DAMASCO, BRYAN M. 11 October 2011 Increased Military Spending in the Philippines: Analysis of the Relationship between Military Spending and Economic Growth as a Development Strategy in the Philippines from 1999-2010 Introduction The Philippines is a developing country faced with challenges in relation to its development. These threats are directed to its national security and sovereignty, with internal problems such as the domestic insurgency particularly in Mindanao and the resurfacing of external issues through the Chinese military buildup in the West Philippine Sea. In 2010, the Philippine government proposed an 81% increase in military spending for 2011 as a response to the insurgency and foreign threat. These security problems pose threats to its development prospects on many levels. On the other hand, the proposed increase in military expenditure raises the question of its validity and whether it will also affect its prospects for development, or worse, if it is even necessary. Since the pioneering work on the relationship between military spending and development through economic growth in developing countries was published (Benoit 1978), this topic has been continuously debated by several scholars. On one camp, some scholars posit the direct relationship between military spending and development (Benoit 1978, Hirnissa 2009, Zwi and Ugalde 1992), while the others forward an indirect relationship (Olof et.al. 1982, Deger and Smith 1983). Similarly, some scholars speculate that the relationship between the two can’t be readily pinpointed (Kusi 1994) or which direction it should be (i.e. military spending to promote growth or growth to increase military spending). With these various arguments, many of the proposed follow-up studies suggest specific analysis of military spending in each developing country to understand this complex relationship. In relation to this, this paper evaluates the factors in increasing military spending. It also looks at the case of the proposed military spending in the Philippines and its effects on economic growth as a measure of development according to traditional development models followed by the Philippine government. Similarly, this study looks at its implications for development policies and critiques the current development model.
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DAMASCO, BRYAN M. 11 October 2011
Increased Military Spending in the Philippines: Analysis of the Relationship between Military
Spending and Economic Growth as a Development Strategy in the Philippines from 1999-2010
Introduction
The Philippines is a developing country faced with challenges in relation to its
development. These threats are directed to its national security and sovereignty, with internal
problems such as the domestic insurgency particularly in Mindanao and the resurfacing of
external issues through the Chinese military buildup in the West Philippine Sea. In 2010, the
Philippine government proposed an 81% increase in military spending for 2011 as a response to
the insurgency and foreign threat. These security problems pose threats to its development
prospects on many levels. On the other hand, the proposed increase in military expenditure
raises the question of its validity and whether it will also affect its prospects for development, or
worse, if it is even necessary.
Since the pioneering work on the relationship between military spending and
development through economic growth in developing countries was published (Benoit 1978),
this topic has been continuously debated by several scholars. On one camp, some scholars posit
the direct relationship between military spending and development (Benoit 1978, Hirnissa 2009,
Zwi and Ugalde 1992), while the others forward an indirect relationship (Olof et.al. 1982, Deger
and Smith 1983). Similarly, some scholars speculate that the relationship between the two can’t
be readily pinpointed (Kusi 1994) or which direction it should be (i.e. military spending to
promote growth or growth to increase military spending). With these various arguments, many
of the proposed follow-up studies suggest specific analysis of military spending in each
developing country to understand this complex relationship. In relation to this, this paper
evaluates the factors in increasing military spending. It also looks at the case of the proposed
military spending in the Philippines and its effects on economic growth as a measure of
development according to traditional development models followed by the Philippine
government. Similarly, this study looks at its implications for development policies and critiques
the current development model.
Definition of the Problem
In developing countries, the relationship between military spending and development is
contentious and studies on the relationship of defense spending and economic growth
produced mixed results (Frederiksen and Looney 1983, 633). Following the assumption of
Frederiksen and Looney, it is the military expenditure that affects or influences the economic
growth and not vice versa. However, the relationship between the two is determined by the
availability of resources, as developing countries are grouped as either resource constrained or
resource unconstrained (Frederiksen and Looney 1983, 633). Increased military expenditure in
resource constrained developing countries will have a negative effect on their economic growth
and, subsequently, their development prospects. The Philippines, as a resource constrained
developing country, will likely have a negative relationship between military spending and
economic growth because an increase in military spending will have a negative effect on its
economic growth. If we consider this relationship as true, then an increase in military spending
of the Philippines will reduce economic growth and eventually development because the budget
allocated to increase level of military expenditures take over resources that could otherwise
have been employed as civilian investment (Frederiksen and Looney 1983, 637).
