Ties that Bind: Alliances, Finance, and Military Capacity

• In Event: Conflict Processes and Finance

Abstract

Major powers use financial assistance to bolster the military capacity of allies. Part of this relationship involves states providing financial support to ease budget constraints and promote military spending in allies. In the short term, alliances provide increased security benefits. In the long term, financial assistance from major powers undermine allies’ incentives to develop their own financial capacity to attract foreign capital without major power assistance. As a result, major powers must either pay increasing marginal costs to finance allies, else allies’ military capacity will gradually decline. To test our theory, we develop a new latent measure of financial assistance between the United States and its allies from 1960 – 2015. Using this measure, we find that financial assistance from the U.S. does increase military spending in the short term, but those increases marginally decline over time. In addition, we find these effects to be more pronounced in non-democracies. Our findings have implications on alliance dynamics and states’ financial development.

Author

• Patrick E. Shea, University of Houston