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Economic impact of defense expenditures

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1983
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World military expenditures have been rising rapidly, increasing by over 22 per cent in real terms in 1970-79, even as the rate of economic growth slowed in both developed and developing countries. Developing countries’ expenditures on defense in the same period rose in real terms from US$72.6 billion to $118.7 billion—an increase of 63 per cent—while their share of world military expenditures rose from 17.1 to 22.5 per cent. As a proportion of gross national product, however, military expenditures in developing countries dropped slightly in 1970–79 from 5.8 to 5.5 per cent.

Data on military and defense expenditures are not uniformly available on all countries. Nevertheless, an established body of information (see Related reading) unmistakably points to a rising trend of such expenditures in developing countries, which can be examined against the background of their economic development.

Most of the developing world as we know it today emerged as independent nations in the aftermath of World War II and, in the case of Africa, after 1960. In the two decades following that date there was a proliferation of wars and civil disturbances worldwide, often with costly economic aftereffects, and most of these occurred in the developing world (Sivard, 1980).

World military expenditures, 1972, 1976, and 1981(In millions of U.S. dollars, at 1979 prices and exchange rates)
197219761981
World total416,304456,045518,727
Developed market economies238,596232,980262,137
Centrally planned economies[143,805][157,869][173,652]
Organization of Petroleum
Exporting Countries11,12732,934[46,220]
Non-oil developing countries
With 1978 GNP per capita below US$3006,333(6,390)[7,687]
With 1978 GNP per capita between US$300-6994,6958,002[7,090]
With 1978 GNP per capita above US$69910,82516,620(20,284)
Total non-oil developing countries21,85331,01235,061
South Africa1,3262,815
Source: Stockholm International Peace Research Institute, The SIPRI Yearbook of World Armaments and Disarmament, 1982, Taylor and Francis Ltd., London, U.K., p. 140.Note: Details may not add to totals because of rounding.—Indicates information not available or not applicable.() Indicates SIPRI estimates.[] Indicates imputed values, with a high degree of uncertainty.
Source: Stockholm International Peace Research Institute, The SIPRI Yearbook of World Armaments and Disarmament, 1982, Taylor and Francis Ltd., London, U.K., p. 140.Note: Details may not add to totals because of rounding.—Indicates information not available or not applicable.() Indicates SIPRI estimates.[] Indicates imputed values, with a high degree of uncertainty.

Defense expenditures have long been considered necessary, indeed beyond question in many countries. Efforts to control or even eliminate them have an equally long, though less successful, history. Apart from their strategic or political implications, defense expenditures have an obvious economic impact that can be particularly acute in the developing world, where resources are scarce and therefore the opportunity cost of such expenditures is high. This was especially true during the decade of the 1970s—one of significant economic turmoil, with the economies of the developing world adversely affected by developments beyond their control, including the sudden and substantial rise in the price of energy and the slowing down of growth in the industrial world.

The debate over the economic implications of military expenditures continues—most recently in the United Nations Second Special Session on Disarmament in the summer of 1982. However, no clear agreement has emerged about the nature and extent of their economic impact.

Many supporters of military expenditures justify them not only on the grounds of national security and stability but also in economic terms. Defense industries are considered seedbeds of technical knowledge and skills that are passed on, either directly or indirectly, to the civilian sector. The military and ancillary services are said to provide employment and training for large numbers of people. Further, the use of military personnel in national health and education schemes is given as an example of the participation of the military in institution building in the developing world. A number of countries in Africa and Asia have attempted to put such schemes into effect.

Some social scientists attribute a major role to the military in the modernization of developing societies. They believe that the military is often the leading sector of the economy in contact with modern technological advances and that it imparts training to its personnel in handling sophisticated equipment. This experience is said to be transmitted to both the rural sector, where most soldiers originate from and return to, and the urban sector, where most military organizations operate.

An often quoted major study of the relationship between expenditures on defense and economic development (Benoit, 1973) provides evidence that even though defense expenditures outpaced economic growth in 1950–64 in 44 developing countries, their expenditures on defense did not have a net adverse effect on growth. In fact, the study concludes that in these countries “the more they spent on defense in relation to the size of their economies, the faster they grew—and vice versa.” Another benefit often cited by supporters of defense expenditures is the creation of basic infrastructure, such as transport and communication networks.

The basic criticism that is leveled against high defense expenditures is that they reduce the total resources available for economic development in poor economies. The growing need of developing countries for both domestic and foreign resources could be met, it is argued, by freeing some of the current defense allocations, especially where economic difficulties demand major structural adjustments. Critics charge that defense sector expenditures complicate the task of adjustment since they escape analysis and scrutiny while using up economic resources.

Average defense and other central government expenditures in non-oil developing countries, 1976–80

(Per cent of total expenditure)

Source: IMF, Government Finance Statistics Yearbook. 1982.

The high import content of the defense sector is another major cause for criticism. In developing countries as a whole, arms imports represent about 5 per cent of total imports. Where such imports are financed by external loans, they add to the rising burden of external debt. And, to the extent they are paid for by export earnings, they absorb resources that could have been put to productive alternative uses.

Opposing the view that the defense sector provides employment, and therefore income, critics often suggest that defense expenditures transfer income to a relatively small, privileged group in the cities. The majority of people of the developing world live in rural areas and therefore do not benefit from the activities of the defense sector. The modernizing effects of the military, it is asserted, mainly stem from training for the use of highly sophisticated military hardware and weapons, most of which have no application in the civilian economy. The education of military personnel to handle such equipment and to work within military organizations does not necessarily make them valuable additions to the pool of technical talent available within a developing country. Critics point out that it is difficult to transfer the knowledge of, say, the operation and maintenance of sophisticated fighter aircraft to any sector of the civilian economy in a developing country.

The suggestion of a positive correlation between military expenditures and economic development in some developing countries does not, critics assert, establish a causal relationship between the two. The Benoit study, for instance, covered a period of large-scale foreign economic aid that may have compensated for the diversion of resources toward defense. Further, these heightened aid flows may have been a major factor in the growth of the countries studied. A more recent study, of 69 developing countries over the 1950s and 1960s, indicates that growth of military expenditures reduced the rates of growth, investment, and agricultural production. A 1 per cent increase in the military’s share of gross domestic product (GDP) was associated with a 23 per cent and 18 per cent drop in the respective shares of investment and agriculture in GDP (Taylor, 1982).

The provision of basic transportation and communication infrastructure, often cited as a benefit of defense expenditures, could just as easily be justified on purely economic grounds, according to critics. A rural road, they assert, could, in fact, be justified on the basis of improved transportation of rural produce to urban markets and the better flow of goods and services in the other direction. There would still be an additional spinoff to the military if it required such a road for strategic purposes.

The entire debate over defense expenditures and their economic costs comes down to the twin questions: how much defense does a country need and how much can it afford? The answer does not lie in the area of economics alone but is related to many national and international considerations of social, political, and economic import. In the final analysis, it is the prerogative of individual governments to assess both the costs and benefits of rising expenditures on the defense sector and to decide, according to their priorities, the proper allocation of resources between defense and other needs.

Snuja Nawaz

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