Tuesday, April 28, 2020

Military Expenditures should be evaluated using the Purchasing Power Parity Method

U.S. Military Spending vs. the WorldFor a country that only spends $60 billion in defense, Russia's military capability is impressive. Not only can its military deliver large quantities of weapons, but it possesses highly competent scientists and research institutes that enable the development of hyper-sonic weapons such as Tsirkon and Avangard, as well as air defense systems like the S-500. To contextualize, Russia's military expenditure is equivalent to France's and United Kingdom's, and despite the similar expenditure, its military is significantly more advanced and can maintain over a million personnel while purchasing/producing vast quantities of very potent military equipment. How and Why this happens?

The main reason this happens is because the use of market exchange rates grossly understates the actual volume of Russia's defense budget. With it having a weaker currency, it can afford services of brilliant scientists, and procure weaponry at a much cheaper costs than France or the UK. For example, minimum wage in the UK is set approximately 1550 € per month; on the other end, in Russia it is estimated at 11,400 Russian Rubble per month, which is almost 142 € monthly. The differences in these figures show that evaluating just on exchange rates could be misleading as 142 EUR in Russia can purchase a lot more than in UK or France. Thus, analysts and researchers should focus their analysis on countries' respective of purchasing power parity (PPP) - instead of using the market exchange rates - as this allows them to consider the difference in costs between countries. Lastly, to further explain why Russia’s military is so powerful, an analysis found that, “using the PPP approach, Russia’s effective military expenditure actually ranged between $150 billion and $180 billion annually over the last five years. That figure is conservative; considering hidden or obfuscated military expenditure, Russia may well come in at around $200 billion.” So next time, you’re analyzing countries’ actual military expenditure, use the PPP approach as it will provide a clearer analysis.

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