Defence Output Measures An Economics perspective

Defence Output Measures An Economics perspective
Defence Output Measures
An Economics perspective
Prepared By:
Keith Hartley
Department of Economics
University of York
York YO10 5DD
United Kingdom
University of York, UK
Contract Project Manager: Robert M.H. Burton
PWGSC Contract Number: DND-10/23136
CSA: Binyam Solomon, TL Defence Economics Team
DRDC CORA CR 2011-178
November 2011
Defence R&D Canada
Centre for Operational Research and Analysis
Defence Economics Team
Defence Output Measures:
An Economics Perspective
Keith Hartley
University of York, UK
Prepared By:
Keith Hartley
Department of Economics
University of York
York YO10 5DD
United Kingdom
University of York, UK
Contractor's Document Number:
Contract Project Manager: Robert M. H. Burton
PWGSC Contract Number: DND-10/23136
CSA: Binyam Solomon, TL Defence Economics Team
The scientific or technical validity of this Contract Report is entirely the responsibility of the Contractor and the
contents do not necessarily have the approval or endorsement of Defence R&D Canada.
Defence R&D Canada – CORA
Contract Report
DRDC CORA CR 2011-178
November 2011
Principal Author
Original signed by Keith Hartley
Keith Hartley
University of York, UK
Approved by
Original signed by Robert M. H. Burton
Robert M. H. Burton
Section Head, Joint Systems Analysis
Approved for release by
Original signed by Paul Comeau
Paul Comeau
Chief Scientist, DRDC CORA
Defence R&D Canada – Centre for Operational Research and Analysis (CORA)
© Her Majesty the Queen in Right of Canada, as represented by the Minister of National Defence, 2011
© Sa Majesté la Reine (en droit du Canada), telle que représentée par le ministre de la Défense nationale,
2011
Abstract ……..
This Contract Report examines the measurement of defence output from an economics
perspective. Economic theory offers some policy guidelines for determining the optimal defence
output for any society. As an optimising problem, the economics rule is to aim at the socially
desirable or optimal defence output which is achieved by equating additional or marginal costs
with additional or marginal benefits.
While the economics approach is difficult to
‘operationalise’ into a set of clear unambiguous policy guidelines, it does provide a framework
for designing valuations for defence outputs and activities. Experience of measuring defence
outputs is reported for the UK, Australia, New Zealand, a group of European nations and the
USA.
Résumé ….....
Le présent rapport de contrat examine la mesure des extrants en matière de défense d’un point de
vue économique. La théorie économique offre certaines lignes directrices stratégiques pour la
détermination des extrants optimaux de défense pour toute société. En tant que problème relatif à
l’optimisation, la règle d’économie consiste à viser un extrant de défense optimal ou souhaitable
sur le plan social qui est réalisé en faisant concorder les coûts supplémentaires ou marginaux avec
les avantages supplémentaires ou marginaux. Bien que l’approche économique soit difficile à
« opérationnaliser » en une série de lignes directrices stratégiques claires et sans équivoque, elle
offre toutefois un cadre pour la conception des évaluations pour les extrants et activités de
défense. L’expérience de la mesure des extrants en matière de défense est rapportée pour le
Royaume-Uni, l’Australie, la Nouvelle-Zélande, un groupe de nations européennes et les ÉtatsUnis.
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DRDC CORA CR 2011-178
Executive summary
Defence Output Measures: An Economics Perspective
Keith Hartley; DRDC CORA CR 2011-178; Defence R&D Canada – CORA;
November 2011.
Measuring output is not usually regarded as a policy problem. Market economies ‘solve’ the
problem through market prices reflecting the choices of large numbers of buyers and willing
sellers. But defence differs from private markets which is why there is a problem in measuring
and valuing defence output.
Economic theory provides guidelines for measuring defence output. These guidelines are
expressed as a set of rules for achieving the ideal or society’s preferred amount of defence.
However, these rules cannot be operationalised and converted into clear guidance for policymakers.
Defence markets lack the incentive and penalty structures of private markets. Defence markets
are dominated by state-ownership and state funding of Armed Forces. There are not large
numbers of private consumers, they lack competition, their top managers are not profit-seekers,
and there is no capital market threatening take-overs and bankruptcy.
Defence markets have further distinguishing features. Both defence and peace are public goods
where the lack of price signals lead to the under provision of the product. Also, in conflict,
defence forces destroy markets, use military power to re-allocate resources and create chaos
reflected in destructive power. In contrast, markets promote voluntary trade and exchange, prices
are used to allocate resources and markets are about equilibrium and creative power.
Military production functions show the relationship between defence inputs and defence output.
Measures of defence inputs can be obtained but output measures are more difficult to
‘operationalise.’ Defence budgets provide useful information on defence inputs reflected in
military spending. Input, output, management and resource accounting budgets have been used
as outcome measures but none have ‘solved’ the problem of measuring and valuing defence
output.
Falling defence budgets and rising unit costs of equipment mean that defence policy-makers will
not be able to avoid the need for difficult defence choices such as base infrastructure closure or
divesting military capabilities. The benefits of defence spending are outlined and critically
assessed. Both economic and non-economic benefits are presented.
Experience of measuring defence outputs is reported for the UK, Australia, New Zealand, a group
of European nations and the USA. The published data do not improve on the measures of
defence capability provided by some nations (e.g. UK). But capabilities are limited measures of
defence output, lacking data on the value of benefits from the capabilities. Nor are the
capabilities comprehensive measures of defence output, often omitting some outputs.
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Overall, the study identifies key questions which have to be addressed in measuring defence
output. These are what is defence output; how can it be valued; and is it a worthwhile
investment?
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Sommaire .....
Defence Output Measures: An Economics Perspective
Keith Hartley; DRDC CORA CR 2011-178; R & D pour la défense Canada –
CARO; novembre 2011.
La mesure des extrants n’est habituellement pas perçue comme un problème en matière de
politiques. Les économies de marché « règlent » le problème par des prix du marché reflétant les
choix d’un très grand nombre d’acheteurs et de vendeurs consentants. Mais la défense diffère des
marchés privés, ce qui explique pourquoi il y a un problème concernant la mesure et l’évaluation
des extrants en matière de défense.
La théorie économique offre des lignes directrices pour la mesure des extrants en matière de
défense. Celles-ci sont exprimées en une série de règles permettant de réaliser le volume de
défense idéal ou privilégié par la société. Or, ces règles ne peuvent être opérationnalisées et
converties en directives claires pour les décideurs.
Les marchés de la défense ne disposent pas des structures d’incitatifs et de sanctions des marchés
privés. Les marchés de la défense sont dominés par les propriétés étatiques et le financement des
Forces armées par l’État. Il n’existe pas un très grand nombre de consommateurs privés, ils
manquent de concurrence, leurs cadres supérieurs ne sont pas à la recherche de profit et il n’existe
pas de marché financier les menaçant de mainmises ou de faillites.
Les marchés de la défense ont d’autres particularités. La défense et la paix sont des biens publics
où le manque de signaux des prix entraîne une offre sous-optimale du produit. De même, en
conflit, les forces de la défense détruisent les marchés, usent de la puissance militaire pour
réaffecter des ressources et créent un chaos qui se reflète dans un pouvoir destructeur. En
revanche, les marchés font la promotion du commerce et des échanges volontaires, les prix sont
utilisés pour affecter les ressources et les marchés reflètent l’équilibre et le pouvoir créateur.
Les fonctions de la production militaire montrent la relation entre les intrants et les extrants en
matière de défense. Les mesures relatives aux intrants de défense peuvent être obtenues, mais les
mesures relatives aux extrants sont plus difficiles à « opérationnaliser ». Les budgets de la
défense offrent de l’information utile sur les intrants en matière de défense reflétés dans les
dépenses militaires. Des budgets de la comptabilité des intrants, des extrants, de la gestion et des
ressources ont été utilisés comme mesures relatives aux résultats, mais aucun n’a « réglé » le
problème de la mesure et de l’évaluation des extrants de défense.
Les budgets de la défense en décroissance et l’augmentation des coûts unitaires d’équipement
signifient que les décideurs dans le domaine de la défense ne seront pas en mesure d’éviter de
devoir faire des choix difficiles en défense, comme la fermeture de bases militaires ou le retrait de
capacités militaires. Les avantages relatifs aux dépenses en matière de défense sont présentés et
évalués de manière critique. Tant les avantages économiques que non économiques sont
présentés.
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L’expérience de la mesure des extrants en matière de défense est rapportée pour le Royaume-Uni,
l’Australie, la Nouvelle-Zélande, un groupe de nations européennes et les États-Unis. Les
données publiées ne permettent pas d’améliorer les mesures relatives aux capacités en matière de
défense fournies par certaines nations (p. ex. Royaume-Uni). Or les capacités constituent des
mesures limitées en matière d’extrants de défense, manquant de données sur la valeur des
avantages provenant des capacités. Les capacités ne sont pas non plus des mesures exhaustives
d’extrants en matière de défense, omettant souvent certains extrants.
Dans l’ensemble, l’étude cerne les questions principales auxquelles on doit répondre dans la
mesure des extrants en matière de défense. Ces questions sont : quel est l’extrant de défense?
Comment peut-il être évalué? S’agit-il d’un bon investissement?
