Guest Article Reducing Military Expenditures in the Third World

International Monetary Fund. External Relations Dept.
Published Date:
January 1991
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Developing countries should seek to reduce their military expenditures, as a percent of GDP, by 50 percent during this decade

Robert S. McNamara

Former President, The World Bank

Military expenditures in the developing countries in 1988 approximated $170 billion, 4.3 percent of GNP. They were only slightly less than total expenditures for health and education and they have quintupled in constant dollars between 1960 and 1988, increasing at a rate twice that of income per capita.

Can such large outlays, in countries so drastically in need of capital to accelerate the rate of economic and social advance of their five billion inhabitants, be reduced? My answer is: Yes. This article will put forward the proposition that a combination of the following actions:

  • United Nations Security Council guarantees of territorial integrity;

  • Continuing reductions in both conventional and nuclear arms by the Great Powers;

  • Tight control of the proliferation of weapons of mass destruction and the means to deliver them;

  • Substantial limitations on arms exports from arms producing nations; and

  • The tying of financial aid in developing countries to reductions in military expenditures by these countries could lessen the risk of war among Third World nations and lead to cuts in their military expenditures, as a percent of GNP, of more than half by the end of the decade. The end of the Cold War offers dramatic opportunities for the nations of the world to move in this direction. The international organizations, including financial institutions such as the World Bank, can catalyze the process thereby accelerating economic and social development without reducing security.

A world of conflict

The past 45 years have seen some 125 wars and conflicts in the Third World, leading to 40 million deaths. It is often suggested that the Third World has been turned into an ideological battleground by the Cold War and the rivalries of the Great Powers. That rivalry has undeniably been a contributing factor and some of the most costly wars have directly involved one or more of the Great Powers. Others grew out of the decolonization process. Many of these conflicts, however, including some of the most costly in terms of human lives, have had their roots in historical enmities within and among developing countries. They have resulted from the desire for regional dominance on the part of some Third World governments, attempts by developing governments to alter their social order, and the persistence of substantial inequities within developing nations.

In view of the diverse reasons countries have for going to war, we must conclude that in the world of the future, conflicts within and among nations will not disappear even though East and West cease to fight their proxy wars in the South. But a different world would emerge if the Great Powers and their allies agreed on and adjusted their foreign and defense policies in accordance with the conditions stipulated above.

Reducing military budgets

As we move to limit both nuclear and conventional forces, while providing for collective action against military aggression wherever it may occur, military budgets throughout the world—in both developed and developing countries—can be reduced substantially.

Over 1978-88, the Third World imported $371 billion of arms (nearly $450 billion in 1988 prices), more than three quarters of the arms traded internationally. While these figures reflect the relative lack of domestic production capability in the Third World and a legitimate concern to protect national sovereignty, there is clearly great scope for reducing Third World military expenditures by reducing arms imports.

Both supply and demand for arms must be addressed. The United States and the Soviet Union have tended to use arms transfers as a means of maintaining political support in strategically located Third World nations. For many of the Western European and some emerging Third World suppliers (in particular, China and Brazil), economic considerations have been paramount. The sale of weapons and arms production technology has helped to make the domestic defense industries of these smaller producers economically viable and has opened the door to nonmilitary exports. Over the last decade or so, economic considerations have become increasingly important for the Soviet Union as well.

But the demand for weapons is strong too, and many Third World governments have actively sought to purchase arms. One of the most important demand factors is involvement in conflict—internal or external. Of the top 15 Third World arms importers during 1978-88, who together account for about three quarters of arms imported by the Third World, 13 have been party to conflicts of many years’ duration. In addition, Third World governments acquire arms to protect against perceived internal and external threats, to bolster their claims to regional power status, as a symbol of unity and independence, and to reward the armed forces for support against internal opposition.

The availability of financing is an important factor in arms purchases. Seven of the top 15 arms importers have had access to petrodollars. Another five have been recipients of grants or heavily subsidized credits. Some Third World countries have received financial assistance from oil rich countries that has allowed them to acquire arms from abroad.

