Free Riding in NATO
Beginnings of NATO:
The second world war was dubbed the war to end all wars. However, once the war ended, it was clear that the Soviet Union would pose a new threat to western Europe — namely, by facilitating the spread of Communism. An expansion of the 1947 Treaty of Dunkirk, which was signed by Britain and France, would be drafted to include new member states: Belgium,
Luxembourg, the United Kingdom, and the Netherlands. This new pact would be dubbed the Treaty of Brussels and would provide military, economic, and social cooperation amongst the member states.
However, the Soviet threat would become apparent in the summer of 1984 when the Soviet Union blocked Ally supply lines into Berlin prompting large-scale airdrops of supplies by the Allies. The Soviet-sponsored coup of the democratically elected Czechoslovakian government by the communist party along with ally’s realization that they were too weak militarily to oppose the Soviets would solidify their fears as well. So, George C. Marshall, the US Secretary of state at the time, ordered a meeting with European officials to explore a new treaty amongst the western countries. The resulting North Atlantic Treaty (NATO) was signed on April 4th, 1949 by President Harry S Truman. NATO would contain countries: The United Kingdom, France, Belgium, Luxembourg, the Netherlands, the United States, Canada, Portugal,
Italy, Norway, Denmark, and Iceland.
NATO’s first Secretary General, Lord Ismay, stated NATO’s primary goal was, “to keep the Russians out, the Americans in, and the Germans down.” Members agreed that if one of them were attacked, they would retaliate by whichever way they deemed reasonable. NATO does not require a member to respond with military action. However, they are obliged to respond to any attack against their allies, but it may be with direct military support, or indirectly through financial means.
Current Threats to NATO:
With the collapse of the Soviet Union in the 1990s and the admittance of Germany into NATO, their primary purpose was no longer apparent. NATO accepted the membership of postsoviet countries such as Latvia, Estonia, Lithuania, Slovakia, Slovenia, Bulgaria, Croatia, Albania, and Romania with an overwhelming majority. With this larger alliance, NATO would shift their focus more towards peace-keeping in the world.
However, Russia would once again prove to be a nuisance to European NATO members in 2008 when Russia invaded Georgia. Although Georgia is not a member of NATO, the invasion gave legitimacy to Vladimir Putin’s goal to regain lost Russian territory after the fall of the Soviet Union. Putin would also explicitly state that he intends to protect Russian speakers living in former Soviet territories. Then in 2014 Russia invaded Ukraine further legitimizing his claim. France and Germany negotiated a cease-fire between the Ukraine and Russia called Minsk II; however, it is violated frequently. Russia now has troops stationed in these annexed lands. Moreover, today Russia continues their goals by trying to intimidate the Baltic states, which are
NATO members, by holding snap military exercises.
NATO members recognize past Russian aggression and see the current threat posed to the NATO member Baltic states. However, there is not a consensus on how to deal with these aggressions. Poland is the most openly hostile state to the Russians and has accepted military aid willingly. The invasion of Ukraine highlights some of the disagreement between the United States and Germany within NATO. For instance, seventy-one percent of Germans, when surveyed, were in favor of providing economic aid to Ukraine. The Americans, on the other hand, were sixty percent in favor of providing economic aid. The public’s view of providing aid is unanimously in favor on both sides. However, the contrast lies in the public’s view of providing military aid. Forty-six percent of Americans were in favor of providing military aid whereas only nineteen percent of Germans were in favor. Sixty-two percent of Americans were in favor of admitting Ukraine to NATO whereas only thirty-six percent of Germans approved.
Above I have only highlighted only some external issues for NATO members, and there are more that could be covered. However, I believe the evidence above sufficiently highlights
NATO’s current problems both external and internal. Namely, Russian aggression and intimidation of both NATO and non-NATO states, and, secondly, disagreement amongst NATO states on how to solve problems. For the rest of this paper, I will focus on whether there is freeriding in NATO. Namely, through examining NATO funding targets, and current trends in funding country-to-country.
Free Riding in NATO:
To first assess whether there is free-riding in NATO we first need to explore what freeriding is and why it arises in agreements such as NATO. This questions first brings us to the subject of public goods. In our introductory economics classes, we learned about the goods we use every day — these are called private goods. Namely, we can exclude others from using them, and our consumption of them prevents others from using them as well. However, when one cannot exclude someone from a good or rival their consumption that good is called a public good. National Defense is a favorite example of a public good because, seemingly, no matter how many people there are in a country it does not seem to impede the military’s ability to defend them.