Objectives
The purpose of this study is to examine the relationship between military spending and
economic growth as an indicator of development in the Philippines from 1990 until 2010. First,
the study will identify the factors that characterize military spending in a resource constrained
developing country, and how these factors affect military spending decisions. Next, it will
analyze how the increase in military spending will affect economic growth. Lastly, it will explore
how the changes in economic growth affect results of development studies rolled out by the
Philippine government in various sectors.
Rationale (Significance)
The study is significant because it looks into the relevance of military spending in the
Philippine setting. A previous study conducted by scholars between the years 1956 until 1982
conclude that it is economic growth that influences military spending (Frederiksen and LaCivita
1987, 359) and it needs revisiting, especially it has been almost three decades since the study
was conducted. Similarly, the proposed 81% military spending the Philippine government in
2010 is the biggest increase in the previous years and this puts into question the importance of
studying the relationship between the two anew. The study intends to contribute to a better
understanding of these concepts and how it can help in decision making processes regarding
budget allocation and policy development.
Scope and Limitation
The study focus on the discussion of the military spending and development in the
Philippines from 1998 until 2010, and describe the dynamics of their relationship prior to a
drastic increase of military spending share in the Growth Development Product (GDP). But as
discussed in the first part of the review of related literature, the study will use the definition of
development in terms of GDP and other indicators under it. Another consideration is corruption.
In one study, “corruption is associated with higher military spending as a share of GDP and total
government expenditures” (Sanjeev et.al. 2000, 16). But as the study of corruption and military
spending encompasses a broad topic not directly quantifiable in relation to the GDP, and not to
mention issues in transparency, this study leaves the corruption question out and proposes
subsequent research to venture into the same field of analysis.
Review of Related Literature
Development or other growth indicators restricted on economic terms have been
criticized by various scholars as they can be misleading and self-defeating (Currey 1973).
However, GDP per capita as a derivative of GDP shows the extent to which the total production
of country can be shared by its population. Likewise, the growth in real GDP per capita indicates
the pace of income growth per head of the population (United Nations). As a single composite
indicator it is a powerful summary indicator of economic development. It does not directly
measure sustainable development but it is a very important measure for the economic and
developmental aspects of sustainable development (United Nations). For the purposes of this
paper, we will use this traditional definition as an indicator of development.
Development is measured by various indices. But as one of the purposes of this paper is
to identify the relationship of military spending and economic growth, it then follows one of the
traditional notions of GDP (Gross Domestic Product) being a measure of development through
macroeconomic models. Even if the GDP suffers in measuring “true” development as it does not
factor social cohesion and environment, it remains to be the source of the budget for military
expenditure of a country.
In various studies discussing the link between military expenditure and development,
comparisons were made on the relationship of the defense spending and economic growth. In
the pioneer work of Emile Benoit, he states that:
Defense spending could help economic growth by: 1) feeding, clothing and housing a
number of people who would otherwise to be fed, housed and clothed by the civilian
economy, 2) providing education and medical care as well as vocational and technical
training, 3) engaging in a variety of public works – roads, dams, river improvements,
airports, communication networks that may in part serve civilian uses and 4) engaging in
scientific and technical specialties otherwise performed by civilian personnel (Benoit
1978, 276).
In his study of less developing countries (LDCs) from 1950 to 1965, he found out that
“heavy defense burden generally had the most rapid rate of growth (civilian growth) and those
with the lowest defense burdens tended to show the lowest growth rates” (Benoit 1978, 271).
In other words, increased military spending means economic growth. The Philippines has been
identified to have a low defense spending leading to low growth rates as well, which eventually
led to slow civilian growth (Benoit 1978, 271). The direction of interaction was posited to be an
increase in defense spending will lead to growth and not the other way around.
