late 1970s. While the signing of

this agreement does not necessarily imply an intention to implement it,








there was a clear demonstration that economic interests (as articulated by

local producers under the influence of market forces) took precedent over

political requirements.

The Brazilian military's perception of a geopolitical threat during the

Cold War (i.e., "communist subversion" of the domestic political process),

along with its vision of Brazil as a potential great power, led to the

development of an indigenous arms industry. The United States, however,

did not attach the same strategic importance to the Southern Hemisphere.

After the war, the United States transferred a significant amount of arms

technology to Western Europe and Japan so as to counter the Soviet military

presence in Europe and Asia.

U.S. efforts in South America, in comparison, were insignificant,

although Brazil did sign a 1952 Military Assistance Agreement as part of the

U.S. containment policy. Military assistance to Brazil consisted mainly of old

technology and aging equipment. Even after the military came to power in

1964, the United States did not transfer any significant technology or

sophisticated equipment.

Brazil's decision to turn to the newly modernized European arms

industry for help proved beneficial. The transfer of European technology

allowed the Brazilian industry to develop a complex arms production

capability to the point of a successful entry into the export market in the

mid-1970s. The newly found sense of military independence led to the








cancellation by Brazil in 1977 of the military assistance agreement it had

signed twenty-five years earlier with the United States.

Brazilian integration into the international arms market, however,

exposed its development policy to the paradox of national insecurity. The

need to acquire ever more advanced arms technology to compete in the

world market led Brazil to agree in 1984 to a new military agreement with the

United States, this time seeking the transfer of sophisticated arms technology

from U.S. sources. While Brazilian local producers welcome technology

imports from the United States, the state does not encourage it because of the

political stipulations attached to them, such as not allowing the export of

arms built with U.S. technology to countries hostile to U.S. interests.

Although the United States would like to build closer relations with an

emerging power, it is wary of sophisticated arms technology transfers to the

Third World. As a result, the states on both sides have signed an agreement

of which they do not intend to make extensive use. Suppliers in the United

States see arms sales as a commercial deal rather than as an instrument of

foreign policy. This pragmatic position creates a direct conflict between

commercial and strategic interests. The signing of the agreement for the

United States represents the dilemma that exists between these two interests.

For Brazil, as an emerging power, the signing of an agreement with a

technology supplier represents an important additional source of innovation

which improves the competitive position of local producers in the

international market. Nevertheless, dependence on a dominant power such








as the United States requires a political and strategic commitment that Brazil

has avoided since its "declaration of military independence" in 1977. The

ambivalence found in the implementation of the 1984 agreement represents

the bargaining process that exists in Brazil's national security policy circles

between commercial and strategic interests.

This study is divided into two parts. The first part considers theoretical

propositions found in the development-power linkages (Chapter 1) and

applies them to the study of the post-World War II international arms

market (Chapter 2). The second part takes the specific case study,

U.S.-Brazilian military relations since World War II, and explores (Chapters

3-5) the theoretical underpinnings developed in the first part. The last

chapter (Chapter 6) broadens the case study to include a comparative view of

other middle powers under a suggested analytical framework.

Before the case study is fully developed, the next chapter details the

expansion of the international arms market after World War II. Much of the

discussion in the present chapter about development and power is applied to

the issue of arms trade. The next chapter discusses the effort of many NICs to

develop indigenous arms production as a critical national security strategy.

This effort reflects the agency-level argument as discussed in this chapter. At

the structural level, the expansion of technology transfers is presented as an

"enabling" factor in Third World arms producers' competitiveness.









Notes

1. For the purpose of the present study, the term "NIC" is an economic
description of a country which has attained a level of development which
sets it apart from other Third World countries, while the political-strategic
expression of the same development is found in the term "middle power."
For a discussion of the position of NICs in the international trade system, see
Dominick Salvatore, ed., The New Protectionist Threat to World Welfare
(New York: North-Holland, 1987); and Christopher Saunders, The Political
Economy of New and Old Industrial Countries (Boston and London:
Butterworths, 1981). For a more detailed look at the way the term "middle
powers" is used in the international relations literature, see Steven L.
Spiegel, Dominance and Diversity: The International Hierarchy (Boston:
Little, Brown and Company, 1972); and Carsten Holbraad, Middle Powers in
International Politics (New York: St. Martin's Press, 1984).

2. See, for example, Kenneth N. Waltz, Theory of International Politics
(Reading, Mass.: Addisson-Wesley Publishing Company, 1979).

3. A.F.K. Organski and Jacek Kugler, The War Ledger (Chicago and
London: The University of Chicago Press, 1980). Organski and Kugler portray
mobility as a "power transition," with fundamental consequences to
international security. This concept will be discussed in greater detail in this
chapter.

4. Both proponents of realism and interdependence have made this
distinction in their textbooks. For a realist perspective, see John Spanier,
Games Nations Play, 7th ed. (Washington, D.C.: Congressional Quarterly Inc.,
1990). For an interdependence viewpoint, see Robert O. Keohane and Joseph
S. Nye, Power and Interdependence (Boston: Little, Brown and Company,
1 977).

5. For an excellent study of Third World acquisition of missile
technology, see Janne E. Nolan, Trappings of Power: Ballistic Missiles in the
Third World (Washington, D.C.: The Brookings Institution, 1991).

6. Charles Herzfeld, "Technology and National Security: Restoring the
U.S. Edge," The Washing~ton Quarterly 12 (Summer 1989): 171-83; and Edward
A. Olsen, "A Case for Strategic 'Protectionism,'" Strategic Review 15 (Fall
1987): 63-9.

7. Lamar Bowles, interview with author, Houston, Tx., 22 May 1990. Mr.
Bowles is a senior advisor to the President of Rockwell International.









8. Stanley E. Hilton, Brazil and the Great Powers, 1930-1939: The Politics
of Trade Rivalry (Austin: University of Texas Press, 1975); Stephen D.
Krasner, Structural Conflict: The Third World Against Global Liberalism
(Berkeley and Los Angeles: University of California Press, 1985), 19.

9. Krasner, Structural Conflict, 115.

10. Ibid., 4.

11. A.F.K. Organski, World Politics, 2nd ed. (New York: Alfred A.
Knopf, 1968); Robert Gilpin, War and Chang~e in World Politics (New York:
Cambridge University Press, 1983).

12. For a representative sample of this tradition, see Immanuel
Wallerstein, "Dependence in an Interdependent World: The Limited
Possibilities of Transformation Within the Capitalist World-Economy,"
African Studies Review 17 (April 1974): 1-26; Immanuel Wallerstein,
"Semi-peripheral countries and the contemporary world crisis," Theory and
Society 3 (Winter 1976): 461-84.

13. Immanuel Wallerstein, "The Relevance of the Concept of
Semiperiphery to Southern Europe," in Semiperipheral Development: The
Politics of Southern Europe in the Twentieth Century, ed. Giovanni Arrighi
(Beverly Hills: Sage Publications, 1985), 31-9. The term (semi-periphery),
however, has remained vague and obscure. See Ruth Milkman,
"Contradictions of Semi-Peripheral Development: The South African Case,"
in The World-System of Capitalism: Past and Present, ed. W. L. Goldfrank
(Beverly Hills: Sage Publications, 1979), 264, in which the author suggests:
"Wallerstein has done little to specify what is distinctive about a
semi-peripheral location in the world-system. .. The category seems to serve
as a catchall for all of the countries that includes such diverse cases as Canada,
China, Iran, and Poland, as well as Brazil and South Africa." Even the
Ivory Coast has been included in the "semi-peripheral" zone: see Karen A.
Mingst, "The Ivory Coast at the Semi-Periphery of the World-Economy,"
International Studies Quarterly 32 (Sept. 1988): 259-74.

14. Martin Wight, Power Politics (London: Royal Institute of
International Affairs, 1948).

15. Paul M. Kennedy, The Rise and Fall of the Great Powers (New York:
Random House, 1987).

16. Ron Ayres, "Arms Production as a Form of Import-Substituting
Industrialization: The Turkish Case." World Development 11 (Sept. 1983):
813-23.








17. For a good discussion about ISI and export-led growth, see Paul
Streeten, "A Cool Look at 'Outward-looking' Strategies for Development,"
The World Economy 5 (Sept. 1982): 159-69.

