Article

Military Expenditures Military Expenditures in the Developing World

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1991
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Developing countries continue to allocate, on average, over 5 percent of their GDP and up to 20 percent of central government expenditures for the military, a major drain on their financial resources

Daniel P. Hewitt

Following the thaw in the Cold War, the world has been awash in talk of the “peace dividend,” a concept that appears to be easier to launch than it is to define or to collect. Major decreases in military expenditures appear to be certain in Eastern Europe, but the situation in industrial countries seems unclear. Meanwhile, many developing countries continue to spend relatively large amounts on the military, despite their deep, and in many cases, growing economic difficulties. Some recently have cut back their military expenditures in the face of mounting financial constraints. However, over the past two decades, developing countries have consistently allocated a higher proportion of GDP to the military than industrialized nations. Further, developing countries can ill-afford sustained high levels of military spending since this contributes to low growth and domestic economic hardship by diverting funds from social programs, economic development projects, and the private sector.

In order to establish a sound basis for future action, a solid understanding of past policies is crucial. Accordingly, this article, which is based on a longer study (see box), examines military expenditures in 125 nations over 1972-88 to show the distribution of world military expenditures between categories of nations and geographic regions and to provide an insight into the allocation decisions of individual nations. Although collecting reliable estimates of military expenditures is difficult because under-reporting is common, the data does provide a useful indication of overall magnitudes, and accurately depicts trends.

Among the primary conclusions of the longer study, a wide diversity is found to exist in the level of military expenditures by different groups of developing nations. However, in recent years (1983-88), the level of military expenditures in proportion to GDP among developing nations has fallen by over 25 percent from 6.3 to 4.7 percent; simultaneously, regional differences have contracted considerably. Additionally, substantial evidence exists indicating that military expenditures react to financial constraints. Low-income nations and heavily indebted nations have consistently spent less on the military than average. Further, in an analysis of the functional breakdown of government expenditures, an overall contraction in the allocations to the military is observed to have occurred in response to the debt crisis of the 1980s.

While the trends and determinants of military expenditures describe behavioral choices, economic theory offers limited insight on the optimal level of military expenditure or on the steps nations should take to attain them. Furthermore, the article follows the convention of economics by avoiding speculation on why governments support military expenditures and the merits of so doing. Instead, the primary purpose of this inquiry is to describe the trends in military and other government expenditures, and delineate, where possible, the economic consequences of political choices on such expenditures.

Overall trends, 1972-88

Together, the United States and the Union of Soviet Socialist Republics on average accounted for nearly one half the total military expenditures of 125 countries over 1972-88, and the five next largest spenders accounted for about 20 percent of the total. Industrial countries averaged 53 percent of the total (see Table 1), while the share of the Eastern European countries was 30 percent in the 1970s and 21 percent in the 1980s.

Table 1.Average military spending around the world: Adjusted SIPRI data, 1972-88
In percent of 1
GDPWorld military expenditureCentral government expenditure 2
1972-881972-881972-88
Industrial countries33.852,714.3
Eastern Europe9.225.420.7
Developing countries5.922.020.0
Asian developing6.38.127.2
Middle East11.68.023.1
North Africa9.61.817.1
Sub-Saharan Africa3.71.512.8
Latin America and Caribbean2.32.58.6
Total4.9100.016.5
Developing country groupings:
Net creditor nations9.45.425.0
Heavily indebted2.83.510.9
Small low-income economies3.60.612.2
Sources: Authors estimates, based on SlPRl and ACDA data

These are weighted averages derived by converting annual figures into US dollars, using official exchange rates, and thean avaraging the yearly ratios.

This column shows SIPRI military expenditures as percent ot central government expenditures; adjusted SIPRI military expenditures to central government would be higher.

The country categories are derived from the IMF World Economic Outlook, with minor modifications to reflect the entire time period covered in this study.

Sources: Authors estimates, based on SlPRl and ACDA data

These are weighted averages derived by converting annual figures into US dollars, using official exchange rates, and thean avaraging the yearly ratios.

