Military expenditure: The numbers of a common place

04/05/15

With regard to the defense industry, particular importance is given to the concept of "dual use", that is the possibility of both civil and military use of a product or technology.

It is a concept that has deep historical roots if we consider that Adam Smith, in "The Wealth of Nations" published in 1776, to explain the reasons behind the division of labor (see Book I, Chapter II), makes 'example of an individual who has more speed and dexterity than others in making bows and arrows, useful since ancient times in hunting but also in wars against tribes or enemy populations.

Even military spending presents its duality, is an indicator of the balance of power between the states that act in the framework of international relations, for which it has a high political-strategic value, and is directly linked to the geopolitical interests of which it is at the same time instrument and expression but also represents an important item of public spending and therefore a macroeconomic lever in the hands of governments, around which a battle is waged between a plurality of industrial and financial interests to win supply contracts and contracts, certainly for the validity of projects but also thanks to the weight of their political representatives.

Moreover, the products of the armaments industry are still goods and those who make them must nevertheless sell them by participating in the struggle for their national and international market share. The political-strategic component makes defense spending indispensable and on average guarantees greater stability compared to other areas but can not fully protect against the physiological alternation of expansion and recession (or in any case phases of slowdown) of the global economic cycle and the implications of the differentiated rhythms of the states that compose it.

Those who join the pacifist associations and engage in campaigns for disarmament and those who, on the other hand, support the need and reiterate the importance of an efficient national military-industrial complex, seem to agree at least on a point summarized by what now it has become a commonplace that we will be in the presence of "a sector that knows no crisis". Like all clichés, the one in question presents an excess of simplification but does not fail to grasp an aspect that has its concrete foundation.

In trying to establish what is true in this statement a good opportunity is offered by the repercussions on the defense industry, of what is called the most serious economic crisis by the 1929, whose first signs came in late February and early March 2007 with the beginning of a downward trend in the price of housing in the United States that will highlight the difficulties of companies providing subprime loans New Century Financial (second US operator in the real estate loan with 60 billion mortgages that will declare bankruptcy in April of the same year), and Accredited Home Lenders Holding, which will record a halving of their stock market values ​​with an attached interest in the Security Exchange Commission.

In the following summer, the situation was aggravated by the failure of the American Home Mortgage which managed assets for 20 billion dollars. On the European side, the IKB in Düsseldorf is saved by the intervention of a pool of German banks with 15 billions of euros, in early August BNP Paribas announces the freezing of three of its funds for the difficulty of repaying the shares of its customers. The date, however, which conventionally marks the precipitate of the situation, is the 15 September 2008 which sees the bankruptcy of Lehman Brothers, one of the 5 large investment banks of Wall Street.

The latter, until the bursting of the real estate bubble, are true landmarks of what still remains the world's main financial center, as everyone knows no longer exists: Bear Stearns and Merrill Lynch were saved through acquisitions led by the Federal Reserve, respectively JP Morgan and Bank of America, Goldman Sachs and Morgan Stanley have maintained their autonomy but operating a statutory change that sanctioned the abandonment of specialization as business banks, bringing them closer to the activity of commercial banks. Needless to dwell on the list of financial giants involved but it is worth mentioning the case of the American International Group, the world's first insurance group, saved by the intervention of the US government with an operation that will spark controversy along with the nationalization of the two mortgage company, already semi-public, Fannie Mae and Freddie Mac.

This is to summarize the extent of the explosion that affected the international financial markets and whose shockwave could not but invest the real economy. The defense industry was already in the process of a restructuring (as well as its client of reference), made necessary by the change in the international relations framework produced by the collapse of the Yalta order, and it is on this process that we inserted the great economic-financial crisis called "subprime mortgages".

Therefore, wanting to test the resilience of the defense market with respect to the events of the overall economic situation, we can first of all compare, remaining in general terms to avoid being overwhelmed by a plethora of figures, some data related to the world economic cycle and their defense market terms. This involves a boring but indispensable warning of method.

As many point out, the data provided by the statistical survey lend themselves to being challenged to support different positions, often opposed, because contrary to what could be thought of as numbers, these do not necessarily constitute objective reference points in the study of phenomena social. In this way the different parties in question elaborate different data readings, highlighting the findings considered most useful to support their point of view, so that the detractors of the statistics come to argue that this is in itself false and therefore useless because made of averages that are almost always "medium chicken". A typical battleground in this sense, for example between the political forces of government and opposition, is represented by the key to understanding the economic indicators that summarize the levels of employment, taxation and household income.

