IN ALL THE DISMAL assessments of the economic performance of developing and newly developed nations in recent years, one glowing success is often overlooked. In many of these countries, a prospering, technologically up-to-date and export-minded industry is emerging to drive the pace of future economic development -- and that industry is weapons.

In Brazil, Chile, South Korea, the Philippines, Singapore, India, Pakistan, Egypt and Israel, planners are pinning hopes for rapid development in part on sophisticated manufactured products with a seemingly unlimited market: tanks, armored vehicles, counter-insurgency aircraft, assault rifles, cluster bombs, artillery pieces and even advanced jet fighters.

These countries' involvement in what the authoritative Stockholm International Peace Research Institute (SIPRI) estimates to be an $800-billion-a-year global arms industry is, to be sure, a story of mixed blessings. The development clearly does not make the world a safer place. It will undercut even modest efforts to control the arms trade; and it already is providing competition for U.S. industry.

"The time has come to free ourselves from the United States and the countries of Europe," declared Brazilian Air Force Minister Joelmir Campos de Araripe Macedo in 1977. "It is a condition of security that each nation manufacture its own weapons."

The good news is that the booming arms business is helping less-developed countries obtain sophisticated technology, gain new markets for their products and provide employment for a new class of trained technicians that otherwise might look for jobs in the industrialized world.

Brazil currently produces 40 percent of its armed forces' equipment, and may soon supply 75 percent. Meanwhile, Singapore sings the praises of its Ultimax 100 and SAR-80 5.5 mm assault rifle, Chile's Carduro S.A. pictures its armored vehicles and cluster bombs in an inventory of available weapons, and international arms publications carry performance reports on the Brazilian firm Engesa's Cascavel, Boomerang and Jararaca armored vehicles and Embraer's Bandeirante patrol and transport airplanes.

India, Egypt, and Israel each have exceeded $1 billion in arms sales abroad in recent years. Brazil, with $2 billion in annual sales, is currently the world's fifth largest arms exporter. In 1982, Third World countries accounted for almost 15 percent of world arms exports, up from a minute one- quarter of 1 percent in 1964, according to SIPRI.

The expansion of indigenous arms industries raises a number of disturbing issues for those concerned about the effectiveness of arms embargoes -- whether to a nation like South Africa or one like Iran. It also disturbs the proponents of economic modernization.

What's more, the unregulated proliferation of weapons with great destructive power may not in itself make "little wars" more likely; but it is guaranteed to make them more costly and deadly.

The proliferation of suppliers further complicates already enfeebled attempts to control the spread of ever-more-lethal modern weapons. Today, big-power efforts to stop the supply of weapons -- as in the case of the U.S. embargo on arms shipments to Iran and Guatemala -- can be easily circumvented by Third World arms companies that are anxious to grab a bigger share of the world market.

Another problem is that the creation of local arms industries can color a nation's entire economic-development strategy. Critics of this focus argue that the enormous investment in weapons technologies could be better spent meeting the immediate needs of developing economies for more schools, better health facilities and industries geared toward satisfying civilian needs.

For many emerging arms producers -- and for others who aspire to such a status -- the motivation to develop an arms industry is primarily nationalistic. Possession of such a capability has come to be viewed as a vital element of national power and symbol of independence from traditional suppliers in East and West.

Regional aspirations or rivalries also prompt the development of indigenous capabilities. The Arab Organization for Industrialization (AOI) was envisioned as a collective Arab effort to respond to Israel's unchallenged weapons industry. The AOI foundered after the Egypt-Israel rapprochement, but today, both Egypt and Saudi Arabia are trying to create independent arms industries outside it.

As with Israel, the development of Brazil's military industries cannot be separated from its desire to attain regional superpower status. And the arms race, conventional and nuclear, is a basic element in tensions between India and Pakistan.

Embargoes, implemented or threatened, have also encouraged the creation of local industries. Egypt has had long experience with unreliable access to Western arms, and with Soviet "spare-parts diplomacy" in which Moscow has gained leverage by withholding needed replacement parts.

Fear of a possible U.S. arms embargo has encouraged Taiwan's efforts to gain the technology needed for its own weapons production. It has been lining up cooperation arrangements with U.S. arms manufacturers and sharing information with Israel, according to the Israeli press.

