HISTORY : World Economy: History and Theory

Transcription

1 HISTORY : World Economy: History and Theory Dr. Jari Eloranta Professor of Comparative Economic and Business History Appalachian State University, Department of History Office: Anne Belk Hall 249S (Office hours: see syllabus) Phone: A. LONG-RUN TRENDS IN MILITARY SPENDING B. RESEARCHING MILITARY SPENDING: METHODS AND OVERALL FINDINGS 1

2 A. Long-run Patterns -The new style of warfare, prominent in the Revolutionary Wars of the latter part of the 18th century, and the rapid population growth, (TOTAL WAR) reversing the armed forces population shares again toward decline, increased the European warring potential even further. For example, the French army grew over 3.5 times in size from 1789 to 1793, up to 650,000 men, the British army grew from 57,000 men in 1783 to 255,000 in 1816, and the Russian army retained a massive size of 800,000 men even after This kind of mobilization, encouraged by the introduction of conscription by the French during the revolutionary wars, became more or less permanent in the 19th century, requiring new sources of financing. The 19th century introduced reforms such as reliance on balanced budgets, innovations in public debt management, and direct taxation. These reforms were supported by the industrial revolutions and rising productivity levels, and accompanied by an industrialization of war and armaments production from the mid-century on. The economic challenges posed by these changes differed. In the French case, the mean defense share (=military expenditures of central government spending, percentage) remained roughly the same in , circa 35 per cent, whereas its military burden (=military expenditures of GDP, percentage) rose modestly to 4.2 per cent. In the British case, the mean defense share in declined slightly to 36.7 per cent compared to the early 19th century. However, the strength of the British economy actually enabled a slight military burden decline to 2.6 per cent, a similar figure incurred by Germany in the same period. Figure 2. Military Burdens (=Ratio of ME to GDP, %) of Four Great Powers and Aggregate Real Military Spending in the 16-country (minus Finland) System, % (MILBUR) Year GER, MILBUR FRA, MILBUR SYSTEM ME (IN 1913 GBP) UK, MILBUR USA, MILBUR Billions (ME) A lot of variance in the various countries military spending patterns, e.g. before WWI! Also, note the impact of wars. Sources: Eloranta

3 Figure 3. Military Burdens (=Ratio of ME to GDP, %) Plotted Against GDP per Capita Levels, Richer countries spent relatively less on their military establishments than the poorer ones! Sources: see Eloranta 2002 and Eloranta On definitions, see Eloranta Figure 4. Military Burdens (=Ratio of ME to GDP, %) Plotted Against Democracy Levels (0-10), Higher levels of democracy induced lower ME! Sources: see Eloranta 2002 and Eloranta Democracy scale used is the so- called Polity IIID scale, 0 indicating an autocracy, 10 indicating a perfect democracy. 3

4 A. Long-run Patterns (cont.) -For most countries the period leading to the First World War meant comparatively higher military burdens. The United States, the new economic leader, incurred a meager 0.7 per cent average military burden, similar to the interwar period. In the First World War ( ), this military potential was unleashed in Europe, with a war of attrition causing immense suffering and property damage amounting to perhaps 36 billion USD. After the war, especially in the 1920s, public spending in most countries was plagued by budgetary immobility. However, although the defense shares of democracies dropped noticeably, their respective military burdens stayed either at similar levels as before or actually increased for example, the French military burden rose to a mean level of 7.2 per cent. Also, the British mean defense share dropped to 18.0 per cent, yet the average military burden actually increased, despite efforts to cut military spending. For these countries, the mid-1930s marked the beginning of rearmament, although their authoritarian challengers had begun earlier. Hitler s Germany increased its military burden from 1.6 per cent in 1933 to 18.9 in 1938, a rearmament program promising both guns and butter. Mussolini s efforts in Italy were less successful, producing a military burden of only four to five per cent in the 1930s. The Japanese rearmament drive was the most extensive, amassing a military burden as high as 22.7 per cent in In the Second World War ( ), the initial phase from 1939 to early 1942 favored the Axis as far as their strategic and economic potential were concerned. After that, the war of attrition, with the United States and the USSR joining the Allies, turned the tide in favor of the economically superior Allies. The economic demands of the war were unprecedented, as for example the British maximum military burden of circa 27 per cent in 1918 was dwarfed by the over 50 per cent level maintained respectively throughout the Second World War. This war also brought with it a new military-political leadership role for the United States, especially within the NATO (founded in 1949). The USSR, rising to new prominence during and after the war, established the communist Warsaw Pact in The war also gave impetus to welfare states that brought the OECD government expenditure average from under 30 per cent of GDP in the 1950s to over 40 per cent in the 1970s. Figure 23. Mean Military Burdens of the Selected Eleven European Countries Compared with the Six Other (All Authoritarian Except USA) Countries, Sources: see Appendices, Appendix 2 for details. The averages are unweighted. Note: for details on the countries included, see Figure 11. 4

