Military Expenditure Trends for and What They Reveal

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1 174 Global Policy Volume 7. Issue 2. May 2016 Military Expenditure Trends for and What They Reveal Research Article University of Texas at Dallas Abstract The article uses newly available consistent military expenditure data for to examine past and current global spending trends during and after the Cold War. We are particularly interested in the impact of the end of the Cold War, 9/11 and the 2008 recession on military spending worldwide. The global share of military spending of East Asia & Pacific and the Middle East & North Africa increased relative to other regions since This increase underscores the need for western allies to bolster their power projection capacities. After 1999, both China and Russia raised their real defense spending, with China s increases far exceeding that of Russia. Both countries have a long ways to go to rival US capabilities. The North Atlantic Treaty Organization (NATO) continues to be heavily dependent on US defense spending. The post-1998 expansion allies assume about 2.4 per cent of the alliance s defense burden, while representing significant risks to NATO, given recent Russian actions in the Ukraine. Policy Implications The recent relative growth of military expenditure in the Middle East & North Africa and East Asia & Pacific underscores the need for western allies to bolster their air and sea-based power projection. These regional changes also augment the required size of rapid deployment forces. Except for the US, France and the UK, western allies have not responded to these needs. NATO must foster greater links with East Asia & Pacific countries, given altering defense and economic activities in the region. Despite US Secretary of Defense Robert Gates call on NATO to redress its increasing reliance on the US, his concerns are even truer today than when delivered in Recent recovery in Europe from the 2008 recession provides an opportunity to address this imbalance. NATO s post-1998 expansion presents many risks to the alliance, especially because the expansion allies only account for 2.4 per cent of NATO s aggregate military expenditure in Russian aggression in Ukraine and elsewhere underscores these risks. Given recent defense buildups in China and Russia, the US and its NATO partners must consider reversing their recent military expenditure cutbacks. Fortunately, China and Russia have a long ways to go to challenge US military might. The Stockholm International Peace Research Institute (SIPRI) recently extended its military expenditure database to provide consistently constructed spending estimates across countries for (SIPRI, 2015) and made these estimates available to a select group of scholars. Up until now, SIPRI s consistent military expenditure figures were only available back to 1988, thus excluding most of the Cold War years. Comparing military expenditure may offer insights on how momentous world events (e.g., the end of the Cold War in 1991, North Atlantic Treaty Organization (NATO) expansion in 1999, the unprecedented terrorist attack on 11 September 2001 (henceforth, 9/11), or the great recession of 2008) affected the trends, regional distribution and burdens of military expenditure worldwide. The purpose of the current study is to employ these new expenditure data to assess and characterize changing defense patterns, trends and burdens, beginning with the global rise of total military expenditure since 1960, and the post-cold War fall in the median share of GDP devoted to defense. For , the paper displays contrasting regional military expenditure patterns in terms of global shares for seven distinct regions. Of particular interest is the marked change in regional shares i.e., the rising shares of East Asia & Pacific and the Middle East & North Africa and the recent falling shares of North America and Europe & Central Asia. These changing patterns have policy implications, later identified, for defense spending and force structure among western allies. In addition, the new data allow for an assessment of NATO burden sharing dating back to 1960, based on two alternative burden-sharing measures (i.e., allies shares of total NATO spending and allies share of GDP devoted to defense spending). This analysis identifies changes in burden sharing, consistent with the economic theory of alliances (Olson and Zeckhauser, 1966), 1 after NATO expanded from 16 to 28 members starting in 1999, with the inclusion of Eastern European countries, many of 2016 The Authors. Global Policy published by Durham University and John Wiley & Sons Ltd. Global Policy (2016) 7:2 doi: / This is an open access article under the terms of the Creative Commons Attribution-NonCommercial License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited and is not used for commercial purposes.