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Table of contents
Abstract …….. ................................................................................................................................. i
Résumé …..... ................................................................................................................................... i
Executive summary ........................................................................................................................ iii
Sommaire ........................................................................................................................................ v
Table of contents ........................................................................................................................... vii
List of tables ................................................................................................................................... ix
1
Introduction............................................................................................................................... 1
1.1
Terms of Reference ....................................................................................................... 1
2
The Contribution of Economic Theory ..................................................................................... 2
What is the problem and why does it exist? .................................................................. 2
2.1
2.1.1
Defence Markets: Public Goods .......................................................................... 2
2.1.2
The Guidelines of Economic Theory ................................................................... 3
2.2
Comparing Defence and Private Markets ...................................................................... 3
Public Choice and Principal-Agent Models .................................................................. 5
2.3
3
The Military Production Function ............................................................................................ 7
3.1
Technical Spin-Offs....................................................................................................... 9
3.2
Defence-Growth Relationships ................................................................................... 10
4
Assessing Defence Outputs: Problems and Challenges .......................................................... 11
4.1
The Problem ................................................................................................................ 11
4.1.1
Defence Budgeting ............................................................................................ 11
4.1.1.1
Input Budgets ........................................................................................... 11
4.1.1.2
Output Budgets ........................................................................................ 12
Management Budgets............................................................................... 12
4.1.1.3
4.1.1.4
Resource Accounting and Budgeting (RAB) ........................................... 12
4.2
Challenges ................................................................................................................... 13
5
Defining Defence Outputs: The Benefits of Defence ............................................................. 14
Security ........................................................................................................................ 14
5.1
5.2
The Economic Benefits of Defence ............................................................................. 15
5.3
The Non-Economic Benefits of Defence..................................................................... 17
6
The Evidence: International Experience with Measuring Defence Output ............................ 18
6.1
UK Experience ............................................................................................................ 18
UK Experience in Other Parts of the Public Sector and the Private Sector................. 21
6.2
6.3
Australian Experience ................................................................................................. 22
6.4
New Zealand Experience ............................................................................................. 24
6.5
European Experience ................................................................................................... 26
6.5.1
France ................................................................................................................ 26
6.5.2
Germany ............................................................................................................ 27
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6.5.3
Italy .................................................................................................................... 27
6.5.4
Spain .................................................................................................................. 27
6.5.5
Sweden............................................................................................................... 27
6.5.6
The European Defence Agency ......................................................................... 27
6.5.7
The USA ............................................................................................................ 28
6.6
Evaluating International Experience ........................................................................... 28
7
Conclusion and Policy Recommendations.............................................................................. 30
References ..... ............................................................................................................................... 31
List of symbols/abbreviations/acronyms/initialisms ..................................................................... 35
viii
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List of tables
Table 1 Defence Inputs for a Group of Nations (2009).................................................................. 9
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1.1
Introduction
Terms of Reference
The Terms of Reference required research on defence outputs and the production of a background
paper on the measurement of defence outputs from an economic perspective. The economic
discussions and lessons learned from the UK experiences are expected to facilitate DND’s own
efforts to establish a workable output measure that can be aligned with CBP and other
governmental management systems (Contract DND-10/23136, January 2011).
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2
2.1
The Contribution of Economic Theory
What is the problem and why does it exist?
Defence sectors absorb substantial scarce resources with alternative uses (e.g. schools, hospitals).
The costs of defence are well known within each country. However, there is no obvious single
indicator of the value of defence output. This contrasts with the valuation of output in private
sector market economies. In defence, the traditional solution to measuring output has been to
assume that output equals inputs (a convention widely used in the public sector).
Market economies produce a wide variety of goods and services. These are exchanged in markets
which facilitate beneficial trade and exchange. In competitive markets (as defined by
economists) there are large numbers of willing buyers and large numbers of willing sellers
resulting in a set of market prices for goods and services. These market prices show society’s
valuation of the various goods and services by reflecting consumer’s willingness to pay and
supplier’s willingness to provide the various goods and services.
But not all markets resemble the economist’s competitive model. Often, there are major
departures from the competitive model leading to market failures where markets fail to fully and
accurately satisfy consumer demands. There are three major sources of market failure. First,
markets might be imperfect reflecting monopolies, oligopolies and entry barriers. Second,
externalities mean that left to themselves, private markets will provide ‘too much’ of a socially
undesirable good or activity (e.g. pollution) and ‘too little’ of a socially beneficial good (e.g. the
spin-offs from R&D). Third, public goods with defence as a classic example of such goods lead
to market failure as discussed in the next section (Tisdell and Hartley, 2008).
The policy problem for defence is now clearer. Private markets for, say, motor cars and TVs, are
characterised by physical outputs of these goods (e.g. numbers of cars and TV sets produced per
year) and a corresponding set of market prices which, show society’s valuation of these goods
(what they are worth to society based on consumers willingness to pay). There are no such
market prices for defence. Why not?
2.1.1
Defence Markets: Public Goods
Defence markets are distinctive with some unique features. Defence is a classic example of a
public good and its results or mirror image in the form of peace is also a public good. A public
good is non-rival and non-excludable: my consumption of the air defence of Toronto does not
affect your amount of protection and once defence is provided I cannot exclude you from its
consumption. Private goods such as motor cars and TV sets are rival and excludable: my
consumption of a motor car means that you cannot have it and I can exclude you from using
(consuming) my motor car (where my purchase of a car conveys private property rights in the
vehicle).
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The public goods features of defence provide incentives for free riding both within a nation and
between nations in a military alliance (e.g. NATO; US-Canadian security). Free riding results in
a nation’s citizens failing to reveal their true preferences for, and valuations of, defence. Here,
the problem is that the state in providing and financing defence does not know the true
preferences of the potential beneficiaries of defence: it cannot easily quantify the volume of the
defence public good demanded by consumers and estimate the true price the beneficiaries are
willing to pay (Engerer, 2011). There are some theoretical solutions to estimating the optimal
amount of a public good but these are difficult to operationalise (Cornes and Sandler, 1996). Or,
public opinion polls might be used but these are a limited mechanism for assessing accurately
society’s opinions on defence spending and defence policy and the willingness of citizens to pay
for defence.
2.1.2
The Guidelines of Economic Theory
Economic theory offers some policy guidelines for determining the optimal defence output for
any society. As an optimising problem, the economics rule is to aim at the socially desirable or
optimal defence output which is achieved by equating additional or marginal costs with additional
or marginal benefits. But this approach is difficult to ‘operationalise’ into a set of clear
unambiguous policy guidelines.
Marginal costs and especially marginal benefits are not immediately obvious and identifiable.
The economic model assumes a social welfare function showing society’s preferences between
defence (security) and civil goods: again, an attractive concept but not one which is readily
operationalised and identifiable for any society. Furthermore, estimates of the benefits of defence
are complicated by its public goods and free riding characteristics. In addition, voting systems are
not reliable and accurate methods of identifying voter preferences for specific public goods and
services. Typically, elections are general embracing choices between political parties offering
various taxes and spending policies with defence budgets and policies as one element in the
product mix. Problems can also arise in aggregating voter preferences into a ranking for society
as a whole (the voting paradox: Tisdell and Hartley, 2008). Further problems arise since the
economic model assumes maximising behaviour when agents might be satisficers settling for an
acceptable solution short of the maximum.
2.2
Comparing Defence and Private Markets
There are major differences between private markets and defence markets. Private markets have
market prices showing society’s valuation of its outputs where these prices reflect a set of
incentive and penalty mechanisms. Goods are ‘private’ rather than public goods with
excludability and rivalry; there are large numbers of private consumers and buyers; there is
rivalry between firms; firms are motivated and rewarded through profits; and a capital market
imposes penalties on poor economic performance through take-overs and the ultimate sanction of
bankruptcy (with managers losing their jobs).
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The Armed Forces in defence markets lack such incentive and penalty mechanisms so that they
are slow to adjust to change. Often, change in the Armed Forces results from budget pressures,
new technology, defeat in war and occasionally by the views of a reforming Defence Secretary or
Chief of the Defence Staff (Solomon, et al, 2008).
In contrast to private markets, defence markets have no market prices: for example, there are no
market prices for submarine or tank forces. Nor are defence markets based on rivalry between
suppliers; there is no profit motive for suppliers; nor are there capital market pressures
corresponding to take-overs and bankruptcy in private markets. Defence markets have a further
distinctive feature reflected in the state-funding and state provision (ownership) of its Armed
Forces. Governments are monopsony buyers and monopoly providers of Armed Forces. This
contrasts with private markets where there are large numbers of buyers and rivalry amongst
suppliers. State-owned and funded defence markets are less likely to undertake worthwhile
changes. There is also a unique military employment contract which differs drastically from
private sector employment contracts. The military employment contract requires military
personnel to obey commands which relate to type, duration and location of work (world-wide
deployments) with the probability of injury and death.
Each of the Armed Forces is a monopoly supplier of air, land and sea systems with monopoly
property rights in the air, land and sea domains. This has implications both affecting efficiency in
defence markets. There are barriers to new entry which prevent rival Armed Forces from offering
competing products. For example, armies often operate attack helicopters and UAVs which are
rivals to close air support and surveillance provided by air forces; similarly, land-based aircraft
are alternatives to carrier-borne aircraft. Efficiency requires that there be a mechanism for
promoting such competition; instead, each Service guards its traditional property rights in the air,
land and sea domains thereby creating barriers to new entry. There is a related impact on
efficiency. As monopolies, each of the Armed Forces lacks any competing organisations and
hence, any incentives for efficiency improvements and for innovation. Here, efficiency embraces
both allocative and technical efficiency. Allocative efficiency requires the choice of the socially
desirable output and technical efficiency requires the use of least-cost methods of production.
Again, problems arise in determining allocative efficiency (see below on principal-agent models).
However, technical efficiency can be assessed by allowing activities traditionally undertaken ‘inhouse’ by the Armed Forces to be ‘opened-up’ to competition from private suppliers (military
outsourcing). Indeed, the formulation of such competitions can offer improvements in allocative
efficiency (e.g. by inviting competitions for different levels of service in order to identify
marginal costs for different levels).
Defence markets lack other incentives of private markets. There are no profit incentives to
stimulate and reward military commanders for searching for and introducing productivity
improvements or for identifying new and profitable opportunities (for example, the role of
entrepreneurs in private markets). The absence of a capital market also means that military
managers are unlikely to lose their jobs for poor performance and that there are no capital market
opportunities for promoting and rewarding mergers and take-overs. For example, a military
commander of a regiment cannot merge with another regiment to achieve economies of scale and
scope, nor can an army regiment acquire air force and naval transport units where such mergers
might offer both cost savings and output improvements (such as horizontal, vertical and
conglomerate mergers).
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Uncertainty dominates defence policy. Defence policy has to respond to a range of future threats,
some of which are unknown and unknowable. Assumptions are needed about likely future allies
and their response to threats, the location of threats, new technologies and the time dimension of
threats (e.g. today or in 10-15 years time or 30-50 years ahead where the uncertainties are
greatest). These uncertainties mean that forces have to be capable of adapting to change, and
today’s weapons have to be capable of meeting threats up to 50 years ahead. Admittedly, the
private sector faces considerable uncertainty about future markets and new technologies and these
unknowns extend over lengthy time horizons. However, defence is different in that the
uncertainties are dependent on and determined by governments and nation states rather than by
the actions of large numbers of private individuals as consumers, workers and shareholders.
There is one further key difference between defence and private markets. Defence aims to avoid
conflict but where conflict arises, it destroys markets, creates disequilibrium, it means resource
re-allocation based on military forces and leads to chaos: the result is destructive power. War
involves the destruction of labour and capital. In contrast, private markets are about equilibrium,
voluntary trading and exchange, resource allocation based on prices, leading to creative power (a
greater output of goods and services).
2.3
Public Choice and Principal-Agent Models
Defence choices are made in political markets which are a further reason why they depart from
the economist’s optimising solution. Political markets comprise voters, political parties,
bureaucracies and interest groups each pursuing their self-interests. Voters as taxpayers are
principals: they want something done and they appoint agents to perform their required tasks. For
principals, the challenge is to design incentives to ensure that agents pursue the aims of the
principals rather than their own objectives. For example, voters as principals will require peace,
security and protection but their agents in Defence Ministries and the Armed Forces might prefer
to buy British or Canadian goods and services because doing so offers jobs, technology and
export benefits which contribute to the re-election of the governing party.