5 Figure 24. Military Burdens of Denmark, Finland, France, and the UK, Sources: see Appendices, Appendix 2 for details. Figure 25. Military Burdens of Germany, Italy, Japan, and Russia/USSR, Sources: see Appendices, Appendix 2 for details. Note: the data of these countries are less robust than the eleven; see Chapter 1 and Appendices, Appendix 2. 5

6 A. Long-run Patterns (cont.) -Military burdens and military-industrial complexes grew concurrently, with military spending levels peaking during the early Cold War. The American military burden rose above 10 per cent in , and retained a high mean value of 6.7 per cent for the post-war period. Great Britain and France followed the American example, albeit more warily. The Cold War embodied a relentless armaments race between the two superpowers, with the USSR spending circa 60 to 70 per cent of the American equivalent in the 1950s. CIA estimates indicate that the cost of U.S. military programs in continued to exceed the equivalent dollar cost of the Soviet programs until From 1972 to 1985, the USSR surged ahead. All in all, during this period the American military spending amounted to 6.1 trillion USD (in 1988 prices) cumulatively, whereas the USSR spent an estimated 6.3 trillion USD. Nevertheless, figures by the Stockholm International Peace Research Institute (SIPRI Yearbooks of World Armaments and Disarmament. Stockholm and Oxford, 1969/ ) point toward a 2-to-1 lead in favor of the NATO over the Warsaw Pact throughout the 1970s and 1980s. Part of this armaments race was due to technological advances that produced a mean annual increase in real costs of circa 5.5 per cent. Yet, consumption spending on personnel and operation has remained the biggest spending item. Figure 1. Military Burdens (MILBUR) of the United States and the United Kingdom, and the Ratio of Soviet over US Military Spending (%), Sources: References to economic data can be found in Eloranta, Jari. Military Competition between Friends? Hegemonic Development and Military Spending among Eight Western Democracies, Essays in Economic and Business History. XIX (2001), ME (=Military Expenditure) data from Singer-Small 1993, supplemented with the SIPRI data for Exchange rates from Global Finance Data [online]. [quoted ] Available in www-format: <URL: 6

7 A. Long-run Patterns (cont.) -The world military spending levels began a slow decline from the 1970s onwards, with the exception of the early 1980s. The American military burden was 6.5 per cent in 1986, whereas by 1999 it had dropped to 3.0 per cent. This has mostly been triggered by the subsequent downfall of the Soviet bloc. The USSR s challenge against the American military dominance began to crumble after the mid-1980s, yet the Soviet military burden remained high until 1990 (12.3 per cent). In the 1990s, with a declining GDP, the Russian military burden has dropped rapidly, to 3.2 per cent in Similarly, other nations have downscaled their military spending in the 1990s. For example, German military spending in 1991 was over 52 billion in constant USD (in 1995 prices), whereas by 1999 it had declined to less than 40 billion. In the French case, the decline was more modest as its military burden decreased from 3.6 per cent to 2.8 respectively. Overall, there was a reduction of circa one-third in the world military spending in real terms in Globally, the world military expenditure remains highly concentrated, with the 15 big spenders accounting for 80 per cent of the world total in In terms of the scale of violence, the 20th century seems to have been the most war-prone in human history by any indicator, yet wars involving great powers have declined in frequency, duration, and the number of participants. Source: SIPRI Yearbook 2004, Table 10A.1,see also SIPRI military expenditure database. Note: Some countries are excluded because of lack of consistent time-series data. World totals exclude Afghanistan, Angola, Benin, Congo (Republic of), Congo (Democratic Republic of), Iraq, Liberia, and Somalia. 7

8 B. Researching Military Spending: Methods and Overall Findings -demand side: national defense ministries and their armed forces demand defense equipment; supply: defense industries both nationally and overseas provide these goods, involves a legally binding contract, in some cases the government as a buyer might impose regulatory requirements on the contractor (e.g. profit controls) -defense markets and industries are government regulated (due to their public good nature), governments can determine whether their national markets should be open or closed, they can impose monitoring costs, and there is often state regulation of profits on defense contracts, to ensure typically that defense contractors do not make either excessive profits or excessive losses (military industrial complex theory, MIC) -in general single equation for military expenditures (demand): ME=ME(INCOME, SPILL, THREAT, PRICES) -Regime types. Peace researchers have analyzed the impact of regime type on how warprone these states are at the monadic (state), dyadic (two states), and system levels. They consistently agree that democracies rarely if ever fight each other. They disagree, however, on whether democracies are inherently less warlike than other regime types. These researchers have not, nonetheless, taken the analysis to the level of military spending, rather than in terms of, e.g., composite indicators of national capabilities. *As the findings of Eloranta (2002) indicate for the interwar period, it seems that democracies and totalitarian nations do differ in their military spending behavior, respective of economic growth. However, it was discovered that less centralized, authoritarian nations such as Spain in the 1920s did not necessarily act differently from the democratic sample nations. The reasons that democracies might behave differently in their external security framework include: 1) the political culture of democratic states, referring to nonviolent norms; 2) the democratic political structure and its decision-making constraints (divided political power, legislative approval, bureaucracies, interest groups, and public opinion). 8

