HSRCArchived Market Reports Balancing Military Spending and Economic Crisis

Balancing Military Spending and Economic Crisis

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Military and policy planners worldwide are torn between two seemingly contradictory urges: reducing military expenditure to help curb spending, and increasing military spending to help curb growing global instability and shifting balance of power.

Over the last decade, military budgeters worldwide went on an expenditure binge to end all binges: America’s Defense Department’s base budget, excluding funds for nuclear weapons and about $12 billion/month for the “Global War On Terror,” rose by nearly 70% between 2001 and 2009. The bullish economic climate, globalization, the global war on terror and the rapid ascent of India and China provided all the excuses and resources to both politicians and military professionals.

But like every good party, this party has also come to an end. The global economic crisis coupled with the dive in petrol prices is forcing both politicians and military planners to take a hard look at future military expenditures. They have some hard decisions to make, and like all hard decisions in life, the arguments on all sides are far from conclusive.

In the U.S., military and defense industry are trying to get used to a relatively restrained budget of about $535 billion. But it’s important to keep in mind that this budget does not include emergency allocations, which is how the Bush administration used to finance the wars in Iraq and Afghanistan to the tune of about another $200 billion/year. Transparency was not the Bush administration’s highest priority. Lets hope the Obama administration is true to its promises and will unlearn that practice.

The Russian economy is in a nose dive in the midst of what started to look like an unbridled race to expand and replenish a military machine that was in a coma for decades after the collapse of the Soviet Union. Oil money, which was supposed to finance a newly equipped (and newly assertive) Russian military, has dried up, leaving big plans on the drawing boards, with no funds to pay for them. And as if to add humiliation to insult, Russian weapons exports, a large source of foreign currency, are also drying up fast, as the world’s financial crisis strangles potential clients’ credit sources.

Indian policy and military decision makers are facing a real quandary. On the one hand the country’s economy is suffering greatly, as consumer markets across the world shrink – a direct challenge to the double digit growth of Indian defense budgets over the last decade; on the other hand, perceived and real vulnerability to external and internal threats, both conventional and asymmetric, appear to be growing rapidly. Indian defense officials complain that the country’s chief potential rivals, Pakistan and China are spending about 4% of their GDP on defense, while India’s defense budget rises to a mere 2% of the country’s GDP. With that in mind, India’s defense budget is set to rise to about $40 billion next year (about 3% of GDP), bucking economic trends and no doubt raising eyebrows and maybe even real protest. India’s weapons imports have also seen a huge growth spur over the last decade, and are set to grow even more in the coming years, reaching more than $10 billion in 2012.

Not to be outdone, China’s military budget also exhibits all the signs of addiction to long term double-digit growth. Real numbers are difficult to come by, but experts estimate China’s military budget for 2010 to range between $100 and $180 billion (official figures are around $60 billion). The country, like India, finds itself in a bind, with a military expansion plan on steroids, colliding head on with a nearly catastrophic decline in economic activity, a mix that might result in internal de-stabilization, as well as an increased sense of external vulnerability.

The British military is not feeling so well these days either; overstretched and under-budgeted, politicians and military planners are struggling in an attempt to reconcile between perceived needs and very real budget cuts. In the meantime, the British army is shrinking steadily, while its commitments in Iraq and Afghanistan (mainly the latter) increase the strain on both equipment and personnel. Proven vulnerabilities to internal terror campaigns are an added strain, and with an economy in emergency mode, both constituencies and politicians are in no mood to hear about the need to spend billions on what many consider misguided help to America’s imperial ambitions. As it is, Britain’s defense budget as a percentage of the GDP is the largest in the EU, far above most of its neighbors.

Traditional big consumers of military hardware, such as Gulf states are also feeling the effects of the drop in oil prices, and are reconsidering ambitious military projects. This is bound to impact British, American, French and other traditional weapons exporters. If the crisis continues, reconsiderations will become cancellations, hurting both the pocketbooks of defense contractors, but also the pockets of defense industry workers throughout the western hemisphere.

With the economic crisis set to continue for at least another year, and with countries around the world getting used to the idea that the impact of this crisis will continue to effect their economies for several years to come, it is reasonable to assume that defense budgets will stagnate, if not shrink over the next several years, unless the economic crisis slides into a military crisis, in which case all bets are off. Either way, it seems like all of us, proponents and opponents of military spending are doomed to live the Chinese proverb: “May You Live in Interesting Times”.

Gil Siegel

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