COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1707 The Effects of the Security Environment on Military Expenditures: William Nordhaus, John R. Oneal, and Bruce Russett June 2009 Countries' military expenditures differ greatly across both space and time. This study
examines the determinants of military spending, with particular reference to the
importance of the external security environment. Using the liberal-realist model of
international relations, we first estimate the probability that two countries will be
involved in a fatal militarized interstate dispute. We then aggregate these ex ante
estimates of the likelihood of dyadic conflict, calculating the annual joint probability
that a country will be involved in a fatal dispute. This is our measure of the external
threat. We then estimate the level of military spending by country and year as a function
of the security environment, arms races with foes and the defense expenditures of friendly
countries, states' involvement in actual military conflict, economic output, and various
other political variables. In analyses of a panel of 165 countries, 1950 to 2000, we find
that the security environment is a powerful determinant of military spending. Indeed, our
prospectively measured estimate of the external threat is more influential than any of
several influences known only ex post. Our best estimate is that a one percentage point
rise in the probability of a fatal dispute leads to a 3 percent increase in military
spending. |
