Building a Jihdi Economy in Emirate - IV

Building a Jihadi Economy in the IEA Part IV Economic Plan for sustaining a Jihadi Economy Defining the Defense-Industrial Complex A wide range of production activities are involved in production for the jihadi economy. Defense products are not substitutes for each other. The aerospace industry for example produces fighter aircrafts, military transport, surveillance, satellites, guided missiles and helicopters, each of which has specific military uses. Military equipment can be divided into three major categories: 1) weapon systems 2) auxiliary equipment (e.g. command and control system, intelligence and security systems) 3) general purpose products (fuel, medical equipment). The jihadi economy is technologically integrated. Military equipment production has different levels of technological competency. At the top are integrated systems (fighter aircraft, tanks) below them are security systems and sub-assemblies (warheads) and at the bottom components and materials (integrated circuits, semiconductors). Transferability of technological knowhow and knowledge vary within these different segments of military equipment production systems and between the military equipment. Integration of production sector and non-military segment of the jihadi economy is (consumer electronics, petrochemicals, ITC and even agriculture and civilian services) is feasible and can be promoted by appropriate policy measures. The arms producing segment includes large and small public and private segments. Companies in these sectors include those which produce only arms and those which produce armaments and goods for use in the non-arm producing segments of the jihadi economy. Some companies in the arm sector concentrate exclusively on R&D, others on production or the supply of maintenance and logistic support. Companies often combine R&D, production and logistic support activities. The inter-industry supply chain includes prime contractors, sub-contractors and suppliers of components and materials. Prime contractors for one weapon system are often sub-contractors and input suppliers for others. As noted earlier (Part I) a jihadi economy is one where a deliberate attempt is made to integrate all economic activity with armaments production. Thus the “defense industrial complex” consists of all existing and potential supply of goods and services to the armed power. This “supply chain” is extended through policy measures but the relationship between the armaments economy and other non-arms producing sectors of the jihadi economy is complex. It is likely to be highest with respect to the technology intensive capital goods producing sector (manufacturing, ITC related production and services, transport equipment) and lowest with consumables. The armament sector is the core of a jihadi economy. Integration of different segments of the jihadi economy with the armament sector may be measured by the share of their output sold to the armament sector. The dependence of the armament sector on other sectors may be measured by the share of such sectors in the total purchase of the armaments sector over a time period.

State policy must recognize investment in the armaments sector as a wealth producing activity – not as a waste and not merely as a response to perceived national security threats. The wealth enhancing impact of armaments investment is enhanced by policy success achieved in integrating the armament sector with the rest of the jihadi economy. Armaments production may stimulate industrialization and be a source of manpower training and technological innovation throughout the economy. It can also serve as a means for lowering dependence on foreign markets and for dealing with economic downturns and cycles of unemployment and stagnation. Policy Perspectives Governments have a crucial role in the development of the arms industry. The need for state involvement is enhanced when a country – such as the Islamic Emirate – faces a possible global intervention government support can be both direct and indirect through state investment or the provision of fiscal incentives and trade protection measures. Attempts may also be made to manage ownership concentration within the arms production sector and the regulation of pricing mechanisms. Government must also articulate a proactive procurement policy determining the level of import to domestic production of armament and other similarly supplies. Allocating manpower between the armaments sector and other sectors of the jihadi economy and promoting employment linkages between them can also be seen a government responsibility. Policies can also stimulate technological upgrade in weapon producing system. Government should play a role in stimulation of the R&D effort and developing technological competition and in negotiating technology transfer agreements with foreign suppliers of military equipment and knowhow. Structuring joint military projects with friendly anti-imperialist partners (Iran and North Korea) can also play such a role. The experience of the USSR during 1921-1987 illustrates well how a planning framework can be used to facilitate the integration of the armament sector with the rest of the economy. The key to such integration – as the Soviet experience has shown – is the development of “dual technologies” – i.e. technologies appropriate both for the production of military and civilian sector equipment (tanks and tractors, surveillance and other telecommunication equipment). Some military equipment must be imported. It is necessary to diversify input sources so as to avoid dependence on major imperialist partners (Europe, the US and China). Development of maintenance and repair capacities of imported weapons and of weapons captured from the American army during 2002-2021 can be an important first step in acquiring weapon systems manufacturing knowhow and in subsequent import substitution efforts. Policy must also aim at advancing from national manufacturing of parts and accessories to the manufacture of locally designed manufacture of weapon systems. Armament import policy must focus on maximizing technology transfer from source countries. For technology transfer to be accelerated R&D investment in the armaments sector must increase. Many third world countries (Iran, India, Pakistan, Brazil and South Korea) have developed indigenous armament industries and armed import dependence on imperialist powers is no longer necessary. During the Iran-Iraq war of the 1980s, the Islamic Republic relied extensively on imports from third world sources.