Expressing and enforcing the aims of principals is affected by the limitations of the voting system
as a means of expressing voter preferences for defence spending and policies. Free riding further
affects the willingness of voters to accurately reveal their preferences for defence. Principals also
lack the necessary information for making informed and rational defence choices. The result is
that agents have opportunities for determining national defence policy and pursuing their own
interests when doing so. For example, a nation’s international peace-keeping contributions might
provide considerable satisfaction to the country’s Prime Minister, senior Ministers and civil
servants from attending international meetings at the UN and participating in regional meetings.
The principal-agent and public choice analysis raises the general question of who gains and who
pays for these defence policies (e.g. international peace-keeping; national procurement of defence
equipment, including offsets)? Ultimately, taxpayers pay and receive some defence benefits
whilst agents consume some benefits which have not been chosen by voters and taxpayers.
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The principal-agent model has implications for choices, resource-use and efficiency in defence
markets. It also has implications for measuring defence outputs where these will reflect a
combination of principal and agent choices. The model can also be linked to the political market
where defence choices are made.
In political markets:
1. Voters and taxpayers as principals will seek to maximise the benefits (satisfaction) from
their votes.
2. Political parties are vote-maximisers; governments seek re-election and will become
agents of voters.
3. Bureaucracies can be modelled as budget-maximisers acting as agents of the government.
4. Producer groups will be profit-seekers (rent-seekers) acting as agents of the procurement
agency or bureaucracy.
The principal-agent and public choice models provide an analytical framework for understanding
the military-industrial-political complex and its influence on defence choices and outputs. As
principals, voters are generally poorly informed about defence policy so they will allow defence
choices to be made by various agents, namely, governments, civil servants in Defence Ministries
and procurement agencies, and by the Armed Forces. These agents will be further influenced by
powerful producer groups in the form of large defence contractors (e.g. via lobbying) seeking to
be awarded lucrative defence contracts.
Examples abound of the influence of the military-industrial-political complex on defence choices.
Government Ministers will be aware of the vote-consequences of defence choices (e.g. impacts of
base and plant closures; the benefits of awarding defence contracts to firms in marginal
constituencies). Defence Ministries and the Armed Forces aiming at budget-maximisation will
over-estimate the threat and under-estimate the costs of their preferred policies and projects.
Exaggerating the threat from terrorism enables the Armed Forces to obtain larger defence
budgets; under-estimating the costs of a new weapon system allows the project to start and once
started, projects attract interest groups and become difficult to stop (a factor in ‘optimism bias’).
Defence contractors will also use persuasive language to be awarded valuable defence contracts.
For example, it will be claimed that the contract will contribute valuable jobs, technology, spinoffs and exports and will be ‘vital’ to the future of the national defence industrial base. Rarely is
attention given to the opportunity cost question, namely, whether the resources used in the
defence project would provide even greater net economic benefits if used in alternative sectors of
the economy. Overall, the public choice and principal-agent models show how these groups are
likely to influence defence choices and defence outputs.
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3
The Military Production Function
There is a further contribution from economic theory to output measurement in the form of the
military production function. This is an input-output relationship relating all defence inputs to
defence output. Inputs comprise technology, capital (bases, equipment) and labour (military
personnel in the form of conscripts and/or volunteers). A formal expression of the function is:
Q
f ( A, K , L)
(1)
where Q is defence output and A, K and L are inputs of technology (A), capital (K) and labour
(L).
While the model appears attractive, there are at least four major problems. First, it is assumed
that the factor inputs are arranged to minimise costs. This assumption is unrealistic in view of the
lack of efficiency incentives in defence markets: there are no incentives and penalties to achieve
least-cost production. Second, all defence inputs have to be identified and correctly valued.
Third, defence output is simply asserted without recognising the problems of identifying and
valuing defence output, including the multi-product nature of defence output. Fourth, the model
simply identifies defence outputs resulting from various inputs: there are no criteria for
determining society’s preferred defence output (the best or optimal defence output) 1 .
The two central problems with military production functions arise over inputs and outputs.
Consider the problem of identifying and valuing all relevant inputs. These comprise technology,
capital and labour and include the following items:
1. Technical progress as reflected in inputs embracing new equipment and new military
facilities, including communications. For example, compare today’s space satellite
communications systems with the military communications facilities in 1914 (e.g.
observation balloons).
2. Physical capital comprises equipment, military bases, land and logistics (repair and
maintenance).
3. Human capital comprising military personnel reflected in numbers and in their human
capital reflected in the skills of the military labour force. Skills and productivity will
differ between regular forces, conscript and reserve forces. Other co-operating and
1
There are various forms of production function. A Cobb-Douglas production function is widely used.
This makes two assumptions. First, short-run diminishing returns as a variable factor is varied against a
fixed factor; and second, constant returns to scale over the long-run when all factors are variable. With
constant returns to scale, the exponents of capital and labour sum to one and each exponent shows that
factor’s share in total income or output (e.g. an exponent of 0.75 for labour suggests that labour incomes
account for 75% of total income, with capital accounting for the remaining 25%).
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substitute labour inputs comprise civilian labour inputs, including military outsourcing
and police forces (e.g. police forces substituted for British Army troops in policing
Northern Ireland: Ridge and Smith (1991)).
Identifying, measuring and valuing defence output is even more challenging. Economic theory
simply asserts the concept of defence output without exploring its definition and multi-product
nature which is the focus of this study.
There are few published studies which have estimated military production functions. Typically,
such studies have estimated for readily identified measures of effectiveness, such as providing an
air defence capability or the numbers of aircraft destroyed or the number of aircraft sorties per
day. This approach is used in cost-effectiveness studies but such studies focus on only a limited
measure of defence output (Hildebrandt, 1990; 1999). For example, a cost-effectiveness study of
air defence would compare the costs and effectiveness of alternatives such as land-based air
defence missiles versus manned fighter aircraft; or anti-submarine capability would compare
land-based maritime patrol aircraft versus naval frigates; or anti-tank capability would compare
missiles and attack helicopters. A different approach was used in a more recent study which
estimated a military production function where various defence inputs were used to estimate the
probability of winning in various conflict scenarios (Middleton, et al, 2011).
There is a variant of the military production function, namely, a defence R&D production
function. This shows that current defence R&D determines future military equipment quality with
its impact on defence output. The relationship between defence R&D and equipment quality is
positive but subject to diminishing returns and substantial lags: for example, today’s military
equipment quality was determined by defence R&D spending some 10-15 years ago. Equipment
quality can be ‘converted’ into time advantage. Thus, over the period 1991-2001, US military
equipment was six years ahead of that of the UK, seven years ahead of France and twelve years
ahead of Sweden (Middleton, et al, 2006). The defence R&D production function can be
expressed as:
Eq
f ( RDd , Z )
(2)
where E q is military equipment quality (e.g. British versus US tanks); RD d defence R&D and Z
represents all other factors.
The defence R&D production function needs more theoretical and empirical work. For example,
‘other factors’ might contribute to equipment quality and these need to be identified in the model.
Furthermore, the links between equipment quality and military capability need identifying
including the role of variables such as military skills which will also contribute to final defence
output. Similarly, the model focuses on the broad aggregate of defence R&D spending without
any analysis of the most effective mix of research and development spending. More empirical
work is needed to determine the most cost-effective ratio of research to development work within
total defence R&D budgets and the impact of that R&D on equipment quality.
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Traditionally, defence outputs were measured on an input basis where inputs were assumed to
equal outputs. Table 1 presents some input data of the type used for measuring some of the inputs
to a military production function.
Table 1 Defence Inputs for a Group of Nations (2009)
Country
Defence
spending
(US$
millions,
2009
prices)
Australia
Canada
France
Germany
Italy
Spain
Sweden
UK
USA
China
India
New
Zealand
Defence
share of
GDP
(%)
Armed
Forces
Personnel
(Numbers,
000s)
Defence R&D
(US$, millions,
2000 prices)
20109
19869
54446
47466
30489
16944
6135
59131
574070
98800
36600
1.8
1.5
2.1
1.4
1.4
1.2
1.3
2.7
4.0
2.0
2.6
58
67
243
254
197
134
13
197
1368
2285
1325
242.7
201.6
3643.5
1103.2
64.9
1666.5
218.7
2559.9
65896.0
NA
NA
1358
1.2
9.8
NA
Notes:
Defence spending data for Australia, China, India and Sweden are in 2008 prices: source SIPRI (2011).
Data for NATO nations is provided from one source and is on a consistent basis.
Defence R&D data are in US$ millions 2000 prices and PPP rates.
NA is not available. Sources: NATO (2010); OECD (2010).; SIPRI (2011).
3.1
Technical Spin-Offs
Defence R&D can also contribute to wider economic benefits in the form of technical spin-offs
and spill-overs (external benefits or external economies). There are numerous examples such as
the jet engine, avionics, radar, composite materials, the internet and the application of helicopter
rotor blade technology to wind turbines. These externalities might be regarded as part of defence
output but such views need to be assessed critically. Technology spin-offs are not the main aim of
defence spending which seeks to provide peace, protection and security. Any technical spin-offs
can be regarded as a windfall gain from defence spending. Moreover, a list of spin-off examples
fails to address the central question of the market value of such spin-offs and whether there are
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9
better alternative uses of defence R&D resources. Consideration also needs to be given to the
wider economic impacts of defence spending.
3.2
Defence-Growth Relationships
A considerable literature has developed on the relationship between defence spending and a
nation’s economic growth. There are two alternative hypotheses. First, the view that defence
spending favourably affects an economy’s growth rate (a positive impact: Benoit, 1973). Second,
the contrasting hypothesis that military expenditure adversely affects a nation’s growth rate:
Deger and Smith, 1983). Some of the literature has widened the possible relationship to include
the impact of defence spending on other macro-economic variables such as employment,
unemployment, inflation, exports and R&D (Hartley, 2010a).
Both hypotheses are dominated by myths, emotion and special pleading. Plausible explanations
can be provided for a positive or negative impact of defence spending on growth and there is
evidence supporting both impacts! The divergent results reflect the need for a properly-specified
model of economic growth showing the causal relationships, including the integration of defence
spending in such a model. Typically, defence spending is simply added to a conventional growth
model without careful consideration of its causal impact on growth. The varied results in this field
reflect different economic and econometric models, different combinations of variables, different
time-periods, cross-section and time-series studies, an heterogeneous set of countries and the use
of data of varying degrees of reliability and scope of coverage.
