Comparing post-cold war military conversion in the United States and Russia

Abstract

According to the conventional wisdom, military conversion in Russia would be more difficult than in the United States because Russia does not have the developed market infrastructure and institutions that help western defense firms redeploy resources for civilian production. A closer look raises doubts about these arguments. Western defense firms have had difficulties with conversion because they cannot compete with the existing relatively efficient civilian firms. Meanwhile, the principal competitors of the Russian defense firms, the large Russian civilian enterprises, are closer in nature to defense enterprises than to efficient market firms. While this does not bode well for the Russian economy in general, the defense enterprises should not find themselves at a significant disadvantage in the civilian markets. Two effects can be distinguished. On the one hand, due to the more developed market infrastructure, the U.S. economy is presumably good at redeploying defense-related resources across firm boundaries. On the other hand, the large and efficient civilian sector in the United States makes the marginal "civilian" value of the redeployed resources low. It is the interaction of these factors, rather than the degree of development of market infrastructure alone, that determines the relative difficulty of military conversion. Additionally, empirical evidence based on regional data indicates that despite enormous defense expenditure cuts, the economic performance of Russia's regions is only relatively weakly correlated with the regions' dependency on defense industry. ©Western Economic Association International.