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Defense Spending and Economic Growth
506
Book Reviews
James E. Payne and Anandi P. Sahu, Defense Spending (Westview Press, Boulder, 1993) pp. xi + 283, $42.50.
and Economic
Growth
As a discipline, economics has traditionally given scant attention to defense issues. However, in recent years mainstream academic research activity in this area has increased, symbolized by the emergence of the journal, Defense Economics. In the first volume of that journal, Michael Intriligator (1990, p. 10) defined defense economics as a field “in which the tools of economics are applied to the defense sector in order to analyze its domestic and international implications.” In Defense Spending and Economic Growth, James Payne and Anandi Sahu seem to have taken the illustration of Intriligator’s definition as their organizing principle. The chapters in this book collectively show how a wide range of tools can be used to analyze the relationship between military expenditure and economic growth. CGE, VAR, I-O, large scale macro, and several types of growth and game-theoretic models are used by the contibutors along with a variety of econometric techniques. However tool display is not the explicit goal of Payne and Sahu. In both the preface and the editors’ introduction, they contend that the motivation for this book is the end of the Cold War; i.e, the public and policymakers need to know how one should think about the relation between defense spending and economic growth in this new era: “We examine the effects of defense spending on economic growth and investigate how the changed world political climate is likely to alter the importance and pattern of defense spending both for developed countries and developing countries.” (xi) This is an ambitious goal given the difficulty of identifying the path of these geopolitical and economic changes and then translating the emerging patterns into useful analytical measures. On balance, the book is less successful in generating insights into the new era than it is in showcasing defense economics. However it is an important addition to the literature because of the need for a single work that updates the major controversies regarding the relation between defense and growth. After the editors’ introduction, the chapters are divided into four parts. Three chapters are grouped under the heading “Theoretical Underpinnings.” The first of these, by Rati Ram, provides a thorough overview of the issues and the relevant explanatory concepts and will be especially helpful to the reader who is not an economist. Michael Mueller and H. Sonmenz Atesoglu use a two-sector production function framework to try to explain how defense technology spillovers could affect the civilain sector as part of an explanation of how defense spending affects growth. As the authors note, without estimating the key parameters of the model it is not possible to conclude whether a reduction in defense spending will increase or decrease growth. While it would be interesting to see parameter estimates a larger concern is whether this is a useful theoretical approach. This is not so much a theory of defense spending and economic growth (the title of the paper) as it is a theory of the transmission of technical efffects between two sectors in a neoclassical growth model context. In other words, the defense and civilian sectors could be
Book Reoiews
507
renamed farm and nonfarm and because the comparative static properties of the model would not change, a reduction in dairy research would have exactly the same effects on growth as an equivalent reduction in laser weapons research. The point is not that growth models should be abandoned but that more theoretical work in this area is needed. Some of the unique institutional features of the defense sector must be incorporated in the theory if understanding technology spillovers is to get past guns versus butter simplicities. The last chapter in this section is by Charles Anderton on arms race modelling. The application of game theory to military issues has a long history. In a sense, arms race models are almost a self-contained subfield of defense economics. Anderton shows how the distinction between arms ‘stocks’ and arms ‘potentials’ leads to the inclusion of economic growth into the reaction functions of the model and then looks at some arms race scenarios. This research is interesting but more useful for explaining how the cold war ended rather than the consequences of its ending. The next section, “Effects on Industrialized Countries,” includes six diverse chapters. There is a very well-written paper by Peter Boettke on the collapse of communism. He persuasively argues that the Soviet centrally planned economy suffered serious systemic weaknesses but that illusions were created by the West in its overestimation of Soviet economic performance and potential. The decline in the Soviet threat in the late 1980s and early 1990s was accompanied by a decline in U.S. defense spending. The impact of this decline on employment at the national and regional levels are, respectively, the topics of papers by J. Paul Dunne and Lori Taylor. Both use input-output models which is a logical approach because this technique can capture the short-run, indirect effects of defense spending reductions. Taylor comes up with a measure of defense sensitivity for each of the states in the U.S. This line of research will be useful to policymakers interested in defense conversion issues who should note Taylor’s comments regarding the inherent weaknesses in using input-output analysis. Dunne is more concerned with national employment levels. He suggests the impact on employment from defense cuts would be small but cautions against any generalizations because of the variety of possible