PAKISTAN: IN DEFENSE OF DEFENSE SPENDING
By Shafei M Hali
The Defense budget of Pakistan has always been a source of scrutiny for the public. The aim of this paper is to present a cogent case for depicting the advantages of defense spending in Pakistan. In this paper vital statistics that justify defense spending are presented and go on to prove that the optimal policy mix Pakistan is implementing of tax reforms together with defense expenditure expansion.
Every country that holds a large sized military is critical of defense spending in light of distribution of scarce resources. The dilemma of the “guns versus butter” trade-off is what leads the people in these countries to complain about the large chunk of their national budget being allocated to the military. These conscientious objectors are perhaps oblivious of the fact that the military is a necessity; especially for countries like Pakistan which inherited the need to maintain a massive military since its inception owing to the security concerns and a hostile eastern neighbor. Similarly countries that face omni-directional threats are constrained to maintain a strong military to deter the threat to their security, in-order to maintain an ecosystem conducive to economic prosperity. The presence of a massive military is often hard to quantify economically on security grounds. Theoretically it is the very foundation on which the economy of a country is built, which can crumble in the wake of a security threat. The current security risks facing Pakistan bolster the argument that without security the economy enters a state of entropy. The provision of security and stability is one of the primary pre-requisites for any society to flourish. Thus we have established the premise that a strong, well trained and well equipped military is essential for Pakistan’s survival. Budgetary allocation in this essential head must be viewed pragmatically and optimistically.
The aim of this article is to present a cogent case for depicting the advantages of defense spending in Pakistan. Let us examine some of the vital statistics that justify defense spending.
Creation of jobs
The military in Pakistan is a huge platform for providing employment. The estimated strength of the military personnel is about 1000,000 and if we include the estimated number of reserve staff to the total military strength the numbers stand at 1,550,000. According to the Ministry of Defense the approximate number of civilian staff is 250,000. The total number of people directly employed by the military is around 1,800,000. The population of Pakistan according to CIA’s World Fact Book is estimated at 170 million. If we do the arithmetic, the Military is directly responsible for providing 1.05% of Pakistan’s population with jobs.
The effects of spending on job creation are three dimensional.First are the “direct effects” which as we have gauged to be around 1.05% of the total population are provided employment opportunity by the military. The second dimension consists of the “indirect effects”; these create jobs associated with industries that supply intermediate goods to the spending entity i.e. the military. In case of the military there are countless intermediate goods providers; a few of them are: the military ration suppliers, who provide food for the military messes, there are separate companies that provide medicines to the armed forces hospitals and dispensaries, the construction contractors that help build, maintain and expand military bases and garrisons, and textile and apparel companies like Lawrencepur, who provide clothing for the uniforms etc. The third dimension of effects comprises “induced effects”; these effects create jobs as a result of the spending done by the people already furnished with jobs. In the case of the military, when the 1800,000 people directly employed by the military and the countless others who are indirectly employed, when they spend money from their salaries according to their consumption, further jobs are created because of the multiplier effect. It can be stated that the military in Pakistan has a Keynesian effect on job creation in Pakistan.
To take a deeper look into the aspect of, the creation of livelihood induced by military spending, we must give consideration to the work of Mark A. Hooker and Michael M. Knetter who conducted a study titled: The effects of military spending on economic activity: evidence from state procurement spending. There were two main findings of the Hooker and Knetter’s study. “First is that military procurement spending does explain a statically significant degree of the variation in employment growth across states. Second, we find evidence in support of a nonlinear relationship between procurement spending and employment growth.” 
Findings of Mark A. Hooker and Michael A. Knetter’s study revealed that, whenever defense spending is curbed, contract awards are reduced which leads to the loss of jobs because of the reduction of demand of the labor force in the production facilities and this is only the direct job loss some indirect job losses also occur due to reductions in business for local firms that supply the operations of the respective production facilities. Unemployment or loss of jobs directly results in the contraction of household budgets resulting in less consumer spending, which as a consequence impacts local businesses leading to effect the livelihood of all personnel residing and working in the vicinity of these defense production facilities.
To better understand the dynamics of the economic relationship of these weapons manufacturers and the public we can look at “General Dynamics Bath Iron Works, which represents about 75 percent of employment in Sagadahoc County and about 10 percent of economic activity in a five-county region around Bath (Maine).” Thus keeping in view the earlier discussed concept of reduction in defense spending we can clearly see that if Bath Iron Works contracts are cut it would lead to a chaotic situation in the regions where it’s production facilities lie.
