East-Central European Arms Industries: Between Consolidation and Crisis

Abstract

This article examines the post-Cold War transformation of defence industries in six East-Central European (ECE) countries, all former members of the Warsaw Pact and now members of the European Union and NATO. In the past, the arms industry was one of the pillars of the region's economic and political systems. In the past twenty years the region has gone through a profound transformation that brought fundamental changes in its defence industry. After painful adjustment a renewed arms sector, which is partially integrated into today's global arms production system, emerged. Although its size and prominence declined everywhere, this comparison reveals two distinct regional models, illustrated here by the Polish and Hungarian experiences. In Poland and similar countries the crucial importance of the defence industry was confirmed, whereas in Hungary and similar countries the industry's role has eroded. The ECE experience highlights the crucial role that defence industrial policy still plays in the sector's development. But the article also concludes that arms industry policy is not a suitable tool for national economic policy or management of economic crises.

Acknowledgements

This article is based on my forthcoming book Defence Industry Transformation and EU and NATO Enlargement: The Choices of Central Europe (Oxford and Stockholm; Oxford University Press and Stockholm International Peace Research Institute, forthcoming). The book is the result of research carried out between 2004 and 2010 in the six East-Central European countries. The principal source of information was 85 in-depth interviews the author carried out in the respective countries between 1993 and 2010. The author would like to offer thanks for the excellent editorial advice of the editors of CSP and the helpful comments of four anonymous reviewers.

Notes

The history and recent developments in these latter were very different than those of the six countries in the sample. Albania, at the borders of the region and with a yet more specific historic heritage, is also excluded.

For a resume of developments see EBRD, Transition Report 2000: Economic Transition in Central and Eastern Europe, the Baltic States and the CIS, and Transition Report 2009: Transition in crisis?; Janos Kornai, ‘The Great Transformation of Central Eastern Europe. Success and Disappointment’, Economics of Transition, Vol. 14, No. 2 (2006).

Michal Jeziorski, ‘The State of Arms’, Warsaw Voice, 26 May 2004; Slawomir Kułakowski, ‘A Way to Stabilization', Polish Defence Industry, No. 3, 2005.

About the post-Cold War transformation of the East Central European defence industry, see Ian Anthony (ed.), ‘The Future of the Defence Industries in Central and Eastern Europe’, SIPRI Research Report No. 7. 1994; Ann Markusen and Joel Yudken, Dismantling the Cold War Economy (New York: Basic Books, 1992); Yudit Kiss, The Defence Industry in East Central Europe. Restructuring and Conversion (Oxford and Stockholm: Oxford University Press and Stockholm International Peace Research Institute, 1997).

About the invisible, long-lasting ‘imprinting’ of defence industrial patterns, see Andras Brody, ‘A hon vedelmerol’ [About Defending Home], Valosag, No. 6. 1990; Julian Cooper, ‘Transforming Russia's Defence Industrial Base’, Survival, Vol. 35, No. 4, 1993; Pal Germuska, ‘Military-economic Planning in Socialist Hungary: The History of the General Organisational Department of the National Planning Office, 1948–1971’, Europe-Asia Studies, Vol. 60, No. 5 (July 2008).

About developments in the Polish defence industry, see Marla K. Nelson, ‘The Polish Defence Industry. Restructuring in the Midst of Economic Transition’, in Ann R. Markusen, Sean DiGiovanna and Michael C. Leary (eds), From Defence to Development?: International Perspectives on Realizing the Peace Dividend (London: Routledge, 2003); Grzegorz Holdanowicz, ‘Polish Defence Industry: Living on the Edge’, Jane's Defence Weekly, 16 Apr 2003; Andrzej Modrzejewski, ‘Polish Arms Industry Structure and Potential’, in Polish Defence Yearbook: Industry, Armed Forces and Security Services (Technika Wojskowa and Polish Chamber of National Defence Manufacturers: Warsaw, 2007); Jeziorski, ‘The State of Arms’ (note 3); Pawel Wieczorek and Katarzyna Zukrowska, ‘Conversion in Poland: The Defence Industry and Base Redevelopment’, BICC Brief No. 8, 1996; Interview with Arkadiusz Krężel, President of the ARP, Industrial Development Agency, 8 May 2006, Warsaw; Interview with Andrzej Spis, Vice President of the Bumar Sp. z o.o, 12 May 2006; Interview with Marek Havelka, Marketing Officer, Bumar SP. z.o.o., 3 October 2007, Warsaw; Interview with Jakub Jaworski, Director of the International Co-operation Office, Polish Chamber of National Defence Manufacturers, 8 May, 2006, Warsaw; Interview with Slawomir Kulakowski, President of the Polish Chamber of National Defence Manufacturers, 3 October 2007, Warsaw (interviews on file with author).

