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The Boom Economy

Why 2012 is a great year to be in the arms business.

In what seems an odd juxtaposition, global military spending is slowing down while the global trade in weapons is on the rise.

The data are clear about these trends. For the first time in 14 years, global military spending did not increase last year, part of an overall slowdown in global military spending that began in 2008. But, on the other hand, the Stockholm International Peace Research Institute (SIPRI) reports that worldwide arms transfers -- that is, state-to-state shipments of major conventional weapons -- increased by 24 percent when comparing the five-year period between 2002 and 2006 to the more recent 2007-2011 period. In 2011 alone, according to the Congressional Research Service (CRS), the value of arms transfers agreements (as opposed to actual deliveries) with developing countries more than doubled over the same figure for 2010, reaching more than $71 billion; actual deliveries to developed nations in 2011 reached their highest point since 2004 at $28 billion.

So what is happening?

Untangling the trends in military spending is slightly more straightforward: most of the world's major military spenders -- and in particular the United States and several of its key allies -- are seeing a significant squeeze on their military budgets (unlike in major developing world countries), with cutbacks coming as the wars in Iraq and Afghanistan wind down and economic austerity measures start to bite. Ten of the world's top 15 military spenders showed either decreased or flat military budgets last year. In 2011, these 10 countries accounted for 64 percent of total global military spending, and one of them, the United States, alone accounted for about 41 percent of total global military spending  (meaning U.S. military expenditures were roughly equivalent to that of the next 14 countries combined). When these big spenders experience even small decreases, it has a big impact on the global totals.

It is worth noting that cutbacks brought on by the financial crisis and economic recession do not tell the whole story. In Europe, most military budgets have been more or less stagnant for a decade. Military spending for the European members of NATO was at the same level in constant prices in 2011 as it was in 2003. Between 2002 and 2011, German military spending fell nearly 4 percent, while Italy's shrank by 21 percent. As the financial crisis intensifies in Europe, we should expect military spending on the continent to continue its slowdown.

But why the big increases in the international arms trade even as global military spending shrinks? The answers here are a little more complicated. One of the most important explanations arises from the nature of the global arms trade itself, which is largely a flow from the developed to the developing world. According to CRS, arms transfer agreements with developing nations accounted for just over 72 percent of all arms transfer agreements globally from 2008 to 2011 and reached 84 percent in 2011 alone. SIPRI data, which tracks actual deliveries, finds that the non-Western and developing world easily accounts for the lion's share of arms imports as well: the top 15 arms importers for the 2007-2011 period include India, South Korea, Pakistan, China, Singapore, Algeria, the United Arab Emirates, Saudi Arabia, Turkey, Malaysia, and Venezuela.

As a result, in contrast to the United States and most of its closest allies, the major importers in the developing world have not been as affected by the global economic downturn. Others have economies fuelled by resource exports -- such as Algeria, the UAE, Saudi Arabia, Australia, and Venezuela, allowing for greater spending on military imports.

Another explanation takes us back to the downsized military budgets noted above. Countries at the top of the military spending charts also tend to have some of the largest arms industries. It is more difficult to document direct causation, but it stands to reason that with dwindling procurement budgets and downsized military requirements at home, arms exporters will look more actively to external markets. Some militaries will look to export surplus equipment -- a cheaper alternative to maintaining equipment they do not need.

It is interesting to note that, as the U.S. military budget flattened in 2011, American arms exporters had a banner year with $56 billion in arms transfer agreements with the developing world. This figure represented 79 percent of all arms-transfer agreements in the developing world in 2011, a remarkable jump over the United States' 44 percent share in 2010.

Other big powers also saw big increases in their arms exports in recent years. For example, China, while still a small exporter in comparison to the United States and Russia, nevertheless saw a significant uptick in its arms exports, more than tripling its arms transfers between 2007 and 2011, according to SIPRI data. Russian arms suppliers also saw their exports increase by 43 percent from 2007 to 2011. These countries too appear to be taking advantage of relatively good economic growth and increasing military budgets in parts of the developing world.

Taken together, these trends point to a number of likely developments for the years ahead. The United States' position as the world's leading military spender and arms exporter is unlikely to be significantly challenged in the near-term, though financial and political constraints will place limits on American freedom of military action abroad. As the United States struggles to maintain its influence abroad, diminished procurement budgets at home could prompt increased U.S. arms exports and a renewed emphasis on developing closer military ties and enhancing the capacity of friendly governments -- such as key Gulf states Saudi Arabia, UAE, and Oman -- through such sales.

At the same time, however, the gap in defense spending, weapons development, and military capacity between the United States and its traditional allies -- such as Japan and European countries -- will continue to grow. And this gap is not only a matter of hard military capacities. There is a growing realization in European capitals, as shown by their policy choices and resource allocations, that military solutions are likely to be less and less relevant to addressing future security challenges.

In that light, look for more discussion in Europe of improving intra-European security and the ability of governments and societies to respond to domestic threats and contingencies (often called "societal resilience"); "pooling and sharing" among their militaries; and, to the degree power projection is maintained by some of the larger countries, a focus on lighter and more nimble expeditionary forces. While these moves make sense in the European context, they will frustrate many in the United States who are looking for more robust military capacities and commitments from their transatlantic allies. More likely, however, will be a Europe aiming for "burden-shedding" rather than "burden-sharing" both in budgetary contributions to domestic military- and NATO-related preparedness and regarding long-term, heavy land-based intervention capabilities.

Meanwhile, military capabilities are diffusing even more rapidly to burgeoning regional players. A part of this can be explained simply because they can -- an expanding budgetary pie in those countries with bright economic prospects will mean more resources available for military acquisitions. But it is also true that many of the leading arms importers see themselves in dangerous neighborhoods or as rightful regional leaders, and hence in need of greater military capabilities. 

China's longstanding military modernization program can be measured in part by its booming military expenditures and arms imports. (China increased its military spending by 170 percent between 2002 and 2011 and ranked number one in arms imports for much of the past decade.) It will be important to follow China's recent return to the top 10 arms exporters to see if it is a short-term phenomenon or a longer-term show of growing military clout.

Other countries such as Saudi Arabia (which increased its military budget by 90 percent between 2002 and 2011) and India (66 percent over that period) are already making major, long-term investments in their military capabilities in an effort to firmly establish themselves as regional leaders. Saudi Arabia easily ranked number one in 2011 amongst developing nations with some $34 billion in arms transfer agreements and is aiming to make its military the powerhouse on the Gulf. India, with $7 billion in such agreements was number two in 2011, but it has put forward plans to spend an estimated $150 billion over the decade on modernizing its armed forces. The United States will seek to play a big role -- diplomatically, militarily, and as a supplier -- in those Saudi and Indian aspirations.

Increased military spending and arms acquisitions do not always translate neatly to increased military and political power or even greater security, even if a given country's leadership believes it needs to leverage budgetary resources toward those ends. But as these and other countries along the southern and eastern rim of Eurasia continue over time to spend heavily on their militaries and weapons imports, regional power dynamics, both real and perceived, will drive security dilemmas, defense competitions, and increased military expenditures and acquisitions in the Gulf, in South Asia, and around China's maritime periphery.

So, while military budgets of the United States and its allies will continue their decline, that won't be true of the rest of the world.

BILAL QABALAN/AFP/Getty Images

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