CAUSAL RELATIONSHIPS BETWEEN THE DEVELOPMENT OF THE DEFENCE SECTOR AND STRUCTURAL CHANGES IN THE NATIONAL ECONOMY

Abstract

Abstract

The full-scale war has caused substantial changes in the allocation of resources and the structure of demand in Ukraine’s economy. Growing security needs have been accompanied by a redistribution of budget expenditures, an expansion of government demand for armaments, an increase in the production capacity of defence enterprises, and the development of defence technologies. Through intersectoral cooperation, this demand extends to related economic activities and intensifies competition for capital, skilled labour, technologies, and budget financing. The aim of the study is to identify and systematise the causal relationships between the development of the defence sector and structural changes in Ukraine’s national economy, determine the channels of resource reallocation, and establish the balance between modernisation effects and structural risks. The analysis is based on data on military and budget expenditures, defence production, production capacity, innovation activity, and macroeconomic indicators for 2021–2026. For international comparisons, SIPRI military expenditure indicators were used and analysed separately from Ukraine’s official indicators of expenditure on the security and defence sector. Causal relationships were traced through the sequence of production and resource changes rather than on the basis of correlations between aggregate indicators. It was established that the development of the defence sector has become one of the significant drivers of resource reallocation in the national economy. The share of military expenditure increased from 3.2% of GDP in 2021 to 34–40% during 2022–2025, while the output of armaments and military equipment reached approximately USD 9 billion in 2024. The budgetary, production, investment, labour, technological, and foreign trade channels of influence were systematised. Defence demand contributes to localisation, the development of intersectoral cooperation, the modernisation of the production base, and innovation activity. At the same time, the concentration of resources intensifies competition for capital and skilled labour, while dependence on critical imports and government procurement creates additional structural risks. The long-term effect of defence sector development will depend on the extent to which the demand it generates is transformed into value added created in Ukraine, new production linkages, and sustainable technological competencies. This requires deeper localisation, the development of the technological base, and the diversification of sources of financing and markets.