The Effects of Defence Spending Reductions: A CGE Estimation of the Foregone Peace Dividend in the Case of Greece

With the collapse of bipolarity and the end of the East-West armaments race, defence budgets have shrunk and military expenditures across many countries have fallen, opening-up the prospect of potential beneficial economic spin-offs. In the case of Greece, a country with a higher than average defence burden, military spending has not exhibited similar downward trends as it has done in other members of NATO and the European Union. The paper, using a Computable General Equilibrium model, estimates through simulations the effects on the Greek economy had reductions in current defence spending been equal to the NATO average. The results from the CGE estimations suggest that a shift of expenditure from defence into non-defence public spending would have an appreciable beneficial impact.     

Country survey XVII: New zealand's defence policy

New Zealand's current defence strategy, first expressed in NZ Government (1991), is one of "self-reliance in partnership". We outline the country's defence policy in historical context, examine its current defence expenditure and capabilities, and document the genesis of recent major changes in security policy. We pay particular attention to the role of explicit economic analysis and advice in the formation of these policy changes.     

Country survey XVI the defence sector in the economy of a declining superpower: Soviet Union and Russia, 1965-2001

The Soviet Union was able to develop a large military-industrial complex and become the world's second superpower despite deficiencies in its centrally planned economy because defence was given high priority status and special planning, rationing and administrative mechanisms were used to attain national security objectives. However, in the period 1976-85 the effectiveness of priority protection diminished and defence institutions experienced more of the problems typical of the shortage economic system. The heavy defence burden also created growing difficulties for the civilian economy. The attempts by the Gorbachev government to reform the defence sector and improve defence-economic relationships during perestroika (1985-91) uniformly failed. For most of the transition period, the Russian military-industrial complex has been adversely affected by its low priority status, cuts in defence spending, instability of the hybrid politico-economic system, and negative growth of the economy. The armed forces and defence industry have been reduced in size and their outputs of military services and equipment have fallen to low levels. Nevertheless, the Russian armed forces still have over one million troops, significant stocks of sophisticated conventional weapons, and a large nuclear arsenal. The government of President Putin has raised the priority of the defence sector, increased real defence spending, and adopted ambitious plans to revive Russian military power. It is likely, though, that tight resource constraints will hamper efforts to reform the armed forces and to upgrade weapons. By 2010 Russia will be an important, but not dominant, military power in Eurasia.     

Guns for Butter? Empirical Evidence from China

Abstract

This study examines the causal nexus between defence spending and education expenditure in China using the bootstrap Granger full-sample causality test and sub-sample rolling window estimation. The full-sample result indicates that there is no causality between defence spending and education expenditure. By adopting a time-varying rolling window approach to revisit the dynamic causal relationships, this article identifies a negative unidirectional causality running from education expenditure to defence spending. The finding suggests that it is the education expenditure crowds out defence spending in China rather than reverse. No causality is demonstrated from defence spending to education expenditure, indicating that an increase in military spending will not crowd out expenditure on education. The results could be partly explained by that the education expenditure in China is below the requirement of corresponding economic growth, urging for more financial budget. Whereas the findings support a negative trade-off between defence and education expenditures, they refute the theory of ‘guns for butter’.     

Country Survey I–Military Spending in India 1

After a brief survey of the Indian economy, we survey the supply and demand of military expenditures in India over the last four decades. The causes of military expenditures appear to include regional rivalries and protracted conflicts, but it has proven difficult to delineate these with empirical models. The effects of military spending in India on economic growth appear to be benign, despite much speculation to the contrary. However, the opportunity costs of defence spending are shown to be considerable. We conclude with speculation about the role of debt and debt servicing in retarding future economic growth in India. We also speculate about the potential for the creation of a war economy in India.     

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.     

Panel Causality Analysis Between Defence Expenditure and Economic Growth in Developed Countries

There is much controversy in the literature over whether military expenditures have a positive, negative or no relation impact on economic growth. The aim of this paper is to determine the relationship between GDP and defence expenditure. The study analyses GDP and defence expenditures of the developed countries with cross-sectional ADF and SURADF unit root tests using annual data for the years 1980–2007. We conclude that in the long term, according to the Pedroni cointegration test, there exists a relationship between defence expenditure and economic growth. Furthermore, by utilizing the Granger causality test, we find that defence expenditure is a factor in economic growth. In other words, our study validates the hypothesis that defence spending by economically developed countries positively contributes to their economics.     

Defence R&D expenditure: The crowding-out hypothesis

The impact of defence expenditure on the economy has been widely studied through different types of models. However, the results from these studies have not reached definitive conclusions, and have left a gap in the analysis of the impact of defence R&D expenditure at the economy level. Defence R&D has specific characteristics, which lead to market failures: public good, high risk and uncertainty, national security. Also, defence R&D creates two types of externalities: negative (crowding-out), and positive (spin-off). Crowding-out is the major economic debate about defence R&D. This paper analyses the crowding-out hypothesis by applying three types of models for the UK case: supply, demand, and demand-supply models. From these three models the most reliable is chosen and applied to the individual cases of France, Germany, Japan and USA. The paper also reports the results for the pooled data of these five countries, and for four error component models. The results from estimating such models shed light on the defence R&D crowding-out hypothesis.     

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.     

