Monitoring Military Expenditures

The SIPRI military expenditure project was initiated in 1967 to study developments in world military expenditure. The current SIPRI database on military expenditure covers 172 countries and contains consistent data for the period since 1988. Data for the most recent 10-year period are published annually in the SIPRI Yearbook. Data from 1988 is available in the SIPRI military expenditure database on-line. SIPRI provides the only long-term, historically consistent series of military expenditure data with global coverage available today.

Learn more about SIPRI's military expenditures project

 

Defining military expenditure

There is no generally agreed definition of military expenditure worldwide. SIPRI seeks to include in its definition of military expenditure all costs incurred as a result of current military activities. The guideline definition used by SIPRI includes expenditure on the following actors and activities: (a) the armed forces, including peacekeeping forces; (b) defence ministries and other government agencies engaged in defence projects; (c) paramilitary forces, when judged to be trained and equipped for military operations; and (d) military space activities. It includes all current and capital expenditure on: (a) military and civil personnel, including retirement pensions of military personnel and social services for personnel; (b) operations and maintenance; (c) procurement; (d) military research and development; and (e) military aid (in the military expenditure of the donor country). It does not include civil defence and current expenditure for past military activities, such as for veterans' benefits, demobilization, conversion and weapon destruction.

Other organizations and countries employ varying definitions of military expenditure. Media reports on military expenditure, including in specialist publications, tend to report simply the defence budget of the country in question, although many countries have significant military expenditure in other budget lines. (Sometimes, a defence budget may also include items not included in the SIPRI definition, such as demobilization costs). The International Monetary Fund's Government Financial Statistics Yearbook (GFSY) collects expenditure data according to a functional classification; functional classifications typically place military pensions within the social security function, military healthcare within the health function, etc. Many countries likewise report military expenditure according to a functional definition.

The NATO definition of military expenditure is similar to the SIPRI definition; however since 2004 NATO has changed its definition so as to exclude expenditure on paramilitary forces (even those with a national defence function in times of war) if they are not "realistically deployable".

Why measure military expenditure?

Military expenditure information is used by a wide variety of users, including governments, diplomats, academic researchers and students, non-governmental organizations, international organizations such as the World Bank and IMF, journalists, and interested members of the general public. Military expenditure data are for a variety of purposes, including;

  • To assess the economic burden of a country's military forces on their economy.

  • To assess a governments priorities, possibly by comparing spending on the military with spending on other sectors such as health and education, and changes in their relative levels over time.

  • To assess a country's orientation as relatively peaceful or 'militaristic' (although one should be cautious in such an assessment, as this also depends on a country's security situation), or as a measure of how they view the various security threats and challenges they may face. Rapid increases in military expenditure over a short period of time may for example be a warning sign of possible internal or external conflict, although the connection is far from direct.

  • To give a rough indication of the relative level of military capability or power of different countries – such a use is rather problematic, as there is no direct relationship between military expenditure – an input measure – and military capability or power, which are output measures.

  • To conduct statistical research relating military expenditure across countries and/or over time to other economic, political and security variables. Such research may include:

  1. The impact of military expenditure on economic growth and development, or on other economic variables such as international debt or corruption.
  2. The existence or otherwise of 'trade-offs' between spending on the military and other areas such as health and education.
  3. The determinants of military expenditure, such as a country's economic wealth, armed conflict, political systems, and the military expenditure of neighbours and rivals.
  4. The effect of military expenditure (along with other variables) on the risk of armed conflict.

