Will Greater Defence Spending by ASEAN Countries Compromise Their Economic Growth?

Geopolitical uncertainty is casting a long shadow over global security and pushing up defence spending across the world. Several Southeast Asian countries increased their national defence spending significantly in 2025 (Table 1). Defence spending in Southeast Asia is likely to continue its upward trajectory as the region confronts geopolitical challenges, including tensions in the South China Sea and persistent border disputes between neighbouring countries. At the same time, uncertainty over the future extent of the US security commitment is increasing pressure on countries in the region to devote more of their own resources to defence.

Table 1. Southeast Asia’s Burgeoning Defence Spending

Country	Total National Spending on Defence, 2024 (USD)	Total National Spending on Defence, 2025 (USD)	Percentage Increase (%)
Singapore	$15.1B	$17.0B	12.6
Indonesia	$11.0B	$15.0B	36.4
Vietnam	$8.5B	$10.0B	17.6
Philippines	$6.1B	$6.4B	4.9
Thailand	$5.5B	$6.0B	9.1
Malaysia	$4.3B	$4.9B	14.0
Cambodia	$0.72B	$0.74B	2.8

As defence budgets rise, an important economic question follows: what does additional military spending do to economic growth? The answer is far from straightforward. Additional government spending can support demand and economic activity, particularly when an economy has unused productive capacity. But defence expenditure also carries an opportunity cost. Resources devoted to military equipment, personnel and related activities cannot simultaneously be spent on infrastructure, education, health or other areas that may have larger effects on productive capacity and long-term growth.

That trade-off is especially important for emerging markets and developing economies (EMDEs), a group that includes most Southeast Asian economies. Many face large development needs alongside limited fiscal buffers and exposure to external shocks. The relevant question is therefore not simply whether defence spending raises GDP. It is whether the additional economic activity it generates is sufficiently large and persistent to compensate for the alternative uses of scarce public resources. In this sense, the economic consequences of higher defence spending ultimately depend on both its immediate demand effects and the extent to which it crowds in — or crowds out — other productive activity.

The authors’ recent research investigates this question using a broad international sample, with particular attention to emerging and developing economies and Asia and the Pacific. Rather than treating every increase in a defence budget as an independent policy change, the study identifies unusually large increases in defence expenditure relative to a country’s historical spending pattern, then examines how economic activity evolves in the years following these episodes. Put simply, the exercise asks whether an unusually large increase in defence spending tends to be followed by higher or lower output, and whether that relationship differs systematically across groups of economies.

The distinction between advanced economies and EMDEs is striking. In emerging and developing economies, defence spending shocks are followed by positive and persistent increases in output, with the estimated effect reaching around 0.7–1.0 per cent of GDP after eight years. In advanced economies, by contrast, the response is weak and could become negative (Figure 1). These findings are consistent with the more detailed estimates in the authors’ academic article, which show substantially stronger responses among EMDEs than among advanced economies.

Figure 1. Defence Spending Multiplier is Limited in Advanced Economies — But Positive and Sustained in Emerging Markets and Developing Economies

Effect of Defence Spending Shocks on GDP

There are several plausible reasons why the effects may differ. In EMDEs, greater availability of underutilised resources and differences in sectoral structure may allow additional defence spending to generate a larger demand response. The extent to which initial spending circulates through the domestic economy could depend on the proportion of procurement that is supplied domestically rather than imported. In advanced economies, the additional spending may amount to reallocations within an already mature defence sector more than economic stimulus. These are possible but not conclusive explanations for why defence spending is intrinsically more productive in developing economies. Indeed, our empirical approach captures the overall response of the economy rather than identifying separate mechanisms.

Nor should the positive average response among EMDEs be interpreted as an economic prescription for expanding defence budgets. Our further analysis shows considerable variation across countries. The effects tend to be stronger and more persistent where public debt is lower and financial systems are more developed, while trade openness, revenue capacity and institutional quality also influence how economies respond. The broader message is that fiscal and institutional conditions matter: the same increase in defence expenditure need not produce the same economic consequences across countries.

…simultaneous defence buildups across neighbouring economies appear to provide little sustained regional stimulus and may generate negative medium-term effects through crowding out and the reallocation of resources.

The type of defence expenditure also matters. Core military spending and, to a lesser extent, defence-related research and development are associated with more positive output responses than civil defence and foreign aid, although these differences should be interpreted cautiously. The surrounding security environment matters as well: defence expenditure is substantially more expansionary in high-conflict environments. At the same time, defence shocks occurring across a region generate only weak positive spillovers in the short run and negative effects over the medium term. Taken together, these findings suggest that there is no single “defence multiplier”. The economic consequences depend on what governments spend the money on, the circumstances in which they spend it, and the fiscal and economic conditions prevailing at the time. The full paper similarly cautions against treating the component estimates as a structural decomposition of the effects of defence spending.

Regional differences reinforce this point. Within EMDEs, South Asia displays particularly strong and persistent output responses to defence spending shocks, with effects approaching or exceeding 1 per cent over the medium term. The East Asia and the Pacific region, by contrast, shows a considerably weaker response that is not statistically significant. Other developing regions also differ: Latin America and the Caribbean and Sub-Saharan Africa show positive and persistent responses, while the responses in Europe and Central Asia and the Middle East and North Africa are close to zero or negative. Such differences may reflect variations in economic structure, fiscal capacity and the composition of defence procurement. More import-intensive procurement, for example, can cause a larger share of additional spending to leak abroad rather than stimulate domestic activity. For Southeast Asia, the implication is important: the positive average effect found across EMDEs cannot simply be applied to ASEAN economies, since the evidence for East Asia and the Pacific is considerably more muted.

Looking Ahead

The implications for Southeast Asia are therefore more nuanced than either the advocates or critics of higher defence expenditure might suggest. Defence spending should not be regarded as a general instrument of macroeconomic stabilisation. Even where additional expenditure supports domestic activity, the size and persistence of that effect depend heavily on country circumstances. Moreover, simultaneous defence buildups across neighbouring economies appear to provide little sustained regional stimulus and may generate negative medium-term effects through crowding out and the reallocation of resources.

For Southeast Asian policymakers, opportunity costs are consequential. Additional resources devoted to defence cannot simultaneously finance infrastructure, health, education or other public investments that may generate larger and more inclusive long-term economic returns. A positive economic response to defence spending must not be taken as evidence that defence spending represents the most productive use of additional public resources.

Ultimately, decisions over defence budgets cannot be reduced to their effects on GDP. Southeast Asian governments face legitimate demands to protect territorial integrity, maritime security and national resilience in an increasingly uncertain regional and global environment. Greater security may itself generate important economic benefits by reducing uncertainty and strengthening confidence, although such effects are difficult to quantify. But the economic evidence points to an important distinction: defence expenditure may be necessary for security reasons without being desirable as an instrument for promoting growth. In particular, the relatively muted response to defence expenditure in East Asia and the Pacific provides little basis to expect such spending to boost economies across Southeast Asia.

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