Military Spending Cuts and the Global Economy

The end of the Cold War presents the global community with the opportunity to reduce the arnount of resources allocated to defense expenditures. This chapter considers the quantitative implications of plausible cutbacks in defense expenditures in the industrial economies over the next two decades. A reallocation of resources away from the defense industries in many economics will inevitably lead to reduced economic activity in the medium term because the resources released from defense-related industries cannot be automatically absorbed into private production. Nonetheless, in the short run there can be gains to credibly announced cutbacks in defense, and the medium-term costs can be reduced as long as the savings are used to reduce government fiscal deficits. In the longer run it is estimated that the reallocation of resources for moderate cuts in military spending can raise global GDP by around 0.4% per year forever. The asymmetry between countries that lose (those that cut most) and those that gain, suggests a payoff to international cooperation and burden-sharing during the adjustment process. This chapter also considers the problem of the movement of weapons into developing countries as a result of the reduction in defense spending in the industrial economies. It is argued that a system based on economic incentives compatible with raising regional security is necessary to prevent future regional conflicts.