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World Wide Military Expenditures

As of 01 January 2011 there were 199 independent sovereign countries on planet Earth. The CIA World Factbook provides data on military expenditures for 173 countries [and notes that Iceland ranks 174, with no military expenditure]. This World Factbook entry gives spending on defense programs for the most recent year available as a percent of gross domestic product (GDP); the GDP is calculated on an exchange rate basis, i.e., not in terms of purchasing power parity (PPP). GDP dollar estimates for countries are reported both on an official exchange rate (OER) and a purchasing power parity (PPP) basis. Using the OER GDP figure to calculate the proportion of, say, Chinese defense expenditures in GDP, because that share will be the same as one calculated in local currency units. But the data derived from the PPP method probably provide the best available starting point for comparisons of economic strength.

Except as noted, this table represents the CIA data on spending on defense as a percent of gross domestic product (GDP), multiplied by gross domestic product (GDP) calculated in terms of purchasing power parity (PPP). The CIA budget number for the USA is $573 billion, which does not include the annual emergency war supplemental. For FY2011, the actual total for the USA is $741.2 billion, bringing the defense budget to 5.2% of GDP, rather than 4.1%.

Accurately estimating Chinese military expenditures is a difficult process due to the lack of accounting transparency. The CIA estimates for China of a GDP of $8,818,000,000,000 [on a PPP basis], 4.3% of which is devoted to defense, yield military expenditure of about $380,000,000,000. China's GDP in 2009 was $4.814 trillion on an exchange rate-basis.

Various government and independent calculations for the PLA's expenditures for 2003 - the most recent year for which a significant number of institutions published estimates - ranged from $30.6 billion to $141 billion based on official exchange rates or purchasing power parity (PPP) models. China's declared military budget in 2003 was $22.3 billion at official exchange rates. In 2003 IISS estimated Chinese PPP-based military spending at about $85 billion, while SIPRI's PPP estimate was $140 billion. In 2003 the official budget was RMB 185.3 billion, which was $22.4 billion at current exchange rates. In 2010 IISS estimated Chinese PPP-based military spending at about $114 billion, or 1.88% of GDP. By 2010 the official budget had increased to RMB 532.1 billion, or $77.9 billion at official exchange rates. In Military and Security Developments Involving the People's Republic of China 2010 the US Defense Department estimated that actual Chinese military spending was double this about, over $150 billion on an official exchange rate (OER) basis.

There are three important countries for which CIA does not provide military expenditure data: Serbia, Ethiopia and North Korea. Serbia's current exchange rate GDP is $40.28 billion (2010 est.) according to the US State Department, while the PPP GDP is $78.05 billion, according to the Central Intelligence Agency, a ratio of about 2 : 1. Ethiopia's current exchange rate GDP is $28 billion (2009 est.) according to the London-based International Institute for Strategic Studies (IISS), while the PPP GDP is $77 billion, according to the Central Intelligence Agency, a ratio of 2.75 : 1.

Of late, the London-based International Institute for Strategic Studies (IISS) does not even provide economic data on North Korea, much less an estimate of military spending. The IISS does provide military spending estimates for five other smaller countries not covered by the CIA data: Bahamas, Montenegro, Kosovo, Timor-Leste, and Antigua and Barbuda. These IISS spending estimates are based on current account exchange rates, and so must be converted to PPP values for comparison.

A total of 17 countries have no regular military forces. Saint Lucia and Grenada have Ministries of National Security, but these are police units. For national defense, Saint Vincent relies on the Regional Security System, headquartered in Barbados. Kiribati has no regular military forces, whcih are constitutionally prohibited. Under the 1983 Compact of Free Association, the US has full authority and responsibility for security and defense of the Marshall Islands.

Purchasing power parity (PPP)

Purchasing power parity (PPP) exchange rates are the value of goods and services produced in the country valued at prices prevailing in the United States. This is the measure most economists prefer when looking at per-capita welfare and when comparing living conditions or use of resources across countries. The measure is difficult to compute, as a US dollar value has to be assigned to all goods and services in the country regardless of whether these goods and services have a direct equivalent in the United States (for example, the value of an ox-cart or non-US military equipment); as a result, PPP estimates for some countries are based on a small and sometimes different set of goods and services. In addition, many countries do not formally participate in the World Bank's PPP project that calculates these measures, so the resulting GDP estimates for these countries may lack precision. For many developing countries, PPP-based measures are multiples of the official exchange rate (OER) measure. The difference between the OER- and PPP-denominated values for most of the weathly industrialized countries are generally much smaller.

If countries do not share a common currency, some conversion must be made in order to compare their R&D expenditures. Unfortunately, comparisons of international research and development statistics are hampered by the lack of R&D-specific exchange rates. The only rates consistently compiled and available for a large number of countries over an extended period of time are market exchange rates (MERs) and purchasing power parities (PPPs).

At their best, Market exchange rates [MERs] represent the relative value of currencies for goods and services that are traded across borders; that is, MERs measure a currency's relative international buying power. However, MERs may not accurately reflect the true cost of goods or services that are not traded internationally. In addition, fluctuations in MERs as a result of currency speculation, political events such as wars or boycotts, and official currency intervention, which have little or nothing to do with changes in the relative prices of internationally traded goods, greatly reduce their statistical utility.

