This paper explores counter-trade as a practice that articulates the ‘market state’ and its attendant economics. In analysing offset agreements as a specific exemplar of counter-trade, the business facet of the defence industry in Africa, the enveloping realpolitik and the overarching trade regime are considered. Herein are found poignant truths that hold opportunities and ominous portents for Africa.

Market states: Africa and strategic economics

Non-tariff barriers, market access, supply chain security, credit security, ‘new protectionism’, ‘state capitalism’ and development. All these concepts and phenomena communicate what Philip Bobbit expounds as permutations and concerns of the ‘market state’.⁽²⁾ The market state is characterised by the domestic legitimacy of the state resting on its ability to gift opportunity to all its denizens, from individuals and groups to business entities.⁽³⁾ In the first two cases the responsibility accords with the stipulations of the United Nations for a state to secure income and alleviate poverty.⁽⁴⁾ Human security is at issue, set in relief against the inherent insecurity and risk of the free market, which characterises the structure of the international economic system.⁽⁵⁾ The third case points to the beneficial role that the private sector is believed to be able to play in engendering the needed opportunities and poverty alleviating capabilities, especially in terms of development. All states engage in the international economic arena, balancing concerns of both economic sovereignty and the need to increase competitiveness through domestic demands for growth and the welfare of their citizens. At the same time they are confronted with the need to innovate as the permeating demand is for opportunity.⁽⁶⁾ Counter-trade is an example of such innovation that may provide opportunity for Africa, especially within the context of the defence industry.

Counter-trade is the replacement of hard currency in a business deal with goods and services; in lieu of a buyer paying for all the seller’s wares with money, the cost to the buyer is offset by an agreement whereby the seller’s goods are traded for other goods and services.⁽⁷⁾ This allows for flexibility in situations where currency is simply not available. This is particularly relevant where foreign exchange is lacking. Offset deals, an exemplar of counter-trade that is worth US$ 500 billion globally, represent an apposite innovation as they reflect a broadening of the original deal’s ‘opportunity’ component.⁽⁸⁾ This is done by increasing the buyer’s purchasing and bargaining power. To elaborate, the buyer negotiates a position wherein the supplier agrees to invest in the buyer’s economy (directly or indirectly in relation to the original deal), whereby the original commercial exchange is augmented by additional economic benefits.

National economic interests stand opposed to the criticisms that counter-trade and offsets are ‘unfair’ by virtue of their perceived distortion of competition. These national interests are of specific relevance to Africa as they communicate grave concerns of economic security. The objectives of economic security include: supply security, access to finance and credit, market access, techno-industrial capability, achievement of socio-economic paradigm qua policy (achieving the ‘developmental state’), security of a transborder community (Maghreb region, Sahel region, common markets), systemic goals (regional economic formation such as the Southern Africa Development Community and most inclusively, the African Union), alliances (economic partnerships as manifested in the New Partnership for Africa’s Development, for example).⁽⁹⁾

As an illustrative case, technological security can be attained through industrial partnerships and offsets if the transferred skills feed into a country’s manufacturing and research and development veins. This is of particular salience if one follows the rationale of Alain Touraine and Daniel Bell’s theses of a post-industrial society, wherein tertiary level industries (research and development, information technology, services) are seen as the growth engines for global economies.⁽¹⁰⁾ These inputs can add to a country’s international competitiveness, which is one requirement of ensuring economic security in a world in which the international economic structure is characterised by vulnerabilities and risks, minimised by an economy’s competitiveness.⁽¹¹⁾

It has been shown, however, that offset deals increase the ‘retail’ cost of deals in real terms.⁽¹²⁾ It is nevertheless possible that the spinoffs linked to the offsets will outweigh the increased costs. This is in turn dependent on the state’s support regarding the outlay of costs relating to, for example, capability maintenance and continued business. Already one has a scenario in which state agency has an important role to play. Moreover, original equipment manufacturers will not sell technology, even packaged in an offset deal, if it will help the recipient to compete against it. The original manufacturer will ensure that the technology is contained, controlled, managed and even limited. The advantage and benefit, especially in an offset deal, stems from the continued work (employment) that accompanies the acquired capability, and then only if the initial outlay can be effectively leveraged.⁽¹³⁾