scenarios on how the ‘peace dividend’ will be distributed. The papers by Dunne and Taylor complement the chapter by Jon Haveman, et al., which uses a computable general equilibrium model to evaluate different defense reduction scenarios (e.g., tax reductions, deficit reductions, more nondefense spending) and different states of the world (unilateral versus multilateral reductions). The conclusions are also similar: minimal aggregate effects from defense reduction but potentially large sectoral impacts in the short run. The Haveman model is interesting because of the attention given to trade variables. A minimal aggregate effect from defense spending cuts, over the next ten years, comparable to those recently taken is also the conclusion reached by Laurence Meyer and Frederic Raines based on simulations using a large macroeconometric model. Potential theoretical support for this minimal impact view comes from the
508
Book Reviews
chapter by James Payne, et al., which uses an unrestricted vector autoregression model to focus on causality (meaning Granger causality). Their conclusion, defended by an arsenal of appropriate econometric techniques, is that neither defense spending nor nondefense spending have an impact on economic performance. Those familiar with this type of modelling will notice that the issue (recognized by the authors in a footnote) of how lag lengths are handled is a weak area; further research would be needed before such a conclusion is used for designing defense conversion policies. Two papers are included in the section on the effects of defense spending on less developed countries. Research on this topic expanded rapidly after the 1973 publication by emile Benoit in which a positive relationship between defense spending and economic growth was found for a group of developing countries. This result was somewhat counterintuitive. The previous conventional wisdom saw developing countries squandering their savings and foreign exchange reserves to import arms rather than capital goods that would further the industrialization process. In the literature that followed, Benoit’s results were both reaffirmed and reversed. The conclusion that this debate is still unresolved is evident from the chapter by Basudeb Biswas. In a previous paper, Biswas used a production function model and data from the 1960-77 period and found no significant effect of military expenditure on economic growth. Using the same model but with data from 1980-89, Biswas now finds a positive effect. Robert Looney has done a lot of research in this area and his contribution with Peter Frederickson, “Arms Imports and Third World Growth in the 198Os,” helps to clarify where the debate now stands. They give a concise review of the path empirical work has taken on this issue. They note that most recent research efforts have focused on subsample construction and take this theme in their study. The results indicate that in developing countries that are not resource constrained (higher income), there is a positive relation between defense spending and growth but for the resource constrained subsample there is no significant effect. For this debate to make progress, researchers would benefit from an historical perspective on the role of defense production in the industrialization process. [See Sen (1984) and note that Looney is one of the few researchers in this debate who has tried to focus on subsample divisions between producers and nonproducers.] In the last section there are two unrelated papers. The first, by John Scott, reveals that there is a terrorism subfield of defense economics. Scott analyzes the possibilities for a nation to successfully deter terrorism through reputation building under incomplete information. This research is based on previous work by Scott on reputation building and is related to the game-theoretic, entry-deterrence models in the industrial organization field. The second paper, by Anandi Sal-m and Robert Kleiman, speculates on the economic consequences of the end of the Cold War. This turns out to be the only chapter where the focus is thinking about the new era. If such new thinking is the suggested reason for the book, other chapters should
Book Reviews
509
have addressed this new era focus. Instead, simulations of a decline in defense spending are independent of changes in the former Soviet Union. Shouldn’t the end of the Cold War have some objective effect on the analysis aside from reductions. in spending growth? For example, it would be logical to expect that the defense spending most directly linked to the past arms race/national security regime would be the first to go, i.e., the end of the Cold War should have an effect on the composition of the defense budget, not just its level. The composition effects may have long-run employment and technology effects that differ from those reported in this book. In addition, presumably there would be fewer third world brush fires (i.e.,: proxy wars in developing countries w/superpower backing) which, ceteris paribus, should lead to a reduction in third world arms imports. It would have been interesting if such speculations could have been taken up in other than the last chapter. This book will be most useful as an introduction for the mainstream economist to the field of defense economics. It will be less useful to the historian, political scientist, sociologist, or other econometrically unsophisticated reader who may be drawn to the book by the title.
References Benoit, l%mile, 1973, Defense and Economic Growth in Developing Countries (Lexington Books, Lexington) Intriligator, Michael, 1990, On the Nature and Scope of Defense Economics, Defence Economics I. 3-11. Sen, Gautam, 1984, The Military Origins of Industrialization and International Trade Rivalry (St. Martin’s. New York).
