I i?.C£\ C V } V O f European University Institute Department of History and Civilisation \ (» THE DEMAND FOR EXTERNAL SECURITY BY DOMESTIC CHOICES: Military Spending as an Impure Public Good among Eleven European States, 1920— 1938 Jari Eloranta Thesis submitted for assessment with a view to obtaining the degree of Doctor of the European University Institute Florence, June 2002 «Kfouuuuuuoucpimui i j European University Institute 3 0001 0041 9847 1 European University Institute Department of History and Civilisation THE DEMAND FOR EXTERNAL SECURITY BY DOMESTIC CHOICES: Military Spending as an Impure Public Good among Eleven European States, 1920—1938 Jari Eloranta Thesis submitted for assessment with a view to obtaining the degree of Doctor of the European University Institute Examining Jury: Professor Mark Harrison, University of Warwick (external supervisor) Professor Riitta Hjerppe, University of Helsinki Professor Alan Milward, European University Institute Professor Jaime Reis, University of Lisbon (supervisor) The CD-ROM disc accompanying this work is kept at the Issue Desk at the Florence, June 2002 shelfmark THESES ELO Please ask the duty staff to make it available for consultation 3 1 o . 5 < L European University Institute Department of History and Civilisation Villa Schifanoia Via Boccaccio 121 50133 Florence, Italy © 2002 Jari Eloranta. All rights reserved. CONTENTS: PREFACE 1. INTRODUCTION 1 1.1. Aims o f the Study 1 1.2. Research Traditions and Military Spending Analysis 3 1.3. Data Problems and Solutions 10 1.4. Key Research Questions in the Thesis 28 2. MILITARY SPENDING AS AN IMPURE PUBLIC GOOD: Combining Macro­ level Influences with Micro-level Analysis of Domestic Political Markets 31 2.1. Theory o f Pure Public Goods 31 2.2. Measuring Impure Public Goods: The Impact of Systemic Changes, Regime Type, Domestic Actors, and the Political Markets 41 2.3. Summary o f the Hypotheses 62 3. ECONOMIC CHALLENGES, ELUSIVE COLLECTIVE SECURITY, AND DIVERGENT MILITARY SPENDING PATTERNS, 1920—1938 69 3.1. Economic Development, Central Government Spending, and the Impact of the Great Depression 69 3.2. Collective Security Aspirations and the League o f Nations 90 3.3. Military Spending Patterns Emerging Through Different Indicators - How Much is "Enough”? 108 4. THE DEMOCRATIC PEACE ARGUMENT, LACK OF INTERNATIONAL LEADERSHIP, AND SYSTEMIC FACTORS, 1920—1938 133 4.1. Military Spending and Regime Type - Exploring the Democratic Peace Argument 133 4.2. Leader-Challenger-Follower? The Interdependence of Military Spending and Economic Development 153 4.3. Systemic Characteristics o f the Demand for Military Spending 163 5. MILITARY SPENDING BEHAVIOR OF THE SELECTED ELEVEN EUROPEAN STATES, 1920—1938: Responding to External or Internal Variables? 177 5.1. The Demand for Military Spending as a Pure Public Good in an "Alliance": The League o f Nations as an Alliance? 177 5.2. The Demand for Military Expenditures as an Impure Public Good among the Individual Countries 191 5.3. Conclusions 202 6. THE "WEAK" STATE PERSPECTIVE: Implications of the Interwar Anus Trade and the Domestic Political Markets 205 6.1. Theoretical Implications o f the "Weak" State Perspective and the Interwar Arms Trade 205 6.2. Arms Exports and Imports o f the “Weak" States 216 6.3. Conclusions 227 7. THE POLITICAL ECONOMY OF MILITARY SPENDING: The Cases of Sweden and Finland, 1920—1938 231 7.1. Theoretical and Empirical Considerations in Comparing Sweden and Finland 231 7.2. The Swedish Path: Disarmament Compromises and Persistent Private Military Production 245 7.3. The Finnish Path: Domestic Political Divisions and Early Institutional Rent-seeking Opportunities 260 7.4. Conclusions 289 8. CONCLUSIONS AND FURTHER RESEARCH CHALLENGES 293 BIBLIOGRAPHY 303 APPENDICES 327 APPENDIX 1. Details on the Abbreviations and Statistical Tests APPENDIX 2. Details on the Data Sources and Adopted Solutions APPENDIX 3. Additional Data Tables APPENDIX 4. Additional Figures List of Tables and Figures in the Text: Table 1. Inter-state (=Between Recognized States) and Extra-State Wars (=Within States, Between the Core State and Its Extensions), 1920— 1938 Table 2. Characteristics of World Armies in the Interwar Period, by the League of Nations Table 3. Summary of British Military Expenditures in 1923, by the League of Nations Table 4. Comparison of the Preferred Nominal Military Expenditure (=ME) Data of Eleven Countries and Three Other Sources, 1920— 1938 Table 5. Industrial Recovery in the Selected Eleven European Countries, 1929=100 Table 6. Entry into and Exit from the Interwar Gold Standard by the Selected Eleven European States Table 7. Average Number of Cabinet Changes in a Year in the Selected Eleven European Countries, and the Number of Votes Cast / Population in the First Elections Held during the Periods 1870—1913 and 1920— 1938 Table 8. Members of the League of Nations in 1920 and 1938 Table 9. Military Exertions of Five Great Powers in the First World War Table 10. Military Burdens and Defense Shares of Seventeen Nations, Individually and on the