Arms: The business of international relations

Counter-trade and offsets are often criticised as façades employed by politicians to justify and legitimise the purchase of arms.⁽¹⁴⁾ Not denying the relevant concerns of the ‘arms control’ regime, politicians on an international level and stripped of the so-called smoke-screens will still require some defence capacity; militaries represent an institution that only they can legitimately fulfil in service of the state, which has a monopoly on the legitimate use of force. The abiding obsession and indeed the rasoin d’état of International Relations as a scholarly pursuit is a preoccupation with war and peace. The reality of conflict and the ideal of peace both have a commercial component in so far as the defence industry and its business exigencies are given structure as an institution through the political and economic contingencies.

To elaborate, Africa as a geo-economic region is growing at a consistent pace due to its resources, growing youth demographic and increased urbanisation.⁽¹⁵⁾ Africa as a geo-strategic region is still plagued by conflict, both political and armed. While foreign investment pours in, banking and telecommunication grows, managers are buoyant and developing and developed countries seek to curry favour to access Africa’s resource cornucopia, much of the conflict remains intra-African.⁽¹⁶⁾ The militaries are the only institutions that possess the capacity in terms of man power, logistics and materiel to quell internal risks and threats while easing vulnerabilities.⁽¹⁷⁾

By focusing on niche markets or specific facets of the defence industry, areas can be targeted where positive externalities such as skills and technology transfers are maximised.⁽¹⁸⁾ The economic rationale behind this is that one gets more economic ‘bang’ for one’s defence-spent-‘buck’: The opportunity cost of military expenditure can be decreased, even if the monetary value cannot. There is an industry aphorism that says a state’s desire to attain defence technology is inversely proportional to its ability to pay for and absorb it, not to mention maintain it.⁽¹⁹⁾ Nonetheless, in the initial contingency a Government must see the state and society as a system, as business sees its internal structure in relation to the outside world.⁽²⁰⁾ In this case counter-trade and offsets can be geared to suit the broader economic, commercial and industrial system, a concept that communicates interdependence and interconnectedness. This is a characteristically business or corporate approach, whereby all impacting factors are analysed considering those that have a vested interest (a ‘stake’) in the entity (a ‘state’).

Concomitantly, offsets can be used as a mechanism to increase cooperative relationships between industries, between Government and industry and between states. A state, however, is not a business and should not necessarily be run as one. This mantra may have truth in it but changes in the state necessitate a change in the rigidity of this belief. Where the state was previously tasked with generating welfare for its citizens, it has been posited that its legitimacy now lies in creating opportunity. Welfare for a greater portion of the populace could be brought about by redistributive methods, whereby state bureaucracies do not function by the imperatives of making profit but only effectively using what is granted to them. To create opportunity requires a more entrepreneurial capacity and innovating orientation.

A booming industry: Economic security and risk in Africa

The standard rationale for investment remains the same for the arms sector: A market’s potential for profit trumps other factors in importance.⁽²¹⁾ With Africa representing a market the demand of which reflects the modern facets of war (small wars, insurgencies, terrorism and peacekeeping operations), basic economic logic dictates that it may also become the definitive modern arms market.⁽²²⁾ Moreover, the defence industry is also reflective of those economic trends that have come to characterise other industries through globalisation: outsourcing.⁽²³⁾

Harbingers of market savvy business in the defence industry are already visible in Mechem’s ‘Casspir’ armoured vehicle, used by the United Nations; Paramount’s ‘Mbombe’ armoured vehicle; Denel’s ‘Badger’ infantry combat vehicle; and the Nigerian armoured personal carrier, ‘Proforce Pf1’.⁽²⁴⁾ In each case a niche market communicating the needs of the demand-unit has been catered to.⁽²⁵⁾ In the aforementioned, contingencies on the ground and the military activities of each country were considered in both the domestic and international sphere. The Casspir, Mbombe and Proforce Pf1 cater to a specific strategic and security environment wherein the emphasis is on humanitarian activities and intervention, peacekeeping, peace enforcing and policing endeavours; manifestations of global trends in military missions. As such, it is when counter-trade agreements can complement or supplement operational requirements and strategic doctrine that true value can be realised, especially when tied to broader security or economic concerns. To paraphrase Dr. J Yong, Africa’s arms industry represents ‘economy of scope’. One elucidation of this is that Africa’s economic security objectives are so broad, including human security, poverty, income security, environmental security and societal security, that it means offset agreements can be so constructed so that they pander to several economic security goals at once.⁽²⁶⁾

