Economics of defense

The economics of defense or defense economics is a subfield of economics, an application of the economic theory to the issues of military defense. It is a relatively new field. An early specialized work in the field is the RAND Corporation report The Economics of Defense in the Nuclear Age by Charles J. Hitch and Roland McKean ( 1960, also published as a book ).[1] It is an economic field that studies the management of government budget and its expenditure during mainly war times, but also during peace times, and its consequences on economic growth. It thus uses macroeconomic and microeconomic tools such as game theory, comparative statistic, growth theory and econometrics. [2]

Principles

In addition to defense proper, defense economics covers other aspects, such as disarmament and arms conversion.[3]

In terms of economics, a distinctive feature of the defense is that it is public goods, and as such it is both non-excludable and non-rivalrous.[3] As such, it may suffer the so-called "free rider problem".[4]

General economic theories of military spending

The Neoclassical theory

In the Neoclassical theory, military spending can be considered as a public good. Indeed, the government acts as a rational agent, it tries to maximise the welfare of society by taking into account the security benefits, the opportunity costs and the trade-off between military and civil spending. This theory is often criticized because of its unrealistic assumptions, for example (its assumption) about the rational agent (theory).[5]

The most famous model neoclassical model is the one of Feder-Ram, developed by Biswas and Ram in 1986, and adapted by Feder a few years later. It mainly focuses on the effects of military spending on economic growth of developing countries through the export effect, thanks to a cross-country study. This model is criticized because military spending represents one single explanatory variable in a simple linear regression. [6]

The Keynesian theory

In the Keynesian theory, in case of ineffective aggregate demand, military spending increases the output of a country (see also Military keynesianism). According to Faini et al (1984), military spending can increase growth, through an increase of capacity utilization, investment and profits. This theory is criticized because it is mainly focus on the demand side and not enough on the supply and production side. [7]

The Marxist theory

The Marxist theory considers military spending as necessary for the development of the Military-industrial complex in class struggle and capitalism. According to Baran and Paul Sweezy (1966), this type of government spending enable to control wages and profits in case of underconsumption. [8]

United States

Typically, the United States uses a combination of hard power (military force), soft power (diplomacy and foreign assistance) and domestic counterterrorism (homeland security).[9] During the early 2000s, the United States' national defense budget rose to about $800 billion per year. In recent years, it has dropped to $600 billion annually, which is still a large figure relative to Cold War averages and other countries' budgets.[10]

Military defense spending tables

List by the Stockholm International Peace Research Institute
2017 Fact Sheet (for 2016)[11]
SIPRI Military Expenditure Database[12]		 List by the International Institute for Strategic Studies
Top 15 Defence Budgets 2015[13]
RankCountrySpending
($ Bn.)		% of GDP
World total 1,6862.2
1United States United States611.23.3
2China China215.71.9
3Russia Russia69.25.3
4Saudi Arabia Saudi Arabia63.710
5India India55.92.5
6France France55.72.3
7United Kingdom United Kingdom48.31.9
8Japan Japan46.11.0
9Germany Germany41.11.2
10South Korea South Korea36.82.7
11Italy Italy27.91.5
12Australia Australia24.32.0
13Brazil Brazil22.81.3
14United Arab Emirates United Arab Emirates22.85.7
15Israel Israel17.85.8
16Canada Canada15.51.0
17Spain Spain14.91.2
18Turkey Turkey14.92.0
19Iran Iran12.33.0
20Algeria Algeria10.66.7
21Singapore Singapore9.93.4
22Taiwan Republic of China9.91.9
23Pakistan Pakistan9.93.4
24Colombia Colombia9.93.4
25Poland Poland9.72.0
26Netherlands Netherlands9.21.2
27Oman Oman9.016.7
28Indonesia Indonesia7.70.9
29Mexico Mexico6.80.6
30Kuwait Kuwait6.36.5
RankCountrySpending
($ Bn.)
1United States United States597.5
2China China145.8
3Saudi Arabia Saudi Arabia81.9
4Russia Russia65.6
5United Kingdom United Kingdom56.2
6India India48.0
7France France46.8
8Japan Japan41.0
9Germany Germany36.7
10South Korea South Korea33.5
11Brazil Brazil24.3
12Australia Australia22.8
13Italy Italy21.6
14Iraq Iraq21.1
15Israel Israel18.6

North Atlantic Treaty Organisation

At the Prague Summit 2002, with the 9/11 terror attack not in the distant past and the enlargement of NATO into Eastern Europe (Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia and Slovenia), member states agreed the need to strengthen the alliances ability to deal with a wide range of new threats. After this submit members countries committed to establishing a minimum level of acceptable defense spending of 2% of annual GDP. As of 2016 figures, only five member states (United States of America, Estonia, United Kingdom, Poland and Greece) have reached this figure NATO. "Defence Expenditure of NATO Countries (2010-2017)" (PDF). NATO Media. Retrieved 1 May 2018. </ref>.

