There can be many reasons for the creation of military enterprises. Traditionally, military involvement in businesses developed due to governments being unable to support the full scope of military operations. This could either be due to insufficient funds to sustain the military’s budgetary requirements or to the urgent need to allocate funds to other elements of government spending. As a result, the military is often instructed to adopt a self-sustainability model and seek alternative means to fulfill its budget requirements.

 

In some instances, military businesses function as a funnel for demobilised or retired military personnel to be employed in the private sector. In most countries where the military owns businesses, this happens through a formal structure. In the cases of Pakistan and Turkey, the armed forces own businesses which are incorporated under a holding company. In Pakistan, the military-business complex has evolved around four foundations owned by the various service wings. As of 2007 some sources estimate that the combined value of these companies was approximately US $1.13 billion.

 

Whatever the reason for the military to own private businesses, it is not good integrity practice. Where possible, the ministry and/or the military should divest themselves of businesses. When this is not possible, or not possible within current political constraints, then special efforts should be made to make businesses transparent. This includes accounts, assets, audit and oversight, beneficial ownership and the financial flow from the business to its owners.

 

The People’s Liberation Army (PLA) involvement in the Chinese economy dates back to the end of the civil war in 1949. The motivation for the development of the PLA’s military economy was two-fold: self-sufficiency and ideology. At its peak in 1993, it was estimated that the PLA owned approximately 20,000 businesses which ranged from small cooperatives to conglomerates. By 1997 approximately 10,000 PLA-owned businesses earned between US $1-3 billion a year.  However, the entrenchment of this profit-driven culture within the military, the lack of civilian oversight mechanisms and the PLA’s privileged position in society increased the risk of corruption among the PLA’s ranks. The growing concerns regarding corruption were detrimental to the PLA’s public image. From the viewpoint of the civilian leadership under Jiang Zemin, the best approach to combating corruption within the PLA was to eliminate the roots of the problem. This resulted in the official 1998 announcement that the PLA was to dissolve its military business empire. 

 

One of the key lessons from the PLA’s divestiture programme is that preparatory steps were integral to its success. Prior to Jiang Zemin’s official announcement of divestiture, several measures had been introduced which ultimately helped to soften the blow from the loss of the

PLA’s economic empire:

 

1. Withdrawal of preferential tax rates

2. Removal of privileged access to national infrastructure

3. Installation of a new military leadership

4. Introduction of focused and targeted legislation to curb the scale of military enterprises

5. Strengthening the judicial system and its ability to prosecute military officials.

 

Each measure played a vital role in ensuring the success of Jiang’s reforms. They were all introduced over a period of time to help reduce any potential discontent. The foundations for divestiture began as early as 1989, and the process was only completed by 1999. By effecting these reforms, Jiang Zemin not only ensured that a new leadership sympathetic to his cause was put in place, but also minimised opposition to his proposed changes. The early removal of preferential treatment for military businesses also helped to improve competition in the economy and ensured that PLA enterprises were forced to compete on an equal footing. This helped to reduce the PLA’s privileged status in society, reducing the strength of the omnipotent army model.

 

---

Read more on Financial Risks.

Read more on Our Work.