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Transcript of Research Paper 3-1
Terry Chaney 1Econ 497Research Paper
An Econometric Study of Global Defense Spending
Terry Chaney 2Econ 497Research Paper
EXECUTIVE SUMMARY
The focus of this paper is to develop an econometric model that helps describe an
individual country’s defense spending as a percentage of annual GDP. More specifically,
the purpose is to identify which factors might contribute to countries that dedicate a large,
perhaps disproportionate percentage of their GDP on military expenditures. And this
would then increase conflict in the entire region. Understanding these factors would be
useful in discovering what drives global demand for weapons and facilitate conflict
resolution strategies. For example, increased demand for vital resources by developing
countries can create hotspots where a potential conflict is more likely to occur. The
importance of being able to anticipate potential hotspots and preventing unnecessary
bloodshed should be a concern to the developing world, whose defense contractors are
the beneficiaries of this global arms trade.1
The model was chosen to encompass various economic, geographic and
demographic characteristics of a country, which may help explain why one country
spends most of its resources on weapons and another does not. Intuitively, the
expectation was that if a country has a relatively young, disenfranchised population that
is ruled by an autocratic regime and also happens to be resource-rich that country
probably spends more arming itself against its neighbors and rival factions within its own
1 The author also takes it as a given that any country has the right to defend itself from outside aggressors.
Terry Chaney 3Econ 497Research Paper
country. And an OLS regression of the data does seem to support this thesis to some
degree. For example, unemployment proved to be a positive significant factor. Median
age, literacy and inflation, while having a negative effect as expected were not
significant. Of the various resource variables that I used oil production was positively
significant related to defense spending. Zinc, nickel and diamonds had a positive but not
a significant relationship within the model; while tin, gold and uranium were negative
predictors with no significant effect. A democracy and transparency ranking was applied
to each country and oddly enough, democracy was significant and transparency was not.
As far as geographic location is concerned, each region had a positive effect on defense
spending (in 2007) with only the Middle East dummy variable having a significant effect.
BACKGROUND DISCUSSION
On a daily basis households are faced with choices regarding how to allocate
resources. Some are trivial: how much should I spend on lunch? Others are more
difficult: how much should I save for retirement? Governments too must decide how to
allocate their country’s scarce resources. For example, they need to decide how much of
the years tax revenues will be used for things like: health care, education and national
defense. In
Terry Chaney 4Econ 497Research Papertheory anyway, these decisions are made based on the wants and needs of various interest
groups. A country like the U.S, with a GDP of over $13 trillion will have much more to
work with. And even though the U.S. has by far, the largest military budget on the
planet, it amounts to roughly 4% of GDP annually (this is assuming that the Pentagon is
accurately reporting their budget, which is unlikely). Defense spending varies from
country to country, but globally it is big business. In 2007, the world spent an estimated
$1.2 Trillion arming itself and preparing for war—some of the highest levels since the
Cold War.
Much of the existing academic literature uses defense spending as the explanatory
variable, and then studies how it affects variables such as economic growth, health care
spending, etc. The goal here on the other hand, is to discover which factors would
explain a country’s defense budget. A reasonable model should include variables that
take into consideration a country’s population, geography, government structure and
access to resources. The hypothesis to be tested, briefly stated, is that if a country’s
population is relatively young and unemployed then that country would be more likely to
organize their citizens militarily. This may serve fundamental social and economic
functions and it may also be a rather natural process of development that most nation-
states experience on their way to maturity—whatever that might be.2 In addition to this,
one would also expect that less developed and less democratic counties would fit this
profile. The assumption is that more democratic countries wouldn’t tolerate a
2 . For example, this was the situation in the U.S. during the 60’s: the baby boomers who are now preparing to upset the country’s economic stability with retirement were upsetting Johnson and Nixon with their civil disobedience—ah, to be bored and young.
Terry Chaney 5Econ 497Research Paperdisproportionate percentage of their wealth to be funneled into guns rather than butter.
