MILITARY EXPENDITURE AND ECONOMIC GROWTH

This paper tests the relationship between military expenditure and economic growth by including the impact of the share of military and civilian components of government expenditure in an economic growth model with endogenous technology. In this framework, we empirically consider the hypothesis of a non‐linear effect of military expenditure on economic growth. Differences between the costs and benefits of the defence sector has traditionally explained the non‐linear relationship suggesting that shocks to insecurity may also be a source of non‐linearity as they determine a re‐allocative effect within government expenditure. While parametric partial correlations are in line with empirical findings, the robustness of estimations is tested by using a non‐parametric approach. The negative relationship between military expenditure and growth in countries with high levels of military burden predicted by theory becomes significant only after including a proxy for re‐allocative effects in the growth equation.     

Estimating non‐transparent military expenditures: The case of china (PRC)∗

Data limitations arising from non‐transparency in military expenditure reporting impose significant constraints on economists studying country and comparative developments in this field. This article focuses on the case of China. It reviews the recent literature on China's military expenditure, examines the variance in published estimates, and identifies three factors which help explain the variance: budgetary falsification; non‐budgeted PLA revenue; and the US dollar purchasing‐power parity of the yuan. Conclusions emphasize important policy implications of such variance and suggest a more active role for defence economists in a field of research generating considerable attention from international relations scholars.     

Concept costing for defence projects: the problem and its solution

It is intrinsic to the nature of military competition that the unit acquisition costs of defence systems rise generation by generation. Traditional “bottom‐up” methods of cost‐estimating cannot meet the increasing demands for extensive studies of many options before commencing design and, while “top‐down” estimating techniques are an improvement, in particular by reducing the time required for preparing estimates, they also are inadequate to meet current requirements. A new method has been devised, therefore, further developing “top‐down” methods using Bayesian techniques to make best use of the available information, whether certain or uncertain, and its accuracy established by example.     

Specialization in defence forces

The choice between balanced and specialized defence forces depends on the technology of defence output (e.g. whether a force scope multiplier is present), the existence of scope and scale economies, the platform customization costs and, of course, the level of defence budgets. Minimum force element levels (thresholds), and scale economies facilitate specialization as opposed to scope economies (e.g. platform‐sharing), scale diseconomies and the force scope multiplier (e.g. defence weakest‐link technology). When a balanced force is not optimal, the option value of a non‐optimally maintained force element must also include the opportunity cost arising from suboptimal force elements. Shrinking defence budgets may produce two surprising phenomena. If some force elements are shut down as a result of thresholds, the surviving ones may increase in platform numbers as well as enjoying closer‐to‐most‐desirable platforms. Furthermore, if heritage force elements are shut down within the budget contraction environment, overall defence capability might rise.     

Estimated UK employment dependent on ministry of defence expenditure and defence exports

The Ministry of Defence (MOD) has published estimates of the number of average full‐time UK industry employees dependent on MOD expenditure and defence exports for a number of years. This paper provides the outcome of a recent review of the process used. The method of deriving MOD and defence export final demand vectors, and calculating from these estimates of direct employment (i.e. that in supplying companies) and indirect employment (i.e. that incurred through the supply chain) are described. Difficulties with the data are explored. Alternative approaches, methods used in other countries and challenges posed by changing MOD administrative systems are briefly discussed.     

Country survey IV: Pakistan

This paper examines the role of the military in Pakistan, particularly in regard to civil‐military relations and defence industrialisation. Pakistan's military expenditure is relatively high, but apart from investment multipliers, little of this spending filters through to the civil sector. Pakistan's defence‐industrial strategy centres on rebuild and Chinese technological collaboration. However, while this ‘capital‐saving’ approach has merit, the strategy has thus far failed to stimulate broader civil development linkages. A conclusion of this paper is that Pakistan is failing to maximise the strategic dual‐use benefits of integrating civil‐military activity.     

Country survey VI: Australia

Australia is a geographically large country, with the world's longest national coastline to defend, but a relatively small economy of some 17.5 million people. Since World War II, Australia has faced the dilemma of how to structure defence policy in the absence of an identifiable threat. Its policy of self‐reliance aims to permit Australia to conduct defensive operations in the event of low/medium level threats without depending immediately on its allies. This is to be achieved through the technological sophistication of defence equipment, a highly professional but small defence force and local industry support.

The burden of defence, measured as the share of defence outlay in GDP declined from about 3% in 1971–72 to about 2.3% in 1993–94. It has been the Government's policy to encourage the development of local defence‐related industry, in particular in areas such as: electronics/optics; communications and information technology; aerospace; shipbuilding and repair, munitions; and land vehicles. However, defence procurement has a small impact on the Australian economy as a whole.     