This model defined by Hooker and Knetter also holds true for the defense manufacturing facilities in Pakistan namely: Pakistan Ordnance Factories (POF), Pakistan Aeronautical Complex (PAC) and Pakistan Navy Dockyard. All these facilities employ hundreds of thousands of people and are an important source of providing livelihood. Defense spending retrenchment would mean cut back on production and maintenance resulting in cost cutting and layoffs; which as proven in Knetter and Hooker’s study would have a compounding effect in terms of direct job losses, indirect job losses and induced job losses thus immensely affecting the overall economy.
Defense Spending as an investment engine
The Armed Forces of Pakistan have bases and garrisons spread all over the country. In most of the places where we see garrisons and military bases we see that economic activity is also rampant and growing. This is because military installations require all the essential necessities like: power, water, food and most importantly well maintained transportation links. One does not need to ponder why economic growth occurs around military bases as the above mentioned necessities of the military bases are also the building blocks of an ecosystem conducive to economic growth. Military garrisons and bases bring with them all these necessities from which the locals also benefit; thus the tree of economic growth takes root much quicker near military installations than other areas.
If we invert the hour glass and look at the locality of the major military garrisons we will see that there was little population surrounding these military installations. Rawalpindi, Sargodha and Wah are a few examples. Sargodha city of today started out as a small town it was in 1959 that the Pakistan Air Force (PAF) converted an abandoned British WWII air-field in to a PAF station; it was just a small town with orchards of oranges surrounding the base. Because of the construction of a PAF Base, which proved to be the most important PAF base, this small town gained importance and has now become the 8th largest city of Pakistan, with an estimated population of 700,500. The chief occupation has shifted from farming to wholesale and retail. It is evident that due to the installation of a military base this small town gained all the pre-requisites for economic growth.
The history of Rawalpindi reveals that its development was very different from that of Sargodha and many factors riveted its development among them formation of a British garrison played a very significant role. Traces of Rawalpindi encompassing a civilization go back 3000 years but the actual leap to the status of a big city took place when “Lord Dollhouse made Rawalpindi the headquarters of the Northern Command, railway was linked to Rawalpindi. And, it became the largest cantonment in the South Asia.”The chronicles of Rawalpindi provides evidence for another important aspect of military’s role in economic development which is the provision of well maintained transportation links. The population of Rawalpindi in the 1950s was around 232 thousand and in 2010 it is estimated to be 2.2 million making it the 4th largest city of Pakistan.
Small city of Wah gained the title of a cantonment in its name in 1951 when the foundations for Pakistan’s first ordnance factory were laid. Today Wah is a complex of 14 different defense production factories which employ 40,000 people and because of defense spending Wah Cantonment is considered one of the most well equipped cities of Pakistan. With the most efficient fire department, well maintained transportation links, medical facilities, electricity, relatively efficient development authority and most notably 115 educational institutes. It is one of the few places in Pakistan with a 100% literacy rate. Indeed because of defense spending Wah has become an economic hub.
The consumption function
The presence of a massive military is often hard to quantify economically on security grounds but can easily be analyzed for its job-creation potential. The military creates jobs according to a study by Robert Pollin and Heidi Garrett-Peltier at the Political Economy Research Institute (PERI) of the University of Massachusetts-Amherst; “Each billion dollars of tax revenue Invested in the military creates 8,500 jobs.”The US economy revolves around the consumption function and in the current financial crisis the Obama administration has been trying to stimulate the economy with various stimulus packages whose aim is to boost consumption which in return will fuel the overall economy. Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan, a professor at Harvard and a member of The Wall Street Journal's board of contributors believes that apart from the economic stimulus packages which are being employed by the government to jump start the economy, “A substantial short-term rise in spending on defense and intelligence would both stimulate the US economy and strengthen the nation's security.”Similarly the military in Pakistan contributes to a lot of consumption. According to the Ministry of Defense Pakistan finance division approximately Rs. 120,000,000,000 is allocated in the defense budget for the salary expense of the armed forces. We know that the total strength of the military including the civilian staff is around 1800,000 which can be considered as 1800,000 households. The average income of each household is around Rs.66, 666. According to a study conducted by the State Bank of Pakistan the house hold saving rate is 9.92%. According to the Ministry of Defense; the military personnel pay an average of 2.5% of their salaries as tax. The total estimated tax the military personnel pay computes to Rs. 3,000,000,000. Now we can easily determine the amount which is consumed and the amount which is saved per military household. Per household the average saving is about Rs.6,448 and the average consumption per household computes to Rs. 58,552. Thus out of 120 Billion rupees the military personnel of Pakistan re-invest Rs.105,393,600,000 back in to the economy. This re-investment because of the consumption function has a multiplier effect on the economic growth and sets the economic growth on the fifth gear. One cannot see the effects of this multiplier effect induced by the consumption function overnight. The effects of the consumption function can be correlated to the hour hand of a clock. Which seems stagnant but is actually moving and within 12 hours without our knowing. it actually completes a full rotation. Similarly the consumption function’s effects stealthily keep on strengthening the economy and their effects become visible in the long run.