18. Curt Gasteyger, Searching for World Security (New York: St.
Martin's Press, 1985).

19. Dennis H. Wrong, Power: Its Forms, BasesadUe(CigoTh
University of Chicago Press, 1988), 220.

20. Steven Lukes, Power: A Radical View (London: Macmillan, 1974).

21. Lukes himself has argued in an edited volume, Power (New York:
New York University Press, 1986) that perhaps the search for a generally
satisfying definition of power is a mistake: "What unites the various views of
power is too thin and formal to provide a generally satisfying definition,
applicable to all cases." (pp. 4-5)

22. Robert A. Dahl, Who Governs? Democracy and Power in an
American City (New Haven: Yale University Press, 1961).

23. C. W. Mills, The Power Elite (Oxford: Oxford University Press, 1956).

24. Robert A. Dahl, "The Concept of Power," Behavioral Science 2 (1957):
201-15.

25. P. Bachrach and M. S. Baratz, "Two Faces of Power," American
Political Science Review 56 (Dec. 1962): 947-52; P. Bachrach and M. S. Baratz,
"Decisions and Nondecisions: An Analytical Framework," American
Political Science Review 57 (Sept. 1963): 632-42; P. Bachrach and M. S.
Baratz, Power and Poverty: Theory and Practice (Oxford: Oxford University
Press, 19'70).

26. Lukes, Pgwer, 10.

27. Albert O. Hirschman, National Power and the Structure of Foreig~n
Trade (Berkeley and Los An eles: Universit of California Press, 1945).

28. Anthony Giddens, New Rules of Sociological Method (London:
Hutchinson, 1976); and Anthony Giddens, Central Problems in Social Theory:
Action, Structure and Contradiction in Social Analysis (Berkeley and Los
Angeles: University of California Press, 1979).

29. M. Foucault, "Disciplinary Power and Subjection," in Power, ed.
Steven Lukes (New York: New York University Press, 1986), 229-42.








30. See, for instance, David A. Baldwin, Paradoxes of ]Power (New York:
Basil Blackwell, 1989).

31. Wrong, Power: Its Forms, Bases, and Uses, viii.

32. Ibid, ix.

33. Max Weber, Economy and Society, trans. G. Roth and C. Wittich
(Berkeley and Los Angeles: University of California Press, 1978).

34. Hans J. Morgenthau, Politics Amongr Nations, 5th ed. (New York:
Knopf, 1973).

35. Wrong, Power: Its Forms, Bases, and Uses, 13. Italics in original.

36. Albert O. Hirschman, "Beyond asymmetry: critical notes on myself
as a young man and on some other old friends," International Organization
32 (Winter 1978): 45-50.

37. Organski, World Politics; Organski and Kugler, The War Ledger.

38. Organski, World Politics, 183.

39. Ibid., 339.

40. Although Organski presents these stages as a logical outcome of
international processes, they should be viewed more as a historical outcome,
particularly linked to two world wars in this century.

41. Organski, World Politics, 344; emphasis in original.

42. Ibid., 364.

43. Ibid., 367.

44. Guatam Sen, The Military Origins of Industrialisation and
International Trade Rivalry (New York: St. Martin's Press, 1984).

45. Ibid., 249.

46. Ibid., 7.


47. Ibid., 77.








48. Alexander Gerschenkron, Economic Backwardness in Historical
Perspective (Cambridge, Mass.: Harvard University Press, 1962).

49. Stanley E. Hilton, Brazil and the Great Powers, 1930-1939; The
Politics of Trade Rivalry (Austin: University of Texas Press, 1975).

50. Sen, The Military Orig~ins of Industrialisation, 66.

51. Robert Gilpin, The Political Economy of International Relations
(Princeton, N.J.: Princeton University Press, 1987), 215; for a sample of this
literature, see Paul R. Krugman, ed., Strategic Trade Policy and the New
International Economics (Cambridge: The MIT Press, 1986).

52. Waltz, Theory of International Politics.

53. Alexander Wendt, "The agent-structure problem in international
relations theory," International Organization 41 (Summer 1987): 335-70.

54. Peter Evans, Dependent Development: The Alliance of
Multinational, State, and L~ocal Capital in Brazil (Princeton: Princeton
University Press, 1979); Theotonio dos Santos, "The Structure of
Dependency." American Economic Review 60 (May 1970): 231-6.

55. Wallerstein, "Dependence in an Interdependent World."

56. Ruy Mauro Marini, Subdesarrollo y revoluci6n (Mexico City: Siglo
Veintiuno Editores, 1969).

57. Fernando Henrique Cardoso and Enzo Faletto, Dependency and
Development in Latin America, trans. Marjory Mattingly Urquidi (Berkeley
and Los Angeles: University of California Press, 1979).

58. Immanuel Wallerstein, "The Present State of the Debate on World
Inequality," in The Cap Between Rich and Poor: Contending Perspectives
on the Political Economy of Development, ed. Mitchell A. Seligson (Boulder
and ILondon: Westview Press, 1984), 119-32.

59. Immanuel Wallerstein, "Semi-peripheral countries and the
contemporary world crisis," Theory and Society 3 (Winter 1976): 461-84; A. D.
Roberts, "The sub-imperialism of the Baganda." Journal of African History 3
(1962.): 435-50.

60. Wallerstein, "The Relevance of the Concept," 38.


61. Cardoso and Faletto, Dependency and Development, 143.









62. Ibid., 140.

63. Ibid., 160.

64. Peter Evans, Dependent Development: The Alliance of
Multinational, State, and Local Capital in Brazil (Princeton: Princeton
University Press, 1979).

65. Ibid., 227.

66. Ibid., 276-7.

67. Hyun-Chin Lim, Dependent Development in Korea, 1963-1979
(Seoul, South Korea: Seoul National University Press, 1986), 13.

68. Douglas C. Bennett and Kenneth E. Sharpe, Transnational
Corporations Versus the State: The Political Economy of the Mexican Auto
Industry (Princeton: Princeton University Press, 1985), 253.

69. Peter Evans, "State, Capital, and the Transformation of Dependence:
The Brazilian Computer Case," World Development 14 (July 1986): 791-808.

70. Ibid., 805.

71. Ibid.

72. Ibid., 804.

73. David G. Becker, Jeff Frieden, Sayre P. Schatz and Richard L. Sklar,
eds., Postimperialism; International Capitalism and Development in the Late
Twentieth Century (Boulder & London: Lynne Rienner 'Publishers, 1987).

74.~ Folker Fraibel, Jilrgen Heinrichs, and Otto Kreye, The New
International Division of Labour, trans. Pete Burges (Cambridge: Cambridge
University Press, 1980).

75. Such is the dialectical position we find in Lukes, Power: A Radical
View.

76. Giddens, New Rules.


77. lbid.









78. Stewart R. Clegg, Power, Rule and Domination: A Critical and
Empirical Understanding of Power in Sociological Theory and Organizational
Life (London: Routledge and Kegan Paul, 1975).

79. Giddens, Central Problems.

80. Ibid.

81. Anthony Giddens, The Constitution of Society (Cambridge: Polity
Press, 1984).

82. Stewart R. Clegg, Frameworks of Power (London: SAGE: Publications,
1989), p. 147)

83. J. M. Barbalet, "Power, Structural Resources, and Agency," Current
Perspectives in Social Theory 8 (1987): 1-24; D). Layder, "Key Issues in
Structuration Theory: Some Critical Remarks," Current Perspectives in Social
Theory 8 (1987): 25-46.

84. Alexander Wendt, "The agent-structure problem in international
relations theory," International Organization 41 (Summer 1987): 335-'70;
Alexander Wendt and Raymond Duvall. "Institutions and International
Order," in Global Changes and Theoretical Challenges, eds. Ernst-Otto
Czempiel and James N. Rosenau (Lexington, Mass.: D.C. Heath and
Company, 1989), 51-73.

85. David Dessler, "What's at stake in the agent-structure debate?"
International Organization 43 (Summer 1989): 467.

86. Ibid.

87. Friibel et al., The New International Division, 45.

88. Rodney W. Jones and Steven A. Hildreth, Modern Weapons and
Third World Powers (Boulder, Colo.: Westview Press, 1984), 64.

89. Katherin Marton, "Technology Transfer to Developing Countries
via Multinationals," The World Economy 9 (December 1986): 409-26.

90. Anne G. Keatley, ed., Technologrical Frontiers and Foreign Relations
(Washington, D.C.: National Academy Press, 1985).

91. Norman A. Graham, "Security Dilemmas in the Sale and Transfer of
Pacing Technologies," in Marketing Security Assistance; New Perspectives on








Arms Sales, eds. David J. Louscher and Michael D. Salomone (Lexington,
Mass.: D.C. Heath and Company, 1987), 218.

92. William J. Long, U.S. Export Control Policy (New York: Columbia
University Press, 1989).

93. Jones and Hildreth, Modern Weapons, 7; see also Stephanie G.
Neuman, "International Stratification and Third World Military Industries,"
International Organization 38 (Winter 1984): 16'7-97.

94. Helena Tuomi and Raimo Viiyrynen, Transnational Corporations,
Armaments and Development (New York: St. Martin's Press, 1982).





CHAPTER 2
MIDDLE POWERS IN THE INTERNATIONAL ARMS MARKET


Chapter 1 outlined two important aspects of power relations that we

will explore now in the context of the international arms trade system. At the

structural level, we will deal with the enabling power of structure, which

facilitates middle powers' participation in the international arms market.

