Military aid to Ukraine has positive impact on Western economies – NBU assessment

This was reported by Ukraine’s National Bank (NBU) in its Inflation Report (July 2023).

According to the report, one US dollar spent by donor governments on military needs generates $0.79-0.87 of GDP in these countries within one to two years, and the overall positive effect does not disappear even after five years.

In addition, there are a number of additional positive effects for donor countries, such as the possibility of sharing military experience, more efficient allocation of defence resources, a boost for arms exporters, and productivity gains from additional investment in research and development.

"Therefore, the economic value of military assistance to Ukraine for partners is significantly less than the announced nominal amounts," the NBU said.

Nominal costs

According to estimates by the Kiel Institute for the World Economy, in 2022 alone, the total military aid commitments to Ukraine amounted to more than $66 billion. Last year, 32 countries provided military support, although its amount, both in absolute terms and relative to GDP and defence budgets of partners, was not uniform.

The largest donor in terms of nominal amounts of military support was the United States (over $40 billion), followed by Estonia and Latvia (0.75-0.90% of GDP, 35-40% of military spending), as well as Lithuania and Poland (0.35-0.45% of GDP, 15-20% of military spending).

At the same time, the total amount of aid in 2022 was approximately 5% of the total military expenditures of partner countries, according to the Stockholm International Peace Research Institute. For none of the allies did the amount of military aid relative to GDP exceed 1%.

Fiscal stimulus

According to the NBU, when governments spend money, a significant portion of it tends to stay within the country, creating the basis for a fiscal multiplier. Its concept is that each monetary unit spent generates not only a direct contribution to value creation, but also triggers a chain reaction of further processes through its impact on consumption, investment, and other economic activity, creating additional growth.

"Existing research provides convincing evidence that the multiplier effect of military spending is positive and long-lasting," the review says.

The fiscal multiplier effect of military spending generates additional GDP and compensates for the costs of aid. According to the preliminary results of the study, the fiscal multipliers for the countries that provided military assistance to Ukraine in 2022 are statistically and economically significant. A $1 increase in military spending in donor countries is associated with a $0.65 increase in real GDP in those countries during the same year, $0.87 in a year, and $0.79 in two years. Cumulative multipliers decrease over longer horizons, but remain positive and significant.

Other economic incentives from maintaining Ukraine's defence capability

The following factors can increase the positive effect of assistance to Ukraine and reduce the absolute cost of such support for partners:

- Exchange of practical military experience through ongoing training of the Ukrainian Armed Forces and joint strategic planning. This allows partners to improve their own security system and further reduce the risks of getting involved in military conflicts;

- optimization of resource allocation in the defence sector. Assessment of the advantages and disadvantages of the weapons provided to Ukraine in real combat conditions allows partners to allocate funds for the production of truly effective weapons with the greatest impact;

- examples of successful use of weapons provide an impetus for exporters of defence goods, which is already reflected in the growth of share prices of arms manufacturers. For example, since the beginning of the full-scale invasion, the shares of arms manufacturers of some allies have increased from 18% (Lockheed Martin Corp., USA) to 62% (Leonardo S.p.a., Italy). During this period, the S&P 500 stock index rose by just 3%;

- additional investments in defence research and development, involving many countries and sectors of the economy, create conditions for technology spillover and long-term productivity growth.