Trading Arms and the Demand for Military Expenditures: Empirical Explorations Using New SIPRI-Data

This paper analyzes the impact of arms imports and exports on national military expenditures. The recent literature on the determinants of military expenditures has mainly focused on countries' external security environments and their regime type. Based on existing theoretical work, we argue that, in addition to these factors, arms trade flows may have an important role to play. First, we show that rising imports of major conventional weapons do not necessarily translate into higher defense spending. Rather, this relationship depends on political, economic, and contract conditions that influence different choices of financing imports. Therefore, the effect should be very heterogenous. Second, exports may have both a negative or a positive impact depending on regime type and the perceived impact of exports on national security. We empirically test these expectations for 156 countries from 1949 to 2013 using arms trade and new military expenditure data provided by SIPRI. Employing static and dynamic panel data models, we find that the effect of arms imports on defense budgets does indeed differ between regions and time periods. With respect to exports, there is evidence of a strategic substitution effect between military expenditures and arms exports in democratic countries: increases in arms exports are followed by a reduction in military expenditures. For non-democratic societies on the other hand, arms exports do not tend to be associated with lower military spending.