Does the Funding of the Defence Sector Depend on Economic Factors in the Long Run? The Cases of Estonia, Latvia, and Lithuania

Abstract

The purpose of this publication is to study the dependence of defence funding on economic factors, namely the prosperity of the country, economic growth, the budget deficit, gross government debt, and inflation rate. The investigation uses secondary data obtained from the Eurostat database and covers the period from 1997 to 2021. The author analyses three Baltic countries such as Estonia, Latvia, and Lithuania, to ascertain which economic factors have a statistically significant effect on defence sector funding. For this purpose, the author applies correlation analysis and automatic linear modelling (ALM). The findings of the investigation showed differences and similarities between the countries under consideration. In the case of Estonia, defence funding is significantly affected by the prosperity of the country, which is expressed in real GDP per capita, and gross government debt. These economic factors explain 92.6 per cent of defence funding. The cases of Latvia and Lithuania are very similar in terms of the influence of economic factors on defence spending. In these countries, the tendencies of real GDP per capita significantly effect on defence funding. This influence is slightly different and amounts to 76.2 and 78.4 per cent, for Latvia and Lithuania, respectively. The insights of the research can be useful to the governments of these nations when making decisions about defence funding aimed at ensuring security in the Baltic region.