{"id":38386,"date":"2018-04-11T11:01:47","date_gmt":"2018-04-11T01:01:47","guid":{"rendered":"https:\/\/www.aspistrategist.ru\/?p=38386"},"modified":"2018-04-11T11:01:47","modified_gmt":"2018-04-11T01:01:47","slug":"abcs-defence-industry-economics-concepts-part-1","status":"publish","type":"post","link":"https:\/\/www.aspistrategist.ru\/abcs-defence-industry-economics-concepts-part-1\/","title":{"rendered":"The ABCs of defence industry economics\u2014the concepts (part 1)"},"content":{"rendered":"
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A notable feature of recent debate about investing in Defence capital equipment projects has been the differing views of stakeholders on how that investment affects the economy\u2014for example here, here<\/a>, here<\/a> and here<\/a>. So, let\u2019s have a look at the concepts behind the economic impact of such projects before illustrating them with a case study (in part 2).<\/p>\n

When defence capital equipment projects are undertaken in Australia, their size is usually measured in terms of employment, sales and added value (basically sales minus the material and associated inputs bought from other industries). Each of these measures constitutes a form of economic benefit by adding to the value of what the nation produces.<\/p>\n

Quite often, stakeholders are interested in how these measures play out at a state or regional level, where the economic effects of projects tend to be magnified. And stakeholder interest also turns to the individual contributions of prime contractors, companies in a project\u2019s domestic supply chain and all those companies\u2019 employees who spend their wages and salaries on consumer goods and services.<\/p>\n

All this data can be generated using input-output (I-O) economic modelling. However, a purely I-O approach deals only with the economic benefits of projects. Economic costs<\/a> aren\u2019t considered.<\/p>\n

Those costs take two main forms. One is the resources diverted from other areas of the economy\u2014especially areas with higher levels of added value (or productivity)\u2014or where the resources are in short supply. This includes drawing skilled labour away from other projects and industries rather than from the ranks of the long-term unemployed. To the extent that this occurs, a project\u2019s expansion comes at the cost of contraction in other areas of the economy.<\/p>\n

The second main form of economic cost arises from the fact that\u2014excluding export projects whose costs are met by overseas customers\u2014defence projects need to be paid for. That requires that the government raise taxes or reduce its expenditure elsewhere. Both actions detract from other areas of economic activity. Borrowing more money to pay for projects has its own costs and complications<\/a>.<\/p>\n

This form of cost might be partly offset by the tax revenue generated by equipment projects. However, as other areas of the economy\u2014which also pay tax\u2014shrink in response to economic costs, any net gain in government tax revenue will be smaller than it first appears.<\/p>\n

From a broader, national welfare perspective, the adverse economic effects of raising revenue to pay for projects should be matched by the added national security provided by the capital equipment projects. Nonetheless, an economic cost is incurred and should be included in any study where jobs and growth are issues of interest.<\/p>\n

Where Defence pays a price premium to ensure that its equipment is built or sustained in Australia rather than overseas, the government needs to raise even more revenue. Ostensibly, the extra economic costs involved should be offset by Australian industry receiving considerably more work than if the equipment had been produced abroad. Additional work should generate more tax revenue for government, helping to defray the economic costs a price premium imposes.<\/p>\n

However, those benefits only apply to the extent that the additional industry resources that would have been employed had the equipment been built or sustained in-country couldn\u2019t have been put to good use somewhere else in the economy.<\/p>\n

In terms of broader national welfare, the economic costs associated with a price premium might be mitigated by a military\u2013strategic advantage in the form of higher levels of industrial sovereignty<\/a>. But again, such costs still exist and need to be identified if jobs and growth are the focus. Of course, the case for sovereignty must also be made.<\/p>\n

Bringing all these points together, the economic benefits of defence projects will be higher when four conditions hold:<\/p>\n