 

SIPRI regards military expenditure as a measure of the economic resources devoted to the military. SIPRI presents military expenditure data for each country in several forms: first, in current-price, local currency terms, as this represents the primary raw data from which all others are calculated. Secondly, in constant price dollar terms. Constant prices allow meaningful comparisons of the resources consumed by the military over time, allowing for inflation, while conversion to a common currency allows some measure of cross-country comparison, although this is problematic as the market exchange rates used for conversion may not accurately represent the purchasing power of a currency, while alternative purchasing power parity rates are also subject to numerous difficulties. (See below under market exchange rates vs purchasing power parity rates.) Conversion to a common currency also allows military expenditure to be aggregated globally or regionally, to gain a sense of the total volume of resources devoted to the military worldwide. Thirdly, in current price dollar terms, with local currency figures converted at the exchange rate for that year. Fourthly, SIPRI reports military expenditure as a proportion of each country's GDP (based on figures for each in current local currency). This figure, the 'military burden' is the most direct measure of the economic burden of the military sector. It may also give an indication of the degree of 'militarisation' of a country, although this should be treated with caution. In addition, SIPRI publishes data for military expenditure per capita and, where data for the latter is available, military expenditure as a percentage of government expenditure, as an indication of the relative priority given to the military in government budgeting decisions.

Conversion of data into constant US dollars

SIPRI places most emphasis on ensuring that its military expenditure series are consistent over time for each country. While comparability between countries is sought as far as possible, this is given lower priority, as consistency over time is necessary to be able to assess trends in spending, and as the variations in reporting data by different countries is so great as to render full cross-country comparability unachievable. Constant-price dollar conversions are of greatest use for comparing trends in military expenditure data over time, for a given country, using these consistent series. To prodce constant dollar figures, each current price local currency series is first converted into constant price local currency for the chosen base year, (currently 2014), and then converted into US$ at the market exchange rate for the base year. For example, suppose that prices (measured by the CPI) in a particular country had risen by 20% between 2005 and 2014. Then to convert the 2005 figure to constant dollars, first we would add 20% to obtain a constant (2014) local currency price, then divide this figure by the dollar exchange rate in 2014 for that country's currency.

(For countries following a fiscal year other than the calendar year, current local price data for the fiscal year is first converted into calendar year data by assuming a constant rate of expenditure through each year, before conversion to constant dollars is carried out. An exception is the USA for which the original fiscal year data is used directly).

This ensures that we have a meaningful comparison between this country's military expenditure in different years, taking account of inflation - we have consistency over time.

However, if we want to compare, say, this country's 2005 military expenditure with that of a neighbour for example, the comparison is distorted by the fact that we are converting at 2014 exchange rates - which may not have changed in the same way as relative prices between 2005 and 2014. If we wanted to properly compare two countries' expenditure in 2001, we should convert the figures at the 2005 exchange rate. Therefore, for such cross-country comparisons it is better to use the figures expressed in current US dollars, in particular when comparing countries in years far from the base year.

Market exchange rates vs purchasing power parity (PPP) rates

Market exchange rates are determined by the supply and demand of currencies used in international transactions. However, the prices of many goods and services on domestic markets are determined in partial or complete isolation from the rest of the world. Therefore, the MERs do not always accurately reflect differences in price levels between countries.

An alternative is to use purchasing power parity (PPP) conversion factors (or PPP exchange rates). The PPP dollar rate of a country's currency is defined by the World Bank as 'the number of units of a country's currency required to buy the same amount of goods and services in the domestic market as a U.S. dollar would buy in the United States'. >The only PPP rates available for all countries are GDP- based basket of goods and services that are major components of the gross domestic product. Such GDP-based PPP rates are designed to control for differences in price levels and thus to provide a measure of the real purchasing power of the GDP of each country.

