Wages and Warfare: Standard Measure May Vastly Understate Russia, China’s Military Spending

The United States famously spends more on defense than the next seven countries combined, almost three times that of its nearest rival China and 10 times that of Russia.

But that commonly used data is flawed, according to a handful of analysts and academics, who are trying to persuade think tanks to adopt a different set of numbers to rank military spending.

According to their analysis, Russia’s defense spending in 2018 was not $61 billion, but $159 billion. And China’s spending is almost double the latest $250 billion figure at around $450 billion, reaching 75 percent of U.S. military spending.

The new numbers come from using a different way of calculating: eschewing the time-honored method of comparing spending via exchange rates for a method that adopts a measure known as power purchasing parity (PPP), which compares what currencies can buy locally.

For military analysts and generals steeped daily in details of missile batteries, warship numbers, troops, training, terrain, asymmetric advantages, and theories of victory, neither set of crude figures is likely to much affect overall assessment of an adversary’s military prowess.

But these topline spending figures are resulting in misleading newspaper reports and skewing threat perceptions among some key decision-makers, claim those producing the new data.

Epoch Times Photo
Chinese troops march during a military parade in Tiananmen Square to mark the 70th anniversary of the founding of the People’s Republic of China in Beijing on Oct. 1, 2019. (Greg Baker/AFP/Getty Images)

“I think this crude military spending analysis has permeated every level of the decision-making apparatus,” said Richard Connolly, director of the Center for Russian, European, and Eurasian Studies at the University of Birmingham in the UK, referring to the regular numbers as calculated using the market exchange rate.

“I’ve been banging this drum for about two years,” he told The Epoch Times. “I think I am the only person who has written about Russian military expenditure at PPP. Nearly everybody, be it think tanks, such as the IISS, CIPRI, or the media more widely or policymakers, will use market exchange rate.”

That market rate is the standard measure used to rank military spending internationally, he says. “Most key decision-makers use it.”

He says it distorts because it does not account for the cost of labor or fluctuations in currency markets.

“It understates military expenditure in poorer countries and overstates it in richer countries.”

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Military expenditure in selected countries (USD billion) at market exchange rates: the usual figure used to compare military spending. Source SIPRI. (Richard Connolly)

An Alternative Measure

In October 2019 Connolly wrote an occasional paper (pdf) for CNA—a research organization with a 75-year history of military analysis—breaking down how the exchange rate data do not reflect Russia’s military spending and proposing a new set based on a PPP analysis.

Connolly says it is sometimes obvious that using market exchange rates just doesn’t add up, giving the example of Russian military spending around 2014-2016—a time when Russia was ramping up military spending,

“They were buying more equipment, they were engaged in more operations, they had peaked in military procurement, they had in that year dozens of intercontinental ballistic missiles with nuclear warheads, tens of fast fighter jet aircraft, and over 100 helicopters. You go through this phenomenal list in just that year (2014) alone. Measured in rubles terms [military spending] was rising pretty sharply during this period.”

Russian anti-aircraft missile systems C 400 drive during the military parade marking the 75th anniversary of the lifting of the Nazi siege of Leningrad, at Dvortsovaya Square in Saint Petersburg on January 27, 2019. (Olga Maltseva/ AFP via Getty Images)
Russian anti-aircraft missile systems C 400 drive during the military parade marking the 75th anniversary of the lifting of the Nazi siege of Leningrad, at Dvortsovaya Square in Saint Petersburg on Jan. 27, 2019. (Olga Maltseva/ AFP via Getty Images)

“But at market exchange rates, because the price of oil collapsed in the late summer/early autumn of 2014, the ruble weakened. So according to the market exchange rate, military expenditure [apparently] declined in 2014 and then into 2015.”

When he produced a PPP-based estimate it put Russian military spending at $159 billion 2018 last year, instead of the $61 billion from the exchange rate figure. Russian defense spending peaked at over $200 billion in 2016, according to his data.

Epoch Times Photo
Russian military expenditure at market exchange rates and PPP exchange rates, 2005-2018 (USD billion). Source: SIPRI; IMF WEO; calculation by Connolly. (Richard Connolly)

According to Connolly’s PPP calculation, Iran’s spending would be nearly $50 billion last year, as opposed to the $13 billion exchange rate figure, which he points out is quoted in the U.S. Defense Intelligence Agency Report last year.

China’s spending is over $450 billion, according to his calculations.

Epoch Times Photo
Military expenditure of selected powers at PPP exchange rates, 2005-2018 (USD billion)
Source: SIPRI; IMF WEO; calculations by Richard Connolly. (Richard Connolly)

Chairman of Joint Chiefs Agrees

Chairman of the Joint Chiefs of Staff General Mark Milley alluded to these issues in 2018 when challenged by a senator wielding the usual exchange rate figure for Russian military spending during a Senate Appropriations Committee hearing.

“We’re spending $600 [billion], $700 billion against an enemy that’s spending $80 billion,” said Sen. Dick Durbin (D-Ill.), the ranking Democrat on the panel. “Why is this even a contest?”

