Defense, Welfare and Growth

Perspectives and Evidence

Steve Chan, Alex Mintz

• Publisher: Routledge
• Year: 1992
• ISBN:
  9781134903108
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

Expert essays bring together material from many developed and developing countries to determine how defense spending can affect welfare provision and economic growth.

1 Defense, welfare, and growth:

Steve Chan University of Colorado

INTRODUCTION

In the early 1990s, the last decade of the century, momentous changes are taking place in the world. The European Community is scheduled to further remove barriers to trade and travel among its member countries in short order, so that Western Europe is poised to become a more integrated political and economic unit rivaling the power of the two superpowers. At the same time, political and economic liberalization has been sweeping the East European countries. Authoritarian rulers have fallen from power in these countries, just as the physical and political barriers separating them from the West have been falling in rapid succession (with the Berlin Wall being the most prominent symbol of these barriers). The Soviet Union’s policies of internal reform and external détente under Mikhail Gorbachev have clearly contributed to a significant relaxation of political and military tension between the East and West.

Turning to the Pacific Basin, the relations among China, Japan, and the United States are more cordial today than probably at any other time in this century. While the bloody suppression of the prodemocracy demonstrators at Tiananmen Square has stemmed the forces of political liberalization in China, that country is likely to continue its military retrenchment and foreign cooperation in order to create and sustain a policy environment conducive to rapid economic modernization. China’s capitalist neighbors in East Asia have featured some of the most dynamic economies in the world. Led by Japan, these modern ‘trading’ nations (such as South Korea, Taiwan, Singapore, and Hong Kong) have eschewed traditional instruments of military assertion and force projection abroad in favor of commercial expansion and economic competitiveness. Trade protectionism rather than military aggression poses a more realistic danger to their national security.

With the prominent exception of the U.S. invasion of Panama and the Iraqi invasion of Kuwait, the direct resort to arms in settling international disputes has become less fashionable as the decade of the 1980s came to a close. Military détente—if not necessarily political reconciliation—has come to the Falklands/Malvinas, India and Pakistan, Israel and Egypt, Iran and Iraq, North and South Korea, and China and the Soviet Union. Concomitantly, Moscow has withdrawn its troops from Afghanistan, and Hanoi has done the same in Kampuchea. Thus, the spirit of Hobbes has abated, and has been replaced by collaboration among the world’s major powers in the Iraq-Kuwait crisis leading to Iraq’s military defeat and the restoration of Kuwaiti sovereignty.

Given these recent developments, it is important for us to reexamine the rationales for and outcomes of national defense, which may affect and be affected by international tension, civilian welfare, and domestic industrial productivity. This collection of essays seeks to improve our understanding of the empirical relationships between defense exertion on the one hand, and a variety of socioeconomic performances on the other hand. They are mostly concerned with the socioeconomic consequences of defense exertion. Despite their different analytic and substantive foci, they all engage in explicit formulation of theoretical expectations and systematic evaluation of the pertinent evidence across space or time. Consequently, they enable us to assess the generalizability and robustness of various hypotheses regarding the effects of defense exertion.

The remainder of this Introduction is organized in three sections. First, I review various perspectives regarding the consequences of governmental allocations of money and manpower to the defense sector. Second, a similar literature survey is undertaken to identify the prevailing expectations about the welfare consequences of defense allocation. Finally, I relate the analyses presented in this volume to the previous research, and summarize the theoretical and substantive highlights of these analyses.

DEFENSE EXERTION AND ECONOMIC PERFORMANCE

There is no shortage of perspectives intended to shed light on the question of what consequences defense spending is likely to produce. Many of these perspectives have been influenced by the conditions or experiences of Western countries, especially those of the advanced industrial powers featuring capitalism and pluralistic democracy. At the same time, with the notable exceptions of the USSR, India, Israel, South Korea, and Taiwan, systematic empirical verification or clarification of the expectations derived from these perspectives has been largely limited to these same countries.

In this book, we will focus on the nonmilitary consequences of defense exertion. To the extent that efforts to boost one’s defense capabilities result in a process of mutual armament escalation, national security is more likely to be undermined than enhanced. International disputes accompanied by arms races are much more likely to lead to war than international disputes in the absence of these races (see Goertz and Diehl 1986; Morrow 1989; Wallace 1979, 1980, 1982; Weede 1980a). Therefore, hypermilitary vigilance may actually be counterproductive in enhancing national security. The consequent increase in international tension and conflict is likely to provide a poor environment for domestic economic growth.

