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Military Expenditures and NaturalResources: Evidence from RentierStates in the Middle East and NorthAfricaHamid E. Alia & Omnia A. Abdellatifaa School of Global Affairs and Public Policy, The AmericanUniversity in Cairo, Cairo, EgyptPublished online: 30 Oct 2013.

To cite this article: Hamid E. Ali & Omnia A. Abdellatif (2015) Military Expenditures and NaturalResources: Evidence from Rentier States in the Middle East and North Africa, Defence and PeaceEconomics, 26:1, 5-13, DOI: 10.1080/10242694.2013.848574

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MILITARY EXPENDITURES AND NATURALRESOURCES: EVIDENCE FROM RENTIER STATES IN

THE MIDDLE EAST AND NORTH AFRICA

HAMID E. ALI* AND OMNIA A. ABDELLATIF

School of Global Affairs and Public Policy, The American University in Cairo, Cairo, Egypt

(Received 19 August 2012; in nal form 3 June 2013)

It has been argued that the discovery of a new natural resource greatly increases the risk of conict. This researchaims to study the effect of natural resources on military spending, using the data from rentier states in the MiddleEast and North Africa (MENA) countries from 1987 to 2012. In considering the resource curse, the types ofnatural resources matter. Our empirical results demonstrate that the resource curse arising from the abundance ofcertain natural resources, particularly oil and forest resources, leads to increases in military spending. In contrast,the rent from coal and natural gas has a negative impact on military spending, while the rent from minerals has noimpact on military spending, controlling for GDP growth and per capita income.

Keywords: Military expenditures; Natural resources; Middle East

JEL Codes: H54, N5, N55

1. INTRODUCTION

After the Arab Spring, the Middle East and North Africa (MENA) entered into a new phaseof political confrontations. The unrest is expected to continue for decades before the regionstabilizes. Uncertainty about these changes may lead MENA countries to build up theirsecurity capacity as a deterrent against external threats, such as Iran and Israel, or internalones. The military build-up in this region will persist for years to come. Currently thisregion spends 7.4% of its gross domestic product (GDP) on the military, while the globalaverage is 3.1%.It has been argued that the discovery of a new natural resource greatly increases the risk

of conict, especially if the resource is oil (Bannon and Collier, 2003). In many cases,increasing oil revenues have been accompanied by rapid increases in military spending andarms imports. According to the Stockholm International Peace Research Institute (SIPRI,2010), rising prices and new oil and gas exploitation have given governments windfallrevenues, some of which have found their way into military spending.There are many reasons to believe that high levels of resource revenue dependency may

lead to high levels of military spending and arms purchases. First, the military acts as theprotector of regimes in MENA countries, as demonstrated by the Arab Spring: regimes fell

*Corresponding author: School of Global Affairs and Public Policy, The American University in Cairo, Cairo,Egypt. E-mail: hali@aucegypt.edu

2013 Taylor & Francis

Defence and Peace Economics, 2015Vol. 26, No. 1, 513, http://dx.doi.org/10.1080/10242694.2013.848574

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when the military withdrew its support, as in the cases of Egypt and Tunisia. The regimemust pay a premium to hedge against this risk. Having natural resources such as oil willreduce the opportunity costs of increasing military spending; it facilitates the acquisition ofarmaments and strengthens the ability of the military to protect the natural resources.Second, the military plays a dominant role in economic matters in MENA countries, asdemonstrated by the growing militaryindustrial complex (Ali, 2012). Building up themilitaryindustrial complex protects national security. The perceived security needs of thestate compelled policy-makers to apportion signicant budgetary resources to the military;however, because of the states inability to collect tax revenue, they resort to nancing thebudget with the rent from natural resources. The region has long possessed the worldshighest level of military expenditure relative to GDP and also has vast oil revenues (SIPRI,2010). The income effect is dominating as military goods as normal goods. In MENA, theresource curse has produced poor governance and mismanagement of the natural resourcerent. It has perpetuated the domination of political oligarchs and affects the welfare of thepopulation as a whole.In support of the resource curse hypothesis, we claim that an abundance of natural