The Demand for Turkish Defence Expenditure

Although a number of studies concerning Turkish defence-growth relation have been published in recent years, little attention is given the demand for Turkish defence expenditure. This is an important issue for understanding which variables contribute to the determination of the demand for military expenditure. However, it is difficult to develop a general theory or a standard empirical approach for the determination of the demand military expenditure. This study models and estimates the demand for Turkish defence expenditure for the period 1951-1998 using autoregressive distributed lag approach to cointegration (ARDL) following the methodology outlined in Pesaran and Shin (1999). This procedure can be applied regardless of the stationary properties of the variables in the sample and allows for inferences on long-run estimates, which is not possible under alternative cointegration procedures. The findings suggest that Turkish defence spending is determined by NATO's defence spending, Greece's defence spending and some security considerations.     

Country survey III — Defence spending in West Germany

This survey article deals with defence spending in West Germany from 1960 on, and the resulting manpower levels and major weapons of the Federal Armed forces, focusing on macro‐economic aspects. Statistics compiled from a variety of published and unpublished sources are presented in 16 tables. An econometric defence‐spending function is derived for the period. For comparison, the equivalent data of East Germany from the last years is also presented. The small set of developments in the next few years that can be predicted firmly are discussed.     

Estimating defence budget saving from disarmament: the United States’ case

Probing the technology in the production of US national defence by using a dynamic cost‐function model with adjustment costs, this paper evaluates the effect of reducing the level of national defence on the defence budget saving. Our inquiry involves estimating the defence production structure without output data for non‐market goods that are normally unavailable. Our findings include: (i) the United States behaves rationally to minimize cost in the production of national defence; (ii) the adjustment costs are larger in disarmament than in military build‐up; (iii) due to the adjustment costs peculiar to disarmament, the defence budget saving from disarmament appears small, but cutbacks allow great savings on the defence budget.     

ANALYSING DEFENCE DEPENDENCY: THE IMPACT OF THE ROYAL NAVY ON A SUB‐REGIONAL ECONOMY

This paper provides a methodology for estimating the economic impact of defence spending at a sub‐regional level. It does so by calculating the income and employment generated by Britain’s Royal Navy and associated defence activities in the City of Portsmouth and its surrounding area, during the financial year 2003–2004. In an era of military consolidation, the paper offers an insight into the multifaceted impact of defence‐related expenditure. Hence, it presents a generic framework that could prove useful to other researchers when seeking to measure the sub‐regional impact of naval, airforce and army facilities in other national contexts.     

A LONG‐RUN ANALYSIS OF DEFENCE SPENDING IN THE NATO COUNTRIES (1960–99)

This paper analyses the long‐run demand for defence output through a homogeneous treatment of 15 NATO member countries between 1960 and 1999. We carry out a progressive study of the interactions between either defence spending or defence burden and their main determinants: income, external threat and allied military spending. To that end, we use time‐series analysis with endogenously determined structural breaks. We further consider individual country functions related to one another through a common correlated effects method, in order to take into account explicitly the connections between members of an alliance.     

Country survey VIII: Federal republic of Yugoslavia

This survey article focuses on defence economics issues and provides data and analysis on the Federal Republic of Yugoslavia's (FRY) defence policy, defence spending, the size of its armed forces, its defence industries and the cost of the civil war. The main section is devoted to the period from 1990 to the present and deals with the following aspects: the situation after the break‐up of the former Yugoslavia, general economic data; the cost of the civil war, the defence budget; the armed forces; the manufacture of armaments and the structure of the defence industry.     

Country survey XII: South Africa

This article examines the relationship between defence expenditure and economic performance in South Africa, both prior to and after that country's first fully democratic election in 1994. Prior to 1994 defence expenditure decisions were largely dominated by non‐economic factors; since then defence spending has declined in reaction to, inter alia, the need to address a number of socio‐economic inequities.

After 1975 in particular, military industrialisation in South Africa placed a disproportionately high burden on the country's industrial resources and natural economic and technical capabilities. However, although this suggests that the opportunity cost of domestic arms production has been fairly high, the country's poor economic and development performance since the mid‐1970s is a function of underlying structural deficiencies and institutional constraints rather than the consequence of inordinately high defence spending levels.     

