What Determines Military

Expenditures?
Empirical evidence on the economic and politicalfactors that influence national military spending
Daniel P. Hewitt

I i recent years, some countries have spent association with military spending. The second decision the leadership makes
as much as one fourth of GDP on the military, Among the political variables investigated, is on the level of overall government spend-
while others less than 1 percent. Wide varia- as expected, countries engaged in interna- ing. Clearly, the two decisions are interrelated
tions in military expenditures exist not only tional war or civil war are found to spend and should reinforce each other. A country
between different regions of the world and more on the military. Additionally, countries that spends more on the military is likely to
different economic groups but also within dif- characterized as multiparty democracies have a larger public sector. Likewise, a coun-
ferent categories of countries (see "Military spend less on the military than others—such try that devotes a larger share of its resources
Expenditures in the Developing World" by as countries characterized as monarchies (but to government is also likely to spend more on
the author in the September 1991 issue of without multiparty democracy), military gov- the military. The framework, which is specifi-
Finance & Development). Can this pattern of ernments, and socialist governments. Finally, cally set up to test this relationship, confirms
military expenditure be explained by the eco- land area and border length are found to have that the two reinforce each other.
nomic characteristics and political circum- a positive influence on the level of military The second equation, therefore, focuses on
stances of nations? Are differences in military expenditure. the determinants of central government ex-
policies due primarily to country specific cir- The analytical framework of the study is penditure as a proportion of GDP. The pur-
cumstances, or are they attributable to inher- able to explain 55 percent of the variation pose of this equation is to test for the indirect
ently unobservable political phenomena— and, therefore, a large proportion of the varia- influences on military expenditure transmit-
such as excessively complicated political in- tion can be accounted for by political and eco- ted through changes in central government
teractions between different countries? nomic characteristics of countries. Since a sig- expenditure. Since the results show a positive
A recent study of military expenditures in nificant proportion is still left unexplained, relationship between military and central
125 countries over a 17-year span provides country specific historical and political cir- government spending, factors that induce an
useful insights into the apparent determi- cumstances are also undoubtedly quite im- increase in overall government spending indi-
nants of world military expenditures (see portant influences. rectly induce an increase in military spend-
box). Contrary to popular belief, the study in- ing. (The results from the second equation
dicates that military spending is highly reac- Empirical results should not be interpreted, however, as offer-
tive to observable financial constraints. The The empirical framework envisions the ing a full explanation of the determinants of
ratio of military expenditure to GDP is found leadership of a nation making two types of central government expenditures.) In this
to rise with GDP in low- and middle-income decisions. First, the leadership decides how equation, the level of military expenditures is
countries and remain constant for high in- much to spend on the military, and thus, the viewed as an influence on the demand for
come countries. Heavily indebted countries first empirical equation focuses on the deter- overall government expenditures. The other
and small low-income economies are found to minants of military expenditures as a propor- financial variables are indicators of resource
spend less on the military than other nations. tion of GDP (see table). Among the explana- constraints on the economy and the govern-
The level of public and publicly guaranteed tory variables, the economic indicators ment. The political variables are viewed as
foreign financing is found to have a positive incorporated in the equation represent an in- proxies for the political preferences of the
dication of the financial constraints con- leadership, as in the first equation.
fronting governments. The political variables Economic variables. The results indi-
are indicators either of the political circum- cate that the ratio of military expenditures to
For details of this study, see "Military Expenditure: stances (such as a state of war) or the political GDP rises with GDP and per capita GDP (see
Econometric Testing of Economic and Political ideology of the leadership. The geographical table). The level of military spending rises
Influences" by the author, available as IMF variables reflect the cost of defending more quickly than GDP at low levels of GDP
Working Paper WP/91/53, countries. and flattens out to a constant ratio at higher

