National and International Issues

Defence Economics

A fundamental question that governments all over the world face is how to set aside relatively scarce resources for competing ends. The array of choices is dizzying. In the end, the manner in which the public pie is carved up turns on a host of factors, such as the geostrategic environment particularly regional tensions, internal security, the state of the economy, the level of economic and technological development and the predilections and priorities of the people at the helm.



As a rule, provision of public goods has a first call on the government budget. Such goods are marked out by two exclusive features: they are non-excludable; and they are non-rival. Non-excludability means that once a good or service is produced, it isn’t possible to prevent a segment of society from consuming it. Non-rivalry means that a large number of people can consume the product without winding down its utility for others. Public goods create the free-rider problem, because even those who don’t contribute to their production can enjoy it. For instance, non-taxpayers can also go to a park constructed out of taxes. Hence, the familiar economic cost and benefit analysis doesn’t apply to public goods. That’s the reason that such goods are almost always supplied only by the state. 


Even if national defence is a public good, skeptics may still enquire why defence spending should be undertaken at all. Why should a country maintain a large military establishment and finance it out of public kitty? The answer is that defence spending is the cost of deterrence. War is red in tooth and claw, as it brings in its train a heavy, and at times colossal, loss of life. It’s also enormously expensive and is often followed by a prolonged recession, hyperinflation or both.


Public goods are further broken down into impure and pure. The former are either non-excludable or non-rival but not both. A public park may be excludable if people have to pay to enter it. By the same token, a bridge may become unavailable for motorists down the line if it’s choked with traffic. However, national defence or security, like clean air, is a pure public good. This is because once a country’s defence capability is developed, it benefits everyone (non-excludability) and that a typical individual is not made worse off if this benefit is extended to others (non-rivalry). If a product or service is a pure public good, the state can become oblivious of its responsibility to supply it only at the expense of public interest.  



Source: SIPRI & World Bank


Even if national defence is a public good, skeptics may still enquire why defence spending should be undertaken at all. Why should a country maintain a large military establishment and finance it out of public kitty? The answer is that defence spending is the cost of deterrence. War is red in tooth and claw, as it brings in its train a heavy, and at times colossal, loss of life. It’s also enormously expensive and is often followed by a prolonged recession, hyperinflation or both. Not only that, it has tremendous opportunity cost as human and material resources consumed in a conflict could have been used elsewhere. Therefore, war must be given a wide berth at all costs. 


Deterrence comprises two components: one, to attain the minimum level of military capability to knock some sense into a would-be aggressor and hold it back from flying at another country. Short of such capability, a country will be considered a fair game by its adversaries. Two, to send out the message to the potential invader that war can be costly for it as well. Deterrence may be pricey but, for sure, it’s far less than going to war.


But the mere fact that war is the kiss of death doesn’t extirpate it. From time to time, countries are caught up in the whirling vortex of a sanguinary conflict.  In a world characterized by anarchy in the absence of an international government; a world which lacks a universally binding agreement to put an end to war; and where notwithstanding all pretensions of international law and niceties of diplomatic norms, power is the ultimate arbiter in the event of a cross-border show of strength, only effective deterrence can underwrite that a country having a chip on its shoulder would think twice before setting out on a costly adventure. In a word, power underpins inter-state relations and the only effective antidote to power is power. 
Deterrence comprises two components: one, to attain the minimum level of military capability to knock some sense into a would-be aggressor and hold it back from flying at another country. Short of such capability, a country will be considered a fair game by its adversaries. Two, to send out the message to the potential invader that war can be costly for it as well. Deterrence may be pricey but, for sure, it’s far less than going to war. Defence is a public good, because once deterrence is acquired, all citizens benefit from the avoidance of war — even those who deem defence expenditure to be a gargantuan burden on national exchequer or even those who don’t contribute a penny to building up the military capability of their nation. 


A notable exception is India, which is classified as a low middle income economy but has the world’s fourth-largest defence budget. India has also the lowest per capita income ($1979) — and that too by a wide margin — among the world’s top 10 defence spending nations.


