4 October 2022

Better methods of comparing military spending are needed

An FOI study investigates how the method for comparing international military spending can be further developed. Previous studies show that the choice of method for converting different currencies has substantial impact on the final result. The report was produced on behalf of the Ministry of Defence.

A slate on which it says "Price" and "Value" på.

The purpose of this report is to show the problems that arise in using exchange rates to compare military spending. Image from Shutterstock.

FOI regularly produces Defence Economic Outlook that compare defence spending between different countries.

“The special thing about this study is that it is a methodological review,” says analyst Maria Ädel, one of the authors behind the report.

“The purpose of this report is to show the problems that arise in using exchange rates to compare military spending. We want to improve the methods used to actually be able to show how much a country gets out of each purse,” she says.

Traditionally, military spending is compared by converting exchange rates and using purchasing power parities for GDP, which is an economic measure developed by the World Bank to be able to compare the price level of goods and services between different countries.

“One problem with using exchange rates is partly that they fluctuate over time and partly that this doesn’t say anything about how much the money is worth in each country,” says Maria Ädel.

The reason why exchange rates still have to be used is because the actual prices for such things as defence materiel, salaries and infrastructure often are confidential.

The report’s other contribution to highlighting methodological challenges is that the authors have reclassified Swedish military expenditures so that they are comparable to the 2019 figures for two NATO countries, the United Kingdom and Poland.

The authors perused all the appropriations for Swedish defence in the annual national report and then distributed the costs between four different categories; personnel, materiel, infrastructure and miscellaneous, which includes research and development among other things.

“We decided on NATO’s model, since it includes these four categories, in order to be able to compare expenditures. Swedish expenditures are divided into quite a number of different appropriations that would fall quite nicely within these four more general categories. It took extensive matching work to get a common nomenclature, or list of terms,” says Maria Ädel.

Finally, the authors wanted to try to construct a defense-specific purchasing power parity measure, a so-called PPP measure. Purchasing power parity ratios, PPPs, are conversion rates for different currencies that make it possible to compare values for different countries in units with the same purchasing power. They simply wanted to investigate whether the World Bank’s method of calculating GDP could be used to derive defence purchasing power.

“It is important to have access to real figures or be as close to reality as possible; for example, we used salaries for public sector personnel, and, for materiel, exchange rates based on an annual average taken from the Riksbank. Finally, we compared the countries’ expenditures per these categories with the respective PPP ratio for the relevant category,” says Maria Ädel.

When asked what the report’s most important contribution is to the discussion of how international military expenditure should be compared, Maria Ädel replied that it is the review of different methods.

“You have to be aware of the shortcomings you’re dealing with when comparing military expenditure between different countries. We haven’t managed to produce a perfect defense-specific purchasing power parity measure, or PPP measure, but hopefully this report will lead to further discussion,” she said.