Furthermore, if one country is arming itself and that same country’s population is
increasing rapidly, that country’s neighbors would likely follow suit. Thus, the data
should reveal regional patterns of high military spending. Finally, a country that meets
the other criteria and is also resource rich would create an environment that was ripe for
conflict—not to mention exploitation from within or without. These factors would then
be reflected in a large percentage of a country’s GDP being spent on defense related
items.3
This section examines how some of these factors may contribute to a region’s
defense budget and risk of conflict. It is reasonable to expect country X’s neighbors to
increase their defense budget if they observe X growing rapidly and buying tanks and
jets. One could argue that this is exactly what has happened in the Middle East over the
last fifty years. Some of this can be explained by the large amount of oil reserves under
the sand. But other factors are at work here as well. For example, many of these
countries, such as Saudi Arabia have only recently gained independence from colonial
rule. And though the oil-rich nation’s economy seems to rise and fall with the oil market
the House Of Saud remains in power. The kingdom is notorious for its brutality,
corruption and its arbitrary approach to due process. In addition to this there is the
problem of income
3 There does seem to be a hidden assumption in the following discussion that high defense spending implies increased conflict. The relationship between conflict and defense spending was not tested, but the assumption is that greater defense spending increases the likelihood of military conflict.
Terry Chaney 6Econ 497Research Paperinequality. According to an article in, Middle East Report, “In 1981, US and Saudi
Arabian per capita income levels were equivalent at roughly $18,000 per year. In the 20
years since, while the US level has grown to $36,000, the average Saudi Arabian
household income plummeted, now hovering around $7,500” (Jones, p.43). The
country’s population is young (median age is 21) growing rapidly and unemployment is
around 13%. Saudi Arabia also spends a large percentage of their oil revenues on
weapons—most of which are purchased with petro-dollars.
The significance of oil to the global economy and the conflict this creates has
already been written about extensively. And while the existence of large oil reserves
should not be overstated, it would be foolish to exclude it from the equation. According
to the hypothesis, oil production should have a positive effect on defense spending. The
effect of oil production on defense spending may be more indirect. In an article for,
American Journal of Political Science, Benjamin Smith argues that “oil wealth is
robustly associated with more durable regimes and significantly related to lower levels of
protest and civil war” (Smith, p.232). Smith’s study did not find that oil wealth was used
as a tool of repression but that leaders in oil-rich states “invested their windfall revenues
in building state institutions and political organizations that could carry them through the
hard times”(Smith, p.232).4 Smith suggests that the boom and bust cycles of the oil
market do not seem to affect the longevity of authoritarian regimes. For example, he
observes “the collapse of oil prices in 1986 exerted no significant negative effect on
4 How these repressive regimes maintain their power for as long as they do is not clear. It may be that there are cultural differences at work here; and thus, it may not be appropriate to apply western standards of democracy to the Middle East.
Terry Chaney 7Econ 497Research Paperregime viability or civil conflict among oil exporters” (Smith, p.232).5 Moreover, Smith
found that overall democracy was positively related to incidents of civil war—which is
rather unexpected. However, “location in the Middle East and North Africa increased the
likelihood of civil war” (Smith, p.240). Thus, even if oil wealth does have a stabilizing
effect within a given country, it appears to have a destabilizing effect within the region.
In the last fifteen years large oil reserves have been discovered in the Caspian
Sea region.6 And since the collapse of the Soviet Union countries like Kazakhstan have
become important players in the geopolitical energy game. Klare discusses how the
relative importance of the Caspian Sea region was revealed as a shift in the U.S. national
security strategy during the 90’s. Klare discusses Operation CENTRAZBAT-97, which
was the first deployment of U.S. combat troops to that particular region. The operation
began September 15, 1997, when “five hundred paratroopers from the army’s 82nd
Airborne Division jumped into an arid battle zone in southern Kazakhstan.7 Their
assigned mission: to link up with friendly forces from Kazakhstan, Kyrgyzstan, and
Uzbekistan and engage in simulated combat against renegade forces opposed to a
regional peace agreement” (Klare, pp. 1).
5 One could argue that this is precisely what Hugo Chavez’s project is in Venezuela.
6 And in terms of gaining independence these are the youngest countries.7 Relations with Uzbekistan have cooled since then, in 2005 President Karimov ordered U.S. troops to leave the country.