2 Military Expenditure Trends 175 which belonged to the Warsaw Pact during the Cold War. Additionally, the paper shows how military spending of the US, China, and the Russian Federation (henceforth, Russia) changed after This change is rather marked in recent years as China takes advantage of its spectacular economic growth and Russia modernizes its armed forces (SIPRI, 2013). Real military spending grew by 45 per cent in the US during , despite decreases since 2010 owing to budget deficit concerns. China and Russia real military expenditure grew by 321 and per cent, respectively, during Even though global real military spending has grown since 1960, this paper shows that the median share of GDP devoted to military expenditure has fallen since the end of the Cold War in This then indicates that, on average, countries are allocating more of their income to nondefense spending. However, military expenditure has grown markedly in the Middle East & North Africa and the East Asia & Pacific during recent years. Defense growth in these regions underscores the need for western allies to bolster their power projections capacity to unstable areas beyond Europe, where they have vital economic and security interests. To do so, western allies must reverse a pronounced downward trend in their defense shares of GDP in order to afford more aircraft carriers, large-haul transport planes, tanker aircraft, and long-range bombers. Moreover, enhanced NATO economic and security links are needed with East Asian and Pacific countries as China s dominance in the region grows. The paper also documents a rising degree of free riding by most NATO allies on the US, France, and the UK, consistent with ally defense in out-of-area theaters possessing a great deal of publicness (i.e., nonrival and nonexcludable benefits) (Olson and Zeckhauser, 1966). This means that Germany and many other NATO allies must reassess their falling defense burdens, especially since the 2008 recession. Moreover, US budget sequestration reduced US real military spending since 2010, thereby allowing China and Russia to play defense catch-up with the US. Fortunately, our analysis shows that China and Russia have a long ways to go to challenge US superior defense capabilities. The remainder of the article contains six sections. The next section presents preliminaries that identify our regional and sample compositions. This section primarily focuses on what constitutes military expenditure and the various ways it can be represented. Total military expenditure for is then reviewed, followed by the presentation of regional trends. Next, NATO defense spending and burden sharing are investigated. The next-to-last section compares the US, China, and Russia real defense spending since 1992, while the final section contains concluding remarks. Preliminaries The extended SIPRI (2015) military expenditure data apply a consistent definition as to what constitutes defense spending to generate comparable estimates for most countries back to SIPRI rely, in large part, on governments official military expenditure data to generate country-level spending amounts from defense budget categories. SIPRI s definition of military expenditure includes outlays on armed forces (inclusive of peacekeeping troops), expense of defense ministries, cost of defense-related government agencies, spending on paramilitary forces, and cost of military-associated space activities (e.g., military surveillance satellites) (SIPRI, 2013, p. 200). In a given fiscal year, both current and capital spending on military-sector civilian personnel, military procurement, operations and maintenance, and military R&D are included by SIPRI (2013, 2014) in its calculation. When constructing its consistent estimates, SIPRI augments official figures with information gleaned from its network of informed parties and open sources. If the same set of categories did not comprise each country s military expenditure calculation, then cross-country comparisons would be misleading. SIPRI (2013, p. 173) rightfully cautions that military expenditure is a resource input measure that does not necessarily reflect military output. Such output can differ among countries for identical expenditure levels because of waste, corruption, training differences, entrepreneurship differences, equipment vintage differences, force structure, deployment considerations, efficiency differences and logistics. For instance, a country that pays more for an all-voluntary force should attract more capable soldiers, who can get more output or security from the same arsenal of weapons. Nonetheless, consistently defined military expenditure estimates can identify defense growth trends, defense spending discontinuities, defense burdens assumed, and changing regional disparities. These expenditure estimates can also discern similar and contrasting responses to momentous events. For cross-country comparisons over time, military expenditure must be denominated in the same currency in constant value terms. Each country s military expenditure in local currency is converted by SIPRI (2015) to 2011 US dollars by applying market exchange rates and adjusting for inflation. The resulting military expenditure values are then in real terms. In many instances, we present shares e.g., a region s share of global military expenditure for comparison purposes. This regional share is the ratio of a region s aggregate military spending to global military spending for a given year, where the numerator and denominator are in constant US dollars. The display of these shares at different regular time intervals permits the reader to see immediately how regional shares are changing over time. In the case of NATO, allies shares of total alliance military expenditure indicate an important within-alliance burden-sharing indicator (Sandler and Forbes, 1980). We use the regional classifications of the World Bank (2015), where the world is partitioned into seven regions. The major countries in each of these seven regions are as follows: China, Japan and Republic of Korea in East Asia & Pacific; France, Germany, Russia and the UK in Europe & Central Asia; Argentina, Brazil, Colombia and Mexico in Latin America & Caribbean; Egypt, Iraq, Iran, Israel, Saudi Arabia and Syria in the Middle East & North Africa; US and Canada Global Policy (2016) 7: The Authors. Global Policy published by Durham University and John Wiley & Sons Ltd.

