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IMMEDIATE RELEASE

Release No: 115-96
March 04, 1996

Secretary of Defense William J. Perry

Introduction to the Annual Report to Congress

A DEFENSE STRATEGY FOR THE POST-COLD WAR WORLD

The Dangers of the Post-Cold War World

Contrary to the hopes of many and predictions of some, the end of the Cold War did not bring an end to international conflict. The most daunting threats to our national security that we faced during the Cold War have gone away, but they have been replaced with new dangers.

During the Cold War, we faced the threat of nuclear holocaust; today, we face the dangers attendant to the proliferation of weapons of mass destruction. Nuclear weapons in the hands of rogue nations or terrorists are especially dangerous because, unlike the nuclear powers during the Cold War, they might not be deterred by the threat of retaliation.

During the Cold War, we faced the threat of Warsaw Pact forces charging through the Fulda Gap and driving for the English Channel; today, we face the dangers attendant to the instability in Central and Eastern Europe resulting from the painful transition to democracy and market economies now underway there. This instability could lead to civil wars or even the reemergence of totalitarian regimes hostile to the West.

During the Cold War, we faced the threat of the Soviet Union using third world nations as proxies in the Cold War confrontation; today, we face the dangers arising from an explosion of local and regional conflicts, unrelated to Cold War ideology, but rooted in deep-seated ethnic and religious hatreds and frequently resulting in horrible suffering. These conflicts do not directly threaten the survival of the United States, but they can threaten our allies and our vital interests, particularly if the regional aggressors possess weapons of mass destruction.

The new post-Cold War dangers make the task of protecting America's national security different and in some ways more complex than it was during the Cold War. Our task of planning force structure is more complex than when we had a single, overriding threat. Previously, our force structure was planned to deter a global war with the Soviet Union, which we considered a threat to our very survival as a nation. All other threats, including regional threats, were considered lesser-but-included cases. The forces we maintained to counter the Soviet threat were assumed to be capable of dealing with any of these lesser challenges. Today, the threat of global conflict is greatly diminished, but the danger of regional conflict is neither lesser nor included and has therefore required us to take this danger explicitly into account in structuring our forces. These risks are especially worrisome because many of the likely aggressor nations possess weapons of mass destruction. Additionally, our defense planning must provide a hedge for the possibility of a reemergence at some future time of the threat of global conflict.

Also, our task of building alliances and coalitions is more complex in the absence of a global threat. With the collapse of the Soviet Union and the dissolution of the Warsaw Pact, the raison d'être of NATO, for example, had to be reconsidered from first principles in order to relate its missions to the new dangers. Also, new coalitions and partnerships needed to be formed with the newly emerging democratic countries. In building such international coalitions, we understand that the United States is the only country with truly global interests and a full range of global assets -- military, economic, and political. Thus, we are the natural leader of the international community. However, even the United States cannot achieve its goals without the active assistance of other nations. No state can act unilaterally and expect to fully address threats to its interests, particularly those that are transnational in character.

Thus the new post-Cold War security environment requires a significant evolution in our strategy for managing conflict, and it requires new and innovative defense programs and management philosophies to implement that strategy.

MANAGING POST-COLD WAR DANGERS: PREVENT, DETER, AND DEFEAT

Today, our policy for managing post-Cold War dangers to our security rests on three basic lines of defense. The first line of defense is to prevent threats from emerging; the second is to deter threats that do emerge; and the third, if prevention and deterrence fail, is to defeat the threat to our security by using military force. A renewed emphasis on the first line of defense -- preventive defense -- is appropriate in dealing with the post-Cold War dangers and is a significant departure from our Cold War defense policies, where the primary emphasis was on deterrence.

Preventive Defense

During World War II, all of America's defense resources were dedicated to defeating the threat posed by Japan and Germany and their allies. That war ended with a demonstration of the incredibly destructive power of atomic weapons. Thus, when the Cold War began, the fundamental predicate of our defense strategy was that fighting a nuclear war was an unacceptable proposition -- unacceptable from a military as well as a moral standpoint. So we formulated a strategy of deterrence -- a logical response to the single overarching threat we faced during that era: an expansionist Soviet Union heavily armed with nuclear and conventional weapons. This strategy meant that the primary responsibility of previous Secretaries of Defense was making sure that we had adequate forces -- both nuclear and conventional -- to provide unambiguous deterrence.