Indigenous capability expands as new technology flows in, thus

strengthening a country's security position in the international system.

Structural relations, as we shall see, also restricts the drive for self-sufficiency

by reinforcing patterns of dependence on external sources of technology. At

the agent level, the development of an indigenous arms business transforms

the patterns of military relations between middle and dominant powers as

the former reassess their relations with powerful allies. Subsequent chapters

will discuss this dimension within the context of U.S-Brazilian military

relations since World War II. TIhe power of the weak, if such a term may be

used, lies in exploiting the enabling resources in the international system,

such as the proliferation of defense technology suppliers, so as to break the

links of dependence with traditional suppliers. Whether they are successful

in their affirmation of political independence depends on their ability to

expand market interrelations beyond their local patterns of subservience.





Middle powers, in general, have found such a goal harder to reach than

anticipated because of their continuing dependence on foreign sources of

technology in a highly competitive environment.

That is not to say, however, that the "dependent development" analysts

of the 1970s are vindicated. Rather, this chapter attempts to show that

changes in military relations follow patterns associated with an increasingly

interdependent market. Even dominant powers reassess their position in the

market, as middle powers reshape their priorities. The paradox of national

insecurity extends beyond the realm of middle power politics to include the

great powers' response to an internationalized arms market. Such a response

conditions and enables the national security goals of those nations that are

struggling to break old patterns of dependence.

Middle powers participate in the international arms market both as

suppliers and recipients. As exporters, they are critically linked to the

competitive nature of the business, in which demand for sophisticated

products prevails. Their limited ability to generate indigenous technology

reinforces old (or creates new) sources of vulnerability. As recipients, they

exploit the competitive market by striking advantageous arrangements to

obtain foreign technology. While the transfer may be gained easily through

pitting one supplier against another, the middle powers' eagerness to secure

foreign supplies underscores the difficulty they find in attaining their goal of

self-sufficiency. The paradox of national insecurity is revealed in their

attempt to secure the establishment of an indigenous arms industry while





integrating into a global process, which ultimately drags its producers toward

interdependent relations beyond its borders.

Before we explore the intricacies of the paradox of national insecurity,

the first section of this chapter discusses the general limitations found in the

use of data on the arms trade. Problems of measurement are critical, and

outlining them in the beginning should serve as an early warning of the

shortcomings the researcher faces. The second section provides a broad

historical overview of structural changes in the modern arms market since

its first inception in the mid-19th century. This section serves as the basis

from which we can assess the enabling character of structure; namely, the

existence of multiple suppliers willing to transfer defense technology to the

Third World. The third section deals with the way middle powers have taken

advantage of technology transfers so as to develop an indigenous capability.

The last section assesses the dynamics of the paradox in relation to middle

powers' participation in the international arms trade system.



The Measurement of Arms Trade

Ever since the systematic collection of military data began in the 1930s,

researchers have faced the growing challenge of developing reliable data

banks amid a burgeoning arms trade. After World War II, arms transfers

became a critical component of the Cold War, and much emphasis was placed

on detecting the direction and extent of the arms trade in remote regions of

the world. The complexity of data sources deepened accordingly. Interest in








arms transfer data "coincide[d] not only with the behavioral revolution of the

late 1960s but also with a surge in the use of arms transfers as an instrument

of foreign policy."l More recently, as the internationalization of production

reached the military sector, determining the market share of the world's

arms exporters has become even more complicated. Stephanie G. Neuman

suggests, "As weapons systems incorporate more foreign intellectual

properties, components, and materials--tracing their origins and

disaggregating their dollar value will become a futile task. The 'world tank'

will soon follow the 'world car."'2

The use of military data in any international security research is a

delicate proposition. Although several respectable sources are available, we

have to critically evaluate their limitations while incorporating dimensions

such as technology transfers that may not be adequately addressed. Three

well-known institutions provide standard data used both in media accounts

and in scholarly research today. First, the U.S. Arms Control and

Disarmament Aency (ACDA) has published annually since 1971 the World

Military Expenditures and Arms Transfers. ACDA has some access to

intelligence data, especially from the Defense Intelligence Agency. Recently,

however, ACDA has relied on estimates from International Monetary Fund

statistics, particularly for gross national product. As Nicole Ball argues, it is

surprising that ACD)A makes little use of budgetary documents given its U.S.

government connections, which might facilitate contacts with U.S. embassies

and consulates.3 Nevertheless, ACDA is one of the few sources that uses








primary intelligence data sources, while the others rely more heavily on

secondary ones.

Second, the Stockholm International Peace Research Institute (SIPRI)

publishes the yearbook World Armaments and Disarmament, which deals

with a variety of issues ranging from Third World arms transfers to arms

control between the superpowers. SIPRI relies on publicly available

information only. Its main focus is on transfers of major weapons systems

(aircraft, armored vehicles, missiles, battle tanks, and ships) and transfer

agreements (the recipient nation, the specific weapon system, the type of

weapon, the number of units ordered and produced for each year the system

was in production, and the manufacture involved). SIPRI's data collection

amounts to an "arms trade register," an idea first developed by the League of

Nations after World War I.4

The third data source comes from the International Institute for

Strategic Studies (IISS), which annually publishes The Military Balance. The

IISS uses some confidential information, but its military expenditure series is

drawn from data national governments make public. IISS publishes its data

in local currency for only the most recent years. The Military Balance has

been widely used in the popular media because of its simple presentation of

data.

Aside from these three main sources, others cover more specific areas of

concern for arms trade research. Jane's Publications (All the World's Aircraft,

Armour and Artillery, Fighting Ships, Avionics), established for over 90








years, is an internationally acclaimed publisher of reference works on defense

and transport. Revised annually by leading commentators and analysts,

Jane's Yearbooks represent an accessible reference source, particularly for

evaluating the foreign content of "indigenous" production. The United

Nations' Statistical Yearbook and the International Monetary Fund's

Government Finance Statistics Yearbook provide data on government

expenditures, with a functional breakdown that includes the defense sector.

These sources will be extensively used in subsequent chapters of this study, as

the development of Brazil's arms industry is assessed.

SIPRI and ACDA have been the most reliable and widely quoted of all

the sources in scholarly research, and they will be used in this chapter to

demonstrate changes in market structures. Nevertheless, their limitations

should be explained. There are two main types: those due to difficulties in

operationalization and those derived from systemic changes. The first relates

to the way military expenditures and arms transfers are defined and

measured. National governments define military expenditures differently,

which presents a problem for those conducting interstate comparisons.s Since

1975, the United Nations has attempted to standardize military data reporting

from its members, but with limited success.6

NATO countries have used similar definitions, but for those

researchers dealing with non-NATO countries, reliance on a national

government's own definitions creates discrepancies.7 These differences have

become particularly evident as non-NATO countries have increased their








participation in the international arms trade system. There are also

differences in the list of weapons the data sources themselves include in their

transfer calculations. While SIPRI focuses mainly on major weapons systems,

ACDA includes small weapons as well. Differences in sources and definitions

lead to a wide range in data reporting, as Table 2-1 indicates.

A second operational limitation is verification. Both ACDA and SIPRI

report the value of shipments and deliveries as their indicator of arms

transfers, rather than agreements or financial transfers used to pay for

weapons. While deliveries are easier to verify than financial flows and

consummation of signed agreements, the governments can, and often do,

withhold information on delivery of arms based on secret agreements.

Expecting data manipulation by governments should be the rule rather than

the exception. Michael Broska outlines a range of government considerations

that may lead to additional data distortion.b For instance, a government

perceiving threat may have an interest in making military expenditure

figures appear higher than they actually are so as to indicate military strength.

A third operational limitation is found in the development of time

series. Each edition of sources tends to revise past figures as additional

information becomes available.g For a researcher interested in the nuances of

fluctuations, revised numbers break the flow of time series. Arms transfer

figures tend to increase as subsequent editions revise previous calculations.

The need for revisions also reflects the ever-present possibility that certain

transactions have escaped formal, accounting provisions. Ball identifies





TABLE 2-1

Comparisons of Military Expenditures by Source, 1980
($ million, at current prices)


Coun r

Argentina

Brazil


SIPRIa

2,896

822

3,697

2,265


ACDA

1,976

1,625

4,091

4,864

537

3,282

1,772


ISS

3,060

2,019

4,816

4,834

1,076

3,471

2306


India

Israel


Mexico


584


South Korea


2,675

1,615


Turkey


a SIPRI figures were converted by the author from national currency to dollar
amounts using market exchange rates given in the International Monetary
Fund, International Financial Statistics Yearbook 1985 (Washington, D.C.:
IMF, 1985).