9 CERTAIN IMPORTANT CONSIDERATIONS IN PUBLIC GOOD DEMAND ANALYSIS: Susceptible to spillins (behavior of friendly states influential) Identity of agent important Price difficult to ascertain E.G. MILITARY SPENDING ANALYSIS: Importance of levels of analysis Importance of the actors involved Combining macro- and microanalysis Figure 8. The Demand for Military Spending as an Impure Public Good: The Actors and Collective Action INTERNATIONAL COMMUNITY (League of Nations, extra-league initiatives) INTERNATIONAL ARMAMENTS MARKETS ACTORS INDIVIDUAL STATES (Acting both as monads, dyads, as well as within alliances) VOTERS/ CONSUMERS POLITICAL PARTIES STATE AGENCIES ECONOMIC AND POLITICAL INTEREST GROUPS ADMINISTRATIVE ORGANIZATIONS MILITARY ORGANIZATIONS HYBRIDS (Committees etc.) COLLECTIVE ACTION RENT SEEKING: 1. ECONOMIC/ POLITICAL 2. BUREAUCRATIC 3. MILITARY PARLIAMENTARY FRAGMENTATION, ELECTORAL COMPETITION INSTITUTIONS: 1. OPPORTUNITIES 2. CONSTRAINTS SYSTEMIC FACTORS PURE PUBLIC GOOD VARIABLES DEMAND FOR MILITARY SPENDING AS AN IMPURE PUBLIC GOOD Source: Eloranta

10 B. Researching Military Spending: Methods and Overall Findings (cont.) -Level of a system (=group of states, including the most prominent global or regional players); it could be argued that an increase in the aggregate military spending or in the total resources held by the democracies would represent increased systemic stability for the participants of the system, thus reducing the individual country military spending. Competing hypotheses could be tested for the influence of autocracies in the system, again on the aggregate. For example, does increased aggregate military spending or total resources held by autocracies represent a systemic threat? In the empirical applications, the definitions of regime type will be crucial task. Furthermore, these types of arguments can also be taken to the level of a state, which will be the focus in the forthcoming larger study. For example, it could be maintained that the more democratic a regime was, the less of a military burden it would prefer. Of course, contrary arguments could be made about authoritarian regimes. -Overall, it seems that variables that are relevant for the analysis of the demand for military spending include the more common demand variables, some of the systemic variables, and certain proxies relating to the political markets. In general, the demand for ME would be higher the more autocratic the state in question is, since the autocrat is mainly interested in redistributing income to himself and to finance further conquests. Conversely, in democracies the more encompassing interests would guarantee that although redistribution occurs, it will be more equitable. Therefore, democracies would have a higher demand for SE than autocracies. Table 2. Determinants of the Demand for Military Spending, DEPENDENT VARIABLE Military burden (=ratio, military expenditures to GDP, %) Defense share (=ratio, military expenditures to central government expenditures, %) INDEPENDENT VARIABLES (STATISTICALLY SIGNIFICANT) SYSTEM: Changes in the system s military and economic balance; changes in the military resources held by democracies; changes in the military and economic resources held by autocracies; military spending behavior of system s economic leaders; total resources held by the United States PUBLIC GOOD RESPONSES: Prices; income; spillins (from friendly nations); country-specific threat responses INSTITUTIONS AND POLITICAL MARKETS: Great Depression dummy; lagged military spending (bureaucracy); parliamentary fragmentation; country-specific responses to industry as an interest group SYSTEM: Changes in the system s military balance; changes in the military resources held by autocracies; military spending behavior and military resources held by the system s economic leaders PUBLIC GOOD RESPONSES: Prices; income; limited spillins and threats INSTITUTIONS AND POLITICAL MARKETS: Great Depression dummy; lagged military spending (bureaucracy); parliamentary fragmentation Source: Eloranta Based on a panel of 11 European states (using SUR). 10

11 B. Researching Military Spending: Methods and Overall Findings (cont.) -Interdisciplinary research on conflicts recently has provided insights into economic capabilities and cycles of war. At the state level, static and dynamic capability balances, measured especially by military variables, seem to suggest that approximate parity or shifts toward parity have consistently been associated with conflicts in the 19th and 20th centuries. -Advocates of hegemonic perspective, for example Paul Kennedy have argued that uneven economic growth causes inevitably the world s leading states to embark on increasing, costly military spending, opening opportunities for challengers. The results of empirical research on hegemonic cycles are, however, still quite mixed. Research on the economic growth impact of military spending, mostly performed with post-second World War data, has discovered with demand-side models, based on the argument that military spending crowds out investment, a negative growth impact. Nonetheless, in contrast, most supply-side models have pointed toward a small positive growth impact or none at all. A peace dividend arising out of military spending cuts, if one indeed exists, seems to make its contribution indirectly via the investment effect and with a lag of at least five years or more. ANY QUESTIONS ON TODAY S LECTURE? ANYTHING ELSE? 11