A lot of economists abroad and at home believe that improvement of tax collection in Pakistan is the key to solving the government’s deficit problems. Mr. Paul Ross the IMF representative in Pakistan pointed out that Pakistan struggles with the problem of revenue mobilization. The number of Pakistani taxpayers amounts to a little over “2 million people in a country with a population of more than 170 million, he said, observing that many emerging market countries’ tax revenues amount to around 20 percent of GDP compared with 10 percent in 2008/09 in Pakistan.”
Tax collection is the key to success; we look at the western countries and wonder why they are so far ahead in the race of economic development. They obviously did not find the lost city of Atlantis to gain economic development, nor do they discover the leprechaun’s pot of gold where the rainbow begins. One of the main differences between them and us is that their public pays tax and their government ensures tax collection while tax evasion is strictly punishable by law. According to the IMF: “The bottom line is that Pakistan must boost its tax collection rate; otherwise, there will be no money for poverty reduction, investment in health, education, infrastructure, and other priority expenditures that are key to long-term development.”
After looking at the figures presented by the IMF, that a little more than 2 million people out a 170 million, pay taxes leads to the conclusion that the strength of the military is close to 2 million. Which means almost 90% of the tax collected from the public is paid by the military; the rest of the people have a very limited contribution towards the country’s tax revenue. This is a very positive factor in defense of the defense spending, because the military, being a disciplined force, indulges in realistic tax computation and contribution.
Research and Development
The human race aspires to lead a life full of luxury. This human need is fulfilled partially through the research and development funded by defense spending. Every time the military spends money on research and development, countless new technologies are developed because of the residual effect. The internet came into being when the US Department of Defense wanted to link military bases, the micro-wave oven was a by-product of a radar-related research project. The Jet engine was also developed for the military and much later incorporated in the air-line industry. The Mobile phones is also a spinoff of portable radio phones which were enhanced first for the police and military communication purposes. The concept of the TV remote controls was also developed by the German military during WWI. Non-stick frying pans are a byproduct of rocket technology research. The jeep vehicle was also developed for the military in 1939 because the US military needed a new, universal vehicle to replace the motorcycle and its other vehicles.Portable power generators were developed for the military operating in remote areas. Most of today’s gadgets and inventions were either first developed for the military or are a by-product of military R&D spending. Pakistan’s armed forces are also moving towards development of new technologies which will benefit Pakistan immensely. Currently most of our technology development and military research is in collaboration with China but local Pakistan based companies like Integrated Dynamics (ID) in Karachi, East-West Infinity (EWI), Satuma and Global Industrial Defense Solutions (GIDS) are in the drone-making businessother companies involved in research and development are R&D Engineering Company (Karachi) & R & D Precision Export Pvt Ltd have sprouted due to the demand and potential for research and development in Pakistan. R&D Precision Export Pvt Ltd and R&D Engineering currently deal in parts related to high performance applications such as aerospace and maritime technologies. These companies have contributed to a lot of import substitution and self reliance in classified projects.
Since 1992, the United States has exported more than $142 billion dollars worth of weaponry to states around the world.The U.S. dominates this international arms market, supplying just under half of all arms exports in 2001, roughly two and a half times more than the second and third largest suppliers.This brings us to highlight the opportunities available for Pakistan to capitalize upon. Since most of the countries in the world are developing and cannot afford expensive American technology thus having the capabilities of producing low cost weapon systems. Pakistan has become a supplier of a new market for low cost manufactured weapons. “Pakistan's major defense manufacturing companies are owned and operated by Pakistan's military. According to Business Monitor, Pakistan's defense industry contains over 20 major public sector units (PSUs) and over 100 private-sector firms.”
Pakistan’s newly developed JF-17 Thunder; a light combat aircraft has caught the eye of many developing nations as it is a state of the art 4th generation low cost weapon system. The development of the JF-17 Thunder has brought Pakistan “one step closer to becoming a major producer and exporter of planes around the world. About 17 countries are interested in the JF-17 Thunder which was a major attraction at the Pakistani IDEAS 2009 defense show.”