Having briefly explained the raison d'être of defence expenditure, let’s have a look at the state of global military spending. In 2018 — the last year for which full year data are available — the worldwide defence spending amounted to $1.82 trillion, which made up 2.25 percent of the global economic output of $80.93 trillion. The country with the highest millitary budget is, understandably, the United States (U.S.), which spent $649 billion on defence related goods and services. The U.S. is followed by China with $250 billion defence budget. The other major defence spenders in descending order are: Saudi Arabia ($67.6 billion), India ($66.5 billion), France ($63.8 billion), Russia ($61.4 billion), the United Kingdom ($50 billion), Germany ($49.5 billion), Japan ($46.6 billion), and South Korea ($43.2 billion). 
These figures bring out a correlation between a nation’s defence budget on one hand and the size of its economy or per capita income on the other. The U.S., world’s largest economy and with a per capita income of nearly $60,000 accounts for 24 percent of global economic output or GDP and its share in global defence spending is 35.6 percent. Likewise, China, the second-largest economy, which accounts for 15 percent of global GDP makes up nearly 14 percent of global defence spending. The major reason for this correlation is that high income economies are better placed to procure or manufacture high technology weapons. A notable exception is India which is classified as a low middle income economy but has the world’s fourth-largest defence budget. India has also the lowest per capita income ($1979) — and that too by a wide margin — among the world’s top 10 defence spending nations. Rich nations can also benefit from the economies of scale in security consumption, which means that the bigger the size of defence expenditure, the lower is per unit cost.
On the other hand, Japan, which contributes 6 percent to global GDP and has per capita income exceeding $38,000, accounts for only 2.56 percent of the world’s defence spending. This is because since the end of the World War II, the Pacific nation has been a free rider on military protection provided by the U.S. All the same, Japan is the world’s 9th largest defence spender. Even South Korea, which is known to be a pacific country and whose security is also underwritten by Washington, has the 10th largest defence budget because of the threats emanating from the north. National defence is too vital a matter to be left to others — even if they happen to be the staunchest of allies. 


Pakistan’s defence expenditure is six times less than that of India. Since the purpose of defence expenditure is to acquire minimum deterrence capability, which is contingent upon the military capability of the rival in-chief or the potential aggressor, it is the actual size of the defence spending that matters.


This brings us to a fundamental question in defence economics: “How much defence is enough defence?” It’s difficult to answer the question in precise terms because a nation’s defence capability can’t be determined unilaterally; instead it’s contingent upon the capability of another nation — the would-be aggressor — from which the former’s security is at risk. The gap in military capabilities of two rival countries is called threat, which can be undergirded by such factors as an advanced weapon system or a greater stock of arms. As a rule, the higher the threat, the greater is the probability of an attack and thus more pronounced is the need for effective deterrence or defence capability. It’s also important to take into account the regional security situation and external and internal conflicts. A country placed in a testing geostrategic environment or facing grave internal threats to national security needs a proportionately higher defence budget. This is the demand side of defence economics. On supply side, the size of the defence expenditure is constrained by resource availability reflected by the size of the economy or per capita GDP.  


    
 Source: SIPRI


Having looked into the fundamentals of defence economics, let’s turn to the military budgets of Pakistan and India — the two largest economies and the nuclear countries in South Asia, and like it or lump it, the two rival nations which have fought three full-scale wars. Pak-India animosity predates the partition of the British India. The very idea of Pakistan — carving out a separate territory from the ‘motherland’ on the basis of religion — was a repudiation of all that the Indian National Congress, India’s founding party, stood for. Sir Cyril Radcliff-headed commission, which was entrusted with drawing the boundary between the two new states, conceded the Muslim majority Gurdaspur district to India, thus providing it an overland link to Jammu and Kashmir, arguably the largest and richest of the princely states. The rest is history. Imagine, India had no direct access to Kashmir. How in that event subsequent political developments in South Asia would have unfolded?


The nuclear capability, however, doesn’t make conventional military strength irrelevant. Normally, nuclear weapons are neither the first line of attack; nor are they the first line of defence. The so-called five de jure nuclear powers continue to fork out a pretty penny on manufacturing or acquiring conventional weapons.