Sources: Stockholm International Peace Research Institute (SIPRI), World
Armaments and Disarmament, SIPRI Yearbook 1985 (London: Taylor &
Francis, 1985); U.S. Arms Control and Disarmament Agency (ACDA), World
Military Expenditures and Arms Transfers, 1985 (Washington, D.C.:
Government Printing Office, 1985); International Institute of Strategic
Studies, The Military Balance, 1982-1983 (London: IISS, 1982).








several mechanisms for obscuring arms expenditures in the Third World:

double bookkeeping, off-budget financing (special military funds

independent of the national budget), highly aggregated budget categories,

repayment of military-related debt, and manipulations of foreign exchange
and trade statistics.10

While the operational limitations listed above can be monitored to

some extent and compensated for with cross-data source analysis, the second

type of limitation (systemic) is a reflection of the recent changing nature of

the international arms trade system. First, the increased use of offsets--such as

license production and technology transfers--in recent arms sales make it

difficult to track the value and size of transfers. Arms transfer analyses

continue to emphasize end items, while offset arrangements are becoming

critical when one studies a country's arms export policy.ll

Governments tend to stay out of offset agreements, leaving the industry

to negotiate them. Industry has proven even more reluctant than

governments to publicize dollar amounts and details of these arrangements.

This change in the way arms sales are conducted has led Edward J. Laurence

and Joyce A. Mullen to suggest that "the traditional approach of assigning

values to arms sales based on the announced contract is becoming

obsolete."12 While the government may announce the actual number of jet

fighters being transferred to another country, the details about offsets

included in the package have to be drawn from industry officials, sometimes

a hopeless proposition.





The second limitation due to systemic change relates to the increased

use of multinational production, particularly in Europe. While the transfer

may be assigned to a particular country, a researcher has to take into account

the political and economic impact these ventures have on all producers

involved.l3 Laurence and Mullen point to the case of the Tornado, an

aircraft built by Panavia, a multinational company set up by the United

Kingdom, Germany, and Italy.14 While the UK is in charge of marketing the

aircraft, thus technically making it a UK transfer, the other two partners share

in the profit. In recent Tornado sales to Saudi Arabia, Chancellor Helmut

Kohl of Germany came under public criticism for sending weapons to an area

of tension, even though it was officially a UK transfer.

A third source of limitation due to systemic change involves the

expanding applicability of advanced technology in the armament business.

As recipients grow in levels of industrial sophistication, data sources must

pay closer attention to the changing importance of the "grey market."l

Systems, such as helicopters and computers, can be used for both military and

civilian ends. Recent Third World attempts to import supercomputers, for

instance, have met considerable opposition in the United States Congress

because of their application in designing sophisticated weapons.l6 Brazil has

argued that the supercomputers are to be used in meteorological surveys

intended to protect the Amazon.17r Although sales of supercomputers would

not fall under the category of arms transfers, their application to indigenous





industries in new suppliers countries have a direct impact on the structure of

the international arms trade system.



The Structure of the International Arms Market

The limitations due to systemic change, as discussed in the previous

section, should give us a good indication of the significant restructuring of

the international market over the decades. The armament industry as we

know it today is the product of many slow changes, dating back to the wake of

the Industrial Revolution. Creative entrepreneurs armed with the science of

guns and explosives revolutionized European wars in the second half of the

19th century. The steel industry developed armor plates that drastically

changed both the cannon and naval industries. With the end of the railroad

boom in the mid-century, many entrepreneurs, such as Edward Vickers,

founder of the British Vickers company, turned to the armament business.'

The Prussian Alfred Krupp became known as the "Cannon King"

throughout the world.l9 British entrepreneur William Armstrong

dominated the armaments world along with Krupp in the second half of the

century with the production of armor plates. American steel companies, such

as Carnegie Steel of Pittsburgh, also benefited from the growing interest in

the military application of the emerging heavy industries.

The early armament industry was truly internationalized in the sense

that private entrepreneurs marketed their products to a global market under

minimal state intervention via export control. Patriotism often worked as an








informal measure of control, but in the Austro-Prussian War of 1866,

Krupp's weapons were used on both sides of the battlefield, despite protest

from the Prussian government. Business was conducted on a personal basis

with celebrated arms salesmen, such as Basil Zaharoff and James Rendel,

traveling around the world and displaying their amazing inventions in

international industrial exhibitions.

Toward the end of the century, with the arms industry growing in

firepower and technological complexity, the state began to play closer

attention to the value of domestic producers. Bismarck's final step in the

completion of German unity during the Franco-Prussian War in 1870 drew

heavily on domestic private arms producers. In fact, the Prussian victory was

the first industrialized war for Europe, and it established the worldwide

reputation of Bismarck's main supplier, Krupp.20 As the instruments of

destruction progressively became more powerful, the state also began to

assert itself because of the national security threat it represented for a

domestic company to sell weapons to potential enemies. In 1909, for instance,

Krupp offered to build eight warships a year for the British navy, but the

Kaiser vetoed it.21

The horrors of World War I brought to light the extent to which these

private entrepreneurs had proliferated an industry of destruction. Calls from

all points of the globe demanded stricter controls over the private armament

industry. The head of the Krupp firm, Gustav Krupp von Halbach, was even

declared a war criminal after World War I.22 Nations tightened their





regulation of the industry's conduct in selling weapons abroad. Arms sales

were no longer negotiated independently by private firms free of

government control.23 The Covenant of the League of Nations itself

expressed "grave objection" to the private manufactures of armaments. The

mood of pacifism swept the nations as the League in 1933 passed a resolution

"that it is contrary to the public interest that the manufacture and sale of

armaments should be carried out for private profit."24 Disarmament became

a popular subject as arms salesmen received harsh criticism as "merchants of

death."25 Hearings in both Washington and London in the mid-1930s

pondered what was perceived as the cynical greed of the arms makers.

State efforts to control the private armament industry also stemmed

from the former's interest in tapping sophisticated weapons that might give

an advantage over its opponents. In turn, producers eagerly embraced the

opportunity to monopolize the domestic market. In the 1930s, Krupp became

the Nazi's most important supplier.

Nationalist fervor during World War II contributed to a close

association between government and local arms entrepreneurs. In addition,

the increasing sophistication of the weapons, particularly in the booming

aircraft industry, necessitated deeper state involvement. The arms industry

that emerged after World War II contained both elements of private

entrepreneurship and state intervention. The 19th-century revolution in

armaments had been one that favored heavy industry. In the 1940s, however,

the war had changed direction to an alliance of pure science and light





industry. The old arms businesses, such as Vickers, were offshoots of the steel

industry and played very little part.26 The new arms industry, with vast

research costs and long development programs, welcomed government

involvement, particularly in the area of finance and research.

The state significantly increased its control over the domestic arms

industry after the war, also reflecting the ensuing Cold War between the two

superpowers. Because so much was at stake, including the very survival of

each nation, the state closely scrutinized the movement of arms across its

borders. In fact, U.S. rules governing commercial arms transfers reflected a

tight control over the industry.27 As James Everett Katz points out,28

Before a commercial vendor or U.S. government employee
can even begin to demonstrate or discuss selling weapons
technology with a potential foreign buyer, he must receive
permission from the State Department to do so. This only
involves permission to try to market the equipment abroad,
not to sell it.


Following the destruction of German military capability, Britain's arms

industry shared a dominant role with the emergingUnited States. In the Cold

War, British influence diminished, and the United States moved into the

spotlight against the Soviet Union. The United States was particularly

mindful of pursuing arms transfers as part of its containment strategy.29 The

Mutual Security Assistance Act of 1954 repealed and superseded the

isolationist Neutrality Act of 1939.30 The containment strategy included the

transfer of some technology to close allies, particularly in Western Europe

and the Far East, although the United States prized its technological








superiority in the world market.31 State control of the arms trade followed

strict foreign policy guidelines. Unlike the "merchant of death" perception of

the 1930s, the government's efforts to link national security interests with

arms sales lent some degree of legitimacy to the business.

Arms transfers as an expression of national security strategy came to

play a significant role as the Soviet Union entered the market in the 1950s. In

1955, Czechoslovakia announced it would supply Egypt with Soviet arms in

return for cotton and dried dates. Soviet entry into Egypt marked a historic

development in the history of arms sales: "It was the first time that Russia

had sent major arms outside its own area of influence."32 Soviet entry in the

arms trade led to a new monopoly between the superpowers, while the West

European powers struggled to recover economically.