Today, we continue to deter potential adversaries by maintaining the best military forces in the world. But in the post-Cold War era, the Secretary of Defense and the Department also devote significant efforts to working on preventive defense. Preventive defense seeks to keep potential dangers to our security from becoming full-blown threats. It is perhaps our most important tool for protecting American interests from the special dangers that characterize the post-Cold War era. When successful, preventive defense precludes the need to deter or fight a war.

Preventive defense is nothing new -- it has been a central idea of military strategists for over two thousand years. Indeed, it has been an important strand in United States defense policy that has been used before with notable success. After World War II, the United States and its allies undertook significant efforts to prevent a future war by holding out a hand of reconciliation and economic assistance to our former enemies, Japan and Germany. These efforts were an outstanding success, especially the Marshall Plan in Europe. The economies of Japan and Western Europe rebounded, democracy grew deep roots, and our military cooperation and strategic alliances flourished. But Joseph Stalin turned down the Marshall Plan for the Soviet Union and the Eastern European countries that he dominated, and our preventive efforts with the Soviet Union failed.

Instead, the Cold War ensued, and for more than 40 years the world faced the threat of global war and even nuclear holocaust. Having failed to prevent the conditions for conflict, the United States concentrated on the second line of defense -- deterrence. Over the next 40-plus years, deterrence worked, and World War III was averted. Finally, largely as a result of fundamental flaws in its political and economic system, the Soviet Union collapsed, and many of the New Independent States sought to establish democratic governments and free-market systems. The outcome of that unprecedented transformation is still uncertain, but today the threat

of worldwide nuclear conflict has receded, former Warsaw Pact nations are seeking to join NATO, and Russia and the United States are cooperating in both economic and security programs.

Clearly, deterrence and warfighting capability still have to remain central to America's post-Cold War security strategy, but they cannot be our only approaches to dealing with the threats to our security. Instead, the dangers facing us today point us towards a greater role for preventive defense measures. Just as preventive defense measures helped shape our security environment following World War II, preventive measures can help us deal with post-Cold War dangers. Indeed, the end of the Cold War allows us to build on the types of preventive measures successfully introduced by George Marshall in Western Europe, and extend them to all of Europe and the Asia-Pacific region. In addition to maintaining strong alliances with our traditional allies in NATO and the Asia-Pacific region, our preventive defense approach consists of four core activities:

· Working cooperatively with Russia, Ukraine, Kazakstan, and Belarus to reduce the nuclear legacy of the former Soviet Union and to improve the safety of residual weapons.

· Establishing programs to limit the proliferation of weapons of mass destruction.

· Encouraging newly independent and newly democratic nations to restructure their defense establishments to emphasize civilian control of their military, transparency in their defense programs, and confidence-building measures with their neighbors.

· Establishing cooperative defense-to-defense relationships with nations that are neither full-fledged allies nor adversaries, but who are, nonetheless, important to our security.

Investing in these programs today, which my predecessor Les Aspin aptly dubbed "defense by other means," saves us both blood and treasure tomorrow.

Proliferation is a prime example. The possession of nuclear or other weapons of mass destruction by a potential aggressor not only increases the potential lethality of any regional conflict, but the mere possession of the weapons by the potential aggressor increases the chances of conflict arising in the first place. In other words, it is not just that a nuclear-armed Iraq or North Korea would be a more deadly adversary in a war -- it is that with nuclear weapons they are likely to be harder to deter and more likely to coerce their neighbors or start a war in the first place. The Framework Agreement with North Korea is a prime example of our counterproliferation program at work. The dangerous North Korean nuclear program has been frozen since October 1994, when the Framework Agreement was signed.

Another example of preventive defense is our Cooperative Threat Reduction, often referred to as the Nunn-Lugar Program. Under this program, we have assisted the nuclear states of the former Soviet Union to dismantle thousands of nuclear warheads and destroy hundreds of launchers and silos.

Reducing the nuclear threat to the United States and stopping proliferation are only the most dramatic examples of why prevention is so important to our security. This Annual Defense Report describes in detail the programs we have initiated to strengthen our preventive defense, most notably the Partnership for Peace.

