China's Defense Spending Thread
- Thread starter antiterror13
- Start date
Interesting article on China's military spending after adjustments for purchasing power (more nuanced than just using PPP):
China’s military and growing political power
Peter Robertson 30 March 2015
The Soviets matched the US only by spending up to 20% of GDP on the military during the Cold War. This column argues that, in stark contrast to this example, China has the potential to match the US in certain military spheres with similar burden on its economy. Using exchange rates comparisons significantly understates the Chinese military spending. A much more realistic assessment is obtained using PPP terms. If both countries spent the same fraction of their GDP on the military, the relative size of China’s military machine would be more than 90% of the US one.
China’s rapid economic growth has led to a spate of comparisons between the sizes of the economies of China and the US. Authors wishing to make China look big use exchange rates adjusted for local prices.
Frankel (2014) argues that GDP converted at market exchange rates is a better measure of economic power since international spending power but not local spending power is what matters. Specifically, comparisons based on market exchange rate are appropriate for measuring the importance of a country in the world economy, such as the national share of world demand, the impact on financial markets, and international voting rights.
But how should we compare this spending in RMB to the US military budget? Will market exchange rates or PPP exchange rates give a more accurate comparison of relative real military spending in each country?
Military spending in China and the US
In a recent paper, (Robertson and Sin 2015), we show that China’s military budget was 18% of that of the US using market exchange rate comparisons, but 33% of the one of the US using PPP exchange rates. In addition, China spends only around 2% of its GDP on the military, compared to 5% by the US. If China raised its military spending to GDP ratio to the US level, it would be close to par with the US in PPP terms, but still far behind it in terms of market exchange rates.
Such large differences due to exchange rate choices cause anxiety in the Pentagon. It is a ‘known unknown’ that has been flagged many times by, for example, the Rand Corporation, the US Department of Defence, and military statistical abstracts such as the IISS and SIPRI (Crane et al. 2006, US Department of Defence 2011, IISS 2012, SIPRI 2012).
Frankel also points out that the market exchange rate matters for military power. He gives the example of China’s ability to project power in the South China Sea, which depends on its ability to purchase naval capacity. Likewise, China imports the latest generation anti-ship missiles from Russia.
But military spending more generally has a large domestic component. Around 1/3 of China’s military budget is spent on personnel – all of whom are paid substantially lower wages than their US equivalents – even after adjusting for differences in training. So, in this case it is not obvious whether market exchange rates or PPP exchange rate comparisons give a more accurate perspective.
A military unit cost exchange rate
The correct exchange rate with which to compare military spending would be a price or unit cost ratio of military services in each country. We, therefore, tackle this problem by developing Tornqvist and Fisher price indices applied to data on broad military budget shares for personnel, equipment, and operations spending.
In accordance with Frankel’s arguments above, we use market exchange rates as a measure of relative military equipment costs facing each country since most equipment, or close substitutes, is tradable. For relative operations costs, however, we use PPP exchange rates as a reasonable proxy since the operations budget represents a bundle of traded and non-traded goods and services.
Finally, relative personnel costs are obtained using manufacturing wages, either gross or net of on-costs, since this represents the social opportunity cost of military employment.
Even after adjusting for differences in average schooling, we find that these differences in personal costs are very large. Because of this, our resulting relative military cost (RMC) exchange rates are very low. Thus, while the market exchange rate in 210 was around 6.8 RMB per dollar, and the PPP exchange rate was 3.7 RMB per dollar, we obtain a relative military cost exchange rate of 2.9 RMB per dollar.
This low relative military costs exchange rate implies a real value of China’s military spending of 40% of the US in real terms – larger than the level implied by using PPP rates of 33%, and much larger than the market exchange rate based figure of 18%. Moreover, if both countries spent the same fraction of their GDP on the military, the relative size of China’s military machine is over 90% of the one of the US.