3 176 in North America; India and Pakistan in South Asia; and Nigeria and South Africa in sub-saharan Africa. Table 1 lists the sample countries in each of the seven regions. The number of sample countries varies from a high of 48 in Europe & Central Asia to a low of two in North America. Because of data problems, North Korea is not in the sample. Similarly, the Soviet Union is excluded prior to 1992 and China is excluded prior to These two exclusions occur because SIPRI (2015) had much less confidence in past estimates of these countries military spending. 2 Countries with little or no military expenditure e.g., Iceland, Singapore, Hong Kong and some small island countries are excluded from the sample of 165 countries. Two views of total military expenditures In Figure 1, total military expenditure in constant 2011 US dollars is plotted for for the 165 countries. There is an upward trend through 1990 when this expenditure reached trillion US dollars. If the Soviet Union had been included, this upward trend would have been more pronounced. Generally, total military expenditure in real terms declined from 1991 until 1998 when it then rose until its peak of trillion US dollars in The small rise in military spending in 1991 and 1992 is due to the Gulf war and the addition of Russia to the sample. In 2014, world military spending was 1.69 trillion US dollars. Military Table 1. List of countries in data set based on the World Bank regional classification East Asia & Pacific Australia Fiji Lao PDR New Zealand Taiwan, China Brunei Darussalam Indonesia Malaysia Papua New Guinea Thailand Cambodia Japan Mongolia Philippines Timor-Leste China Korea, Rep. Myanmar Singapore Vietnam Europe & Central Asia Albania Czech Republic Ireland Netherlands Sweden Armenia Denmark Italy Norway Switzerland Austria Estonia Kazakhstan Poland Tajikistan Azerbaijan Finland Kyrgyz Republic Portugal Turkey Belarus France Latvia Romania Turkmenistan Belgium Georgia Lithuania Russia Ukraine Bosnia & Herzegovina Germany Luxembourg Serbia UK Bulgaria Greece Macedonia Slovakia Uzbekistan Croatia Hungary Moldova Slovenia Cyprus Iceland Montenegro Spain Latin America & Caribbean Argentina Colombia Guatemala Mexico Trinidad and Tobago Belize Cuba Guyana Nicaragua Uruguay Bolivia Dominican Republic Haiti Panama Venezuela, RB Brazil Ecuador Honduras Paraguay Chile El Salvador Jamaica Peru Middle East & North Africa Algeria Iran Kuwait Morocco Syria Bahrain Iraq Lebanon Oman Tunisia Djibouti Israel Libya Qatar United Arab Emirates Egypt, Arab Rep. Jordan Malta Saudi Arabia Yemen, Rep. North America Canada US South Asia Afghanistan India Nepal Pakistan Sri Lanka Bangladesh Sub-Saharan Africa Angola Congo, Rep. Guinea-Bissau Mozambique South Africa Benin Cote d Ivoire Kenya Namibia South Sudan Botswana Equatorial Guinea Lesotho Niger Sudan Burkina Faso Eritrea Liberia Nigeria Swaziland Burundi Ethiopia Madagascar Rwanda Tanzania Cabo Verde Gabon Malawi Senegal Togo Cameroon Gambia, The Mali Seychelles Uganda Central African Rep. Ghana Mauritania Sierra Leone Zambia Chad Guinea Mauritius Somalia Zimbabwe Congo, Dem. Rep The Authors. Global Policy published by Durham University and John Wiley & Sons Ltd. Global Policy (2016) 7:2

4 Military Expenditure Trends 177 Figure 1. Total military expenditure, Military expenditure in billions of US dollars expenditure grew by 57.6 per cent since 2000 in response to the prevalence of intrastate wars, 3 the need to address transnational terrorism after 9/11, the necessity to upgrade weapon systems, the threat of failed and rogue states, the Iraq and Afghanistan wars, the rise of China and instability in the Middle East & North Africa. Figure 1 also shows that the peace dividend, in terms of falling defense spending, following the end of the Cold War was short-lived for the world as a whole, even though some NATO and ex-warsaw Pact allies are still taking advantage of the dividend, as shown later. The recession of 2008 slowed the rate of increase in global military expenditure. After 2009, the downturn in military expenditure was due, in large part, to the decline in US defense spending as US budget deficit concerns resulted in across-the-board cuts in government spending. In 2012, the US share of global military expenditure fell to less than 40 per cent for the first time since 1960 (SIPRI, 2013). We now turn to an alternative measure of global military expenditure that consists of the median share of GDP spent by sample countries on military expenditure in each year during To compute this measure for a given year, we find military expenditure as a share of GDP for each sample country and then identify the median share over all sample countries in each sample year. Unlike an average share, the median share does a better job in treating outliers. This alternative measure indicates how much of the world economy s productive capacity is devoted annually to defense on average. At the country level, this measure captures the country s defense burden normalized by GDP. Countries whose military expenditure shares are greater than other countries are shouldering a large relative defense burden. In Figure 2, this median share displays a saw-tooth pattern between 1961 and 1981, rising to its highest value of 2.8 per cent in 1981, ten years before the end of the Cold War. This saw-tooth pattern can be attributed to changes in defense policy, periodic crises, new weapon technology and economic factors. During , there is another sawtooth pattern with the median share of GDP earmarked for Figure 2. Median share of GDP devoted to defense, Percentage defense reaching a local peak of 2.6 per cent in This peak came during the buildup of coalition forces (e.g., by the US, Kuwait, the UK, Saudi Arabia, France, Italy and Canada) between 2 August 1990 and 17 January 1991 prior to the onset of Desert Storm or the first Gulf war. Because of this war, military expenditure was 13.7 per cent of GDP for the Middle East & North Africa, with Kuwait spending per cent of its GDP on defense. In addition, the US and coalition members in Europe also increased their median shares of GDP devoted to defense before and during the Gulf War. After 1990, this median share declined rather steadily from 2.4 per cent in 1991 to 1.4 per cent in This decline occurred despite the US increasing its defense share of GDP after 9/11 and the post-1992 defense buildups by China and Russia, discussed toward the end of the article. Remember that high defense shares in a few countries will have little impact on the global median share, which is the middle share of 165 sample countries. From a global vantage, this declining post-1990 defense share of GDP suggests an ongoing peace dividend, especially for NATO and ex-warsaw Pact members, since the end of the Cold War as countries are on average spending less of their GDP on defense, thereby releasing GDP for nondefense (e.g., social welfare or productive) purposes. This alternative measure eliminates the growth in military expenditure arising from the growth in GDP over time, since it is a ratio of two measures. Figures 1 and 2 highlight how different defense measurements provide different perspectives so that multiple representations of military expenditure should be employed as done here. Figure 1 underscores the general upward spending on global defense since 1960, while Figure 2 indicates that countries are generally allocating less of their GDP to defense since the end of the Cold War. The latter tendency is true except for three major powers (i.e., the US, China and Russia) and countries where tensions are high (e.g., Greece and Turkey). Regional defense trends Another useful vantage is to investigate total military expenditure within the seven regions. In Figure 3, military Global Policy (2016) 7: The Authors. Global Policy published by Durham University and John Wiley & Sons Ltd.

