To succeed, decision makers should look behind the headlines of the day to ask the right questions about what will affect their organization in the future. This requires considering the deeper underlying trends that will reshape the strategic landscape in the years ahead. Foremost among them is the shift in global economic power. Although often commented upon by economists and pundits, many strategists focused on defense issues have not fully internalized this historic shift and its implications.<\/p>\n
Here we offer a perspective on how strategists in defense organizations and aerospace and defense companies should approach this challenge. First, we describe how the profound shift in economic power since the end of the Cold War has already reshaped the world\u2019s strategic landscape, including the distribution of global defense spending. The potential evolution of these economic dynamics is fundamental to strategy. Predicting their future is, of course, impossible. Instead, we offer something more modest and practical: a new approach to scenario planning that is rooted in a deep understanding of global economics. Such an understanding reveals the potential for unexpected scale and pace in the shift of defense spending from the United States and its treaty allies\u00a0to emerging economies.<\/p>\n
The strategic landscape reshaped, 1991-2012<\/h3>\n
The past 20 years saw dramatic changes on the battlefield, even as some features endured, and the beginnings of an equally dramatic shift in economic power. In combination, these movements have altered the strategic landscape, and provide a glimpse into the future.<\/p>\n
Continuity and change in military operations<\/h6>\n
For the world\u2019s defense and security organizations, history certainly did not end with the collapse of the Soviet Union and the cessation of the Cold War in 1991. We have since seen conflict on almost every continent, from the last major tank battle of the 20th century at 73 Easting in the Gulf War to numerous wars, clashes, and insurgencies in Europe, Asia, Africa, and the Americas. Since the attacks of September 11, 2001, attention has focused on the greater Middle East\u2014Afghanistan, Iraq, and, increasingly, the struggles for control and influence in the aftermath of the Arab Spring.<\/p>\n
The tempo of military operations has been relentless. Since 1991, for instance, the United States has embarked upon a new military intervention roughly every two years. North Atlantic Treaty Organization (NATO) forces have been at war in Afghanistan for over a decade. South Korean and Japanese forces have deployed for the first time to the Middle East. Meanwhile, the United Nations has launched a new peacekeeping operation every six months. Moreover, the duration of most of these operations has increased to five to ten years. Innovations in military technology and operations have marked these past two decades of conflict. Precision-guided munitions have evolved and demonstrated their effectiveness in conflicts beginning with the Gulf War and continuing in Kosovo, Afghanistan, and most recently NATO\u2019s Operation Unified Protector in Libya in 2011. Advanced missiles now pose particular threats to capital ships and fixed bases. Unmanned aerial vehicles (or remotely piloted air systems) are now standard components in many militaries\u2019 intelligence, surveillance, and reconnaissance (ISR) tool kits, and they increasingly serve as weapons platforms as well. Harnessing big data and employing advanced analytic techniques are other features of 21st century ISR. Cyberwarfare has moved from theory to practice. Militaries today confront adversaries who employ a full spectrum of tactics, from conventional to irregular and even criminal (\u201chybrid war\u201d). Modern navies, for instance, cope with traditional and unconventional foes, including Somali pirates and asymmetrical threats such as terrorist suicide speedboats. Air forces are investing in fifth-generation fighters even as they continue to provide workhorse logistical support for operations in the field. And for foot soldiers, despite the numerous technical advances in communications and equipment, the past decade has been largely spent relearning the lessons of counterinsurgency: \u201cWalk. Stop by, don\u2019t drive by. . . .Situational awareness can only be gained by interacting face-to-face, not separated by ballistic glass or Oakleys.\u201d\u00a0Plus \u00e7a change, plus c\u2019est la m\u00eame chose<\/em>.<\/p>\n Concurrent with these tactical and operational developments, tectonic plates moved at a deeper strategic level. A profound shift in economic power began during this period\u2014one that has already manifested itself in the distribution of traditional “hard” military power among the great powers. This shift will continue to reshape the strategic landscape in the years ahead.<\/p>\n Future historians will likely point to 2007\u201308 as an inflection point in global history. For the first time in over two centuries\u2014since the start of the Industrial Revolution\u2014the majority of the world\u2019s economic growth took place in the developing world, driven in large part by China, India, and other Asian economies. In addition to favorable demographics and reforms to open emerging economies, increasing urbanization\u2014especially in China\u2014drove much of this growth. Significantly, 2008 was also the first time ever that a majority of people lived in cities. The pace of urbanization is staggering. More than 1.3 million people migrate every week to urban areas. And this historic migration will likely continue unabated for the next two decades, mainly in the emerging economies of Asia, Latin America, and, increasingly, Africa.