report 3 - preface
by Joseph DiChiaro III
The collection of papers in BICC Report 3 represents a sampling of presentations made at the Bonn International Center for Conversion's inaugural event-a workshop on conversion of the defense industry in Russia and Eastern Europe, held 11-13 August 1994 in Bonn. The workshop, co-hosted by Stanford University's Center for International Security and Arms Control (CISAC), brought together representatives of government and international organizations, academia and industry, in an attempt to gauge the current state and future prospects of conversion in this most affected region.
The reasons for such a gathering were many. The sheer size of the military-industrial complex in the former Soviet Union, its pervasiveness through several sectors of the economy, and its extension across boundaries of now separate republics, make restructuring efforts especially problematic. As such, we deemed it important to harness the knowledge and experience of individuals from government, industry, consulting firms, investment and lending institutions, and economic and political research institutes-both East and West-to exchange ideas and generate support for the fragile process of reform (a list of workshop participants follows this preface). In doing so we attempted to address the most pressing issues facing policy-makers and practitioners. These included: the role of the state in the restructuring and privatization process; the dangers of mass unemployment and the efforts to provide a 'social safety net'; the effects of external financial assistance and internal subsidization on the reform process; and the technological implications of the changes underway.
As presented here, the papers fall into four groups. Parts I through III examine conversion and industrial restructuring in Russia and Eastern Europe from a macro, micro (firm), and individual level, while Part IV addresses the scope and nature of foreign assistance in this process.
Part I, "The state of conversion and the environment for reform,” offers a broad overview of the condition in which the defense industry now finds itself. Alexei Izyumov, Leonid Kosals and Rozalina Ryvkina of the Russian Academy of Sciences provide a profile of the environment for reform within the Russian military-industrial complex as seen through the eyes of insiders. Beginning with a comparison of conversion in Russia and the West, the authors then summarize the findings of a series of interviews of defense industry officials and management, capturing their views on: the current trends and problems facing the industry; conversion and the prospects of the defense sector; and government policy. They conclude with a set of recommendations-as proposed by those interviewed-designed to remove some of the remaining obstacles hampering effective reform of the defense industry.
Following this view from Russia, Gediminas Rainys of the Economic Research Centre in Vilnius, Lithuania provides the perspective of a neighboring state-once very much a part of the Soviet military-industrial complex-undergoing its own process of restructuring. Rainys points to the development of effective capital markets and the influx of new technology as a means of tackling the daunting restructuring process.
Departing from the macro perspective, Part 2, "The role of privatization and disaggregation in industrial restructuring,” descends to the level of the firm to view the impact of reform. Joseph Blasi of Rutgers University looks at three issues-the current ownership structure of enterprises, the ownership design favored by senior managers, and corporate governance-which, in his words, "will ultimately determine the impact of privatization on the enterprise and the impact of the newly privatized enterprise on economic reform.” Blasi does this by surveying top management from a sample of 200 enterprises in 40 oblasts throughout Russia. Two important findings of this study are (1) the first stage of Russian privatization did not conclude with either nomenklatura ownership or total worker control, and (2) the views of senior managers towards future ownership are neither realistic nor desirable. Fortunately in this respect, outsider ownership and board representation are beginning to make their presence felt.
Michael Higgins and David Binns of the Foundation for Enterprise Development explore in greater detail the impact of insider ownership on the restructuring of privatized enterprises and assess the opportunities and impediments which accompany large employee ownership stakes. Higgins and Binns stress that insider ownership may continue to play a significant, if reduced, role even as the search for investment capital increases outsider stakes.
David Bernstein and Jeffrey Lehrer of CISAC conclude this section by examining the disaggregation of a major enterprise-the Central Aerohydrodynamic Research Institute (TsAGI)-and the broader applicability of this approach. In an effort to restructure, TsAGI, a major research and testing institute, has shed several classes of subsidiaries which has lowered financial burdens by enhancing revenues, removing a portion of the social infrastructure, and employing idle facilities and labor. In this case, the strength of the core business or activity of the enterprise is a major factor in the success of this process. However, the importance of spun-off subsidiaries in relieving the parent firm of excess capacity, labor and the burden of social services should not be overlooked.
Part 3, "The human dimension of conversion,” delves a level deeper into the conversion issue by exploring the impact of displacement and change on the individual worker. Ksenia Gonchar of the Russian Academy of Sciences and BICC opens this section by analyzing the employment aspects of defense industry downsizing in Russia. Gonchar notes that while the cuts may not appear significant from a macro perspective, they could have detrimental effects due to the geographical concentration and political sensitivity of defense industry employment. Gonchar also highlights those segments of defense industrial employment most vulnerable to cuts, points to the adjustment patterns so far exhibited, and offers further measures to ameliorate the displacement.