This column shows SIPRI military expenditures as percent ot central government expenditures; adjusted SIPRI military expenditures to central government would be higher.

The country categories are derived from the IMF World Economic Outlook, with minor modifications to reflect the entire time period covered in this study.

The rest of the world consists of developing nations of varying income levels. Their share of total world military expenditures averaged 20 percent, but was considerably higher at times. Based on data from the Stockholm International Peace Research Institute that was adjusted for our study (see box on data), the peak share of developing countries was 26 percent in 1981, while the lowest level was 15 percent in 1972. In 1988, the share was down to 17 percent. On average, developing countries spent between 4.7 and 6.5 percent of their combined GDP on the military (in 1988 and 1977, respectively).

The regions with the lowest levels of military expenditures in proportion to GDP were Latin America, the Caribbean, and Sub-Saharan Africa. Military expenditures in the Middle East and North Africa were higher; the proportion of GDP in the Middle East averaged 12 percent, and its share of world military expenditures rose from 3 percent in 1972 to 11 percent in 1982-84, before falling back to 7 percent in 1988. The Asian developing nations allocated 8 percent of GDP to the military in the 1970s and 5 percent in the 1980s.

As an indication of the distribution of expenditures by economic classification of countries, the share of the 31 small low-income economies of world military expenditures was 0.6 percent. The share of world military expenditures of the 15 most heavily indebted nations was 3.5 percent. The share of the seven net creditor nations was 5.5 percent, accounting for one fourth of the entire military expenditures of the developing nations in our study.

Rankings by expenditures

Rankings of military expenditures as a percentage of GDP provide a basis for identifying the nations that have chosen to spend a large amount on the military and those that have not. By implication, such an approach serves only to show where countries stand relative to other countries. On an absolute basis, average levels of military expenditures could be inordinately high or low. Even a small percentage of GDP spent on the military may be a relatively large use of scarce resources in terms of foregone benefits in some countries.

Among the 16 countries that are estimated to have spent in excess of 10 percent of GDP (see Table 2), there are no industrial countries, whereas two are low-income nations: Ethiopia and Mozambique. Among the 20 countries that spent 1.6 percent of GDP, four are industrial nations—Japan, Luxembourg, Austria, and Ireland—and six—Niger, Sierra Leone, Ghana, Nepal, Haiti, and Bangladesh—are low-income nations.

Table 2.Rankings of countries by adjusted SIPRI military expenditures as proportion of GDP, 1972—88(In alphabetical order
In excess of 20 percent of GDP
Angola, Iraq. Israel, Jordan, Oman, Syria, Yemen People’s Democratic Republic
Between 10 and 20 percent
Cuba, Egypt, Ethiopia, Libya, Mozambique, Nicaragua, Saudi Arabia. USSR, temen Arab Republic
Below 1.6 percent
Austria, Bangladesh, Brazil, Costa Rica, Cote d’l voire. Dominican Republic. Fiji, Ghana, Haiti, Ireland, Jamaica, Japan, Luxembourg, Mauritius. Mexico, Nepal, Niger, Panama, Paraguay, Sierra Leone
Source: Hewitt. 1991.Note: The ratios are based upon SIPRI data and adjusted tor possible off-budget items. See the box on the author’s longer paper.
Source: Hewitt. 1991.Note: The ratios are based upon SIPRI data and adjusted tor possible off-budget items. See the box on the author’s longer paper.

The empirical explanation of why certain countries spent more and others spent less are explored in numerous studies. In a companion study (to be reported in a later article), econometric estimates explain 55 percent of the variation of military expenditure as a percent of GDP. In absolute terms, military expenditures are found to rise nearly proportionally to GDP and to rise somewhat less than proportionally to central government expenditure. Small low-income economies are found to allocate less to the military as a percentage of GDP than the average; the heavily indebted countries also spent less and apparently cut back in the 1980s relative to the 1970s.