\u00a0The global economic crisis that began in 2008 accelerated this shift in economic power from developing to emerging economies, as the BRIC countries (Brazil, Russia, India, and China) weathered the storm well and the developed economies of the United States, Europe, and Japan suffered and remain vulnerable more than four years later. Between 2009 and 2012, China\u2019s economy grew over 30 percent and India\u2019s 22 percent in real terms, whereas Germany\u2019s grew 7.9 percent and the United States\u2019s 7.1 percent.\u00a0And in 2008, for the first time, a Chinese company led the world in international patent applications.<\/p>\n Taken together, economic and demographic forces drove the most rapid shift in human history in what the McKinsey Global Institute (MGI) calls the \u201ceconomic center of gravity\u201d\u2014the geographic midpoint of global economic activity (Exhibit 1). MGI projects this movement to continue, at a slightly slower pace, for the next 15 years or so, when, by this measure, most of the regional imbalances ushered in by the Industrial Revolution will have been erased.<\/p>\n The ten years from 2000 to 2010 saw the fastest-ever shift in the world’s economic center of gravity.<\/p>\n These economic trends have already started to reshape the global landscape of defense spending. To be sure, a nation\u2019s assessment of its security threats plays a critical role in shaping its defense spending in the near term. That said, a major country\u2019s military power flows in large part from its underlying economic strength over the medium to long term: the faster a country\u2019s economy grows, the more likely its defense spending will increase as well. Despite widely different geopolitical complexities and economic dynamics, the countries with the largest defense budgets, which account for the vast majority of the world’s defense expenditures, have fit this pattern since 1991 (Exhibit 2).<\/p>\n Growth in military spending and GDP are correlated over the long term.<\/p>\n Other more subtle shifts in national power were also taking place between 1991 and 2011. R&D expenditures in all major economies nearly doubled in constant 2011 dollar terms, rising from roughly $740 billion in 1991 to $1.5 trillion in 2011. But just as we saw in defense spending, countries\u2019 R&D investments mirrored trends in their overall economic growth. Europe and Japan\u2019s combined share of global R&D expenditures declined by 11 percent in the 20 years after 1991. Meanwhile, China increased its share of global spending to 9 percent from 1 percent during the same period. Developing countries are thus emerging as true competitors to the developed economies not only with regard to their economies\u2019 sheer scale but also their innovation and technical prowess.\u00a0R&D spending matters: a country\u2019s R&D investments are strongly correlated with the quality of the military\u2019s equipment 25 years later.\u00a0This suggests that in the future, developing countries will narrow the gap in quality between their military equipment and that of developed countries.<\/p>\n We have seen these dynamics play out around the world since 1991. Sustained operations and the increasing costs of modern weapons platforms have proved too much for many Western governments and their publics as they manage the aftermath of the global economic crisis and structural strains in their aging societies. For example, the United Kingdom\u2019s 2010 Defence and Security Review declared bluntly that its \u201cinherited defense spending plans… [are] completely unaffordable\u201d and that it needs to \u201cconfront the legacy of overstretch.\u201d\u00a0France\u2019s earlier national-security review analyzed the changing strategic context and new priorities and thus, through a different logic, reached similar conclusions. The US Department of Defense (DOD), under Secretary of Defense Robert Gates, launched its own efficiencies campaign, which has accelerated under his successors. The planned reductions in the US defense budget in the next decade are literally on the scale of some countries\u2019 GDPs. Other Western militaries are undergoing similar retrenchments. At the same time, however, China, other East Asian countries, India, Brazil, and other emerging economies have continued to increase not only their defense expenditures in real terms, as shown in Exhibit 3, but also, in many cases, the sophistication of their own defense industries.<\/p>\n <\/p>\n Developing countries have closed the gap in defense spending since the end of the Cold War.<\/p>\n <\/p>\n Today, the United States remains the world\u2019s preeminent military power in scale, sophistication, battle-tested experience, and global reach. US defense spending in 2011 was more than five times that of the next highest defense spender, China. America\u2019s traditional allies also occupy important positions in the global defense landscape. Japan, France, and the United Kingdom ranked third, fourth, and fifth in defense spending in 2011. The momentum, however, is unmistakable: emerging economies are positioned to displace the other developed economies in the top tier of defense spenders. China\u2019s rise in defense spending is starkest. In 2011 it spent $126 billion, more than twice as much as the countries that are the next largest spenders: Japan, France, the United Kingdom, and Russia.