5 178 Figure 3. Total military expenditure by region, Military expenditure in billions of US dollars North America East Asia & Pacific Latin America & Caribbean sub-saharan Africa Europe & Central Asia Middle East & North Africa South Asia expenditure plots in constant US dollars for each region are presented for An uneven pattern characterizes North America where US defense spending way overshadows Canadian defense spending. The upturn from 1960 to 1968 reflects the buildup of the US strategic nuclear arsenal and rising Cold War tensions. The downward trend in the 1970s captures US successful efforts to shift more of NATO defense burdens to European allies during the doctrine of flexible response when the alliance would respond in measure to Soviet aggression e.g., Soviet conventional incursions in Europe would be first met with a conventional response (Sandler and Hartley, 1999; Sandler and Murdoch, 2000). 4 This doctrine increased the ally specific component of defense spending because a NATO ally with weaker security forces might have drawn a Soviet attack, thus reducing free riding (Sandler and Murdoch, 2000). During the latter 1970s, the Carter administration reduced defense spending, which reinforced the US downturn. The large rise in military spending in North America in the 1980s is due to the Reagan defense buildup. In the 1990s, there are the peace-dividend years following the Cold War; after 9/11, there is the war on terror buildup of defense. Since 2009, US defense spending fell because of budgetary considerations and sequestration. Europe & Central Asia shows a gradual rise in real military expenditure over the entire sample period. The spike in 1992 comes when Russian military expenditure is added to the data set. Since the late 1990s, Russian defense is driving the trend as most western European countries have been reducing their defense burdens. The steadiest upward trend starting in 1989 characterizes East Asia & Pacific primarily due to the buildup of Chinese military expenditure, which, in turn, encourages defense spending of some possible adversaries (e.g., Japan and Republic of Korea). During , real military expenditure grew by 7.1 per cent in Japan, per cent in the Republic of Korea and per cent in Vietnam. Also, this expenditure grew by 186 per cent in Indonesia. There is an upward trend in real military spending in the Middle East & North Africa in recent years. This trend accelerated after 2000 with the increased dominance of the religious fundamentalist terrorists (Enders et al., 2016). This rise was reinforced in recent years by the instabilities in Egypt, Iraq, Lebanon, Libya, Syria and Yemen following the Arab Spring, which began on 18 December 2010 in Tunisia. During , real military expenditure grew as follows: per cent, Algeria; per cent, Morocco; 35 per cent, Egypt; per cent, Tunisia; per cent, Bahrain; per cent, Lebanon; per cent, Oman; per cent, Saudi Arabia; and per cent, Syria. Syrian defense growth is for , since its expenditure is not available for The remaining three regions are fairly flat with a small upward trend in Latin America & Caribbean in recent years, fueled by efforts by some governments to curb drug-trafficking violence (e.g., Colombia and Mexico) (SIPRI, 2013, p. 125). The small upward trend in South Asia is due to defense spending increases in Afghanistan, India and Pakistan. There is little change in sub-saharan Africa. Figure 3 highlights the post-cold War regional shift in defense spending to two increasingly unstable regions Middle East & North Africa and East Asia & Pacific. This regional shift has policy implications for western allies that are indicated after our presentation of Figures 4 and 5. Our next perspective on regional defense spending is Figure 4, which displays these real expenditures for the seven regions at five-year intervals, except for This figure allows the reader to see at a glance changing relative patterns over time. The figure documents the dominance of North America, with Europe & Central Asia as the second 2016 The Authors. Global Policy published by Durham University and John Wiley & Sons Ltd. Global Policy (2016) 7:2

6 Military Expenditure Trends 179 Figure 4. Regional military expenditure, ,000 1,500 2,000 Military expenditure in billions of US dollars North America East Asia & Pacific Latin America & Caribbean Europe & Central Asia Middle East & North Africa South Asia sub-saharan Africa Figure 5. Regional percentage share of global military expenditure, percent North America East Asia & Pacific Latin America & Caribbean sub-saharan Africa Europe & Central Asia Middle East & North Africa South Asia most important region for in regards to real military expenditure. The growing importance of Europe & Central Asia after 2000 is due to the Russian defense buildup. The figure also shows the growing defense importance of East Asia & Pacific after 1990 owing to defense increases in China, Indonesia, Japan, Republic of Korea and Vietnam. After 1995, there is a notable defense spending increase in the Middle East & North Africa. Modest increases in Latin America & Caribbean and in South Asia are evident after Based on the raw data for real military expenditure, we compute the following defense spending growth rates for : 50.8 per cent, North America; 18.4 per cent, Europe & Central Asia; per cent, East Asia & Pacific; per cent, Middle East & North Africa; 79.3 per cent, Latin America & Caribbean; 83.1 per cent, South Asia; and 27.4 per cent, sub-saharan Africa. The greater defense in East Asia & Pacific and in Middle East & North Africa must be put in proper perspective, because both regions started their defense growth from rather modest initial military Global Policy (2016) 7: The Authors. Global Policy published by Durham University and John Wiley & Sons Ltd.