To increase the dose, the difficulties encountered in finding information from which to obtain reliable quantitative references are emphasized, and this is even more true for the specific uncertainty that characterizes the data on military expenditure, since it is very sensitive data, so much so that in a sense it can be assumed that the "fog of war" manifests itself (even before the operational theater), starting from the determination of the level of resources allocated by each state to its military device and its distribution among the various services armed.

On the other hand, the defense industry is certainly not the only sector that presents, in addition to a not negligible economic importance, also a significant strategic value for a state, think of telecommunications, transport or energy resources, this last often considered the geopolitical sector par excellence ("who deals with oil is politics and in particular foreign policy", is one of the phrases attributed to Enrico Mattei and celebrated also on the big screen by Francesco Rosi).

Summing up, albeit with all due caution and awareness that statistical synthesis can not provide us with the exact representation of reality, without any quantitative references, each comparison would become only a clash between unprovable theses. So in the end the statistics should be taken for what they are: averages with descriptive value of the phenomena that we intend to investigate and therefore still useful in identifying trends.

The implosion of the USSR with the resulting change in relations between powers, has triggered a process of reducing the world military spending that has affected almost all the years' 90 touching its minimum point in the 1998 (833 billion $ cost. )

According to the data prepared by the SIPRI (Stockholm International Peace Research Institute), between the 1989 and the 1998 the military budgets have fallen by 22,1% in real terms, thus reversing the trend of continuous increase between 1949 and 1989. This overall figure is the result of differentiated trends which show how the substantial decline in military spending that affected the 90 years is largely due to the disappearance of the USSR and the break-up of the Warsaw Pact. The minimum level of military expenditure recorded by the Russian Federation in the 1998 (the year of the severe financial crisis that led Russia to default with the IMF's intervention), was 7,1 billion dollars (2000 cost), which implies a reduction of 93% compared to 101 billions of dollars of 1988. In the same period, the corresponding figure for the NATO countries recorded a more contained, although still relevant, -26,5%.

As we recall this decade of reduction in world military spending had aroused a movement of optimism in supporters of disarmament policies that saw in the decline of military spending an objective confirmation of the feasibility of their aspirations. On the other hand, according to the logic that the arms race was determined by the competition between the two blocks led by the US and the USSR, since the Soviet one failed, also the Western forces field in the absence of an enemy (or at least a large enemy), could proceed to disarmament by reorienting the huge resources invested in arms and military research towards more productive and rewarding sectors from an ethical and moral point of view. To describe this situation, the "dividend of peace" formula was coined, a dividend that proved to be difficult to cash in early.

Observing the data it emerges that - except for the particular case of Russia and its "foreign neighbor" - the 90 years have represented nothing more than a phase of production adjustment, repositioning by product range and reference markets of the industrial groups defense, rather than adhering to a disarmament policy. On the contrary, it has never failed to give the operators of the armory sector a certain amount of optimism towards a return to growth, based on the conviction of having the story on its side. In the early '90 Norman Ralph Augustine (photo), president of Martin Marietta (merged in 1994 with Lockheed), said: "I believe that the defense will return, I read the history books, human nature has not changed in 1992" .

In fact, Augustine's expectations will not be disregarded and already starting from 1999 global military spending will increase again to 2012, when current dollars will reach 1.756 billion, marking a reduction of 0,4% in real terms compared to 2011 and however it is a value higher than any year from the end of the Second World War to the 2010 (see SIPRI Yearbook 2013).

The elaborated data (in constant 2011 dollars) in the study of Sophie Durut and Luc Mampay confirm this trend, with a world military expenditure that maintains its upward trend until 1.749,0 billion of 2011 and then falls to 1.739,5 the following year ( see Les rapports du GRIP, Dépenses Militaires, Production et Transferts d'Armes, Compendium 2014).

In February of the 2009 the capitalization of the stock markets had fallen by 50%, the world industrial production of 13% and the international trade recorded a decrease of 20%. Despite the beginning, from the following spring, of a timid recovery supported by the intervention of the states, the 2009 will close with a decrease in the global GDP of 0,4%, the first sign less from the second half of the years' 40 (see ISTAT Report , April 2014). At the end of the same year, the world military spending will mark an increase of 6%, maintaining the positive sign also in the two following years, albeit with smaller figures.

Table 1 - Gross World Product, Global Military Spending

  2008 2009 2010 2011 2012 2013
GDP World% change data in volume 2,7 -0,4 5,2 3,9 3,2 3,0
Spending mil. var. % real terms 4,0 6,0 1,3 = -0,4 -1,9
GDP World MLD $ currents 61.000 56.704 62.692 69.520 70.240 72.792
Military spending, current MLD $ 1.464 1.531 1.630 1.738 1.756 1.747
 

Sources: SIPRI Yearbook 2009-2014; April 2014 ISTAT Report; Sophie Durut and Luc Mampaey, "Les rapports du GRIP. Dépenses militaires, production et transferts d'armes "Compendium 2014; Chiara Bonaiuti and Achille Lodovisi (edited by), "Security, control and finance. The new dimensions of the "Jaca Book 2009" armaments market.