Deterrence

No matter how hard we work on preventive defense, we cannot be sure that we will always be successful in preventing new threats from developing. That is why we must deter threats to our security, should they emerge. The risk of global conflict today is greatly reduced from the time of the Cold War, but as long as nuclear weapons still exist, some risk of global conflict remains. The United States, therefore, retains a small but highly effective nuclear force as a deterrent. These forces (as well as those of Russia) have been reduced significantly, consistent with the START I Treaty, and will be further reduced when Russia ratifies the START II Treaty.

Similarly, to deter regional conflict, we must maintain strong, ready, forward-deployed, conventionally-armed forces; make their presence felt; and demonstrate the will to use them. While the diminished threat of global conflict has allowed us to reduce U.S. force structure accordingly, the increased risk of regional conflict places sharp limits on how far those reductions can go. Today, the size and composition of American military forces, consistent with the Bottom-Up Review conducted in 1993, are based on the need to deter and, if necessary, fight and win, in concert with regional allies, two major regional conflicts nearly simultaneously. The guiding principle is that the United States will fight to win, and to win decisively, quickly, and with minimum casualties.

This principle requires us to maintain a force structure today of about 1.5 million active duty personnel and 900,000 reserve personnel. These forces are organized into 10 active Army divisions and 15 Army National Guard enhanced readiness brigades; 20 Air Force wings (including 7 reserve wings); 360 Navy ships, including 12 aircraft carriers; and 4 Marine divisions (including 1 reserve division). Equally important to the size of the force is the requirement to maintain a commanding overseas presence, including 100,000 troops in Europe and about the same number in the Pacific, all in a high state of readiness. Our overseas presence not only deters aggression, it also improves coalition effectiveness in the event deterrence fails, demonstrates U.S. security commitments, provides initial crisis response capability, and underwrites regional stability. Strong deterrence also requires us to maintain prepositioned equipment in the Persian Gulf, the Indian Ocean, Korea, and Europe and carrier task forces and Marine Expeditionary Units afloat, able to move quickly to any crisis point. And finally, it requires that we keep our forces in the United States in a high state of readiness, and that we have the lift capability to transport them and their equipment rapidly to distant theaters. Having the capability to deploy forces quickly to a crisis decreases the likelihood that they will actually have to be used and increases their chances for success if force is necessary. Our planning involves the extensive use of well-trained Reserve Component forces. Fifteen Army National Guard brigades and many combat support reserve units will be maintained at a high readiness level to allow their use at early stages in military operations. The rest are intended to be used as follow-on forces available for later deployment in longer-term contingencies.

Those are the requirements that go with the ability to fight and win, in concert with regional allies, two nearly simultaneous major regional conflicts. U.S. forces today meet these requirements. While being able to fight and win is essential, that ability alone cannot deter conflict. Deterrence stems from military capability coupled with political will, both real and perceived; credibility is as important to deterrence as military capability. Deterrence of regional conflict failed, for example, in 1950 when North Korea doubted American political will. Some World War II veterans had to turn around and return to the Far East to reassert that political will, at a very high price. Today, American forces in the region serve as a visible reminder of our willingness and capability to help defend our South Korean allies.

In 1990, deterrence of regional conflict failed again when Iraq doubted our political will to defend Kuwait and Saudi Arabia. We demonstrated that will through a costly but highly successful war to evict Iraqi forces from Kuwait. In contrast, deterrence succeeded in October 1994 when Iraq moved forces down to the Kuwaiti border a second time. This time, the United States demonstrated political will by rapidly deploying additional U.S. military forces to the Gulf. Within a few days after the Iraqi forces had moved to the Kuwaiti border, we had deployed 200 fighter aircraft, an armored brigade, a Marine Expeditionary Unit, and a carrier battle group to the theater. These forces created in a few days a presence that took many weeks to assemble in 1990. Faced with that presence and the lessons of Operation Desert Storm, Saddam Hussein sent his brigades back to their barracks. We achieved deterrence through the capability to rapidly build up a highly capable force, coupled with the credible political will to use that force.

Defending U.S. Interests Through Use of Military Force

Deterrence can sometimes fail, however, particularly against an irrational or desperate adversary, so the United States must be prepared to actually use military force. Use of force is the method of last resort for defending our national interests and requires a careful balancing of those interests against the risks and costs involved. The key criteria are whether the risks at stake are vital, important, or humanitarian.

