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Prime Minister Mark Carney announces on Monday that Canada has picked Germany’s TKMS to build 12 submarines for its navy.Ingrid Bulmer/Reuters
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
“This historic investment in the Canadian Armed Forces will bring strong economic benefits and jobs across the country,” said the Defence Minister when the federal government announced its preferred bidder for the navy’s submarine program this week. We’ll be hearing a lot more of this as Canada’s ambitious defence procurement program ramps up – that it will not only make us safer, but richer. But is that true? Does defence spending juice economic growth?
The answer to that question varies from yes, to no, to it’s the wrong question. No, if you are looking for the best way to jolt an economy to life with stimulus spending, defence spending isn’t the way to do it. Its multiplier effect – the number of times the same dollar is spent as it passes from hand to hand in the economy – is too limited. Once built, a weapon adds no more value and can only be degraded. You’d get more, and more rapid, bang for the buck by putting the money to work in health and education.
But if instead your aim is to build new industries that move the country closer to the technological frontier, spending on weapons can play a vital role. It’s been like that throughout history, with war a catalyst that spurs the search for new technologies. Just recently, for instance, Russia’s invasion has forced Ukrainian entrepreneurs to improvise practical solutions. As a result, the country is now so good at building combat drones, its engineers travel the globe advising other militaries.
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If defence procurement is to operate as a sort of industrial policy, though, it works best when used to support research and development. Some studies estimate that if done this way, especially if the private sector is drawn in by the possibilities of exploiting dual-use technologies (those which have both military and civilian uses), each percentage point of GDP of added defence spending can raise long-term productivity growth in the economy by 0.25 per cent. Its positive economic effect can then be further amplified by employing it counter-cyclically, with spending geared toward domestic supply chains rather than foreign subcontractors.
Given that Canada is just skirting recession, this does seem a good time for the government to launch a defence-building campaign. To serve as an industrial strategy, though, it would also require its procurement to replace a competitive bid process with a targeted one that favours strategic industries. Equally, the country will need to build partnerships with other countries, given that the domestic market is too small to support a full defence industry. What Canada probably wants to avoid is a branch-plant economy in which foreign firms create jobs for a few years, then pack up and go home.
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Carney holds a model TKMS (ThyssenKrupp Marine Systems) submarine as he poses with Norway’s Prime Minister Jonas Gahr Store, right, and German Chancellor Friedrich Merz, centre, on the sidelines of the NATO Summit in Ankara on Tuesday.MICHAEL KAPPELER/AFP/Getty Images
Unless, of course, that’s how the country will obtain the weapon systems it most needs to meet its strategic goals. That possible scenario suggests we may be asking the wrong question when we assess a defence procurement strategy based on its economic impact. Presumably, the purpose of Canada’s military modernization is to enhance the country’s security, augment its sovereignty – which is to say, reduce its dependence on the U.S. military umbrella – and bolster the alliances on which a medium-sized, trade-dependent country will always rely. Developing the capacity to build weapons internally, that doesn’t leave one at the mercy of another country, is itself a strategic goal. But in that case, the focus really needs to be on those strategic goals.
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Moreover, a native defence industry can be a twin-edged sword. Countries with significant defence sectors, such as the U.S., France and Germany, may enjoy strategic autonomy, but at a cost to their freedom of manoeuvre. Because they make such highly-specialized products, often at large scale, major companies can often be a sole supplier. In extreme cases they can capture the procurement process, driving up prices – a recurrent complaint in the Pentagon.
With their heavy investment in “legacy” technology and a political constituency that wants to preserve it, defence companies, typically with politicians’ support, often prod governments to stick with weapon systems whose purpose is no longer obvious. It hasn’t escaped notice in Germany that the country’s hugely ambitious defence program has been thin on innovation, heavy on tanks: Germany is a large tank maker, but why the army needs so many of them in the age of asymmetric drone warfare isn’t clear. In extreme cases, a company which the government can’t afford to lose, and whose continued existence requires steady orders, can practically dictate policy. As happened in the recent end to a proposed partnership with Airbus, Dassault has been accused of deciding what kind of aircraft France gets, and some fear that Palantir has similarly captured the British defence ministry.
So, while Canada’s military modernization is a long-overdue development, the government should tread warily. And perhaps the last question we should be asking is “Will it create jobs?”