On the other hand, Kant proposed that there is an inverse relationship between military
spending and economic growth. According to him, reduced military spending promote peace
and prosperity because a) liberal democracies spend less on their militaries, and b) leaders can
provide more resources for services such as education and social goods, therefore safeguarding
political rights (in Fordham and Walker 2005, 142). But the assertion of his study is that liberal
democracies tend to spend less on military compared to military government because of the
general tendency for peace and views the international system as less threatening.
In “Economic Growth and Defense Spending in Developing Countries”, Kusi stated that
the relationship between economic growth and defense spending cannot be generalized across
countries. In his study of LDCs, he correlated economic growth and defense spending in an
annual time series. According to his results, the Philippines from 1971 to 1989 do not show a
relationship between military spending and economic growth (Kusi 1994, 157).
In 1983, Frederiksen and Looney extended the work of Benoit by criticizing that the
previous studies done in this field produced inconclusive and mixed results as they did not take
into consideration the importance of relative financial and resource constraints faced by the
individual countries (1983: 633). In their study, the thrust of the influence remains as military
expenditure to economic growth and not vice versa. However, the difference here is that
resource constraints affect the influence of military spending to GDP and LDCs are clustered into
two groups. According to them, resource unconstrained LDCs tend to show a positive
relationship between military spending to GDP; while resource constrained LDCs exhibit a
negative relationship between military spending to economic growth (Frederiksen and Looney
1983, 641). In their study, the Philippines from 1950-1965 was grouped as a resource
unconstrained LDC, where a direct relationship between defense spending and growth was
found to exist (Frederiksen and Looney 1983, 641).
According to Sandler and Hartley, there are three factors that states consider in order to
determine the percentage of military spending to be allocated from the GDP. These are 1) the
state’s income, 2) the threats it faces, and 3) the military power of its allies (in Fordham and
Walker 2005, 148). The third factor concerning military power of allies stipulates that states
with powerful allies might enjoy the benefits of collective defense while devoting a relatively
small share of national resources to the military (Fordham and Walker 2005, 150). The
Philippine attempts for self-sufficiency began in the early 1970s and the last of the military
bases were pulled out of the country in 1991(Hagelin 1988, 144). However, the Philippines is still
under the external deterrent guarantee from the U.S due to a mutual defense treaty.
Although this relationship between military spending and economic growth in the
Philippines has been discussed in previous studies, albeit not in depth and in cluster analysis
(Benoit 1978, Frederiksen and Looney 1983), Frederiksen and LaCivita specifically studied this
and found out that the direction of the relationship is economic growth causing military
spending and not the other way around (Frederiksen and LaCivita 1987, 359). However, in the
previous studies mentioned, the Philippines was clustered as a resource constrained country but
the follow-up study basically assumed the Philippines to be a resource unconstrained country
were a positive relationship between defense spending and growth was found to exist
(Frederiksen and LaCivita 1987, 356).
Framework of Analysis
Theoretical Framework and Conceptual Framework
The study uses Frederiksen and Looney’s second proposition in which there is an inverse
relationship between military spending to economic growth in a resource constrained LDC (see
Fig. 1). In this proposition, an increase in military spending will then result to a decrease in
economic growth. As we can see, Kant similarly showed that an inverse relationship between
military spending and economic growth but exhibited it through a decrease in military spending
resulting to an increase in economic growth. Technically, he did not explicitly forward the
constraint to resources as a factor but the zero-sum relationship between military spending and
economic growth showed that there is a limit to the resources of a country (i.e. devoting less to
military spending results to increased resources for development). The indicators in the
conceptual framework will be de discussed in depth in the conceptual framework (see Fig. 2).
The conceptual framework shows a reworking of Frederiksen and Looney’s second
proposition. In this aspect, the Philippines will be studied as a ‘resource constrained LDC’. If we
recall the original study, the Philippines was clustered under the ‘resource unconstrained LDC’ in
the period of from 1950-1965, having a positive relationship between military spending and
economic growth. However, in the analysis of this paper, we will consider the negative
relationship between military spending and economic growth from 1990 to 2010, in which we
test the relative decline in economic growth due to increase in military spending.