Turkey learned a similar lesson from the arms embargo imposed by the Carter administration. And the difficulties that Iran is experiencing in the maintenance of tanks and planes purchased from the United States have convinced them and other countries of the perils of relying on foreigners.

Aside from politics, the creation of these new arms industries is also being driven by economic and technological aspirations. Advocates of military industries view them as dynamic engines of development and modernization that can strengthen the industrial and technological infrastructure in the civilian as well as the military sectors.

Nonmilitary spinoffs are particularly apparent in aircraft that, in addition to their principal military applications, can also be used for everything from crop dusting to medical evacuation. Military communications technology can also be used in the civilian sector, as can computers and metal- working.

The growth of Third World arms production has also been spurred by the enormous outlays of precious foreign currency for Western weapons. Although it is often less expensive for a country to buy a plane or tank than to build the weapon itself, local production produces many side benefits. It saves foreign currency, fosters new industries, provides employment for trained technicians who might otherwise emigrate and, ultimately, is a source of export earnings.

Local conditions necessarily limit the practical implementation of such aspirations. Only a few countries -- Brazil, Argentina, the Peoples Republic of China, India, Pakistan and Israel -- can hope to achieve anything resembling self-sufficiency in arms. Others must be satisfied with the assembly of imported kits, the manufacture of marginal components or the production of unsophisticated weapons, electronics or telecommunications.

Egypt, with its less-developed technology and inexperienced workforce, cannot match Israel's production of the Kfir jet and its successor for the 1990s, the Lavi. Instead, it assembles French Mirage 2000 fighter planes and Alpha trainers from kits, and is still only producing marginal components on its own.

Singapore produces small arms with the same ease with which it turns out finished textiles. Thailand, using second-hand machinery, makes bullets for Colt Industries' M-16 automatic rifle, which is manufactured under U.S. license in South Korea and the Philippines. Chinese technicians on loan to Egypt assemble the Chinese F-7, which itself is based on the Soviet Mig 21, for export to Iraq, according to Aviation Week and Space Technology magazine.

These developments have had a revolutionary effect on international trade.

The traditional one-way street of Western arms sales to Third World countries has become a two-way street in which Western arms sellers are only able to make deals if they agree to receive partial payment in Third World products, ranging from commodities to manufactured goods, and promise to transfer technology along with the weapons themselves.

U.S. Treasury officials argue that such trading arrangements distort markets which, if left undirected, would be dominated by the most efficient enterprises. But U.S. businessman say it is that or miss out on markets abroad.

"The days when you had the best product at the lowest price are gone," explained James Mellor, executive vice president for international operations at General Dynamics. "Now business arrangements are paramount and very complicated."

"We can no longer expect other governments to export their jobs by buying their products here in the United States," explains Vincent Jones, president of BMY, which makes armored self-propelled howitzers, ammunition supply vehicles and tank recovery vehicles. "The philosophy that our industry has followed in the past has, in fact, driven many of these countries to become competitors. Had we been willing to work with them on a coproduction basis, they would not have invested their R&D money (in their own arms factories), and we would not find so many competitive products in the world marketplace. Any country willing to coproduce on a 50/50 basis is worth cultivating. That at least gets us into the marketplace."

Unlike the simple supply of finished weapons, the tranfer of technology, maintenance and production machinery, and the skills required to utilize them through coproduction or licensing agreements, involves the transfer of capabilities to produce that weapon. Thus, developing countries not only acquire weapons but also the means to produce and improve them, and perhaps to transfer the knowledge to the civilian sector.

Egypt, for example, will coproduce airframe and turbofan parts as part of its purchase of the French Mirage 2000. At least two of the first 20 aircraft are to be assembled in Egypt. Similarly, Aerospatiale, the French company that manufactures the Dauphin helicopter, has contracted with the Peoples Republic of China for coproduction in that country.

Not surprisingly, Western companies and governments are concerned that the emergence of Third World suppliers, whose capabilities have been improved through the transfer of technology, will take business away from them and cut into profits, as has happened in steel, autos, textiles and now computer chips.

The United States, for example, has so far resisted South Korean requests to aid in the expansion of its arms export sales from $250 million to $2 billion, and to increase the utilization of its weapons industry, now running at only 50 percent of capacity.

In the case of the Vulcan anti-aircraft gun, which is produced by General Electric, the Reagan administration has been reluctant to allow the transfer of a license to South Korea's Dawoo Industries for producing the gun, for fear of creating a new competitor.