THE RELATIONSHIP BETWEEN EXTERNAL DEBT,DEFENCE EXPENDITURES AND GNP REVISITED: THE CASE OF TURKEY

This paper contributes to the continuing debate on the economic effects of military expenditure by undertaking a case study of Greece. Within Europe Greece provides a particularly interesting object of study. It has the highest military burden in Europe and NATO, is the only European Union country situated in the unstable environment of the Balkans, faces a military threat from Turkey, and has a very weak economy. After some background analysis of the economy and military expenditure, the paper investigates the determinants of Greek military expenditure as well as whether the high military burden has played an important role in Greece's poor economic performance over the period 1960–1996. It estimates a Keynesian simultaneous equation model with a supply side, which allows the indirect effects of military expenditure to be captured explicitly. It concludes that the major determinants of Greek defence spending are not economic but strategic (the threat of war) and that the direct effect of defence spending on economic growth as well as the indirect effects through savings and trade balance are all significantly negative. On the basis of such strong results, the paper concludes that defence spending is harmful for the Greek economy.     

Incomplete contracting and target‐cost pricing

Procurement of advanced technology defence equipment requires appropriate contractual arrangements to achieve efficient R&D investments. This paper analyses the optimality of target‐cost and fixed price contracts and shows that target‐cost pricing can achieve a first best where both fixed‐price contracts and cost reimbursement fail to do so. The main message of this paper is that in incomplete contracting optimality may sometimes be achieved by arrangements which combine several formulae which, individually, would fail to achieve efficiency.     

Military expenditure and economic growth: peru 1970–1996

The present study examines the effects of military expenditure on growth in Peru in the period from 1970 to 1996. By using a Deger‐type Simultaneous Equations Model it is possible to break up the net effect into supply‐ and demand‐side influences. The former consist of positive externalities of defence activities on the other sectors of the economy, while the latter can be described as crowding‐out of civilian investment. Estimations find the supply‐side effects to be insignificantly different from zero, while the crowding‐out effect of defence spending is significant and substantial. It is thereby established that defence expenditure has a negative overall effect on economic growth in Peru. Although several caveats – including specification problems of the Deger model, the quality of the data used, a relatively small sample and the presence of autocorrelation in the estimations – must be considered, these results turn out to be quite robust with respect to estimation methods (3SLS, 2SLS, OLS) and slight modifications to the model. They are also consistent with previous empirical findings from other countries and cross sectional studies.     

MILITARY EXPENDITURE AND ECONOMIC GROWTH IN MIDDLE EASTERN COUNTRIES: A DYNAMIC PANEL DATA ANALYSIS

Defence expenditures have both costs and benefits to the economy. The costs of defence expenditures are mainly emphasized as opportunity costs. On the other hand, defence spending may have growth‐promoting potential benefits: a rise in defence spending may result in a higher aggregate demand, production and employment. This paper examines empirically the effects of military expenditures on economic growth for Middle Eastern countries and Turkey, for the time‐period 1989–1999. The relationship between military expenditure and economic growth is investigated by using cross‐section and dynamic panel estimation techniques. Empirical analysis indicates that military expenditure enhances economic growth in the Middle Eastern countries and Turkey as a whole.     

THE LONG‐RUN RELATIONSHIP BETWEEN DEFENCE EXPENDITURES AND GDP IN TAIWAN

Using the Solow–Swan growth model and the time‐trend included in the aggregate production function, this study applies the multivariate cointegration approach to re‐investigate the long‐run and causal relationships between defence expenditures and GDP while controlling for capital and labour input in Taiwan during the 1955–2002 period. It examines the long‐run causal relationship using the weak exogeneity test and utilizes general impulse response functions to determine whether a shock to defence expenditures affects economic growth or vice versa. Our findings provide substantive evidence in favour of the existence of a long‐run equilibrium cointegrated relationship between defence expenditures, GDP, labour and capital stock. The results of the weak exogeneity test indicate that a bi‐directional causal relationship exists in the long‐run between defence expenditures and GDP. Thus, the main policy implication that emerges from the long‐run results is that increasing defence expenditures in Taiwan is an effective means to boost overall economic performance and, with this improved economy, it should then be able to increase its defence expenditures further. Lastly, from our dynamic vector error correction model estimations, it is found that defence expenditures are a major means of adjusting for disequilibria that occur within the system.     

Military Spending and Income Inequality:Evidence on Cointegration and Causality for Turkey,1963–2007

This paper investigates a series of unit root, cointegration and causality tests to ascertain the direction of causality between the growth of GNP and defence expenditure in Turkey for the years 1955–2000. The main conclusion is that there is a long‐run equilibrium relationship between GNP and defence expenditures. Furthermore, the short run causality test indicates that there is a unidirectional causality between variables, from defence expenditure to economic growth. In order to see the effect of a shock, we employed impulse response analyses. The results show that GNP decreased during the period then output finally recovered from the initial shock to defence expenditures.