In the lower level, we consider the factors pointed out by Sandler and Hartley’s that
influences decisions in identifying if there is an overall increase or decrease in military spending:
a) the states income, b) threats and c) military power of allies. The states income is primarily
correlated with the GDP of the country per year. Under threats, it will be measured through
external and internal threats (Thompson 2001 in Fordham and Walker 2005, 149). External
threats will be measured through the level of threat faced by a given state according to COW
Project’s Composite Index of National Capabilities (CINC) of the rival state (China), and internal
threats through deaths incurred by the state in intrastate wars (insurgencies in the Philippines)
(Fordham and Walker 2005, 149). As for the military power of allies, it will be measured through
the CINC of the state’s military ally with which it has a Type I alliance or defense pact
(Philippines and the United States)(Fordham and Walker 2005, 149) and the military assistance
it has given.
Methodology
The study will use statistical information from World Bank’s World Development
Indicators as well as information from Correlates of War from 1998 to 2010 leading to the
increase in 2011 military spending plan, as long as data can be obtained. The study starts with
1998 because it has the most significant drop in the growth rate of the GDP before a gradual
increase until 2000 and it is a good starting point of the study. Graphs and tables will be studied
showing the figures and most especially the trend in the Philippines for:
a) Growth Domestic Product (GDP)
b) GDP growth rate (in %)
c) Military expenditure (in $ mn)
d) Military expenditure from GDP (in %)
e) Military expenditure growth rate (in %)
f) Composite Index of National Capabilities (CINC) of China
g) Composite Index of National Capabilities (CINC) of the Philippines
h) Number of casualties (deaths) incurred from intrastate wars
i) Composite Index of National Capabilities (CINC) of the U.S.
j) Military Assistance of the U.S. to the Philippines (in $ bn)
k) GDP growth rate (in %)
l) GDP per capita (in $)
The CINC is a measure of state power in which “the National Material Capabilites data set
contains annual values for total population, urban population, iron and steel production, energy
consumption, military personnel, and military expenditure“(Singer et.al. 1972). The study will
look at the CINC scores of China, the Philippines and the U.S. The casualties from internal
threats will be taken from the total of deaths that occurred from Second Philippine-Moro
confrontation (Philippine Government vs. MILF), Third Philippine-Moro confrontation (Philippine
Government vs. MILF & ASG) and Philippine Joint offensive (Philippine Government vs. MILF &
NPA) as of December 31, 2007 (Singer et.al. 1972). The Military Assistance of the U.S. to the
Philippines will be based on the total assistance given (in $ mn) from 1998 to 2008 (Center for
Defense Information). This military aid will be the total of the International Military Education
and Training (IMET) funds and Foreign Military Financing (FMF) received from the U.S.
Additionally, we will also look at the following data to analyze if these indicators show a
significant change in relation to military spending for the same time period:
m) GDP per capita (in $)
n) GDP per capita growth rate (in %)
After examining the relationship and trends between these factors according to the process
indicated in the conceptual framework, we will then analyze the results and factor in the
possible effects of the proposed increase in military spending from 2010 to 2011 not included in
the data to the economic growth (which is our indicator of development). Similarly, if there is a
negative effect to the economic growth due to increased military spending, then we speculate
on the possible policy developments to counteract this unfavorable outcome.
Presentation of Findings
After plotting the figures obtained from the indicators of World Bank for the Philippines
(World Bank) in a line graph, we can see the trends for the following indicators (See Annex for
the complete table):
State’s Income
As we can see, the trend is that the total GDP of the Philippines increased from $ 82.344
billion to $ 199.589 billion from 1997 to 2010 (Fig. 3) and there’s also a similar increase in the
military spending from $ 988.13 million to $ 1.363.50 billion from 1997 to 2009 (Fig. 11); please
note that there’s no data available for 2010 in Fig. 11. At first look, this is congruent to Sandler
and Hartley’s assertion that military spending should rise together with the national income
because the state has more to protect and more resources with which to protect it (Sandler and
Hartley in Fordham and Walker 2005, 149). However, the increase in total figures of GDP is
contrary to the trend in the allocated budget for military spending. If we look at Military
Spending as Percentage of GDP from 1997 to 2009 (Fig. 12), we can see that there is a gradual
decrease from 1.20% to 0.81%, from 1997 until 2009. This means that the Philippines has been
gradually decreasing the budget allocation for military spending, even if there is a numerical
increase in from the GDP from 1997 until 2009.