Similar concerns prompted the U.S. decision, later reversed, to stop the sale of Israel's Kfir jet, which is powered by a U.S. engine, to Ecuador. The transfer of certain state-of-the-art technology to Israel for the development of its Lavi fighter has also been opposed by U.S. manufacturers.

The U.S. government has begun to direct its attention to the various implications of international coproduction and industrial participation agreements. The International Technology Transfer Panel, headquartered in the Pentagon, represents an American attempt to manage this growing aspect of the arms trade by establishing guidelines for the transfer of technology -- primarily to other principal weapons producers but also to such nations as the PRC, South Korea, Taiwan, Greece, Israel and Egypt.

Northrop's efforts to market its F-20 fighter to India were short-circuited by Washington, which opposes the transfer of computer and engine technology like that used in the F-20 to countries (such as India) which have economic agreements with the Soviet Union. "It is because the U.S. is not willing to transfer technology to us that we buy from the Soviet Union," explains K. Subrimanian, director of India's Institute for Strategic Studies and Defense Analysis.

One problem in all this is that Third World countries may be substituting one type of dependency for another. While the creation of local arms industries makes them less dependent on the West for arms, it makes them increasingly dependent on the West for the advanced technology necessary to sustain a modern arms industry.

Israel and Brazil continue to depend heavily on Western technology. In Israel's case, its military dependence upon Washington today is greater than ever. The more it relies on state-of-the-art technology for its airplanes, for example, the less able the planes would be to fly without American computers and jet engines. Egypt's weapons industry is almost completely reliant on imported technology, foreign licenses and design plans. Its engineering and tooling capabilities require close collaboration with Western experts.

Brazil, with arms sales of more than $2 billion last year, exemplifies the growing importance of the Third World in the '80s weapons trade. Nigeria is seeking Brazilian assistance. Saudi Arabia is bankrolling a $180 million agreement under which Egypt will assemble 120 Tucano-127 military trainer airplanes manufactured by Brazil's Embraer company. And the Saudis have just concluded a five-year military cooperation agreement with Brazil aimed at expanding its own infant weapons industry.

Saudi Arabia appears interested in co- producing Brazil's Astros II multi-rocket launcher, the Osorio tank and Tucano trainer. The Saudis may also be interested in purchasing the AMX subsonic fighter, which Brazil is coproducing with the Italian firms Aeritalia and Aeromachi for delivery in 1987, and frigates produced under license from Britain's Vosper Thorneycroft. Saudi Arabia would be able to resell or transfer weapons to whomever it chooses. Both Iraq and Egypt have received shipments of Saudi weapons in the past.

After President Carter reimposed an arms embargo on Brazil in 1977 to protest human rights abuses by the military junta, European manufacturers hoped to step into the vacuum. Instead, the Brazilian government created IMBEL -- the acronym in Portugese for the War Material Industry of Brazil -- to mobilize domestic resources for self- sufficiency.

Just as the Uzi submachine gun has become the ubiquitous symbol of Israel's export success, the Urutu and Cascavel armored vehicles are the most visible examples of Brazil's successful production and marketing strategies. Both vehicles emerged on the world scene as part of Libya's arsenal during its short border war with Egypt in 1977. The Soviet Union was so impressed that it managed to obtain production information for the Cascavel's 90mm Belgian gun made under license in Brazil.

Qatar, Gabon and Guyana have ordered vehicles, and the Iraq-Iran war has produced orders from both antagonists. According to a representative of the American League for Exports and Security Assistance, a trade group made up of some 30 U.S. export-oriented defense companies, U.S. manufacturers of competing products "worry a lot about" the Cascavel and Urutu. "The Brazilians are a force to be reckoned with," said one of them.

Unlike other industries in which developing countries have emerged as equal competitors with the West and Japan, the weapons business will continue to be dominated by the major industrial nations for the foreseeable future. The Third World is still not capable of matching a first-class aircraft like the F-15 or the Mirage, or exotic look- down, shoot-down avionics or Soviet missilry.

But that still leaves the huge and lucrative middle market -- armored personnel carriers or artillery, for example. These weapons involve research and development costs that are bearable by a developing country. They also can exploit the developing world's greatest comparative advantage -- low labor costs.

And it is in this middle area where Brazil and the 20 or so other developing nations with weapons industries, will continue to improve their capabilities and the range of their products and services.