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Peace Economics, Peace Science and Public Policy

Editor-in-Chief: Caruso, Raul

Ed. by Bove, Vincenzo / Kibris, Arzu / Sekeris, Petros

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Volume 19, Issue 3

Issues

Volume 17 (2011)

Volume 4 (1996)

Volume 3 (1995)

Volume 2 (1994)

Volume 1 (1993)

On Defence Expenditure Reduction: Balancing Between Austerity and Security in Greece

Andreas S. Andreou / George A. Zombanakis / Petros M. Migiakis
Published Online: 2013-10-25 | DOI: https://doi.org/10.1515/peps-2013-0030

Abstract

This paper aims at contributing a literature update by assessing the impact of policies focusing on defence-procurement spending on the growth rate of the Greek economy with special reference to the recent crisis environment using artificial neural networks. The main conclusion drawn in the case of the Greek economy in general and during austerity times in particular, is that defence-procurement policy is considerably inflexible concerning both increases and reductions. In fact any further decreases will have a direct impact on the security of the country given the dramatic reduction of the defence budget and the arms race against Turkey. By contrast, any increases will only burden the balance of payments without adding to the GDP, once the bulk of the defence equipment is imported due to the inefficiency of the domestic defence industrial base. A compromise, therefore, between security and austerity would call for a gradual shift towards domestic sources procurement, assuming, of course, considerable upgrading of the Hellenic defence industrial base.

Keywords: defence expenditure; economic growth; debt

JEL codes: H56; H63

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About the article

Corresponding author: George A. Zombanakis, Bank of Greece – Economic Research Department, 21, Panepistimiou Street, Athens 102 50, Greece, E-mail:


Published Online: 2013-10-25

Published in Print: 2013-12-01


The present paper hopes to contribute to the recent extensive debate appearing in the Greek and international daily press concerning suggestions to close down some of the country’s defence industries aiming at the reduction of defence spending.

SIPRI (2010 and 2011).

National Accounts Statistics of Greece and SIPRI (2010 and 2011). It seems, however, that the situation is even tighter according to the Defence Minister’s statement in the Parliament, at the end of 2009, who declared a reduction of the equipment procurement payments to reach 0.8% of the GDP for 2010, 0.3% of the GDP for 2011 and a bare 0.1% of the GDP for 2012!

According to Frost and Sullivan Defence and Security Reports for Greece (Frost and Sullivan 2009) the percentage of contribution of local contractors to the armament programs appears to be higher than what it actually is because it reflects the value of contracts undertaken by Greek firms and not their exact production, i.e., their value added in each of those contracts. Once this dimension is taken into account the real contribution of the Greek defence industry is not estimated to exceed 10% of real productive contribution. This inadequacy promotes business activity by the local agents of the various foreign suppliers with the value of the so called “military offsets” in some cases even exceeding 100% of that representing the initial agreement. It appears, however, that the use of such offsets is far from being fruitful for the Greek side, given that the legal framework underlying their application is full of “gray areas” leaving ample room for personal interpretation (ELIAMEP 2007).

The predominantly fiscal nature of the current Greek crisis pointing to its excessive twin deficits has inevitably raised the question of its balance-of-payments sustainability as treated among others by Zombanakis, Stylianou, and Andreou (2009) and Brissimis et al. (2010).

There have been cases, however, in which balance of payments entries have failed to reflect major procurement programmes on the import side. In fact, a considerable number of purchases particular during the beginning of the time period under study, refer either to second-hand material provided via foreign aid programmes at a negligible cost (Foreign Military Sales, Economic Support Funds, Military Assistance Programmes, International Military Education Programmes), or via bilateral long-run procurement contracts. In some of these cases transactions fail to reflect the corresponding balance of payments burden mainly due to the disagreement concerning the extent to which transactions must be recorded on an accrual or on a payments basis.

As Brauer (2003) puts it, “Greece’s arms industry still is primarily state-owned, highly inefficient and underutilises its capacity; only very recently are a number of these firms being privatised. In contrast, the Turkish arms industry began privatisation and foreign joint-venture participation in 1983 (rather than mere licence production)”. “Both countries’ arms industries are diversified into air, land and sea transportation systems, ordnance and information technology and associated electronics, but Turkey’s arms industry appears substantially more diverse than that of Greece.”

According to Sezgin (1997), “the defence industry ……… will be an important part of the Turkish industrial sector and productivity and export potential will increase in the future. ………. empirical evidence showed that Turkish defence spending …….. helps economic growth. There is a positive and significant relation between military size and economic growth”.

Indeed, there are sources like Sala–i-Martin (1994) arguing that the impact of government economic policies jointly, rather than “individually and separately, is the phenomenon that really matters’ for long-term economic growth. This description seems to reflect the Greek defence procurement policy to a very large extent. In fact, as earlier indicated, the inefficiency of the government policies and the emphasis placed on importing the bulk of the country’s defence equipment leave little room for the domestic defence industrial base for a positive contribution to the EMPAE requirements and consequently to the country’s GDP growth, a fact also supported by empirical evidence (Dritsakis 2004; Dunne, Nikolaidou, and Vougas 2001).


Citation Information: Peace Economics, Peace Science and Public Policy, Volume 19, Issue 3, Pages 437–458, ISSN (Online) 1554-8597, ISSN (Print) 1079-2457, DOI: https://doi.org/10.1515/peps-2013-0030.

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