\u00a0Chinese authorities announced in March 2013 that they plan to increase defense spending another 10.7 percent in 2013. The direction is clear. Developed economies\u2014and the world\u2019s leading military establishments historically\u2014have experienced relative decline vis-\u00e0-vis the major developing economies since 1991. Yet the scale, scope, and pace of change of the shift in economic power cannot be simply extrapolated from the recent past to understand the future. Instead, strategists will require a new approach to manage this era\u2019s particular strategic uncertainties.<\/p>\n Scenario planning is an established tool for business and defense strategists.\u00a0Done right, scenario planning accounts for the major variables or drivers that could shape the future, in sufficient depth and vividness to enable strategists to draw out potential implications for the strategy and plans of their organizations. Scenarios are not meant to be predictive or comprehensive, covering all possible futures. Rather, the goals are to define a range of possibilities and identify important continuities among them, as well as significant uncertainties or risks that a strategy should address. Such an analysis, in turn, helps to frame critical questions and generate strategic insights that then shape the strategic decisions of today and adaptation tomorrow.<\/p>\n Today, defense scenarios typically start with geopolitical, security, or more operational assumptions or with a statement of guiding objectives (such as \u201cCounter violent extremism, deter and defeat aggression, strengthen international and regional security, and shape the future force\u201d; \u201cUS forces must be prepared to fight \u2018two and a half\u2019 wars simultaneously\u201d; or \u201cBlue Force must be ready to counter Red Force in country X\u201d). For example, the US DOD\u2019s recent strategy documents\u2014the February 2010\u00a0Quadrennial Defense Review Report<\/em>\u00a0and the February 2011\u00a0National Military Strategy of the United States<\/em>\u2014briefly review the changing strategic environment but do not offer alternative scenarios. The importance of this era\u2019s economic forces, however, suggests that a different approach, one with a more explicit grounding in these new economic realities, is needed. National-security strategies typically do not explore the full implications of the shift in economic power now under way.\u00a0The approach outlined here is designed to address this gap. The development of rich, sophisticated scenarios for the future course of the global economy provides its starting point. These scenarios, in turn, enable the mapping of changes in countries\u2019 economic power in relative and absolute terms. The trends most immediately relevant for defense and security organizations\u2014especially levels of defense spending and R&D investment\u2014are then built upon these economic foundations.<\/p>\n We use a set of economic scenarios for the next decade built with McKinsey\u2019s Global Growth Model (GGM)\u00a0to illustrate this approach. The GGM is a database and modeling tool that supports the construction of detailed economic scenarios down to the country level. Its variables span GDP and more than 100 others, including demographics, education levels, public debt, R&D investments, and urbanization rates. The baseline economic scenarios employed here are predicated on the assumption that major developed and emerging economies will develop with different growth rates\u2014namely, developing economies will tend to grow at a significantly higher rate than developed economies. We emphasize these different outcomes and groups because, broadly speaking, the challenges faced by countries in each group are similar. Generally, advanced economies have struggled not only with the aftermath of the 2008 downturn but also with meeting their aging populations\u2019 multifaceted challenges. Meanwhile, emerging markets have tried to sustain or accelerate growth through export promotion, the allocation of capital, continued economic reform, urbanization and industrialization, and other tactics.<\/p>\n The relative performance of these different groups of economies thus describes a range of four principal scenarios. The GGM scenarios are bounded by emerging markets\u2019 growth rates (between 3 and 7 percent per year from 2013 to 2022) and advanced economies\u2019 growth at 1 to 3 percent annually. These growth rates define four broad-based scenarios shown in Exhibit 4: Global Growth Renewed, Advanced Economies Rebound, Emerging Economies Lead, and Global Lost Decade. <\/p>\n Four scenarios describe possible paths for the global economy from 2013 to 2022.<\/p>\n <\/p>\n Together, these scenarios portray different potential future international landscapes and balances of economic power among the major economies. They make clear that the stakes are extraordinarily high for the health of the entire global economy. While growth continues across all scenarios, the difference in total global real GDP between the most favorable scenario ($100 trillion, under Global Growth Renewed) and the least favorable one ($84.5 trillion, under Global Lost Decade) is a staggering $15 trillion per year in 2022. That is roughly equivalent to the US economy today.