About the Hungarian defence industry see, for example, Kovács Géza Péter, President of the Defence Industry Association of Hungary, Lecture delivered at the Defence and Security Policy Cooperation Forum, (Védelem és Biztonsàgpolitikai Egyuttmukodési Forum), Budapest, 3 April 2007; Új utakon a hazai védelmi és biztonsági ipar, Ministry of National Development and Economy, 2009. 12. 07, http://www.nfgm.gov.hu/feladataink/kulgazd/vedelem/hazai_vedelmi.html; ‘Fegyvert készenlétbe!” Védelmi és Biztonsági Együttműködési Fórum a gazdasági minisztériumban. [Arms ready! Defence and Security Cooperation Forum at the Ministry of Economy], Ministry of Economy and Trade; Interview with Dr. Molnár Sándor Head of Department of Industry and Ferenc Győrfi, responsible for defence industry, Ministry of Economy and Transport, 29 March 2005. Budapest; Interview with Dr. Kovács Géza Péter, General Director, Dunai Repülőgépgyár RT and President of the Defence Industry Association of Hungary, 16 Apr 2006. (interviews on file with author). Kovács Géza Péter, Lecture delivered at the Defence and Security Policy Cooperation Forum, Budapest, 2 December. 2009, available at www.nfgm.gov.hu/data/cms2019229/5.pdf

Andrzej Kinski, ‘Malaysia, Iraq—and More . . . Would Poland Increase her Share in the International Defence Trade?’, Polish Defence Yearbook: Industry, Armed Forces and Security Services (Technika Wojskowa and Polish Chamber of National Defence Manufacturers: Warsaw, 2007).

Kulakowski, ‘A Way to Stabilization’ (note 3); ‘New Export Offer, Polish Market Talks to Edward E. Nowak, President of Bumar Ltd.’, Polish Market Economic Magazine, 11 August 2009.

Jeffrey P. Bialos, Fortresses and Icebergs – The Evolution of the Transatlantic Defence Market and the Implications for U.S. National Security Policy (Washington, DC: Center for Transatlantic Relations, 2009), p. 447.

Anna Kapica-Harward, ‘Polish Firms Losing the Export War’, Warsaw Business Journal, 8 November 2010.

About developments in the Slovak defence industry, see Zora Kominkova and Brigita Schmognerova, ‘Conversion of Military Production: Comparative Approach’, Papers presented at a conference organized by the Slovak Academy of Science and the Friedrich Ebert Foundation, Friedrich Ebert Foundation, Bratislava, 1993; Yudit Kiss, Regional and Employment Consequences of the Defence Industry Transformation in East Central Europe (Geneva: International Labor Organization, 1999); Burkard Schmitt, Timo Behr and Albane Siwiecki, ‘EU Enlargement and Armaments. Defence Industries and Markets of the Visegrad Countries’, Occasional Paper No. 45, Institute for Security Studies, Paris, 2004; Interview with Peter Dudak, Director of Department, Ministry of Economy of the SR, 28 October 1997; Interview with Mario Nicolini, Adviser to the State Secretary, Ministry of Defence of the Slovak Republic, Bratislava, 21 March 2005; Interview with Jozef Velebny, Director, Peter Dudàk, State Counselor, Stefan Plancar, Counselor of the Department of Industrial Policy Ministry of Economy of the Slovak Republic, and Lubomir Gazak, Vice President of the Association of Defence Industry of the Slovak Republic, 21 March 2005, Bratislava (interviews on file with author).

The Bozena mine clearance system, the Zuzana self-propelled howitzer, the Tatrapan armoured vehicle, the DIAL chemical stand-off detection system, and the Aligator light wheel vehicle are the most successful Slovak military products.