A considerable literature has used Granger causality tests to examine the relationship between
military spending and the economy. A critique of this literature concluded that parameters may
not be stable over different time periods or different countries and that “... Granger causality test
statistics are uninformative about the size and direction of the predicted effects and Granger
causality measures incremental predictability and not economic causality” (Dunne and Smith,
2010, p440). The critique concludes with the need to provide “measures of the political and
strategic determinants of military expenditures, such as threats” (Dunne and Smith, 2010, p440).
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4
Assessing Defence Outputs: Problems and
Challenges
4.1
The Problem
Defence differs from private markets in that there are no output measures such as the numbers
and values of motor cars produced and sold. Private markets provide a set of performance and
efficiency measures such as sales, labour productivity and profitability. Traditionally, defence
outputs were measured on an input basis where inputs were assumed to equal outputs. In fact,
defence outputs are a complex set of variables concerned with security, protection, and risk
management, including risks avoided, safety, peace and stability.
There is a further complication. Austrian economists assert that defence policy-makers cannot
measure human values and their valuation of foregone alternatives when making choices.
People’s valuations are subjective; they differ between individuals, and they cannot be measured,
compared and weighted (Butler, 2010, p83). In contrast, defence inputs are more easily
identified, measured and valued with the results reflected in a nation’s annual defence budget.
For economists, questions then arise as to whether annual defence budget information provides
data to assess the efficiency of its military expenditure: how much is spent and what are the
resulting outputs? Do defence budgets provide policy-makers and politicians with the sort of data
needed to assess the benefits and costs of different defence forces? For example, a larger army or
navy or air force; the impacts of substituting equipment for military personnel; or the impact of
substituting reserves for regular force personnel? Various types of defence budgets are available
and have been used comprising input budgets, output budgets, management budgets and resource
accounting budgets.
4.1.1
4.1.1.1
Defence Budgeting
Input Budgets
Input budgets provide some limited information on defence inputs such as the pay of military and
civilian personnel, supplies, production and research and movements (Hartley, 2011, chp 4).
However, such budgets have major limitations for assessing efficiency. First, the budget fails to
show any defence outputs other than the vague heading of ‘defence.’ Second, it does not relate
inputs to specific outputs (e.g. air defence; anti-submarine defences). Third, inputs focus on the
current year only and do not reflect the life-cycle costs of current procurement decisions. Fourth,
inputs are not always valued in terms of market values reflecting scarcity of resources (e.g. some
resources, such as military bases and land for training, might not be priced and are available at
zero price; other resources such as conscripts are not priced at their labour market values). These
limitations led to the development of output budgeting.
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4.1.1.2
Output Budgets
Output budgets also known as programme budgets are in complete contrast to input budgets and
are much closer to the economist’s model of defence budgets. They provide information on some
of the outputs of defence such as nuclear strategic forces, air defence, aircraft carriers, infantry
regiments and reserve forces together with their costs. Output budgets also provide information
on the possibilities for substitution (e.g. between nuclear and conventional forces; between
reserves and regulars). With output budgets, a distinction needs to be made between the budget
available to the Defence Ministry and the budget released to Parliament and the public. The
published version of the budget does not reveal all the information available to the Defence
Ministry and the basis for the choices which are reflected in the published version (Davies, et al,
2011, chp 17).
There are at least two major limitations with output budgets. First, the expenditure figures used
in output budgets are unlikely to be least-cost solutions due to lack of competition and proper
market structures. Second, whilst they are known as output budgets, there remain problems in
identifying the outputs of defence. Often, outputs are defined in terms of the numbers of military
personnel, aircraft squadrons, warships and infantry regiments. But the published data are usually
measures of intermediate, rather than, final outputs in the form of protection, security, safety and
peace. For example, the numbers of military personnel are misleading if their training,
productivity and readiness for operations are ignored. Similarly, the numbers of aircraft, tanks
and warships are misleading without data on their average age and their operational availability
both currently and in the future. Then, the combinations of military personnel and equipment
need to be assessed as effective forces with their ability to be deployed and sustained to different
overseas locations for long periods.
4.1.1.3
Management Budgets
Management budgets focus on efficiency. Top level and lower level budget holders are identified
and awarded cash budgets where delegated financial powers allow military commanders and
managers to switch resources to achieve agreed objectives. But, inevitably, there are problems
with management budgets. Budget holders (e.g. commanders of bases and units) often face
constraints on their freedom to vary the mix of inputs of capital and labour (equipment and
personnel). It is not unknown for large items of expenditure to be pre-committed leaving base
and unit commanders with choices about relatively small items of expenditure (e.g. window
cleaning; catering; transport). And efficiency incentives are reduced if some of the benefits
accrue to the Defence Ministry or the national Treasury. Nor can efficiency be achieved without
clearly-specified defence output targets. Cost savings can easily be realised if output targets are
not specified!
4.1.1.4
Resource Accounting and Budgeting (RAB)
The UK adopted RAB in 2002 in order to bring public sector accounting practices into line with
those in the private sector. RAB represents a shift from cash-based budgets to resource
accounting which includes depreciation and cost of capital charges. There is an annual balance
sheet for the Ministry of Defence (MoD) showing fixed and current assets, provisions and
liabilities. Data on the value of MoD’s fixed assets includes valuations for fighting equipment and
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the defence estate (e.g. military bases and land for training). By identifying the costs of holding
assets, RAB provides incentives for disposal (e.g. of surplus land, bases and estates). However,
the adoption of private sector management and accounting practices alone will not lead to
efficiency in MoD. The private sector has a range of mechanisms and incentives for achieving
efficiency including competition, the profit motive and the capital market with the threat of takeover and bankruptcy. Such mechanisms and incentives are absent from MoD (and the public
sector). All parts of the public and private sectors consist of individuals and groups with
incentives to pursue their self-interest (people will adjust and play any games: principal-agent
models): the task for MoD is to provide efficiency incentives equivalent to those in the private
sector. Here, the continued absence of an acceptable measure of defence output remains a serious
obstacle to assessing efficiency in the defence sector.
4.2
Challenges
Two pressures will make it essential to focus on the size of a nation’s defence budget and the
efficiency with which defence resources are used. First, continued pressure to reduce defence
budgets and re-allocate resources to other public spending programmes, especially education,
health and welfare (including care for the increasing elderly populations). Second, the additional
pressure on defence budgets from rising equipment costs. A simple example shows the
importance of rising unit equipment costs which will affect all nations (all figures are for unit
production costs in 2010 prices):
x
Spitfire unit costs (1940): £154,850
x
Typhoon unit costs (2010): £73.2 million
x
Typhoon replacement in 2050: £1+ billion
Norman Augustine famously forecast that with continued rising unit costs, by 2054, the entire US
defence budget will purchase just one aircraft which would have to be shared between the Air
Force and Navy (the Marines would have it for one day in leap years). He also forecast that the
UK and France would reach this position two years earlier (Augustine, 1987, p143). Rising unit
costs and constant or falling defence budgets (in real terms) means that difficult defence choices
cannot be avoided: something has to go and the question is, what? The challenge in answering
such questions requires reliable measures of defence output or in the absence of such measures,
the development of improved proxies. This study contributes to knowledge by identifying the
issues involved in developing better output measures and by reviewing the experience of other
nations.
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5
Defining Defence Outputs: The Benefits of Defence
In principle, defence provides an output in the form of goods and services which provide a stream
of current and future benefits to a nation’s citizens and to the citizens of other nations who might
also receive such benefits. The benefits are both economic and non-economic although such a
distinction can be problematic. The economic benefits of defence usually take the form of
services which contribute to national output. The non-economic benefits of defence include its
foreign policy benefits, peace-keeping and its contribution to a nation’s ‘feel good’ factor,
including its involvement in being a responsible international citizen and member of the
international community.
Typically, defence economists rarely address the concept of defence output apart from vague
references to security. Government statisticians and the National Accounts have traditionally
measured defence output on the convention that output equals input (ONS, 2008). Improving this
limited measure requires that the concept of defence output be developed and explored.
5.1
Security
Security can be defined as the feeling of being secure and safe. In principle, defence provides
security which is a multi-product output embracing protection, safety, insurance, peace, economic
stability and risk avoidance or reduction (Solomon, et al, 2008). Further dimensions include
prosperity, individual and national freedoms, liberty and the ‘way of life.’ These are all difficult
to measure and might be influenced by factors other than defence. Also, these aspects of security
are public goods which are not marketed and non-marketable services involving no tangible and
physical products. Such difficulties of measurement do not remove the need for exploring
concepts as a means of understanding the challenges of measuring defence output.
Security is sometimes defined as the absence of threats or risks (Baldwin, 1997; Engerer, 2011).
But a world of no threats or risks does not and cannot exist: real worlds are characterised by
threats and risks. Questions then arise about which threats and risks can be reduced, by whom
and at what cost? New developments have led to security referring to issues other than military
security (creating fuzzy boundaries). Individuals are faced with threats to their lives, health,
property, other assets and their prosperity (e.g. from criminals and terrorists; disease/pandemics
and ill health; natural or man-made disasters; economic recessions). Individual threats are
additional to threats to nation states (e.g. military threats from other nations; environmental
problems originating from other nations) which raises questions about which threats should be
handled privately and which publicly. And where threats are handled publicly, which is the most
appropriate and least-cost solution? For example, military solutions are appropriate for external
military threats whilst internal policing is most appropriate for internal threats from criminals
(e.g. physical violence to individuals involving injury and death; robbery). Threats to an
individual’s state of health require dietary, medical and care solutions (e.g. from doctors and
nurses; care homes). Threats to prosperity require government macro- and micro-policies to
promote full employment and economic growth (e.g. opportunities for education, training and
labour mobility although some of these activities can be funded privately). Technical progress
and changing consumer preferences have resulted in shifts from the public provision of security
to private protection measures provided and financed by individuals (e.g. private security
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guarding; camera surveillance of property; creation of neighbourhood watch schemes providing
local club goods).
Security has a geographical dimension. For example, defence can be viewed as a means of
protecting a nation’s property rights over its land, sea and air space. But a nation’s defence forces
might also be used to protect other nations’ citizens so that the public good becomes international
which further increases the problem of obtaining and financing the optimal amount of the
international public good (including peace). Overall, security measures can be analysed as
national or international public goods, club goods and private goods each with different solutions
and each embracing different industries (e.g. security industries; defence industries: Engerer,
2011). These different industries have different customers, products and technologies (Sempre,
2011).
5.2
The Economic Benefits of Defence
Defence contributes to individual and collective security and protection, both of which are
valuable commodities. It protects households and their assets, firms and their assets, the national
infrastructure, national institutions and national freedoms (e.g. democracy; freedom of speech and
movement, etc). It also protects national interests, including independence and ‘appropriate
sovereignty’ (e.g. protecting a nation’s interests in a globalised world, including leverage and
status in world politics and diplomacy: see below). How can these commodities be valued?