There are special requirements to meet the pernicious insurgency threat in the Islamic Emirate. It requires military equipment light enough to be transportable to remote areas. Small unit commanders need to be provided with advanced control systems. Logistic support of these units is essention as is the provision of precision targeting. Information systems (satellites, airborne surveillance systems and drones) with remote sensors capabilities. There is a need to establish full military control over thousand of kilometers reducing the cost of surveillance requires the adoption of appropriation process technologies in the armament segment. As already noted linkages between the armament and civilian industries should be promoted and “dual technologies” incorporated where possible. Thus the armament sector is to be considered a part of the mixed economy with production, expenditure and investment linkages between public and private partnerships. While it may be necessary to establish an armament producing state firm (as firms), it should have linkages with private sector firms and the private firms may be encouraged to manufacture arms and their components and military services. Micro and Macro Economic Policies Minimizing costs in the armaments industry should be a major policy concern. Costs include not only the costs of production and development (R&D) but also operational and maintenance costs and these latter are associated with production and development design. Government subsidization of military sector production should not encourage inefficient use of resources by companies (both public and private) but subsidization should attempt to take account of the overall growth enhancing impact of the production activity of an armament company. The strong relationship between buyers (the government) and sellers (companies) of armament products leads to oligopolistic ally determined price structures. The government is the sole monopolistic buyer of major defense products (except small arms) and the number of sellers of them is usually limited. Sales are determined on the basis of bargained long term contract. Since the security requirements – especially insurgency and border threats – can change unexpectedly the armaments market is subject to a high level of insecurity and risks. However this riskiness can be reduced through microeconomic integration of the armaments market. Government offers for armaments procurement are usually based on cost estimation of supplier companies (subject to margins of error) which may differ significantly from cost estimates of suppliers them self. Government must make monitor producers effort at minimizing costs/enhancing productivity. Capitalist theorists assume that producers are necessarily profit maximizers. This is not a realistic or acceptable assumption for an Islamic economy. As company and government managers reject capitalist norms and practice the virtues of esar, azm and tawakkul, cost structures may increasingly reflect just prices with ethically determined supplier margins. Policy must therefore focus on promoting esar, azm and tawkkul among both government and company management to facilitate the emergence of just prices in the armaments market.

Fixed price and cost re-imbursement contracts are common in the armaments market. Different techniques have been applied in capitalist economies to share risks between buyers and sellers in the armaments market. Contracts specify target uses, profit ratio and supervision arrangements and regulatory practices. In an Islamic economy ethical and spiritual formation should be the most important features of the regulatory regime. Asset concentration is relatively high in the armaments sector. In the post-Cold War period (especially since 1995 up to 2020) a merger wave has swept through the global arms industry. However it is not necessary to maintain all resources and expertise in a large company and there is room for small and medium sized companies in the arms market developing weapon systems and components. Attempts should be made to avoid underutilization of capacity in the armaments sector. Technological upgrade has been an important cause of increased concentration in this sector. The arms industry has witnessed a strong tendency towards vertical integration. The defense supply chain is complex relying on prime contractors, many sub-contractors and suppliers of components. Government investment is concentrated in prime suppliers, setting up large public arms producing companies but private investors may dominate sub-contractor and component supplier groups. Manpower policy has been discussed in Part III of the paper but it may be noted that the armament sector has a high demand for technologically skilled labor and invests heavily in training. A significant proportion of arms sector manpower consists of scientists, engineers and technicians and their jobs on relatively secure. Investment requirements of the arms economy are high – both for physical equipment and for intangible assets (R&D). The armed sector budget is the main source of financing of both fixed and intangible assets. Working capital is also often provided as part of long term contracts by government. In capitalist countries defense production are heavily relevant on the capital market. In an Islamic economy arms financing may be provided by non-interest borrowing and non-tradable sukuk related to the profit margins of the arms producers or to the average rate of growth of the economy. The arms economy has a culture of innovation – advancing technology incorporation itself becomes a stimulus for the development of new weapon systems. Technological innovation come not incrementally but in great leaps. Technological gaps within new and old weapon systems are significant and the development process is long. Policy priorities applied research over basic research in the armament sector but neglecting basic research may slow down innovation. Moreover, the incremental approach was effective and decisive in developing missiles technology which have central rule in present day weapon systems. Efficient and continued technological innovation requires its location in small research units operating in a decentralized manner relatively isolated from the other activities of the arms producing company. Such units should enjoy closed contracts with outside research and research departments of the government and university. They build prototypes to demonstrate project feasibility. They may suggest development of alternatives at the subsystem level. They can suggest methods for reducing costs.