Aggregate, 1870— 1913 and 1920— 1938 Table 11. Statistical Tests on the Means, Medians, and Variances of the Two Military Expenditure Deflators, 1920—1938 Table 12. Comparison of the Relative Military Stock and Military Spending of France and Germany, 1920— 1938 Table 13. Extension of the Franchise, Eleven European States Table 14. Two Different Measurements on the Number of Democracies and the Number States on the Aggregate, 1870—1940 Table 15. Composition of the Polity HID Democracy and Autocracy Indices Table 16. Unit Roots in the Defense Shares and the Military Burdens for Seventeen Countries, 1920— 1938 Table 17. Spearman Rank Correlations on the Relationship Between Military Spending Variables and Levels of Democracy Across a Cross-section of Twenty-four Countries, 1925, 1930,1935 Table 18. Impact of Regime Type on the Military Burden Across a Cross-section of Twenty- four Countries, 1925,1930,1935 Table 19. U.S. Leadership Position in Perspective in the Interwar Period Table 20. Results of the Granger Non-causality Tests for Seventeen States, 1920—1938: Summary of the Findings Table 21. Generalized Least Squares (GLS) Estimates on the Short-Run Impact of Military Spending on Economic Development for Seventeen States, 1920— 1938 Table 22. GLS Estimates on the Short-Run Impact of Military Spending on Economic Development for the Selected Eleven European States, 1920— 1938 Table 23. Original CINCs (Based on the Entire COW Database) and the Modified CINCs in a 17-country System for France, Germany, Russia/USSR, the United Kingdom, and the United States, 1920— 1938 Table 24. GLS Estimates of the Systemic Influences on Pooled Defense Share and Military Burden in the 17-state System, 1920—1938 Table 25. GLS Estimates of the Systemic Influences on Pooled Defense Share and Military Burden in the 11-state System, 1920— 1938 Table 26. Nonparametric Tests on the Exploitation and Joint-Product Hypotheses for the Selected Eleven European States, 1925, 1930,1935 Table 27. Nonparametric Tests on the Level of Development Hypothesis for the Selected Eleven European States and the Sample of Twenty-four States, 1925, 1930, 1935 Table 28. GLS Estimates on the Spillins as an Independent Variable in Representing Either Pure and/or Impure Public Good Characteristics of Military Spending for the Selected Eleven European States, 1920—1938 Table 29. Common Responses to the Theoretically Relevant Independent Variables in the Demand for Military Spending Among the Selected Eleven European States, 1920— 1938 Table 30. Individual Country Responses to the Theoretically Relevant Independent Variables in the Demand for Military Spending Among the Selected Eleven European States, 1920— 1938 Table 31. Characteristics of the Aggregate Trade, Military Trade, and Military Spending for the Nine “Weak” European States (%): 1925, 1935 Table 32. Structural Developments in the Military Trade of the Nine “Weak States”, 1925, 1935 Table 33. Military Export Patterns of the Nine “Weak” European States: Individual Country Regression Results, 1920— 1937 Table 34. Military Export Patterns of the Nine “Weak” European States: SUR Estimation Results, 1920— 1937 Table 35. Military Import Patterns of the Nine “Weak” European States: Individual Country Regression Results, 1920— 1937 Table 36. Military Import Patterns of the Nine “Weak” European States: SUR Estimation Results, 1920— 1937 Table 37. GLS Estimates on the Short-Run Linear Path Dependence Imposed by Consumption ME on the Aggregate ME of Five European Countries, 1920—1938 Table 38. GLS Estimates on the Short-Run Linear Path Dependence Imposed by the Central Government Expenditures (=CGE) on the Aggregate ME of the Selected Eleven European States, 1920— 1938 Table 39. Structure of Finnish and Swedish Industry, Percentage, by Branches, 1920— 1940 Table 40. Structural Composition of the Finnish Military Expenditures, 1920— 1938, Millions of FIM in Current Prices Figure 1. GDP per capita for Belgium, Denmark, Finland, France, the Netherlands, Norway, Portugal, Spain, Switzerland, Sweden, and the UK: 1920, 1929, 1938 Figure 2. Dutch M E Data in Comparison, 1920— 1938 Figure 3. Unweighted Mean Shares of Military Consumption Expenditures (=CONSME) and Military Capital Expenditures (=CAPME) in the Aggregate ME for Five European States, 1920— 1938 Figure 4. Development of the Population-weighted Military Import Share as a Percentage of Nominal ME for Nine “Weak” States, 1920— 1937 Figure 5. Consumption of Defense as a Public Good, by Two Agents Figure 6. Demand for Military Spending in a Two-member Alliance Figure 7. Military Spending as a Pure Public Good in an Alliance Figure 8. Demand for Military Spending as an Impure Public Good: The Actors and Collective Action Figure 9. A Research Framework for Studying Military Spending as an Impure Public Good Figure 10. Organization of the Hypotheses in the Thesis Figure 11. Mean Adjusted Real GDP per Capita (in 1929 Quasi-USD) of the Selected Eleven European States and the Aggregate Adjusted Real GDP (in 1929 Quasi-USD) of Seventeen Nations, 1920— 1938 Figure 12.