Defence Economic Outlook 2016

This report is the first in a biennial series called Defence Economic Outlook (DEO) which is carried out through the project Defence Economic Studies at the request of the Swedish Ministry of Defence. Each DEO report will contain an overview of global military expenditure as well as a special topic. This year's topic is the driving forces behind military expenditure by the countries around the Baltic Sea. Globally, Western countries have decreased their military spending over the past decade while several countries in other regions, especially emerging economies, have increased theirs. The US remains the world's foremost military power and largest military spender, but countries such as China and Russia have steadily been closing the gap. This change has not been nearly enough to shift the global power balance, but it has changed regional security dynamics. Focusing on the Baltic Sea region, we conduct an econometric analysis, drawing on defence economic theory. We investigate whether the Russian military buildup has affected the other countries in the region. Our findings suggest that increases in the rate of change in Russian military spending and Russian military expenditure as a share of gross domestic product help to explain the increases in military expenditure by the other countries around the Baltic Sea. Economic growth and population change can also help to explain patterns of military spending in the region. The results also suggest that Baltic Sea countries other than Russia to a certain extent rely on each other for security. While interpreting the causality of these findings with caution, they are nonetheless statistically significant and can contribute to deepen our understanding of military spending in the Baltic Sea region.