By the 1960s, as the U.S. position in the world economy weakened, arms

sales gained a commercial dimension apart from their containment

perspective. The Kennedy administration, for instance, was deeply worried

about the deficit in the balance of payments, seen as a grave threat to the

stability of the dollar in the international market. In 1961, the Pentagon set up

the "International Logistics Negotiations," an organization in charge of

selling arms overseas, thus moving the United States away from grants in

arms transfer decisions to military sales. Its first head, Henry Kuss, resembled

the old arms salesman. This time, however, it was the government urging

companies to sell.3 Most sales first went to members of NATO and Japan, as

the United States countered the growing Soviet military influence in Europe





and Asia. Here, both commercial and foreign-policy requirements

intertwined. Ironically, though, U.S. national security interests in Europe and

Asia helped erode its competitive position in the world market in the

long-run. In rebuilding these two regions after the war, the United States

helped build modern factories, which became formidable competitors to

aging U.S. industries.34

In England, when the Labor government under Harold Wilson came to

power in 1964, British arms sales increased under the argument that foreign

currency was needed to allow additional arms imports. In January 1966, the

new minister of defense, Denis Healy, announced to parliament his decision

to appoint an arms salesman under the pragmatic pretense of winning back

foreign currency:35

While the Government attaches the highest importance to
making progress in the field of arms control and
disarmament, we must also take what practical steps we can
to ensure that this country does not fail to secure its rightful
share of this valuable commercial market.


The new post, the Head of Defense Sales, reflected the same concern

that was emerging in an economically recovered Europe--keeping domestic

arms industries commercially viable. Their small domestic market hampered

their ability to reach economies of scale, therefore leading them to seek sales

abroad. In addition, large sales allowed companies to recover some of the

research and development costs in an increasingly expensive industry. As

sophisticated arms producers emerged in France, West Germany, and Italy,





the international arms business became highly competitive. Although the

development of arms industries in Europe followed national security

calculations (political independence), their survival came to depend on

commercial considerations. As Ulrich Albrecht points out, "In contrast to the

global calculus of the superpowers, the European nations are regional powers

with limited foreign policy objectives."36 Therefore, arms exports can be

structured along economic lines (reaching economies of scale, for instance)

without the dominance of international political arguments, such as the

search for clients and allies: "The flow of arms exports from European

countries, as opposed to those from the superpowers, must be interpreted

primarily as an outgrowth of economic and industrial policies, rather than of

foreign policy."3

A crowded European arms market created an eagerness to open markets

iri the Third World. In the first decade of the Cold War, the United States had

controlled the Third World market by transferring its World War II-vintage

surplus weapons through mutual security agreements. As Table 2-2 indicates,

the United Kingdom lost some of its market share in the 1950s, while the

Soviet Union increased its presence in the Third World market. What is

peculiar about structural change during that period is the steady increase in

France's market share. By the late 1960s, there were four main players (the

US, USSR, UK, and France) playing a significant role in the Third World

market. Both Germany and Italy showed only modest increases in market

share.





















































Source: Stockholm International Peace Research Institute (SIPRI), World
Armaments and Disarmament, SIPRI Yearbook 1969-1970 (London: Gerald
Duckworth & Co. Ltd., 1970), 341.

Note: Excluding exports to North and South Vietnam. Parenthesis indicates
percentage of total exports of major weapons to the Third World.


TABLE 2-2


Exports of Major Weapons to the Third World by Supplier, 1950-1968
(US$ million, at constant 1968 prices)


Year
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968


USSR
20 (9.52)
30 (9.67)
20 (9.52)
120 (22.22)


50 (8.47)
80 (10.66)
170 (22.97)
120 (9.30)
110 (14.10)
110 (12.64)
280 (37.33)
500 (56.81)
220 (25.88)
180 (26.86)
200 (21.05)
390 (37.14)
680 (55.28)
370 (35.92)


UK
60 (28.57)
30 (9.67)
40 (19.04)
130 (24.07)
130 (25.00)
110 (18.64)
120 (16.00)
170 (22.97)
240 (18.60)
120 (15.38)
160 (18.39)
180 (24.00)
60 (6.81)
80 (9.41)
80 (11.94)
130 (13.68)
120 (11.42)
70 (5.69)
170 (16.50)


France


FRG


Italy


50 (23.80)
170 (54.83)
130 (61.90)
210 (38.89)
300 (57.69)
250 (42.37)
270 (36.00)
240 (32.43)
630 (48.83)
300 (38.46)
480 (55.17)
230 (30.66)
200 (22.72)
280 (32.94)
240 (35.82)
440 (46.31)
260 (24.76)
260 (21.13)
300 (29.12)


-5 (2.38)
-40 (12.90)


-5 (0.92)
(0.96)
(1.69)


30 (5.55)
50 (9.61)
40 (6.78)
120 (16.00)
50 (6.75)
100 (7.75)
40 (5.12)
20 (2.30)
30 (4.00)
70 (7.95)
110 (12.94)
80 (11.94)
30 (3.15)
110 (10.47)
100 (8.13)
120 (11.65)


(


:0.67) 20
-20


20


(2.67)
(2.70)
(1.55)


10 (0.77)
20 (2.56)
20 (2.30)
10 (1.33)
5 (0.56)
10 (1.17)
30 (4.47)
10 (1.05)
110 (10.47)
10 (0.81)
10 (0.97)


10 (1.15)



10 (1.17)
10 (1.49)
5 (0.52)
10 (0.95)
10 (0.81)
20 (1.94)





Latin America, in particular, benefited from U.S. transfers. In fact, in the

1950s the region consumed a high percentage of major weapons sent to the

Third World, as Table 2-3 indicates. In the wake of decolonization and the

growing conflict in the Middle East, other regions gained in importance.

What was distinct about the 1960s was that arms sold to the Third World

were increasingly more sophisticated, replacing World War II technology.

Latin America, traditionally a U.S. sphere of influence, found increasing

resistance from the United States to its acquisition of major sophisticated

weapons. As late as 1968, no Latin American country possessed supersonic

fighters. The French sale of supersonic Mirage 5 fighters in 1968 to the new

defiant military junta in Peru drew strong protest from Washington. Many

military leaders in Latin America, as Sampson argues, "were increasingly

resentful of this [U.S.] restraint, and they looked to Europe for alternative

suppliers."38 In 1973, Peru placed another order for sophisticated weapons,

this time for 200 Soviet T-55 tanks, the first major purchase of Soviet arms by

any South American country.

In 1973, under pressure from American arms companies, the Nixon

administration reversed the policy of restraint and allowed sales of U.S.

sophisticated arms to Latin America. Nixon encouraged arms transfers in

general as part of an attempt to improve balance of payments amid the oil

shock. Nixon also had allowed some degree of technology transfer under his

"Guam Declaration" of 1969, which encouraged the creation of regional

powers to work as U.S. close "clients."39 The so-called "Nixon Doctrine"









TABLE 2-3

Imports of Major Weapons by Central and South America, 1950-1968
(US$ million, at constant 1968 prices)

Mexico and
Central South
Year America (%) America (%)

1950 5 (2.40) 40 (19.04)
1951 --)80 (25.80)
1952 20 (9.52) 20 (9.52)
1953 10 (1.85) 60 (11.11)
1954 10 (1.92) 110 (21.15)
1955 10 (1.69) 140 (23.72)
1956 10 (1.33) 90 (12.00)
1957 5 (0.67) 90 (12.16)
1958 10 (0.77) 110 (8.52)
1959 10 (1.28) 30 (3.84)
1960 30 (3.44) 120 (13.79)
1961 90 (12.00) 140 (18.66)
1962 150 (17.04) 50 (5.68)
1963 20 (2.35) 40 (4.70)
1964 20 (2.98) 20 (2.98)
1965 10 (1.05) 50 (5.26)
1966 10 (0.95) 70 (6.66)
1967 5 (0.40) 60 (4.87)
1968 (--- 80 (7.76)



Source: SIPRI, World Armaments and Disarmament, SIPRI Yearbook
1969-1970, 340.

Note: Parenthesis indicates percentage of total Third World imports of major
weapons. The symbol "(-)" indicates nil, or less than $2.5 million. Central
America indicates 11 countries from Panama northwards up to the United
States; South America indicates the rest of Latin America.









signaled U.S. defeat in Vietnam and the decline of U.S. direct

interventionism in the Third World.

The creation of client/regional powers required some transfer of

defense technology so as to boost domestic arms production capability. In

addition, some U.S. administration officials argued that the decline in the

domestic arms market following the Vietnam War made the export market

all the more important for local producers.40 In 1973, President Nixon

invoked section 4 of the Foreign Military Sales Act, which allowed the

president to waive congressional restrictions on the transfer of sophisticated

weapons, in order to allow sales of Northrop F-5E supersonic fighters to

Argentina, Brazil, Chile, Colombia, and Venezuela.41

The policy, while not as coherent in its application as its European

counterpart, was short lived. In 1974, Congress adopted the "Nelson

Amendment" to the Foreign Assistance Act, giving the legislative branch

tighter control over major Foreign Military Sales transactions. Congress

passed the Arms Export Control Act in 1976, "the first comprehensive piece

of legislation to establish formal policy guidelines for the military sales

program,"42 further tightening its control over arms sales.

