The Economic Implications of Reductions in Military Budgets and Force Levels in Eastern Europe

This Note assesses the impact of the East European military budget and force reductions, for good and ill, on the economies of these countries. The study quantifies the current budget and force reductions, assesses the potential economic benefits stemming from reducing military spending and analyzes the adjustment costs of reducing output in military goods. The study finds that military spending cuts should release resources equivalent to 0.5 to 1 percent of net material product, a considerable savings. Reductions in military goods production may raise unemployment rates by a few tenths of a percentage point in Czechoslovakia and Poland. In Czechoslovakia, the ensuing unemployment will be concentrated in Slovakia, where alternative employment will be more difficult to find than in other parts of the country. Because the East Europeans balance arms trade bilaterally, reductions in procurement should have little effect on their balance of payments. In short, the effects of reducing military budgets in Eastern Europe are likely to be highly positive on balance.