22 Finance & Development / December 1991

©International Monetary Fund. Not for Redistribution

levels of GDP. Thus, low-income nations are
characterized by relatively low levels of mili-
tary spending, middle-income nations spend a
higher proportion of their GDP on the mili-
tary, and military expenditures tend to level
out to a constant proportion of GDP for
higher-income nations.
As expected, military expenditures are pos-
itively correlated with central government ex-
penditures, that is, they rise and fall together.
A 1 percent rise in central government expen-
ditures is found to cause a 0.75 percent rise in
military expenditures, which implies that mili-
tary expenditures tend to increase at a
slightly lower rate than the budget. This re-
sult, therefore, establishes the proposition that
increases in central government expenditures
tend to increase military expenditures and
factors that influence government spending
indirectly influence military spending.
Military expenditures are also found to in-
crease government expenditures.
The availability of external funding is an
important element of the financing constraint
on government. The variables associated with
the 15 most heavily indebted middle-income
nations (including ten in Latin America), one
covering 1972-79 and the other covering
1980-88, illustrate this. Surprisingly, during
the 1970s (prior to the world debt crisis), both
central government expenditures and military
expenditures in the heavily indebted countries
were below the world average. During the
1980s, the level of military expenditures in
these countries relative to GDP fell further,
while central government expenditures rose
somewhat relative to the world average. This
can be interpreted as a reaction to the
increased interest costs that these countries
had to bear—the higher interest payments in-
creased government expenditures and
simultaneously depressed the share available
for military expenditures (see "Military
Expenditures in the Developing World" by
the author in the September 1991 issue of
Finance & Development).
Another financial proxy associated with
small low-income economies shows that while
their average central government expendi-
tures were equal to the world average, their
military expenditures were significantly be-
low the world average. Apparently the low
purchasing power of these nations and their
emphasis on economic and social develop-
ment (as indicated by the high share of such
expenditures in central government budgets)
led them to allocate a lower proportion of both
government resources and GDP to the mili-
tary. This result lends support to the notion
that military expenditures are a "superior
good" among developing nations, that is, mid-
dle- and high-income nations spend relatively
©International Monetary Fund. Not for Redistribution
more on the military than low-income nations.
The net flow of public and publicly guaran-
teed external financing, which indicates the
level of foreign financing that the government
contracts, also has a positive effect on govern-
ment expenditures, as expected. However, it
also has a positive association with military
expenditures. Therefore, higher levels of gov-
ernment financing relative to GDP are found
to induce higher military spending both indi-
rectly, by inducing higher overall government
spending, and directly, by increasing the
share of the budget allocated to the military,
on average. This result implies that external
assistance to a nation will induce higher mili-
tary spending. Further, in general, these re-
sults indicate that national levels of military
expenditures do react to financial constraints
and that governments take account of eco-
nomic conditions and consequences, as well
as political circumstances, in forming the mili-
tary budget.
Political and geographic variables.
While recognizing the likely importance of po-
litical circumstances in formulation of mili-
tary expenditure policy, their inclusion in em-
pirical analysis presents a challenge, since
only objective and observable features of a na-
tion can be used. Accordingly, each country
has been assigned to mutually exclusive polit-
ical categories (which can also vary over
time). The list of categories was chosen for
their observability as well as their potential
relevance.
The benchmark category is a multiparty
democracy, not recently engaged in either an
international war or a civil war (including all
nations whose political process is dominated
by a multiparty system, regardless of the po-
litical ideology of the leadership or the nomi-
nal presence of a monarch). The other cate-
gories are (1) countries at war or recently
engaged in an international conflict (regard-
less of their political leadership), (2) countries
engaged in a major internal civil war (regard-
less of their political leadership), (3) countries
ruled by monarchies, (4) countries ruled by
military governments, (5) countries ruled by
socialist governments, and (6) others (which
consist of one-party states that do not fit into
any of the other categories or highly unstable
democracies).
These categories capture a number of fac-
tors that are likely to affect the priority the
leadership assigns to military expenditures,
while the number of options was kept to a
minimum for the sake of simplicity. A state of
war obviously affects the demand for military
expenditures. Additionally, the historical ba-
sis for the government is likely to influence
the leadership's view of military expenditures
and the priority assigned to the military.
Finally, a government's ideological view of
the role of the state in an economy is a poten-
tially important factor.
Countries engaged in international war
spend the most and those engaged in civil war
are second highest, as expected. Among the
other variables, the ranking from highest to
lowest expenditures on the military was
monarchy, military government, socialist gov-
ernment, and others. By inference, multiparty
democracies are found to spend the least on
the military (see box).
The political categories are slightly differ-
ent in the government expenditure equation.
The two war-related options were dropped be-
cause theory suggests that the presence of
war should not have a direct effect on the
overall level of government spending; instead,
war will increase military expenditures and
thereby indirectly influence government ex-
penditures. The results indicate that socialist
governments have the highest level of central
government spending relative to the GDP,
then in descending order are multiparty
democracies, other forms of government,
monarchies, and military governments. Thus,
relative to multiparty democracies, socialist
governments tended to have higher central
government expenditures and to allocate a
higher proportion of government spending to
the military. Military governments and
monarchies tended to have smaller public sec-
tors, but tended to allocate a higher share of
the budget to the military; the same is true of
countries in the "other" category, but to a
lesser extent. However, the direct effect of the
form of government on military spending
dominates the indirect effect in each case.
Therefore, monarchies and military govern-
ments allocate a larger share of GDP to the
military than socialist governments when
both the direct and indirect effects are
combined.
The geographic variables included in the
estimation equation confirmed prior expecta-
tions. Land area and border lengths are found
to have a positive influence on military spend-
ing, presumably because they increase the
costs of defense. Additionally, as expected,
coastal borders have a less powerful effect
than land borders, since coastal borders pro-
vide natural protection in most cases, and are,
therefore, less costly to defend.
Central government expenditure.
The analysis of central government expendi-
tures in this study is not intended to provide a
comprehensive overview of the determinants
of government spending. Instead, its purpose
is to indicate how military expenditure inter-
acts with central government expenditure (see
equation 2 in the table).
As will be recalled, a 1 percent increase in
Finance & Development /December 1991 23
 An explanation of the Mow important are individual factors in military
empirical framework and central government expenditures?
In order to indicate how the results in this study
Equation 1 Dependent variable: Ratio of military expenditure to GDP1
are derived, a brief discussion of some of the
technical details may be useful. The quality of Coefficient
empirical results always reflects the accuracy of Constant -7.9
the data. The military expenditure data used for Real GDP in US dollars1 0.23
2
Real GDP in US dollars squared -0.0075
this study are based primarily on estimates of
Population1 0.025
the Stockholm International Peace Research Ratio of central government expenditure to GDP1 0.76
Institute (SIPRI), which is widely believed to Net flow of public and publicly guaranteed external capital 1.02
represent the best available comprehensive Heavily indebted nations, 1972-79 -0.39
data source. The other major sources include Heavily indebted nations, 1980-88 -0.45
IMF published data, World Bank, United Small low-income economies -0.15
Nations, and US government publications. International war 1.50
Another important characteristic of an em- Civil war 1.08
pirical study is the framework in which it is Socialist government 0.32
Military government 0.69
cast Every empirical study, either explicitly or
Monarchy 1.15
implicitly, is based on a model. The particular Other forms of government 0.37
model or framework that is used, by necessity, Land areas (in square kilometers) 0.057
imposes a certain interpretation on the data and Land borders (in kilometers) 0.030
the results indicate whether or not the frame- Coastline (in kilometers) 0.012
work that the researcher used is plausible. R-squared 0.557 / Number of observations 2,025
However, the process rules out other points of
Equation 2 Dependent variable: Ratio of central government expenditure to GDP1
view or other plausible interpretations of ob-
served tendencies simply by ignoring them. Coefficient

