National Defence Budgets: The Importance of External Threats
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In this thesis I study and provide insight into how national defence budgets are determined. This is accomplished through the use of both theoretical modeling and empirical analysis. A main theme running through the thesis is that a primary determinant of domestic levels of defence spending is the defence spending level of other nations. By conditioning on these global interactions in a structured way, I am able to provide meaningful estimates of the impact of various factors on national defence spending. In Chapter 2, I examine the costs and benefits of maintaining domestic arms manufacturers during peace time. A model is developed that examines under which circumstances a country would wish to maintain domestic arms industries. The predictions of this model are tested using the historical example of Canada's lack of advanced shipbuilding facilities during World War II. By comparing the performance of corvettes and destroyers during convoy escort, I quantify the superiority of the latter over the former. A counterfactual scenario then examines the savings in terms of ships and lives that could have resulted from having invested in domestic arms industries in peace time. Chapter 3 examines more generally how national defence budgets interact with each other in a spatial econometric framework. By creating a series of weighting matrices that qualitatively represent how countries are likely to interact militarily, I quantify the extent to which a country's relative location impacts its level of defence spending. I find that relative location is a significant determinant of defence spending, and furthermore, I am able to identify regions of both high and low defence spending spillovers. Some countries have large domestic arms industries, whereas others largely import their military hardward. In Chapter 4, I examine, both theoretically and empirically, how this distinction and the resulting arms trade influences defence spending behaviour. I also examine the impact that a base level of security, measured by geographic and socioeconomic factors has on the choice of defence budget. Consistent with the theory, I find that there are significant differences between arms producers and importers in the way they respond to exogenous factors.