Military Expenditures: Will the Post-1985 Decline Be Sustained?

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Abstract

For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

AFTER sharp increases during the first half of the decade, world military expenditures as a proportion of GDP fell steadily from 1985–90. Although there are no comprehensive data from 1991 onward, there are indications that the trend is continuing. Does this represent the beginning of a sustained downward trend in world military expenditures? Or is it just a temporary aberration? To help answer these questions, an IMF study looked at trends in more than 120 countries for the period 1985–90 {see box).

As it turned out, military expenditures fell from about 5.6 percent of GDP in 1985 to 4.3 percent in 1990. a decrease of about 23 percent (Chart 1). The induction was across the board—on average, almost all regions decreased military spending by 10 percent or more, with developing countries reducing expenditures as much as industrial countries.

Chart 1.
Chart 1.

Military expenditure as a percent of GDP decreased in almost all regions

Citation: Finance & Development 30, 004; 10.5089/9781451951813.022.A008

But what were the reasons behind this decline? First, empirical tests confirm that financial and economic variables have exerted an important influence on military spending. In the developing world, military spending is generally greater as a share of GDP in countries with higher GDP, population, inflows of external financing and ratio of central government expenditure to GDP. Small, low-income, and heavily indebted countries generally spend less. In recent years, signs of economic strain in many developing countries, as well as the economies in transition, appear to have led governments to shift resources away from defense budgets (Charts 2 and 3).

Chart 2.
Chart 2.

As central government expenditures in percent of GDP fell…

Citation: Finance & Development 30, 004; 10.5089/9781451951813.022.A008

Chart 3.
Chart 3.

… a greater share of the burden of adjustment was placed on the military budget

(Military expenditure in percent of central government expenditure)

Citation: Finance & Development 30, 004; 10.5089/9781451951813.022.A008

1—Yugoslavia and East Germany are missing.2—Central government expenditure statistics are not reliable for Iraq, Syria, and Yemen.

Second, econometric results indicate that government policies toward military spending are affected by political changes. Chart 4, a cross tabulation of the political variables and changes in military spending from 1985–90, shows that more countries lowered their military expenditures as a percent of GDP than raised them. Countries that lowered military expenditures the most include economies in transition, other countries that changed their form of government, democracies, and countries at war.

Chart 4.
Chart 4.
Chart 4.

Military expenditure as a percent of GDP decreased in almost all regions

Citation: Finance & Development 30, 004; 10.5089/9781451951813.022.A008

1—The no change designation means that the ratio of military expenditures to GDP increased of decreased by less than 10 percent2—Countries that were sociatist prior to 1985.3—Countries that changed categories from 1983–1989.4—Countries that introduced democratic reforms from 1990–1992 or are in the process of introducing democratic reforms.

The study identifies several reasons for such decreases. The profound internal political changes in the latter part of the 1980s, as many former socialist countries embraced a more democratic form of government, have generally retarded the level of military spending to GDP among these countries. The changes in Eastern Europe and the former Soviet Union are well known. In addition, between 1983 and 1989, eight new democracies emerged among developing countries, replacing seven military governments, bringing the total number of democracies in this sample to 41. As for countries at war and democracies, the decrease in military tensions since the end of the Cold War. along with cuts in military aid, are likely reasons for their drop in military spending.

For a thorough analysis, see “Military Expenditures 1972–1990: The Reasons Behind the Post-1983 Fall in World Military Spending,” by Daniel P. Hewitt. IMF Working Paper, WP/93/18. The study offers a variety of econometric estimates of the determinants of military expenditure in 124 countries.

Finance & Development, December 1993
Author: International Monetary Fund. External Relations Dept.
  • View in gallery

    Military expenditure as a percent of GDP decreased in almost all regions

  • View in gallery

    As central government expenditures in percent of GDP fell…

  • View in gallery

    … a greater share of the burden of adjustment was placed on the military budget

    (Military expenditure in percent of central government expenditure)

  • View in gallery View in gallery

    Military expenditure as a percent of GDP decreased in almost all regions