Terry Chaney 8Econ 497Research Paper
The end of the Cold War and the opening of the Caspian Sea to increased foreign
investment has done little however to nurture democratic institutions in this region—
despite Borat’s best efforts. For example, Uzbekistan and Kazakhstan are both ruled by
former Communist Party bosses and have proven that the new boss is not much different
from the old boss.8 Most of the countries of this region, so far, (in terms of dollars spent)
do not present much of a military threat. However, the population in this region, like
many of the Middle Eastern countries is young and unemployed.9 And as NATO
continues its expansion into this region and threatens Russia with a missile defense
system in Turkey, the possibility for a highly militarized “Eurasian Corridor” increases
dramatically. There is evidence that Russia has not only adopted a new security strategy,
but also a new theoretic framework, to address this perceived aggression into its sphere of
influence. And in addition to NATO, China is also considered a very real national
security threat. (Jackson, p.386).
It has often been said that the wars of the future will be fought over water rather
than oil (something fun to look forward to). The total amount of water reserves however,
in this model was neither positive nor significant. And there could be a number of
reasons for this. For example, if the (desert) countries of the Middle East have the
strongest effect on the model’s results then water reserves would not appear to fit
particularly well. On the other hand, there are historical examples of water disputes in
the Jordan, Tigris-Euphrates
8 Parade.com ranks Uzbekistan’s President Karimov the #5 worst dictator in the world—right behind Hu Jintao of China.9 The median age in the U.S. is 36, Uzbekistan and Turkmenistan is 22. And unemployment in Turkmenistan is around 60%, which is the highest of the “stans” including Afghanistan.
Terry Chaney 9Econ 497Research Paperand Indus River Basins. The Tigris and Euphrates Rivers, for example, are vital to the
economies of the bordering countries. As Klare points out “Syria obtains about 85
percent of its total renewable water supply from the Euphrates, while Iraq obtains nearly
100 percent of its supply from the two rivers combined” (Klare, p.175). The population
is increasing rapidly in this region, which increases the risk of future water disputes.
Africa’s history over the last fifty years has also been turbulent and chaotic as
(overt) colonial powers have receded (although they still exercise control behind the
scenes to some extent). For example, during the Cold War the U.S. and Russia were both
arming different factions within Angola, with the goal of gaining access to the country’s
valuable mineral and petroleum resources. This competition for resources by foreigners
aggravated discord between factions within the country as well. The Soviet-backed
MPLA and the U.S.-backed UNITA were engaged in a bloody civil war that lasted
several decades after the Portuguese withdrew from the country. Unfortunately, the end
of the Cold War did not mean the end of conflict on the continent. For example, the rich
diamond wealth of Sierra Leone proved to be an enticing target for the insurgent Liberian
leader Charles Taylor. Like the Congolese dictator Mobutu, Taylor realized that having
access to mineral wealth is the key to maintaining power.
According to author Michael Klare, “the illicit diamond trade in Angola generates
an estimated $700 million per year, and sales from Sierra Leone are thought to be worth
at least half as much. In Congo, royalties from copper and uranium are thought to have
netted long-term dictator Mobutu Sese Seko and his close associates several hundred
Terry Chaney 10Econ 497Research Papermillion dollars per year” (Klare, p.192). Klare also discusses the increasing use of
private military companies, such as Executive Outcomes and Sandline International10,
which are often used to protect large mining and petroleum operations in “unstable”
regions. And while the use of mercenaries is not a recent development, not only does
their presence not seek to reduce conflict “their interests are best served by allowing the
fighting to continue as long as possible”. He then observes that, “these multiple factors—
the violent pursuit of resource wealth in poor and divided countries, the lack of an
effective international response, the willingness of many resource firms to traffic with
warlords and rebels, and the prominent role of PMC’s—have combined to increase the
intensity, lethality, and duration of the internal conflicts of the post-Cold War era”(Klare,
p.195).
