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Amid accelerating geopolitical competition and ongoing debate about Australia’s defence spending, we would do well to avoid the lessons of the Soviet Union, which sought to compete militarily, leaving its economy woefully simple, unproductive and frail.
At the height of the Cold War, the Soviet Union presented an imposing picture of military might, endless columns of tanks on Red Square, rocket silos and the reach of a global ideological project.
But behind that spectacle lay an economy that by the 1970s and 1980s was creaking: low productivity, faltering technology adoption, chronic shortages and a growing burden from astronomical defence outlays.
That confluence of economic stagnation and military competition is now a cautionary tale as Australia confronts its own fiscal and industrial pressures while lifting defence spending in a more tense Indo-Pacific.
The Soviet story is often told as one of political failure or ideological collapse and while those elements certainly were contributing factors, the truth is as always far more nuanced.
But economists and historians underline a clearer, if more prosaic, driver: for decades Moscow directed an outsized share of national resources into the armed forces and strategic industries, and that commitment increasingly competed with and then constricted civilian investment and productivity growth.
The bulk of the country’s industrial muscle was channelled into steel, tanks, aircraft and missiles rather than consumer goods and technologies that could have lifted living standards or productivity.
Several retrospective economic studies show that the Soviet defence burden rose through the post-war decades and that, while estimates vary, defence commitments contributed materially to slower economic growth in the 1960–89 period.
That dynamic, a prolonged, high-tech arms competition with an adversary whose economic and technological base is larger and more productive, is central to understanding how military competition can translate into economic strain.
American and allied intelligence and policy analyses during and after the Cold War repeatedly flagged the economic engine of military power: growth, innovation and productive capacity convert directly into the ability to sustain a long competition.
When an economy lags behind in those respects, the cost of maintaining parity in weapons, platforms and technological sophistication becomes crushing.
Washington’s own Cold War calculations recognised that the Soviet Union devoted a significantly higher share of its gross national product to military purposes than most Western democracies, with political consequences that worked against economic modernisation.
Fast forward to the 2020s and while Australia occupies a very different economic and strategic position from the détente era superpower, there are some startling similarities.
In contrast to the Soviet economy, Australia’s economy is open, trade-oriented and dominated by services, finance, education and tourism, while commodity exports remain a powerful source of national income. Services account for roughly four-fifths of domestic production, a sign that Australia’s comparative advantages have shifted away from heavy industry and mass manufacturing towards knowledge and resource-led sectors.
That structural simplicity has advantages: flexible labour markets, integration in global value chains and a high per-capita standard of living. It also imposes constraints when the government decides to rapidly ramp up defence capacity, which is inherently capital and skills-intensive.
However, the growing geopolitical and strategic challenges transforming the Indo-Pacific, combined with mounting domestic political and economic challenges, including stubborn inflation, mounting public and private debt, and the pressures of AUKUS are all adding to the mounting challenges to meaningfully lift the nation’s defence spending.
Compare the pair
The quantum leap in Australian defence spending announced in recent years – roughly AU$50 billion of extra investment over a decade – focused on submarines, warships, missiles and advanced systems, is intended to address what Canberra described as rising strategic risk in the Indo-Pacific, above all the military modernisation of the People’s Republic of China.
The package will lift defence spending modestly as a share of gross domestic product later in the decade, but most of the headline funding flows to the back end of the 10-year plan.
Industry leaders and strategic analysts accept the logic of investment but warn that the scale, timing and complexity create political, fiscal and industrial headaches.
Where the Soviet and Australian cases converge is not in scale. The USSR was a superpower with a command economy built for large-scale mobilisation but in the economic trade-offs, every democracy must weigh when it seeks to expand military capacity in the face of a credible strategic challenge.
Equally worth understanding is the brittleness of the two national economies, and while the factors that make and made the two economies brittle are in some ways different, the centrality of how brittle the economies were and are, continue to be significant vulnerabilities that undermine the capacity to spend on defence.
Economic brittleness
Now yes, there are some fundamental differences, where Soviet leadership could order factories to retool or redirect production because it controlled prices, investment and labour allocation, Australia’s market economy does not have that lever.
Instead, Canberra must compete in global markets for skilled workers, microchips, shipyards and engineering services while keeping borrowing, inflation and public services on a sustainable path.
But that is only part of the problem. Fundamentally, the diversity, complexity and resilience of the national economy is as, if not more, critical in the face of mounting geopolitical challenges.
These differences matter – where the Soviet system accumulated distortions: chronic underinvestment in consumer industries and services, weak incentives for innovation, and a public finance system that masked inefficiencies.