One strength of our method is that it allows for the fact that the US uses more equipment-intensive techniques and China uses labour-intensive techniques. Thus, it avoids substitution bias associated with fixed basked approaches. Moreover, it can also be readily calculated with minimal data.
One caveat is that the method assumes the technology for combing inputs –but not the inputs choice – is the same in both countries. But even allowing for say, a 10%-20% productivity advantage in the US due, for example, to less corruption and better procurement practices, it would still leave a very large estimate of real spending that would be closer to the PPP estimate of China’s military spending.
Conclusion
We find that converting China’s military spending in RMB to dollars using market exchange rates will dramatically understate its real size. A more realistic assessment shows that China’s real spending is closer to the value implied by PPP exchange rates.
This economic measure of military strength is important because it shows that China has the potential to match the US in certain military spheres with a similar burden on its economy. This is in stark contrast to the Soviets’ cold war strategy, where they matched the US only by spending up to 20% of GDP on the military.
So, in terms of military spending, China is ‘number 2’ but only by a small and shrinking margin. This will matter a great deal in terms of its ability to enforce territorial claims and achieve its foreign policy objectives. In these terms, China’s ability to wield international political power would seem to be very close to that of the US.
Editor's note: The author gratefully acknowledges the hospitality of St Anthony's College, Oxford and the CSAE, Oxford University.
China’s military and growing political power
Peter Robertson 30 March 2015
The Soviets matched the US only by spending up to 20% of GDP on the military during the Cold War. This column argues that, in stark contrast to this example, China has the potential to match the US in certain military spheres with similar burden on its economy. Using exchange rates comparisons significantly understates the Chinese military spending. A much more realistic assessment is obtained using PPP terms. If both countries spent the same fraction of their GDP on the military, the relative size of China’s military machine would be more than 90% of the US one.
China’s rapid economic growth has led to a spate of comparisons between the sizes of the economies of China and the US. Authors wishing to make China look big use exchange rates adjusted for local prices.
Frankel (2014) argues that GDP converted at market exchange rates is a better measure of economic power since international spending power but not local spending power is what matters. Specifically, comparisons based on market exchange rate are appropriate for measuring the importance of a country in the world economy, such as the national share of world demand, the impact on financial markets, and international voting rights.
- As Frankel notes, since the market exchange rate is approximately half the value of the purchasing power parity (PPP) exchange rate, the US remains the world’s largest economic power by a substantial margin.
But how should we compare this spending in RMB to the US military budget? Will market exchange rates or PPP exchange rates give a more accurate comparison of relative real military spending in each country?
Military spending in China and the US
In a recent paper, (Robertson and Sin 2015), we show that China’s military budget was 18% of that of the US using market exchange rate comparisons, but 33% of the one of the US using PPP exchange rates. In addition, China spends only around 2% of its GDP on the military, compared to 5% by the US. If China raised its military spending to GDP ratio to the US level, it would be close to par with the US in PPP terms, but still far behind it in terms of market exchange rates.
Such large differences due to exchange rate choices cause anxiety in the Pentagon. It is a ‘known unknown’ that has been flagged many times by, for example, the Rand Corporation, the US Department of Defence, and military statistical abstracts such as the IISS and SIPRI (Crane et al. 2006, US Department of Defence 2011, IISS 2012, SIPRI 2012).
Frankel also points out that the market exchange rate matters for military power. He gives the example of China’s ability to project power in the South China Sea, which depends on its ability to purchase naval capacity. Likewise, China imports the latest generation anti-ship missiles from Russia.
But military spending more generally has a large domestic component. Around 1/3 of China’s military budget is spent on personnel – all of whom are paid substantially lower wages than their US equivalents – even after adjusting for differences in training. So, in this case it is not obvious whether market exchange rates or PPP exchange rate comparisons give a more accurate perspective.