resources, particularly oil, encourages increases in military spending. Natural resourcesprovide incentives to reward the protector of the states, that is, the military. More impor-tantly, the nature of the states themselves, the types of regime leadership, and the patronagesystem provide motive and opportunity for higher military spending. However, there is noempirical research pertaining to natural resources and military spending in the MENAregion, except for one excellent case study on Algeria by Perlo-Freeman and Brauner(2012).This research aims to study the effect of natural resources on military spending, using the

data from rentier states in the MENA countries from 1987 to 2012. For our purpose, wedisaggregate the natural resources rent to oil, natural gas, mining, forest, and coal rents toassess their impacts on military spending. Types of natural resources matter to militaryspending. The research results demonstrate that the resource curse derived from the abun-dance of natural resources, particularly oil and forest, increases military spending, while therent from coal and natural gas has a negative impact on military spending, and the rent fromminerals has no impact on military spending, controlling for the GDP growth and per capitaincome. The ndings presented in this paper highlight the need to shift developmentpriorities, especially after the wave of the Arab Spring, with its public demands to allocatemore resources to bread than to guns. The new leaderships have an opportunity to revisittheir spending priorities and realign budgetary allocations to the most productive sectors.The paper is organized as follows: Section 2 provides the literature review. Section 3

presents the data. Section 4 species the model to be used. Section 5 offers the modelresults. Section 6 provides concluding remarks.

2. BRIEF LITERATURE REVIEW

The literature has not identied a clear relationship between military spending and the avail-ability of natural resources. It has, however, focused on the resource curse in dening therelationship between armed conict and natural resources. The debate on the resourcecurse is focused on the impact of natural resources on slowing economic growth (Sachsand Warner, 1995, 1999, 2001; Leite and Weidmann, 1999; Doppelhofer et al., 2000;Gylfason, 2001). It also found high poverty rates (Ross, 2003) and high corruption levels(Collier and Gunning, 1999; Leite and Weidmann, 1999; Sachs and Warner, 1999;

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Marshall, 2001; Schloss, 2002) in countries suffering from the resource curse. In addition,the governments are authoritarian (Wantchekon and Lam, 1999; Ross, 2001; de Soysa,2002). Other studies have linked at least one of these phenomena to the incidence of civilwar (DeNardo, 1985; Muller and Weede, 1990; Reno, 1995; Hegre et al., 2001; Collier andHoefer, 2002; Elbadawi and Sambanis, 2002; Fearon and Laitin, 2003; Le Billon, 2003).One study (Varisco, 2010) argued that there is an interrelationship between armed conictand natural resources. Although this interrelationship is not direct or straightforward,Varisco concluded that armed conict has a strong link with natural resources, particularlyoil. The focus of these researchers on the impact of natural resources on military spendingis illuminating and strengthens the thesis of the resource curse. The MENA countriescertainly have governing issues such as corruption, as well as high poverty rates andeconomic and social disparities.We argue that, in the case of MENA, there are several reasons linking high military

spending and natural resource endowments. First, according to Ross (2004), states thatdepend heavily on the export of oil, gemstones, and minerals tend to suffer from a varietyof problems, including slow economic growth, high poverty rates, high corruption levels,and authoritarian governance. Though Ross does not mention high military spending, webelieve that it is one of the manifestations of the resource curse. Second, countries that arehighly dependent on revenue from natural resources may lead to governments whose holdon power depends more on keeping control of the revenue-generating infrastructure than onpromoting the general economic development of the public (Perlo-Freeman and Brauner,2012). Thus, the military may acquire greater signicance as the guarantor of regimesurvival. In MENA, most of the regimes and leadership are embedded within the militaryestablishment, and the revolving door between military and business interests has keptmilitary spending at high levels.Additional support for the idea that high levels of resource revenue dependency may

also lead to high levels of military spending and arms purchases are listed in SIPRI,2010, including the fact that natural resources provide a direct source of foreign currencyrevenue that can be used to fund potentially controversial expenditures such as largeforeign arms purchases, and, unlike taxes, does not carry a high political cost. In manyMENA-region and other developing countries, recent increases in oil revenues have alsobeen accompanied by rapid increases in military spending and arms imports (SIPRI,2010).Natural resources can also be a source of international tension and conict. Such conict

