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Peace Dividend

The idea that lower defense spending leads to greater economic growth

What is a Peace Dividend?

A peace dividend is a concept that long-term economic benefit(s) can be derived from decreasing defense spending and allocating resources elsewhere. In simpler terms, a peace dividend refers to the idea that money spent less on arms and more to fulfill human needs would spur greater long-term economic growth.

The term was popularized by former U.S. President George H.W. Bush and former U.K. Prime Minister Margaret Thatcher in the wake of the Soviet Union’s dissolution in the early 1990s.

 

Summary

  • A peace dividend is the idea that lower defense spending leads to greater economic growth.
  • In a paper by the IMF, it was outlined that a reduction in military expenditures would adversely impact short-term GDP but result in longer-term GDP growth above the baseline.
  • The term “peace dividend” was popularized by U.S. President George H.W. Bush and U.K. Prime Minister Margaret Thatcher.

 

Understanding a Peace Dividend

The premise behind a peace dividend is that as an economy comes out of a major war/conflict, budget spending for defense is assumed to be partially redirected to social programs. In turn, the redirection of capital to presumably more “efficient means” would spur greater economic activity, paving the way for long-term economic benefits. The idea was referenced in the New York Times in 1992 after the dissolution of the Soviet Union:

“As a peace dividend from the Cold War’s end, a minimum of $30 billion over four years is to be taken from the Pentagon’s research budget and put into advanced work in areas like robotics, smart roads, biotechnology, machine tools, magnetic-levitation trains, fiber-optic communications, and national computer networks.”

 

The IMF Take on a Peace Dividend

A paper published by the International Monetary Fund (IMF) argues that when each and every country reduces military expenditures by 20% over a five-year period, the conclusion is:

 

Over the short-term:

As the government reduces military spending, it could cause a fall in aggregate demand and reduce the growth of gross domestic product (GDP).

 

Over the longer-term:

Lower military spending allows for lower interest rates and the ability of the government to lower taxes. It can induce greater private sector investment, which will increase the rate of growth of the capital stock and potential output.

The anticipation of future disposable income would raise private consumption. As a result, the increase in private sector activity would overcome the initial short-term shortfall of GDP and result in more significant longer-term growth in GDP.

 

The premise behind the IMF paper is that a reduction in military expenditures would negatively impact economic growth in the short term but result in economic growth above the baseline in the medium to long term. It is important to note that the paper did not measure the impact of lowering military expenditures on national security, which is one of the criticisms behind the existence of a peace dividend, discussed below.

 

Criticisms of the Peace Dividend

Although some research papers have pointed to the existence of a peace dividend in real economies, the subject is still highly debated. Criticisms of the existence of a peace dividend include the following:

  • Military spending is required to ensure national security interests. For example, if a major nation decreased its defense spending, it could embolden poorly functioning regimes to become bad actors and cause conflicts, which would eventually result in adverse economic consequences. Spending money on military acts as insurance for global stability, which is difficult to peg a monetary value to.
  • The reallocation of spending from the military to elsewhere may not be efficient. Allocating capital from the military to other programs does not automatically result in marginal benefits for the economy – the programs to which the resources are reallocated may be an inefficient means of capital use. Policymakers may be incentivized to direct spending to areas that personally benefit them but negatively impact other industries, resulting in a net economic loss.
  • Increases in unemployment in the military space may not be offset. It is widely acknowledged that a decrease in military spending would force military contractors to shrink their labor force. It is uncertain whether allocating spending elsewhere would spur employment growth beyond the employment losses from the military labor force.

 

Peace Dividend in the News

On February 27, 2022, Germany announced a plan to prioritize military spending due to Russia’s invasion of Ukraine by increasing its annual defense spending to more than 2% of its GDP. For comparison, before Germany’s announcement, the country’s annual defense spend relative to GDP was below 1.5%. In several major news outlets, this action was referred to as the end of Germany’s “peace dividend.”

 

Additional Resources

Through financial modeling courses, training, and exercises, anyone in the world can become a great analyst. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

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