Such an effort reflected the same disarmament concerns that were

voiced in the 1930s as the "merchants of death" roamed around the world in

search of profitable markets. This time, however, governments also had a

commercial stake in the arms business. The oil crisis in the 1970s had

propelled arms sales to an important position as a source of revenues,









particularly for the European countries. The Carter administration continued

the assault on arms sales with policy directive (PD-13), calling arms sales an

"exception" rather than an established mechanism of foreign policy.

President Carter's failed attempt to establish an international regime to

control arms transfers (CAT) during his presidency further strengthened the

argument that the arms market had swelled beyond the control of even the

world's main producer.

By the end of the 1970s, the United States had lost its commanding lead

in major weapons sales to the Third World, while the four main European

producers, along with the Soviet Union, had established themselves as

serious competitors (see Table 2-4). Detente in the 1970s diluted the U.S.

foreign-policy strategy of arms transfers while legitimizing the commercial

reasoning behind sales abroad. After World War II, the Soviet-American

monopoly gave recipients little control over the arms flow. With detente and

the oil crisis in the 1970s, European suppliers turned to the Third World for

markets, thus causing a significant breakdown of U.S. and Soviet control

over sophisticated weaponry flows. As Table 2-5 indicates, the arms export

market share of major producers underwent a significant change by the early

1980s. The "other" category in the table, in particular, highlights the entry of

non-traditional producers, such as Third World middle powers, into the

market.

Decolonization in the 1960s had an immediate impact on the demand

side of the arms market, as the new nations attempted to exert control over









TABLE 2-4


Exports of Major Weapons to the Third World by Supplier, 1969-1989
(US$ billion, at constant 1985 prices)


Year
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989


US
3.11 (43.07)
3.55 (38.50)
3.83 (32.59)
5.92 (39.43)
6.26 (36.90)
4.48 (34.51)
7.07 (52.12)
7.25 (45.58)
9.72 (44.02)
6.85 (31.24)
4.02 (19.02)
5.71 (28.36)
6.27 (28.30)
7.19 (30.67)
6.25 (27.63)
4.98 (21.70)
4.11 (20.80)
4.92 (20.90)
6.27 (23.95)
3.65 (18.94)
2.52 (15.50)


USSR
2.16 (29.88)
4.12 (44.68)
4.96 (42.26)
5.87 (39.10)
7.02 (41.38)
4.73 (36.45)
2.87 (21.17)
4.87 (30.61)
7.23 (32.75)
9.06 (41.33)
9.78 (46.31)
8.59 (42.66)
7.14 (32.20)
7.11 (30.33)
6.89 (30.43)
7.31 (31.84)
7.75 (39.22)
10.32 (43.32)
10.76 (41.11)
8.23 (42.78)
8.51 (52.23)


UK
1.03 (14.34)
.47 (5.11)
1.21 (1031)
1.19 (7.95)
1.30 (7.70)
1.07 (8.24)
1.19 (8.81)
.83 (5.23)
1.64 (7.43)
1.20 (5.47)
.77 (3.65)
.70 (3.49)
1.16 (5.23)
1.67 (7.12)
.58 (255)
1.13 (4.96)
.94 (4.77)
1.02 (4.32)
1.53 (5.84)
1.16 (6.05)
.99 (6.09)


France
.27 (3.78)
.69 (7.51)
.67 (5.76)
.78 (5.23)
1.64 (9.68)
1.26 (9.72)
1.14 (8.42)
1.39 (8.78)
2.15 (9.76)
2.41 (10.98)
3.26 (15.44)
2.35 (11.70)
3.13 (14.13)
2.89 (12.33)
2.84 (12.55)
3.60 (15.69)
3.78 (19.14)
3.35 (14.24)
2.51 (9.62)
1.31 (6.81)
1.52 (9.36)


FRG
.05 (0.77)


.08 (0.73)
.11 (0.71)


.40 (3.14)
.26 (1.92)
.16 (1.04)
.20 (0.92)
.25 (1.17)
.16 (0.76)
.28 (1.40)
.93 (4.19)
.32 (1.36)
1.17 (5.19)
1.83 (7.99)
.52 (2.63)
.65 (2.75)
.25 (0.6)
.48 (2.49)
.15 (0.91)


Italy
.08 (1.17)
.03 (0.40)
.09 (0.80)
.13 (0.91)
.15 (0.87)
.26 (2.06)
.14 (1.02)
.16 (1.02)
.29 (1.33)
.32 (1.47)
.97 (4.61)
.65 (3.24)
1.33 (6.00)
1.34 (5.74)
.97 (4.28)
.81 (3.53)
.54 (2.72)
.39 (1.68)
.32 (1.22)
.36 (1.86)
.03 (0.18)


Source: Stockholm International Peace Research Institute (SIPRI), World
Armaments and Disarmament, SIPRI Yearbook 1988 (New York: Oxford
University Press, 1988), 204-5; Stockholm International Peace Research
Institute (SIPRI), World Armaments and Disarmament, SIPRI Yearbook 1990
(New York: Oxford University Press, 1990), 252-3.

Note: The values include licensed production of major weapons in Third
World countries. The symbol "--" indicates nil. Parenthesis indicates
percentage of total exports of major weapons to the Third World.












TABLE 2-5

Arms Export Market Share, 1963-1984
(Percentage)


Non-
Non-US USSR
Year US NATO USSR Pact Others


1963 36.9 18.6 37.6 4.5 2.4
1964 35.3 20.3 345 8.3 1.7
1965 39.1 11.8 34.2 8.2 6.7
1966 40.6 12.0 35.6 6.8 4.9
1967 44.1 7.0 38.0 6.9 4.0
1968 50.3 11.5 29.8 4.8 3.6
1969 59.7 13.2 18.8 4.7 3.6
1970 53.3 12.0 25.8 4.6 4.2
1971 53.5 11.3 25.2 4.6 5.4
1972 38.4 19.1 27.9 4.4 10.2
1973 39.4 14.7 38.7 4.2 2.9
1974 41.0 15.8 33.6 5.7 3.8
1975 38.0 16.6 31.0 6.4 8.0
1976 35.3 19.8 31.7 5.4 7.7
1977 34.0 18.8 33.5 6.5 7.2
1978 27.9 23.4 33.1 8.0 7.5
1979 21.9 18.4 45.6 6.5 7.7
1980 22.0 25.4 39.3 5.3 8.0
1981 23.5 29.0 30.7 6.0 10.8
1982 24.4 22.9 29.6 7.9 15.2
1983 28.4 25.8 26.2 6.6 13.0
1984 22.0 24.3 26.9 8.0 18.8


Source: ACDA, World Military Expenditures and Arms Transfers, 1985, 20.





their territory. The oil shocks in the 1970s also had the dubious benefit of

creating a surge in arms demand from oil exporters in the Middle East. These

factors, matched with the growing European interest in opening new markets

for its weapons exports, thus explain the sharp upward thrust in arms sales in

the 1970s.44

The importance of the Middle Eastern arms market, however, should

be placed into perspective. As Table 2-6 indicates, while OPEC countries in the

1970s significantly increased their share of total world arms imports, during

the same period, they reduced their market share of the Third World imports

of major weapons. In fact, South America managed through heavy

borrowing to increase its share of major weapons imports, as shown in Table

2-7. Latin America became an avid consumer of European weapons, as the

United States lost its grip on the region's import policy.

The importance of the Third World market, along with the

proliferation of suppliers in Europe, moved the trade from a "supplier's

market" to a "buyer's market," at least as far as recipients' latitude to dictate

the terms of the exchange. Rather than being constrained to accept political

conditions attached to arms transfers, recipients began to include in the sale

agreements technology transfer requirements so as to stimulate indigenous

arms production.45 In addition, European suppliers became notorious for

their generous technology transfer offers without strict political guidelines,

such as the prohibition of exports to third parties. Through the production of

arms for exports, European countries recouped R&D costs.










































a Total arms imports (including major weapons) in constant 1982 prices;
market share in parenthesis.

b Imports of major weapons in constant 1985 prices; market share in
parenthesis.

Sources: For 'OPEC' figures, see ACDA, World Military Expenditures and
Arms Transfers, 1985, 89-93; for 'Middle East' figures, see SIPRI, World
Armaments and Disarmament, SIPRI Yearbook 1988, 202-3.