If prevention and deterrence fail, vital U.S. interests can be at risk when the United States or an ally is threatened by conventional military force, by economic strangulation, or by the threat of weapons of mass destruction. These threats to vital interests are most likely to arise in a regional conflict and, by definition, may require military intervention.

In contrast, military intervention in ethnic conflicts or civil wars, where we have important, but rarely vital, interests at stake, requires the balancing of those interests against the risks and costs involved. In general, any U.S. intervention will be undertaken only after thorough consideration of the following critical factors: whether the intervention advances U.S. interests; whether the intervention is likely to accomplish U.S. objectives; whether the risks and costs are commensurate with the U.S. interests at stake; and whether all other means of achieving U.S. objectives have been exhausted. The United States chose not to intervene as a ground combatant in the war in Bosnia and Herzegovina because the risks and costs were too high when weighed against our interests. This decision was made by two successive administrations for essentially the same reasons. However, after successful American diplomacy and NATO military force reshaped the situation and the risks, we made the decision to participate, not as a combatant, but in the NATO peace implementation force.

The bottom line is that the United States is a global power with global interests, and as President Clinton has said, "Problems that start beyond our borders can quickly become problems within them." American leadership, global presence, and strong armed forces can help keep localized problems from becoming our problems, and protect us if they do. At the same time, there are limits to what the United States and its forces can or must do about problems around the globe. As the President said:

"America cannot and must not be the world's policeman. We cannot stop war for all time, but we can stop some wars. We cannot save all women and children, but we can save many of them. We can't do everything, but we must do what we can. There are times and places where our leadership can mean the difference between peace and war, and where we can defend our fundamental values as a people and serve our most basic, strategic interests."

Finally, in some instances, the United States may act out of humanitarian concern, even in the absence of a direct threat to U.S. national interests. Agencies and programs other than the U.S. armed forces are generally the best tools for addressing humanitarian crises, but military forces may be appropriate in certain, specific situations, such as when:

· A humanitarian crisis dwarfs the ability of civilian agencies to respond.

· The need for relief is urgent, and only the military can jump-start a response.

· The response requires resources unique to the military.

· The risk to American service members is minimal.

A good case in point was America's humanitarian intervention in Rwanda in the summer of 1994 to stop the cholera epidemic, which was killing 5,000 Rwandans a day. Only the U.S. military had the ability to rapidly initiate the humanitarian effort to bring clean water, food, and medicine to Hutu refugees who had fled from Rwanda in the wake of a catastrophic tribal conflict, and U.S. forces carried out their mission successfully, at little cost, with little risk, and then quickly withdrew.

IMPLEMENTING OUR PREVENT, DETER, AND DEFEAT STRATEGY

Implementing our defense strategy involves literally hundreds of programs. Their details can be found in the sections which follow this introduction. Highlighted below, however, are some of the key ways that we are implementing our approach of prevent, deter, and defeat.

Reducing the Danger of Weapons of Mass Destruction

During the Cold War, the Soviet nuclear physicist Andrei Sakharov said that preventing a nuclear holocaust must be the "absolute priority" of mankind. This is still true. Today, a primary means for accomplishing this goal is the continued dismantlement of nuclear warheads, bombers, and ballistic missile launchers. The touchstone of our preventive activities in this area is the Cooperative Threat Reduction program, which helps expedite the START I Treaty reductions in the states of the former Soviet Union. This program contributes to some remarkable accomplishments: over 4,000 nuclear warheads and more than 700 bombers and ballistic missile launchers dismantled; a nuclear-free Kazakstan; a Ukraine and Belarus on the way to becoming nuclear free; and successful removal of nuclear material from Kazakstan through Project Sapphire.

It is also vitally important that we prevent potential regional conflicts from assuming a nuclear aspect. That is why we have worked hard to help implement the framework agreement which has frozen North Korea's dangerous nuclear program and, when fully implemented, will eliminate the program altogether. Efforts to reduce the nuclear threat also include sanctions on Iraq and Iran and the indefinite extension without conditions of the historic Nuclear Non-Proliferation Treaty. Such diplomatic measures do not stand in isolation -- they are an integral and crucial part of the U.S. approach to preventing conflict.