It is impossible for free-riding to exist when it comes to regular national defense because citizens are required by law to pay their fair share of taxes. In the case of NATO and international defense, however, countries are not mandated to pay a certain amount towards their defense. However, NATO members met in 2014 and agreed to raise a budget that is equal to two percent of their real GDP — this rule cannot be enforced. This is where free-riding arises. Members are not required to pay a certain amount to be members of NATO, so there is an incentive to pay as little as possible to get by. This incentive can be demonstrated in a simple 2x2 game theory matrix — in this example we will model the decisions between two parties for simplicity.
Where Strategy A is to provide, and Strategy B is to under-provide. As we can see here the dominant strategy for either member is to always under-provide. This is the fundamental problem in associations where there is no mandate of a specific level of financial support.
However, the problem with NATO that arises begins to complicate once we add in more actors. Typically, public goods are underprovided; however, International defense in NATO is overprovided despite members not meeting the agreed upon level of spending — two percent of
GDP. This is because of the over spending by members such as Estonia, Greece, The United States, and The United Kingdom — with the United States overpaying by the largest margin. Latvia is the only country who currently meets the agreed upon level of spending as we can see in the figure below.
A Pew Research poll showed that fifty-eight percent of Germans, fifty-three percent of the French, and fifty-one percent of Italians were against using the armed forces to defend another member of NATO. On the other hand, only thirty-seven percent of Americans and citizens from the UK were opposed to using the armed forces to defend an ally. These poll results, coupled with another poll that said that sixty-eight percent of Europeans believed the United States would use the force necessary to defend against a Russian attack, can be used to explain Europe’s willingness to provide less than the agreed upon two percent of GDP. We can use our median voter model to explain these countries raising a budget where the two percent of GDP target is not met. That is if we assume the legislature perfectly represents their constituents. This can be seen in the diagram below.
This diagram represents a normal distribution of ideal voter points with the black line separating regions, Provide and Underprovide, representing the voter who is indifferent between the two, the green line representing the median voter, and the red lines representing two candidates running for office. In the case drawn above, the candidate who is closest to the median voter wins the election — over the long term the candidates’ positions will converge. This can explain why most countries in NATO do not meet the agreed-upon funding level. In other words, the populace does not want to provide the required amount so to get into office politicians take this position to get elected. Then once elected they raise a lower budget. These effects can still be seen after the NATO meeting in 2014 where member states agreed to spend two percent of their GDP on defense (see figure below).
As we can see in the largest economies in Europe that do not already meet the two percent requirement, their spending has, for the most part, not increased — excluding the Netherlands and Turkey, of course.
Although international defense is overprovided, this does not mean that there is not a burden to other members of NATO. The current budget for international defense is $1.013 Trillion with the United States is providing 69.67%. However, if every member of NATO met the two percent of GDP goal, the budget would shrink to $780.13 Billion, and the United States share of the budget would shrink to 45.63%. I believe that we can trust NATO and assume that the level of defense that a budget of $780.13 Billion would provide is the Pareto optimal point where social marginal benefit is maximized. Given, the margin by which international defense is overprovided and the percentage of the budget that the United States provides, the rest of the members in NATO are free-riding off the United States.
Although we can conclude that many NATO members are not paying their fair share and thus free riding, it is not clear how to get back to the Pareto optimal point. The reason why getting sovereign states to meet the funding level is not apparent is because it seems that the United States overpays for international defense because it is what the American population wants. In an example above, we used the median voter model to justify why most NATO members provide a lesser budget than the agreed upon funding level, and this could easily be extended to the United States to explain why they provide such a large percentage of NATO’s budget. Much of the American population want to spend a considerable amount on international defense, so politicians take this position to get elected. Once elected, they do exactly what their constituents want and dedicate a large portion of the budget to international defense. One could argue that if the United States only provided funding equal to two percent of their GDP versus the three and a half percent they spend now, they could use these funds for other public goods such as education or infrastructure. However, it is not clear that this is what most of the American population wants.
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