Threats
Threats
First we look at external factors in discussing threats to the state that determines
military spending, as “threats to the state can increase both the level of military spending and
the defense burden (Sandler and Hartley in Fordham and Walker 2005, 149). In the case of the
Philippines, we look at China as the external threat to which the state must act against.
Following the increase Chinese military build-up in the Spratlys, this exact phenomenon is one of
the things that prompted the Philippine government to increase the budget allocation for
military spending for 2011. To examine this threat, we use figures from Correlates of War
Project (i.e. Composite Index of National Capabilities) to analyze how much threat China
imposes on the Philippines and examine the trend in China’s military power. China is then
labeled as the “strategic rival” of the Philippines because of an ongoing territorial dispute.
(Thompson 2001 in Fordham and Walker 2005, 149).
If we look at the CINC scores of China from 1997 to 2007 (Fig. 4), we can see that it has
increased from 0.1420133 to 0.1985779 and exhibited by a rising line graph. The Philippines, on
the other hand, shows a declining line graph in which it has decreased from 0.0058835 to
0.0057217 for the same time period (Fig. 5). To stress more this difference, we can see in Fig. 6
that the difference in the CINC scores of the Philippines to China has been continually rising with
0.1928562 in 2007 --- not even close to the highest CINC score of the Philippines at 0.0059190 in
year 2000. Currently in 2007, China has the number one CINC score among all sovereign states
at 0.198578, followed by the United with 0.142149 ; while the Philippines rank 33rd worldwide
(Correlates of War Project).
As for the internal threats, COW Project has grouped insurgencies with data for year
2000 onwards from the Philippines into three groups: Second Philippine-Moro confrontation
(Philippine Government vs. MILF), Third Philippine-Moro confrontation (Philippine Government
vs. MILF & ASG) and Philippine Joint offensive (Philippine Government vs. MILF & NPA). They
were not able to obtain any information on the number of deaths from both parties in the
Second Philippine-Moro confrontation. However, they indicated about 1,000 deaths for the year
2000 in the Third Philippine-Moro confrontation and 2,238 deaths for the year 2005-2006 due
to the Philippine Joint offensive. (Correlates of War Project). However, there were no annual
statistics provided for the death toll.
Military Power of Allies
Lastly, the military power of allies was seen to influence decisions about military
resource allocation. States with powerful allies might enjoy the benefits of collective defense
and devotes a relatively small share of national resources to the military (Olson and Zeckhauser
1966 in Fordham and Walker 2005, 150). As shown in the following graphs, the same is true for
the relationship of the Philippines with the United States through military assistance. The
military power of the United States can affect the Philippines’ military spending. In doing so, we
look at the CINC of the U.S. as obtained from the same source as China earlier.
Looking at Fig. 7, we can see the CINC score of the United States from 1997 to 2007
increased from 0.1396600 to 0.1421487 and there is no drastic difference in inclination as these
scores were plotted in the graph. However, if we consider the Growth Rate of the CINC scores,
we can see that there’s a sharp decline from year 2005 onwards, indicating a drastic decline in
the material power of the United States. In order to correlate this decrease in the U.S. CINC
growth rate to its capability to continue supporting the Philippine military, let us look at the
military assistance accorded by the U.S. from 1997 to 2008.