Defense exertion can take the form of allocating either money or manpower to the military establishment. These two forms represent conceptually the capital-intensive and labor-intensive approaches to national security, and are apt to have different empirical effects on the economy and society. A number of perspectives try to account for the nonmilitary consequences of defense exertion (Chan 1985). They focus on one or more of the three key determinants of GNP growth in classical economics: namely, labor, capital, and technology.

There is, first, the modernization model, which has been most closely associated with the work of Benoit (1972a, 1972b, 1973, 1978). This work acknowledges that defense spending necessarily reduces domestic civilian production, and crowds out civilian investment. However, it argues that these unfavorable effects are apt to be offset by the other more positive effects in developing countries. Defense spending and military service are suggested to instill modern skills and attitudes, help to develop basic economic infrastructure, and produce mild inflation which in turn encourages fuller utilization of the existing production facilities. In support of Benoit’s thesis, Babin (1989) and Kick and Dev Sharda (1986) have found, respectively, that military spending and personnel tended to contribute to faster economic growth in the relatively long term (that is, after a dozen years or so). Several other analysts (for example, Dixon and Moon 1986; Weede 1983) have also discovered evidence indicating that large armed forces (as distinct from large military budgets) seem to be conducive to the development and formation of human capital.

A much more prevalent analytic reaction to Benoit’s studies has been to challenge his conclusion that ‘heavy defense expenditure does not… appear to have been associated with lower growth rates’ (1973, 4). This conclusion has met methodological as well as substantive objections, such as Benoit’s failure to account for the total inflow of foreign resources, the degree to which a country’s production capacities are characterized by slack, and the over-time variations in the data series (see Ball 1983b; Biswas and Ram 1986; Brzoska and Wulf 1979; Deger 1986; Deger and Smith 1983; Dorfman 1972; Frederiksen and Looney 1983; Faini et al. 1984; Grobar and Porter 1989; Hagan 1972; Huisken 1983; Kaldor 1976; Lebovic and Ishaq 1987; Lim 1983; Nabe 1983; Smith and Smith 1980; Terhal 1981). Overall, the studies inspired by Benoit either failed to find evidence supportive of his conclusion or actually produced evidence that contradicts it.

One of the more powerful criticisms directed against Benoit’s conclusion is that he gave too much emphasis to the positive effects of defense spending in mobilizing the available national resources and in instilling modern skills and attitudes in the developing world, and that he did not give enough emphasis to the negative effects of defense spending on savings and investment. It is the latter contention that undergirds the second major perspective on the economic consequences of defense spending. The capital formation model stresses private investment as the key determinant of economic growth. Two proponents of this model thus argued that ‘the negative effect of military expenditures on saving (and investment) outweighs the positive modernization and technological effect on the growth rate’ (Deger and Smith 1983,346). Smith’s (1937,1980) other studies led him to conclude that for the developed Western economies there tended to be a rough one-to-one tradeoff between a country’s military expenditures and its total investment. The existence of such a tradeoff has been observed in both the developed and developing countries (Cappelen et al. 1984; Deger 1986).

One strand of this literature emphasizes the military expenditures and commitments associated with the burden of international leadership. A hegemonic power bears a disproportionate amount of the costs of providing for public goods such as global peace, monetary stability, and free and orderly trade (Gilpin 1975; Kindleberger 1973, 1981; Krasner 1976). Over time, whether due to the free-riding by others and/or the continuation of outmoded policy practices by the leading state, the international system undergoes a period of relative deconcentration of power (Modelski 1987a, 1987b). To the extent that defense spending dampens capital formation and thus slows economic growth, it is a major contributing cause of the hegemon’s decline (Smith 1977). It may therefore facilitate international status mobility and power transition, which may in turn intensify international rivalry and precipitate war (Organski and Kugler 1980).