In 2002 the Polish government created two capital groups: the Aviation and Radio Electronics Industries Group, which united aircraft and electronics producers, under the control of ARP, a development agency; and the Bumar Group, which included ammunition, rocket and tank manufacturers and was put under the control of PHZ Bumar sp. Z o.o. a foreign trade company.

Interview with Dr. Bálint Kunos, Deputy State Secretary of Defence Economy, Ministry of Defence, Budapest, 1 April 2005 (on file with author).

Interview with Milan Balaz, Director of the Armaments Division of the MoD of the Slovak Republic, Bratislava, 25 October 2005 (on file with author).

Interview with Bojidar Penchev, Head of Department, Defence Industry, Ministry of Economy, Sofia, 25 June 2005; Interview with Slawomir Kulakowski, President of the Polish Chamber of National Defence Manufacturers, Warsaw, 3 October 2007 (on file with author).

The amphibian companies have the technology, know-how, certificates and flexibility to switch rapidly between the two spheres. The Polish Andoria Co. is a middle-size, principally civilian vehicle-maker that took over the assets of a bankrupt Daewoo factory. It acquired a NATO supplier certificate that helped it to benefit from the F-16 offset deal and became one of the suppliers of Nour USA, a company that beat Bumar in a major Iraq arms tender. The Hungarian Pro-Patria Electronics originally sold its high-tech surveillance and early warning systems on the civilian markets, but after a major MoD order it became one of the core defence firms. When state orders dried up, the company switched completely back to civilian and foreign markets, but keeps its defence profile ‘on hold’.

Interview with Managing Director Wieslaw Pastula, PZL Mielec, 22 March 1994; Interview with Artur Wojtas, MoB, Commercial Director, 5 June 2006 (on file with author); Interview with Ingmar Wyczalek, Marketing and Development Deputy Director, Euro-Park Mielec, Special Economic Zone, Industrial Development Agency, Mielec Branch Office, Mielec, 5 June 2006 (on file with author); ‘Black Hawk will take off from Mielec’, Newsletter of the Polish Information and Foreign Investment Agency, 23 March 2007; ‘First S-70i Helicopter Joined at PZL Mielec; Milestone Marks Historic Moment for Sikorsky Aircraft’, Planenews Aviation News, 18 June 2010.

See Perry Charles and Dimitris Keridis (eds), Defence Reform, Modernization, and Military Cooperation in Southeastern Europe (Washington DC: Potomac Books, 2004); Liviu Muresan, ‘Romania’, in H.J. Giessmann (ed.), Security Handbook 2004. The Twin Enlargement of NATO and EU (Baden: Nomos Publishers, 2004); Dimira Dimitrov, The Restructuring and Conversion of the Bulgarian Defence Industry During the Transition Period (Bonn: Bonn International Conversion Centre, 2002).

Roundtable discussion with Peter Magvasi, Financial Director, Jan Fillo, Director of Strategic management, Juraj Kovacik, Head of the Engines Division and other members of the management of ZTS TEES Martin, 29–30 March 1993; Interview with Jozef Hanzel, Communication manager, 16 February 1994; Interview with Jan Minar, Public Relations Officer and Karol Sutora, Head of Personnel, 30 October 1997; Interview with Miroslav Macko, Marketing Manager and Rudolf Cyprian, Public relations officer, Martin, 17 February 2004 (interviews on file with author).

Interview with Krassimir Pingelov, Managing Director of Electron Progress AD., Sofia; 24 June 2005, ‘Electron Progress Makes it to NATO,’ The Sophia Echo, 12 September 2005.

For useful resumes of the EU-led modernization process in ESCE see D. Mario Nuti, ‘Alternative Fiscal Rules for the New EU Member States’, Discussion Paper 84, TIGER-WSPiS, Warsaw, 2006; D. Mario Nuti, ‘The Impact of the Global Crisis on Transition Economies’, Economic Annals, Vol, LIV, No. 181 (April–June 2009); Laszlo Csaba, The New Political Economy of Emerging Europe (Budapest: Akadémiai Kiadó, 2007).

About the crucial role that international institutions, and particularly EU and UN regulations, had on ECE arms industries, see, for example, Weapons under Scrutiny, Center for the Study of Democracy and Saferworld Report (London: Saferworld, April 2004); Simon Rynn, Philip Gounev and Thomas Jackson, Taming the Arsenal: Small Arms and Light Weapons in Bulgaria (Belgrade: SEESAC, 2005); Amnesty International, Iansa, Oxfam International, Arms without Borders. Why a Globalized Trade needs Global Controls, Oct 2006; Mark Bromley, ‘The Impact on Domestic Policy of the EU Code of Conduct on Arms Exports: The Czech Republic, the Netherlands and Spain’, SIPRI Policy Paper No. 21, 2008.