As far as macro policy is concerned the Islamic Emirate of Afghanistan must aim at gradually increasing the share of domestic production in total arms procurements over the medium run. This does not mean reducing arms imports from carefully selected sources. Balancing domestic procurements and imports may be a major concern of flexible military planning. The military plan must be a central component of the national economic plan of the Islamic Emirate. The development of a strong defense-industrial base is a pre-requisite for safeguarding the Islamic regime and arms import policy must contribute to the strengthening of national jihadi resilience. Imports must complement the national armaments industry. They must suit local circumstances and the national military doctrine. Imports must not be a means for exposing the national military sectors to imperialist surveillance and sabotage or reducing the element of surprise in battlefield initiatives. Producing arms nationally is necessary for stimulating innovation and developing unique solution to national security issues. National planners must address the following questions: What size of the armament-industrial complex is feasible given the existing capacity and foreseeable potential of the national economy? What capabilities should be developed and how to strengthen the integration of the armaments sector with all other economic sectors? What weapon systems should be urgently developed and capacities for the development of which weapon systems should be planned for over the medium run (five years)? What organizational forms are appropriate for integrating the armament sector with other economic sectors? What weapon systems and military knowhow must be imported and from which sources/countries and at what prices? What initiatives are necessary to promote the spirit jihad (the virtues of esar, azm and tawakul) at the mass level so that every citizen regards himself as a mujahid? The share of domestic production in total armament production must be planned to increase over the medium run. A deliberate policy effort is required to enhance the wealth creating impact of the armaments industry. Spillover effects of employment and technological upgrade from the armaments to other sectors and vice versa should be planned and R&D expenditure on other sectors should be encouraged. Manpower mobility from the armaments sector to other economic sectors and services should be promoted. Dual use of technological development should in realized. While the military sector is the core of a jihadi economy it depends on the civilian economic base. The higher the literacy level in a society the greater the scope for expanding military production and for integrating such production with that of the other economic sectors. Industrial strategy is as important determinant for the scope and development of the military sector. There is a strong relationship between adopting an import substitution industrialization strategy and growth of defense expenditure. Growth in military production should generate the possibilities for the establishment of new industries that otherwise would not have emerged. Backward linkage effects of military producers are high and stimulate civilian industrialization. The growth of armaments production can also be used as a means for reducing brain drain – the outflow of scientists and engineers in particular – from the Emirate Islamia.

It is important to recognize that developing a jihadi economy – an economy in which the military sector is the core of the economic system represents a deliberate social choice to decelerate the rate of growth of per capita consumption. Military investment and some of military induced civil investment grows at the expense of consumer goods production. A jihadi economy is not a welfare economy and maximizing the rate of growth of per capita consumption is not its policy objective. However, basic needs – food, clothing, housing, education and medicine – must be met and will grow with the growth of population and its gainful employment but the motivation at the mass level must not be increase in consumption but the achievement of falah in akhira through the promotion of the virtues of sabr, infaq and shukr at the mass level. Replacing the “economic man” by the Momin as the economic base of society is a fundamental challenge which the Islamic government faces today. The national plan must specify an acceptable rate of growth of consumption (and of the associated pattern of income distribution) compatible with the maximization of the jihadi effort over the short and medium run. A key function of the nationwide dawah effort must be to render this planned prioritized widely socially acceptable. Another limitation of the policy to develop the jihadi economy as its core sector is that it rules out the possibility of adopting an export oriented industrialization strategy. Some imperialists client countries – Israel, Taiwan, South Korea – have used export oriented strategies to promote defense sector production. But in existing circumstances arms export possibilities for the Islamic Emirate are likely to be limited and concentrated in a few countries (Iran, North Korea, Russia, Venezuela and perhaps Brazil and Mexico). Short and medium term import requirements are likely to be significantly higher than export earnings and exchange allocation will be required for financing military import expenditure over both the short and medium run. Since the Islamic government is the sole purchaser of military output (except for small arms) its procurement policy needs to be carefully designed. This procurement policy must balance military production of weapon system against their cost efficiency risk sharing with supplier companies and distribution of company profits financed by public taxes and borrowing. Appropriate regulatory systems need to be developed. Regulatory regimes have varying costs. regulation may influence the number of entrants in the military industrial complex and their associated supply chain. Production and development may be located in one or several companies. Dual sourcing may be regulated. Incentives for keeping costs low may be introduced. Fixed price contracts may be developed and payment streams associated with development activities. Detailed specification of output may or may not be left to the direction of the prime contractors. Measure can be instituted to reduce capacity underutilization.