TABLE: 2-6

Arms Imports-Market Shares, 1973-83
(US$ billion)


Middle East b


OPEC Countries a


Year

1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983


3.177
4.562
5.168
8.199
10.899
11.649
11.152
9.228
13.923
14.410
11.963


(11.85)
(20.61)
(24.521)
(31.37)
(37.55)
(36.42)
(31.86)
(26.75)
(35.89)
(37.46)
(34.07)


10.269
6.760
7.248
7.398
9.833
7.605
6.003
8.319
8.966
11.5L22
11.293


(60.49)
(52.07)
(53.40)
(46.46)
(44.52)
(34.67)
(28.41)
(41.31)
(40.43)
(49.14)
(49.88)









TABLE 2-7

Imports of Major Weapons by Central and South America, 1970-1989
(US$ million, at constant 1985 prices)


Central
America


South
America


Year


1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989


(%/)


(2.93)
(6.21)
(6.47)
(13.63)
(9.92)
(11.25)
(12.41)
(12.61)
(10.27)
(7.34)
(10.08)
(13.44)
(10.37)
(12.11)
(13.00)
(5.92)
(4.77)
(6.32)
(4.28)
(5.90)


185
135
261
309
299
204
234
557
268
295
187
657
1,092
901
599
659
618
371
203
300


(1.90)
(1.06)
(1.54)
(1.79)
(2.21)
(1.43)
(1.51)
(2.47)
(1.17)
(1.32)
(0.88)
(2.74)
(4.51)
(3.79)
(2.61)
(3.20)
(2.62)
(1.41)
(1.05)
(1.84)


285
786
1,093
2,354
1,338
1,600
1,922
2,836
2,335
1,635
2,137
3,215
2,509
2,878
2,980
1,219
1,124
1,655
824
963


Source: SIPRI, World Armaments and Disarmament, SIPRI Yearbook 1990,
250-1.

Note: The values include licensed production of major weapons in Third
World countries. Parenthesis indicates market share (percentage of total
Third World imports of major weapons). Central America indicates all
countries from Panama northwards up to the United States; South America
indicates the rest of Latin America.








For some Third World countries with considerable industrial

infrastructure, this "buyer's market" offered an enticing opportunity to

establish a sophisticated arms industry which would reduce its dependence

on foreign suppliers. The next section details the efforts of many of those

Third World countries to develop indigenous arms production. It is

important to note that their attempts came at a time when the Cold War

showed signs of weakening and the superpowers had lost control over the

flow of sophisticated technology.

As a result, the market had become once again truly internationalized.

Even during the Reagan administration, which reversed many of its

predecessors' arms sales policies, the United States lost more share of the

Third World market, while Europe and the Soviet Union sped ahead (see

Tables 2-4 and 2-5). The increasingly competitive international arms market

has led some analysts to refer to the phenomenon as the

"commercialization"' of the arms trade. Ferrari, Madrid and Knopf

summarize the new dynamic this way:4

In order to win contracts, nearly all suppliers have been
offering some of their most sophisticated equipment along
with extensive technology sharing and logistic support,
cut-rate financing, and offset arrangements that sometimes
exceed the purchase price. Suppliers also have been
increasingly willing to sell to any nation, with the result
that nations widely censored for human rights violations or
engaged in protracted wars have had relatively little trouble
obtaining sophisticated weaponry. Similarly, political and
ideological differences among sovereign nations have not
prevented arms transactions between them.








After World War II, two superpowers dominated the "seller's market,"

as the mode of exchange for middle powers was primarily ideological

(capitalism versus communism). In the 1960s, such an arrangement began to

break down in Third World regions as European companies began to offer

sophisticated weapons with no attached political strings. Such was the case of

the French sale of jetfighters to Peru in 1968 as mentioned earlier. In the

"buyer's market" of the 1970s and 1980s, the number of suppliers multiplied,

although the two superpowers continued to play a dominant role in the

market.

What made this structure different from the previous one was that the

superpowers no longer had a monopoly on the flow of advanced arms

technology. As Michael C. Sekora, a former official of the Defense Intelligence

Agency, said: "It used to be that the U.S. was the storehouse for all

technology. Now advanced technologies are ending up in third world

countries. It's no longer simple to control."47

In the seller's market, a bipolar order constrained aspiring powers to a

bilateral dependence under an either /or allegiance proposition.

Nevertheless, competition between the two superpowers allowed aspiring

powers to strike favorable arms transfers deals which led to increased

hardware capability in the Third World. Both superpowers encouraged an

arms race in the Third World, leading to an increased hardware capability for

many industrially weak nations. The superpowers, however, transferred

little technology.








As the world economy expanded and new suppliers emerged, aspiring

powers freed themselves from traditional military relationships and sought

new ones. Nevertheless, they continued to experience dependence not on

specific suppliers but on foreign supplies (e.g., capital, technology). The

proliferation of suppliers allowed aspiring arms producers to use technology

transfers as a bargaining strategy. Buyers often required some degree of

technology transfer with each purchase of hardware. Sellers had little choice

in a buyer's market. The breakdown in role rigidity was particularly evident

as Third World middle powers entered the arms export business in the 1970s

and became themselves part of the chain in the process of technological

diffusion.

The downturn in the global economy during the early 1970s with the oil

crisis and increasing fiscal hardships suffered by major and aspiring powers

alike heightened the importance of competitiveness in the international

market. This conjunctural dimension brought two results to the

international arms market. On the one hand, the United States, as a major

technology supplier, began to explicitly link cooperative defense-sharing

issues with economic issues, including trade balances.48 On the other hand,

the increasing cost of research and development brought companies together

in joint ventures (particularly between Third World middle powers and

European producers), such as the Brazilian participation in the development

of the AMX jet fighter with two Italian companies. While the former shift

has restricted aspiring powers' options, the latter has opened new avenues








for the production of sophisticated armaments--and consequently, further

advancements in "indigenous" production. By the mid-1970s, as some of

these Third World arms producers entered the arms export market, there

were additional signs that the commercial motive had overtaken

foreign-policy objectives in the sale of armaments. Countries such as Brazil

and Israel became famous for their low-cost weapons, many of them ideal for

combat in the Third World. By the early to mid-1980s, the popular media

gave wide coverage to the emergence of Brazil's arms exports.49

In the early 1980s, several factors contributed to a decline in the arms

market, which considerably stiffened competition and jeopardized the

commercial position of middle powers as arms suppliers. The oil glut in the

early 1980s and the debt crisis reduced Third World demand for weapons due

primIarily to the scarcity of foreign exchange. Klare also attributes the decline

in new military orders to the saturation of many Third World armns

inventories, following the buying binge of the 1970s.50 In addition, some of

the decline could be explained in relation to indigenous arms production in

the Third World.

The thawing of the Cold War in the late 1980s after Gorbachev had

solified its power in the Soviet Union also meant domestic defense budget

constraints in the United States, which made the American defense industry

even more eager to sell abroad. Concern about the mounting U.S. trade

deficit bolstered the arguments of proponents of U.S. arms exports, while

further crowding the market with potential sellers. As a representative of an








American arms exporting company bluntly surveyed the arms market,

"We're all down now to nibbling crumbs. .. The damn oil boom has gone,

and there's not much money anymore. The world in general is bankrupt."51

Currently a lively debate rages in the arms trade literature over the U.S.

market position. Stephanie G. Neuman promotes the view that despite the

post-World War II proliferation of suppliers, the United States continues to

dominate the market. She adds: "contraction [of the arms market in the

1980s] has exposed the relative weaknesses of other supplier states--often

concealed in a rapidly expanding buyer's market-and highlighted the size

and strength of the U.S. economy with its potential for increased influence in

the world's arms trade."52 While Neuman offers a compelling argument for

continuing U.S. economic might, she does not carefully evaluate the internal

dynamics that post-war market restructuring has had in the United States.

Faced with the same demand contraction at home, U.S. arms

manufacturers are reevaluating their position in the global market. U.S.

export control policy has been at the center stage of this debate. Both

manufacturers and policy-makers have attempted to adjust their position to

the new post-Cold War environment. Although the Reagan administration

presided over an increase in arms exports to the Third World, technology

exports controls, particularly to the East, were tightened. During the Reagan

administration, as the United States experienced a deteriorating commercial

position, many loudly questioned the principles underlying export control.

Much of the restricted technology was available from other Western









European countries. The argument, therefore, went that restricting U.S.

technology exports only hurt U.S. companies' competitive position in the

international market, given the emergence of a buyer's market. Some

analysts have argued that attempting to control technology is a waste of time

and energy because it attempts the impossible task of slowing down other

producers: "What one has to do is to run faster."5

A 1987 National Academy of Sciences study recommended that the

Department of Commerce be placed in charge of technology export licensing

rather than the Department of Defense (DoD).54 Because the United States

has a market advantage in advanced technology, the study found that

restricting its flow abroad only imperils its competitive performance.