A military unit cost exchange rate
The correct exchange rate with which to compare military spending would be a price or unit cost ratio of military services in each country. We, therefore, tackle this problem by developing Tornqvist and Fisher price indices applied to data on broad military budget shares for personnel, equipment, and operations spending.
In accordance with Frankel’s arguments above, we use market exchange rates as a measure of relative military equipment costs facing each country since most equipment, or close substitutes, is tradable. For relative operations costs, however, we use PPP exchange rates as a reasonable proxy since the operations budget represents a bundle of traded and non-traded goods and services.
Finally, relative personnel costs are obtained using manufacturing wages, either gross or net of on-costs, since this represents the social opportunity cost of military employment.
Even after adjusting for differences in average schooling, we find that these differences in personal costs are very large. Because of this, our resulting relative military cost (RMC) exchange rates are very low. Thus, while the market exchange rate in 210 was around 6.8 RMB per dollar, and the PPP exchange rate was 3.7 RMB per dollar, we obtain a relative military cost exchange rate of 2.9 RMB per dollar.
This low relative military costs exchange rate implies a real value of China’s military spending of 40% of the US in real terms – larger than the level implied by using PPP rates of 33%, and much larger than the market exchange rate based figure of 18%. Moreover, if both countries spent the same fraction of their GDP on the military, the relative size of China’s military machine is over 90% of the one of the US.
One strength of our method is that it allows for the fact that the US uses more equipment-intensive techniques and China uses labour-intensive techniques. Thus, it avoids substitution bias associated with fixed basked approaches. Moreover, it can also be readily calculated with minimal data.
One caveat is that the method assumes the technology for combing inputs –but not the inputs choice – is the same in both countries. But even allowing for say, a 10%-20% productivity advantage in the US due, for example, to less corruption and better procurement practices, it would still leave a very large estimate of real spending that would be closer to the PPP estimate of China’s military spending.
Conclusion
We find that converting China’s military spending in RMB to dollars using market exchange rates will dramatically understate its real size. A more realistic assessment shows that China’s real spending is closer to the value implied by PPP exchange rates.
This economic measure of military strength is important because it shows that China has the potential to match the US in certain military spheres with a similar burden on its economy. This is in stark contrast to the Soviets’ cold war strategy, where they matched the US only by spending up to 20% of GDP on the military.
So, in terms of military spending, China is ‘number 2’ but only by a small and shrinking margin. This will matter a great deal in terms of its ability to enforce territorial claims and achieve its foreign policy objectives. In these terms, China’s ability to wield international political power would seem to be very close to that of the US.
Editor's note: The author gratefully acknowledges the hospitality of St Anthony's College, Oxford and the CSAE, Oxford University.
A case for 15 years of 10% growth
The time is right for China to increase its military spending by 10% for the next 15 years. This would mean a quadrupling in that time. The economy should more than double, meaning that military spending as a fraction of GDP would increase by less than a factor of two.
Sample numbers in USD
(Disclaimer: I'm not sure about the right treatment of inflation.)
Now
China: GDP 11 trillion, (case a) mil. spending ~150 billion, 1.4% of GDP; (b) SIPRI est. 215 billion, 1.9% of GDP
USA: GDP 18 trillion, mil. spending 600 to 700 billion, ~3.3% of GDP
2032 (assuming China 6% GDP growth, USA 2% GDP growth, without inflation)
China: GDP 26 trillion, (a) mil. spending 630 billion, 2.4% of GDP; (b) 900 billion, 3.5% of GDP
USA: GDP 24 trillion, mil. spending ~800 billion, assuming 3.3% of GDP, probably more
Cumulative spending between 2017 and 2032
China: (a) 5 trillion; (b) 7.2 trillion
USA: 10.5 trillion
If the right number in 2017 is 150 billion, then even after a quadrupling Chinese spending would be lower than America's is currently. In this case, even 5 years of 15% growth followed by 10 years of 10% growth makes sense ((c) final number 800 billion, 3% of GDP, cumulative 6.1 trillion).
