Monday, September 13, 2010

Arms Sales and Why Economic Decisions are Political

. Monday, September 13, 2010

A report regarded as the most detailed evaluation of unclassified global arms transactions data released over the weekend by the Congressional Research Service found that the "Great Recession" has dramatically affected state-to-state arms transactions, with arms sales dropping to $57.5 billion in 2009, a drop of roughly 8.5% from 2008. (It looks like the actual report hasn't yet been released to the public, only to members of Congress, but here is an analysis of US arms sales from the CRS released last December and last September's CRS analysis of conventional arms sales to the developing world).

The United States remained well ahead of all other states with arms sales totaling $22.6 billion which comes out to about a 39% market share, but down from total sales of $38.1 billion in 2008. The report tells us that the largest arms selling states are the most powerful states, as is expected, with Russia, France, UK, Germany, Italy and China trailing the United States. The largest purchasers are middle income countries, with Brazil, Venezuela and Saudi Arabia as the three largest consumers, and Taiwan, the UAE, Iraq, Egypt, Vietnam, India and Kuwait following closely behind.

What effect do these arms sales have on the international arms market? Well, those countries that are purchasing new equipment surely aren't going to destroy their "dated" equipment but rather are going to transfer this old equipment legally or illegally down the income chain to less developed states. In one way, this is a good thing. These poorer countries are able to increase their capacity for self-defense and internal policing and these arms should help consolidate their monopoly on the use of force within their borders at a cheaper price than they otherwise would pay in a market where middle income countries weren't selling their old equipment. The int'l arms market expands, and prices on second-hand arms should decrease. These lower prices should allow states to allocate the savings from arms sales to providing services to their domestic populations.

But, what about the rest of the money that states use to purchase weapons and arms? Is this a productive use of state resources? What effect do these arms transactions have on economic growth, violence and development in these countries? Military/arms purchases tend to be non-productive in terms of direct effects on growth and development; they don't tend to add points to GDP. These purchases could be indirectly growth improving if they increase a state's capacity to ensure peace and stability, thus having a positive effect on investment and production for a variety of reasons (investors face less uncertainty, production and consumption aren't affected by armed conflict, etc.).

Many people argue that these funds should be invested in more efficient and productive sectors such as education, health, and infrastructure instead of on arms purchases and that they don't understand why countries waste money on arms. They argue that developing countries need to maximize growth and help their struggling and poor citizens. So the question is why aren't funds being allocated to their most efficient use? Shouldn't the market reward efficient and productive asset allocation? Why are states leaving percentage points of economic growth on the table and instead investing in arms purchases? Politics.

If there is one thing that this blog tries to make clear it's that politics matters, that politics affects decision-making and that you can't analyze economic transactions unless you bring the politics in. Politicians use arms sales to buy the support of their militaries by providing them with new equipment in order to ensure loyalty. Voters tend not to like it when they perceive their militaries to be ill-equipped, underfunded and not ready to defend their borders or counter an invading force, thus incentivizing politicians to spend on arms. Politicians and states use military spending as a signal to opposing states regarding their military intentions, capabilities and power. Politicians use arms to combat domestic insurgencies, uprisings and other domestic civil unrest. Politicians use arms sales to establish ties with powerful arms-selling states (who also have the world's largest domestic markets and influence in international financial organizations and other IGOs), and they hope that individual arms sales will be coupled with other aid, military ties or inducements in the future. These are all politically-based reasons for why states spend money on arms. Asset allocation in domestic economies is a political act, and that's why we don't always (rarely?) see efficient outcomes.


Arms Sales and Why Economic Decisions are Political




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