Coming back to the military budgets of Pakistan and India; for meaningful comparison, their defence expenditure is measured in the common currency — the American dollar — as well as calendar year wise. In case of Pakistan, total defence expenditure in 2017 — the last calendar year for which full year data are available — amounted to $10.77 billion. Defence spending has steadily increased over past one decade. In 2008, $5.23 billion were spent on producing or procuring military goods and services, which went up to $5.27 billion in 2009, $5.97 billion in 2010, $6.95 billion in 2011, $7.48 billion in 2012, $7.65 billion in 2013, $8.65 billion in 2014, $9.48 billion in 2015, and further to $9.97 billion in 2016. On average, defence expenditure registered an annual increase of 8.5 percent over past one decade.
In comparison, India’s defence spending in 2017 was recorded at $63.92 billion. From $33 billion in 2008, defence spending went up to $38.72 billion in 2009, $46.09 billion in 2010, $49.63 billion in 2011, $47.22 billion in 2012, $47.42 billion in 2013, $50.91 billion in 2014, $51.30 billion in 2015, and further to $56.64 billion in 2016. On average, defence expenditure bumped up 7.9 percent annually over the past one decade. 
During this period, Pakistan’s economy grew 3.7 percent per annum to reach $305 billion, while the Indian economy expanded 6.7 percent per annum to reach $2,651 billion. Thus not only is India’s economy much larger than that of Pakistan, it has also expanded at a much faster pace in recent years. 



Data source: World Bank & SIPRI


Herein lies Pakistan’s major limitation vis-à-vis its eastern and much bigger neighbour. In case of Pakistan, defence spending’s share in the GDP (3.2 percent) and general public expenditure (16.8 percent) has been larger than that of India (2.6 percent and 9.4 percent respectively). At the same time, Pakistan’s defence expenditure is six times less than that of India. Since the purpose of defence expenditure is to acquire minimum deterrence capability, which as explained in a preceding paragraph, is contingent upon the military capability of the rival in-chief or the potential aggressor, it is the actual size of the defence spending that matters. India can set aside a much bigger amount for defence than Pakistan, because of a much larger resource base. Not surprisingly, India has had an edge over Pakistan on almost all the indicators of conventional military strength, such as manpower, tanks and fighter aircraft.


India is the globe’s largest buyer of arms and makes up 12 percent of the global sales. In 2008, the world’s ‘largest democracy’ procured $1.85 billion worth of arms, which racked up in subsequent years, reaching $3.36 billion in 2017. During this period, New Delhi’s arms imports peaked at $5.32 billion in 2013.


The gap in conventional military capability between the two countries dates back to the 1947 Partition, which gave India a lion’s share in distribution of industrial, financial and military assets between the two new states. New Delhi thus got a head start in terms of conventional military capability. War broke out between Pakistan and India in 1947 over Kashmir, which set the stage for the subsequent antagonistic bilateral relations. Being a bigger country, India was able to apportion much larger resources to building up its military capability. In response, Pakistan was left with no honourable choice — the alternative, of course, was to accept India as an authoritarian ‘big brother’ and live in ‘concord’ on the latter’s terms — but to develop minimum deterrence capability. The philosophy of deterrence also underlies Pakistan’s nuclear doctrine. When India went nuclear (India also detonated nuclear bomb in 1974, ironically called it ‘Smiling Buddha’) in 1998, Pakistan did the balancing act. The nuclear capability, however, doesn’t make conventional military strength irrelevant. Normally, nuclear weapons are neither the first line of attack, nor are they the first line of defence. The so-called five de jure nuclear powers continue to fork out a pretty penny on manufacturing or acquiring conventional weapons. 
It’s also in order to compare import of arms by Pakistan and India. India is the globe’s largest buyer of arms and makes up 12 percent of the global sales. In 2008, the world’s ‘largest democracy’ procured $1.85 billion worth of arms, which racked up in subsequent years, reaching $3.36 billion in 2017. During this period, New Delhi’s arms imports peaked at $5.32 billion in 2013. Pakistan, on the other hand, spends much less on arms imports. In 2008, the country purchased $1.07 million worth of weapons, which went up to $2.18 billion by 2010. Subsequently, arms imports declined and fell to $710 million in 2017, which are nearly one-fifth of those of India. 



