Weekly Business Insights from Top Ten Business Magazines | Week 298 | Shaping | 1

Extractive summaries of and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Week 298 | May 26 – June 1, 2023.

The cost of the global arms race

The Economist | May 23, 2023 

Listen to the Extractive Summary of the Article

Last year defence spending worldwide increased by nearly 4% in real terms to over $2trn. The share prices of defence firms are performing better than the overall stockmarket. 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.  The Economist estimates 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.

Certain fears may be misplaced.  For example, barring a hot war between big powers, global defence spending is unlikely to grow above the low single digits of global GDP—meaning that its impact on global aggregate demand, and thus inflation, will be similarly small.  Spending can remain historically low, in large part, because defence is more efficient than it used to be. Today a country can spend relatively modestly to acquire fearsome capabilities. As such, defence spending tends to fall relative to GDP, particularly in peacetime.  Defence could continue to get better and cheaper in relative terms because of the changing nature of what we called the “military-industrial complex”. And a defence-tech ecosystem has sprung up not only in America but also in other parts of the world.  The fiscal consequences of the new defence boom may be modest if the industry becomes more efficient. 

What of the impact on growth? Many historians argue that defence spending is a drain on the rest of the economy. Keeping a country secure has great economic value. Forced limits on military spending in postwar Japan and West Germany, by contrast, coincided with huge productivity improvements in both countries.  This is only a partial story, however. Countries such as Israel and South Korea combine vibrant economies with big defence sectors.  The Economist research indicates that more guns need not mean less butter.  More defence-related r&d could boost wider innovation. And more investment in defence capabilities could also have positive spillover effects on the rest of the economy.  One way or another, a new era of rearmament beckons.

3 key takeaways from the article

1. The Economist estimates 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.
2. Defence could continue to get better and cheaper in relative terms because of the changing nature of what we called the “military-industrial complex”. And a defence-tech ecosystem has sprung up not only in America but also in other parts of the world.  The fiscal consequences of the new defence boom may be modest if the industry becomes more efficient. 
3. What of the impact on growth? The Economist research indicates that more guns need not mean less butter.  More defence-related R&D could boost wider innovation. And more investment in defence capabilities could also have positive spillover effects on the rest of the economy.  One way or another, a new era of rearmament beckons.

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Topics: Defence, Global Economy, Productivity