From Fig. 9, we can see that the Military Assistance of the U.S. to the Philippines started
in 1997 as $ 1.295 billion and saw a steady decline until 2001. But in 2002, we see that there is a
sharp increase from $ 3.778 billion total military assistance from the previous year to $ 46,025
billion. Following the September 11, 2001 attacks, the Philippines has shown support to the U.S.
war on terrorism and offered substantial aid to the U.S. through overflight privileges, use of
military bases and intelligence cooperation and logistics support to sustain U.S. efforts to track
down al-Qaeda (Center for Defense Information 2007, 3-4). In return, the U.S. substantially
increased its Foreign Military Financing (FMF) from $ 2.342 billion to $ 44 billion, comprising the
major bulk of military assistance. However, the 2002 military assistance was the largest in the
period given and saw a steady decline in Fig.9 and sharp decline in Fig. 10 only after a year.
Analysis of Findings
After presenting the information in graphs for the following indicators, we can deduce
the following observation:
a) The GDP of the Philippines is continuously increasing and the share of military spending
is numerically increasing as well; however, the percentage of military spending relative
to the GDP is gradually decreasing;
b) Notwithstanding the lack of complete information regarding deaths in the insurgencies
as an indicator of internal threats to the Philippines, we see that the external threat
imposed by China is great that their hard power (material resources) is very significant.
Any increase in the Philippines’ own military spending will have no effect in mitigating
the difference between their CINC scores.
c) Following the September 11, 2001 attacks and the U.S. war on terror, the Philippine
share of the U.S. military assistance continues to decline, which then puts into action
Olson and Zeckhauser’s indirect assumption that a decrease in the U.S. resolve (as a
powerful ally providing collective defense) will push the Philippines to devote a bigger
share of its national resources to the military.
Based on these findings, we can say that a single factor alone can’t determine the
decision to increase military spending. The increase in GDP of the Philippines might
automatically equate to assuming that the military spending should increase as well.
However, other factors such as how the (external) threats are perceived and the quantity of
military assistance received influence this as well. From these, we see that the increasing
external threat and the decreasing military assistance might be two of the reasons in
influencing the decision to increase military spending in the Philippines in 2011.
If we go back to our conceptual framework, the growth rate of the GDP is an indicator of
economic growth (following traditional definitions of development in macroeconomics).
Looking at Fig. 14, the line shows an erratic movement but a gradual increase of the
Philippine growth rate from 1997 to 2010 (with the latter showing the steepest climb). If we
were to hold the findings that if we increase the rate of military spending from 2010 to 2011,
it will reduce economic growth because of the negative relationship between military
spending and economic growth.
Economic growth and improving the standard of living is connected with the GDP per
capita. Increased defense spending hinders growth because increased defense spending
reduces the civilian GDP (Benoit 1978). From 1997 to 2010, it shows an increase in the GDP
per capita of the Philippines (Fig. 15). If there’s an increase in military spending, then it
takes away the budget that is more likely to help civilian development.
Conclusion
As a resource constrained developing country, the Philippines cannot afford to increase
its military spending just because of perceived external threats from China and abandonment of
military assistance from the United States. On one hand, the Philippines can allocate its entire
budget towards military spending and we will still hold no chance against the burgeoning
military might of China. Instead, we can sustain the current rate of budget allocation for military
spending and allocate these resources to other development strategies that will benefit the
civilian community. The best way to deal with China is diplomacy and finding common grounds
in the economic arena, as chances of cooperation will be much greater than the issue of
national security. The United States will remain as a major military ally of the Philippines but we
can’t guarantee on continuous military support as they are faced with their own domestic
problems (i.e. economic dilemma), basically attributed to the sustainability of their ‘war on
terror’. Increase in military spending will have a negative effect in the economic growth of the
Philippines because we are resource constrained and the shift in the government’s priority away
from high-growth projects to defense expenditure will affect prospects of development
(Frederiksen and Looney 1983, 637).
References
Benoit, Emile. January 1978. “Growth and Defense in Developing Countries.” Economic
Development and Cultural Change. 26(2): 271-280.
Correlates of War Project. 2007. Accessed October 14, 2011.
http://correlatesofwar.org/COW2%20Data/Capabilities/NMC_v4_0.csv and