Tarja Cronberg of the Technical University of Denmark takes a different approach, exploring the environment in which technology is shaped and negotiated and the effect of bracing changes in that environment on the daily lives of those scientists and engineers who were once the fabric of its stabilization. Though it has been shown elsewhere that technology becomes destabilized when the institutional structures underlying it become destabilized, Cronberg proves this not necessarily to be the case in Russia. While formal institutions-indeed the entire economic system-have collapsed, institutionalized practices, routines and meanings have not. The challenge, Cronberg concludes, is to channel the tremendous scientific potential released by the end of the Cold War into a clear national task.
Part 4, "Financial assistance and the role of donor nations,” completes this volume by taking a look at external efforts to finance and assist the process of reform in the former Soviet Union. Frank Borstelmann of the Investitions-Bank of the State of North Rhine-Westphalia offers an overview of multilateral and bilateral economic assistance to the former Soviet Union, focusing on the multilateral efforts of the European Union and the bilateral example of Germany.
Ethan Kapstein of the OECD highlights the issue of defense-dependent regions in the former Soviet Union-why they should be treated as special cases worthy of assistance, and the nature and adequacy of the assistance afforded them. Kapstein argues that donor nations should strive to provide a 'package' of assistance to these regions rather than follow the narrow, enterprise-level approach which has so far hampered the effective resolution of the deep-seated problems these regions face.
These papers, as well as others presented at the workshop, inspired a wealth of discussion and generated a host of unanswered questions which should serve to advance the study, and contribute to the effective execution, of the restructuring process in the defense industries of Russia and Eastern Europe. The most poignant and recurring themes of the discussion sessions can be summarized as follows.
One of the questions which emerged early in the proceedings was the role of the state in the conversion and restructuring process. Should the state merely establish the legal and economic framework necessary to enable firms to adjust, intervene in promoting an active 'conversion policy,' or take a hands-off approach and allow market forces to run their course? Given the special nature of the defense industry-its relative geographic and functional isolation, the monopsonistic demand for military goods, the political sensitivity surrounding its future course-a general consensus existed for some measure of government support, though its precise nature was open to debate.
The diverse audience also saw the need for a broader approach-inviting the contribution of various fields and pushing beyond narrowly focused research and advice. As the nature of change has been so dramatic, so too should the search for effective solutions be constantly evolving and dynamic, rather than employing stock methods and providing stock responses to a situation which is by no means ordinary. However, in inviting the contributions of various fields and integrating the work of researchers, an effort should be made to standardize methodologies-or at the very least, exchange information-to minimize the reliance on inaccurate data. Important work is being done; however, differing terms of reference in case studies (often of the same firms) result in little comparability of data, often diminishing their usefulness.
In a related issue, the value of research, consultancy and technical assistance to the region was often brought into question. Without questioning the good intentions of those undertaking the work, an effort should be made to constantly reassess the rationale for research and technical assistance in order to efficiently employ those resources being devoted in this direction. Along these lines, independent assessment of technical assistance as a means of insuring its efficacy could prove beneficial.
Organized and unorganized crime was a recurrent theme, exemplifying the uncertainty within the Russia economy and driving away cautious investors. However, while the issue has been the focus of much public attention, little has been done in terms of analyzing its impact on the economy.
It was noted, and reflected in several of the presentations, that a broader policy approach is also required. Pessimistic characterizations and questionable results of applied conversion usually stem not from the "failure of conversion” per se, but rather from the shortcomings of an initial definition of conversion which was overly naive and simplistic and which failed to take into account either the scope of the problem or the various sectors of the economy affected by reductions in military expenditures. However, the emergence of research on the multiple factors that impact restructuring and the 'packaging' of assistance to troubled regions (see Kapstein in this volume) are promising signs of a more comprehensive outlook.
In the period since the workshop, the pace of change in the political and economic landscape of Russia and Eastern Europe has shown no signs of slowing, yet the main views expressed still remain valid. The precise role of the state in the restructuring of defense industries, both East and West, remains a focus of debate; the need for an interdisciplinary approach and comparability of data still rings true; criticism from the subjects of research and recipients of technical assistance is further cause for reevaluation of intentions and impact; and the recent occurrence of several high-profile murders in Moscow has only heightened attention on the pervasiveness of crime. The fact that these issues still linger should not detract from efforts towards their eventual resolution, but rather serve to inspire further work. While a few unexpected events-such as the conflict in Chechnya and calls for renationalization of enterprises in the oil and gas, aluminum, and military sectors (Financial Times, 30 December 1994, p. 2)-have fueled doubt and dampened optimism, the reform process edges slowly forward, benefiting from critical evaluation and practical advice.
There are many people to thank in regards to the workshop and these subsequent proceedings. BICC and CISAC would like to thank the German State of North Rhine-Westphalia and the Carnegie Corporation of New York, respectively, whose primary financial support made this collaboration possible. I, personally, would like to extend my appreciation to the support staff at BICC who mustered the energy to assist in the organization of the workshop while simultaneously establishing the Center itself. Lastly, BICC and CISAC extend their appreciation to all those who attended, without whose effective participation all our preparations would have been in vain.
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