Impact of the Gripen Offset Agreement on the Hungarian Economy

By Zsolt Lazar

The biggest and most controversial offset programme in Hungary was the one connected with the acquisition of the Swedish Gripen jetfighters. The primary topic of the research is the influence of the Hungarian Gripen offset agreement on the domestic economy and its potential in terms of economic development, technology transfer and other benefits during the programme period. Moreover the research evaluates the implementation of the offset programme through various economic measures, contrasting it with other successfully completed offset programmes as well as distinguishing the true economic outcome and benefits from those which are presented by the media.

• Language: English
• Publisher: BookBaby
• Release date: Aug 2, 2015
• ISBN: 9781483556611

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1  Introduction

The primary topic of the research is the influence of the Hungarian Gripen offset agreement on the domestic economy and its potential in terms of economic development, technology transfer and other benefits during the programme period. The topic was brought to my attention when I was working as a trainee aircraft mechanic during an agreement-related fighter jet tender at a military airbase in Tököl. Furthermore, I am interested in military procurement linked to economic compensation programmes and technological developments through direct investment.

The fifth anniversary of the conclusion of the Gripen offset agreement in 2014 and the tenth anniversary of the first delivery of Hungarian aircraft in 2016 give the topic special relevance.

The purpose of the research is to evaluate the implementation of the Gripen offset programme in Hungary through various economic measures, contrasting it with other successfully completed offset programmes as well as distinguishing the true economic outcome and benefits from what is presented by the media.

The initial literature review analyses the existing theories and concepts relating to countertrade agreements and clarifies the meaning of ‘offset’. It also explores what makes an offset beneficial for the economy, compares the offset policies of different countries along with their goals, and briefly describes, criticizes and contrasts the related principles. The background section of the analysis will overview the economy of Hungary, the agreement’s implementation history and present actors. The economic impact of the agreement will be analysed using statistical datasets. The indirect benefits and future perspectives subchapter contains information on related projects that have been successfully implemented or will be implemented in the future. Given that both the Hungarian offset programme and the Gripen defence procurement procedure were heavily criticized by NGOs and politicians, the possible negative effects will be overviewed and evaluated in the corruption and controversial issues section.

Countertrade has played an important role in international economic and industrial cooperation, especially in the age of globalization, with more than 130 countries currently involved (Maj. Gen. Mrinal Suman, 2005). On a national level, its benefits include an increasing GDP, new export-import opportunities and know-how. On a regional level, the results of the related investments are reflected in a declining unemployment rate and higher performance in production.

1. Picture - Photo by Markus Schrader (2014): Saab Gripen 59th TFW NATO Tiger Meet 2014 Schleswig-Jagel.

There are many ways to implement procurement and each of these requires the purchaser to have some kind of industrial involvement. Due to the limited defence budgets and the high development costs, governments sign offset agreements to benefit from the derived jobs and the acquisition of technology. These kinds of cooperation are typical of aerospace manufacturing, where they can reduce the research and development costs and offer savings on the programmes (Martin, 1996).

Offset agreements are defence contracts or compensatory trade agreements which are made by foreign governments/companies to provide the purchaser with some form of compensation. These compensations have two basic forms. One of them is called ‘direct offset’, which includes cooperation, licensed or non-licensed production and financing activities. The other form is called ‘indirect offset’, which requires the seller to reinvest capital (foreign direct investment) or provide credit assistance or technology (technology transfer) (Bureau of Industry and Security, US Department of Commerce, Code of Federal Regulations, Section 701.2, Definitions, 2013).

However, offsets are prohibited in civil trade agreements by World Trade Organization regulations (WTO, General Agreement on Tariffs and Trade, 1947) because these agreements can easily lead to corruption and they are hard to monitor (Crawford-Browne, 2004).

2  Research question, hypothesis and objectives

The hypothesis of this research is the following statement:

The Gripen offset programme has positively influenced the Hungarian economy; it achieved its main goal of improving the economy through technology transfer, new jobs, increased tax revenue and foreign direct investments.

The questions this research will answer are the following:

•    How has the Hungarian economy benefited from the Gripen offset programme?

•    How did Hungary utilize the available resources and opportunities during the contract period?

•    What kind of changes took place and what were their effects during the 10-year programme?

•    Compared to the Czech programme, what was the main differences in economic terms?

•    How did the bribery and corruption related to the contract impact on the international reputation and transparency index of the Hungarian economy?

The specific objectives of this research are the following:

1.    To define the Gripen offset programme (background, objectives, priorities, projects, initiatives, milestones);

2.    To analyse the outcome, opportunities and drawbacks of the programme;

3.    To explore the impact of contract-related bribery and corruption on the reputation of the Hungarian economy.

3  Literature review

3.1 Introduction

Based on the trends that we can see worldwide, it can be stated that world military spending will always be a focal point and one of the most debated types of public spending. According to the Stockholm International Peace Research Institute’s (SIPRI) Arms Transfers Database, the estimated total value of the global arms trade was at least USD 43 billion in 2011. Since these cooperation and economic agreements are highly confidential, open source information and datasets are often not available; so the real volume of the world’s arms trade may be even higher.

Nevertheless, governments try to promote these kinds of bilateral or even multilateral defence industry cooperations and arms trade agreements in order to gain benefit from both economic and political relationships. Moreover, they seek to improve their national capabilities through the collaboration’s technology transfer, spillover effects and other economic benefits from the given FDI.

The dilemma is whether to purchase weapons from another country or to develop and produce them internally based on the country’s own resources. Brauer and Dunne defined two basic types of arms acquisition in their introduction to their book, Arms Trade and Economic Development (2004). One of them is when a country designs, produces and purchases everything within its own boundaries. The other is called ‘off-the-shell’ and involves acquiring them from a foreign country. Every other possibility entails various levels of cooperation and involvement, one of which is called an ‘offset’.

In so far as states avoid duplicating research and development costs, these approaches to industrial collaboration offer an interest that would be beneficial for both participants. Moreover, interaction can create more competitive economies, which implies significant savings as part of