There are at least three approaches.
First, estimate a nation’s per capita defence spending and then ask whether its citizens are willing
to pay at least such a sum for the annual protection offered by its Armed Forces. Comparisons
can be made with other public spending programmes, such as health and police forces. Second,
value-of-life studies can be used to estimate the valuation of lives saved and injuries avoided
resulting from the provision of Armed Forces (Jones-Lee, 1990). Health economists have
developed measures of health output in the form of quality adjusted life years or QALYS (but
these are not valued). The defence equivalent of QALYS would be protection adjusted life years
(PALYS: Hartley, 2010b). In addition to estimating the value of lives saved from defence, there
are further gains from valuing the property saved by avoiding damage and destruction (i.e.
estimating both human and physical capital saved). Third, consider defence as insurance in
response to various current and future known and unknown threats and contingencies. These
contingencies involve time-periods of some 25-50 years into the future: the result is lags in the
relationship between inputs and defence outputs meaning that defence productivity cannot be
based on the standard relationship between inputs and outputs within a calendar year. The
insurance approach has private market comparators. Individuals and firms pay for a variety of
insurance policies and other forms of protection. Examples include households buying insurance
for homes, motor cars, driving, health care, international travel and retirement. In addition,
households buy further protection in the form of household security (e.g. alarms; guard dogs),
purchasing safer motor cars, locating in a safe neighbourhood and joining neighbourhood watch
schemes (through payments-in-kind). Similarly, firms make various insurance payments for
protecting their assets; they employ security guards and introduce measures to protect their staffs
and assets from terrorist attacks. Admittedly, these are private rather than public goods but
nonetheless, the payments in cash and kind provide some indication of the willingness of
households and firms to pay for protection: such willingness to pay might then be applied to
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15
estimating the minimum level of a nation’s defence spending. Further spending on protection is
reflected in expenditure on a nation’s police forces and internal security. The result is a
substantial expenditure on private and public spending on internal security: again, such sums
provide an estimate of the lower bound of national defence spending.
By providing security and protection for a nation’s citizens, defence spending and the Armed
Forces create the conditions allowing and promoting beneficial voluntary trade and exchange
within and between nations. Protection of national property rights over land, sea and air space
promotes national market exchanges whilst protection of international trade routes promotes
beneficial international trade and exchange. For example, a nation’s navy protects its
international shipping and trade routes, including protection from piracy. National and
international market exchange contributes to improving society’s welfare (e.g. compare a society
which lacks well-developed national markets). In the context of national markets, the Armed
Forces provide a capability to respond to national emergencies and provide aid to the civil
community. Without Armed Forces, the civil powers would have to provide more resources for
emergencies (at a cost for providing such capabilities which will only be required infrequently) or
ignore such contingencies.
Defence spending and a nation’s Armed Forces prevent and avoid conflict and where conflict
occurs they seek to minimise its duration and effects on citizens as well as contribute to a rapid
post-conflict recovery. In this context, defence provides a deterrent aiming to persuade potential
adversaries that conflict is not worthwhile. Where deterrence fails, defence spending aims to
provide a war fighting capability to achieve a ‘successful’ conclusion by minimising the costs of
conflict. These features are economic benefits reflected in the cost savings from avoiding conflict
or in minimising its duration and contributing to post-conflict recovery and restoration of market
activity. Again, it is difficult to measure cost savings for events which do not occur. Indeed,
such problems raise the general methodological issue of the counter-factual: what would have
happened without a nation’s defence spending?
Defence spending provides some direct national economic benefits comprising jobs, technology,
spin-offs, exports and import-savings. The Armed Forces are a source of employment, their
spending in local areas adds further to employment, and they provide a source of trained and
skilled labour for the rest of the economy. In addition, spending on national defence industries
further contributes to jobs, advancing technology, spin-offs and the balance of payments.
However, these economic benefits need to be assessed critically: there are serious doubts about
many of these claimed economic benefits. For economists, a major concern arises over the
alternative-use value of the resources employed in the Armed Forces and national defence
industries. It needs to be asked whether the resources used in the military-industrial complex
would make a greater contribution to jobs, technology, spin-offs and exports if these resources
were used elsewhere in the economy (Hartley, 2010b).
Bilateral military alliances might provide additional economic benefits. For example, the US-UK
special relationship provides the UK with access to US technology for its nuclear-powered
submarines and missiles for its nuclear deterrent; it provides the UK with a leading role in the F35 programme; and enables major UK defence firms’ access to the US defence market (e.g. BAE;
Rolls-Royce). Also, the USA provides security and protection for the UK which might otherwise
require a larger defence budget. Similarly, Canada benefits from US defence spending and
protection leading to lower Canadian defence spending.
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5.3
The Non-Economic Benefits of Defence
Defence spending also contributes major non-economic benefits to a nation and it might be that
the non-economic benefits are valued more highly than the economic benefits. Non-economic
benefits are those which do not contribute to national output. They comprise political, militarystrategic and international benefits.
These non-economic benefits include the ability to pursue national interests and foreign policy
objectives; adding to a country’s international reputation, standing and status in the world (the
feel good factor); and its position in the world power hierarchy. These non-economic benefits
might be reflected in a nation’s position in the United Nations (e.g. membership of the Security
Council), its membership of world economic organisations (e.g. OECD; IMF; G-8 and G-20
groups of nations), its leadership positions in international military alliances (e.g. NATO) and its
ability to influence the behaviour of other nations. There are military-strategic benefits from
bilateral or multilateral military alliances (e.g. benefits from standardisation of equipment and
tactics: some of these benefits are economic in the form of cost-savings).
A nation can obtain further non-economic benefits in the form of prestige and international
reputation by providing military forces for international peace-keeping and peace enforcement
leading to world peace. But such peace-keeping contributions are not costless. Further noneconomic benefits arise where a nation’s Armed Forces contribute to international efforts on
humanitarian aid and disaster relief. These contributions provide a ‘feel good’ factor for the
contributing nation’s citizens (e.g. national spending on child protection and social services:
Hartley, 2010b).
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17
6
The Evidence: International Experience with
Measuring Defence Output
6.1
UK Experience
Before 1998, the UK published traditional input and intermediate measures of its defence output.
Typically, these comprised numbers of Armed Forces military personnel and their formations
embracing numbers of aircraft squadrons, infantry regiments, tank units and warships. The
published data on unit numbers were available in varying degrees of detail (e.g. aircraft squadrons
by types of aircraft; types of warships, etc). The amount of published data and its detail has
improved over time. Data were also published on the numbers of regular and reserve forces and
the numbers of civilian personnel employed by the Ministry of Defence (MoD). During the Cold
War, the Armed Forces focused on preparing for and deterring a direct military attack on the UK
or Western Europe. After the Cold War, there was no longer a direct military threat to the UK.
In 1998 the publication of the Strategic Defence Review (SDR) marked a significant change in
published defence output measures.
The 1998 SDR represented a pioneering contribution to UK published data on defence output
measures. For the first time, the UK published data on its defence capabilities which are a more
meaningful indicator of defence output. These defence capabilities are viewed as planning
commitments. The 1998 SDR committed the UK to be a ‘force for good’ in the world with an
associated world military expeditionary capability. On this basis, the UK Armed Forces were
able to support continuing commitments (e.g. Northern Ireland at that time) and be able to:
i.
Respond to a major international crisis of a similar scale and duration to the Gulf War
(an armoured division; 26 warships; over 80 combat aircraft); or,
ii. Undertake a more extended overseas deployment on a lesser scale (e.g. Bosnia) while
retaining the ability to mount a second substantial deployment if this were made
necessary by a second crisis (e.g. combat brigade and supporting air and naval units). It
was not expected that both deployments would involve warfighting or that they would be
maintained for longer than six months. One might be a short warfighting deployment; the
other an enduring non-warfighting operation (SDR, 1998, p23).
These defence capabilities were subject to various constraints of readiness, location, duration and
concurrency. Different levels of readiness involve different cost levels: continued high readiness
is costly. Similarly, location and duration affect force requirements: regional conflicts outside the
NATO area and for an indefinite duration require different sizes and structures of Armed Forces
compared with short-term deployments to, say, Bosnia or Kosovo. SDR identified the core
regions of Europe, the Gulf and the Mediterranean. Concurrency is a further issue involving the
number of operations which can be conducted at any time involving their scale, location and
duration. The UK was committed to conducting two medium scale operations concurrently
(SDR, 1998).
Following the 9/11 terrorist attacks on the USA, the 1998 SDR was modified. A modified policy
was announced in 2003/04 which comprised Cmnd 6041, 2003; Cmnd 6269, 2004):
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x
The ability to support three simultaneous small to medium scale operations where at least
one is an enduring peace-keeping mission (e.g. Kosovo) 2 . Small scale is defined as the
UK’s deployment to Macedonia in 2001; medium-scale is Afghanistan (2001); and large
scale was operation TELIC (Iraq); or,
x
The ability at longer notice to deploy forces for large-scale operations while running a
concurrent small scale peace support operation or,
x
Ability to project military force to sub-Saharan Africa and South Asia as well as a
capability to respond to international terrorism.
The most demanding operations will be conducted as part of a coalition, usually involving the
USA. This requires the UK’s Armed Forces to be interoperable with US Forces. An
announcement that the optimum ratio for prolonged commitments was 3-4 ships and 5 Army and
RAF crews/units for each one deployed (Cmnd 6269, 2004). Further changes occurred with the
Strategic Defence and Security Review of 2010 (Cmnd 7498, 2010). Following planned budget
cuts, the UK’s Defence Planning Assumptions and its defence capabilities were reduced to:
x
An enduring stabilisation operation around brigade level (up to 6500 personnel) with air
and naval support; and,
x
One non-enduring complex intervention (up to 2000 personnel) and,
x
One non-enduring simple intervention (up to 1000 personnel) or,
x
o
Alternatively, three non-enduring operations if not already engaged in an
enduring operation or,
o
For a limited time, and with sufficient warning, committing all the UK’s effort to
a one-off intervention with up to three brigades with air and naval support (about
30,000 personnel). This would be about two-thirds of the force deployed to Iraq
in 2003.
Maintaining a ‘residual defence capability’ for unforeseen emergencies or to reinforce
existing operations or to respond to scenarios where the UK acts alone (HCP 992, 2011,
p20).