Obviously, the national security dilemma rests on the fact that much of the

United States' advanced technology has military application. In fact, defense

contractors have been complaining that DoD is discouraging commercial

arms sales.55

The decline of the Cold War has created its own dynamic in the

superpowers' position in the arms market. For one, U.S. arms contractors are

faced with the grim prospect of a shrinking domestic market. Long insulated

from the whims of the international market, they are now faced with the

difficult question of developing a new business strategy for the 1990s. Defense

conversion to civilian production is a possibility many analysts find "an

empty promise," although some, such as Rockwell International

Corporation, have successfully diversified production in the 1980s.5 Using








foreign sales -to compensate for lower domestic demand does not seem

promising either because the growth rate of the global arms market seems

insufficient to accommodate all producers. Richard F. Grimmett, a defense

specialist at the Congressional Research Service, has asked: "Where is the

market for arms suppliers? If the cold war continues to wind down, you will

see increasing competition over a much more reduced pie."5

In this new environment, some analysts have expressed serious

reservations about the United States' ability to monopolize technology. Klare,

for instance, argues that these recent changes suggest a "fundamental

restructuring" of the international arms traffic

in the 1970s this traffic was dominated by a handful of major
suppliers that generally sold finished military
goods--including large numbers of sophisticated, front-line
systems--to avid customers in the Third World. Today, we
see a much more heterogeneous trade involving a larger
number of suppliers offering a wider assortment of
products, a more cautious pool of buyers, and a growing
emphasis on technology transfers, modification and
upgrade kits, logistical gear and other non-weapons items.


In 1987, the United States, Canada, the United Kingdom, France, West

Germany, Italy, and Japan signed the nonbinding Missile Technology Control

Regime to keep the Third World from developing ballistic missiles.59 But

compliance with regime restrictions has proven elusive.60 As Aviation

Week & Space Technology reports,**

In a recent solicitation for satellite launch services, Brazil
required bidders to present a detailed proposal for export of
liquid-state rocket motors. The French, party to the
restrictions, nevertheless seized the edge in the competition








by offering Brazil their Ariane Viking motor. McDonnell
Douglas is prohibited by U.S. law from going that far with its
Delta 2. But it hopes to win with a counteroffer, approved by
the State Dept., which would permit Brazilian engineers to
learn about propulsion by taking part in the space station
project.


In essence, competition among suppliers (regardless of geographical origin)

drives the transfer of technology, even with the opposition of the state.

Klare suggests three consequences of this restructuring directly related

to the middle-powers' ability to compete in the arms market.62 First, he

points out the sharp increase in the intensity of supply-side competition. As

new exporters on the bloc, middle powers increasingly have to use the latest

techniques in marketing and advertising to secure new orders, a difficult task

given their limited budgets. Second, with increased competition, many

well-established suppliers, particularly in Western Europe, have relaxed arms

export controls. Third, a "buyers' market" has endowed recipients with

greater leverage when negotiating terms for new purchases. One, should not

forget, however, that middle powers play both roles as recipients and

suppliers. Therefore, although they may benefit from import credit

allowances and concessions such as offset agreements, they must also be

prepared to offer them when in the supplier role.

The fundamental characteristic of the new arms market is the

increasing use of technology transfers as a marketing device for suppliers. As

argued earlier, the evolving structure has benefited middle powers in their

efforts to develop an indigenous arms industry. The remainder of this





section will provide a more detailed account of the use of offsets in the arms

business.

Technology is identified not only as a process, but also as a national

asset. As such, it becomes a critical part of economic policy-making with

far-reaching implications for world trade.63 Those nations with high

technological capabilities enjoy greater prestige in the international arena,

while those that fall behind find themselves downgraded in the power

hierarchy. While efforts to develop indigenous technology top the

development agenda of many Third World countries, technology transfers,

or offset agreements, are frequently used to close the North-South gap.

Offset requirements have become a "necessary evil" or an "inescapable

fact of life" in today's arms business, an agreement that exporting companies

do not enter into by choice.64 So why do transnational companies actively

participate in the diffusion of arms technology? Ball outlines four possible

explanations.65 First, arms producers seek to expand or protect their markets

in the Third World. Because competition between suppliers of technology is

often quite fierce, offset agreements are sometimes the only way they can

make a sale. As a U.S. industry official argued, companies tend to take the

short-sighted view of business. Because the immediate pressure is orders,

sales and profits (keeping the shareholders happy), if sale opportunities to the

Third World come along, companies will probably jumpp at it, because if they

don't, their competitors will."66 Another industry official place the dilemma

more directly:6








The transfer of technology issue is somewhat overrated in
the minds of our politicians. I certainly am aware of the
possibility that we can transfer technology to a foreign
company which then can use it against us, either militarily
or economically, but if we don't supply that technology I
think somebody else will. I believe we are just cutting our
own noses to deny helping other countries in developing
their technology, even if it does mean transferring some of
ours to them.


One of the strategies used to transfer technology is by setting up

cooperative arrangements. During the 1970s, the most important foreign

partner for Brazil's Embraer was the U.S. company, Piper. While Piper used

Embraer to enter Brazil and export markets in third countries, Embraer

extensively subcontracts for the U.S. producer. "The program," as Tuomi and

V~yrynen correctly point out, "successively increases the domestic content of

Embraer's products and hence makes the Brazilian aircraft industry more

self-sufficient. "68

Second, the transfer of technology may be an effective way to evade

restrictions imposed by one's own government on arms exports. Subsidiaries

in middle powers often bypass arms exports restrictions imposed in the

company's home country. Some analysts have referred to this process as the

development of a "worldwide production network," in which a company

takes advantage of its network of subsidiaries to bypass restrictions from its

home country. Despite the U.S. embargo against Turkey in 1975, Northrop

continued to supply Turkey with spare parts produced in Taiwan.69








TThird, Ball argues that relatively cheap labor provides an attractive

alternative for foreign investment, particularly in the production of

components, which includes some degree of technology transfer. Finally, a

fourth explanation as to why offset agreements come to play a major part in

the arms market lies in an attempt by the supplier's government to gain

political influence in the recipient nation. The United States transferred

much technology to NATO countries as part of its effort to standardize the

weapons, given some hesitation by European governments to readily accept

U.S. political influence in production decision-making. The U.S. transfer of

technology to Western Europe also followed the containment strategy, which

envisaged an economically recoveredEurope under the U.S. sphere of

influence.

There are two types of offsets used in international transactions.70

"Direct" offsets include the production of some equipment in the recipient

country as a way of offsetting the cost of importing the weapons. The

agreement may consist of co-production, licensed production, subcontracted

production, or joint venture. The most widely used form of direct offsets by

the United States has been co-production, involving a

government-to-government agreement to transfer technical data for the

production of defense items overseas. Licensed production is usually a

firm-to-firm or firm-to-government agreement for the production of

components, or even a final weapon system.n1








"Indirect" offsets consist of a strategy used by weapons supplier to raise

cash on behalf of a potential arms buyer. Because the prospective buyer does

not have the cash to purchase weapons, the arms producer agrees to market

other products (e.g., coffee, beans, shoes) as a way of raising the necessary cash

for the purchase of weapons.72 Grant T. Hammond argues that in some cases

U.S. contractors are becoming international trading companies, supplying a

diverse list of products (from Brazilian shoes to Yugoslavian ham) as an

effort to raise cash for the arms purchasers.73 While indirect offsets have

become an important part of the arms business, this study will concentrate on

the direct form of offsets since they are at the heart of middle powers'

industrialization and national-security strategy.

Offsets became an important business strategy after World War II, as

European powers faced foreign exchange shortages.74 Despite Europe's

economic recovery, offsets continued to be widely used in the booming arms

industry. U.S. technology was eagerly sought. Western European producers

took advantage of Cold War politics to secure the latest in defense

technology. Probably the best known offset arrangement involving U.S. and

European producers consisted of the 1975 Memorandum of Understanding

among several NATO countries for the co-production of F-16 fighter

aircraft.75 Although the United States welcomed this agreement and others

as part of NATO standardization efforts, many European countries have

complained about the United States' reluctance to release technology even to

allies, particularly after European economic recovery. Klare summarizes well





the wavering uncertainty of U.S. policy: "On the one hand, U.S. leaders

sought to promote political cohesion and military standardization within

NATO through collaborative arms programs; on the other hand, they wished

to prevent further erosion of America's technological leadership through

curbs on technology exports."76 Considering that many of the European

producers became fierce competitors in the international market, the United

States' reluctance should not be surprising.

Although demand for offsets has come primarily from European

countries in their attempt to acquire U.S. defense technology,"7 middle

powers have followed similar strategies. Many of the Asian middle powers,

for instance, are known for their tough bargaining in the acquisition of

foreign technology. South Korea, in particular, requires that on defense

import purchases of over $1 million at least 50 percent be offsets, with a

minimum 20 percent in the form of direct offsets with technology transfer.7

In the early 1970s, when the Nixon administration approved the sale to

Brazil of 42 F-5E fighters, Brazilian officials did not accept the deal until it was

agreed that some of the subsystems in the supersonic fighter would be

produced in Brazil.7

Middle powers have found Europe a rather accessible source of

technology because European producers are much more dependent on the

export market than U.S. suppliers. Therefore, European producers are easy

prey in a predominantly buyer's market. For instance, Argentina's light tank

named TAM (Tanqlue Argentino Mediano) drew on a modified version of




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