When the arms race escalated, combined with global oil shocks and fiscal mismanagement bit, those distortions turned into a cascade.
For Australia, similar distortions, while less likely, are no less risky to the national economy, particularly given the narrow areas of focus that form the central pillars of economic growth, particularly the highly cyclical nature of resources and agricultural exports and the over-dependence on real estate speculation all serve to undermine the strength, resilience and competitiveness of the national economy.
In particular, the risks that can lead to stagnation, dwindling economic complexity, key input costs, skill shortages, cost blowouts in major procurement, dependence on foreign supply chains for critical technologies, and diversion of investment away from productivity-enhancing civilian sectors are real and politically immediate.
Australia’s current industrial footprint is not scaled for that task, as COVID-19 revealed, and would come under even further and potentially catastrophic strain during a protracted conflict.
Stretch it too fast and too far and the economy risks two outcomes familiar to students of public finance: chronic cost overruns (as firms seize rents when demand outstrips capacity) and the crowding out of other productive investment, if government borrowing or taxation diverts capital away from the private sector.
Both outcomes erode the fiscal room that democracies need to adapt and invest in peacetime priorities such as health, education and innovation.
Critically, the Cold War showed that industrial mass alone is not enough: it is the marriage of money, research and productive efficiency that sustains military modernity.
In the late Soviet period, research and development often produced impressive hardware but struggled to translate breakthroughs into widespread productivity gains.
For Australia, the practical question is how to ensure defence modernisation coexists with a broader productivity strategy. That means channel-setting carefully sequenced procurement to allow local industry to scale, partnering with allies for tech transfer, and protecting funding for education and dual-use R&D that feeds civilian growth as well as military capability.
The risk of neglecting that balance is not ideological decay but economic sclerosis: higher costs, slower growth and diminished capacity to sustain long-term strategic competition.
Politically, the Soviet example also warns against letting defence priorities crowd out institutions that enable economic resilience, something that is of increasing importance in the contemporary Australian context.
Central planning insulated military spending from debate; Australian democracy enacts the opposite risk, political cycles, electoral promises and short-termism can produce erratic funding decisions.
The recent Australian approach, a large, front-loaded procurement plan with much spending back-loaded into the future, is a pragmatic hedge against immediate budgetary pain. Yet it also risks a “commitment problem”: promises become legally and reputationally binding, squeezing future governments’ fiscal flexibility.
Successful adaptation therefore demands bipartisan planning, transparent cost estimates and critically, credible industrial strategies across all the long-forgotten aspects of the national economy to avoid the fiscal whiplash that contributes to economic malaise.
Final thoughts
None of this implies that Australia should hesitate to invest in its defence. The strategic environment is demonstrably different from the 20th-century bipolar contest, and the qualitative demands of 21st-century warfare with cyber, space, long-range precision strike and unmanned systems all require sustained investment.
The point instead is a pragmatic one: the manner in which Canberra pursues those investments will determine whether Australia experiences a Soviet-style trade-off between guns and growth, or a managed transition that bolsters deterrence without choking off civilian prosperity.
Critically, that management rests on three pillars.
First, fiscal realism: defence plans should be costed transparently and include recurring sustainment costs, not just acquisition headlines.
Second, industrial policy that leans on alliances: where possible, Australia should pursue co-production and long-term technology partnerships rather than expensive attempts at rapid autarky.
Third, an economic underpinning that boosts productivity across the board, skills, R&D, and infrastructure so that the economy can absorb higher defence spending without crowding out other priorities.
History gives no guarantee.
The Soviet Union’s collapse had many causes beyond the defence burden: political ossification, nationalities tensions and a failure of reform.
However, its experience dramatises a central and inescapable truth of strategic competition: military power is rooted in economic health, competitiveness, productivity and diversity. Democracies that forget that lesson – that the sinews of competition are not only tanks and missiles but schools, factories, and productive citizens – risk trading short-term security theatre for long-term vulnerability.
For Australia, the task is to turn strategic urgency into durable capability. That requires a defence policy that is sober about costs, an economic policy that raises the country’s productive ceiling, and politics that can sustain the difficult choices over the long term.
The Soviet example is a warning and a guide: invest, yes, but do so in ways that truly builds national capacity, rather than just being another parade of iron.
Get involved with the discussion and let us know your thoughts on Australia’s future role and position in the Indo-Pacific region and what you would like to see from Australia’s political leaders in terms of partisan and bipartisan agenda setting in the comments section below, or get in touch at
Stephen Kuper
Steve has an extensive career across government, defence industry and advocacy, having previously worked for cabinet ministers at both Federal and State levels.