The longitudinal evidence for the above argument, however, is much more supportive in the case of the United States during 1946–78 than Britain during 1813–1913, a finding that has led to the conclusion that ‘the defense-investment tradeoff is not a generic factor in the relative decline of system leaders and, derivatively, the world system’s distribution of power’ (Rasler and Thompson 1988, 82). Another recent review of the U.S. case also concluded that ‘defense spending is not an important determinant of investment’ (Gold 1990, 3). Thus, it seems that the hypothesized defense-investment substitution effect was more limited among the great powers than might have been suspected. Similarly, several other studies on developing countries such as India, Taiwan, and the Middle Eastern nations were unable to establish any statistically significant tradeoff between defense spending and civilian investment (Chan 1988; Faini et al. 1984; Lebovic and Ishaq 1987). Indeed, as Smith and Georgiou (1983, 13) acknowledged forthrightly, ‘the effect of military expenditure on growth through investment and capital formation is likely to be a long run one and so not picked by the short lags used in time series analysis.’ As another consideration, Deger (1986) pointed out that capital formation in the developing countries may be constrained not only or necessarily by a shortfall in savings due to high military spending; one must also take into account the reduced absorptive capacity to utilize the available savings as a result of the hypothesized unfavorable impact of military spending on public funding for human resources.

A third perspective on the impact of defense spending on economic performance can be called the balance of payment model, or the export-led growth model. This model argues that defense spending tends to deprive resources and talents to the most dynamic sectors of the economy, that these sectors tend to be most heavily involved in the export business, and that countries that are most adept in expanding export have tended to grow fastest economically (Rothschild 1973). The decline in a country’s foreign trade competitiveness in turn leads to a weaker currency, structural unemployment, and chronic trade deficits. Although some of these tendencies have been suggested by others (for example, Deger 1986; Dumas 1977; Melman 1970, 1972, 1974), there has apparently been little systematic data analysis to follow up on Rothschild’s original work. A review of the U.S. data has led at least one economist to conclude that defense spending has not been a primary cause of the decline in that country’s international competitiveness, and that overall this spending ‘has been a relatively neutral feature of the American economic landscape’ (Gold 1990, 3). One time series study on Taiwan—which happens to be one of the most successful ‘trading states’ in the recent decades—failed to show any strong impact, positive or negative, of defense spending on export expansion or export composition (Chan 1988).

The fourth and final perspective may be labeled the technological displacement model. It basically argues that by drawing scientific and engineering talents from the civilian sector to military research and development (R & D), defense spending tends to hamper the innovation and therefore the growth of civilian economy (for example, Dumas 1977; Lindgren 1984b; Russett 1970). Systematic analyses of this hypothesized impact, however, have failed to yield strong and unambiguous evidence. Thus, for example, Gleditsch et al. (1988, 211) were unable to discover ‘very clear evidence of a competitive relationship’ between military R & D and civilian R & D. The proportionate size of civilian R & D was positively correlated with productivity gains in only five of the eight advanced Western countries analyzed in their study, and the proportionate size of military R & D was negatively related with productivity gains in six of these eight cases. This argument receives support from the review of U.S. data by Gold (1990, 3), who argued that ‘there is no long-term trade-off between defense and civilian R & D.’ In another study focusing on a developing country, Deger and Sen (1983) hypothesized that military spending should affect the technological advance of different civilian industries in India, which has one of the largest armament ...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• FIGURES
• TABLES
• CONTRIBUTORS
• 1: DEFENSE, WELFARE, AND GROWTH:
• 2: DEFENSE SPENDING AND ECONOMIC PERFORMANCE: A DISAGGREGATED ANALYSIS
• 3: POLITICAL-ECONOMIC TRADEOFFS AND BRITISH RELATIVE DECLINE
• 4: GUNS, BUTTER, AND GROWTH: THE CASE OF NORWAY
• 5: EATING YOUR CAKE AND HAVING IT TOO: THE JAPANESE CASE
• 6: MODELS OF MILITARY EXPENDITURE
• 7: ECONOMIC GROWTH, INVESTMENT, AND MILITARY SPENDING IN INDIA, 1950–88
• 8: MUDDLING THROUGH SECURITY, GROWTH, AND WELFARE: THE POLITICAL ECONOMY OF DEFENSE SPENDING IN SOUTH KOREA
• 9: MILITARY BURDEN, ECONOMIC GROWTH, AND INCOME INEQUALITY: THE TAIWAN EXCEPTION
• 10: THE DUAL ECONOMY AND ARAB-ISRAELI USE OF FORCE: A TRANSNATIONAL SYSTEM?
• 11: THE IMPACT OF MILITARY EXPENDITURES ON HUMAN-CAPITAL DEVELOPMENT IN THE ARAB GULF STATES
• 12: MILITARY PARTICIPATION, ECONOMIC GROWTH, AND INCOME INEQUALITY: A CROSS-NATIONAL STUDY
• 13: DO WE YET KNOW WHO PAYS FOR DEFENSE? CONCLUSIONS AND SYNTHESIS