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Defense spending soars, no benefit to local economy
September 29, 2018, 4:44 pm

World military expenditure is estimated to have reached $1.7 trillion in 2017, the highest level since the end of the Cold War. The six-nation Gulf Cooperation Council (GCC) bloc’s contribution of nearly 8 percent to this global military expenditure, was far higher than the combined defense spending of the United Kingdom, Germany and Italy, and it was more than the defense spending of the entire European continent minus the top economies.

To put this in another perspective, the global average military spending by countries is around 2.3 percent of their Gross Domestic Product (GDP); the NATO military alliance is struggling to get its members to allocate even 2 percent of their GDP to defense; by contrast, the GCC states spent 9.5 percent of their GDP on defense in 2017.

According to latest available data from Stockholm International Peace and Research Institute (SIPRI), Saudi Arabia and the UAE reported the largest defense budgets in 2016 with $63.7 billion and $22.8 billion respectively.

Saudi Arabia’s military spending is expected to increase further in the next few years considering the rising commitments in active military engagement in the region. UAE’s military expenditure reached a record high in 2016 with an active procurement pipeline being continued through 2017 with large orders for aircraft and weaponry.

Oman’s military budget at $10.6 billion is the highest in terms of GDP, this was followed by Kuwait with $6.5 billion in spending, Qatar with $2.2 billion, and Bahrain with $1.5 billion in defense expenditure.

Together the six GCC states are believed to have spent in excess of $106 billion in 2016. Military burden refers to the defense expenditure of a country as a share of its GDP. It indicates the proportion of resources the country dedicates to defense spending and the burden it consequently poses on the nation’s economy.

Not surprisingly, seven of the 10 countries with the highest ‘military burden’ in the world in 2017 were in the Middle East: Oman (12% of GDP), Saudi Arabia (10% of GDP), Kuwait (5.8% of GDP), Jordan (4.8% of GDP), Israel (4.7% of GDP), Lebanon (4.5% of GDP) and Bahrain (4.1% of GDP). The global military burden has ranged from a post-Cold War high of 3.3 percent in 1992, to a low of 2.1 percent in 2014.

The large spending on arms and ammunitions has no doubt given GCC countries impressive military arsenals, and, in the process, allowed global arms suppliers to profit immensely, but experts question whether this massive arms cache has given the concerned states the capability to fend off real or potential threats in the future.

Defense analysts also point out that while it is true that higher oil revenues in recent years have enabled GCC states to spend more freely on arms purchases, they have done very little to leverage their enormous military spending to benefit local economies.

A properly structured and implemented defense spending policy would allow governments in the region to establish local defense manufacturing facilities. This would not only spur economic growth and create much-needed job opportunities for citizens, it would also develop and advance the industrial and technological base of the region. Also, from a defense perspective, it is always better to attain self-sufficiency in defense capabilities than to be reliant on the capricious decisions of foreign governments.

Unfortunately, despite spending billions annually on defense procurement, the six-nation GCC bloc currently do not have any meaningful local defense production capabilities. A recent study by the multinational professional services company, PricewaterhouseCooper (PwC) found that local defense procurement and services in the six GCC states amounted to only around $6 billion annually.

This contrasts with the joint defense budget of more than $100 billion annually, most of which is spent on purchases from overseas. Over the last two decades, GCC governments have grown increasingly aware of the potential to leverage their defense spending.

This realization has resulted in modest joint-venture contracts and offset programs with foreign arms suppliers and governments, but nothing of any real meaningful value. Even the most significant defense spenders in the GCC — Saudi Arabia and the United Arab Emirates — have only rudimentary defense industrial capabilities, mainly centered around assembling finished products from parts sourced overseas, or relatively small-scale maintenance, repair and overhaul (MRO) facilities.

With the region in a continual state of geopolitical conflicts and concomitant huge annual expenditure on defense, GCC policymakers need to concentrate on more large-scale localization of their defense requirements.

One way of achieving this localization is for other GCC states to follow the path outlined by Saudi Arabia in its Vision 2030 strategy, which mandates that 50 percent of the Kingdom’s defense procurement has to be sourced ‘onshore’ with its borders. In the case of Saudi Arabia, this could translate into a local procurement spending of nearly $35 billion a year.

Other GCC states could realize proportional savings in overseas purchases, if they too implemented similar policies. Many countries that spend far less than the GCC on defense as a proportion of their GDP, have successfully developed local defense manufacturing and support capabilities through pursuing sound defense policies and coordinating investments and arms purchases between foreign suppliers and local manufacturers.

Today, many of these nations, such as Australia, South Korea Turkey and countries in eastern and central Europe have become significant arms exporters on their own. However, to realize some degree of defense self-sufficiency, GCC states will first have to get their act together.

For starters, they will need to coordinate and consolidate their defense purchases, either through a centralized GCC defense procurement plan or through joint decisions and cooperation of defense ministries in each state.

This merger of defense procurements would not only enhance interoperability, and reduce maintenance and supply chain logistics between the GCC defense forces, it would also strengthen the bloc’s bargaining power with suppliers when it comes to localization of manufacturing. But, given the current political rift and general disarray among GCC members, the cooperation and coordination needed to achieve even a modicum of defense self-sufficiency looks like a tall order.

- Staff Report

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