Further, public and publicly guaranteed external credit tended to engender increased military spending in recipient developing nations. This result indicates that by increasing the resources available to the government, financial assistance helps increase military spending. Among the political factors, the presence of international war or civil war led to higher levels of military spending; nations governed by monarchies, military governments, and socialist governments tended to spend more than those characterized as multiparty democracies. Finally, the results confirm that the geographical characteristics of a nation, such as size and border length, tended to influence the level of military spending.

The proportion of central government expenditures allocated to the military is another way of ranking countries. But this measure of resource allocation decisions and the relative burden of military spending must be interpreted with caution, because such outlays depend on the size of the government and the level and nature of decentralization, as well as on the size of the military. The average ratio worldwide of military expenditure to central government expenditures was 16.5 percent during 1972-88. The industrial country average was somewhat lower, while Eastern European and developing countries had higher than average military expenditures. Among the developing nations, the ratio of military expenditure to central government expenditures in Latin America and the Caribbean was well below the global average; in Sub-Saharan Africa, it was slightly below the world average, while in the Middle East and Asian developing nations, it was well above.

Military imports

An issue that is much discussed in the context of military spending by developing nations is the extent to which imports of military equipment have used up scarce foreign exchange in those countries. The ratio of military imports to total imports averaged 7 percent among developing countries over 1972-88. The ratio was generally below average in Sub-Saharan Africa, Latin America and the Caribbean, and Asian developing nations, while it was nearly double the average in the Middle East and North Africa.

Certainly there are individual countries whose arms imports have been a high proportion of total imports. (For some countries, arms imports even exceed official merchandise imports, indicating that arms imports were not fully included in official trade data.) However, particularly for low-income and heavily indebted countries, the actual cash payment for arms imports has often been a very low proportion of the assessed value, since much of the military equipment purchased by these countries had a high grant element and favorable financing arrangements. Michael Brzoska (“Military Trade, Aid and Developing Country Debt,” World Bank Working Paper) estimates that half the purchases from the United States and the Soviet Union were financed through loans or grants and half were paid for in cash.

Budgetary tradeoffs

Since the availability of resources is limited in the medium term, once a nation chooses to fund a given level of military expenditure, ways of financing must be located. Thus, there is always an opportunity cost to military spending. Although the transmission mechanisms are complicated and vary from country to country, the opportunity cost of military expenditures can be categorized into three basic options. A government can increase its overall budgetary expenditures, which in general will lead to lower levels of current private consumption. It can decrease social expenditures, which will lower the quality of social services. Or a government can cut expenditures designed to increase the productive capacity of the nation, such as public infrastructure and economic services, and thereby diminish economic growth. Some tentative conclusions on how governments, on average, have accommodated military expenditures are available from a number of sources.

Data on military expenditure

The sources for data used in this and the companion econometric study are the World Bank, the United Nations, the Stockholm International Peace Research Institute (SIPRI), the US Arms Control and Disarmament Agency (ACDA), and the US Central Intelligence Agency, in addition to external Fund publications. In a number of cases, published national accounts were used as a supplement The military expenditure figures are derived primarily from SIPRI.

The SIPRI estimates are useful because they are in local currency. Further they are more reliable than other major sources of such information because their coverage is clearly defined, comprehensive, and consistently applied to each country. SIPRI data were adjusted in two ways. First, SIPRI does not provide estimates of military expenditures of the Soviet Union and China, two extremely important military powers. ACDA estimates were used for China’s military expenditures, while Dmitri Steinberg’s estimates of Soviet spending (“Trends in Soviet Military Expenditure.” Soviet Studies, October 1990), were adjusted for possible overshooting.

The second major modification to the SIPRI data involved expanding the coverage and definition of military expenditures to take account of foreign-financed expenditures in the military expenditures of the recipient nations. The SIPRI definition excludes financial expenditures and it is likely that most foreign military purchases are off-budget in developing countries and, therefore, omitted form the SIPRI estimates. It is preferable to define the military expenditures of a nation as consisting of all military expenditures, regardless of the means of financing, consistent with IMF accounting methods. Ideally, this can be accomplished by adding the off-budget military expenditures to the SIPRI figures. However, there is no sure way of knowing to what extent foreign purchases are off-budget items for individual countries. To correct for the measurement error, an alternative set of military expenditure figures was derived- the adjusted SIPRI military expenditures. A formula was used to estimate the off-budget military expenditures from arms imports data provided by ACDA, supplemented with US foreign military aid figures. No adjustment was made for industrial nations or net creditor developing nations (see the working paper for a fuller description and a list of country categories).