MoD budgets pay for the UK force elements to be ready for operations as outlined in the Defence
Planning Assumptions. However, the costs of these missions are funded from the Government’s
Contingency Reserves. Over time, the rising unit costs of defence equipment and of volunteer
military personnel will result in smaller Armed Forces and reduced defence capabilities (as
defined by the UK MoD). More important would be an assessment of the costs of achieving
these defence capabilities compared with other nations providing similar capabilities (i.e. is the
UK providing its capabilities at least-cost?). Within MoD, measures of defence training activities
are used to assess performance. These include flying hours, days spent at sea and Army
personnel data on gains to trained strength and data on military exercises (ONS, 2008).
2
Interestingly, the 2003/04 policy increased the UK’s defence capabilities and commitments.
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19
The MoD publishes an annual performance report which offers some further insight into its
defence capabilities (HCP 992, 2011). For example, its 2011 Report focused on success in
Afghanistan reflected in the costs of operations; the costs of its force elements (e.g. a ship at an
annual cost of £28 million; a fixed wing combat aircraft at £6.5 million per year); and the direct
costs of Service personnel (£49000 per Service personnel per year: HCP 992, 2011). Useful
though such information might be, it is both qualitative and vague (success in Afghanistan) and
focuses on input costs which are unhelpful data by themselves. On force readiness, the MoD’s
Performance Report admits that “Measuring and aggregating readiness is complex, not least
because it is based on judgements of what is required to enable the Armed Forces to respond to a
wide range of potential challenges”(HCP 992, 2011, p21). MoD reports on where there are
‘critical and serious weaknesses’ in UK Forces. For 2010/11, the main focus was on the
capabilities and force elements used in Afghanistan. Interestingly, MoD’s Performance Report
included a section on Defence Exports where one aim is to support British industry and jobs
(HCP 992, 2011). Defence exports are not an obvious output indicator for the MoD.
The MoD’s Performance Report also included a section on implementing the 2010 Strategic
Defence and Security Review which provided further information on the interpretation of the
UK’s defence capabilities. There is a NATO commitment to spend at least 2% of GDP on
defence; there is an aim of achieving savings from contract renegotiations with the defence
industry; to retain a surface fleet of 19 warships; to reduce the force of main battle tanks by 40%;
and to scrap the Nimrod MRA4 fleet (at a saving of some £200 million per aircraft: HCP 992,
2011).
The UK’s defence capabilities output measures are an improvement on the traditional input
approach but there remain deficiencies at least in terms of publicly available information. For
example, the National Audit Office has reported that the UK MoD has a good system for
defining, measuring and reporting the readiness of its Armed Forces which compares well with
other countries (e.g. Australia; Denmark; USA: NAO, 2005). It is recognised that perfect
readiness is too costly. But, the published data on readiness refers to whether there are serious or
major weaknesses which are useful but not very illuminating (e.g. without knowing what and
where such weaknesses arise and their impact on force effectiveness). A statement that 50% of
UK Forces had no serious or critical weaknesses suggests that the remaining 50% of the Forces
demonstrated such serious weakness which is a source of concern! Moreover, these performance
assessments are undertaken by MoD personnel which could raise questions of objectivity.
A National Audit Office Report on the performance of MoD in 2009-10 presented and reviewed
performance indicators (NAO, 2010). This Report focused on financial management information
(e.g. management of stocks and assets)) and made no mention of defence output measures. At
most, there was a mention of broad defence output indicators. These included qualitative
evaluations such as ‘success on operations;’ whether there were serious and critical weaknesses in
readiness; manning levels in relation to manning balance by Service (with no data); and flying
hours achieved against targets (again, without any data). In relation to the MoD aim of global and
regional reduction in conflict, no output measure was reported by the National Audit Office
(NAO, 2010).
The National Audit Office also publishes value for money reports (e.g. on multi-role tanker
aircraft capability) and annual reports on MoD’s major projects. The project reports assess major
defence projects against their contractual commitments on cost, delivery and performance usually
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identifying cost overruns, delays and a failure to meet all performance requirements. Such value
for money reports are a useful addition to knowledge but they do not include wider industrial and
economic benefits of major projects, nor do they provide any assessment of the ‘battle-winning’
performance of defence equipment (e.g. as demonstrated in Afghanistan and Iraq).
Overall, the UK’s defence capabilities are useful measures of defence output but deficiencies
remain. Some of the indicators of force readiness are qualitative; readiness is a variable measure
depending on circumstances (readiness for what, when and where?); no valuation is placed on
each of the capabilities; not all capabilities are identified; and the capabilities cannot be
aggregated into a single measure of defence output. None of the output measures address the
contribution of defence to conflict prevention and its contribution to minimising the costs of
conflict including the saving of lives. In fact, MoD economists have examined the different
approaches to capturing output used in various parts of MoD. “These include a number of partial
aggregations and a balanced scorecard approach covering the three main areas of activity: success
in military tasks, readiness to respond and preparing for the future... and... it was confirmed that
no existing technique offered a solution. Although it is hoped that in the longer term progress
will be made on the direct measurement of defence outputs and productivity, this remains an
elusive goal” (Davies, et al, 2011, p399).
6.2
UK Experience in Other Parts of the Public Sector and the
Private Sector
Other parts of the UK public sector have addressed the issue of measuring their outputs.
Examples include health, education, public order and safety, transport and social protection. The
problems of measuring UK public sector outputs were reviewed by Atkinson (2005). This
Review started by recognising that government output is generally non-marketed output and it is
the absence of market transactions which underlie many of the problems of measuring public
sector outputs. The traditional approach used in National Accounts statistics is the output equals
input convention (Atkinson, 2005). The Review recognised that in the case of defence it is hard
to identify the exact nature of the output (Atkinson, 2005, p12). Some principles were suggested:
can we borrow from private sector experience (where the focus is on value-added); and
government output should be adjusted for quality changes (which is a problem for defence).
The Atkinson Review reported on experience of output measurement in public sectors such as
health, education, public order and safety and social protection. In health, it reported on the use
of an aggregate output index constructed from separate series such as total numbers of in-patient
and day cases. It recognised quality issues where health care embraces saving lives and
extending the life span and preventing illness. Here, it reported on the possibilities of using
quality measures of health care based on Quality Adjusted Life Years (QALYS). Education
output was measured by such indicators as examination results and the numbers of full-time
school pupils (but numbers fail to reflect attendance). Public order and safety embraced police,
fire, law courts and prisons. Outputs were measured by such indicators as number of nights spent
in prison; fighting fires; and the number of crime-related incidents. Social protection includes the
residential care of children and adults and output is measured by the numbers in residential care
(Atkinson, 2005). Experiences of measuring outputs in these parts of the UK public sector
provide some guidance for measuring defence outputs. Measuring health outputs involving
saving lives and preventing illness have parallels in defence. The development of QALYS for
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21
health might be extended to defence in the form of Protection Adjusted Life Years (PALYS).
Since the Atkinson Review, the Office for National Statistics has continued to develop and
improve output measures for various parts of the UK public sector. For example, education
output measures are now adjusted for attendance and for quality changes (e.g. annual changes in
examination points scores: ONS, 2010). But often the output measures are aggregate indices with
no valuation of outputs.
Experience of measuring output in the UK transport sector has addressed a key issue raised in
defence, namely, the value of life and the value of lives saved by transport improvements. The
value of life is based on a person’s willingness to pay (e.g. for good health care; for road safety
improvements). On this basis, the UK Department of Transport valued a life at £1.57 millions
and a non-fatal serious injury at £176,215 per person (2009/10 prices).
Experience in the UK private sector might provide guidance on the possible valuations to be
placed on defence output. In the private sector, individuals and households allocate resources to
protection and safety. Examples include insurance policies for protecting property; household
security measures (e.g. cameras; fencing; alarms; dogs); car insurance and purchase of safer cars;
location of homes in ‘safe’ areas; and the purchase of private medical and life insurance. In
addition, there are public expenditures on protection, including police, fire and rescue services,
prisons as well as health care. Expenditures on these ‘comparator sectors’ provide an indication of
society’s willingness to pay for various measures of protection.
6.3
Australian Experience
The Defence White Paper of 2009 outlined Australia’s defence policy and force structure to 2030
(DoD, 2009). It specified Australia’s strategic interests to comprise (ranked in order of priority):
x
The defence of Australia against armed attack with the capability to act independently so
as not to be reliant on foreign military forces. This principal task requires the Australian
Defence Force (ADF) to control the air and sea approaches to Australia.
x
The security, stability and cohesion of Australia’s immediate neighbourhood which is
shared with Indonesia, Papua New Guinea, East Timor, New Zealand and the South
Pacific Island states.
x
An enduring strategic interest in the stability of the wider Asia-Pacific region;
x
A strategic interest in preserving the world international order which restrains aggression
and manages other risks and threats and addresses the security impacts of climate change
and resource scarcity.
These objectives are to be achieved by Australia acting independently, by leading military
coalitions and by making tailored contributions to military coalitions. As a result of these
priorities, the ADF of 2030 will need to improve especially its maritime capabilities as well as
enhancing its air capabilities. Part of the funding for these capability improvements are to be
achieved by efficiencies and savings of AUD $20 billion which it is claimed will not compromise
effectiveness (DoD, 2009, p14). Also, to fund ADF of 2030, the Government has committed to
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real growth in the defence budget of 3% to 2017-18 and then 2.2% real growth to 2030 (DoD,
2009, p137). The 2009 White Paper recognises that defence planning is about managing strategic
risks, that uncertainties remain and that it is not possible to eliminate all risks (an ideal warning
time of 10 years is reported: DoD, 2009, chp3, p28).
The 2009 White Paper deals with preparedness embracing readiness, sustainability and
concurrency. It recognises that preparedness comes at a cost (but provides no data on the costs
of different levels of preparedness). Sustainability refers to the ability to undertake tasks and
operations over time, whilst concurrency deals with the ability to conduct a number of operations
in separate locations simultaneously. The White Paper provided an extensive list of the required
capabilities of the ADF including:
x
the capabilities needed for sea and air control around Australia
x
deploy a brigade group for combat operations for a prolonged period of time in the
primary operational environment (for shorter period beyond that area)
x
deploy a battalion group to a different area of operations in the primary operational
environment
x
maintain other forces in reserve for short-notice, limited warning missions
x
provide tailored contributions to operations in support of Australia’s wider strategic
interests (e.g. special task forces group)
x
provide assistance to civil authorities (e.g. fisheries protection; terrorist incidents; support
for major events; emergency responses; humanitarian and disaster relief in Australia and
its neighbours; provision of search and rescue support, etc).
The list of capabilities is extensive with no ranking and little indication of the military resources
available for each capability. Some of the capabilities are clearly military; others, including aid to
civil authorities, are a general ‘catch-all’ which might be used to justify public support for
defence spending. Further data on capabilities is provided by the annual defence budget.