The analysis of government behavior in this Constant 2.8

study is based upon what economists call a
"public choice" framework. In this setting, the
leadership is assumed to act as if it were an eco-
nomic entity, such as a business making a pro-
duction decision or a household deciding how to
spend its available income. The leadership is
treated as if it maximizes its own welfare sub-
ject to its specific national economic, political,
and geographic circumstances.
The leadership is envisioned as making two
fundamental decisions in formulating the mili-
tary budget: It chooses the overall level of gov-
ernment spending and, simultaneously, decides
the proportion of the budget to allocate to the
military. Such a process is represented as an al-
location of national resources between private
expenditures, military expenditures, and non-
military government expenditures (consisting
primarily of social and economic programs).
Although there are numerous other decisions
and subcategories of expenditures that are ex-
tremely important for the economy, this delin-
eation is the focus of the study. This framework
produces a two equation system. In the first, the
determinants of military expenditures as a pro-
portion of GDP are tested. The second equation
tests the determinants of central government
expenditures as a proportion of GDP.
The statistical technique is designed to iso-
late the effects of each variable from the other
variables. For instance, the effect of central gov-
ernment spending on military expenditures is
isolated from the effects of population or GDP
variations. Therefore, the coefficients provide
much more information than might be derived
from a simple correlation analysis.
The coefficients associated with most of the
major variables are elasticities that indicate the
Development index1
Ratio of military expenditures to GDP1
Net flow of public and publicly guaranteed external capital
Heavily indebted nations, 1972-79
Heavily indebted nations, 1980-88
Small low-income economies
Socialist government
Military government
Monarchy
Other forms of government
R-squared 0.316 / Number of observations 2,025
Source: Hewitt, 1991. See box on model. 'Significant at the 95 percent level of confidence. "Significant at the 99
percent level of confidence. 'The natural loa of the variable. 2Jhe sauare of the natural log of GDR
percentage change in the dependent variable asso-
ciated with a percentage change in the explanatory
variable. For the other variables, the coefficients in-
dicate the direct influence.
In the first equation, the dependent variable is
the natural log of the ratio of military expenditures
to GDP. Among the explanatory factors, the follow-
ing have coefficients that represent elasticities (be-
cause in each case the natural log of the variable
was used in the empirical test): the natural log of
GDP (in US dollars, based upon 1980 purchasing
power parity weights); the natural log of GDP
squared; population; the ratio of central govern-
ment expenditures to GDP; land area (in square
kilometers); land borders (in kilometers); and coast-
line (in kilometers).
The other variables have ordinary coefficients in-
stead of elasticities. These are the ratio to GDP of
the net flow of public and publicly guaranteed ex-
ternal financing (for net debtor developing nations
only); 15 heavily indebted nations in 1972-79; 15
heavily indebted nations in 1980-88; 31 small low-
income economies; and the political variables de-
scribed in the text With the political variables, for
0.47
0.183
1.72
-0.097
-0.049
0.001
0.101
-0.226
-0.160
-0.043
technical reasons, there is no coefficient associ-
ated with the benchmark category, multiparty
democracies. Instead, all the other coefficients
are interpreted as indicating the effect of being
in that particular category in comparison to be-
ing in the benchmark category. Finally, to ad-
just for changes in the overall level of military
expenditure over time, variables for each year
were included in the analysis. The results, not
reported in the table, indicate that a consider-
able drop in the level of world military expendi-
ture occurred in the 1980s,
In the second equation, the dependent vari-
able is the ratio of central government expendi-
tures to GDP. The explanatory variables are the
natural log of the ratio to GDP of military ex-
penditures, and a development index based on
per capita GDP and life expectancy (see the
working paper for full details). The other vari-
ables are the same as in the first equation, ex-
cept that the two war-related variables have
been dropped. In this case, the time variables
indicate a steady increase in central govern-
ment expenditures occurred over the period.