inevitably leads to and justies higher military spending. Moreover, even in countries whereconict does not exist, an increase in military spending can be justied by the desire toprotect the natural resources from internal or external enemies, real or imagined (SIPRI,2010). For example, Brazil increased its defense spending in response to the growing needto protect the Brazilian borders, the Amazon rainforest, and massive offshore oil discoveries(Ribeiro and Prada, 2012). Finally, revenues from natural resources often lack transparencyand accountability, which may lead to large off-budget military spending and corrupt armspurchases (Perlo-Freeman and Brauner, 2012).

3. THE DATA

These panel data include 20 MENA countries over the period 19882012. The data forGDP, GDP growth, GDP per capita, oil rent, coal rent, natural gas rent, mineral rent, andforest rent, all as a percentage of GDP, are collected from the World Bank (2013). Military

MILITARY EXPENDITURES AND NATURAL RESOURCES 7

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spending data are from SIPRI (2013), measured as a percentage of GDP. TABLE I showsthe average of spending from 1988 to 2012.The highest military spenders are Oman, Saudia Arabia, Jordan, and Kuwait; all of these

except Jordan are oil producers. The patterns of GDP per capita resemble those of GDPgrowth; higher per capita GDP is associated with higher growth except in the cases ofSudan and Syria, where high growth is associated with lower GDP. However, the highestGDP per capita countries are oil-producing countries: Qatar, UAE, and Kuwait. OnlyMorocco and Iran produce coal rents, and they are a small fraction of the GDP.Djibouti, Sudan, Egypt, and Algeria are the biggest recipients of forest rent; it ranges from1.60.155%.Mineral rent is led by Morocco, followed by Jordan and Iran. In Qatar, Algeria, and

Oman, natural gas contributes 12.4, 10.9, and 5.9% of GDP, respectively. Oil rent in Iraq,Kuwait, and Saudi Arabia contributes 77.9, 41.6, and 39.5% of GDP.It should be noted that countries with an abundance of natural resources do not necessary

allocate all of the proceeds to the military; however, the income effect and substitutioneffect movement are not clear. In any given country, the income effect may dominate thesubstitution effect or vice versa. The choice is dictated by the preferences of the leadershipand by political expediency. For example, after 9/11 MENA countries showed signicantincreases in military spending in response to security needs and the consequences of the USinvasion of Iraq.Figure 1 shows that military spending follows the pattern of oil rent. As oil rent spiked,

military spending followed the same trajectory. However, after the second Gulf War in2003, military spending declined in Qatar, Saudi Arabia, and the United Arab Emirates.During the same period, Iran and Sudan increased their military spending very steadily asoil rent increased.

TABLE I Military Spending and Natural Resources Rent (Averages, 19882012, as Percentage of GDP)

Country

Military

expenditure

%GDP

GDP

growth

GDP per

capita (in

dollars)

Coal (in

dollars)

Forest (in

dollars)

Mineral

(in dollars)

Natural gas

(in dollars)

Oil (in

dollars)

Algeria 1.7 2.56 1903.71 0.000 0.155 0.081 10.934 12.667

Bahrain 5.0 5.53 12,048.18 . . 0.000 0.000 7.346 19.873

Djibouti 7.0 0.95 867.69 . . 0.409 0.000 . . . .

