Mon | May 25, 2020

Walter Molano | Fighting the wrong war

Published:Thursday | April 9, 2020 | 12:14 AM
In this, March 28, 2020 file photo, a staffer works on a ventilator refurbishing assembly line at Bloom Energy in Sunnyvale, California. Ventilators are in demand worldwide to fight the coronavirus crisis.
In this, March 28, 2020 file photo, a staffer works on a ventilator refurbishing assembly line at Bloom Energy in Sunnyvale, California. Ventilators are in demand worldwide to fight the coronavirus crisis.

OP-ED CONTRIBUTION: EMERGING MARKET ADVISER

Every year, governments around the world spend a combined total of more than US$1.8 trillion on defence spending. The smartest minds in the world are deployed to develop new materials, software and weapons.

The United States will spend a total of US$738 billion on its military in 2020, This represented 15 per cent of the total budget, before the onset of the coronavirus, as well as more than 3 per cent of GDP. While, this is relatively small, when compared to the US$3.6 trillion, or about 17 per cent of GDP, that is spent on health care, it is an important use of resources that could be put to better use.

Of the US$3.6 trillion that is spent on health care, a third, or US$1.2 trillion, is spent on hospital care. Physicians and clinical services absorb 20 per cent of the spending, while retail pharmaceutical drugs represent 9 per cent of the outlays. The remaining amount is split between nursing homes, dental care, home health and other professional services. Durable equipment represents only 2 per cent of the spending, or US$55 billion.

To be fair, the government pays less than half of the health spending. Moreover, the public expenditures on health are shared between the federal, state and municipal levels. Nevertheless, what is noteworthy is the relatively small amount that is spent on durable equipment.

Meanwhile, the Pentagon spends US$146 billion on military hardware. This includes US$1.87 billion for 98 F-35 jet fighters and US$12.8 billion for a new Ford Class aircraft carrier. Altogether, the Navy will spend US$22.2 billion on the acquisition of a dozen new ships in 2020. There was even US$40 billion set aside for the creation of a new Space Force.

This is in sharp contrast to the US$20,000 that it costs to build a ventilator. Even with price gouging, ventilators are selling for about US$50,000 per unit. For the cost of one aircraft carrier, the Governor of New York could get the 30,000 ventilators he so badly needs – even if he pays jacked up prices.

The problem is that the United States is gearing up its defences to fight the wrong enemy. Even though military planners prepare for a two-front war, like the one they waged during the 1940s, the truth is that society has evolved way beyond that construct. The collapse of the Soviet Union three decades ago, and the subsequent rise of globalisation, introduced a new form of international competition.

Military conflict was eschewed for economic competition. The free flow of factors of production brought new prosperity for the world as a whole, but created challenges for previously privileged groups. It also introduced globalised risks, such as synchronised economic downturns, global financial crises, trade wars and the risks of pandemics.

Policymakers took steps to prepare for some of these risks, by creating global institutions and response mechanisms, such as the G7 and the G20. These two groups of nations were put together in the aftermath of the recent global economic crisis in order to facilitate policy coordination at the highest levels of government.

The International Monetary Fund, IMF, was capitalised and staffed with the resources needed to help countries with economic problems. The World Trade Organization, WTO, was organised to address trade issues and help resolve disputes. There were even protocols prepared to deal with the environmental problems produced by too much economic global prosperity.

However, the issue of global health problems received much less attention. The World Health Organization, WHO, was an institution to provide information and coordination at the global level, but it was woefully underfunded and understaffed. Part of this was due to the mendacity that health problems were mainly the purview of developing countries. It is true that there had been several pandemics in the past, such as SARS, MERS, West Nile virus and Zika, but most of the effects had been relegated to the Far East or the equatorial tropics of Africa and South America.

In other words, they were far away from the comfort zone of Europe and North America. The WHO budget in 2020 is only US$4.8 billion. Moreover, most of the money is for operations. There is very little set aside for equipment procurement.

It is true that governments around the world are mobilising to build new equipment and medical facilities. Billions are being poured into research in order to find a way to address the new coronavirus. This should become the new normal.

Given that we are now in a globalised, cooperative setting, preparing for military conflict should be less pressing.

The vast industrial infrastructure used to prepare for a military Armageddon that will never arrive should be rejigged to prepare for the possible armageddon’s of the globalised economy. Among them, there is the possibility of another pandemic. We should stop fighting the wrong enemy and refocus our efforts on engaging the correct one.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com