Australian defence budgets show published data on expenditure on various overseas operations,
the sources of planned cost savings and capital investment programmes. There are data on the
extra costs of overseas operations and on the numbers of military personnel by service
(permanent; reserves; numbers of high readiness reserves). Further budget data are presented on
planned performance and outcomes for each of three defence outcomes comprising the protection
and advancement of Australia’s national and strategic interests and support for the Australian
community and civil authorities (including expenditure by military base area). Some limited
performance indicators are published such as the number of unit ready days for the navy and
flying hours for each of the services (DoD,2011).
A review of defence accountability was published in 2011 with the aim of improving
accountability across defence (Black, 2011). The review recommended the introduction of
specific, measurable and achievable outcomes with individuals given ownership and made
accountable for their outcomes. The review recognised that there was a lack of specific outcomeDRDC CORA CR 2011-178
23
based language in defence and an insufficient use of measurable outcomes. Particular focus was
placed on performance measures for shortfalls in equipment delivery to time, budget and quality
(e.g. average delays of 28% or 2+ years; cost overruns of 52%: Black, 2011, p60-61). However,
the review focused on management-organisational issues (e.g. too many committees) and not on
the development of defence output measures and their consequences.
In June 2011, the Australian Minister for Defence announced a Defence Force Posture Review
designed to assess whether the Australian Defence Force (ADF) is correctly positioned
geographically to meet Australia’s modern and future strategic and security challenges. These
include:
x
The rise of the Asia-Pacific and the Indian Ocean rim as regions of global strategic
significance.
x
The growth of military power projection capabilities of the Asia Pacific countries.
x
The growing need for the provision of humanitarian assistance and disaster relief
following extreme events in the Asia Pacific events; and
x
Energy security and security issues associated with expanding offshore resource
exploitation in Australia’s North West and Northern approaches.
The ADF Force Posture Review will consider how the ADF will support Australia’s ability to
respond to a range of activities including deployments on overseas missions and operations;
support of operations in Australia’s wider region; and engagement with the countries of the Asia
Pacific and Indian Ocean rim in ways which will help to shape security and strategic
circumstances in Australia’s interest. The Force Posture Review will also make recommendations
on basing options for Force 2030. There is also a Submarine Sustainment Review which will
review the sustainment of Australia’s Collins Class submarines. Both Reviews are due to be
completed by April 2012 (ADF, 2011).
6.4
New Zealand Experience
New Zealand has a considerably smaller defence effort compared with the UK (see Table 1;
Hartley 2010b). Nonetheless, it has devoted substantial resources to measuring its defence output.
This section describes and assesses the development of its output indicators as published in 1991,
1993 and 2011.
In 1991, the New Zealand Defence Force (NZDF) published defence output measures in its
Annual Plan (NZDF, 1991). At this time, the output of the NZDF was grouped into two main
categories, namely, retained outputs and current outputs. Retained outputs are the military
groupings of operational forces which are retained to provide the Government with a basis of
military power from which force may be applied. Current outputs reflect the range of current
activities undertaken by the NZDF which reinforce foreign policy goals and contribute to the
well-being of the nation. Current outputs were further divided into core (military activities which
contribute to military outcomes) and non-core (services provided to the community). Published
output data were provided for each of these various outputs. For example, retained outputs
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consisted of eleven outputs, namely, naval combat forces; mine countermeasure forces; naval
control and protection of shipping organization; strategic assets (force troops); ready reaction
forces; infantry brigade group and force maintenance; long-range maritime patrol force; offensive
air support force; long and medium-range air transport force; medium and short-range air
transport force; and the utility helicopter force. Each output presented performance targets and
performance achievements. For example, the performance target for the infantry brigade group
required deployment for operations within 90 days and the performance achieved was for such a
force to be available for sustained low-level operations at 90 days notice. Offensive air support
required 3760 flying hours by Skyhawks but there was a shortfall of over 400 hours against this
target.
Changes were made and announced in 1993 (NZDF, 1993). Seven output classes were identified,
comprising protection of New Zealand’s territorial integrity and sovereignty; the provision of
military advice; the provision of intelligence; the provision of ancillary services; the contribution
to regional security; mechanisms for participation in defence alliances; and contributions to
collective security. Each output class was divided into sub-groups each with performance targets
and achievements. For example, the sub-group of countering terrorism had a performance target
of two counter-terrorist exercises but only one such exercise was conducted. Similarly, for the
sub-group deterring intrusions, there was a performance target of sustaining a naval presence for
up to 30 days in the New Zealand area and it was reported that this capability was demonstrated
and achieved. Whilst an impressive amount of detail was published, there are serious deficiencies
with the outputs reported and performance indicators used. First, the outputs and performance
indicators reported are mainly inputs and intermediate measures of output. Second, some of the
outputs are strange elements for defence outputs, namely, the provision of advice, intelligence
and ancillary services which includes civil defence assistance, support services to the community
and ceremonial support for the state. Third, the published data provide no weighting to indicate
the relative importance of the various defence outputs. Is the provision of advice and intelligence
ranked as highly as protection of New Zealand’s territorial integrity and sovereignty? Fourth,
some defence outputs might more appropriately be the responsibility of other government
departments. Inevitably, defence outputs are refined and developed with time and experience and
the New Zealand position at 2011 is summarised in the next section.
The NZDF Statement of Intent (NZDF, 2011) outlines the country’s defence policy over the next
25 years. It specifies the primary mission of the NZDF as securing New Zealand against external
threat, protection of its sovereign interests and the ability to take action to meet likely
contingencies in the country’s strategic area of interest. This primary mission recognises that the
country’s national interests affect both the security and prosperity of the nation. New Zealand
must trade to survive which requires that New Zealand has unfettered access throughout the AsiaPacific region to go about its business. “Instability, conflict and war, even far from New
Zealand’s shores, can therefore directly affect New Zealand’s social and economic well-being”
(NZDF, 2011, p9). Recognizing that the primary mission of the NZDF is so broad, a number of
subsidiary or intermediate outcomes have been developed.
The NZDF main and intermediate outcomes are currently not linked to a formal set of measures,
mainly due to the complexity of measuring outcomes which deliver security and protection: there
is no single measure of success in delivering protection. “There is no definitive way of knowing
what might have happened, but did not happen, because of the activities of the NZDF” (NZDF,
2011, p34).
DRDC CORA CR 2011-178
25
The NZDF has 37 outputs within 16 output/expenses classes. Its output expenses classes include
naval combat and support forces; mine countermeasures; land combat and support forces; naval
helicopter forces; airborne surveillance; and fixed wing and rotary transport forces. Other output
categories are strange components to be regarded as defence outputs, including military
hydrography, military advice and multi-class output appropriations (e.g. support to youth
development; support to military museums: NZDF, 2011). The NZDF also stresses its links with
the community reflected in the provision of skills to society, promotion of a ‘healthy’ defence
industry and a “buy New Zealand” procurement policy (NZDF, 2011, p11). However, it is now
explained that these links to the community arise as by-products of the NZDF (NZDF, 2011,
p11).
The NZDF uses a measure of military capability which shows the combined effect that inputs
have on operational effectiveness. Military capability is assessed using two elements, namely,
preparedness and force components described by the acronym PRICIE which comprises
Personnel; R&D; Infrastructure; Concepts of operations and training; Information/technology;
Equipment and logistics (NZDF, 2011, p48).
The NZDF recognises that its output measures appear as inputs rather than outputs. Inputs are
used as proxies for military capabilities (e.g. that 500 flying hours of a specific type of aircraft
will provide a certain military capability); but the measurement systems and capabilities are
classified. However, following the New Zealand Defence Review, concerns were expressed that
the current system is input focused and that there is a desire to measure military impacts and
outcomes and cross-sector security outcomes. Where complex relationships are involved, it
might not be possible to easily identify and measure cause and effect (CAG, 2011). No
valuations of output are provided.
6.5
European Experience
The focus is on the major European defence spending nations using English language published
data. The nations comprise France, Germany, Italy, Spain and Sweden.
6.5.1
France
A new French defence policy was announced in 2008 with the aim of making French armed
forces more flexible for rapid deployment from the Atlantic to the Indian Ocean. France aims to
provide the necessary resources to ensure the security of its citizens, to safeguard national
independence and consolidate the nation’s military and diplomatic power. Under the new policy,
France will be able to project 30,000 personnel with 70 combat aircraft, one carrier group and two
naval battle groups within a six month period for up to a year ( a force capable of dealing with
one major war or crisis at a time). Nuclear deterrence remains a key military mission but
terrorism is the most immediate threat; and there are public service missions. There will be
reductions in the numbers of military personnel and investment in new equipment. Some
equipment is of poor quality: for example, only 50% of Leclerc tanks are mission ready; its
refuelling aircraft are 45 years old; and some Puma helicopters are 30 years old (Independent,
2008). In 2010, the UK and France agreed an Anglo-French Defence Treaty with the potential
for greater bilateral co-operation between their armed forces and defence industries.
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6.5.2
Germany
NATO remains the centrepiece of Germany’s defence policy. The new defence policy announced
in 2011 involves some major changes for Germany’s armed forces. There will be reductions in
the defence budget; conscription will be abolished to be replaced by an all-volunteer force;
Germany’s expeditionary capabilities will be improved; and there will be closer military cooperation in Europe, especially in procurement and training (GMOD, 2011). Under the new
policy, Germany plans to increase the deployment of the Bundeswehr outside Germany from the
current 7,000 to some 10,000 soldiers (but there is no statement of the geographical coverage of
these expeditionary forces). There are also plans to reduce the numbers of equipment (aircraft;
helicopters; ships).
6.5.3
Italy
Despite possible cuts in defence spending due to Italy’s austerity programme, Italy retains
expeditionary capability. Reports suggest that the air force has been particularly affected
defence cuts. There are also reports that Italy is planning to reduce its involvement
peacekeeping missions in the Balkans and possibly in Lebanon, concentrating instead
Afghanistan where force levels peaked at 4000 soldiers (Nativi, 2010).
6.5.4
an
by
in
on
Spain
Reductions in defence spending were part of the austerity programme. The 2011 budget reflected
four objectives: the safety of the troops (via operating and logistics expenditure); operational
readiness; the maintenance of weapons systems; and international operations and the fulfilment of
Spain’s international commitments. New tools were announced for improved oversight and
management of defence expenditure.
6.5.5
Sweden
A new defence policy was announced in 2009 with an emphasis on mobility and flexibility of
Sweden’s armed forces. It plans that an entire operational organisation of some 50,000 people
will be used within one week after a decision on heightened alert. In contrast, today only onethird of the national operational organisation is equipped and prepared for an operation within one
year. Some defence capabilities were listed in terms of numbers of military personnel (e.g.
deployment of 1,700 people for continuous international peace-support operations) and in
numbers of Gripen aircraft (100 of the C/D model). The voluntary principle will replace
compulsory military service and there will be substantial reserve forces (e.g. four mechanised
battalions). Sweden specified its area of national interest, namely, the Baltic Sea or the northern
area (SMOD, 2009).