The comparison (at current values) of the trend of world GDP with military spending shows that in the 2008-2012 period the latter has continued to grow at a higher rate (19,9%) compared to total wealth production (15,5%), so it would seem that the military budgets were not affected by the crisis. Looking at the data on the various geo-economic areas that make up the general picture, it can be seen that the dynamics in question are a bit more complicated.

Considering the 2008 as a cutting measure it can be seen that in the four post-crisis years all the large regional areas mark a slowdown in the growth rate of military spending compared to the previous four-year period, with the European continent being the only one to show the sign less, especially for the reduction of spending in western and central Europe, while the eastern one is growing. As we have seen (1 table) the general tendency to reduce is accentuated in 2013 with a further decrease in real terms of 1,9%.

In this situation of general slowdown, the Middle East with the exception of Oman, Saudi Arabia and Kuwait, with the exception of 2012 increase their military spending by 51%, 12% and 10% respectively. In particular, Riyad in the decade 2003-2012 has doubled the defense budget. This is the result, on one side of the advantage guaranteed by oil revenues (the sharp decline in the price of oil started in the second half of the 2014), which allowed to limit the effects of the global crisis, and on the other side of the activism of some regional powers, in particular Iran, which fuels the tendency to rearm. The Middle East area is confirmed as a nerve center within the broader "crisis arc" (to put it with Brzezinski) that goes from the Maghreb to Pakistan.

Therefore, it can be assumed that the financial crisis of the second half of the 2000 years did not bring about a sort of "decoupling" between the two dynamics compared, which would have meant a trend in military spending completely unrelated to the global economic cycle. In fact, the respective indicators prove to be correlated and the consequences of the crisis will also be felt on defense budgets albeit with a delayed effect of a few years compared to the contraction of: Global GDP, international trade and stock market capitalization of the 2009.

The real downturn in defense budgets in 2012, after a substantial standstill in 2011, is the combination of the financial crisis and measures aimed at reducing public deficits (the famous austerity policies) on the one hand, and the other than the change in the situation regarding the ongoing military operations, in particular in relation to the withdrawal plans from Afghanistan and Iraq.

2 table - $ billion billions. 2011

  2004 2005 2006 2007 2008 var. % 2004-2008 2009 2010 2011 2012 var. % 2008-2012
Africa 23,2 24,2 25,9 26,6 30,3 30,6 31,6 33,6 37,1 38,3 26,4
America 620,1 651,5 665,1 685,4 736,9 18,8 793,4 817,2 807,9 767,6 4,2
Asia and Oceania 246,8 260,1 275,2 295,8 312,3 26,5 348,5 355,3 369,5 381,5 22,2
Europa 382,6 387,0 397,2 407,8 419,2 9,6 428,4 418,6 410,5 418,6 -0,1
Western Europe 311,7 307,9 310,2 312,3 318,5 2,2 325,9 315,8 301,6 296,4 -6,9
Eastern Europe 48,3 55,5 63,0 70,0 76,6 58,6 78,9 80,2 87,0 100,3 30,9
Central Europe 22,5 23,6 24,0 25,5 24,2 7,6 23,6 22,6 22,0 21,9 -9,5
Middle East 91,3 100,0 106,6 112,5 109,7 20,2 112,4 118,5 123,3 133,6 21,8
 

Source, author's elaboration from: Sophie Durut and Luc Mampaey, «Les rapports du GRIP. Dépenses militaires, production et transferts d'armes »Compendium 2014

However, the future seems to promise well since, according to the first published data, the 2014 marked a return to growth that was missing from the 2010 (with an increase of 1,7% as reported for example by the Military Balance). Naturally the aggregate datum is the result of unequal partial components that confirm a tendency towards the change of the relative weights of the forces in the field and the greatest attention remain (something that does not surprise anyone) reserved to China which, although slowing down with a growth of the GDP that has left the double figure to stand at an always respectable 7%, has declared an increase in its military spending of 10% reaching 126 billions of dollars, according to estimates communicated by Agence France Presse.

Naturally, for companies in the sector it does not mean that there will be a phase of easy gains, indeed, the struggle to manage programs and get hold of orders announces a further tightening that will require competitiveness and critical mass appropriate to an international chessboard where the definition of a new world order it will depend first of all on multipolar relationships between continental powers.

Leonardo Chiti

(photo: IDEF'13)