If undemocratic countries spend more on defense spending does the converse
hold: do democratic countries spend less on defense related budget items? In a 2001
article for the The Journal of Conflict Resolution, James H Lebovic, argues that spending
priorities among Latin American democracies were shifted away from military spending
by 12% between 1988 and 1994. (Lebovic, p.427). Similar to Africa, Latin America was
also used as a virtual chessboard during the Cold War. And it would be fair to argue that
Latin America produced some of the most brutal dictators of the twentieth century (some
were even trained with U.S. tax dollars).11 Therefore, if Lebovic is correct, then it is
worth asking what is (or is not) happening in Latin America that isn’t happening in the
10 These two particular companies folded in 1999 and 2004 respectively, but the Iraq War especially has drawn attention to the role of PMCs like Blackwater, DynCorp and KBR.11 And thus, it would be interesting to see if Latin American countries were spending more than say the Middle East during the 60’s and 70’s.The CIA Factbook 2007, has only 3 Latin American countries in the top 50 for military spending (% of GDP): Honduras , Cuba and Ecuador.
Terry Chaney 11Econ 497Research PaperMiddle East? Lebovic begins by discussing how democratic institutions may affect the
budgetary process in general.12 And his regression results did reveal that the level of
democracy does have a positive and significant effect on the change in civilian spending
relative to military spending. Also, he found that budget growth had a positive and
significant effect on civilian spending and he suggests that perhaps “a bigger government
budget favors civilian spending and a smaller one favors military spending. Because
Latin American budgets tend, in general, to grow (not shrink), civilian budgets mainly
benefit from this effect” (Lebovic, p. 441). One unexpected result of Lebovic’s model
however, was that in one sample age had a negative effect on social spending, which
suggest that an older population spends less on social programs. Lebovic’s assumption is
that a younger, more democratic demographic would exert political pressure to increase
social spending for programs like education.13He speculates that perhaps an older
population would demand less education spending—but then again, a sufficiently large
older population may demand increases in health care rather than education.
DATA DESCRIPTION
12 Lebovic uses a civil and political rights index from Freedom House, which is slightly different from the 2 that I used.13 Again, echoes of the Civil Rights movement of the 60’s: a younger populace exerting political pressure for less guns more butter.
Terry Chaney 12Econ 497Research Paper
The independent variable used for the study was defense spending as a percentage
of annual GDP for one-hundred and sixty-four countries during 2007.14 The decision to
measure defense spending as a percentage of GDP (rather than total dollars spent) makes
it easier to compare how each country prioritizes its military expenditures relative to
other national interests and to other countries. For example, the United States is the
highest ranked based on total military expenditures, but ranks twenty-first based on its
percentage of GDP spent on defense compared to other priorities. One obvious problem
with this percentage is that it could easily be falsely reported, exaggerated or
underestimated.15
The following explanatory variables were also included in the model for the year
2007:
Unemployment rate: This measures the percent of the labor force that is without a job.
A high rate of unemployment should have a positive impact on defense
spending.http://72.14.205.104/search?sourceid=navclient-ff&ie=UTF-8&q=cache%3Ahttp%3A%2F%2Fwww.photius.com
%2Frankings%2Feconomy%2Funemployment_rate_2007_0.html
Median Age: This is the halfway point in each country where half of the population is
older and half is younger. Since the assumption is that a country with a younger
population will spend more on defense the model should reveal a negative effect on
defense spending. http://www.photius.com/rankings/population/median_age_total_2007_0.html
14 http://www.photius.com/rankings/military/military_expenditures_percent_of_gdp_2007_0.html15 For example, this wouldn’t include “black budget” items or projects—only annual expenditures directly related to military goods and services.
Terry Chaney 13Econ 497Research PaperOil - production: The total oil produced in barrels per day (bbl/day). Due to its
importance to the global economy this should be a positive predictor in the model.
http://www.photius.com/rankings/economy/oil_production_2007_0.html
Literacy: The (best estimate of the) percentage of the total population that can read and
write. High literacy is expected to be a negative predictor of military spending.
http://www.photius.com/rankings/population/literacy_total_2007_0.html
Democracy Index: The Economist’s Democracy Index ranked from one (best) to one
hundred sixty-seven (worst); and also divided into four categories: full democracies,
flawed democracies, hybrid regimes and authoritarian regimes.16
A ranking, with 1 being the highest, of each country’s democratic participation (courtesy
of The Economist). The assumption is that the lower the ranking, or the more
democratic, the less percentage of the overall budget will be spent on defense. Thus, the
effect should be positive.http://www.economist.com/media/pdf/DEMOCRACY_INDEX_2007_v3.pdf
Transparency Index: This index was compiled courtesy of Transparency International.