7 180 expenditure levels compared to North America and Europe & Central Asia. Figure 4 puts these initial expenditures in perspective by displaying expenditure amounts. After 1990, defense increases in South Asia are driven by India and Pakistan, whose military spending grew by and 75.8 per cent, respectively, during These increases were due to their nuclear weapon buildup, a war in 1999, heightened tensions during , cross-border terrorism and their mutual distrust (SIPRI, 2013, 2014). Figure 5 provides yet another perspective of the distribution of regional military expenditure for at regularly spaced snapshots since In real terms, this graph depicts each of the seven regional shares of global military expenditure. Each share is found by taking the ratio of a region s total real military spending to the entire sample s real military spending at selected points in time. In 1960, North America and Europe & Central Asia collectively accounted for 93.4 per cent of global military expenditure. 5 These two regions defense shares fell fairly steadily until they collectively accounted for 59.6 per cent of global military spending in During , the steady rise of the shares in East Asia & Pacific and the Middle East & North Africa are evident. Figure 5 underscores the shifting regional importance in terms of military expenditure over the last 55 years. The shift is particularly important after the end of the Cold War. Because much of the defense industry is in the US and western Europe, these countries defense sector supplied many of the weapons for these defense-expanding regions (Hartley, 2007, 2012; Sandler and Hartley, 1995). In 2011, the world s top defense companies, in descending sales, are Lockheed Martin (US), Boeing (US), BAE Systems (UK), General Dynamics (US), Raytheon (US), Northrop Grumman (US), EADS Airbus (Europe), Finmeccanica (Italy), L-3 Communications (US) and United Technologies (US) (Hartley, 2014, p. 151). Currently China and Russia are expanding and modernizing their armed forces to extend their territorial control in the South China Sea and the Ukraine, respectively (The Economist, 2015; SIPRI, 2013, 2014). As a rogue state, North Korea jeopardizes western interests in East Asia. Islamic State in Iraq and Syria (ISIS), intrastate conflicts, and failed states (e.g., Libya, Iraq, Syria and Yemen) make the Middle East & North Africa a growing threat to western interests and to stability in the region. The heightened defense importance of East Asia & Pacific and the Middle East & North Africa underscores the necessity for NATO allies to be able to project their military assets beyond the NATO theater. This then calls for enhanced emphasis on rapid deployment forces. Such shifting regional power patterns also calls for long-range transport and combat aircraft. The US already possesses the required heavy-lift transport aircraft and is beginning development of the longrange strike bomber for distant combat missions. Other western allies are much more limited in their power-projection capabilities, which weaken NATO s ability to conduct out-of-area combat missions (Hartley, 2012). Currently, the US has ten aircraft carriers, France has a single aircraft carrier, and the UK is developing two Queen Elizabeth aircraft carriers (International Institute for Strategic Studies, 2014). The latter two carriers will not be available until 2017 or beyond. Currently, the UK has three ships that are landing platforms for helicopters. The International Institute for Strategic Studies (2014, p. 94) highlighted France s strategic lift inadequacies. In terms of heavy-lift transport planes, tanker planes, and long-range bombers, France s and the UK s assets are very modest compared to the US (International Institute for Strategic Studies, 2014). Threats in East Asia & Pacific enhance the importance of naval power, leading the US to plan to increase its navy from 273 to at least 300 ships and possibly 350 (The Economist, 2015, p. 65). To address shifting regional patterns of defense spending, there is little doubt that the composition of western armed forces and equipment must undergo a drastic transformation in the near-term at great expense. Recent defense spending trends of NATO allies, displayed in the next section, raise real doubts whether most of these allies are bolstering their armed forces to meet such out-ofarea challenges. The world is at a critical junction in terms of military expenditure policy namely, the ability to address the growing threats in distant venues. This comes after significant declines in western defense spending in response to the post-cold War peace dividend, the 2008 recession, the euro crisis and the concomitant budget crises. NATO alliance and defense spending and burdens Founded in 1949 by 12 countries (i.e., Belgium, Canada, Denmark, France, Iceland, Italy, Luxembourg, the Netherlands, Norway, Portugal, the UK and the US), NATO took in Greece and Turkey in 1952, West Germany in 1955 and Spain in 1982 (Sandler and Hartley, 1999). Unified Germany replaced West Germany on 3 October The alliance grew from 16 to 28 allies between March 1999 and April 2009 with the Czech Republic, Hungary and Poland joining in 1999; Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia and Slovenia entering in 2004; and Albania and Croatia entering in With the exception of Slovenia and Croatia (formerly part of nonaligned Yugoslavia), the expansion allies had been part of the Warsaw Pact prior to the end of the Cold War. With a more belligerent Russia and its recent land grab in Ukraine, these expansion allies present a greater liability concern to NATO. This concern is more poignant given Putin-inspired nationalism in recent years and defense retrenchment in France, Germany, and many other NATO allies. The expanded SIPRI (2015) data allow for an examination of burden-sharing concerns and other dilemmas confronting NATO since Figure 6 displays NATO allies shares of total alliance expenditure for These shares are one important measure of burden sharing by NATO allies at alternative points in time. 6 In Figure 6, allies are grouped into four categories the US, medium powers (France, Germany and the UK), other NATO allies (the other 12 pre-1999 expansion allies), and the 12 expansion allies. The shares for each observation adjust for the number of allies The Authors. Global Policy published by Durham University and John Wiley & Sons Ltd. Global Policy (2016) 7:2