6.5.6
The European Defence Agency
The EDA publishes defence data for its Member States. These include various annual financial
data such as levels of defence spending and its share of GDP for Member States; equipment
procurement and R&D expenditure; spending on infrastructure and construction; defence
DRDC CORA CR 2011-178
27
expenditure outsourced; and expenditure on collaborative equipment programmes. There are also
data on numbers of military, civilian and internal security personnel and expenditure on
personnel, as well as data on numbers of different types of equipment (combat aircraft; tanks;
warships). Most of these data are for inputs rather than defence outputs although some EDA
officials regard such indicators as number of military personnel as output measures. There are,
however, some data which are measures of intermediate output and proxies for defence output,
namely, operation and maintenance expenditure, operational costs, average numbers of troops
deployed and the average numbers of sustainable (land) forces (EDA, 2011). Comparative
analysis of such data for Member States might indicate substantial variations in internal
efficiency.
6.5.7
The USA
The USA is different with its global power commitments and large-scale defence spending. US
national security strategy requires a ‘comprehensive global engagement aimed at supporting a just
and sustainable international order’ (USDOD, 2011, p2-1). The USA remains the only nation
able to project and sustain large-scale military operations over extended distances. Its main
objectives are to prevail in today’s wars; prevent and deter conflicts; prepare for a wide range of
contingencies; and preserve and enhance the all-volunteer force(AVF). Three of these objectives
refer to actual and potential threats, but the commitment to the AVF is an input and not a threat!
Funding for these objectives is partly from efficiency savings including cancellation of unwanted
and poorly performing equipment programmes.
The US DoD publishes a massive amount of data of varying degrees of usefulness. For example,
it states its aim of sustaining military capabilities to fight two wars, confront global terrorism and
provide humanitarian assistance and disaster relief (but no valuations are given to each of these
objectives). It also presents extensive data on performance results relating to its primary
warfighting goals and its supporting goals (e.g. preserving the AVF; implementing the defense
agenda). It is claimed that 75% of DoD performance goals were met in 2010 with 25% not met:
winning our nation’s wars was apparently 100% met even though the final outcomes in
Afghanistan and Iraq remain unknown! Similarly, for defence of homeland security, it was
reported that 67% of goals were not met which seems a surprisingly high failure rate for such a
core defence function (i.e. protecting US citizens: USDOD, 2011, p7-11). Performance results are
made by DoD staff who have an obvious interest in the outcomes. Nor does published US defence
budget data enhance understanding of its defence outputs in terms of capabilities and their
valuations. Budget data show annual expenditure on military personnel, operations and
maintenance, R&D and procurement, family housing and military construction, published by
totals and by service.
6.6
Evaluating International Experience
None of the nations reviewed in this study addressed the challenges of measuring and valuing
defence output. The nearest to an output measure consisted of the identification of various
defence capabilities; but these were not always comprehensive. For example, the UK did not
identify all its capabilities, including defence of the UK homeland and the nuclear deterrent and
no valuations were provided for the various capabilities. Nonetheless, defence capability
measures are an improvement on the traditional input measures of numbers of personnel and
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equipment. The next challenge is whether various capabilities can be weighted and aggregated
into a single index.
DRDC CORA CR 2011-178
29
7
Conclusion and Policy Recommendations
This study has identified a set of questions arising in efforts to measure defence outputs. Indeed,
it has raised more questions than answers; but the process of identifying questions contributes to
further understanding needed to address the central research questions of what is defence
output; how can it be valued; and is defence spending a worthwhile investment?
In its published form, international experience of measuring defence output has found some
useful output measures, usually in the form of specific defence capabilities. These are
improvements on the traditional emphasis on inputs in the form of numbers of military personnel
and equipments (e.g. numbers of combat aircraft, tanks and warships). However, they provide no
indication of the value of these defence capabilities nor the value of other capabilities such as
peace, protection, deterring conflicts and insurance against future threats. Non-economic benefits
rather than measurable economic benefits might dominate the overall benefits of defence
spending. Nor should it be assumed that there exists a single ‘best’ indicator: performance
indicators can often give unexpected and perverse results (e.g. the operation was a success but the
patient died).
A starting point in answering the central research questions is to identify the costs of defence
and then ask whether defence provides at least a similar level of benefits. For example, if
defence spending costs $X bn, does it provide benefits of a similar value? Similar questions need
to be asked about the costs and benefits of conflict and peacekeeping operations: was the Iraq
conflict a worthwhile investment for the USA?
Next, analysis needs to evaluate the costs and benefits of small (marginal) changes. If defence
spending is increased or decreased by 10% what are the effects on defence outputs (benefits)?
Such marginal changes need to be assessed by total and by each military service (e.g. what would
be the impacts of a 10% increase or decrease in the size of the Army?).
Specifying the questions is the first stage in any evaluation; but who raises and answers the
questions? In a democracy, elected politicians are ultimately responsible for determining the size
of military expenditure and its allocation between each of the services. Typically, unelected
agents dominate these choices. Governments might use representative samples of voters to form
focus groups which would offer views on the size of alternative defence budgets and force
structures. Such groups would be advised by officials and military personnel. Focus groups are
not an ideal solution (e.g. free rider problems remain; groups have to be selected and they will
have their internal momentum and dynamics) but they provide politicians with an additional
mechanism for identifying voter preferences on defence spending and policy.
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1,2, 159-176.
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32
DRDC CORA CR 2011-178
ONS (2008) Scoping Paper on the Possible Improvements to Measurement of Defence in the UK
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List of symbols/abbreviations/acronyms/initialisms
ADF
Australian Defence Force
CAG
Comptroller and Auditor General, New Zealand
CF
Canadian Forces
Cmnd
Command Paper (British Government)
CORA
Centre for Operational Research and Analysis
DND
Department of National Defence
DoD
Department of Defense (United States and/or Australia)
DRDC
Defence Research & Development Canada
EDA
European Defence Agency
FY
Fiscal Year
GMOD
German Ministry of Defence
GDP
Gross Domestic Product
IT
Information Technology
NAO
National Audit Office (United Kingdom)
NZDF
New Zealand Defence Force
OECD
Organization for Economic Cooperation and Development
ONS
Office of National Statistics (United kingdom)
PPP
Purchasing Power Parity
R&D
Research & Development
SMOD
Swedish Ministry of Defence
SIPRI
Stockholm International Peace Research Institute
TCE
Transaction Costs Economics
US
United States
DRDC CORA CR 2011-178
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DRDC CORA CR 2011-178
DOCUMENT CONTROL DATA
(Security classification of title, body of abstract and indexing annotation must be entered when the overall document is classified)
1.
3.
ORIGINATOR (The name and address of the organization preparing the document.
Organizations, for whom the document was prepared, e.g. Centre sponsoring a
contractor's report, or tasking agency, are entered in section 8.)
2.
Keith Hartley
Department of Economics
University of York
York YO10 5DD
United Kingdom
UNCLASSIFIED
(NON-CONTROLLED GOODS)
DMC A
REVIEW: GCEC June 2010
SECURITY CLASSIFICATION
(Overall security classification of the document
including special warning terms if applicable.)
TITLE (The complete document title as indicated on the title page. Its classification should be indicated by the appropriate abbreviation (S, C or U)
in parentheses after the title.)
Defence Output Measures:: An Economics Perspective
4.
AUTHORS (last name, followed by initials – ranks, titles, etc. not to be used)
Hartley, K
5.
DATE OF PUBLICATION
(Month and year of publication of document.)
November 2011
7.
6a. NO. OF PAGES
6b. NO. OF REFS
(Total containing information,
(Total cited in document.)
including Annexes, Appendices,
etc.)
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DESCRIPTIVE NOTES (The category of the document, e.g. technical report, technical note or memorandum. If appropriate, enter the type of report,
e.g. interim, progress, summary, annual or final. Give the inclusive dates when a specific reporting period is covered.)
Contract Report
8.
SPONSORING ACTIVITY (The name of the department project office or laboratory sponsoring the research and development – include address.)
Defence R&D Canada – CORA
101 Colonel By Drive
Ottawa, Ontario K1A 0K2
9a. PROJECT OR GRANT NO. (If appropriate, the applicable research
and development project or grant number under which the document
was written. Please specify whether project or grant.)
PG0 10AL
10a. ORIGINATOR'S DOCUMENT NUMBER (The official document
number by which the document is identified by the originating
activity. This number must be unique to this document.)
9b. CONTRACT NO. (If appropriate, the applicable number under
which the document was written.)
DND 10/23136
10b. OTHER DOCUMENT NO(s). (Any other numbers which may be
assigned this document either by the originator or by the sponsor.)
DRDC CORA CR 2011-178
11. DOCUMENT AVAILABILITY (Any limitations on further dissemination of the document, other than those imposed by security classification.)
Unlimited
12. DOCUMENT ANNOUNCEMENT (Any limitation to the bibliographic announcement of this document. This will normally correspond to the
Document Availability (11). However, where further distribution (beyond the audience specified in (11) is possible, a wider announcement
audience may be selected.))
Unlimited
13. ABSTRACT (A brief and factual summary of the document. It may also appear elsewhere in the body of the document itself. It is highly desirable
that the abstract of classified documents be unclassified. Each paragraph of the abstract shall begin with an indication of the security classification
of the information in the paragraph (unless the document itself is unclassified) represented as (S), (C), (R), or (U). It is not necessary to include
here abstracts in both official languages unless the text is bilingual.)
This Contract Report examines the measurement of defence output from an economics perspective.
Economic theory offers some policy guidelines for determining the optimal defence output for any
society. As an optimising problem, the economics rule is to aim at the socially desirable or
optimal defence output which is achieved by equating additional or marginal costs with additional
or marginal benefits. While the economics approach is difficult to ‘operationalise’ into a set of
clear unambiguous policy guidelines, it does provide a framework for designing valuations for
defence outputs and activities. Experience of measuring defence outputs is reported for the UK,
Australia, New Zealand, a group of European nations and the USA.
14. KEYWORDS, DESCRIPTORS or IDENTIFIERS (Technically meaningful terms or short phrases that characterize a document and could be
helpful in cataloguing the document. They should be selected so that no security classification is required. Identifiers, such as equipment model
designation, trade name, military project code name, geographic location may also be included. If possible keywords should be selected from a
published thesaurus, e.g. Thesaurus of Engineering and Scientific Terms (TEST) and that thesaurus identified. If it is not possible to select
indexing terms which are Unclassified, the classification of each should be indicated as with the title.)
Defence Economics, Output Measures, Strategic Planning, Production Functions
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