It ranks government corruption from 0 to 10 (10 being the best or least corrupt). Since a
lower ranking indicates a more corrupt regime, this variable should be a negative
predictor.http://www.transparency.org/news_room/in_focus/2006/cpi_2006__1/cpi_table
16 The Economist Intelligence Unit’s democracy index is based on five categories: electoral process and pluralism;civil liberties; the functioning of government; political participation; and political culture. The five categories are interrelated and form a coherent conceptualwhole. The condition of having free and fair competitive elections, and satisfying related aspects of political freedom, is clearly the basic requirement of all definitions.
Terry Chaney 14Econ 497Research PaperRegional Indicator: A dummy variable for each region. A value of 1 indicates whether
a country is located in: Africa, The Middle East, Asia, Europe or North-South America.
Mineral Resource Indicator: A dummy variable that indicates if a country has reserves
of various mineral commodities. A value of 1 indicates that a country has measurable
reserves of: Uranium, Diamonds, Gold, Nickel, Tin or Zinc. Resource wealth should
have a positive effect on a defense budget.
http://minerals.usgs.gov/minerals/pubs/country/
Water Reserves: This is a measure of how much renewable freshwater a particular
country has access to, measured in cubic kilometers per year. Similar to the other
resource variables, water reserves should be positive predictors.
http://www.worldwater.org/data.html
Inflation rate: A measure of the annual percentage change in consumer prices. The
expectation is that higher inflation rates would be another indicator of civil unrest which
would positively effect military spending.
http://www.photius.com/rankings/economy/inflation_rate_2007_0.html
MODEL AND RESULTS
Terry Chaney 15Econ 497Research Paper
There are a few things from the results of the regression analysis that seem
noteworthy. With respect to the regional indicators, all of the regional dummies had a
positive effect on defense spending. The Middle East dummy variable however, was the
only significant predictor. Which suggests that, all else being equal a Middle Eastern
country will spend a larger percentage of their GDP on military expenditures. And
considering the region’s chaotic history—at least during the last fifty years—this is not
shocking news.17 One surprising result from the regression analysis was that the African
dummy variable was not a significant predictor. This was unexpected considering the
number of hotspots in that region and also its geographic and demographic resemblance
to the Middle East. A second test was then executed, which isolated the African dummy
variable.18 And there were a few noticeable changes in the results. For example, the R-
Square value increased considerably despite the fact that there were fewer variables. But
most of the variables that had been significant in the model with all of the regional
dummies were no longer significant, with the exception of unemployment. The literacy
variable however, stayed negative and was significant at a 90% level. It would be
difficult to draw any meaningful conclusions from this, due to the small number of
observations.
Despite the evidence of these so-called resource wars over most of the resource
variables in this particular model did not lend support to the thesis. The effect of water
17 According to the CIA Factbook, six out of the ten highest ranked countries in this category are located in the Middle East, the other four are African. (http://www.photius.com/rankings/military/military_expenditures_percent_of_gdp_2007_0.html)18 This same test was run with the other regional dummies, but there were not enough observations to generate any output.
Terry Chaney 16Econ 497Research Paperreserves was neither positive nor significant, which was unexpected. It is possible that
water does not belong alongside the other variables due to the difference in its marginal
utility.19 Also, as a wise person pointed out, it could be simply that water becomes more
valuable when it is in short supply—and this would explain its negative effect.20
Diamonds, nickel and zinc were positive factors but not significantly so.21 Uranium, gold
and tin were negative factors which was unexpected.22 This could be due to the fact that a
dummy variable was used instead of the actual amounts in thousands of tons. The
hypothesis was that if any given country, regardless of the magnitude of their respective
reserves, collected enough of these variables it would have a positive effect within the
model. Thus, there is the possibility that this is an excluded variable issue, i.e., that there
simply were not enough resource variables included in the model.
Oil production, however was a positive and significant factor in this model as
expected. This may signify that oil is still one of the global economy’s most significant
resources relative to the various mineral resources in the model. Another possibility is
that the defense industry itself is petroleum- intensive (as opposed to nickel or tin) and
this could be driving defense spending to some degree.
