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.     

Book reviews

Jurgen Brauer's comment presents what he calls a replication of an earlier study by Higgs and Kilduff (1993) and uses it to criticize the adequacy of the Higgs‐Kilduff model. In several respects, however, Brauer has not actually performed a replication: he uses different data, a different sample period, and arrives at different results. His criticisms rest on his own setup, not that of Higgs and Kilduff. Therefore they have no strict applicability to the latter. Moreover, Brauer's stepwise model has no bearing on the Higgs‐Kilduff model, as it violates that model's specification requirements.     

The German arms industry in a European context: A study in successful downsizing

Defence offsets rank as one of the most important and controversial topics within the broad field of defence economics. Arms vendors are likely to view offsetting investment as a distraction, fearful of its potential to hurt the bottom line. By contrast, policymakers in the arms purchasing countries see offsets as an opportunity to extract technology transfer, as well as employment, investment and export sales opportunities. Establishing the actual impact of offsets, however, is not easy. The subject is shrouded in secrecy and myth, with anecdote and generalisation pervading even the intellectual press. This paper seeks to break the mould by offering an empirical case study of the role of offsets in Malaysian defence industrialisation.     

MILITARY EXPENDITURE AND GRANGER CAUSALITY: A CRITICAL REVIEW

A large literature has used tests for Granger (1969) non‐causality, GNC, to examine the interaction of military spending with the economy. Such tests answer a specific although quite limited question: can one reject the null hypothesis that one variable does not help predict another? If one can reject, there is said to be Granger causality, GC. Although the limitations of GNC tests are well known, they are often not emphasised in the applied literature and so may be forgotten. This paper considers the econometric and methodological issues involved and illustrates them with data for the US and other countries. There are three main issues. First, the tests may not be informative about the substantive issue, the interaction of military expenditure and the economy, since Granger causality does not correspond to the usual notion of economic causality. To determine the relationship of the two notions of causality requires an identified structural model. Second, the tests are very sensitive to specification. GNC testing is usually done in the context of a vector autoregression, VAR, and the test results are sensitive to the variables and deterministic terms included in the VAR, lag length, sample or observation window used, treatment of integration and cointegration and level of significance. Statistical criteria may not be very informative about these choices. Third, since the parameters are not structural, the test results may not be stable over different time periods or different countries.     

THE CASE FOR DEFENCE

What is the case for defence and is it a worthwhile investment? This question is addressed for two contrasting nations, namely, the UK and New Zealand. Economists have a set of standard analytical tools for addressing the question but they are difficult to operationalise. This paper provides policy‐relevant answers.     

Modelling the demand for national security expenditure: a note

In the past, national security for the majority of countries was almost exclusively associated with an external military threat emanating from a rival state(s). This was reflected in the standard models for the demand for military expenditure. The emergence of new security challenges such as terrorism, transnational crime networks, failed and rogue states, has profoundly affected the international security environment and the concept of national security. This note develops a model for the demand for national security expenditure adopting a broader, more inclusive definition of national security and includes concomitant budgetary outlets to meet the new security challenges.     

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.     

The right place at the right time,or the right person in the right place?

South Africa's military has, since the First World War, been an oft-used and effective tool in the conduct of South African foreign policy, but this role has not always translated into power for Defence Department principals in its formulation. South African Defence Ministers for most of the country's history have played a minor role in the making of foreign policy; despite a change in this dynamic between approximately 1975–1990, the post-apartheid era has once again seen a diminishment of Defence's power in this arena. This article examines why Defence Ministers have generally been such weak players, with an eye toward disaggregating whether this was a product of interpersonal relationships with Cabinet and – most importantly – the Head of State, or whether this influence (or lack thereof) was more a function of South Africa's international standing. While determining who has influence on this process is difficult given the primacy of the national leader in making foreign policy and a lack of insider accounts by participants in the process, this article relies upon several interviews with participants and knowledgeable observers that help illuminate the process and Defence's role in it.     

Defense spending and the macroeconomy

Given Kinsella's (1990, 1991) appeal for analysis to be pursued using sub‐annual level of data, we pursue such an endeavor in this paper. We examime the effect of defence spending on real output, the unemployment rate, price level, and interest rate covering a quarterly time frame 1960:1 to 1988:1 using an unrestricted vector autoregression framework. Our results parallel the findings of Kinsella in that there appears no causal relationship in either direction between defence spending and economic performance.     

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.