Egypt 6.5 4.56 1461.64 0.000 0.277 0.112 3.847 8.252

Iran 2.0 4.42 1604.60 0.022 0.056 0.406 5.753 25.868

Iraq . . 5.54 802.95 . . 0.019 0.000 1.001 77.854

Jordan 9.4 4.33 1945.37 . . 0.030 0.495 0.221 0.003

Kuwait 8.2 6.46 22,128.67 . . 0.000 0.000 2.308 41.593

Lebanon 1.2 4.81 4830.49 . . 0.014 0.000 0.000 0.000

Libya . . 4.32 6924.94 . . 0.039 0.000 2.681 36.966

Morocco 4.1 4.01 1391.70 0.003 0.213 1.047 0.012 0.005

Oman 18.3 4.89 8810.09 . . 0.000 0.050 5.923 34.084

Qatar . . 13.10 31,936.12 . . . . 0.000 12.436 25.928

Saudi Arabia 15.2 3.51 9248.99 . . 0.000 0.007 2.753

39.475

Sudan 3.6 5.63 377.58 . . 1.663 0.030 0.000 8.386

Syria 7.3 4.91 1232.31 . . 0.018 0.084 2.242 20.721

Tunisia 2.3 4.16 2271.48 . . 0.185 0.356 0.758 3.376

UAE 5.14 31,648.55 . . 0.000 3.507 18.154

Yemen 4.24 532.67 . . 0.037 0.000 0.156 28.899

8 H.E. ALI AND O.A. ABDELLATIF

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Since we have a large and heterogeneous set of countries where data are available, atleast some of the variables have unit roots. The power of panel unit roots test increases withincrease in N compared with low-power degrees of freedom. The Augmented DickeyFullertest (ADF) should be applied to a small sample (Asteriou and Hall, 2011). In addition toADF, we used the Levin, Lin, and Chu (LLC) test, the Im, Pesaran, and Shin (IPS) test,and the Fisher (PP) test. TABLE II shows that all the variables are stationary with laglength of t, t-1 referring to time, and time lagged by one year.

FIGURE 1 Oil Rents and Military Expenditure as Percentage of GDP

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4. EMPIRICAL METHODOLOGY AND RESULTS

Using panel data for MENA countries from 1987 to 2012, the model estimates the relationbetween military spending and natural resources:

Milexit Bo B1GDPGit1 B2GDPPcapitit 1 B3Coalit1 B4Forestit1 B5Mineralit1 B6NaturalGit1 B7Oilit1 B8conflictit vi t it

Where: country (i), time (t), military expenditure (Milexit), GDP annual growth rate(GDPG), GDP per capita in constant 2000 US$ (GDPPcapit), coal rents as percent of GDP(Coal), forest rents as percent of GDP (Forest), mineral rents as percent of GDP (Mineral),natural gas rents as percent of GDP (NaturalG), oil rents as percent of GDP (Oil), thecountry effect (), the time effect (), and the error term ().We attempt to predict the the impact of GDP growth and per capita income on military

expenditure. In the case of MENA countries, military expenditure is independent of GDPgrowth; as a country becomes wealther, it allocates less to the military across the models, asshown in TABLE III. However, the countries rent from forests contributes to a rise in mili-tary spending, and it is highly signicant across the models. For example, 1% increase inforest earnings increases military spending in the range of 2.5 to 3.2%. Increases in oil rentalso result in increases in military spending in the range of 0.05 to 0.07%. The impact ofnatural gas rent on military spending is ambiguous, with negative signs in models 35.However, when we introduced the interaction variable of GDP per capita and natural gasearnings, the variable become signicant and the sign did not change. The rent from coalhas a signicant negative effect on military spending, except in model 1. The oil and forestrents contribute positively to military spending in MENA countries; conversely, the rentsfrom coal and natural gas depress military spending to some extent. It might be that thecountries with long-term contracts to sell oil and forest resources need to acquire militaryprotection for the resources. The countries with natural gas also have oil, so these two vari-ables act as substitutes when it comes to budgetary spending, with the government usingeither the oil or the natural gas receipts. It is more likely, however, that the countries relyon oil to nance their miltary spending: because the oil importers are also arms suppliers, itbecomes feasible to swap oil for guns.Surprisingly, the conict variable in MENA has no impact on military spending. This is

attributed to the fact that from 1988 to 2012, conict became embedded into everyday life,

TABLE II Panel Unit Root Test For Key Variables

Variables LLC IPS ADF PP

Milexit-1 3.85 (0.00)*** 8.19 (0.00)*** 166.86 (0.00)*** 426.69 (0.00)**

GDPGit-1 9.37 (0.00)** 16.16 (0.00)*** 337.49 (0.00)*** 1235.83 (0.00)**

GDPPcapitit-1 1.292 (0.09)* 5.320 (0.00)*** 110.18 (0.00)*** 202.17 (0.00)**

Coalit-1Forestit-1 10.09 (0.00)