8 Military Expenditure Trends 181 Figure 6. NATO allies shares of alliance expenditure, Percent USA Medium powers Other NATO countries Expansion allies Although the US share varies over time, it usually assumes over 60 per cent of the alliance expenditure burden, measured by this metric. Variations in these shares are tied to strategic doctrine, perceived threats, and technological changes (Sandler and Murdoch, 2000; Kollias, 2008). 7 For example, the alteration in NATO strategic doctrine from mutual assured destruction (MAD) to flexible response in the latter 1960s resulted in the US shifting some of its NATO defense burden to western Europe during as conventional forces assumed an enhanced importance in any initial stages of a Soviet incursion in Europe (Sandler and Forbes, 1980; Sandler and Hartley, 2001). This strategic shift made NATO s defense less purely public to the European allies, thereby inducing them to provide more forces to protect their territory. Increased terrorism threats after 9/11 have been shown, in part, to explain the increasing US defense burden share during because transnational terrorism disproportionately targeted US interests (Sandler and Shimizu, 2014). Technological changes may involve the development of new weapon platforms, such as strategic nuclear arsenals in the 1960s or the development of antiballistic missile defenses in subsequent decades. Except for 2000, the US and the three medium powers accounted for at least 80 per cent of NATO spending; thus, just four allies underwrite most of NATO s defense. This reliance on the four largest allies is consistent with Olson and Zeckhauser s (1966) exploitation hypothesis, in which the rich allies shoulder the defense burden of the alliance when defense primarily consists of pure public good benefits. Figure 6 highlights a shrinking alliancewide burden being shouldered by the three medium powers since 1985, which also applies to the other 12 pre-expansion allies after As a consequence, US burdens have been very high during The changing pattern of shares in Figure 6 reflects the changing degree of defense publicness as weapon technology, strategic doctrine, alliance size and threats altered with time. Although the expansion allies carry a slightly increasing spending burden since 2000, they still assumed only 2.4 per cent of NATO military expenditure. This implies that post NATO expansion has placed a huge liability on relatively few allies most notably the US that shoulder much of alliance military spending. Recent increases in defense spending by Lithuania, Latvia, and Estonia will help but constitute relatively little overall increment, given their small initial spending base. Using NATO s spending figures for 2015, Pavgi (2015) showed that the Baltic allies have some of the faster growing defense spending in NATO, with Lithuania leading with 29.5 per cent for These spending increases are motivated by Russian actions in Ukraine. To gain an alternative perspective, we turn to a second burden-sharing measure that was first employed by Olson and Zeckhauser (1966). This burden measure is an ally s share of GDP spent on military expenditure. Division of military expenditure by GDP normalizes for the ally s productive capacity, thereby depicting a capacity-conditioned burden indicator (Kollias, 2008; Sandler and Hartley, 2001). Table 2 lists this indicator for NATO allies at seven points in time. Iceland is left out since its share is virtually zero. Since 1960, the median per cent of GDP spent on defense (last row of Table 2) generally declined for NATO allies. Rather marked decreases in this measure followed the end of the Cold War, except for the US. The latter raised its military expenditure share of GDP after 9/11 and its subsequent involvement in Iraq and Afghanistan. This increase reversed around 2010 owing to US budget difficulties i.e., US Congress actions to reduce the deficit. Global Policy (2016) 7: The Authors. Global Policy published by Durham University and John Wiley & Sons Ltd.

9 182 Table 2. NATO allies military expenditure as a per cent of GDP, Country Canada US Belgium Denmark France Germany Greece Italy Luxembourg Norway Portugal UK Turkey Netherlands Spain Czech Republic Hungary Poland Bulgaria Estonia Latvia Lithuania Romania Slovak Republic Slovenia Albania Croatia Median Table 2 is consistent with a recent theory that military expenditure shares of GDP converge over time for a similar cohort of countries (Arvanitidis et al., 2014; Lau et al., 2015). There is a marked greater degree of similarity among these ratios for NATO allies after For most allies, the decline after 1990 is due to efforts to shift government spending from defense to social welfare. The shift is also partly motivated by actions to reduce budget deficits. After 2008, European governments needed to focus their efforts on the banking sector, the euro crisis and recovery. In 2014, only six allies the US, France, Greece, the UK, Turkey and Estonia were meeting NATO s suggested two per cent of GDP defense spending target. The fall in German military spending as a per cent of GDP from 4.0 per cent in 1960 to 1.2 per cent in 2014 is particularly worrisome, given Germany s essential position in NATO. The two burden-sharing measures provide a consistent picture of allies burdens and actions for which there is increasing free riding on the US, the UK, and France by most NATO allies. Moreover, changes in each measure are consistent with strategic doctrine, threats, economic contingencies, and alliance size that affected NATO defense publicness over time. In his farewell address to NATO, then US Secretary of Defense Robert Gates characterized the NATO alliance as two-tiered with those [allies] willing and able to pay the price and those who enjoy the benefits...but do not want to share the risks and costs (Gates, 2011). Figure 6 and Table 2 support this characterization as still holding true in 2014, in so far as just four allies carried 84 per cent of NATO defense burdens, thus underscoring free riding. Moreover, the allies shares of GDP going to military expenditure continued to decline for most member states, with some important allies Canada, Germany, Italy and Spain devoting much less than 2 per cent to defense spending. The two-tiered nature of NATO is underscored by defense R&D spending. In 