In response, Milley picked up on the problems with the numbers. “We’re the best-paid military in the world by a long shot. The cost of Russian soldiers or Chinese soldiers is a tiny fraction.”

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(L-R) Secretary of Defense Mark Esper and Chairman of the Joint Chiefs of Staff Army Gen. Mark Milley hold an end of year press conference at the Pentagon in Arlington, Va., on Dec. 20, 2019. (Drew Angerer/Getty Images)

“I think you’ll find that Chinese and Russian investments, modernization, new weapons systems, etc., their [research and development]—which is all government-owned and also is much cheaper—I think you’d find a much closer comparison,” concluded Milley.

The cost of labor is the main factor that skews the figures, agrees Connolly.

The problem with PPP is that there is no commonly agreed-upon formula for military spending, says Richard Bitzinger, Visiting Senior Fellow, Military Transformations Program at the S. Rajaratnam School of International Studies. “So it is natural that most analyses of military spending would use the standard exchange rates.”

He says that the argument about whether to use PPP has been around for a while.

Epoch Times Photo
Chinese navy sailors march in formation during a parade to celebrate the 70th anniversary of the founding of the People’s Republic of China at Tiananmen Square in 1949 in Beijing, China, on Oct. 1, 2019. (Kevin Frayer/Getty Images)

“The main advantage is that a PPP, if done right, can provide a more accurate and comparable figure of defense spending, reflecting true spending power,” Bitzinger told The Epoch Times. “The disadvantages are that it can overstate spending power, and fail to take into account intangibles like training, leadership, morale, quality of equipment, etc.”

Bitzinger agrees that the exchange rate figure is misleading to an extent. “But using topline defense budget figures is always a risk: it can only tell so much about a country’s military priorities, directions etc. One should always be wary of ‘one data point’ analysis.”

Even if you can figure out what a spending figure is, most military analysts say it is only a broad indication of military power, and even further from any analysis of how any two adversaries would fare on each other’s turf or in any other given context.

“A true assessment of a country’s military prowess (and whether it’s improving or comparatively better than another’s) always requires a broad approach: budgets, procurement, quality, training, tactics etc.,” says Bitzinger.

For Russia, and even more so for China, making any kind of assessment of military spending is hard, because spending is often obscured or fabricated.

“While most analysts and governments understand that China’s published military spending figures are stark fiction, they are used to provide at least one kind of ‘official’ indicator of the growth of China’s military spending,” Rick Fisher, Senior Fellow at the International Assessment and Strategy Center told The Epoch Times.

Epoch Times Photo
Chinese military vehicles carrying DF-41 ballistic missiles roll during a parade to commemorate the 70th anniversary of the founding of communist China in Beijing on Oct. 1, 2019. (Mark Schiefelbein/AP Photo)

“Government and private sector researchers, however, are able to assess what little China does reveal and combine that with unique sources to arrive at useful estimates, but this remains a daily and intensive chore.”

Professor Peter Robertson, Dean and Head of the Business School at the University of Western Australia, has been crunching the numbers on military spending and is convinced that exchange rate-based spending figures are misleading and the PPP-based figures are a better option.

Like Connolly, he doesn’t think the numbers are causing problems of perception deeper in the corridors of the Pentagon.

“But certainly I think in the media in discussion and so forth, people are using this as a quick benchmark on how it compares with the U.S., or how it has changed over recent years,” he told The Epoch Times.

More Bang for the Tourist Buck

Explaining the difference between the exchange rate and PPP, Robertson gives the example of tourists heading to poorer countries.

“The exchange rate that you get at the airport is a market exchange rate, and in a global economy that kind of reflects an average price of traded goods across countries.”

“If I buy a TV in Australia, and then I convert my dollars to yuan and go to China and buy the same TV, it might cost around the same,” he says.

“But if you are buying things that are labor-intensive—like street food, home care services, a hotel, a housemaid—you will find that your money goes a lot further.”

“So the question is: for the military, does the effect hold or not?” he says.

In theory, an exchange rate comparison might hold roughly true for military equipment, such as machine guns, which are also sold on the international market, says Robertson.

Ceremonial unit soldiers during a military parade in Moscow, Russia, on May 9, 2015. (RIA Novosti via Getty Images)
Ceremonial unit soldiers during a military parade in Moscow on May 9, 2015. (RIA Novosti via Getty Images)

“But the military also consists of personnel. And that’s where the problem occurs. China’s got a lot of personal. Roughly speaking about one-third of the military budget goes on soldiers or defense staff generally.”

Robertson has calculated the costs of roughly comparable security services in the United States and China.

“It turns out that Chinese soldiers are very cheap in comparison to U.S. soldiers, even when once adjusted for differences in skill level and so forth.”

According to his analysis, China’s defense sector is about twice as large as the way the exchange rates measure.

“Russia is about three times larger,” says Robertson. “Turkey about four times larger.”

Using exchange rate-based data not only skews comparison between countries but can also skew the year-to-year comparison within the same countries, according to both Robertson and Connolly.