24 Finance & Development j December 1991

©International Monetary Fund. Not for Redistribution

central government spending was found to
lead to a 0.75 percent increase in military
spending on average. Thus, increases in gov-
ernment spending are shared between mili-
tary and nonmilitary spending. The central
government expenditure equation examines
the opposite perspective—how changes in
military expenditures affect the overall level
of central government expenditure. The result
is that a 1 percent increase in military expen-
ditures induces a 0.18 percent increase in cen-
tral government spending. Since this is re-
markably close to the average ratio of
military expenditures to GDP (0.17), it implies
that autonomous increases in military expen-
diture are exactly accommodated by increas-
ing overall budgetary expenditures.
The strict interpretation of this result is
that other types of expenditures are virtually
unaffected by increases in military expendi-
tures, instead private spending is crowded
out. This is, of course, an average result. It is
more likely that the effect of higher military
expenditures on other types of government
expenditures varies from country to country.
In some circumstances, where the budget con-
straint is not tight, increases in military
spending lead to higher spending on all
items—when the government increases mili-
tary spending, it simultaneously spends more
on social programs to appease competing
interest groups. In countries where the
government is financially constrained, it
accommodates higher military expenditures
by decreasing other types of government
expenditures.
Another result in equation 2 is that the de-
velopment index, which is an indication of the
level of economic development of a country
(see box), has a positive coefficient. This con-
Daniel P. Hewitt
a US citizen, is an
economist in the
Government Expenditure
Analysis Division of the
IMF's Fiscal Affairs
Department. He holds a
PhD from Columbia and
has taught at the
University of Connecticut.
firms that central government spending rela-
tive to GDP tends to rise with the level of eco-
nomic development.
Conclusion
The primary motivation behind the study
described in this article was to determine if
any discernible pattern could be identified in
the military expenditure policies across coun-
tries. The military expenditure data, which
were collected in connection with another
study, offer a suitable basis for such a study
since they are reasonably comprehensive,
cover a long period, and represent the best
available estimates.
Opinions differ on the proper level of mili-
tary expenditure in any given country and on
what motivates countries to pursue the widely
different military expenditure policies that are
observed. One prominent view is that no
worldwide pattern exists because military pol-
icy is an inherently country specific phe-
nomenon. For instance, a country's preference
for military expenditure might primarily re-
flect historical experience. A complementary
view, which arrives at essentially the same
conclusion, is that military policy is primarily
driven by external forces and, therefore, is
largely outside the control of a nation's politi-
cal leadership.
The empirical results of our study, while
not necessarily refuting these theories, sup-
port an alternative explanation. Financial fac-
tors emerge as an important determinant of
military expenditures. Thus, affordability ap-
pears to be a major consideration for govern-
ment policymakers in the realm of military ex-
penditures, as in other areas. Further, the
observed pattern suggests that governments
view the military as a luxury item instead of a
necessity. If military expenditures were a ne-
cessity, low-income and small countries would
allocate a higher share of their GDP to the mil-
itary. Instead, the opposite pattern emerges.
Military expenditures of middle-income na-
tions are found to be higher both in absolute
terms and in proportion to GDP, while high-
income nations spend about the same relative
to GDP. An implication of these findings is
that financial assistance of any sort to low-in-
come countries is likely to induce higher mili-
tary expenditures, either directly or indirectly,
through an easing of budgetary constraints.
The results also support the hypothesis
that geographical features of a nation influ-
ence military policies, as do political factors
such as being in a state of war and the form of
government. One interpretation of these re-
sults is that these variables are proxies for the
political situation and the ideology of the lead-
ership. However, the reverse causality could
exist. The geopolitical status of a country
could influence both the type of government
that takes power and the level of military
expenditures.

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