TAX EFFICIENCY AND QUALITY/QUANTITY TRADE‐OFFS IN DEFENSE PROCUREMENT*

In this article the effect of defense spending on aggregate output is discussed. Recent publications in this area are reviewed and new additional evidence is provided. The findings presented in this paper are supportive of the positive effect of defense spending. However, in light of the contrary evidence presented in other papers, empirical evidence taken as a whole, suggests that a definitive conclusion about the effect of defense spending at this time should be avoided.     

Country Survey XIII: Japan's security posture and defense industry prospects

Defense budgets in Japan have been complicated compromises from numerous inputs ‐ including threat perceptions, domestic industrial/technological base development, support for the bilateral security treaty with the United States and internal bureaucratic politics ‐ but with the fall of the former Soviet Union, the clearest justification for higher spending disappeared. Double‐digit defense spending increases that were common in the 1980s have been replaced by annual increases lower than present inflation rates, resulting in negative real growth in the country's defense budget. Domestic economic problems and consistent government pressures for smaller budgets have further slowed annual growth in total spending and have contributed to lower procurement budgets. As a result, the domestic Japanese defense industry is facing far more constrained conditions from the growth years of a decade before.

Government policymakers are examining Japan's regional security environment as well as its alliance with the United States to determine the appropriate course for the country to take in the coming years. The formal security treaty with the United States is likely to remain a major element of government positions, but other aspects of the country's overall security posture are open to debate. Perceptions of a reduced threat environment are fueling additional pressures for defense budget cuts.

The domestic defense industry seeks means to assure its survival in domestic defense markets in this constrained environment. Expansion into overseas markets to offset declining domestic markets is an option that currently is constrained by policy restrictions on arms exports. Industry is advocating re‐examination of those policies and unlike earlier years, government appears willing to respond positively but cautiously to this lobbying.     

NON‐LINEARITY IN THE DEFENCE EXPENDITURE – ECONOMIC GROWTH RELATIONSHIP IN TAIWAN

As we enter the 21st Century, technologies originally developed for defense purposes such as computers and satellite communications appear to have become a driving force behind economic growth in the United States. Paradoxically, almost all previous econometric models suggest that the largely defense‐oriented federal industrial R&;D funding that helped create these technologies had no discernible effect on U.S. industrial productivity growth. This paper addresses this paradox by stressing that defense procurement as well as federal R&;D expenditures were targeted to a few narrowly defined manufacturing sub‐sectors that produced high tech weaponry. Analysis employing data from the NBER Manufacturing Productivity Database and the BEA’ s Input Output tables then demonstrates that defense procurement policies did have significant effects on the productivity performance of disaggregated manufacturing industries because of a process of procurement‐driven technological change.     

Defense Spending and Economic Growth: Some Empirical Evidence from the Arab Gulf Region

The present paper investigates the causal relationship between defense spending and economic growth in six Gulf countries for the period 1975-1998. I use Granger-causality test within a multivariate error-correction framework to explore the existence and direction of causality between these two variables. The empirical results indicate that neither growth nor defense can be considered exogenous and that the relationship between them cannot be generalized across countries. Two implications can be derived from these findings. One is the need for more studies, especially from developing countries, using time-series data. The other is that decisions on defense spending should be based on each country's socio-economic circumstances. Given the small sample size, however, caution is advised in considering the above results and their implications as final.     

Defense Burden and the Effect of Democracy: Evidence from a Spatial Panel Analysis

ABSTRACT

Do democracies spend less on national defense? This paper provides new evidence of the effect of democracy on defense burden based on a Spatial Durbin Model with panel data for 98 countries for the years 1992–2008. While democracy measured by means of an index variable covering the entire range from perfect democracy to perfect autocracy turns out to be insignificant, dummy variables indicating transition to higher levels of democracy reveal a statistically highly significant negative effect of democracy on a country’s defense burden. Allowing for country-specific effects reveals heterogeneity in the effect of democracy across countries. Apart from the effect of democracy, the estimation results indicate strong spatial dependence of military burdens across countries. Moreover, they provide statistical evidence for a peace dividend, for substitution effects in defense spending and for a negative effect on the military burden for countries when they exhibit a trade surplus instead of a trade deficit.     

