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Defence and Peace Economics DOES NEUTRALITY MAKE A This article was downloaded by: [ETH-Bibliothek] On: 16 April 2010 Access details: Access Details: [subscription number 788716161] Publisher Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37- 41 Mortimer Street, London W1T 3JH, UK Defence and Peace Economics Publication details, including instructions for authors and subscription information: http://www.informaworld.com/smpp/title~content=t713640174 DOES NEUTRALITY MAKE A DIFFERENCE? EXPLAINING PATTERNS OF SWISS DEFENSE SPENDING IN 1975-2001 Thomas Bernauer a; Vally Koubi ab;Fabio Ernst c a Center for Comparative and International Studies (CIS), ETH Zurich, Zurich, Switzerland b Oeschger Institute and Department of Economics, University of Bern, Switzerland c Swiss Armed Forces Planning Staff, Ittigen, Switzerland To cite this Article Bernauer, Thomas , Koubi, Vally andErnst, Fabio(2009) 'DOES NEUTRALITY MAKE A DIFFERENCE? EXPLAINING PATTERNS OF SWISS DEFENSE SPENDING IN 1975-2001', Defence and Peace Economics, 20: 5, 413 — 422 To link to this Article: DOI: 10.1080/10242690802051537 URL: http://dx.doi.org/10.1080/10242690802051537 PLEASE SCROLL DOWN FOR ARTICLE Full terms and conditions of use: http://www.informaworld.com/terms-and-conditions-of-access.pdf This article may be used for research, teaching and private study purposes. Any substantial or systematic reproduction, re-distribution, re-selling, loan or sub-licensing, systematic supply or distribution in any form to anyone is expressly forbidden. The publisher does not give any warranty express or implied or make any representation that the contents will be complete or accurate or up to date. The accuracy of any instructions, formulae and drug doses should be independently verified with primary sources. The publisher shall not be liable for any loss, actions, claims, proceedings, demand or costs or damages whatsoever or howsoever caused arising directly or indirectly in connection with or arising out of the use of this material. Defence and Peace Economics, 2009 Vol. 20(5), October, pp. 413–422 DOES NEUTRALITY MAKE A DIFFERENCE? EXPLAINING PATTERNS OF SWISS DEFENSE SPENDING IN 1975–2001 THOMAS BERNAUERa, VALLY KOUBIb,a,† AND FABIO ERNSTc aCenter for Comparative and International Studies (CIS), ETH Zurich, Zurich, Switzerland; bOeschger Institute and Department of Economics, University of Bern, Switzerland; cSwiss Armed Forces Planning Staff, Ittigen, Switzerland TaylorGDPE_A_305321.sgm and Francis (Received 25 October 2007; in final form 25 February 2008) We10.1080/10242690802051537Defence1024-2694Original2009Taylor000000VallyKoubivally.koubi@vwi.unibe.ch & andArticle Francis (print)/1476-8267 Peace study Economics (online) the behavior of defense spending in Switzerland over 1975–2001. Our main interest is in determining how neutrality in international affairs (non-membership in military alliances) affects defense spending. We find that neutrality is associated with a perception of lower levels of external threat; hence it confers economic benefits in the form of a smaller defense burden. However, neutrality does not fully insulate a country from variations in the level of external threat in the global system as perceived by members of military alliances. Swiss defense spending has tracked very closely the spending trends – but at a lower average level – of the United States and other NATO countries. To the extent that post-Cold War threats, such as international terrorism, materialize primarily in the context of existing security alliances, Swiss military spending patterns observed in 1975–2001 are likely to remain the same in the future. Keywords: Defense spending; Neutrality; Alliances; Threat; Security; Switzerland INTRODUCTION One of the main duties of a sovereign country is to protect its territory and people from Downloaded By: [ETH-Bibliothek] At: 08:55 16 April 2010 violence emanating from other countries or from non-state actors such as terrorist groups. This duty can mainly be performed by means of military power. The cost of supporting military capabilities depends on both exogenous (such as geography, history and so on) and endoge- nous factors. An important factor from the latter group is a country’s participation or non- participation in security or military alliances. Switzerland, a neutral country and therefore not a member of any security or military alliance, must to a great extent be self-reliant for its defense. Moreover, it does not have any formal obligation to take sides in international conflicts involving other parties. Swiss policy-makers must then perceive that the country is, relative to other countries, subject to a lower level of external threat. In this paper we examine standard political and economic