Source: SIPRI


Not only has the Kashmir issue remained unresolved with the ascendency of the Bharatiya Janta Party (BJP), India has adopted a more belligerent posture. It isn’t that the Congress Party has been any soft on Pakistan; the 1947, 1965, and 1971 Pak-India wars were fought when the Congress was in the saddle. But the BJP and its poster boy, Narendra Modi, have presided over the transition of Indian state and society from secularism to a fanatical Hindu nationalism or Hindutva. Bludgeoning smaller neighboring nations into submission is the keystone of the foreign policy of the states which are in thrall of a fanatical doctrine. A glimpse of such a policy was seen in the war hysteria whipped up by the BJP government in the wake of the February 14, 2019 incident in Pulwama located in the Indian Occupied Kashmir and later during Modi’s election campaign. On one such occasion while trailing his coat at Pakistan he stated that India had not developed nuclear weapons for Diwali (a major Hindu festival in which a lot of firework is displayed). As New Delhi is increasingly shaking its fist at Pakistan, Islamabad has no choice but to fend for itself.
In addition to Indian hegemony, Pakistan has to contend with two other grave challenges: an unstable Afghanistan, with which Pakistan shares a 2710 kms long border, and the menace of militancy, which has posed an existential threat to the country. The epic campaign against the militancy has tested the resilience of the nation, the armed forces and the economy. During the last ten years, the direct and indirect economic cost of the war on terror has been under the shadow of $99.5 billion, nearly $10 billion per annum, which is almost equal to Pakistan’s one year defence budget. To stamp out the militancy, full-scale counter-militancy operations including Zarb-e-Azb, Khyber I-IV and Radd-ul-Fasaad were launched, for which it was necessary to step up security related expenditure. Although the military operations have broken the terrorist networks and peace has largely returned to the once restive tribal areas, the war is far from over. The militants continue to strike, albeit with far less frequency, including in areas of strategic significance such as Gwadar. Indian hand has been suspected in several such incidents. The aim is to scare foreign investors and make Pakistan bleed economically. It is needless to mention that a flaccid economy will put the skids under Pakistan’s defence capability.  
Bad blood between Pakistan and Afghanistan also predates the 1947 Independence. The Durand Line drawn in 1893 and endorsed in 1919 by the Anglo-Afghan Treaty sowed the seeds of acrimony between Pakistan and its north-western neighbour years before the former was born. Little wonder then that Afghanistan was the only state that opposed the admission of Pakistan to the United Nations. For Pakistan, the Durand Line is a past and closed transaction and thus constitutes a permanent international border. Any attempt to redraw it is out of the question. In contrast, the Afghan leadership has consistently looked upon the boundary with Pakistan as a temporary arrangement — an issue that needs to be settled. 
Over nearly last two decades, Afghanistan has remained a roiled country. Due to a long and porous border, militants infiltrate into Pakistan and then execute clandestine activities. Several acts of terrorism, including the December 2015 Army Public School Peshawar carnage, were masterminded by the militants living on the Afghan soil. On the onset of Zarb-e-Azb, top Taliban leadership crossed over to Afghanistan, where they continue to have sanctuaries. Not only that, acting on the maxim, “An enemy’s enemy is a friend,” New Delhi and Kabul have been courting each other over the years with India having established a toehold in Afghanistan. Such challenges have raised the threat level for Pakistan and made it imperative to step up security related expenditure. 
South Asia has some singular characteristics. Comprising 1.8 billion people, it accounts for 24 percent of the world population of 7.5 billion; however, its share ($3.2 trillion) in the global GDP is only 3 percent. The region is home to the world’s 33 percent of the people who live below the poverty line of $1.9 a day. Among South Asian countries, India has the highest percentage of population — 22 percent — and the largest number of people — 286 million — living below the poverty line. Therefore, if the South Asian nations, particularly India, need to wage war, it’s not against each other but against poverty and squalor. As it’s the largest country and economy in South Asia, India, more than any other country, bears the responsibility for peace and prosperity in the region by eschewing its hegemonic posture and coming to the negotiating table to resolve the outstanding issues with Pakistan.  


The writer is a frequent contributor to national print media on issues of politics and economy.
E-mail: [email protected]
Twitter: @hussainhzaidi
 

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