<\/p>\n The scenarios also have quite different outcomes for the relative distribution of economic power among countries. Across all scenarios, the US economy remains the world\u2019s largest economy. China\u2019s rapid growth continues, but by 2022, it still does not equal the size of the US economy today. The absolute gap between the two narrows more or less depending on the scenario. The other major developing economies follow a similar pattern; Europe and Japan experience steady growth in the most favorable scenarios and stagnation in those that are less favorable.<\/p>\n The four baseline economic scenarios paint very different possible futures for the world\u2019s major economies\u2014and thus for their self-confidence, internal political stability, and the vision of their roles internationally. Geopolitical relations (for example, strains among past allies over burden sharing or opportunities for new alignments among rising powers) would also vary under the different scenarios. To understand these implications, we analyzed global defense spending under the economic scenarios. We focus our analysis on the top 15 defense spenders in 2011. These countries account for the lion\u2019s share of global defense spending under any scenario (that is, nearly 85 percent in 2011) for the sake of simplicity. As mentioned, growth in countries\u2019 defense spending is strongly correlated (r-squared equals 0.84) with their underlying economic growth over longer periods of time. Therefore, we use each scenario\u2019s estimate of countries\u2019 real GDP and a country-specific correlation between defense spending and GDP to derive the percentage of each nation\u2019s real GDP devoted to defense spending in 2022 under each scenario. The likely changes in countries\u2019 relative share of global defense spending between 2011 and 2022 are striking (Exhibit 5). If we divide the 15 countries studied into the United States and its 9 treaty allies, and the emerging BRIC countries and Saudi Arabia, we see that while the US and its allies still account for the majority of defense spending in all scenarios in 2022, their relative advantage is eroded in all scenarios by emerging markets\u2019 higher rates of economic growth. Most dramatically, in the Emerging Economies Lead scenario, the United States and its treaty allies\u2019 relative advantage in global share of defense spending falls by 23 percentage points in a decade, dropping to 55 percent by 2022.<\/p>\n A substantial share of global defense spending will shift away from the United States and its traditional allies.<\/p>\n The scenarios likewise suggest dramatic shifts in defense spending in absolute terms. Defense spending in the BRIC countries and Saudi Arabia will increase significantly in all scenarios\u2014from roughly $290 billion in 2011 to between approximately $550 billion and $830 billion by 2022 (in constant 2011 dollars). The fate of the United States and its major treaty allies\u2019 defense spending is mixed, however. When the major developed economies fare well, their combined defense spending increases from a little over $1 trillion in 2011 to more than $1.4 trillion in 2022; when they fare poorly, in the Global Lost Decade and Emerging Economies Lead scenarios, their combined defense spending falls below $1 trillion by 2022.<\/p>\n Exploring these scenarios for individual countries again shows shifts in defense spending away from the developed economies. Consider the top five defense spenders in each scenario (Exhibit 6). The United States and China maintain their one-two positions in total defense spending in all scenarios. In those scenarios in which US economic growth remains sluggish throughout the coming decade, its defense spending falls more than 15 percent in real terms. The United States\u2019s relative advantage in defense spending over China, however, declines significantly from 5.4x in 2011 to between 3.2x and 1.6x in 2022. India enters the ranks of the world\u2019s top five defense spenders in all scenarios (see \u201cA bright future for India\u2019s defense industry?<\/a>\u201d [PDF\u2013417KB]). Russia and Saudi Arabia round out the top five defense spenders in three of the four scenarios. Only in the Advanced Economies Rebound scenario do France and the United Kingdom\u2014two of the US treaty partners\u2014remain in the top five.<\/p>\n The difference between the two biggest defense spenders varies widely by scenario.<\/p>\n Considering total R&D investments across the different countries provides a rough measure of the dynamism of high-technology industries and innovation, and, as noted above, an indication of long-term trends in the quality of the military equipment the country makes (Exhibit 7).<\/p>\n <\/p>\n The combined European, Japanese, and US share of global R&D investment will shrink in any scenario.<\/p>\n
\n<\/sup><\/a><\/p>\n
\n<\/sup><\/a><\/p>\nThe power shift begins<\/h6>\n
Exhibit 1<\/h4>\n
\n<\/p>\n
\nExhibit 2<\/h4>\n
\n<\/p>\n
\nGlimpses of the future<\/h6>\n
Exhibit 3<\/h4>\n
<\/h3>\n
\n
<\/div>\n<\/div>\n
\n<\/a><\/sup><\/p>\nAn economic-scenario approach<\/h3>\n
\n<\/sup><\/a><\/sup><\/p>\n
\n<\/sup><\/a><\/p>\nExhibit 4<\/h4>\n
<\/h3>\n
\n
<\/div>\n<\/div>\n
Defense-spending scenarios to 2022<\/h3>\n
\n<\/sup><\/a><\/p>\n
\n<\/sup><\/a><\/p>\nExhibit 5<\/h4>\n
\n<\/p>\n
\nExhibit 6<\/h4>\n
\n<\/p>\n
\nExhibit 7<\/h4>\n
<\/h3>\n