Download A focus on military spending could be appropriate, however, in a

notes on the issues in using military spending as an indicator of the quality of
governance
Nick Manning
Steve Knack
January 2000
These notes were prepared by Nick Manning and Steve Knack within the World Bank as
a pointer to some of the key considerations in this complex field. They have no official
standing within the Bank and do not reflect the views of the World Bank or its Executive
Directors.
“Good governance” implies accountability: excessive military spending is arguably a
common manifestation of non-accountable government. Can we identify a measure of
“excessive” military spending that would be useful as a measure of the quality of
governance?
Levels of military spending are inappropriate as measures of the quality of governance,
because:
 military expenditures across countries are strongly influenced by other factors
 expenditure classified as military spending often differs from country to country,
making cross-country comparisons problematic
A more conceptually appealing approach is to measure differences across countries in the
fraction of military spending for which the government is not held accountable.
Various studies have highlighted the other factors influencing military spending:
 Landau’s World Bank study of military expenditures concluded that external threats
were a key determinant of military spending.
 There are huge economies of scale in defense, so one would expect military
expenditures (per capita, or as a share of GDP) to be smaller in larger countries other
things equal. Consider several examples of mutually-hostile neighbors which differ
dramatically in GDP and/or population: Eritrea and Ethiopia, North and South Korea,
Taiwan and China. Differences in military spending (per capita or as a share of GDP)
within each of these pairs of countries has little if anything to do with differences in
the quality of governance.
 Within alliances, smaller countries tend to "free ride," spending less than larger
countries even as a fraction of GDP (see Olson and Zeckhauser, Review of
Economics and Statistics, 1971). This pattern is the result of individual countries
within the alliance responding optimally to incentives and has nothing to do with the
quality of governance.
 Geography matters: Island or mountainous or remote countries are easier to defend
and can spend less.
For levels of military spending to be a useful measure of the quality of governance across
countries, one would at a minimum have to make adjustments in the raw data for these
other determinants of spending. Even then, it is not clear what the operational
implications would be for donors. Aid recipients with already “excessive” levels of
military spending are not necessarily more likely than other recipients to divert aid funds
for further increases in military spending.
A measure of the extent to which governments are not held accountable for their military
spending would be more useful. Military spending in some countries meets certain
auditing standards, but does not in other countries. This approach is reflected in U.S
legislation effective in September 1999, instructing U.S. representative in IFI’s to oppose
aid for countries not meeting certain minimal auditing standards Accordingly, a possible
indicator of the quality of governance is the degree to which countries meet these
auditing standards.
Most or all of actual military expenditures shows up in the government budget in some
countries, but in others sizeable fractions of military spending are either hidden in other
expenditure categories or are off budget entirely. One can reasonably conclude that
where larger fractions of military spending are hidden, that governments are less
accountable to taxpayers as well as to donors, and that aid funds are more likely to be
diverted to military purposes. Thus, budgeted military expenditures as a fraction of
actual expenditures could be a useful indicator of the quality of governance.
These proposed measures – conformity to auditing standards, and the ratio of budgeted to
actual expenditure—are not subject to the objections listed above to using levels of
military spending as an indicator of the quality of governance. In practice, the
problematic nature of measuring excessive military expenditure is shown by the diverse
approaches of major donors and IFIs:
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Canada's strategy document recognizes "the difficulty of measuring 'excessive'
military spending."
Denmark's Ministry of Foreign Affairs has defined "good governance" to include the
"reduction of excessive military expenditure" and reserves the right to reduce aid "if
countries persist in maintaining military expenditure at an unnecessarily high level."
But Denmark "avoids mechanistic approaches" to determining what is excessive,
evaluating each case individually, and using qualitative as well as quantitative
information. Denmark views "improvements in data transparency and accountability"
as ways to reduce excessive spending.
Finland's Foreign Affairs Ministry is concerned that aid funds do not get diverted to
military spending, but "has no specific guidelines on military expenditure".
Germany's Ministry of Cooperation and Development has a standardized
methodology for evaluating excessive military spending. They consider qualitative as
well as quantitative information, including motives for arms procurement, the
political role of the armed forces, relations with neighbors, etc. It offers assistance in
improving "transparency and accountability in the defence budget."
The G-7 regularly issues communiques denouncing "excessive" military spending by
poor nations, but never defines excessive.
IMF "guidelines to staff on assessing military spending eschew reliance on a single
numerical indicator for military spending."
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OECD: the PDGG working group acknowledged the issue of developing a definition
of "excessive."
Sweden: SIDA wants to avoid supporting arms expenditures, but "is concerned about
the lack of reliability in available information on military spending."
UK: The DFID "considers military spending as a share of GDP and the state budget
and in comparison with regional and developing country norms." It appears to be in
the forefront of efforts to improve accountability and transparency in military
spending.
US: :Legislation requires taking military spending into account in aid allocations.
Legislation in 1994 required US officers in IFI's to take into account the provision of
complete and accurate data on military spending, "accountable governance" including
the level of military involvement in the economy, and reductions in "excessive"
military spending.