Hedging Against Potential Future Threats

Despite our best efforts to reduce the danger of weapons of mass destruction, it is still possible that America -- and our forces and allies -- could again be threatened by these terrible weapons. That is why it is important for the United States to maintain a small but effective nuclear force. This deterrent hedge is not incompatible with significant reductions in American nuclear forces, nor is it incompatible with American support for the Nuclear Non-Proliferation Treaty and a comprehensive ban on nuclear testing. This nuclear hedge strategy is complemented by a program to develop a ballistic missile defense system that could be deployed to protect the continental United States from limited attacks, should a strategic threat to our nation arise from intercontinental ballistic missiles in the hands of hostile rogue states.

Another way we hedge against potential future threats is by maintaining selected critical and irreplaceable elements of the defense industrial base, such as shipyards that build nuclear submarines. With the end of the Cold War and the defense downsizing, the need for large numbers of major new ships, aircraft, and armored vehicles has declined significantly. Allowing these defense-unique production facilities to shut down or disappear completely, however, would curtail the nation's ability to modernize or prepare for new threats down the road. Therefore, the Department will selectively procure certain major systems -- such as the Navy's Seawolf fast-attack submarine -- in limited quantities to keep their production capabilities warm, until we are ready to build the next generation nuclear submarines.

Maintaining Strong Alliances and Reaching Out to Old Rivals and New States

Maintaining strong alliances with our traditional allies in Europe and the Asia-Pacific, maintaining constructive relations with Russia and China, and reaching out to new democracies and friends are key elements of our defense posture.

Europe

In Europe, NATO is the foundation of our security strategy, and we continue to play a leadership role within NATO. There are those who allege that NATO is now obsolete. But, in fact, NATO has provided a zone of stability for Western Europe for 40 years, and all 16 members have reaffirmed the importance of the Alliance. Indeed, NATO has received requests from new nations wishing to join, to be a part of this zone of stability.

NATO's Partnership for Peace (PFP) program is already extending a zone of stability eastward across Europe and Central Asia by promoting military cooperation among NATO countries, former members of the Warsaw Pact, and other countries in the region. This cooperation takes place at many levels, from frequent meetings between Defense Ministers to officer exchanges at schools and planning headquarters. The highlight of PFP, though, is the joint exercise program, focusing on peacekeeping training. In August 1995, the United States hosted one of these exercises, Cooperative Nugget, at Fort Polk, Louisiana. Such exercises have had a remarkable effect on European security by building confidence, promoting transparency, and reducing tensions among nations that have, in many cases, been at odds for long periods of Europe's history. PFP is also the pathway to NATO membership for those Partners that wish to join the Alliance.

In fact, the positive effects of PFP resonate far beyond the security sphere. Since political and economic reforms are a prerequisite to participation in PFP or membership in NATO, many Partner nations have accelerated such changes. In addition, many Partner nations are starting to see value in actual PFP activities, irrespective of whether they lead to NATO membership. The lessons learned and values fostered through the program are intrinsically useful.

PFP is one of the most significant institutions of the post-Cold War era. Like the Marshall Plan in the 1940s, PFP today is creating a network of people and institutions across all of Europe working together to preserve freedom, promote democracy and free markets, and cooperate internationally -- all of which are critical to expanding the zone of stability in Europe in our day.

It is critical that this zone of stability in Europe include Russia. Key to this is Russia's active membership in PFP, NATO's development of a special security relationship with Russia, and Russia's integral involvement in broader European security issues, as in Bosnia and Herzegovina. Open, productive security relations with Russia are an essential element of our approach to advancing security in Europe and ultimately limiting the potential for conflict. Recognizing that Russia remains a major world power with global interests and a large nuclear arsenal, the United States seeks a pragmatic partnership with Russia whereby we pursue areas of agreement and seek to reduce tensions and misunderstandings in areas where we disagree. Our successful efforts to include a Russian brigade in the U.S. sector of the NATO-led peace implementation force in Bosnia and Herzegovina readily reflect this partnership.