South Africa, for example, has an advantage in this respect as the history of its arms industry reflects a penchant for exploiting advanced commercial, retro-fitting and dual-usage technologies.⁽²⁷⁾ The 1994 Government of National Unity and the subsequent dominance of the African National Congress treated the defence industry with the same opprobrium and distaste that was reserved for the regime it served.⁽²⁸⁾ The consequent neglect of an entire industrial sector has been to the determent of the South African military structures and the people who might have found opportunity and welfare in the industry. An industry that constitutes 7% of manufacturing is not to be overlooked by a ‘newly-industrialised’, ‘new-market economy’ or ‘development state’ of the ‘African Renaissance’.⁽²⁹⁾

The political shenanigans that have come to characterise the defence industry through South Africa’s ‘Strategic Defence Procurement Package’ have at their core a problem highlighted by Gregor Mills in his work on poverty in Africa: a paucity of quality leadership in policy, accountability and oversight.⁽³⁰⁾ To point the finger of blame at the foreign companies that were involved communicates a negation of responsibility, whereby the South African parties inadvertently insult themselves by denying their own agency in an attempt to shift the blame. And it is agency that Africa needs to activate its engines of growth. Counter-trade is but one example of this.

Conclusion: Trade, state agency and the need to innovate

Many economic and security analysts harp back to the end of the Cold War as a momentous moment, redefining their respective fields in the subsequent years. The dialogue between these two fields has too often occurred in a disjointed and disparate manner, progressing along independent tangents. The issue of counter-trade and offset deals within the defence trade illustrate a way to bring the economic and strategic facets closer together. This acknowledges that economics increasingly structures the global strategic and security environment, with the consequent emphasis on risks and vulnerabilities, as opposed to monolithic, quantifiable threats. Just as business needs to innovate in the face of the economic sphere relating to trade, so too does the state have to innovate in both the economic and security spheres as policy objectives, citizen demands and business expectations change. Finding the correct balance for the state to exercise its agency in trade, especially when it relates to macroeconomic and security objectives, necessitates an appreciation of these developments. Counter-trade, and in this case offset deals in the defence industry, illustrates this. The opportunities for Africa to benefit exist, yet policy objectives, accountability, transparency and support are paramount.

Written by André Dumon ⁽¹⁾

NOTES:

(1) Contact André Dumon through Consultancy Africa Intelligence's Industry & Business Unit (industry.business@consultancyafrica.com). ).
(2) Bobbit, P., 2002. The shield of Achilles. Penguin Books, London.
(3) Ibid.
(4) Nesadurai, H., 2004. Introduction: Economic security, globalisation and governance. The Pacific Review, 17(4), pp. 459-484.
(5) Beck, U., 2005. The Cosmopolitan State: Redefining power in a global age. International Journal of Politics, Culture and Society, 18(3/4), pp. 143-159; Kahler, M., 2004. Economic security in an era of globalisation: Definition and provision. The Pacific Review, 17(4), pp 485-502.
(6) Ibid.
(7) Bannock, G., 2003. Dictionary of economics. Penguin Group, London; Nieman, G. and Bennet, A., 2004. Business Management: A value chain approach. Van Schaik Publishers, South Africa.
(8) Shalal-Esa, A., ‘Defence Firms Rack up $500 billion in incentive deals’, Reuters, 9 July 2012, http://www.reuters.com.
(9) Dent, T., 2010. “Economic Security”, in Collins, A (ed.). Contemporary Security Studies. Oxford University Press, New York.
(10) Blairon, J. and Renouprez, C., Entretien avec Alain Tourine, Intermag, http://www.intermag.be; Hamel, J., 1997. Sociology, common sense, and qualitative methodology: The position of Pierre Bourdieu and Alain Touraine. Canadian Journal of Sociology, 22, pp. 95–112; Kaufman, M., ‘Daniel Bell, Ardent Appraiser of Politics, Economics and Culture, Dies at 91’, New York Times, 25 January 2011, http://www.nytimes.com; ‘Ahead of the Curve’, The Economist, 3 February 2011, http://www.economist.com.
(11) ‘Defence Industry day to Strengthen Relations’, Bua News, 17 March 2011, http://www.buanews.gov.za; Mastanduno, M., 1998. Economics and security in statecraft and scholarship. International Organisation, 52(4), pp 825-854; Yong, J. 2007. Economic security: Redressing imbalance. China Security, 3(2) pp. 66-85.
(12) Brauer, J. and Dunne, J., 2005. Arms trade offsets and development. Africanus, 30(1), pp. 14-24.
(13) Interview conducted by the author with an anonymous defence industry businessman, 14 August 2012.
(14) Brauer, J. and Dunne, J., 2005. Arms trade offsets and development. Africanus, 30(1), pp. 14-24; Interview conducted by the author with an anonymous defence industry businessman, 14 August 2012.
(15) Leke, A., et al., ‘What’s Driving Africa’s Growth?’, McKinsey Quarterly, June 2010, http://www.mckinseyquarterly.com.
(16) Engelbrecht, L., ‘Africa: the last great untapped defence market’, Defence Web, 30 March 2009, http://www.defenceweb.co.za.
(17) ‘SA Defence Industry carries 15 000 jobs’, Defence Web, 19 July 2012, http://www.defenceweb.co.za.
(18) Brauer, J. and Dunne, J., 2005. Arms trade offsets and development. Africanus, 30(1), pp. 14-24.
(19) Interview conducted by author with an anonymous defence industry businessman, 14 August 2012.
(20) Ronis, S., ‘Economic Security is National Security’, Paper presented at the National Defence University Symposium on National Security, October 1997, http://www.emotionreports.com.
(21) Yong, J., 2007. Economic security: Redressing imbalance. China Security, 3(2), pp. 66-85.
(22) ‘The Regulation of New Warfare’, Brooking Institute, February 2010, http://www.brookings.edu; ‘Ghana navy receives ex-German fast attack craft’, Defence Web, 9 July 2012, http://www.defenceweb.co.za; Gumedze, S., ‘Addressing mercenaries and PMSCs in the South African Defence Review’, Institute for Security Studies, 11 May 2012, http://www.issafrica.org.
(23) Engelbrecht, L., ‘Africa: the last great untapped defence market’, Defence Web , 30 March 2009, http://www.defenceweb.co.za.
(24) Gerardy, J., ‘Reboot for SA’s defence industry’, Mail & Guardian, 27 September 2010, http://mg.co.za.
(35) ‘Denel Focusing on Africa and other Emerging Markets’, Defence Web, 27 July 2012, http://www.defenceweb.co.za.
(26) ‘SA Defence Industry carries 15 000 jobs’, Defence Web, 19 July 2012, http://www.defenceweb.co.za; Nesadurai, H., 2004. Introduction: Economic security, globalisation and governance. The Pacific Review, 17(4), pp 459-484.
(27) ‘Denel posts modest R41 million profit’, Defence Web, 19 July 2012, http://www.defenceweb.co.za; Interview conducted by author with an anonymous defence industry businessman, 14 August 2012.
(28) ‘South African Defence Industry’, Global Security.org, http://www.globalsecurity.org.
(29) Gerardy, J., ‘Reboot for SA’s defence industry’, Mail & Guardian, 27 September 2010, http://mg.co.za.
(30) Crawford-Browne, T., ‘The War Business is out of Control’, SABC News, 18 April 2012, http://www.sabc.co.za; Sole, S., ‘The arms deal’s big deceit: the great submarine rip-off’, Mail & Guardian, 28 October 2011, http://mg.co.za; Shalal-Esa, A., ‘Defence Firms Rack up $500 billion in incentive deals’, Reuters, 9 July 2012, http://www.reuters.com. ; Seegers, A. and Sylvester, J., 2007. South Africa’s strategic arms package. University of Cape Town, South Africa.