Jean Belin and Julien Malizard, Chairholder and Deputy Chairholder
Introduction
The health crisis has triggered a global economic crisis. Every continent and every country is affected. To mitigate the effects of the crisis on our economy, an economic emergency plan has been put in place in France, to be followed by a national and European recovery plan. Budgetary trade-offs will have to be made, with certain sectors being given greater or lesser priority. This priority will be determined by political, social or environmental criteria but, given the economic situation, the economic impact of these investments will be of great importance. [1].
In this context, the economic impact of defence has been the subject of several forums [2]. In order to shed some light on these debates, we thought it would be useful to summarise a number of results obtained from the literature, which provide a better understanding of the impact of defence on the economy and the transmission mechanisms. Compared with other branches of the economy, defence economics is still an underdeveloped area of research, but a number of studies have been carried out over the last ten years or so.
The primary objective of the defence system and our defence technological and industrial base (DTIB) is to contribute to the country's security and sovereignty. This objective makes it possible to preserve value and defend our interests. Nevertheless, it remains very difficult for economists, because of measurement problems, to put an economic value on this output. The economic impact of the defence system is therefore most often measured on the basis of externalities: effects on activity, employment, R&D, etc. It is these externalities that are measured in terms of their impact on the economy. It is these externalities that are measured by economists. The aim of this newsletter is to present the results published in academic journals on the French case.
Firstly, we will present the results obtained concerning the place of the DTIB in the national economy and, secondly, we will analyse the multiplier impact of defence spending.
DITB companies play an important role in the French economic system
As with any government sector, a sector's place in the national economy, in terms of activity, jobs or research, depends to a large extent on the level of public spending in that sector. The defence policy put in place since 1945, aimed at strategic independence and the development of an autonomous defence industry, has required significant financial resources. Since the end of the Second World War, the share of defence in GDP has tended to decline, but it is still the third largest budget item, accounting for more than 1.8% of GDP in 2019. In recent years, the defence effort at national and European level has intensified due to the security context and the increase in defence budgets on other continents. [3].
With these budgetary changes since 1945, the role of defence has changed, but defence industrial activity still occupies an important place in France. The activities of DITB companies generate around 200,000 direct jobs (direct payments) and indirect jobs (subcontractors), as well as a large number of induced jobs (generated by the consumption of direct and indirect employees). [4]. An analysis of the structure of these jobs shows that they are both industrial (engineers, technicians, manual workers, etc.) and skilled (researchers, managers, etc.). DTIB companies also play an important role in national research and innovation. They carry out almost a quarter of all research and employ a quarter of all in-house researchers. [5]. They also register a significant proportion of French patents for their civil and defence activities and participate in the structuring of research networks, in particular through the strong involvement of the DGA or DITB companies in competitiveness clusters. In terms of the balance of trade, exports of military equipment made a positive contribution of €6.7 billion to France's trade balance in 2017 and €6.9 billion in 2018. [6]. Exports of civil and military goods by DTIB companies account for around 20% of exports by French companies. [7].
Finally, this defence activity is spread across the whole of France, helping to maintain activity in many under-serviced industrial areas. The DTIB has also often replaced military sites closed as a result of the geographical reorganisation of defence (Meuse, Finistère, Manche and Indre). [8].
What is the multiplier effect of public spending on defence? ?
The most hotly debated issue in the academic community is the macroeconomic impact of defence spending. This question is addressed in the literature by estimates of the multiplier impact of public defence spending on national GDP. It is part of a much broader literature on the impact of public spending in general, and in particular on its counter-cyclical nature. [9].
Econometric studies are always faced with major difficulties, particularly in the field of defence, for reasons of access to data over a long period. They are therefore subject to limitations, but the multiplier effect of public spending on defence appears to be high. [10]. One reason for this is the composition of defence spending, since capital expenditure has a favourable impact on the GDP growth rate. [11]. The Cercle des économistes study, also based on French data, shows a public spending multiplier on GDP of 2 after 10 years in defence. This means that each billion euros invested in the DTIB generates 2 billion in additional activity (GDP) after 10 years. Studies abroad confirm the positive effect of defence spending, and in particular procurement spending [12].
An important question for determining the value of the multiplier and understanding transmission mechanisms is whether public spending (in this case defence spending) favours or crowds out private spending. Econometric studies show that public spending is complementary and does not crowd out private spending (investment and R&D). Spending on equipment by the Ministry of the Armed Forces is complementary to private investment, so there is no crowding out. [13]. In addition, defence R&D spending encourages private R&D by companies [14].
