“Money as a Weapons System”: The Promises and Pitfalls of Foreign Defense Contracting

Summary of Study

Bottom Line: Conventional logic holds that targeted U.S. military spending is an effective way to support the military, improve global economic conditions, and achieve foreign policy goals. However, it’s unclear whether any of this is actually the case -- and whether or not preferred procurement strategies make sense.

The U.S. government spends billions of dollars each year on goods and services overseas, including $1 billion of “strategic” defense spending. Strategic defense spending “is designed to both support global military operations and target specific firms in pursuit of particular foreign policy objectives.” It largely takes the form of contracts awarded by federal officials with little to no competition.

To better understand this process, the Cato Institute collected data on “all U.S. overseas government contracts between 2000 and 2015,” a total of nearly 2.4 million contracts in 252 different countries.

The results were staggering. “In each year between 2000 and 2015, the United States spent more than $9 billion overseas on defense‐​related procurement.” Spending generally surpassed $15 billion every year, “particularly between 2004 and 2013,” when the wars in Iraq and Afghanistan drove U.S. spending overseas to $30 billion each year. After rising each year between 2002 and 2010, spending began to fall through 2015.

From 2000-15, U.S. spending shifted away from Europe and towards the Middle East, Asia, and Africa, a trend largely in line with shifting U.S. military engagements during the same period. “Unsurprisingly, the two largest recipients were Iraq ($86 billion) and Afghanistan ($81.6 billion).” The coming shift towards “great power competition” may reverse this trend, something already demonstrated by the Pentagon’s recent consideration of spending cuts in Africa.

While much of this spending is meant to directly support the military, a “nontrivial portion is also designed to achieve strategic foreign policy objectives.” This spending is largely allocated through contracts the U.S. government awards “noncompetitively” to certain companies in certain countries. So-called “strategically noncompetitive contracts account for around $1 billion of overall DOD spending per year.”

Conventional wisdom holds that by selectively distributing certain contracts, the United States can achieve foreign policy goals while also maintaining the military. “The underlying logic is straightforward: defense procurement creates local jobs and economic opportunities. Market growth and economic development are presumed to contribute to post‐​conflict stabilization.”

Additionally, such positive economic growth is thought to improve foreign perceptions of the United States and the U.S. military. Job creation is also thought to minimize the likelihood that people will join insurgencies, anti-American or otherwise. Moreover, such arrangements allow the United States to avoid procuring goods and services directly from other governments, a typically fraught process.

Simply put, “Spending is thus increasingly treated like an inducement similar to foreign aid or arms transfers.” Unlike direct aid and arms transfers, the United States can generally accomplish strategic spending without upsetting our allies or unintentionally supporting unfriendly or adversarial governments.

But in spite of these stated benefits, this type of targeted spending poses several policy risks.

First, it could harm the recipients of U.S. money. “Research suggests that domestic military spending has at best a limited effect on economic growth,” and that flooding developing economies with cash could actually “stymie growth.” It’s also likely that money flows to the wrong people, encouraging inequality and corruption.

Second, targeted spending could harm American interests, for the simple reason that “wherever large amounts of money are at stake, there are risks of political blowback.” U.S. dealings with a company in one country may cause tensions with other countries to rise. Alternatively, a company in one country may have ties to a less friendly country (like Russia) in which case patronizing that country would fly counter to U.S. interests.

Finally, there are problems with the government’s use of “procurement as a foreign policy tool.” Because procurement isn’t always coordinated among agencies, different branches of the government and military often wind up bidding against each other for the same services.

Moreover, while spending is often thought to be a “cheap” way to achieve foreign policy goals, research suggests that the military actually has to spend a lot for this to be true -- making it just as expensive as other strategies.

Fortunately, there are several ways to resolve these issues. First, the government should conduct research on the economic impact of its procurement plans in order to better understand their cost and value. Second, Congress can make future approval of preferential procurement policies contingent on frequent evaluations that such spending is being used to advance U.S. interests. Finally, policymakers can rethink the value of using procurement as a means to achieve foreign policy goals.

“Ultimately, the question of spending’s efficacy is one not only of means but also of ends.” To attain a better understanding of this issue, policymakers will thus have to take into consideration empirical data along with larger questions about U.S. grand strategy, two things currently absent from discussions of U.S. spending.

Read the full policy analysis here.

Feature Charticle

Cato

Findings:

  • The Department of Defense’s overseas procurement spending radically increased from 2005-2010, largely as a result of the wars in Iraq and Afghanistan.
  • Those same wars caused the majority of procurement spending to shift from Europe to the Middle East, Asia, and Africa.
  • The decline in overall procurement spending and evening out of where such spending is targeted seen in 2015 suggests a possible shift away from the military consensus of the post-9/11 era, and a shift towards a new era of “great power competition.”

Read the full policy analysis here.