After defense spending cuts during the Global Recession, members of the alliance agreed at the Wales Summit 2014 that those that did not already meet the defense spending guidelines to stop cuts to associate budget, gradually increase spending, and aim to move towards the goal within a decade Banks, Martin (15 March 2018). "Results are in: Here's how much NATO allies spent on defense in 2017". Defense News. Retrieved 1 May 2018. </ref>. Thereafter, spending among European allies and Canada increase their defense spending from 2016 to 2017 by approximately 4.87 percent. NATO. "Defence Expenditure of NATO Countries (2010-2017)" (PDF). NATO Media. Retrieved 1 May 2018. </ref> There has a significant increase in the defence spending of some Eastern Europe countries as they see a threat from Russia after the annexation of Crimea, this significant threat has seen an increase in deployment to defence equipment to this region from the likes of the United Kingdom and the United States of America. Although there has been a significant increase in the defence expenditure in some members of the alliance there are a number of countries who are very far away from reaching the 2 percent defence expenditure target.

At the Wales Summit, it was also agreed that Allies who currently spend less than 20% of their annual defense spending on major new equipment, including related Research & Development, will aim, within a decade, to increase their annual investments to 20% or more of total defense expenditures.[14]According to 2017 estimate figures, 12 countries will have reached this target (Romania, Luxembourg, Lithuania, Turkey, Bulgaria, United States, Norway, France, Poland, United Kingdom, Italy and Slovakia).

In recent times, American presidents have become critical of the defense spending of their European NATO allies. Donald J. Trump as a candidate describe NATO “obsolete” but has since withdrawn these claims, he continues to argue that the allies must spend more on their defense. The previous president Barack Obama was concerned that not all NATO members are "chipping in" toward the cost of a collective defense and deterrent against Russia at the time of Ukrainian Russian conflict.[15] According to the 2017 NATO Annual Report on Defence Expenditure, the United States of America spends almost twice the amount of US Dollars on Defence than their European and Canadian colleagues. Even with the significant difference in the expenditure NATO allies account for 70 percent of the global total military expenses.

See also

References

  1. ↑ Keith Hartley, The Economics of Defence Policy: A New Perspective, p.1
  2. ↑ "Defense Economics" by Gavin Kennedy, Encyclopedia Britannica
  3. 1 2 Hartley, p. 3
  4. ↑ "Defense" by Benjamin Zycher in: The Concise Encyclopedia of Economics
  5. ↑ by Giorgio d’Agostino and J Paul Dunne and Luca Pieroni, Assessing the Effects of Military Expenditure on Growth, Chap XX
  6. ↑ "What is the Keynesian multiplier?". Investopedia. 2018-04-10. (Subscription required (help)).
  7. ↑ by Giorgio d’Agostino and J Paul Dunne and Luca Pieroni, Assessing the Effects of Military Expenditure on Growth, Chap XX
  8. ↑ by Giorgio d’Agostino and J Paul Dunne and Luca Pieroni, Assessing the Effects of Military Expenditure on Growth, Chap XX
  9. ↑ Sawhill, Alice M. Rivlin and Isabel V. "How to Balance the Budget".
  10. ↑ Livingston, Ian (6 September 2016). "The recipe for a healthy defense budget".
  11. ↑ "Trends in World Military Expenditure, 2016" (PDF). Stockholm International Peace Research Institute. Retrieved 13 December 2017.
  12. ↑ "Data for all countries from 1988–2016 in constant (2015) USD (pdf)" (PDF). SIPRI. Retrieved 13 December 2017.
  13. ↑ "Top 15 Defence Budgets 2015". International Institute for Strategic Studies. Retrieved 13 December 2017.
  14. ↑ NATO. "Defence Expenditure of NATO Countries (2010-2017)" (PDF). NATO Media. Retrieved 1 May 2018.
  15. ↑ Zezima, Katie (26 March 2014). "Obama concerned not all NATO members 'chipping in' for Russia deterrent". Washington Post. Retrieved 1 May 2018.
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