The Islamic government may assist in the transfer of technologies from the military to civilian sectors both directly and indirectly. Such transfers must not be at the expense of military capability – i.e. they must not impair the military infrastructure. Such transfer must be factor productivity enhancing at the macroeconomic level. Conversion of military technologies and expertise to civilian users has proved most effective in disaster management, mass transportation systems, development of alternative energy and information technology systems. A productive conversion policy can be a means for affectively embedding the military sector within the national economy. All in all, social and economic policy has an important role to play in the functioning of a jihadi economy. Foreign Trade The armaments industry of the Islamic Emirate must interact with the global economy without surrendered to it. This is so for two reasons. First, we cannot yet for a long time produce the extensive range of weapon systems we need. Secondly, because exporting arms and military related services can be a means for earning much needed foreign exchange. At present we can export surplus stocks of weapons captured from the American army during 2002-2021 and a quantity of relatively simple arms and ammunition locally manufactured. Our considerable experience in guerilla warfare makes it possible to export military services to resistance movements in Palestine, Algeria, Kashmir, Colombia, Sahili Africa etc. as Cuba has done for several decades. Sales can also be targeted to some countries in Africa, the Arab world and Latin America by establishing long term relationships with particular companies in these countries. Estimating export demand for currently produced weapon systems should be a feature of the Armed Armaments Production Plan. This Plan should also envisage an upgrade in the weapon exports portfolio as armament sector production expands over the medium run (five years). Military sales to specific countries should also be used to open up these markets to exports of other products of the Afghan economy. While technological upgrade of the armament export portfolio is desirable this should be balanced with the need to produce exportable weapons in relatively large quantities so that economies of scale can be realized. We should be willing to support efforts by third world countries to establish their own defense industrial complexes. We should attempt to enable friendly countries (Iran, Turkey, Indonesia and Qatar) to move up the value chains in arms production. As these countries move up the value chain – as they produce more technologically advanced weapon systems – space is opened up for the import of simpler weapons. The Islamic Emirate should stand relatively to supply such needs. Defense imports can serve as a lever for the growth of armaments sector exports through the establishment of contractual relationships and joint ventures with arms producing companies in friendly countries. Joint venturing is an effective means for both technology transfer and enhancing marketability of the export portfolio.

It has been shown empirically that defense exports normally yield a higher rate of return than other exports and also stimulate the production of civilian production growth by arms producing companies. Thus the system integrative effects of arms exports are likely to be high. It may also serve as a means to enable companies to enjoy economies of scale and reduce unit costs. Arms exports may also have a stabilizing macroeconomic effect preventing shutdowns and manpower turnover. The fiscal impact of armament exports is also positive given their superior profitability they improve producing companies cash flow and reduce their reliance on national budgeting allocations. Despite these positives we should not adopt an export oriented nationwide strategy. Imperialism dominates the global armaments market and there is a very close “hand in glove” relationship between imperialist governments (USA, France, China) and armaments multinationals. We should therefore be very careful in selecting trade and investment partners (both companies and countries) in this area and should consciously avoid contracts and institutional arrangements which subordinate our armaments procurement systems to global market trends. Arms production should respond primarily to national needs not foreign demand and political independence should not be compromised for the sake of technological upgrade or economic efficiency. The export segment of the armament industry must not be developed as an enclave with its own institutional infrastructure. It should be systemically subordinated to domestic production and use. The armaments production plan should also specify import requirements for weapon systems both on a short (one year) and a medium (five years) term basis. In the immediate future facing sanctions and embargoes we must rely exclusively on countries excluded from the global market to varying degrees (Iran, Cuba, North Korea, Venezuela, Russia) and on secondary sources in East and South Europe, arm traders and middle men especially those with whom we developed transactional relationships during 2002-2021. We have to organize regular supply link with particular reference to our need for air defense equipment. Attempts should be made to develop multi-year procurement programs with companies in countries such as Iran, North Korea and Venezuela and perhaps Mexico and organize joint venturing with companies in their countries. This can be an effective means for securing arms imports on a long term basis. DAIMG suggests that in existing circumstances developing military resilience of the Emirate Islamia requires that serious consideration be given to developing a long-term military co-operation agreement with Iran. Iran has successfully faced imperialist aggression for more than four decades and has developed a strong military system despite international sanctions, boycotts and sabotage. We can gain a lot from cooperation with Iran in the field of air defense, the development of surveillance system and information technology and in the organization of a people’s militia. We currently face an imperialist threat therefore it will be advisable to initiate negotiation for the establishment of a long term military cooperation agreement between the Islamic Emirate and Iran.

Working Group on Afghan Economy