Unemployment is also a positive and significant predictor in the model. And
there are several obvious reasons that governments faced with high unemployment would
ratchet up their military. People without jobs and opportunities will blame those in charge
19 What I had in mind was the Diamonds -Water paradox.20 In some of the models that I discarded, Gold had a very negative and significant effect as well.21 Nickel was the most significant at a 90% level.22 The uranium and tin dummy variables had a positive effect on the model, which included only the African dummy variable.—see appendix.
Terry Chaney 17Econ 497Research Paperand will often seek alternatives to their present situation. Thus, the government will use
military force to stay in power; and will try to channel the energy of its (angry and
unemployed) populace into military endeavors. And a sufficiently Machiavellian leader
will then look for a “dangerous” neighbor/enemy to turn the focus away from his own
malfeasance.
Median age did have a negative effect on defense spending but was not a strong
predictor, despite the very young, growing populations in some of the countries that have
been discussed. Similarly, as expected high literacy rates negatively effect defense
spending but not significantly so. And there could be a few reasons that explain this. It
could be that there is some excluded variable, say that measures poverty, which may
improve the explanatory power of the model. For example, Niger which has the lowest
literacy rate (16.7%) is also near the bottom in terms of annual GDP (ranks 180th). Thus,
it may be the case that a threshold of some kind exists in order to have any military at all.
In other words, some countries may be too poverty and disease stricken to sustain any
kind of military infrastructure. There might also be a simpler explanation, such as
discrepancies in how literacy is defined and reported. A country’s rate of inflation also
had a negative and insignificant relationship within the model which was not expected.
But there are probably reasonable explanations for this. Perhaps a country with a high
inflationary rate simply cannot reach the appropriate level of investment necessary to
build a strong military.
Terry Chaney 18Econ 497Research Paper
Regarding democratic participation, the hypothesis was that the less democratic
countries would have a higher level of defense spending—and this was reflected in the
results. The Democracy Index had a positive and significant effect on annual defense
spending. There are however, some obvious subjective difficulties in defining
‘democracy’. For example, if the Economist were published in Riyadh, instead of the
UK the list would be much different—and the Economist acknowledges this.23 The model
also tested a country’s openness or transparency. Transparency’s value to the model was
significant,24 but it had a positive effect which was unexpected, considering that the
Transparency Index ranks a country from 0 to 10.25 There could be several reasons for
this. The Democracy Index is a ranking from 1 to 167 and as expected had a positive
effect, i.e., less democratic countries have a higher ranking number, and thus spend more
on defense. And while the Democracy Index gauges democratic participation the
Transparency Index rates a country 0 to 10 on things such as, the frequency of incidents
of bribery, government corruption and freedom of the press. (And in fact, many of the
highest ranked countries on both lists are the same). These characteristics often do go
hand in hand, and a test did reveal the existence of collinearity
between the Democracy and Transparency variables.26 And of course, the subjective
nature of the concept of Transparency would be subject to the same criticisms as the
concept of Democracy.
23 http://www.economist.com/media/pdf/DEMOCRACY_INDEX_2007_v3.pdf24 http://www.transparency.org/news_room/in_focus/2006/cpi_2006__1/cpi_table
25 Thus, the effect should be negative since a highly rated country is considered to be more transparent. 26 See correlation results that are in the appendix.
Terry Chaney 19Econ 497Research Paper
DISCUSSION OF RESULTS
The results of the regression analysis did reveal some interesting relationships.
For example, the geographic location does seem to matter when it comes to defense
spending. It appears as though Middle Eastern countries can expect to direct more of their
country’s budget towards defense related items. This suggests that the citizens in those
countries will have to settle for less of something else. The fact that the results did
change with respect to the African dummy variable suggests that there may be different
factors driving defense spending on that continent.27 It would be difficult to say at this
point, since the data for this model covered only one budget cycle. It would be
interesting to test whether these regions have changed over time and how this may have
changed before or after the Cold War. In other words, one could ask: has defense
spending declined in Southeast Asia? Has there been a marked decrease in armed
conflict and increased democratic participation? Lebovic’s study suggests that this may
already be happening in Latin America. And though there may be subtle cultural
differences, it is still worth asking: what is working here that isn’t working there?