About the different aspects of the twin enlargement process, see, for example, Schmitt, Behr, and Siwiecki (note 12); Antonio Missiroli, ‘Central Europe Between the EU and NATO', Survival, Vol. 46, No. 4 (December 2004); Wade Jacoby, The Enlargement of the European Union and NATO. Ordering from the Menu in Central Europe (Cambridge: Cambridge University Press, 2006).

In addition to Bumar Holding's large-scale military contracts for the Iraq and Afghanistan missions, Radwar and PIT became key participants in NATO's AGS programme, PZL Mielec produced fuselage for the US Navy, and Produs sold communications systems to NATO.

There is a vast body of literature about the different aspects of the internationalization/globalization of the defence industry. See, among others, Richard A. Bitzinger (ed.), The Modern Defence Industry (Westport, CT: Greenwood, 2009); Ann Markusen and Sean Costigan (eds), Arming the Future (New York: Council on Foreign Relations Press, 1999); Keith Hayward, ‘The Globalization of Defence industries’, Survival, Vol. 42, No. 2 (2000); and J. Paul Dunne, Maria Garcia Alonso, Paul Levine and Ron Smith, Concentration in the International Arms Industry (Bristol: School of Economics, University of the West of England, 2003). On transformations of the European defence industrial base, see Katia Vlachos-Dengler, ‘Off Track? The Future of the European Defence Industry’ (Santa Monica: RAND, 2004); Seth G. Jones, ‘The Rise of a European Defence’, Political Science Quarterly, Vol. 121, No. 2 (Summer 2006); Hélène Masson and Cédric Paulin, Perspectives d'évolution de l'industrie de défense en Europe (Paris: Fondation pour la Recherche Stratégique, 2007); and Andrew D. James, ‘The Defence Industry and ‘Transformation’: A European Perspective', Security Challenges, Vol. 4, No. 4 (Summer 2008).

The putting-out system was widespread before the dawn of the industrial revolution and was still used in small-arms making in 18th-century Britain. See David A. Hounshell, From the American System to Mass Production, 1800–1932 (Baltimore, MD: Johns Hopkins University Press, 1984).

Ethan B. Kapstein, Arsenal's End? American Power and the Global Defence Industry (Washington, DC: Center for a New American Security, 2010), p. 5.

Andrew Latham, ‘The Contemporary Restructuring of the US Arms Industry: Toward “Agile Manufacturing”’, Contemporary Security Policy, Vol. 18, No. 1. (April 1997); Richard A. Bitzinger, ‘The Revolution in Military Affairs and the Global Defence Industry: Reactions and interactions’, Security Challenges, Vol. 4, No. 4 (2008).

The emergence of amphibian companies in fact reflects the metamorphosis of the defence industrial base. Most of these firms are active at the high end of the sector, where the share of fixed capital assets is relatively smaller than at other activities.

‘Global Partners Building Global Security’, Remarks By Robert J. Stevens, Chairman, President and Chief Executive Officer, Lockheed Martin Corporation, at Paris Air Show Media Dinner, Le Bourget, France, 14 June, 2009.

‘The Top 100 for 2009’, Defence News, 10 July 2010, and the SIPRI Military Expenditure Database, http://www.sipri.org/databases/milex

Major procurement decisions are taken on a primarily political basis but have cascading economic consequences. For a thorough analysis of Poland's emblematic F-16 acquisition, see Barre R. Seguin, Why did Poland choose the F-16? (Garmisch: George Marshall Center, 2007).

On the economic impact of offsets, see Jurgen Brauer and J. Paul Dunne, Arms Trade Offsets: What do we Know? (Bristol: School of Economics, University of the West of England, 2009).

