Institutions, capital formation, and defence spending efficiency in the Bucharest Nine: A composite index approach

Abstract

This study analyses defence spending efficiency in the Bucharest Nine (B9) as an outcome shaped by differences in institutions, investment capacity, and macroeconomic structure across post-socialist economic systems. Covering 2006–2023, the article asks why countries exposed to similar security pressures and alliance commitments display persistent variation in how effectively they transform defence expenditure into technological and industrial outcomes. The empirical strategy proceeds in three stages. First, a composite Defence Spending Efficiency Index (DSEI) is constructed using annual dynamic entropy weights and CoCoSo/MARCOS aggregation. Second, Double/Debiased Machine Learning with repeated cross-fitting across 100 random seeds is used to estimate the causal contribution of gross fixed capital formation, innovation capacity, rule of law, government effectiveness, fiscal allocation trade-offs, and geopolitical risk. Third, a circularity-corrected SHAP framework is employed for predictive decomposition, clustering, and scenario-based interpretation. The results indicate that gross fixed capital formation, rule of law, government effectiveness, and innovation capacity are all robust and stable positive determinants of defence spending efficiency, whereas the common global Geopolitical Risk Index and social expenditure show no robust baseline efficiency-enhancing effect. The efficiency-enhancing role of capital formation strengthens markedly following the escalation of the war in Ukraine in 2022, while social expenditure exhibits a significant post-2022 crowding-out interaction. The findings imply that defence efficiency is embedded in the broader functioning of economic systems: Countries with stronger investment capacity, higher-quality institutions, and more developed innovation environments convert defence expenditure into technology- and industry-intensive outcomes more effectively than countries relying primarily on larger defence budgets alone.