Whatever its vaunted benefits in reducing the federal deficit, there's no denying that the defense build-down under way in recent years exacerbated the recession and is hampering the recovery. But as economists Farid Abolfathi and Matthew d'Arbeloff of DRI/McGraw-Hill point out in a new study, the problems of adjusting to the collapse of Soviet power affect many national economies and defense industries.
Even before the breakup of the Soviet Union, aggregate world military expenditures had begun to decline, note the two researchers. According to DRI/McGraw-Hill estimates, U.S. defense spending has already contracted by over 22% in real terms since 1986 and is projected to be down 54% by 1997. And European defense spending is expected to decline by 52% between 1989 and 1997. Meanwhile, military spending has fallen even more precipitously in Eastern Europe and among the former Soviet republics, where such expenditures once accounted for more than one-eighth of gross national product.
In the West, the U.S. is taking the biggest economic hit as the defense share of gross domestic product continues its decline from about 6.4% in 1987 and 5.2% last year to around 3.2% by 1997. The pain is less severe in Western Europe, where defense spending as a percent of GDP has been only half of the U.S. figure, but the effect is magnified because the sharpest drops are occurring while much of the Continent is in recession. Although high-tech industries in many countries are hurting, Britain and France are suffering the most because they have been large arms exporters, while Germany and other countries have been major arms importers.
Indeed, the sharp drop in military spending has already had a dramatic effect on world arms trade. Even with large stocks of former Soviet and Eastern European arms flooding world markets, Abolfathi and d'Arbeloff calculate that exports of major arms systems have already declined by 53% since 1987 (chart).
To be sure, Persian Gulf nations such as Saudi Arabia, Kuwait, and Iran have ordered $50 billion in armaments since the Iraqi invasion of Kuwait in 1990, and they are currently spending some $40 billion to $45 billion a year on defense. And developing nations in East and South Asia, including China, Taiwan, Indonesia, Malaysia, and South Korea, have placed $20 billion in arms orders since 1990. But military budgets in most other developing nations are either stagnant or declining, and rising outlays in the Middle East and Asia are not large enough to offset falling outlays elsewhere in the world.
Abolfathi and d'Arbeloff concede that an anti-Western takeover in Russia or the outbreak of a full-scale regional war in the Balkans would impede the shrinkage in military budgets they project. But they note that the economies of Russia and its allies are too weak to engage in a renewed arms race with the West. Over the long run, they say, defense spending is still headed down.
TECHNOLOGY IS FUELING RETAIL PRODUCTIVITY, BUT SLOWING JOB GAINS
Don't place the blame for lagging retail employment growth entirely on sluggish sales, advises economist Stephen S. Roach of Morgan Stanley & Co. Productivity growth fueled by the increasing use of electronic computing devices is also trimming job gains, he says. In a 1992 National Retail Federation survey of retailers, for example, some 83% of respondents said they will be using bar codes by the end of this year. What's more, the percentage of companies that were already scanning either internally prepared codes or vendor-marked goods jumped from 30% in 1991 to 58% last year.
"The growing use of such devices for point-of-sales computing, inventory management, and other functions," says Roach, "helps explain why retail employment is still down some 400,000 from its 1990 peak."