These econometric results are consistent with the results obtained and the transmission mechanisms highlighted in several studies of the civil sector. The multiplier effect of capital expenditure is greater than that of operating expenditure, and this effect is all the greater the more national the production chain. [15].
Expenditure on military equipment and R&D is in fact capital expenditure. It accounts for 80% of public investment by the State. From a theoretical point of view, the economic impact of this expenditure is greater than that of operating expenditure, which corresponds to consumption expenditure. Investment spending will generate spillover effects likely to stimulate private sector productivity, whereas consumption spending is merely a transfer with no impact on productivity.
Similarly, for strategic reasons, priority is given to national production in the defence sector. Production chains are therefore more national than in the rest of the economy. This priority for national production results in a greater multiplier effect. DTIB companies also outsource more of their R&D to French companies (82% of outsourced R&D is carried out by French companies) than civilian companies (52%). More of the initial investment will therefore remain in France. Similarly, DTIB companies are characterised by higher value added than other companies. The greater capacity of DTIB companies to create wealth also increases the value of the public spending multiplier.
More qualitative arguments (existence of agencies, transmission and processing of information, etc.) are also put forward by certain authors, in France and abroad, to explain the effectiveness of defence spending. In France, the Ministry of the Armed Forces, and more specifically the DGA, has for many years had instruments in place to monitor and steer the DTIB. [16]. Because of its effectiveness, some authors recommend applying the defence steering model to certain civil sectors such as energy. [17].
Conclusion
The Defence Technological and Industrial Base (DTIB) contributes to the country's security and sovereignty. It also has a significant economic impact, in terms of jobs, trade balance, investment and research. Academic studies show that there is a positive effect of defence spending at the macroeconomic level, which is essentially channelled through the Ministry's capital expenditure as public investment. At the microeconomic level, this overall effect can be explained by the stronger performance of DTIB companies and their central position within the national innovation system. A forthcoming newsletter and working paper will explain the methodological issues we face in these studies.
[1] See this recent article by André Torre: https://theconversation.com/quels-secteurs-strategiques-pour-lavenir-de-la-france-138831
[2] In particular, Françoise Dumas (Chair of the French National Assembly's Defence Committee) https://www.lefigaro.fr/vox/economie/francoise-dumas-le-budget-de-la-defense-doit-etre-plus-que-jamais-preserve-20200505, Christian de Boissieu https://www.lesechos.fr/idees-debats/cercle/opinion-un-plan-de-relance-pour-la-defense-1204431, Challenges https://www.challenges.fr/entreprise/defense/un-plan-de-relance-pour-la-defense-une-bonne-idee_710395
[3] https://www.iiss.org/blogs/military-balance/2018/02/european-defence-spending
[4] Source Ministry of Defence
[5] Observatoire de l'Armement study (DGA), Belin, Guille & Masson (2012-2015).
[6] Report to Parliament 2019, the figure for deliveries relates only to physical departures from the national territory. It does not include any associated services.
[7] 20.7% in 2016 and 19.6% in 2017, Ecodef n°107, May 2017, OED, SGA, Ministry of the Armed Forces.
[8] J. Droff and J. Malizard, «Place et rôle structurant des industries de défense dans la réorganisation de la carte militaire en France», Revue Défense Nationale 2017.
[9] A. Auerbach and Y. Gorodinchenko, Measuring the output responses to fiscal policy, American Economic Journal: Economic Policy, 4(2), 2012
[10] J. Malizard, Opportunity cost of defense: an evaluation in the case of France, Defence and Peace Economics, 24(3), 2013.
[11] J. Malizard, «Military expenditure and economic growth, the French case», Revue Economique, 65(3), 2014.
[12] V. Ramey, “Identifying government spending shocks: it's all in the timing”, Quarterly Journal of Economics, 2011.
[13] J. Malizard (2015), Does military expenditure crowd out private investment? A disaggregated perspective for the case of France, Economic modelling, 46, p. 44-52
[14] E. Moretti, C. Steinwender, J. Van Reenen, The Intellectual Spoils of War? Defense R&D, Productivity and International Spillovers“, NBER Working Paper No. 26483, November 2019.
[15] S. Leduc and D. Wilson, Roads to prosperity or bridges to nowhere? Theory and evidence on the impact of public infrastructure investment, NBER Macroeconomc annual, 2012
[16] J. Belin, J. Malizard and H. Masson, “Chapter: French Defence Industry” in The Economics of the Global Defence Industry (Ed. K. Hartley, J. Belin), Taylor & Francis, December 2019.
[17] W. B. Bonvillian, R. Van Atta, “ARPA-E and DARPA: Applying the DARPA model to energy innovation”, Journal of Technology Transfer, 2011.
