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Global macro & geopolitics from a small economy perspective

On small countries & the return of hard power

David Skilling
16 July 2017

France celebrated Bastille Day on Friday, treating the world to pictures of Presidents Macron and Trump watching a never-ending parade of military equipment and personnel. Despite the often less than charitable US portrayal of French military resolve, France has one of the largest militaries in the world and spends 2.3% of GDP on defence. This is the highest in Europe by a margin, although less than the US at 3.3% of GDP.

But they are not alone. Military spending has been increasing strongly in many parts of the world, notably Asia and the Middle East. In part, this reflects growth in large emerging markets: countries spend more on defence as they get richer. China’s military spending, for example, has increased by about 120% since 2007 in constant USD terms according to estimates from the Stockholm International Peace Research Institute. But it is also a reflection of a changing global context in which hard power is back; spending in Russia and the Gulf is up substantially over the past decade. In contrast, military spending as a share of GDP has steadily declined in many advanced economies, from 3-4% of GDP in the 1980s to around 2% of GDP. But this reduction has flattened off, and there are some indications that it is beginning to reverse – notably in several small countries.

Small countries are a particularly good place to look to trace the evolution of global hard power dynamics, due to their deep exposure to the functioning of the international environment. For much of the past several hundred years, to be a small country has been a source of exposure. Although there are examples of highly successful small states, from Venice to the world-bestriding Netherlands in the C17 and C18, life had a tendency of being brutish and short for small countries. But with a more stable security and geopolitical environment, as well as the ability to better access foreign markets, being a small country has become a more viable option over the past century (a point documented by Alberto Alesina and Enrico Spolaore). Indeed, the number of independent states has increased from less than 70 in 1914 to just under 200 today on the basis of a more supportive external environment.

Over the past several decades many small countries have spent less than their large country neighbours on military spending as a share of GDP. Across the advanced economies, small countries have particularly low levels of military spending with a group average of 1.6% of GDP; for example, Denmark (1.2%), Sweden (1.0%), and Austria and Switzerland (both 0.7%). The exceptions are countries with particular security risks, such as Israel and Singapore, which spend substantial amounts (5.8% and 3.4% of GDP respectively). These are rational decisions for small countries that are part of security alliances, as pointed out by Mancur Olson and Richard Zeckhauser as far back as the 1960s.

And many small countries actively banked the peace dividend from the 1990s. Excluding Israel and Singapore, small country military spending declined from 2.0% of GDP in 1990 to 1.0% of GDP in 2016. The reduction in the international security risk profile after the end of the Cold War was met by a reduction in military spending. But over the past several years, small countries have frequently expressed concern about adverse developments in the global system: from the risks of protectionism to the return of big power politics.

In this context, the actions and resource allocation decisions of small countries over the past few years are particularly interesting; they suggest a changing international environment. Across the small economies group, military spending has stopped declining as a share of GDP. Small country military spending grew by over 4% in 2016, and by 6% or more in seven small countries, even in a period of tight fiscal constraint. Part of this may be due to pressure to meet NATO’s 2% target, but it also reflects the need to take greater national responsibility for growing risks.

Indeed, in addition to these spending decisions, there is marked increase in the intensity of strategic focus on military issues. For example, there are active debates in non-NATO members, notably Sweden and Finland, about membership options in response to Russian actions. Sweden and others have been subject to repeated Russian incursions into air and maritime space over the past few years.

Sweden is also introducing conscription from this month (after abolishing the draft in 2010), and will be stationing troops permanently on Gotland (a strategically important island in the Baltic Sea) for the first time since 2005. And neighbouring Denmark is investing US$3b on 27 F-35As. Singapore has recently added new ships and submarines to its capacity, and is continuing to upgrade its air force. Even New Zealand, which is insulated from direct military threats by its physical isolation, is becoming more active. It released a defence white paper last year, committing to spending NZ$14b on new military equipment over the next 15 years (even so, at 1.2% of GDP in 2016, its military spending remains a long way shy of Australia at 2% of GDP).

Some of these decisions reflect idiosyncratic national exposures: to a more assertive Russia (Finland, Sweden, and others) or to a more complex security environment in Asia (Singapore). But the consistent pattern of military spending increases and intensity of activity in small countries around the world is noteworthy, suggesting a sea change in the interpretation of the strategic environment.

Small countries have a well-deserved reputation for strong economic and social outcomes. From Switzerland and the Nordics, to Singapore and New Zealand, small economies have high levels of soft power. But to an increasing extent this is not seen to be sufficient. The increased military spending across small countries is a signal on the changing global environment that should be taken seriously.

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