Does Health Spending Crowd out Defense in the United States? Evidence from Wavelet Multiresolution Analysis

Abstract

This study investigates the association between defense and health spending using multi-resolution analysis incorporating the structural change model. Our empirical results suggested that a negative correlation between defense and health spending persists over the entire period of 1941–2013 in the very long-run (over 16 years cycle), but there is a change in correlation between defense and health spending in the short-run (2–4 years cycle), medium-run (4–8 years cycle), and long-run (8–16 years cycle) during the same period. In particular, there appears to have been a trade-off relationship between defense and health spending during the ex-Korean War period, but there was a complementary relationship between defense and health spending during the post-Korean War period. The crowding-out effect of health spending on defense spending during the period when the Affordable Care Act was put into effect relies on the strength of the positive correlation in the long-run (8–16 years cycle) and negative correlation in the short-run (2–4 years cycle) and very long-run (over 16 years cycle).     

National security,military spending and the business cycle

This paper develops a Dynamic Stochastic General Equilibrium model where national security is an argument in the agent’s utility function and the government chooses optimally the level of military spending to maximize social welfare. National defense depends on military expenditure and on the strategic environment reflecting a potential hostile external threat. We use aggregate data on consumption, investment, and military spending for the US economy to estimate the parameters of the model. Estimation results suggest that consumption and national defense are complements and that military spending variability is mainly explained by external threat shocks although it also depends on the macroeconomic conditions. We compute impulse response functions of the main macroeconomic variables to several shocks: a total factor productivity shock, a defense technology shock, and a strategic environment shock. Surprisingly, we find that the optimal response to an increase in the external threat (a worsening in the strategic environment) will rise output by reducing consumption and increasing investment.     

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.     

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.     

Budgetary Trade-Offs Between Defense,Education and Health Expenditures: The Case of Turkey

The main objective of this paper is to evaluate empirically the existence of a budgetary trade-off between military, education and health expenditures in Turkey for the time period 1925-1998. Development economists, peace and defense economists and political economists have extensively investigated the existence of a trade-off between military, education and health spending since the 1970s. However, the literature review reveals that it is hard to establish a general theory of budgetary trade-off between military, education and health spending and make this applicable for all cases. This is mostly due to economic, social, political, and historical differences among the countries Moreover, it is likely that different research techniques, different time periods analyzed may produce different results. As a result of this, researchers have found a variety of outcomes regarding the trade-off between defense-education and health expenditures. This study presents a brief literature review within the framework of trade-offs between defense-education and health expenditures and also concentrates on theoretical model development. The discussion will center on developing a multi-variable single equation regression model and presenting estimable forms of equations.     

Don't stop with Joint Forces Command … cut AFRICOM too

Abstract

The United States Africa Command (AFRICOM) has been a military success but a strategic messaging failure. The United States’ relationships across Africa cannot be boiled down to military affairs. This paper argues that Africa has many more opportunities than challenges and thus requires a more balanced foreign policy solution from Washington DC than a new military command. For the military engagement that does need to take place, a more low-profile approach would benefit the United States in Africa.     

Stopping Suicide Attacks: Optimal Strategies and Unintended Consequences

We study the behavior of defense spending in Switzerland over 1975–2001. Our main interest is in determining how neutrality in international affairs (non‐membership in military alliances) affects defense spending. We find that neutrality is associated with a perception of lower levels of external threat; hence it confers economic benefits in the form of a smaller defense burden. However, neutrality does not fully insulate a country from variations in the level of external threat in the global system as perceived by members of military alliances. Swiss defense spending has tracked very closely the spending trends – but at a lower average level – of the United States and other NATO countries. To the extent that post‐Cold War threats, such as international terrorism, materialize primarily in the context of existing security alliances, Swiss military spending patterns observed in 1975–2001 are likely to remain the same in the future.     