The fact that mineral wealth was not a stronger predictor of military spending was
unexpected. Again, a model that includes more observations over decades may reveal
more robust results. One idea for a future research project would be to study if specific
27 Another test might be to divide Africa into regions and see if there are differences.
Terry Chaney 20Econ 497Research Paperresources in specific regions over time seem to predict higher levels of military spending
and conflict. It would also be interesting to test whether the global economy demanded
some of these resources during certain time periods. Alternatively, a more
comprehensive approach to this model would be to collect data for the most sought after
elements in the global economy: iron ore, coal, bauxite, timber, etc; and then see if the
results improve significantly.
Oil turned out to be the only resource variable that was a positive and significant
predictor. Most of the reasons for this have already been discussed. And because of oil’s
importance to global economic growth, it would be fair to ask if is this is even an
interesting result. After all is it really surprising that oil production is influencing
military spending? And on some level the relationship between oil, guns and war has
become so politicized, that the discussion only seems to take place on bumper stickers.
The relationship between oil and defense spending, it appears is more subtle and indirect.
The more interesting relationship perhaps, as in Smith’s study, is how oil revenues may
contribute to regime stabilization (or destabilization) at different stages of the boom and
bust cycle. Also, a potential future project would be to test if other energy inputs like
coal or natural gas would be strong predictors.
Democratic participation was a significant factor in the model and the fact that it
did prove to be a strong predictor of defense spending suggests that this might be an
important area of study in the future. Along the lines of Lebovic’s research, which
focuses on Latin America, it is interesting to study how spending priorities are shifted as
Terry Chaney 21Econ 497Research Papera nation evolves, or “matures”. Does a mature democratic nation eventually spend more
on domestic programs like health care and education? Does the overall standard of living
improve significantly—and if not, why? Some may even question if this would even be a
desirable strategy in the Middle East. Depending on the party’s interest, some may prefer
a more militarized Middle East, because it does seem to create a balance of power
dynamic. Thus, including regime type in the model does seem justified.
The hypothesis of a young and unemployed population spending more on defense
was reflected in the regression results, although not as initially predicted. Recall that
median age was a negative predictor of defense spending, which supports the hypothesis
that a younger population is spending more—or at the very least that an older population
is spending less. However, since its effect was not very significant it would be premature
to draw any meaningful conclusions. A better model should compare different regions
over time. Unemployment was a strong predictor in both the model with all of the regions
included and the model which only included the African dummy variable. And therefore
it should be used in any future studies of military sending. How it may affect defense
spending is not entirely clear, but there were a few ideas offered earlier. Again, if the
model does offer any guidance about a nation’s stage of development it would be
important to try and determine why a country with high unemployment seeks military
solutions. And this may be more of a question for Sociology than for Economics.
The effect of inflation within the model is somewhat questionable, and the results
were previously discussed. Initially, it was assumed that high inflation combined with a
Terry Chaney 22Econ 497Research Paperyounger, unemployed populace would create an environment that required a “military
solution”, that would be preferred to civil unrest. And this would then be reflected in a
higher than normal defense budget. It had a negative effect which was not anticipated and
it is possible that the significance of inflation does stifle investment in several budget
categories—including defense spending. It is possible that this is an excluded variable
issue. Or perhaps, patterns of inflationary effects on defense spending would show up
over time. Thus a more complex model could reveal the more subtle effects of inflation
on defense spending. There is evidence that inflation leads to civil unrest. In an article
for International Journal of Middle East Studies, author Larbi Sadiki discusses how
inflation had sparked “bread riots” in several Middle Eastern countries during the 80’s
and 90’s. (Sadiki, p.75). Sadiki considers these protests in places like Sudan and Jordan,
as a positive sign of democratic change that is specific to the Arab world. Sadiki argues
that “deductions made from the experience of mature democracies are of doubtful
relevance for states that are only beginning the process of democratization” (p.88).
Similar to Toby Jones’ article, Sadiki suggests that a social contract in the Arab world
will have to take into consideration the cultural and religious beliefs that are unique to
that region.
WORKS CITED
Jackson, William D. Autumn, 2002. Encircled Again: Russia's Military Assesses Threats in a Post-Soviet World. Political Science Quarterly, Vol. 117, No. 3. (), pp. 373-400.
