COMPARING POST‐COLD WAR MILITARY CONVERSION IN THE UNITED STATES AND RUSSIA

I. INTRODUCTION Defense industries in the post-Cold War environment, in both the East and West, share many unique characteristics and problems including the daunting challenge of conversion from military to civilian production as defense budgets are reduced. The organization, incentives, and performance of defense firms in both the East and West deviate significantly from that of civilian firms found in market-based economies. After examining this gap in the West, many analysts have questioned the economic feasibility of defense conversion in market-based economies. The conversion experience in the West has been illustrated with the now famous remark from a Martin Marietta executive who noted that the West's record at defense conversion had been unblemished by success. Most analysts have gone on to discount the feasibility of effective defense conversion in the East as well and in fact have predicted an even worse outcome there based on the additional handicap of having to convert state-owned or only recently privatized firms that carry the legacy of the Soviet-type economy and operate in the difficult environment of economic transition.(1) For example, Paukert and Richards (1993, p. 61) state: In principle, conversion in centrally planned economies involves the same issue of reallocating resources from defense to civil activities. ... The former USSR, though, is now in a transitional stage, moving from a centrally planned to a market economy which creates even greater problems for conversion and adjusting to defense cuts. Battilega (1994, pp. 2-3) also maintains that while the "magnitude of change" within defense enterprises required for conversion is enormous in both Russia and the United States, the U.S. companies have an advantage because their conversion "is being attempted against the backdrop of a well-developed market economy and business infrastructure. ... In Russia, no equivalent infrastructure exists, and market forces are not yet at work." Bertelli and Marlin (1993) also note that better infrastructure, social welfare, and labor mobility give the West a comparative advantage with respect to conversion. Drawing upon the western conversion experience these and other analysts either state or imply that because Russia is not a developed market economy and currently is undergoing a transformation, the conversion process has to be that much more difficult, if not hopeless. A closer look, however, raises doubts about these arguments. To a large extent, western defense firms have had difficulties converting to civilian production because their corporate culture, as well as much of their physical and human capital, are ill-suited for the conventional marketplace and therefore cannot compete with existing relatively efficient civilian firms. While Russian defense enterprises possess many remarkably similar market handicaps, their principal competitors, the large Russian civilian enterprises, are closer in nature to defense enterprises than to efficient market firms.(2) In a sense, both civilian and defense-related firms in Russia need to undergo conversion to markets. While this does not bode well for the Russian economy in general, the Russian defense-related enterprises and the factors of production they employ should not find themselves at a significant disadvantage in the civilian markets. In fact, in some respects, Russian defense-related enterprises may be better positioned to compete in an emerging market economy than are their civilian counterparts, as defense firms are more used to responding to the needs of the customer, have a reputation for relatively high quality output, and - at least in the beginning of transition - possessed a skilled work force and relatively modern equipment. The case studies conducted by Sikorra (1996) support this view, demonstrating in particular that after examining a host of exogenous and endogenous factors, defense firms in Russia often have a comparative advantage (or at least less of a comparative disadvantage) in terms of having the ability to convert to consumer production vis-a-vis their U. …