The patterns of military expenditures have changed over the past two decades. Three changes are apparent from world-wide data. First, world military expenditures as a proportion of GDP were lower in the 1980s than in the 1970s. Second, the proportion of central government expenditures to GDP increased in the 1980s relative to the 1970s. Finally, the proportion of military expenditures to central government expenditures fell (which follows automatically from the first two trends). Among the developing nations, military expenditures fell as a proportion of central government expenditures in all regions.

These patterns might at first seem paradoxical. Why did central government expenditures rise and military expenditures fall simultaneously? A major reason may be the rise in interest costs. The share of interest payments in central government expenditures rose nearly 80 percent in a sample of 51 developing countries, ranging from 35 percent to 100 percent for the different country groups. Therefore, changes in expenditure patterns between the 1970s and 1980s present an instance of retrenchment; governments had to seek ways of funding their higher interest liabilities. Meanwhile, social expenditures were protected in the majority of cases while military expenditures and expenditures on economic services were cut back. Among the 51 developing countries studied, the share of the military fell 23 percent on a weighted average basis. The share of military expenditures fell in 21, did not change in 13, and increased in 17. The share allocated to social expenditures fell 17 percent on a weighted average basis.

Although there is a great deal of variation among the regions, the same general pattern is observed in the Middle East, North Africa, and Asian developing nations: social services retained high priority, while the military and economic services were cut substantially. In Sub-Saharan Africa, a somewhat different pattern emerges. The ratio of government spending to GDP fell 5 percent; though the share of military expenditures fell substantially, the share of social expenditures fell much less, and the share of economic services rose significantly. In Latin America and the Caribbean, the ratio of government spending to GDP increased 15 percent; the share of social expenditures, of military expenditures, and of economic services all fell about 15 percent. The heavily indebted nations displayed a similar pattern. However, the small, low-income economies were able to increase expenditures on economic services while increasing military expenditures somewhat and decreasing social expenditures substantially; their ratio of government spending to GDP rose 3 percent.

These results should be treated with caution, since allocation decisions of governments are political in nature. What happens in one country in one particular year may have no bearing on what will happen in another year or another country. The data do, however, show that military expenditures tend to react to financial constraints. In fact, on the basis of more expenditure patterns and empirical findings, it is possible to speculate that military expenditures are a so-called “superior good” among developing nations. Middle-income developing countries spent more relative to GDP than low-income developing nations. Many countries that faced a financial squeeze responded by cutting military expenditures substantially.

Conclusions

The most basic lesson from economic analysis is that when a country allocates resources to the military, there are opportunity costs. For instance, the evidence in the study on which this article is based indicates that military expenditures have, in many nations, diverted resources from economic services or development expenditures. The likely consequences of this trade-off is a lower rate of economic growth. In this sense, excess military expenditures must be designated as “unproductive expenditures,” and justification for military spending must be based rigorously on the security needs.

Additionally, from a worldwide perspective, there is a strong case for coordinated decreases in military expenditures (see accompanying article by Robert S. McNamara). Although military expenditures may provide benefits to a given nation, they have a negative impact on the welfare of rival nations, and therefore on a worldwide basis, national military expenditures do not enhance global welfare. A coordinated reduction in military expenditures that does not change the strategic balance will increase economic well-being in the world. Finally, the evidence indicates that military expenditures are quite reactive to financial constraints. Thus, without controls or pressure to do otherwise, foreign financial assistance both enables and encourages a nation to spend more on the military.

This article and a companion article, to appear in a later issue, are based on two recent studies by the author: “Military Expenditure: International Comparisons of Trends” and “Military Expenditure: Econometric Testing of Economic and Political Influences,” available as IMF Working Papers, from the author.

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