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.     

Boost-glide Weapons and US-China Strategic Stability

ABSTRACT

The United States and China are testing boost-glide weapons, long-range strike systems capable of flying at Mach 5 or faster through the upper atmosphere. For the United States, these systems would provide a conventional prompt global strike capability, which, together with US ballistic missile defense programs, Chinese experts regard as a threat to China's ability to conduct nuclear retaliation. This perception is encouraging the Chinese military to modify its nuclear posture in ways that tend to create greater risks for both sides. If China's own boost-glide systems are meant to carry nuclear payloads only, their deployment would not fundamentally alter the current situation between the two states. However, if they were conventionally armed or dual-purpose, or if the United States could not determine the payloads they carried, the deployment of Chinese boost-glide systems could compound problems of strategic stability created by the introduction of ballistic missile defense, antisatellite, and antiship ballistic missile capabilities. If the technical hurdles can be overcome, it may be difficult for the two sides to refrain from these deployments in the absence of strong mutual trust or an established arms-control relationship. New confidence-building measures and expanded mutual transparency are warranted to avoid creating new dangers.     

Externality of Defense Expenditure in the United States: A New Analytical Technique to Overcome Multicollinearity

Abstract

This study estimates a three-sector Feder–Ram model using US annual data for 1965–2014 to confirm the externality of defense expenditure in the United States. Although the model is often used in the literature to scrutinize whether this effect exists, a flaw intrinsic to this model is the appearance of multicollinearity. In this study, I introduced novel techniques, namely: the standardization and estimation of a simple slope, to estimate the model. The results are as follows. First, I prove that the multicollinearity problem can be resolved by standardization. Second, externality, which is judged to conventionally exist, is not found. Third, increases in defense expenditure bring about positive but limited economic growth when the ratio of private to defense expenditure in the previous year ranges from 5.09 to 6.82%. By re-estimating the model, this study contributes to developing the Feder–Ram model within the related literature.     

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.     

Why nations fail: defense spending,fighting commitment and,inter-nations-prosperity-poverty-gap

Both the increasing defense spending and the widening divergence between rich and poor countries are of great concerns. This paper attempts to explain the two concepts in a unify theory framework. In the view of conflict economics, a nation’s defense spending can be seen as the fighting commitment of distributive effort in the global economy while other is the productive effort. The development of global economy needs the productive efforts from almost every nation, and the distribution of the aggregate output is determined in large degree by the fighting commitment of each nation. The numerical simulation of the model gives a reasonable explanation of the patterns of the divergence/convergence of prosperity-poverty gap between nations, the fact which is evidenced by many empirical analyses. (1) Given the initial wealth ratio between nations fixed, there is a critical value of fighting decisiveness, when the actual value is larger than the critical value, it is more likely to result in Matthew effect; otherwise the gap would gradually be shortened. (2) Given the fighting decisiveness fixed, there is a critical value of initial wealth ratio, when the actual value is larger than the critical value, it is more likely to result in Matthew effect; otherwise, the gap would gradually be shortened. The study gives a new perspective to explain and handle the increasingly defense spending and the prosperity-poverty gap between nations.     

Property distribution and configurations of sovereign states: A rational economic model

A nation's wealth is both an object of conquest to covetous aggressors and a resource to its owners for self defense. To maintain autonomy every country must mount a defense which either makes its capture (1) more expensive than any aggressor can afford, or (2) more expensive than it is worth to aggressors. Whether this condition can be satisfied for all countries simultaneously depends as shown in this paper on relative efficacy of military offense versus defense, the aggregate of wealth among nations and its distribution, and the benefits a conqueror may obtain from conquest, including the duration of these benefits. The paper shows how these factors fit together to determine the sustainability and stability of the international distribution of property as embodied in the configuration of sovereign states.     

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’.     

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.