The cost of the global arms race
defence spending would boost the economy. “We can reap a genuine peace dividend this year and then year after year, in the form of permanently reduced defence budgets," he declared in 1992. The world took note.
America went from shelling out 6% of its GDP on defence in 1989 to roughly 3% in ten years (see chart 1). Then came the 9/11 attacks and conflicts in Afghanistan and Iraq. Now with Russia’s invasion of Ukraine, talk of war between America and China over Taiwan, and tensions concerning Iran’s nuclear ambitions, countries are tooling up as never before in this century.
Last year defence spending worldwide increased by nearly 4% in real terms to over $2trn, according to the Stockholm International Peace Research Institute, a think-tank (see chart 2). The share prices of defence firms are performing better than the overall stockmarket (see chart 3). Many NATO allies, notably Germany, plan to meet or exceed spending of 2% of GDP on defence—the alliance’s target.
Other countries are planning to splurge, too. Japan plans to raise defence outlays by two-thirds through to 2027, turning it into the world’s third-largest spender. We estimate that total new defence commitments and forecast spending increases, if implemented, will generate over $200bn in extra defence spending globally each year.
It could be a lot more. Imagine that countries which currently spend less than 2% of GDP per year meet that level and that the remainder increase spending by half a percentage point of GDP. Global defence outlays would rise by close to $700bn a year.
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