The Determinants of Defense Spending in the Gulf Region

ABSTRACT

We examine the determinants of military spending of the six countries in the Gulf Region by using a partial adjustment model in a system setting estimated with the three-stage least squares (3SLS) method. Our model takes into consideration the institutional inertia as well as intercountry correlations, both observed and unobserved. In addition to economic variables, we also consider a series of strategic variables to shed light on various issues such as free riding and spill-in effects. Our findings based on annual data between 1980 and 2016 indicate that the military expenditures are influenced by both economic and strategic factors with a high degree of heterogeneity across different countries. Our results also show that the GCC member countries do not free ride on each others’ military expenditures. In addition, the US military presence is an important determinant of defense spending in the region.

KEYWORDS:

• Demand for defense
• security web
• GCC countries
• Iran
• Iraq
• 3SLS

Acknowledgments

This work was sponsored by the Economic Research Forum (ERF) and has benefited from both financial and intellectual support. The contents and recommendations do not necessarily reflect the ERF’s views. We are grateful for the anonymous reviewers for their extremely useful comments and suggestions.

Disclosure of potential conflicts of interest

No potential conflict of interest was reported by the author(s).

Notes

1. The body of water located between Iran and the Arabian Peninsula has been referred to as ‘Persian Gulf,’ “Arabian Gulf, or the ‘Gulf of Basra’ depending on one’s perspective. We avoid taking sides in this naming dispute and consider this territory comprised of eight countries simply as the ‘Gulf Region.’ For a discussion of different views on this topic the reader is referred to Levinson (2011). Preprint submitted to Defence and Peace Economics 13 April 2021

2. As is well known, the US operates hundreds of military bases around the world. The funding of these bases is complex and can very from country to country, however, it is known that the operational costs such as housing and maintenance alone cost about 4 percent of the total budget of the US Department of Defense (Adedeji, Mosher, and Keating 2019).

3. It is also useful to consider various institutional factors, which are sometimes used in other related studies such as Dizaji, Farzanegan, and Naghavi (2016) and Farzanegan (2018). However, we cannot employ these due to the data quality as well as multicollinearity/micronumerosity issues for this country group. Also we cannot include time specific shocks such as the Iran-Iraq War or the Gulf War in our model. This is due to the collinearity problems with other variables of interest, namely the US military presence in this region.

4. The Bureau of Arms Control (2019) data were employed for the 1980–2003 period for Iraq, 1992–2001 period for Qatar, and the 1980–1996 period for the UAE.

5. Gretl 2020d (64bit) was used. Our data and code are available upon request.