Bruce G. Brunton James Madison University, Harrisonburg, VA 22807, USA
Book Reviews
James E. Payne and Anandi P. Sahu, Defense Spending (Westview Press, Boulder, 1993) pp. xi + 283, $42.50.
and Economic
Growth
As a discipline, economics has traditionally given scant attention to defense issues. However, in recent years mainstream academic research activity in this area has increased, symbolized by the emergence of the journal, Defense Economics. In the first volume of that journal, Michael Intriligator (1990, p. 10) defined defense economics as a field “in which the tools of economics are applied to the defense sector in order to analyze its domestic and international implications.” In Defense Spending and Economic Growth, James Payne and Anandi Sahu seem to have taken the illustration of Intriligator’s definition as their organizing principle. The chapters in this book collectively show how a wide range of tools can be used to analyze the relationship between military expenditure and economic growth. CGE, VAR, I-O, large scale macro, and several types of growth and game-theoretic models are used by the contibutors along with a variety of econometric techniques. However tool display is not the explicit goal of Payne and Sahu. In both the preface and the editors’ introduction, they contend that the motivation for this book is the end of the Cold War; i.e, the public and policymakers need to know how one should think about the relation between defense spending and economic growth in this new era: “We examine the effects of defense spending on economic growth and investigate how the changed world political climate is likely to alter the importance and pattern of defense spending both for developed countries and developing countries.” (xi) This is an ambitious goal given the difficulty of identifying the path of these geopolitical and economic changes and then translating the emerging patterns into useful analytical measures. On balance, the book is less successful in generating insights into the new era than it is in showcasing defense economics. However it is an important addition to the literature because of the need for a single work that updates the major controversies regarding the relation between defense and growth. After the editors’ introduction, the chapters are divided into four parts. Three chapters are grouped under the heading “Theoretical Underpinnings.” The first of these, by Rati Ram, provides a thorough overview of the issues and the relevant explanatory concepts and will be especially helpful to the reader who is not an economist. Michael Mueller and H. Sonmenz Atesoglu use a two-sector production function framework to try to explain how defense technology spillovers could affect the civilain sector as part of an explanation of how defense spending affects growth. As the authors note, without estimating the key parameters of the model it is not possible to conclude whether a reduction in defense spending will increase or decrease growth. While it would be interesting to see parameter estimates a larger concern is whether this is a useful theoretical approach. This is not so much a theory of defense spending and economic growth (the title of the paper) as it is a theory of the transmission of technical efffects between two sectors in a neoclassical growth model context. In other words, the defense and civilian sectors could be
Book Reoiews
507
renamed farm and nonfarm and because the comparative static properties of the model would not change, a reduction in dairy research would have exactly the same effects on growth as an equivalent reduction in laser weapons research. The point is not that growth models should be abandoned but that more theoretical work in this area is needed. Some of the unique institutional features of the defense sector must be incorporated in the theory if understanding technology spillovers is to get past guns versus butter simplicities. The last chapter in this section is by Charles Anderton on arms race modelling. The application of game theory to military issues has a long history. In a sense, arms race models are almost a self-contained subfield of defense economics. Anderton shows how the distinction between arms ‘stocks’ and arms ‘potentials’ leads to the inclusion of economic growth into the reaction functions of the model and then looks at some arms race scenarios. This research is interesting but more useful for explaining how the cold war ended rather than the consequences of its ending. The next section, “Effects on Industrialized Countries,” includes six diverse chapters. There is a very well-written paper by Peter Boettke on the collapse of communism. He persuasively argues that the Soviet centrally planned economy suffered serious systemic weaknesses but that illusions were created by the West in its overestimation of Soviet economic performance and potential. The decline in the Soviet threat in the late 1980s and early 1990s was accompanied by a decline in U.S. defense spending. The impact of this decline on employment at the national and regional levels are, respectively, the topics of papers by J. Paul Dunne and Lori Taylor. Both use input-output models which is a logical approach because this technique can capture the short-run, indirect effects of defense spending reductions. Taylor comes up with a measure of defense sensitivity for each of the states in the U.S. This line of research will be useful to policymakers interested in defense conversion issues who should note Taylor’s comments regarding the inherent weaknesses in using input-output analysis. Dunne is more concerned with national employment levels. He suggests the impact on employment from defense cuts would be small but cautions against any generalizations because of the variety of possible scenarios on how the ‘peace dividend’ will be