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 demand for military spending in the peripheral economies of Europe

Research on the factors that determine the level of military expenditure or military burden in countries, suggest that the dynamics of the determinants of military spending will be best understood by case studies of individual countries and studies of groups of relatively homogeneous countries. This paper provides a comparative analysis of three of the EU's peripheral economies - Greece, Portugal and Spain. A simple model based on a general theory of the demand for military spending provides the basis for an investigation of the relative importance of strategic and other social and economic factors for the three countries.     

Defence spending and economic growth: A causal analysis for Greece and Turkey*

There are a number of studies which consider the relation between military spending and economic growth using Granger causality techniques rather than a well‐defined economic model. Some have used samples of groups of countries, finding no consistent results. Others have focused on case studies of individual countries, which has the advantage of the researchers bringing to bear much more data than the cross country samples and a greater knowledge of the structure of the economy and the budget. This paper adds to the literature by providing an analysis of two countries, Greece and Turkey, which are particularly interesting case studies given their high military burdens, the poor relations between the two and the resulting arms race in the area. In addition to analysing the data using standard “pre‐cointegration” Granger causality techniques, this paper employs modern vector autoregressive (VAR) methodology that utilises cointegration via Granger's representation theorem. The standard Granger causality tests suggest a positive effect of changing military burden on growth for Greece, but this is not sustained when the cointegration between output and military burden is taken into account. The only evidence of significant Granger causality is a negative impact of military burden on growth in Turkey.     

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.     

Russian Reactions to Reagan's ‘Maritime Strategy’

The US Navy's audacious Maritime Strategy of the 1980s is often credited with acting as a key catalyst to the demise of the USSR. In assessing the role of strategic missile submarine “bastions” in the country's overall military strategy, the authors are skeptical of the above thesis, explaining that Moscow actually viewed deployments of Tomahawk land-attack cruise missiles on to US submarines (versus direct threats against the Soviet Navy itself) as the most alarming threat. The authors concede that the arms race played a role in the collapse of the USSR, but deny a direct connection with Soviet naval development citing the relatively minor naval proportion of overall defense spending. For the difficulties facing the fleet at the end of the Cold War, they instead blame deep systemic problems internal to the Soviet Navy.     

Defense spending and economic growth across the Taiwan straits: a threshold regression model

This paper employs both linear and non‐linear models to investigate the relationship between national defense spending and economic growth for Taiwan and China. Using data from 1953–2000 on defense spending, GDP, import, export and capital, we find that China's defense spending leads that of Taiwan. There exists the phenomenon of an arms race between both countries when official Chinese data are used. On the one hand, feedback relations prevail between economic growth and defense spending growth in Taiwan. On the other hand, China's national defense is found to lead economic growth.     

An analysis of the Washington naval agreements and the economic provisions of arms control theory

During the Cold War, two contending hypotheses dominated theories concerning the economic impact of anus control. The first suggested that when certain prerequisites were fulfilled, arms control agreements served to promote lasting reduction in military spending. The second asserted that instead of promoting savings, arms control encouraged diversion of resources to more advanced and expensive weapons, thus driving defense spending higher. Through the examination of the impact of the Washington Naval Agreements on naval expenditure during the 1920s, this paper provides empirical evidence to support the latter of these competing hypotheses. The United States, Great Britain, and Japan all realized economic savings after signing the Washington Naval Agreements. However, these savings soon eroded as the powers developed more advanced weapons‐systems.     

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.     

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.     

An Empirical Analysis of the Arms Race Between South and North Korea

This study analyses an arms race between South and North Korea over the period 1963–2000. Despite the strategic importance of the Korean Peninsula, the arms race between South and North Korea has rarely been studied. In this study, the South–North arms race is empirically estimated using Richardson’s action–reaction model. The pattern of South–North arms race between the Cold War (1963–1989) and the post‐Cold War eras (1990–2000) as well as the existence of an arms race is examined comparing both countries’ defence spending, number of military personnel and tactical aircraft.     

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.     

Country survey VII: Military spending in Greece

Greece is one of the poorest members of the European Union, yet its defence burden is the highest in Europe and NATO. At around 5.6% of GDP in 1994 it is twice the average NATO and European Union burden. In terms of the human and material resources devoted to defence yearly Greece is in comparative terms the most militarised country in Europe. The purpose of this paper is to examine military spending in Greece. It begins with a brief survey of the Greek economy and its development as it relates to defence. The determinants of Greek military spending are then modelled and analysed. The causes of military spending appear to be primarily regional rivalries and conflicts. In particular the ongoing dispute with Turkey is the main external security determinant of defence spending in Greece. The supply of defence inputs is then examined with reference to equipment procurement and indigenous arms production.     