In addition to cooperative threat reduction efforts, such as the Nunn-Lugar program, we also seek to foster greater openness in the Russian defense establishment and to encourage Russia to participate in global nonproliferation activities and regional confidence building measures, by participating in the U.S.-Russian Commission on Economic and Technological Cooperation. The Commission, established by Vice President Gore and Prime Minister Chernomyrdin in 1993, seeks to build confidence by forging a better economic relationship between the United States and Russia. The Defense Department is part of an interagency effort sponsored by the Commission focused on finding, facilitating, and helping finance investments in the region by American business enterprises, targeting a wide range of opportunities -- from

defense conversion to space exploration to prefabricated housing. The Commission's activities benefit Russia's attempts to achieve a market economy, benefit American companies, and benefit American security interests -- a triple win!

Asia-Pacific

In the Pacific, the United States and Japan have entered into a new era in our regional relationship, as well as in our global partnership. A stronger U.S.-Japanese alliance will continue to provide a safe environment for regional peace and prosperity. Our alliance with South Korea not only serves to deter war on the peninsula, but also is key to stability in the region. These security alliances and the American military presence in the Western Pacific preserve security in the region, and are a principal factor in dampening a regional arms race.

We are also fully participating in multilateral security dialogues, such as the Association of Southeast Asian Nations (ASEAN) Regional Forum, which help reduce tensions and build confidence so that tough problems like the territorial dispute over the Spratly Islands in the South China Sea can be resolved peaceably.

Central to our efforts to prevent conflict in the Asia-Pacific region is our policy of comprehensive engagement with China, a major power with a nuclear capability. The United States will not ignore China's record on human rights, political repression, or its sale and testing of dangerous weapons, but we also will not try to isolate China over these issues. We want to see China become a responsible, positive participant in the international arena, and the best way to encourage this is to maintain a vigorous dialogue over a wide range of issues -- including security issues -- so that we can pursue areas of common interests and reduce tensions.

In South Asia, the United States has restarted a bilateral security relationship with Pakistan and begun a new security dialogue with India. These ongoing dialogues can help all three countries focus on areas of common interest, such as international peacekeeping, and could in time provide the confidence necessary to address more difficult problems, such as nuclear proliferation and the long-simmering conflict over Kashmir.

The Americas

In our own hemisphere, we are witnessing a new era of peace, stability, and security. From Point Barrow to Tierra del Fuego, all 34 nations except Cuba have chosen democracy, and economic and political reforms are sweeping the region. This historic development paved the

way for the first Defense Ministerial of the Americas last summer, at which delegations from all

34 democracies gathered in Williamsburg, Virginia, to consider ways to build more trust, confidence, and cooperation on security issues throughout the region. Following on the success and progress at Williamsburg, the nations of this hemisphere already are planning for the second Defense Ministerial in Argentina in the fall of 1996.

Like the Partnership for Peace in Europe, the Defense Ministerial of the Americas provides an opportunity to build a zone of stability in a region once destabilized by Cold War tensions. In the Americas, as in Europe, the tools for building stability include joint training and education programs that promote professional, civilian-controlled militaries as well as personal interactions; information sharing on national military plans, policies, and budgets; and confidence-building measures. In Europe, these activities are led by the United States and NATO. In the Americas, they are emerging by consensus and encouraged by the United States. But ultimately, the result is the same: more democracy, more cooperation, more peace, and more security for the United States.

Regional Preventive Defense Efforts

In each of the regions discussed, the United States has military-to-military relationships and is conducting joint exercises with a much wider range of countries than ever before. These activities promote trust and enable forces from different countries to operate together more effectively, which is essential given the increasing prevalence of combined operations. In the Gulf War, for example, some 40 countries made military contributions. Nearly three dozen countries are participating in the peacekeeping force in Bosnia and Herzegovina, including many non-NATO countries.

Another important part of preventive defense is our effort to promote democratic civil-military relations. One such program, conducted jointly with the State Department, is the International Military Education and Training program, which has now trained half a million foreign officers in the fundamentals of civil-military relations over the last several decades. Similarly, recently established regional training and study centers like the Marshall Center in Germany and the Asia-Pacific Center for Security in Hawaii are designed to promote contacts between regional military officers and civilian defense officials and to foster the principles of civilian control of the military.

