Background: This paper examines the determinants of NATO military expenditure in the post–Cold War period from 1990 to 2019. It focuses on whether differences among NATO allies can be better explained by economic size, resource endowments, or broader indicators of national capability. Objectives: The study compares five predictors of military expenditure: gross domestic product, gross resources, net resources, the Productive Capacities Index, and an adjusted Composite Index of National Capability that excludes the military component. Method/Approach: The analysis uses panel models with country- and year-fixed effects, with standard errors clustered by country. Results/Findings: The results show that economic size and resource-endowment indicators are most strongly associated with military expenditure. Gross domestic product, gross resources, and net resources show consistently positive and statistically significant within-country effects. By contrast, the Productive Capacities Index is positive but statistically insignificant, while the adjusted Composite Index of National Capability has limited explanatory power. The findings remain stable across alternative samples and model specifications. Conclusion: The evidence suggests that economic scale and resource endowments are more useful for explaining variation in defense outlays among NATO allies than broader composite capability indices.
Runje et al. (Thu,) studied this question.