Using GDP-based PPP rates instead of MERs for currency conversion results in much higher output and expenditure figures for many developing and transition countries since they have relatively low prices for non-traded goods and services—thus giving the currency higher purchasing power. A unit of local currency therefore has greater purchasing power within a developing country (which is better reflected by using PPP rates) than it has internationally (which is what is reflected by using MERs). For those such developing and transition countries for whom data was available for 2014, the median increase in military expenditure figures from using PPP rates instead of MERs was by a factor a little over 2. Three-quarters of these countries would see their relative figures increase by at least 80 per cent. However, for most of the 'developed' countries in Western Europe, Canada, Australia, New Zealand and Japan, the use of PPP rates on GDP and military expenditure figures leads to a fall in these totals relative to the USA, by a median amount of 10 per cent. For countries in Central Europe and East Asia that have more recently entered the ranks of rich nations, the picture is somewhere inbetwen. However, the reliability of such PPP rates is lower than for MERs, since PPP rates are statistical estimates, calculated on the basis of collected price data for a basket of goods and services for benchmark years. Between benchmark years, the PPP rates are extrapolated forward using ratios of prices indexes, either GDP deflators or consumer price indexes. Like all statistical estimates they are subject to a margin of error.

Furthermore, GDP-based PPP rates are of limited relevance for the conversion of military expenditure data into US dollars. Such PPP rates are designed to reflect the purchasing power for goods and services that are representative of spending patterns in each country, that is, primarily for civilian goods and services. Military expenditure is used to purchase a number of goods and services which are not typical of national consumption patterns. For example, the price of conscripts can be assumed to be lower than the price of a typical basket of goods and services, while the prices of advanced weapon systems and of their maintenance and repair services can be assumed to be much higher. The extent to which this data reflects the amount of military goods and services that the military budget can buy is not known. Due to these uncertainties, SIPRI uses market exchange rates to convert military expenditure data into US dollars, despite their limitations.

Reliability of military expenditure data

The great majority of countries nowadays make available at least basic military budget information, in many cases over the internet as well as in printed official documents. There are a few countries in the SIPRI database that at present make no data available at all: for the most recent years these are Cuba, Equatorial Guinea, Eritrea, Guyana, Myanmar, Turkmenistan and Uzbekistan. Also no data is available for Somalia due to the lack of a functioning central government.

However, even where military expenditure data is published by national governments, this data may be subject to a number of problems which may limit international comparability of data and a proper understanding of the economic burden of the military on the country.

First of all there is the problem of different definitions of military expenditure in different countries, as discussed above. While SIPRI always seeks data as close as possible to the SIPRI definition, including by finding additional sources of data to the main published defence budget where possible, this is not always available. Secondly, there is the problem of currency conversion, as discussed above.

In addition to these there are numerous issues relating to the reliability, transparency and comprehensiveness of military expenditure data. These issues were explored in a number of case studies conducted by SIPRI of African countries (see Budgeting for the military sector in Africa), but many of the issues discussed there also apply to many other countries.

Reliability: In some countries, especially poorer countries with limited state capacity, there may be weak systems for financial monitoring and control in the military sector and elsewhere. Actual levels of expenditure may be incompletely recorded, or actively falsified due to corruption or otherwise. Some governments may also seek to disguise the true level of expenditure, for example for the benefit of donor countries and institutions. Poor financial discipline may allow ministries or armed services to overspend their budget without sanction. In a number of cases, only budgeted expenditure figures for the military may be available, rather than actual expenditure, which may be substantially different.

Transparency: Many countries provide only limited information on military expenditure, such as just a headline defence budget figure. This makes it hard to know just what is or is not included in military expenditure figures, whether definitions have changed over time, whether figures are for actual or budgeted expenditure, and so forth. Lack of transparency and detail may also call into question the reliability of the data provided.

Comprehensiveness: In many countries, published military expenditure figures systematically exclude significant items of military expenditure. In some cases this is due to a difference of definition, for example the exclusion of military pensions (for which figures may or may not be available elsewhere). In other cases, military expenditure may be funded from a number of extra-budgetary or off-budget sources. Many countries exclude expenditure on arms imports from their military expenditure figures for example. (This is the case in China for example, the world's second-largest military spender). Extra-budgetary military expenditure is spending financed from other lines within the overall state budget. In Russia for example, some spending on military research and development is financed through the  budget for science and technology, with precise figures for how much of this is military-related unavailable. Off-budget spending is sources of revenue for the military outside the regular state budget. Frequently, arms imports and sometimes other military spending is financed from dedicated accounts for natural resource revenues. Chile for example has a dedicated fund for arms imports funded by 10% of the annual revenues of the state copper company, CODELCO (a rare case where the amount of the off-budget revenue for the military is publicly available). Since 2011, successive governments have sought to replace this off-budget funding stream with a more regular and transparent means of funding military acquisitions, but at the time of writing this process has not yet reached a conclusion. Another common source of off-budgetary revenue is military-run business activities, for example in Indonesia.