PPP exchange rates were developed because of the MER shortcomings. PPPs take into account the cost differences across countries of buying a similar basket of goods and services in numerous expenditure categories, including nontradables. The PPP basket is therefore assumed to be representative of total GDP across countries.

Although the goods and services included in the market basket used to calculate PPP rates differ from the major components of R&D costs (fixed assets as well as wages of scientists, engineers, and support personnel), they still result in a more suitable domestic price converter than one based on foreign trade flows. Exchange rate movements bear little relationship to changes in the cost of domestically performed R&D. The adoption of the euro as the common currency for many European countries provides a useful example: although Germany and Portugal now share a common currency, the real costs of most goods and services are substantially less in Portugal.

PPPs are therefore the preferred international standard for calculating cross-country R&D comparisons wherever possible and are used in all official R&D tabulations of the Organisation of Economic Co-operation and Development (OECD).

Because MERs tend to understate the domestic purchasing power of developing countries' currencies, PPPs can produce substantially larger R&D estimates than MERs do for these countries. For example, China's 2002 R&D expenditures are $16 billion using MERs but are $72 billion using PPPs.

Although PPPs are available for developing countries such as India and China, there are several reasons why they may be less useful for converting R&D expenditures than in more developed countries. It is difficult or impossible to assess the quality of PPPs for some countries, most notably China. Although PPP estimates for OECD countries are quite reliable, PPP estimates for developing countries are often rough approximations. The composition of the "market basket" used to calculate PPPs likely differs substantially between developing and developed countries. The structural differences in the economies of these countries, as well as disparities in income, may result in a market basket of goods and services in a developing country that is quite different from the market basket of a developed country, particularly as far as these baskets relate to the various costs of R&D. R&D performance in developing countries is often concentrated geographically in their most advanced cities and regions in terms of infrastructure and educated workforce. The costs of goods and services in these areas can be substantially greater than for the country as a whole.

Offical Exchange Rates (OER)

The sharp fall in the value of the US dollar between 2003 and 2005 would produce a change in world ranking of military spending. Some of the official budget estimates date from as early as 2002, and substantial fluctuations in international currency exchange rates, and in particular the persistent decline in the value of the dollar relative to other currencies, renders some of these older budget estimates somewhat misleading. Some recent exchange rate estimates are available from CIA.

A nation's budget at offical exchange rates (OER) is the home-currency-denominated annual figure divided by the bilateral average US exchange rate with that country in that year. The measure is simple to compute and gives a precise measure. Many economists prefer this measure when gauging the economic power an economy maintains vis--vis its neighbors, judging that an exchange rate captures the purchasing power a nation enjoys in the international marketplace. Official exchange rates, however, can be artifically fixed and/or subject to manipulation - resulting in claims of the country having an under- or over-valued currency - and are not necessarily the equivalent of a market-determined exchange rate. Moreover, even if the official exchange rate is market-determined, market exchange rates are frequently established by a relatively small set of goods and services (the ones the country trades) and may not capture the value of the larger set of goods the country produces. Furthermore, OER-converted values are not well suited to comparing figures over time, since appreciation/depreciation from one year to the next will make the OER value rise/fall regardless of whether the home-currency-denominated changed.

A continuous drop in the value of the dollar tends to increase inflation in the US both by raising the prices of imported goods and by reducing the competitive pressure on US producers to keep price increases low. As the value of the dollar relative to a foreign currency falls, foreign producers must either raise their prices in dollar terms; find ways to reduce costs (for example, by boosting productivity); or let profits, in terms of their own currency, fall. As the dollar has fallen over the five years from 2002 to 2007, foreign exporters, anxious to avoid losing market share in the United States, have been trying to keep the dollar prices of their goods from increasing too rapidly. Consequently, import prices generally have not increased nearly as much as the dollar has fallen.

The rapid rise in the value of the U.S. dollar between 1995 and 2001 made it very difficult for US exports to remain price competitive during that period. The dollars per Euro from 1997-2003 started at 1.2 in 1997 and fell to between .8 and .9 in 2000. However, between 2002 to 2004 the value of the US dollar dropped sharply. The same timeline holds for the US dollar against the Canadian dollar, the British pound, the Australian dollar, the South African rand and the Swiss franc.

The Federal Reserve's broadest measure of the nominal trade-weighted exchange value of the dollar declined 3 3/4 percent from the beginning of 2006 through early February 2007. Over that period, the dollar appreciated 2 1/4 percent against the yen and 1 1/2 percent against the Canadian dollar, but it depreciated about 9 percent, on net, against the euro, almost 13 percent against sterling, and 4 percent against the Chinese renminbi.

On average, the value of the dollar fell by 2.1 percent against the currencies of the United States' major trading partners in 2006, and as of mid-2007 the Congressional Budget Office [CBO] expected declines of between 2 percent and 3 percent in 2007 and 2008. The US dollar fell to a record low versus the euro on 18 September 2007 after the US Federal Reserve cut its key interest rate by an aggressive half a percentage point to prevent the US economy from weakening further on turmoil in the credit and housing markets. Against the dollar, the euro was 0.7 percent higher to trade at $1.3962, and the traded against the yen at 115.70 yen. The dollar fell nearly 1 percent against the Canadian dollar to trade at 1.0164, a 30-year low.



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