2013, the US spent $66.9 billion on R&D (US Office for Management and Budget, 2015), while France spent $4.362 billion, the UK spent $3.715 billion, and Germany spent $1.233 billion (European Defence Agency, 2015). Other NATO allies spent less than $0.266 billion on R&D. As mentioned earlier, most NATO allies do not have much power projection capabilities. With rising unit price of combat planes, ships, and other armaments, smaller defense budgets mean that allies will necessarily have to reduce their armament supply and increasingly trade capital for soldiers (Hartley, 2012; 2014). Both trade-offs may weaken allies capabilities. Clearly, NATO must confront its unequal burden sharing and disparate capabilities, especially among its richer allies if the alliance is to continue to protect its out-of-area interests. The recent buildup by the Balkan allies will do little to offset NATO s eastern risks owing to expansion allies modest base-level military expenditure, highlighted by Figure 6. The inclusion of Ukraine in NATO, given the risks already assumed in Eastern Europe and recent Russian aggression, would seem ill-advised. The US, China and Russia, We now move from regional and alliance analysis to a closer examination of military expenditure in three major powers. Figure 7 displays total military expenditure in constant 2011 US dollars for We choose these years because the extended SIPRI data possess consistent observations for Russia and China during this period. Moreover, important changes in these two countries military expenditure occurred from 1999 on. In Figure 7, the left-hand vertical axis measures US military expenditure, while the right-hand vertical axis measures Chinese and Russian military expenditure in constant US dollars. Two scales are used because US military spending is currently so much greater than that of Russia and China. Figure 7 highlights the upward trend in US defense spending after 9/11 until Chinese military expenditure began to rise slightly in 1994 and really accelerated after China has a long way to go to catch up with the US in terms of military expenditure; it has even further to go in terms of weapon stocks, weapon capabilities, and troop quality. For example, China has a single refurbished Sovietera aircraft carrier and another two under construction, while the US has ten nuclear-power supercarriers (The Economist, 2015; International Institute for Strategic Studies, 2014). It will take many decades for China to catch up with US naval power (The Economist, 2015). The rising military prowess of China will necessitate the US reallocating some of its naval assets to the Far East The Authors. Global Policy published by Durham University and John Wiley & Sons Ltd. Global Policy (2016) 7:2

10 Military Expenditure Trends 183 Figure 7. Total military expenditure for three major countries, Military expenditure in billions of US dollars USA China Russia Military expenditure in billions of US dollars Russia shows a more gradual rise in military expenditure that is anticipated to pick up as it modernizes its arsenal and augments its troop capabilities. However, Russian economic challenges, which are formidable, should delay these planned modernizations (SIPRI, 2013, p. 342). In 2014, China s military expenditure is twice that of Russia. For , US military expenditure grew by 45.4 per cent, while China s and Russia s military expenditure grew by 321 and per cent, respectively. Clearly, the US and its NATO allies must base their future defense spending on the potential threats pose by these huge increases. Figure 8 displays these three countries share of global military expenditure, along with the aggregate share of the other 162 sample countries at five snapshots. The expanding shares of China and Russia and the contracting share of the US are readily apparent since China s share expanded right through 2014, while US shares expanded for The graph underscores that Chinese defense shares are far greater than Russian shares at each displayed snapshot. This comparison does not account for these countries military weapon stocks, where Russia has the decisive edge over China (International Institute for Strategic Studies, 2014). Figure 8 indicates that the US is conceding some military prowess to China and Russia since The US Congress and the President will surely consider this lost ground in future budget deals especially given the Republican control of the House and Senate. Many US Republican presidential candidates are raising defense spending concerns in their myriad televised debates during Conclusions SIPRI expanded defense data provide an opportunity to characterize defense spending trends globally, regionally and in three major countries. In addition, aspects of NATO burden sharing are investigated. At a regional level, defense expenditure growth in East Asia & Pacific and the Middle East & North Africa exceeded most other regions. This recent increase in two regions that have been plagued by conflicts, failed states, and politically instability raises a strategic concern for western Figure 8. Three major countries share of global military expenditure, percent USA Russia China Others allies. To address these region-based increases in armaments, these allies must greatly augment their power projection capabilities and their rapid deployment forces. This exigency comes during a retreat from defense spending by many western European allies following the end of the Cold War. This retreat, coupled with a defense increase by the US after 9/11, has resulted in an unbalanced NATO alliance, for which the US and a few medium-sized allies are shouldering most of the alliance burden. Economic recovery provides an opportunity for NATO allies to reallocate more resources to respond to these rising out-of-area threats. Even within Europe, NATO faces a greater challenge from a rising degree of nationalism in Russia. This is particularly worrisome as Russia modernizes its forces and assumes a more aggressive posture. NATO has defense commitments to its expansion allies, which account for a tiny fraction of NATO military expenditure, while presenting significant potential risks. Finally, there is the concern posed by the closing military spending gap between China and the US. The paper puts Global Policy (2016) 7: The Authors. Global Policy published by Durham University and John Wiley & Sons Ltd.