Not all weapons must be imported. More than 54 developing countries have some domestic arms production. Of these, 10 produce nearly all the major weapons manufactured in the Third World. The investments that have made this possible have been significant, particularly in terms of foreign exchange.

Financing military outlays

An important but difficult factor to assess in the financing of military expenditures is the fungibility of external resources, that is, the ability of governments to either divert such resources or free up other resources for military acquisitions. Common sense—and some evidence—suggests that general purpose balance of payments or budgetary financing from abroad enables a government to spend more on the military than would be otherwise possible. It is, therefore, bad economics and bad policy for donor nations and international financial institutions to continue to behave as if the funding of stabilization, adjustment, and development programs can be separated from the financing of military expenditures.

Reducing the demand for arms

Wars and arms procurement (both domestic and abroad) have created a heavy military expenditure burden for a number of Third World countries. To the extent that security assistance takes the form of loans, involves barter trade, or causes additional security-related outlays, it adds to that burden. To reduce the demand for arms in the Third World, whether the arms are imported or produced locally, we should introduce into the system of Collective Security a guarantee by the Security Council and regional organizations of the territorial integrity of member states. The strengthening of regional bodies, such as the Organization of American States and the Organization of African Unity, as well as the creation of such groups for Asia and the Middle East as regional arms of the Security Council, would help this process. International organizations should agree, as well, to actively assist countries in finding negotiated solutions to conflicts.

There is, of course, the danger that reduction of tensions and military forces of the East and the West—and the effectiveness of new high-tech weapons—may lead industrial country arms producers to seek new markets for their products in the Third World. This approach would succeed only if the Third World countries have the financing for such purchases. To the extent that such financing is provided by suppliers through credits, grants, or barter arrangements, curtailment of such facilities would keep down Third World military outlays on imports.

Sources of military aid

Reliable and detailed data on security assistance are not widely available. The United States is one of the few countries that provides such data. The three main components of US security assistance are the Military Assistance Program (MAP), which provides grants; the Economic Support Fund (ESF), which provides balance of payments help and finances commodity import programs, increasingly on a grant basis; and the Foreign Military Sales (FMS) program, which enables countries to purchase military hardware and services on credit.

In fiscal year 1989, seven countries—Greece, Honduras, Kenya, the Philippines, El Salvador, Thailand, and Turkey—received 80 percent of the $468 million MAP funds. Nine—Egypt, Greece, Israel, Jordan, Morocco, Pakistan, Portugal, Tunisia, and Turkey—shared the $4.3 billion FMS program. Two of these—Israel and Egypt—accounted for 75 percent of FMS credits, and all these credits were “forgiven,” that is, converted into grants. Nearly 80 percent of the $3.6 billion under the ESF went to five countries—Egypt, Israel, Pakistan, the Philippines, and El Salvador, with Israel and Egypt getting nearly 60 percent of the total amount. In fart, these two countries received nearly two thirds of the $8.4 billion in FMS ESF, and MAP fund, allocated by the United States in FY 1989.

While very little is publicly known about the scale and terms of Soviet security assistance, it is clear that the Soviet economy is less and less able to support any kind of massive aid beyond its borders. For domestic political reasons, planned cuts in military aid to Cuba may not proceed in 1991, but India, for example, hitherto a major recipient of Soviet military supplies, now must pay in hard currency for weapons and arms-production technology imported from the Soviet Union

Another source of military assistance for some Third World countries has been the oil surplus countries of the Middle East Saudi Arabia, Algeria, Kuwait, and the United Arab Emirates have provided varying amounts of grants and credits, primarily to other Muslim countries, such as Egypt, Iraq, Pakistan, and Sudan.

Domestic considerations

While external security considerations play an important role in determining military expenditures in many Third World countries, many such countries continue to allocate large proportions of their budgets to the military without any obvious external threat. Others continue to spend large amounts on security even after external threats have disappeared. The reason often is the desire of the armed forces to preserve a strong internal posture. In some countries, this is the primary objective of such expenditures.