Pakistan Air Force has not kept its focus on just one development. The PAF has been multi tasking and trying to develop many new technologies among them is PAF’s Unmanned Aerial Vehicles Program. The PAF has been working closely with the private sector to develop technology for this program, among these companies is Integrated Dynamics (ID) based in Karachi which has not only been producing drones for the PAF but has also been exporting to Australia, Spain, South Korea and Libya and the United States. Again Pakistani manufacturers have been relying on providing low-cost solutions. ID’s Drones cost only a fraction of the cost of comparable products made in the United States and Europe. ID UAV prices start from about “$ 20,000 while comparable UAV products made in the West start from about $ 200,000.”
Other companies like R&D Precision Export Pvt Ltd and R&D Engineering currently deal in exporting aerospace parts and systems to the European Union; these parts include military and civil aircraft parts for air vehicles such as the euro copter, Bell Helicopter and Augusta Westland.
Pakistan’s armed forces have been working very hard to enter into the elite group of weapon system exporting countries, as weapon systems are usually amongst the list of most expensive equipment and exporting such equipment not only bolsters the economy significantly but boosts the country’s morale as well. This is the very reason the Ministry of Defense Production, was created in September 1991. South Asian, Middle Eastern and African countries have increased their interest in Pakistan’s defense production significantly. It has been reported that Sri Lanka has purchased cluster bombs, deep penetration bombs and rockets and Unmanned Aerial Vehicles (UAV) from Pakistan.“In a July 2008 interview with Pakistan's Dawn newspaper, Major General Mohammad Farooq, Director General of the Defense Export Promotion Organization said that optical instruments like night vision devices, laser range-finders and designators, laser threat sensors, artillery armor mortars and munition, mine detectors, anti-tank rifles, missile boats, different types of tear gases, fuses of unarmed vehicles, security equipment and sporting and hunting guns were also being manufactured in Pakistan. "The fuses are being purchased by countries like Italy, France and Spain," and Pakistan has become the leading manufacturer and exporter of land-mines, cluster bombs and depleted uranium munitions.”This ministry has been bending its back to promote exports of Pakistani weapon systems and that is why the Defence Export Promotion Organization (DEPO) launched the I.D.E.A.S Exhibitions, which have placed Pakistan’s defense production in the global limelight. And according to reports, the Defense exports of Pakistan in 2006 stood at $ 500,000,000 and have been growing annually.
Pakistan’s defense budget is justified not only because of the arguments presented above but also because of the countless social welfare, rescue and rehabilitation activities that the military indulges in, which no other organization in Pakistan can carry out. In the wake of natural calamities like floods, storms, landslides, earthquakes, epidemics, extreme law and order situations, helping (IDPs) and famine; it is the military that comes to aid the people in every trial and tribulation. The economic cost of all these peacetime activities is hard to calculate but is immensely huge in magnitude.
The military of Pakistan’s contribution to this nation are not only limited to provide its services in the wake of security threats and calamities. Pakistan’s military is responsible for educating the nation, with the military’s brainchild the National University of Sciences and Technology which is ranked at number 20 in Asia,the military’s National Defence University, the PAF’s Air University, and Navy’s Bahria University ranked 19 in Pakistan. Apart from higher education the military is also committed towards providing primary, secondary and intermediate education. The Pakistan Air Force has 27 schools established all across Pakistan.Fauji Foundation funded by the army has over a 100 schools and institutions across the country with over 41,000 students.These institutions are not limited to imparting education to children and wards of military personnel but accommodate children from non-military background too.
The provision of hospitals and quality doctors to cater to the needs of the people is also a responsibility that country’s military has always been fully committed to undertake in its own capacity. There are 8 Class A Combined Military Hospitals (CMHs). 7 class B CMHs and 14 class C CMHs in Pakistan. Apart from these the PAF operates 7 hospitals and the Navy also has two main Hospitals PNS Shifa and PNS Hafeez..
After conducting an intense review of the military peacetime activities, it is evident that curbing the defense budget is not the solution to the problem of the government’s deficit, as the military’s activities are deep rooted in to the society when it comes to the provision of public goods that any cut-back would do more harm than good. Many experts believe that any retrenchment in the defense budget in Pakistan is only going to add to the problems of the country and this retrenchment is going to destabilize the country economically, politically and is going to raise security concerns. According to Dr. Robert E. Looney at Naval Postgraduate School in California, who conducted a study titled ‘Pakistani defense expenditures and the macro economy: Alternative strategies’ concluded that “In fact, rapid reduction in the defense budget is likely to impair the situation even further. On the other hand, modest efforts in tax reform are by far the most effective means of restoring fiscal stability… The optimal policy mix is one of tax reform together with defense expenditure expansion.”
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