The case of a passive surveillance system, Era (originally called Tamara, later renamed Vera) developed by the Czech HTT Tesla Pardubice company, illustrates the difficulty in gaining market access for even the most outstanding products of local R&D. HTT Tesla Pardubice was one of the traditional champions of the Czech defence industry; it was badly affected by the transformation years and changed owners several times. However, the Era system was internationally recognized and the company, assisted by the government, made several efforts to market it. In 2003 the CR was about to sell six radar systems to China, but due to pressure from the United States, the deal was cancelled. In 2004 the US bought one Vera passive surveillance system, ‘in order to test it before eventually helping the CR to export it’. In October 2006 an American surveillance and flight tracking developer, Rannoch Corporation, bought HTT Tesla's successor company, which produced the system. In 2007 Rannoch changed its name to Era Corporation, and in 2008 it was taken over by SRA International, Inc, a leading American provider of technology and strategic consulting services. At present Era surveillance systems are deployed in many locations, both west and east, including the CR and the former Soviet Union. See Carlo Kopp, ‘Warsaw Pact/RussianPLA Emitter Locating Systems/ELINT Systems, Technical Report APA-TR-2008-0503’, September 2009; Magnus Bennett, ‘Radar System Won't go to China. Sale's Reversal Follows U.S. Pressure; Reasons for Past Approval Foggy’, The Prague Post, 27 May 2004; ‘L'Irak, la lutte contre le terrorisme et le radar Vera au programme de la visite en République tchèque du ministre délégué américain des Affaires étrangères’, Radio Praha, 15 September 2009; František Bouc, ‘Czech Radar Company sold. U.S. Company Now Owns Highly Advanced Radar Systems’, The Prague Post, 15 November 2006; ‘Rannoch Corporation Changes Company Name to Era Corporation: New Corporate Brand Reflects Vision for Next-Generation Surveillance, ATC Global 2010’, Era Corporation, 6 February 2007; ‘SRA Completes Acquisition of Era Corporation’, SRA, 30 July 2008.

‘S-70iTM Black Hawk Helicopter Debuts at MSPO Exhibition’, Sikorsky Press Release, 7 September 2010; ‘Sikorsky Adds Key Link to International Supply Chain’, High-Performance Composites, July 2009; ‘Sikorsky Aircraft and RUAG Sign Letter of Cooperation for Aftermarket Services in Germany’, Sikorsky Press Release, 8 June 2010.

About the EU's security and defence identity, see Nicole Gnesotto (ed.), EU Security and Defence Policy: The First Five Years (Paris: Institute for Security Studies, 2004); Geoffrey Edwards, ‘The New Member States and the Making of EU Foreign Policy’, European Foreign Affairs Review, No. 11, 2006; Richard G. Whitman, ‘NATO, the EU and ESDP: An emerging division of Labour?’ Contemporary Security Policy, Vol. 25. No. 3 (December 2004); A European Way of Security (Madrid: Human Security Study Group, 2007); ESDP@10 (Paris: EU Institute for Security Studies, 2009).

In the widescale discussion of NATO's new strategy, relatively little is said about ESCE countries. A good resume of reactions in the region is Beata Górka-Winter and Marek Madej, NATO, Member States and the New Strategic Concept: An Overview (Warsaw: The Polish Institute Of International Affairs, May 2010).

Hugh Bayley (rapporteur), ‘The Global Financial Crisis and its Impact on Defense Budgets’, 178 ESC 09 E rev 1 Information Document, NATO Parliamentary Assembly, Committee Reports 2009 Annual Session, http://www.nato-pa.int/default.asp?SHORTCUT=1928 (accessed August 2011).

Anders Fogh Rasmussen, ‘Security policy in an era of budgetary constraint’, Speech at Conference of Security and Defence Agenda, Brussels, 21 June 2010; Nick Witney, Re-Energizing Europe's Defence and Security Policy, European Council of Foreign Relations, July 2008; ‘Defence’, Financial Times Special Report, 8 September 2008.

Nick Iliev, ‘Bulgarian Defence Industry Switches to Energy – Due to Lack of Government Support’, The Sofia Echo, 11 December 2008.

The concept of soft budget constraints was elaborated on by Janos Kornai in A hiany (The Shortage Economy) (Budapest: Kozgazdasagi es Jogi Konyvkiado, 1982), and The Socialist System: The Political Economy of Communism (Oxford: Oxford University Press, 1992). See also Janos Kornai, Eric Maskin and Gerard Roland, ‘Understanding the Soft Budget Constraint’, Journal of Economic Literature, Vol. 41, No. 4 (2003).