Protecting the Readiness of Our Forces -- Near- and Medium-Term

No security strategy is better than the forces that carry it out. Today, the United States has forces that are well-trained, well-equipped and, most of all, ready to fight, as their performance over the past year in the Persian Gulf, Haiti, and Bosnia and Herzegovina illustrates. The Department has maintained this readiness in spite of a drawdown of historic proportions. Drawdowns create turbulence in the force, which historically has undermined readiness. Recognizing this history, we have taken unprecedented steps to maintain readiness while reducing our forces in the wake of the Cold War. By the end of 1996, the drawdown will be nearly complete, which means an end to the turbulence. In the meantime, though, the Department continues to maintain near-term readiness at historically high levels through robust funding of the Operation and Maintenance (O&M) accounts. This remains the Department's top budget priority. Manifesting this priority, the Department's FY 1995 and FY 1996 budgets and the FY 1997 budget request are at historically high levels of O&M funding (normalized to force size).

Medium-term readiness depends on attracting top quality people and retaining them after they have developed technical and leadership skills. To do so, we must offer not only challenging and rewarding work, but also an appropriate quality of life, a term used to encompass the entire package of compensation and benefits, as well as the work and living environment for military service personnel. Protecting quality of life is not only the right thing to do for the men and women who serve and sacrifice for their country, it is also critical to preserving medium-term readiness.

Last year, President Clinton approved an increase in defense spending of $25 billion over six years largely aimed at improving the quality of military life. This includes a commitment to ensure that military personnel receive the full pay raise authorized by law through the end of the century. It is also directed at extensive improvements in military quality of life programs, including housing -- a key concern to service families. This past year, a distinguished panel, led by former Army Secretary John Marsh, looked beyond existing DoD efforts to identify quality of life problems and suggest high-leverage, affordable solutions. The panel concentrated on three major areas: housing, personnel tempo, and community and family services. Action on the panel's recommendations is being incorporated into the Department's overall effort to preserve quality of life.

Modernization -- The Key to Long-Term Readiness

To ensure military readiness in the long term requires the Department to modernize the armed forces with new systems and upgrades to existing systems to maintain America's technological advantage on the battlefield. For the past five years, the Department has taken advantage of the drawdown and slowed modernization in order to fully fund those expenditures that guarantee near-term readiness -- spare parts, training, and maintenance. As a result, the modernization account in FY 1997 will be the lowest it has been in many years, about one-third of what it was in FY 1985. At the same time, the average age of our military equipment has not increased, because as the forces were drawn down, the older equipment was weeded out. But now that the drawdown is nearly over, the modernization reprieve from aging is nearly over, too.

So, beginning in FY 1997, the Department is planning a modernization ramp-up, which will be critical to the readiness of the forces in the next century. By the year 2001, funding to procure equipment to modernize our forces will increase to $60.1 billion in current dollars -- over 40 percent higher than what it is in the FY 1997 budget. This five-year plan will focus on building a ready, flexible, and responsive force for a changing security environment. The force will continue to maintain our technological superiority on the battlefield by seizing on the advances in information-age technology, such as advanced sensors, computers, and communication systems. At the same time, the modernization program will focus on bread and butter needs, such as airlift and sealift, and the everyday equipment ground forces need in the field, such as tactical communications gear, trucks, and armored personnel carriers.

This five-year modernization plan is based on three assumptions. First, that the defense budget topline will stop its decline in FY 1997 and begin to rise again (as proposed in the President's five-year budget). Second, that the Department will achieve significant savings from infrastructure reductions, most importantly from base closings. The third assumption of our modernization program is that the Department will achieve significant savings by outsourcing many support activities and overhauling the defense acquisition system.

Base Realignment and Closure (BRAC)

The Base Realignment and Closure process is directly linked to modernization and long-term readiness. As we downsize the military force, we must also reduce our Cold War infrastructure. Our efforts to manage this process have been aimed at saving money while ensuring that troops have the training and equipment they need to be ready in the future. While the Department has made significant progress in base closings, many BRAC recommendations have not yet been implemented, and an imbalance between force structure and infrastructure remains.

Until we fully execute the BRAC process, money will be tied up in nonperforming real estate, draining funds from our modernization efforts and other programs. While base closing initially costs money -- the FY 1996 budget included $4 billion allocated to base closing costs -- there will be significant savings in the future. In the FY 1999 budget, the Department projects $6 billion in savings from closing the bases, thus allowing a $10 billion swing in savings. These and future savings from base closing will be devoted to modernization.