Robertson gives the example of Chinese military spending.

“In recent years there has been a lot of stuff in the press about double-digit percentage growth in China’s military spending,” says Robertson. “What’s actually happening in the background is that there is rapid wage growth in China—and so the military, like the factories are facing increasing personal costs, pensions. So the amount of real resources they are getting for the same expenditure is going down.”

PPP: Better, But not Perfect?

Once the adjustment has been made for the cost of rising wages, that increase in military expenditure is a lot more moderate than the exchange rate figures indicate, he says.

Robertson says that he compared his own more tailored data-crunching of military spending against PPP numbers and the exchange rate figure.

“You’ve got one that’s good for machine guns (the exchange rate) and one that’s good for personnel (PPP). The question is: which one’s going to be better on average for military spending?”

“I worked out that the PPP ones—even the ones based on the consumer index—do a better job than those based on market exchange rate. But they’re still not exactly the right number either.”

Connolly said he came to a similar conclusion.

“Using the PPP measure is not perfect—but I think it’s roughly right,” says Connolly. “U.S. dollars at the market exchange rate is precisely wrong.”

He notes that some people say that consumer price baskets used for PPP are not military-specific. However, he believes that basket is still related to the costs a military will incur, which is why the comparison holds.

“What’s the cost of transport? That’s going to relate to the cost of logistics. What’s the cost of living? That’s going to help to measure the purchasing power of a soldier. What’s the cost of a car? That will be related to the cost of manufacturing etc.”

Connolly concedes the need for a simple figure for a side by side comparison. “All I would say is use PPP, rather than market exchange rate. Just that one change, I think, would be massive.”

He says he is working on a PPP formula specific for the Russian military and that others are working on one for China.

Spending and Strategy

For analysts at the Center for Strategic and Budgetary Assessments (CSBA), the challenge of comparing military spending is not simply putting a set of simple numbers in policymaker’s hands—but getting them to think about the strategic implications.

Drilling into the details of military spending reveals military-strategic choices and their limitations, according to Harrison Schramm, senior fellow at the CSBA.

“In our current work, we are focused on the strategic choices—and money ends up being a proxy because money is easy to measure,”Schramm told The Epoch Times. “The answer that we are looking for in our work is, ‘If I choose A, how does it impact the ability to choose B in the future?’ So that’s the level of detail we are going for.”

Making a true “apples to apples comparison” of spending is very hard, says Schramm.

“The real art in this is to choose assumptions that are tractable and explainable,” he says. They are choosing less-than-perfect classical statistical methods to crunch out equations to figure out the cost of ships or planes, precisely to make the process more accessible.

Machine learning or neural nets might give a better answer, Schramm says, “but it’s an answer that you would never be able to explain.”

“It is almost more important to be able to explain why we think that’s the number than to actually have a precise number because that gets into the choices a nation has to make.”

“I would consider this to be a runaway victory if I could simply get people to acknowledge openly that there are choices that have to be made [by adversaries writ large], and that it’s not ‘everything all of the time.’ Some people have this idea that China is this juggernaut and that they can just build ad infinitum. And that is not true.”

But getting to the numbers isn’t easy.

Hiding the Numbers

“There’s a wealth of data that the U.S. has in open forums about how they spend their money,” says Schramm. “The Russians and Chinese don’t do that. We have their topline, by which I mean the total sum of the checks that they are able to write. And then we have it broken down by a couple of categories. It’s extremely opaque.

“What makes this hard is that it is possible that the Chinese and Russians themselves don’t know what it really costs. When doing analysis or trying to apply statistics against it, you find yourself having to make a lot of assumptions because the problems have so much freedom.”

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China’s sole operational aircraft carrier, the Liaoning (C), sailing during a drill at sea on April 18, 2018. (AFP via Getty Images)

Adding to the problem of assessing China’s military spending is the increasingly blurred line between military and civilian spending, says Fisher.

“Under Civil-Military Fusion, you now have a broader requirement for the economy to serve the military. In essence, anything under the control of the Chinese Communist Party that it deems is necessary for military power construction can be diverted to that end. So it is possible to ask: is it now essentially impossible for anyone, even Chinese, to tell you a real number for Chinese military expenditures?”

He explains that the U.S. Department of Defense has been publishing an annual assessment of China’s military strength, now called the China Military Power Report, since 1998.

“For 20 years, this report has for American taxpayers and the rest of the world defined the rise of China’s power. China’s political and military leadership will never produce a report as credible as the U.S. report. Every year they complain and howl about this report, but my assessment is that they are very thankful as this report produces the fear they very much desire.”

Meanwhile in Russia, the market exchange rate numbers suit President Vladimir Putin, who frequently quotes them, notes Connolly. He says they play up the notion of “the encircled fortress,” of a plucky beleaguered Russia surrounded on all sides by far better-funded Western military powers.

Connolly says that although his figures might suit the budget-pushing military hawks, he believes the market exchange rate figures are used in the West partly because it suits a certain narrative about the Western countries far out-muscling their rivals.

Follow Simon on Twitter: @SPVeazey
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