Terry Chaney 23Econ 497Research Paper Jones, Toby. Autumn, 2003. Seeking a "Social Contract" for Saudi Arabia. Middle East Report, No. 228, pp. 42-48 Published by: Middle East Research and Information Project.
Klare, Michael T. Resource Wars: The New Landscape Of Global Conflict.New York: Metropolitan Books, 2001.
Lebovic, James H. Aug., 2001. Spending Priorities and Democratic Rule in Latin America. The Journal of Conflict Resolution, Vol. 45, No. 4. pp. 427-452.
Sadiki, Larbi. Feb., 2000. Popular Uprisings and Arab Democratization International. Journal of Middle East Studies, Vol. 32, No. 1, (), pp. 71-95 Published by: Cambridge University Press.
Smith, Benjamin. Apr., 2004. Oil Wealth and Regime Survival in the Developing World, 1960-1999. American Journal of Political Science, Vol. 48, No. 2, pp. 232-246 Published by: Midwest Political Science Association
ONLINE SOURCES
http://www.photius.com/rankings/spreadsheets_2007/
http://www.economist.com/media/pdf/DEMOCRACY_INDEX_2007_v3.pdf
http://www.transparency.org/
http://minerals.usgs.gov/minerals/pubs/country/
http://www.worldwater.org/data.html
APPENDIX
Correlation Africa
Terry Chaney 24Econ 497Research Paper
Correlations
1 -.757**.000
49 45-.757** 1.000
45 47
Pearson CorrelationSig. (2-tailed)NPearson CorrelationSig. (2-tailed)N
TRANSPARENCY
DEMOCRACY INDEX
TRANSPARENCY
DEMOCRACYINDEX
Correlation is significant at the 0.01 level (2-tailed).**.
Correlation Rest of World
Correlations
1 -.715**.000
176 160-.715** 1.000160 166
Pearson CorrelationSig. (2-tailed)NPearson CorrelationSig. (2-tailed)N
TRANSPARENCY
DEMOCRACY INDEX
TRANSPARENCY
DEMOCRACYINDEX
Correlation is significant at the 0.01 level (2-tailed).**.
Terry Chaney 25Econ 497Research Paper
20.015.010.05.00.0
MilitaryexpenditurespercentofGDP
60
40
20
0
Freq
uenc
y
Mean =2.591Std. Dev. =2.3838
N =164
Terry Chaney 26Econ 497Research Paper
100806040200
UnemploymentRate
60
50
40
30
20
10
0
Freq
uenc
y
Mean =13.68Std. Dev. =15.016
N =200
Terry Chaney 27Econ 497Research Paper
50.045.040.035.030.025.020.015.0
Medianagetotal
25
20
15
10
5
0
Freq
uenc
y
Mean =27.598Std. Dev. =8.3559
N =221
Terry Chaney 28Econ 497Research Paper
Defense Spending As Percentage of GDP: 20071 2
Rest Of World AfricaObservations 130 26R-Squared 0.48 0.682Literacy -0.003 -0.07
0.837 0.068Median Age -0.012 0.101
0.802 0.594Oil Production 2.87E-07 1.18E-06
0.037 0.119Transparency 0.313 0.306
0.015 0.697Democracy Index 0.014 0.013
0.025 0.4African Dummy 0.224 NA
0.788 NAAsian Dummy 0.974 NA
0.189 NAN. & S. American Dummy 0.76 NA
0.327 NAEuropean Dummy 0.747 NA
0.311 NAMiddle East Dummy 2.775 NA
0 NACopper Dummy 0.798 1.691
0.1 0.244Gold Dummy -0.519 -0.253
0.237 0.851Nickel Dummy 0.879 NA
0.139 NATin Dummy -0.458 NA
0.497 NAZinc Dummy 0.398 0.234
0.426 0.907Diamond Dummy 0.555 0.365
0.457 0.703Silver Dummy -0.329 NA
0.531 NAUranium Dummy -0.621 0.01
0.376 0.996Water Reserves 0 0
0.586 0.937Unemployment 0.041 0.089
0.004 0.006Inflation -0.001 -0.003
Terry Chaney 29Econ 497Research Paper
0.547 0.289