Asymmetric effects of military expenditure between Turkey and Greece

One of the major topics of the defense economics literature regarding Turkey and Greece has been the empirical modeling of various aspects of arms racing. However, despite a considerable amount of research, little evidence has been found in favor of an arms race between the two countries. In the literature, this failure of applied studies has been attributed, among other reasons, to the sensitivity of the results to the underlying model specification, to small sample size, and to measurement issues. This study uses novel, nonlinear, models to investigate the possible relationship between the military expenditures of the two countries. It is assumed that if there are two regimes characterizing the low (or negative) and high-growth military expenditure periods, the growth rates of one country's military expenditure may have distinct effects on the military expenditure regimes of the other country or may contribute to the change from one regime to another. The nonlinear models examined are Smooth Transition Regression models (STRs). Strong evidence of nonlinearity for Greece is found, with asymmetry relating to two distinct regimes through lagged Turkish military expenditure changes.     

The comparison of military budgets of the eastern and central European countries

The evolutions of military expenditures in Eastern and Central European countries are difficult to estimate and to compare, due to the lack of available data for these states. Some results of the extent of cuts in defence spending since 1990 are interesting to interpret, but it is difficult for econometricians to use these figures even carefully. The structures of national military expenditure have been modified to the detriment of arms equipment. Thus, the disarmament process needs a special analysis of the arms industry.     

Pricing war within a real option framework∗

The aim of this paper is to provide insights on war spending using simple tools of financial calculus rather than developing a general theory. Combining Grossman and Han's theory of war finance with the empirical literature that displays a straightforward relationship between the real value of money and wartime military events, we advocate the use of the real option approach of war spending. Some calculations and an empirical example illustrate this approach.     

Measuring hard power: China’s economic growth and military capacity

China’s rapid economic growth is facilitating massive increases in its military spending and causing increased security concerns in Asia and the Western Pacific. But there is uncertainty over how large China’s military spending is relative to other countries, or how fast it is growing in real terms. We address this issue by deriving a relative military cost price index based on the relative unit costs of inputs. We find that China’s real military spending is much larger than suggested by exchange rate comparisons, and even larger than standard purchasing power parity comparisons. We also find, however, that the real growth of China’s military spending has been smaller than conventionally thought. This is due to rapidly growing wages in China and the large share of personnel in China’s military budget.     

Endogenous Growth and Defense Expenditures: A New Explanation of the Benoit Hypothesis

This paper develops an endogenous growth model to examine the linkage between military expenditures and economic growth. We adopt the modeling strategy where both the supply side and the demand side effects of national defense are taken into considerations. Our result finds that a rise in military spending tends to stimulate the sustained growth rate, confirming Benoit's famous empirical findings.     

Military Spending,Conflict and External Debt in Sub-Saharan Africa

The damaging economic effects of the debt crises on Africa in the late 1980s encouraged considerable research on the determinants of external debt in developing economies. Although sub-Saharan Africa's (SSA) debt was cut by two-thirds by 2008, through two debt relief programmes, debt in the region has since been rising at an increasingly rapid pace. This study provides an empirical analysis of the determinants of external debt in SSA over the period 1960–2016, using dynamic panel methods. It also considers two potentially important factors that have received relatively little attention. One is military spending, rarely considered, despite a number of well-publicised scandals over the procurement of unnecessary and expensive high-tech weapons systems. A second, is the possibility that the countries studied have been involved in conflict. The empirical results point to a positive impact of military spending on external debt, but with some evidence of heterogeneity across the countries. Furthermore, findings indicate that the positive effect of military expenditure on debt becomes more marked in countries that have been affected by conflict. These results imply that policies to improve security and reduce military spending could be beneficial in reducing external debt and, potentially, improving economic performance in the region.     

The Demand for Military Spending in Egypt

Egypt plays a pivotal role in the security of the Middle East as the doorway to Europe and its military expenditure reflects its involvement in the machinations of such an unstable region, showing considerable variation over the last 40?years. These characteristics make it a particularly interesting case study of the determinants of military spending. This paper specifies and estimates an econometric model of the Egyptian demand for military spending, taking into account important strategic and political factors. Both economic and strategic factors are found to play a role in determining military burden/spending, with clear positive effects of lagged military burden, suggesting some sort of institutional inertia, plus negative output and net exports effects. The strategic effect as a result of the impact of Israel’s military burden is mostly positive and significant, though its impact is reduced when the impact of important strategic events are taken into account. The military spending of Egypt’s allies Jordan and Syria generally seems to have had no effect on Egypt’s spending. These results are consistent over a range of econometric techniques.     

Worldwide military spending, 1990–95

The decline in military spending that began in the mid‐1980s continued through 1995, and this decline was widespread both geographically and by level of development. Cuts in military spending appear to have potentially important implications for non‐military spending and fiscal adjustment. In contrast to findings for previous periods, military spending has declined more than proportionately in those countries that have reduced total spending. Countries with Fund programs have reduced military spending more sharply than other developing countries, largely reflecting outcomes in the transition economies. Further, military spending appears to have been less resilient in program countries than other developing countries.