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Rebel activity and drug trafficking cause South American government’s military budgets to explode

Introduction

Global defense spending continues to grow, despite many developed nations implementing considerable cuts to their defense budgets as part of their austerity measures. Western Europe in particular has suffered, as the impact of the Eurozone crisis has been felt by many EU members. For many countries in Europe defense spending is seen as a politically ‘safe’ area to make cuts, particularly as operations in Afghanistan wind down. At the same time, North America is suffering from the US’ sequestration measures which resulted in a decline in spending in 2012.
However, the Asia-Pacific region, South America and parts of Eastern Europe are picking up the mantle of Western defense spending, resulting in the continued growth of global defense spending.

Industry figures

Globally, 2012 saw a 1.9% increase in defense spending, almost half of the previous year’s growth as many countries cut back on their defense budgets. For the 2008-2012 period, defense spending experienced a 4.4% compound annual growth rate. This period saw troop surges in Afghanistan during 2009 and 2010, and the corresponding years show high growth, particularly 2009.

Europe actually saw strong growth in 2012’s defense spending, however this is primarily due to Russia’s increase of 21.6% to $90.1bn over 2011’s budget. Russia, alongside Poland, is propping up spending across Europe as a whole, however Western Europe has seen defense spending fall as a percentage of GDP in many countries, resulting in stagnation in real terms.

Asia-Pacific and South America have seen strong growth, with Asia-Pacific seeing a 6.5% increase in 2012 for a total of $363.4bn, and a 10.2% increase in spending to $59.1bn for South America in the same year.

In contrast to these figures, North America saw a 3.9% contraction to $712bn in 2012, primarily due to the US’ 4.1% decline in defense spending as a result of automatic budget sequestration.

Industry trends/issues

The Asia-Pacific region has experienced significant growth in defense spending, fuelled primarily by China, India and Indonesia.

Economic prosperity and political tensions with the US and Japan have seen China’s defense spending experience double digit growth for most of the last 20 years, and with a new leadership courting the military, it is likely this will continue for the foreseeable future.

India’s growing economy, coupled with its territorial disputes with the two nuclear powered countries of China and Pakistan, have resulted in significant defense spending growth which is likely to continue for quite some time.
Many South American countries are not only seeing their economies developing, but also having to deal with increased drug trafficking and border security. Furthermore, countries like Colombia and Peru have to deal with rebels such as the Farc and ELN rebel groups in Colombia, and the Shining Path rebel movement in Peru. These factors have contributed to increased defense spending in South America.

Europe and North America have seen significant slowdowns and declines in defense spending as austerity measures and sequestration kicks in across the regions, with claims that US military readiness is being adversely affected by the automatic cuts.

However, Eastern Europe has bucked this trend thanks to Russia’s significant increase in defense spending as part of its 2008 military reforms.

Russia’s reforms came about due to the relative difficulty the country experienced in its victory over Georgia in the August 2008 Russian-Georgian war, as many shortcomings were exposed during operations. Poland has also carried out significant defense spending increases as its economy has prospered, with many of the leading defense companies scrambling to try and take advantage of this.

Find this interesting? For more, please read our ‘Defense Spending Industry Reports’.

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