determinants of military spending in Switzerland. In addition, we seek to infer whether Switzerland’s status as a neutral country †Corresponding author: Center for Comparative and International Studies (CIS), ETH Zurich, Seilergraben 49, 8092 Zurich, Switzerland. E-mail: [email protected] ISSN 1024-2694 print: ISSN 1476-8267 online © 2009 Taylor & Francis DOI: 10.1080/10242690802051537 414 T. BERNAUER ET AL. makes it behave differently from other countries that belong to military alliances. We use the behavior of the defense budget to examine whether neutrality insulates a country from changes in the level of external threat in the global system. We find that neutrality does alter defense spending but does not fully insulate a country from developments in the level of external threat in the global system as perceived by non- neutral countries. Switzerland’s (and Austria’s, a neighboring and also neutral country of similar size) average level of defense spending has remained systematically below that of Western European NATO members. However, at the same time, Swiss defense spending has followed the trend of spending in NATO countries. These two findings imply that the level of external threat perceived by neutral countries is indeed lower than that perceived by allied countries; that is, neutrality does confer savings in defense spending. Moreover, variation in the level of external threat to alliance members, as expressed by their defense spending, is strongly positively correlated with variation in the level of external threats to neutral countries (again measured by their defense spending). Hence, neutrality does not fully insulate a country from global, alliance-related risks. We also find that the level of external threat matters for the ‘budget’ dividend of neutrality. That is, the difference in the average defense-to-GDP ratio between neutral and aligned countries shrinks with a decrease in the level of external threat. In particular, following the collapse of the Soviet Union, the gap in defense spending (as a share of GDP) between the main NATO countries and two neutral countries (Switzerland and Austria) has become smaller. The remainder of the paper is structured as follows. The next section offers a literature review. The empirical analysis is carried out in the third section, which is followed by a concluding section. REVIEW OF LITERATURE Theoretical Research There is a substantial body of theoretical and empirical literature in political science and economics that seeks to explain defense spending. The theoretical explanations can be classi- fied in three categories: (1) arms races; (2) organizational and bureaucratic politics; and (3) economic welfare maximization. The arms race literature, following Richardson (1960), explains time-series patterns of military expenditure in terms of action-reaction behavior Downloaded By: [ETH-Bibliothek] At: 08:55 16 April 2010 between two rivals. It identifies three major influences: (a) the military spending of the other nation (rival) in the threat system (the ‘reaction’, ‘defense’ coefficient); (b) the economic burden of defense (the ‘fatigue coefficient’); and (c) the underlying grievances held by one nation against the other (the ‘grievance’ coefficient). The arms-race model of military expenditure seems more suitable for countries involved in conflict or engaged in an enduring rivalry, such as the US–USSR Cold War rivalry (Majeski, 1985), the Indian–Pakistani (Deger and Sen, 1990), the Arab–Israeli (Mintz et al., 1990), and the Greek–Turkish relationships (Kollias and Makrydakis, 1997. In these cases the military preparedness of the other represents the overwhelming security issue/consideration. The organizational and bureaucratic politics explanation emphasizes ‘incrementalism’ and bargaining over the defense budget, starting from the status quo. It implies that the best predic- tor of new increments to military spending is simply the increments of the immediate past; that is, the main determinant of this year’s defense budget is last year’s budget (Correa and Kim, 1992). The economics literature tends to ignore bureaucratic or political processes. It uses a standard neo-classical model in which a nation-state is represented as a rational agent who maximizes a welfare function depending on security and economic variables subject to a SWISS NEUTRALITY 415 budget constraint. Defense spending balances the welfare benefits of extra security derived from military expenditure against its opportunity costs in terms of forgone civilian output (Dunne and Perlo-Freeman, 2001; Avramides, 1997; Smith, 1995). Within this optimization framework, a wide variety of forms for the welfare function, budget constraint, and security function have been employed. Empirical
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