Completing the BRAC process quickly is not only key to saving money, it also is the right thing to do for the communities involved. The Department is helping these communities find imaginative ways to put the excess defense property to productive use as quickly as possible. When base closure is done right, it can leave communities better off, with a more diverse economy and more jobs. The key is early community involvement and planning. For example, when Louisiana's England Air Force Base was slated for closure, the Alexandria Chamber of Commerce worked with the Air Force to develop a base reuse plan. Months before the base did close, small business enterprises had already signed leases, resulting today in hundreds of new jobs for Alexandria.

Acquisition Reform and Privatization

Over the past two years, the Department has undertaken the most revolutionary changes in its acquisition system in 50 years, and is looking for ways to further reform the system through privatization.

Acquisition Reform

First, the Department discarded the system of military specifications, or MilSpecs, which spelled out how contractors must design and produce military systems, supplies, and services. In

its place, the Department will use commercial and performance standards. These will call for the highest quality standards available in the commercial market or, if there are no relevant commercial standards, will use functional specifications which describe how the equipment is to perform -- and challenge suppliers to meet that standard any way they want.

The second major change in the defense acquisition system began on October 1, 1995, when the new federal acquisition streamlining regulations were published. These regulations, in effect, will allow the Defense Department to buy from the commercial marketplace more often, and buy more like commercial firms do.

Defense acquisition reform is important not only because it will help pay for the defense modernization program, but also because of a phenomenon called technology pull. This phrase describes the demand for advanced technology to give the United States battlefield superiority. Technology pull has its roots in the U.S. military experience in Operation Desert Storm. Before Operation Desert Storm, many U.S. military commanders and outside experts were skeptical of advanced technology applied to combat. For example, they questioned the concept of the Reconnaissance Strike Forces, developed in the 1970s and deployed in the 1980s. This concept combined stealth aircraft, precision-guided munitions, and advanced surveillance technology to offset superior numbers of Soviet forces. But there was great concern that such advanced technology was too delicate, or that it would not work in the fog of war. But in Operation Desert Storm, the same Reconnaissance Strike Forces crushed the Iraqi military force with very low U.S. losses. Skeptics became believers. Advanced technology proved itself, and military commanders are finding myriad uses for it -- not just smart weapons, but also smart logistics, smart intelligence, and smart communications. Military commanders are revising their doctrine and tactics to take advantage of this technology, and they want to pull it faster into their war planning.

The key technology they want is information technology, and it is being developed at a breathtaking pace, but not by the Defense Department. It is being developed by commercial computer and telecommunications companies, dual-use (defense-commercial) technology firms, and small high-tech businesses and universities. The Department cannot pull this technology from these sources without acquisition reform, because the current system limits access to these sources either directly, by throwing up regulatory barriers, or indirectly, by slowing the ability to purchase and employ new generations of technology in a timely way.

Privatization

The Department not only needs to do more business with commercial industry, it also needs to act more like commercial industry.

There are numerous examples of private sector companies turning to outside suppliers for a wide variety of specific, non-core goods and services. By focusing on core competencies, they have reduced their costs by lowering overhead and improved their performance.

Major opportunities exist for the Department to operate more efficiently and effectively by turning over to the private sector many non-core activities. For example, private sector companies are already under contract to perform some commercial activities on bases around the world. This type of outsourcing can be expanded.

To implement this strategy, the Department has been systematically examining opportunities for privatizing, as well as reviewing both institutional and statutory obstacles to its full utilization. Early in 1996, work groups engaged in these efforts will provide reports on how privatization can be better used to lower DoD costs while enhancing its effectiveness.

CONCLUSION

In the uncertainty that has followed the Cold War, the United States has not only the opportunity, but also the responsibility to help ensure a safer world for generations of Americans. President Clinton has said: "As the world's greatest power, we have an obligation to lead and, at times when our interests and our values are sufficiently at stake, to act."

The Department of Defense is supporting American leadership in this new era. As the Department completes the transition to a post-Cold War military force, it has undertaken policies and programs to prevent threats to our security from emerging and to maintain well-trained, ready forces able to deter or respond quickly to a range of potential threats and seize opportunities.

The world has changed dramatically over the past few years, but one thing remains constant: a strong military force, made up of the finest American men and women, is the nation's best insurance policy. Each element of the defense program described in this report supports this fundamental, indisputable fact.

William J. Perry

Full report will be available late March or early April

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