After these 15 years military spending can again grow with the economy, still faster than the USA and from a higher base.
What about PPP?
Some things are definitely cheaper in China than in the USA, including salaries and ships. For many others we don't have any information, and some may be more expensive (J-20 compared to F-35). In 15 years, the difference is almost guaranteed to decrease. If China gets twice the value for the same amount of money, simply double the above figures. China ends up with a lot higher spending in 2032, but the total expenditure is still close, although in China's favor. I see no reason not to do it.
I also think China should increase military R&D spending (don't know the current number; USA ~70 billion) to at least 150% of the American number as soon as possible and do the same with the number of researchers in military R&D.
The time is right for China to increase its military spending by 10% for the next 15 years. This would mean a quadrupling in that time. The economy should more than double, meaning that military spending as a fraction of GDP would increase by less than a factor of two.
Sample numbers in USD
(Disclaimer: I'm not sure about the right treatment of inflation.)
Now
China: GDP 11 trillion, (case a) mil. spending ~150 billion, 1.4% of GDP; (b) SIPRI est. 215 billion, 1.9% of GDP
USA: GDP 18 trillion, mil. spending 600 to 700 billion, ~3.3% of GDP
2032 (assuming China 6% GDP growth, USA 2% GDP growth, without inflation)
China: GDP 26 trillion, (a) mil. spending 630 billion, 2.4% of GDP; (b) 900 billion, 3.5% of GDP
USA: GDP 24 trillion, mil. spending ~800 billion, assuming 3.3% of GDP, probably more
Cumulative spending between 2017 and 2032
China: (a) 5 trillion; (b) 7.2 trillion
USA: 10.5 trillion
If the right number in 2017 is 150 billion, then even after a quadrupling Chinese spending would be lower than America's is currently. In this case, even 5 years of 15% growth followed by 10 years of 10% growth makes sense ((c) final number 800 billion, 3% of GDP, cumulative 6.1 trillion).
After these 15 years military spending can again grow with the economy, still faster than the USA and from a higher base.
What about PPP?
Some things are definitely cheaper in China than in the USA, including salaries and ships. For many others we don't have any information, and some may be more expensive (J-20 compared to F-35). In 15 years, the difference is almost guaranteed to decrease. If China gets twice the value for the same amount of money, simply double the above figures. China ends up with a lot higher spending in 2032, but the total expenditure is still close, although in China's favor. I see no reason not to do it.
I also think China should increase military R&D spending (don't know the current number; USA ~70 billion) to at least 150% of the American number as soon as possible and do the same with the number of researchers in military R&D.
PiSigma
"the engineer"
China is not interested in spending over 2% on military, got a whole lot of infrastructure to build. Schools and hospitals to build. Unless China want to garrison the planet, there is no need.
I hope you're wrong. Few people would put military spending as a civilizational priority; rather, it's a necessity.
There are plenty examples to show that higher military spending doesn't impede economic growth and development (South Korea, United States, Israel, Singapore).
solarz
Brigadier
You'd be wrong about the US. Pretty much every social ill that the US is currently experiencing can be traced to its wars in the last two decades.
China's military spending is meeting its needs for the current state of things. Unnecessarily high military spending is just poor policy.
PiSigma
"the engineer"
Higher military doesn't impede economic growth, but it provides less growth than everything else. And growth is what China is looking for, so basically invest in everything else and keep military to a minimum.
I definitely don't suggest more wars, just more military spending.
Right now, only frigates and destroyers are being mass produced. Soon, there will also be stealth fighters and bombers, transports, tankers, nuclear submarines and more.
solarz
Brigadier
I believe the J-20 is not at the mass production stage yet.
As for the rest, China will produce what it needs.
The linked post doesn't demonstrate that. It claims that military spending creates fewer jobs than spending in other sectors.
China is looking for growth, but also for other things, such as security.