11 184 this closing gap in proper perspective: i.e., China still has a long ways to go to match US military might. Nevertheless, the US needs to increase its military assets in the Far East. NATO allies, in general, must foster greater economic and military ties to East Asian & Pacific countries. Notes 1. This theory predicts that the rich allies shoulder the defense burdens for the poor allies if common defense is a purely public good with nonrival and nonexcludable benefits for allies (Hartley and Sandler, 1999). In so doing, the rich allies devote a greater share of their GDP to defense compared to poor allies. This burden-sharing prediction may not hold if military expenditure provides a large share of country-specific benefits (Sandler and Hartley, 2001). 2. The Soviet Union is excluded from the data because SIPRI (2015) only records three years of Soviet military expenditure just prior to the Soviet Union s collapse in Thus, our comparison of US, Chinese and Russian military expenditure is for Estimates of Chinese defense data are generally less reliable than those of other countries. 3. Intrastate wars numbered from 27 to 37 a year since 2001, with most of them in Africa and Asia. The only interstate wars have been India and Pakistan ( ), Afghanistan and US-led allies ( ), Iraq and US-led allies (2003), Djibouti and Eritrea (2008) and Cambodia and Thailand (2011) (SIPRI, 2013). 4. Prior to the flexible response doctrine, NATO adhered to the mutual assured destruction (MAD) deterrence, where any Soviet aggression in Europe would trigger a nuclear exchange. MAD allowed Europe to free ride on the US nuclear arsenal and greatly reduced the need for strong conventional forces along European allies borders. 5. Since the Soviet Union is left out of the sample, this percentage would be even greater with its inclusion. 6. This measure was first devised by Sandler and Forbes (1980) and has been used in many studies, such as Kollias (2008). 7. Dutheil de la Rochere et al. (2014) explored the impact of Strategic Defense Initiative on NATO spending. 8. We view all defense spending as part of an ally s NATO burden. Some researchers argue that US and Canadian spending needs to be parsed between military expenditure earmarked for Europe and this expenditure geared for elsewhere (e.g., Hartley and Sandler, 1999; Sandler and Murdoch, 2000). Because NATO s interests now extend outside of Europe, this argument is less persuasive in recent years. The US has developed power projection capabilities and rapid deployment forces to address NATO s strategic interests in and beyond Europe. References Arvanitidis, P., Kollias, C. and Anatasopoulos, K. 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(2012) The Economics of Defence Policy. London: Routledge. Hartley, K. (2014) The Political Economy of Aerospace Industries: A Key Driver of Growth and International Competitiveness?. Cheltenham: Edward Elgar. Hartley, K. and Sandler, T. (1998) NATO Burden-Sharing: Past and Future, Journal of Peace Research, 36(6), International Institute for Strategic Studies (2014) The Military Balance London: Routledge. Kollias, C. (2008) A Preliminary Investigation of the Burden Sharing. Aspects of an EU Common Defence Policy, Defence and Peace Economics, 19(4), Lau, C. K. M., Demir, E. and Bilgin, M. H. (2015) A Nonlinear Model of Military Expenditure Convergence: Evidence from ESTAR Nonlinear Unit Root Test, Defence and Peace Economics, doi: / Olson, M. and Zeckhauser, R. (1966) An Economic Theory of Alliances, Review of Economics and Statistics, 48(3), Pavgi, K. (2015) NATO Members Defense Spending, in Two Charts, [online]. Available from: 06/nato-members-defense-spending-two-charts/116008/?oref=d-river [Accessed 7 November 2015]. Sandler, T. and Forbes, J. F. (1980) Burden Sharing, Strategy, and the Design of NATO, Economic Inquiry, 18(3), Sandler, T. and Hartley, K. (1995) The Economics of Defense. Cambridge: Cambridge University Press. Sandler, T. and Hartley, K. (1999) The Political Economy of NATO. Cambridge: Cambridge University Press. Sandler, T. and Hartley, K. (2001) Economic of Alliances: The Lessons for Collective Action, Journal of Economic Literature, 39(3), Sandler, T. and Murdoch, J. C. (2000) On Sharing NATO Defence Burdens in the 1990s and Beyond, Fiscal Studies, 21(3), Sandler, T. and Shimizu, H. (2014) NATO Burden Sharing : An Altered Alliance, Foreign Policy Analysis, 10(1), Stockholm International Peace Research Institute (SIPRI) (2013) SIPRI Yearbook 2013: Armaments, Disarmament and International Security. New York, NY: Oxford University Press. SIPRI (2014) SIPRI Yearbook 2014: Armaments, Disarmament and International Security. New York, NY: Oxford University Press. SIPRI (2015) SIPRI Extended Military Expenditure Database, Preliminary Version, Stockholm: SIPRI. US Office for Management and Budget (2015) Outlays by Function and Subfunction: , Historical Tables [online]. Available from: [Accessed 2 November 2015]. World Bank (2015) World Bank List of Country and Lending Groups [online]. Available from: [Accessed 2 November 2015]. Author Information Todd Sandler, Vibhooti Shukla Professor of Economics and Political Economy at the University of Texas in Dallas. His expertise includes the study of global and regional collective action and the study of terrorism. His research was funded by the Vibhooti Shukla endowment. Justin George, PhD candidate in Economics at the University of Texas at Dallas. His current main interests are: economic analysis of failed states, hostage taking and national military expenditures. He has a recent article in Journal of Peace Research on peacekeeping The Authors. Global Policy published by Durham University and John Wiley & Sons Ltd. Global Policy (2016) 7:2