Considering Defence Procurement as Industrial Policy

Last week, I testified before the Standing Committee on National Defence on a variety of issues related to North American security. One of the points I stressed is that making decisions about defence programs based on industrial benefits is problematic, especially at a time where defence spending is flat or even being cut. The Chair of the committee asked me to provide a short memo outlining the benefits and the costs of such a focus, as he clearly favours such an approach. Below, you will find my response to this request.

Pros:

• A small number of jobs will be created, some somewhat permanent and some temporary.


• Developing equipment tailored for the needs of Canadian forces is better than Canadian-izing foreign equipment.


• Some self-sufficiency in defence manufacturing.


• Less dependency on allies and others for urgent repairs/upgrades.


• Canada temporarily re-energizes dormant ship-building industry.
  
  
  
  • After this wave of ships is built, Canada will not need new ones for another 20-40 years, so the shipyards will again become dormant unless they can somehow become more efficient than shipyards elsewhere—which is unlikely. Unless Canadian shipping companies are heavily subsidized, they are unlikely to buy Canadian-built ships, which means more tax money spent on relatively few jobs.
  
  
  
  


• Greater public support for defence spending.

Cons:

• Due to limited Canadian capacity, delays in ship-production will be inevitable.


• Canada spends more money for less military capability. The markup on buying domestically is far greater than 10 percent. So, Canada gets less bang for the buck, which is not a good deal for taxpayers.
  
  
  
  • With the potential exception of F-35 technology, there are few economies of scale.
  
  
  • In times when the defence budget is increasing, this extra cost could be affordable. But now?
  
  
  
  


• There are far better investments Canada can make in the economy that have greater multipliers for jobs, taxes, and industry than defence spending. There is plenty of scholarship demonstrating that military spending, while having some positive spinoffs, does not produce as much of a multiplying effect as other investments, such as education.
  
  
  
  • Some companies may be incentivized to get into businesses for which they are poorly suited and then find themselves out of luck when partnerships do not materialize.
  
  
  • Many of the specialized skills for defence contracts do not translate to civilian projects, limiting the afore-mentioned multiplier/spinoff effects.
  
  
  
  


• Using defence procurement as a jobs program is bad for Canadian politics. It will distort spending as defence contractors will develop programs with an eye on which ridings matter most to each party. This might be good for winning some votes, but it then means that procurement decisions become even more politicized. Parties will compete for votes by choosing their favoured programs. This will move defence procurement decisions further away from what is best for Canada and towards what is best for particular parties.
  
  
  
  • One of the advantages Canada has over the United States is that party loyalty means that parties are not as compelled to direct government spending to particular districts, which tends to produce inefficiencies (pork). Seeing defence spending as pork is bad for good governance and bad for the military. They end up getting weapons they do not want or need—and then don’t get the weapons they do need.
  
  
  
  

The aerospace industry argument is somewhat different since Canada actually has some success and capability there. Given the nature of the competition between the various contenders, each one promising industrial benefits, Canada will receive investment from international competitors, so the focus really should be on what plane is best for the Canadian Air Force.

Ultimately, Canada is going in the direction of the plan outlined by the Harper government. I don’t like it because I think the focus of defence spending should be on getting the maximum defence bang for the buck rather than focusing upon where the material is sourced. With that said, I understand the politics of it. So, if Canada does make decisions based on “industrial benefits,” I simply recommend understanding that this means Canada gets less and prepare for it by cutting personnel, bases, and whatever else that is premised on a larger military. Of course, these cuts may hurt the Canadian economy (and voters) more than industrial benefits help.