Military Expenditure as a Proxy for State Power. The Case of France

This paper attempts to build a simple indicator of state power. Military expenditure is the paper’s point of departure, with the definitions given by NATO, SIPRI and others. This definition is discussed and a power version is build, using French budgetary data. Then a defence of the result against traditional or non-traditional critics is presented under an imperative of action. Finally, this concept is enlarged and a new concept of power expenditures is given, one more time using French budgetary data. The conclusion is that this large expenditure concept is an unbiased but imperfect indicator of the will to act, and has to be completed by GDP to indicate the capability to act in the long-run.     

Country survey IX: Spain

From the early 1980s Spain embarked on a wide‐ranging process of military reform, from organisational changes to defence industrial policies. Investment in military equipment was set to grow, policies were drawn up to foster the domestic defence industrial base, defence R&D rocketed, and Spain joined a myriad of international arms development programmes. Yet, by 1991 the process of reform had run out of steam. Expenditure planning proved unreliable, and firms suffered from sharp cutbacks in procurement expenditure. The model of defence industrial growth sketched in the mid‐1980s had floundered. The Spanish case provides an example of how the quest to maximise defence procurement from domestic sources can fall victim to industrial and budgetary constraints. Spanish defence producers are now becoming increasingly intertwined with foreign defence companies.     

Brazilian National Defence Policy: foreign policy,national security,economic growth,and technological innovation

ABSTRACT

With the world’s ninth largest economy and comprising nearly 60% of South America’s GDP, 47% of its territory, and 49% of its population, Brazil has become a regional power and an important actor in world affairs over recent decades. This scenario has led the government to re-evaluate its role in the world order, resulting in the enactment of the National Defence Policy, whose objective was to consolidate the country as a regional power while at the same time addressing national security issues, promoting economic development through a series of defence programmes, restructuring the defence industrial base, fostering innovation through technology and knowledge transfer to Brazil, and indigenous research and development. However, the policy’s implementation suffers from several challenges discussed in this article, which may test the capability and competence of Brazilian policymakers, military, industrialists, and other individuals and organisations involved in its implementation.     

The future of European defence policy: An economic perspective

European defence policy has been dominated by politics. This paper shows how economic principles can be used to derive guidelines for the formulation of European defence policy. The inefficiencies of the EU's existing defence arrangements are identified. It is shown that there is scope for efficiency improvements in the EU's Armed Forces and its defence industries.     

‘I have seen the future and it works’: The US defence industry transformation – lessons for the UK defence industrial base

The US has embarked upon a major transformation of its approach to defence industrial base planning. Although bureaucratic and industrial inertia, as well as budgetary constraints, may delay transformation, its effects will lead to radical changes in the US defence industrial base with new entrants and new combinations of players. The UK, with more modest defence ambitions, capabilities and budget, will seek to keep in touch with the US. However, a commercially‐led drive to embed UK industry even more deeply in the US defence market could be the last step in creating a largely US–UK North Atlantic relationship, with much of Europe very much a subsidiary business concern. This contains a risk that the UK will become increasingly dependent on the US for design and integration of major systems and national defence industrial capability focused on a limited number of niche technologies.     

Small countries and the consolidation of the European defence industry: Portugal as a case study

In this paper, we analyse the dilemma confronted by a small country in relation to the consolidation taking place in the European defence industry. Assuming that Portugal must maintain its armed forces, and must retain a minor defence industry, this industry must be competitive in small niches. Competitiveness must be based on, amongst other elements, technical efficiency and technological change. We investigate this issue, first characterizing the threats faced by the Portuguese defence industry, then investigating its present efficiency and finally, we discuss its role in the consolidation of the European Industry. We conclude that the Portuguese defence industry has no alternative but to opt for innovation and European partnership, which are complementary policies, but which require the active involvement of the stakeholder (i.e. the Government) in effecting these fundamental shifts in direction and emphasis. If this strategy does not succeed, the defence policy should be based on offsets.     

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.     

France and its allies: A comparative study of defence spending trends since 1985*

Within the EU France devotes to defence the largest financial and human resources although it is not the richest country, nor has it the largest population or labour force. The cost of nuclear weapons accounts for only a small fraction of this abnormally high French defence effort. If France had restructured its military capabilities at the same rate as its principal Allies during the 1985–1994 period, then French defence outlays would be about 20% less than at present. The fundamental reasons for France's excess defence outlay comprise virtual total dependence on French sources for equipment, produced in very small numbers; a military presence outside of Europe; and too many personnel. These deficiencies, and the consequent absence hitherto of a “peace dividend”, indicate a failure to identify the country's real strategic requirements, and a lack of will to reorganise efficiently French defence. The recently announced reform towards an all‐professional force is unlikely to achieve the potential and desirable improvement in cost‐effectiveness.     

Modelling international conflict under conditions of state level economic and political uncertainty

Formal models of international conflict have tended to concentrate on change across the security dimension, assuming that the state level economic and political dimensions are constant. However, the conclusion of the Cold War suggests that over the long run these dimensions are not constant; indeed, the development of economic power, state level limits on defence expenditures, structural impediments to economic change, and several other ‘constants’ clearly do have an endogenous role in international conflict. This paper suggests one strategy for their inclusion as a causal factor in conflict modelling.     

Country survey XI: Defence and the Israeli economy

The literature on economic aspects of defence in Israel is critically reviewed by subject: measuring the defence burden, the determinants of defence spending, the effects of defence spending on the economy, and the military‐industrial complex. An overview of the Israeli economy is provided, and some new econometric findings on the determinants of defence spending are presented. The paper concludes by addressing policy issues in the context of Israel's jubilee.