distributed. The papers by Dunne and Taylor complement the chapter by Jon Haveman, et al., which uses a computable general equilibrium model to evaluate different defense reduction scenarios (e.g., tax reductions, deficit reductions, more nondefense spending) and different states of the world (unilateral versus multilateral reductions). The conclusions are also similar: minimal aggregate effects from defense reduction but potentially large sectoral impacts in the short run. The Haveman model is interesting because of the attention given to trade variables. A minimal aggregate effect from defense spending cuts, over the next ten years, comparable to those recently taken is also the conclusion reached by Laurence Meyer and Frederic Raines based on simulations using a large macroeconometric model. Potential theoretical support for this minimal impact view comes from the
508
Book Reviews
chapter by James Payne, et al., which uses an unrestricted vector autoregression model to focus on causality (meaning Granger causality). Their conclusion, defended by an arsenal of appropriate econometric techniques, is that neither defense spending nor nondefense spending have an impact on economic performance. Those familiar with this type of modelling will notice that the issue (recognized by the authors in a footnote) of how lag lengths are handled is a weak area; further research would be needed before such a conclusion is used for designing defense conversion policies. Two papers are included in the section on the effects of defense spending on less developed countries. Research on this topic expanded rapidly after the 1973 publication by emile Benoit in which a positive relationship between defense spending and economic growth was found for a group of developing countries. This result was somewhat counterintuitive. The previous conventional wisdom saw developing countries squandering their savings and foreign exchange reserves to import arms rather than capital goods that would further the industrialization process. In the literature that followed, Benoit’s results were both reaffirmed and reversed. The conclusion that this debate is still unresolved is evident from the chapter by Basudeb Biswas. In a previous paper, Biswas used a production function model and data from the 1960-77 period and found no significant effect of military expenditure on economic growth. Using the same model but with data from 1980-89, Biswas now finds a positive effect. Robert Looney has done a lot of research in this area and his contribution with Peter Frederickson, “Arms Imports and Third World Growth in the 198Os,” helps to clarify where the debate now stands. They give a concise review of the path empirical work has taken on this issue. They note that most recent research efforts have focused on subsample construction and take this theme in their study. The results indicate that in developing countries that are not resource constrained (higher income), there is a positive relation between defense spending and growth but for the resource constrained subsample there is no significant effect. For this debate to make progress, researchers would benefit from an historical perspective on the role of defense production in the industrialization process. [See Sen (1984) and note that Looney is one of the few researchers in this debate who has tried to focus on subsample divisions between producers and nonproducers.] In the last section there are two unrelated papers. The first, by John Scott, reveals that there is a terrorism subfield of defense economics. Scott analyzes the possibilities for a nation to successfully deter terrorism through reputation building under incomplete information. This research is based on previous work by Scott on reputation building and is related to the game-theoretic, entry-deterrence models in the industrial organization field. The second paper, by Anandi Sal-m and Robert Kleiman, speculates on the economic consequences of the end of the Cold War. This turns out to be the only chapter where the focus is thinking about the new era. If such new thinking is the suggested reason for the book, other chapters should
Book Reviews
509
have addressed this new era focus. Instead, simulations of a decline in defense spending are independent of changes in the former Soviet Union. Shouldn’t the end of the Cold War have some objective effect on the analysis aside from reductions. in spending growth? For example, it would be logical to expect that the defense spending most directly linked to the past arms race/national security regime would be the first to go, i.e., the end of the Cold War should have an effect on the composition of the defense budget, not just its level. The composition effects may have long-run employment and technology effects that differ from those reported in this book. In addition, presumably there would be fewer third world brush fires (i.e.,: proxy wars in developing countries w/superpower backing) which, ceteris paribus, should lead to a reduction in third world arms imports. It would have been interesting if such speculations could have been taken up in other than the last chapter. This book will be most useful as an introduction for the mainstream economist to the field of defense economics. It will be less useful to the historian, political scientist, sociologist, or other econometrically unsophisticated reader who may be drawn to the book by the title.
References Benoit, l%mile, 1973, Defense and Economic Growth in Developing Countries (Lexington Books, Lexington) Intriligator, Michael, 1990, On the Nature and Scope of Defense Economics, Defence Economics I. 3-11. Sen, Gautam, 1984, The Military Origins of Industrialization and International Trade Rivalry (St. Martin’s. New York).
Bruce G. Brunton James Madison University, Harrisonburg, VA 22807, USA