** 8.66 (0.00)*** 127.42 (0.00)*** 214.06 (0.00)***

Mineralit-1NaturalGit-1 1.08 (0.08)

** 8.84 (0.00)*** 133.49 (0.00)*** 289.78 (0.00)***

Oilit-1 10.14 (0.00)*** 9.72 (0.00)*** 163.44 (0.00)*** 475.09 (0.00)**

*p-values are shown in parentheses with signicance level at 10%;**p-values are shown in parentheses with signicance level at 5%;***p-values are shown in parentheses with signicance level at 1%.

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TABLEIII

Fixed

effectspaneldataestim

ates,with

military

expenditureas

thedependentvariable

Variable

Model(1)

Model(2)

Model(3)

Model(4)

Model(5)

Constant

9.6675

(19.94)***

9.9787

(20.13)***

0.4552

(18.61)***

10.4551(18.51)***

10.4192(18.43)***

GDPGit-1

.00006

(0.00)

.0012(0.05)

.0043(0.17)

.0043(0.17)

.0083(0.27)

GDPPcapit it-1

.0011(14.40)***

.0012(14.64)***

.0013(13.69)***

.0012(13.38)***

.0012(13.67)***

Coal it-1

24.3637(1.41)

53.8848(2.17)

**

56.4791(2.30)

**

56.6031(1.98)

**

61.1698(2.40)

**

Forest it-1

2.5983

(2.68)

***

2.8437

(2.97)

***

3.12457(3.25)

***

3.1281

(2.99)

***

3.2551

(3.32)

***

Mineralit-1

0.0586

(0.58)

0.0589

(0.59)

0.0663

(0.67)

0.0662

(0.67)

0.0665

(0.67)

NaturalGit-1

0.0132

(0.35)

0.0125

(0.34)

0.2147

(1.76)

*0.2144

(1.69)

*0.2168

(1.77)

*

Oil it-1

0.0733

(3.09)

***

0.0733

(3.15)

***

0.0594

(2.44)

**

0.0588

(1.79)

*0.0676

(2.51)

**

Conict it

0.2453

(1.23)

0.2731

(1.40)

0.2415

(1.24)

0.2411

(1.20)

0.2674

(1.35)

GDPPcapiaCoal it-1

0.0102

(2.22)

**

0.0068

(1.39)

0.0068

(1.35)

0.0071

(1.44)

GDPPcapiaNaturalGit-1

0.0001

(1.74)

*0.0001

(1.64)

0.0001

(1.76)

*

GDPPcapiaOil it-1

0.0003

(0.01)

GDPGiForest it-1

0.002(0.72)

F30.35

28.60

26.58

23.91

24.09

R2

63.49

63.62

63.76

63.76

63.70

N111

111

111

111

111

Note:The

t-values

areshow

nin

parenthesesandaregenerally

signicant

at10%

(*),5%

(**),and1%

(***).

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and its effect was thus neutralized. The MENA countries were increasing military spendingfor purposes of deterrence rather than for going to war. The model results show R2 is 63%.The values of the F-statistics reveal that, overall, the models are statistically signcant.

5. CONCLUSION

Military spending and natural resources dynamics in MENA are under researched, and thearguments of resource curse in aggregate forms do not convey sufcient information forstatistical inference. In this study, disaggregating the natural resource rents providesmeaningful tools to dissect the impact of natural resources on military spending. Not allresources are curses. Oil and forest rents support the resource curse hypothesis. Coal andnatural gas rents have a negative effect on military spending, while mineral rent isindependent of military spending. Thus, types of natural resources matter to military spend-ing. This study should be expanded in the future to include more countries from differentregions of the world, so as to further investigate the resource curse hypothesis.

ACKNOWLEDGMENT

The useful and constructive comments by two anonymous referees are gratefullyacknowledged. The usual disclaimer applies.

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Abstract1. INTRODUCTION2. BRIEF LITERATURE REVIEW3. THE DATA4. EMPIRICAL METHODOLOGY AND RESULTS5. CONCLUSIONACKNOWLEDGMENTReferences