Wherever possible, SIPRI seeks to find information on extra-budgetary and off- budgetary sources of military spending, or make estimates where precise figures are not available. In the cases of Russia and China, for example, SIPRI makes annual estimates based on methodologies developed by experts on military spending in these countries. However in many cases the missing expenditure is not available in any public source, and is not susceptible to a reasonable estimate.

SIPRI documents as far as possible known omissions and uncertainties in military expenditure data for each country in the footnotes to the military expenditure tables in the SIPRI Yearbook. Further information on issues relating to military expenditure data for individual countries is available on request.

Military expenditure and military capability

While there may be other political or economic motivations, the primary reason countries carry out military expenditure is to acquire military capability of one sort or other. However, extreme caution should be exercised in drawing a link between a country's level of military expenditure and their degree of military power or military capability, as there are many other factors that contribute to military capability, and many intervening factors affecting the degree to which military expenditure succeeds in buying military capability.

Firstly, it should be recognized that military expenditure is a flow measure, that is a measure of current resources devoted to renewing, replacing and expanding military capability. It therefore does not measure the acquired stock of capabilities represented both by previous stocks of equipment, and by accumulated knowledge, experience, infrastructure, organization and doctrines (or lack thereof) within the military establishment. For example, when Russian military expenditure plummeted following the collapse of the Soviet Union in 1991, they retained the Soviet Union's nuclear arsenal, and much of their stocks of conventional weapons. Of course as such equipment has aged this may well have led to a commensurate drop in Russia's military capability.

Secondly, the value of military expenditure in creating military capability will vary enormously from country to country. An important factor will be whether the mix of military expenditure between, for example, personnel and equipment expenditure, is appropriate for the types of military task desired by the country. Many countries, for example, have sought to reduce the size of their armed forces since the end of the Cold War, seeking to create a smaller, but better trained and equipped force suitable for engaging in modern armed conflicts. Conversely, if a country has high levels of military spending, but most of this is going towards maintaining an excessively large army, this spending may not translate into much meaningful military capability. Another factor will be the efficiency of military expenditure; this may be adversely affected by corruption, for example, by poor management and organization of forces, or by poor planning and execution of equipment projects. A further factor is a country's technological absorption capability – large sums of money spent on major high-tech equipment may be of little value if a country lacks the trained personnel, military organization and doctrine to effectively use the equipment.

Thirdly, a country's military capability will depend also on factors which may be hard to measure in financial terms, such as morale, military preparedness, combat experience, doctrine and organization, etc. Even more so, a country's military power – its ability to use its military capability to achieve desired political goals – will depend on a whole range of other political, geographical and economic factors, such as the overall economic and industrial strength of a country, the size of a country in terms of borders and coastlines to be defended, the terrain in which armed forces may be expected to operate, the quality of communications between different areas of operation, the strength of their potential adversaries and alliances with other countries, a country's position within the international community, and many more.

Therefore, while one could be fairly confident that a country with annual military expenditure of $50 billion would almost certainly have considerably more military capability than one with annual expenditure of $5 billion. However, beyond these very broad and clear comparisons, attempts to draw conclusions about a country's level of military capability from its level of military expenditure should be regarded with considerable skepticism.   


Notes:

World Bank, World Development Indicators 2007 (World Bank: Washington, DC, 2007), p. 245.