September 8, 2014
Is NATO's 2% of GDP a relevant target?
By James Hasik
Sometimes it’s what you spend, and sometimes it’s where and how you spend it.
With a few announcements of new spending around the NATO Summit, the alliance is a little closer, but only a little, to its “2-20” goals: that every member state will devote 2 percent of its GDP to its military, and 20 percent of that spending to investment. But why those figures? That is, why spend less or more, and on troops or equipment? To know whether these 2-20 numbers are important, we should ask whether there are theoretical bases for demanding them—or any thresholds, for that matter.
In the past I have denigrated the idea that this-or-that country needs to spend a certain percentage of GDP on its military, because the metric is not tied to any scenario, or even a set of notional capabilities. Why is it not higher or lower? The 2 percent figure does seem today a stretch goal for many European countries. At present, only the United States, the United Kingdom, Estonia, and Greece meet the 2 percent threshold. Germany and Canada are particularly laggard, spending under one percent. But that illustrates the question. Canadian Prime Minister Stephen Harper almost scoffed at the target, arguing that a conservative government doesn’t spend money to spend money, but rather, meets its international obligations as economically as it can. By some measures it has: Canadian troops fought as hard as any in Afghanistan, NATO’s only Article 5 campaign to date, and they fought on a budget. Similarly, at the Atlantic Council in June, German Defense Minister Ursula Von Der Leyen argued that “it’s not only a matter of 2 percent of the GDP, but it’s also a question of where you want to spend the money and how you want to spend the money.”
But perhaps percentage of GDP spent is a useful proxy for the degree of militarization of an economy. The Soviet Union was a clear case of over-militarization—too much spending on armaments suppressed Soviet economic potential even beyond what the dead hand of communism could achieve on its own. But too little spending could provide too small an economic base from which to develop military capabilities in a sudden military crisis. We should not, after all, presume that all wars will be 'come-as-you-are' affairs. Spending just to spend may have an offensive ring, but in a counterpoint to frequent attacks on defense ministries’ overhead, it is the 'institutional army' that reconstitutes forces when they’re needed.
That said, the argument must be adjusted for the degree of trade, both imports and exports, in military goods and services. Importing weapons doesn’t build the same military-industrial capacity that exporting weapons does. But domestic production without exports may not build surge capacity, and uneconomical production wastes resources in a way that 'two percent compliance’ obscures. As David Foster of China Lake further reminds me, what constitutes GDP varies from country to country. America’s commercial truck-building industry could make MRAPs on short notice, but Napa Valley has had a lesser role in war-fighting.
Now what about that recommended 20 percent for investment? Byron Callan of Capital Alpha Partners has remarked to me that "some of the most interesting wars occur when two sides show up intending to play different games.” The Russian gambit in Crimea was a spetsnaz affair, but so far, its game in eastern Ukraine has depended heavily on armor and artillery. However, if the other side disproportionately bases its defenses on mobilizable reserves of infantry, then the fraction of peacetime spending devoted to materiel may not reveal its true military power. Finland lies outside NATO, and spends but 1.5 percent of GDP on defense. But the government there so far considers its 230,000 reservists, behind extensive minefields and the country’s dense terrain, and backed by tanks and rocket launchers, more than adequate to ward off a Russian attack. On the other hand, retirements of old systems are important for shifting money into developing new equipment, and for shifting managerial attention into developing new ideas. Expeditionary armed forces are often more capital-intensive than territorial ones, and technological advances demand fresh investments and fresh thinking about them.
Frankly, the 2 percent figure may just be a stake in the ground, which seemed politically palatable when adopted in the 1990s, to rally European NATO to remediate its collective action problem. European countries face broadly similar threats, if in a rough gradient from east to west. Some clustering of spending around 2 percent of GDP would indicate a common level of commitment to common defense. As Scowcroft Center Director Barry Pavel told Defense News, “it’s not going to happen across the entire alliance, but it’s useful for framing incentives for some nations to start to contribute more.” For as Defense Industry Daily commented wryly this morning, if Latvia and Lithuania "are serious about retaining their post-Soviet independence, they need to field more than just light infantry formations.” If they want to continue to engender sympathy to the west, they might raise their spending and investment to at least Estonian levels.
James Hasik is a senior fellow at the Brent Scowcroft Center on International Security.