Foreign policy: The old guns and butter routine

Jan 26, 2012
Originally published on January 26, 2012 9:01 am

Christian Caryl, a senior fellow at the Legatum Institute and a contributing editor of Foreign Policy, is the editor of Democracy Lab.

On the face of things, OYAK Inc. offers a shining example of the qualities that have made Turkey such a big economic success story over the past few years. OYAK is the country's leading car manufacturer (having beaten out Ford's local subsidiary for the top position). It makes tires, cement, iron, and steel. It owns one of Turkey's biggest insurance companies, and its brokerage is a major player in the financial markets. It owns a chain of grocery stores, and also makes some of the things that are sold in them, from biscuits to tomato paste. Its 29,000 employees toil away in 50 different companies.

It turns out, though, that OYAK enjoys a crucial edge over its competitors in the various markets where it's a player. That is because it happens to be the pension fund of the Turkish armed forces. Though its CEO is a civilian, virtually all the members of its board are current or former generals (including the current defense minister). Though the company is beholden to its private shareholders, it enjoys many of the perqs of a public entity. All 200,000 officers in the armed forces are obligated to pay 10 percent of their salaries to the fund. Firat Demir, a Turkish economist at the University of Oklahoma, points out that some members of its board sit on the powerful National Defense Commission, a post that potentially gives them advance knowledge of government decisions on economic policy. (When Turkey devalued its currency in 1994 and 2001, says Demir, many businesses were devastated. But OYAK sailed through with nary a scratch — a triumph one of its managers attributed to "gut feeling.") Nor does the company pay corporate income tax. Yet its budget is subject to minimal outside oversight.

There's no question that the armed forces, once an all — powerful force in Turkish society, have seen their role gradually erode over the years as democratic institutions have gradually taken root in the country. But Demir argues that the military has managed to preserve considerable political power precisely by retaining a variety of economic prerogatives. OYAK is just the tip of the iceberg. There are other military — controlled charitable funds and companies that enjoy monopoly powers in various business sectors. Meanwhile, the civilian government, led by the Islamist Justice and Development Party, still shields the official defense budget from anything more than superficial scrutiny. "The political side might be restricted," says Demir, "but the economic power is what stays."

Even so, Turkey is much better off in this respect than many other countries around the world. Many societies trying to make the shift away from authoritarianism often find that it's precisely their militaries that stand in the way of crucial economic reforms. That usually turns out to be the case because senior officers control private assets that give them a direct stake in the outcome. From Egypt to Burma, countries struggling to open up their economies are discovering that they have to get past the generals first.

There are powerful historical reasons for this. In many developing nations, the army often turns out to be the most effective state institution. Just take Pakistan, where the army has tended to lord it over the shaky central government since the country was founded in 1947. By some estimates the Pakistani army today controls 10 percent of the civilian economy, including businesses ranging from granaries to cement factories. In China, the People's Liberation Army, direct descendant of a guerilla force that once had to produce its own food and clothing in the field, today owns companies producing everything from bicycles to satellites. "In Central America, for example, particularly Honduras and El Salvador, the military or its pension fund owns banks, insurance companies, telephone companies, shrimp businesses, hotels, and palm oil farms," U.S. scholars Frank Mora and Quintan Wiktorowicz wrote in a 2003 paper. They also pointed out that Nigerian military officers still retain key positions in the economy there, especially in the all — important energy sector.

Buying the army off also tends to be a good insurance policy for would — be dictators. This was already well understood by Roman emperors, who gradually institutionalized bribes to the military in the form of donativa, cash payments aimed at ensuring loyalty. It's a principle maintained today by many modern rulers in the Middle East — Hosni Mubarak being one of the most notable examples. The Egyptian army has translated those prerogatives into a vast business empire that encompasses pasta, butane gas cylinders, real estate, livestock farming, and gas stations. (In 2008, when food prices were soaring, the army boosted its popularity by dispensing free bread from its own bakeries.) Mubarak was happy to let the military make all the money it wanted as long as it didn't pose any challenge to his continued rule. (That this tradeoff entrenched inefficiency and barred many Egyptians from economic opportunity was the least of his worries.)

It should hardly come as a surprise, then, that the military's business dealings are already becoming the key issue in the next stage of Egypt's revolution. The Muslim Brotherhood, set to dominate the newly elected parliament, has already signaled that it's ready to make oversight of the defense budget (implicitly including the army's commercial undertakings) one of its priorities. If the Brotherhood makes good on its threat, it will be justified in claiming that it has taken a major step toward circumscribing the army's power.

But that is much easier said than done. The problem in countries where the military has big private business interests is precisely that the generals understand that they won't be able to compete if the playing field is leveled out. Nowhere, perhaps, is this more of an issue than in impoverished Burma, where large swathes of the economy are under the control of current or former senior officers(the country's former leader, Than Shwe, is shown in the photo above). Sean Turnell, an expert on the Burmese economy at Macquarie University in Sydney, says that there already indications that what he calls "military commercial interests" are "acting in ways to impede reform" — for example, by retaining their control of licenses for the lucrative export of resources such as natural gas, timber, and gemstones. The only way to break their stranglehold, he says, is through a broad liberalization of the economy that introduces transparency and genuine competition.

That just might work — but only if the generals can be persuaded that they'll benefit in other ways as the country's economy opens up to the outside world. In reality, squaring this circle will undoubtedly translate into many a messy compromise. Experts say that the countries facing this dilemma should prepare for a long, hard slog.

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