When governments have armed themselves against their own people in an attempt to maintain themselves in power, the general public often has limited access to the policymaking process and the formal economic system. Under such conditions, elite groups fight for power and some groups are discriminated against or repressed. In such situations, international or regional conflict resolution strategies need to be matched by internal conflict resolution strategies.

In this regard, equitable development and distribution of resources play a key role. In many parts of the Third World, economic systems function primarily to benefit a relatively limited number of people, and political systems are manipulated to continue the dominance of the elites. Indeed, one of the most important effects of military expenditure, which has serious implications for political and economic development, is the degree to which it strengthens the political influence of the armed forces at the expense of civilian groups within Third World societies. The greater the political power of the security forces, the less likely it is that the requirements for democratic governance will be met. It is, therefore, necessary to strive for a political system that allows all groups to articulate their demands and is capable of producing workable compromises between competing interests. The greater the power of the security forces, the less likely the possibility of democratic governance.

When security forces claim a role in guaranteeing internal security for a society, they are not, in most cases, seeking to make all citizens equally secure. Indeed, their actions often create greater instability. All too frequently, the security forces are not protecting a majority of the population from a minority bent on pursuing its own political and economic objectives; instead, they are seeking “regime security” (which often means “military regime security”).


The role of the military is, of course, the prerogative of each government. The international community nonetheless needs to identify ways in which it can encourage countries to reduce their security-related expenditures in favor of development.

International financial assistance should be linked to movement toward “optimal levels” of military expenditures, taking into account, of course, sources of external threat to a country. The “conditionality” inherent in such an approach could take the form of the proposal contained in Facing One World, the report of the “Independent Group on Financial Flows to Developing Countries,” chaired by former German Chancellor Helmut Schmidt. This group, which included former Presidents or Prime Ministers of Nigeria, Peru, Canada, and the Republic of Korea, urged that in allocating foreign aid decisions, special consideration be given to countries spending less than 2 percent of their GNP in the security sector. The huge savings that many countries could make by reducing their security expenditures to this level could be used to address pressing economic and social needs. Even though the application of conditionality may be contentious, it is an essential part of the solution to the waste represented by excessive military spending in poor countries today.

Global Investment Needs, Savings, and Military Spending

IMF Managing Director, Michel Camdessus spoke in July at the United Nations Economic and Social Council (ECOSOC) meeting in Geneva on the growing need for global savings in the years ahead and the need to fill the gap between investment and savings. In that context, he spelt out the importance of curtailing “unproductive spending,” including that on the military.

Here is an excerpt from his ECOSOC speech:

Broadly speaking, it appears that the additional—and I stress additional—demand for saving might well exceed $100 billion in 1991 and thereafter. A large sum, indeed, which would be higher still if allowance is made for substantial financial support for the Soviet Union, but is still considerably less than 1 percent of the GDP of the industrial countries. The problem is daunting, but it is not insoluble if all countries seek to stimulate savings through appropriate financial policies and to reduce dissavings—particularly public ones—through fiscal policies focused on cuts in unproductive spending. This kind of spending takes several forms: prestige projects, unproductive administrative machinery, military spending beyond the minimum required for national defense, and spending associated with protectionism. Everyone will understand that I recommend attacking first those expenditures whose external impact is the most harmful because they result in mounting waste beyond national border: here I refer most particularly to military spending and protectionism.

I know that people will say that savings in the latter area can only be made gradually and the effects will be visible only after some time; even so, however, there is broad scope for genuine progress. Allow me to give two examples of this, keeping in mind the size of the additional requirements of about $100 billion to which I referred earlier.

First, with regard to military spending which might be expected to decline somewhat with the reduction of East-West tensions and the settlement of several regional conflicts. Imagine that in such a climate all countries were to decide to reduce their military spending to the level of the worldwide average of 4.5 percent of GDP recorded in 1988. In this case, annual worldwide savings of $140 billion would be generated.

This article is derived from a longer paper delivered at the World Bank Annual Conference on Development Economics in Washington, DC, in April 1991. That paper will be appearing, along with others presented at this conference, in a special supplement of the World Bank Economic Review and the World Bank Research Observer in 1992.

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