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Relationship Between Military Expenditure and Economic Growth in ASEAN: Evidence from Indonesia

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Relationship Between Military Expenditure and Economic Growth in ASEAN: Evidence from Indonesia 1 Military Expenditure and Economic Growth Relationship between Military Expenditure and Economic Growth in ASEAN: Evidence from Indonesia Tangguh Chairil, Indonesia Defense University, Indonesia Dedy S. Sinaga, Indonesia Defense University, Indonesia Annisa I. Febrianti, Indonesia Defense University, Indonesia Abstract World military expenditure in post-Cold War world shows increasing trend especially in ASEAN region; Indonesia is no exception. The trend may have been supported by the argument that military expenditure has positive multiplier effects on economic growth. Unfortunately, there have been not too many studies on the effect of military expenditure on economic growth in the Indonesia context. This paper examines the topic by first reviewing literature on the relationship between military expenditure and economic growth, then by empirically testing the causal relationship between the two variables by using the Augmented Sollow Growth Model. The result shows that Indonesia's military expenditure has positive effect on the country's economic growth, which is most possibly caused by development of human capital as effect of military expenditure. Keywords: military expenditure, economic growth, Indonesia, Augmented Sollow Growth Model Introduction expenditure at US$1,733 billion, increasing 51 percent from US$1,146 billion in 2001. In the post-Cold War world, the global One of the regions that have been strategic environment endured changes, in experiencing constant increase in military which the intensity of inter-state conflicts expenditure is the Southeast Asia. While has been decreasing while internal conflicts global military expenditure fell by more have been more emphasized. Along with than 40 percent in real terms between 1987 the end of Cold War, global military and 1997, the military budgets of the five expenditure constantly decreased from original members of ASEAN (Indonesia, US$1,613 billion in 1988 to US$1,052 billion Malaysia, the Philippines, Singapore, and in 1996. However, after 1998, global military Thailand) increased by more than 75 expenditure had been increasing again. In percent in real terms over that period. 2012, SIPRI estimated world total military According to Andrew L. Ross (1990), Indonesia military expenditure is Journal of ASEAN Studies, Vol. 1, No. 2 (2013), pp. 106–121 © 2013 by CBDS Bina Nusantara University and Indonesian Association for International Relations ISSN 2338-1361 print / ISSN2338-1353 electronic Journal of ASEAN Studies 107 determined by two types of threats: internal and Dunne (2011). In line with this, and external threats. Indonesia military Anggoro (2003) states that the relationship expenditure was fluctuating between 1988 between the military expenditure will still and 2010. Before the 1997-98 economic be a never ending debate among defense crises, the share of military expenditure in economists. the gross domestic product (GDP) had So far, the increasing trend of Indonesia already decreased from 4.2 percent to 1.5 military expenditure has been caused less percent in the previous 15 years, despite by the argument about the relationship annual GDP growth averaged to 5.5 between military expenditure and economic percent. In 1998, Indonesia military growth, and more by the needs to fulfill the expenditure increased by 38 percent in local Minimum Essential Force (MEF). MEF is “a currency from Rp4.78 trillion in 1997 to force level that can guarantee the Rp6.60 trillion in 1998. However, the drop attainment of immediate strategic defense of Indonesia’s currency exchange caused interests, with the procurement priority the military expenditure to decrease in real given to the improvement of minimum terms, from US$2.50 billion in 1997 to defense strength and/or the replacement of US$2.10 billion in 1998. outdated main weapon systems/ From 2001 to 2012, Indonesia military equipment.” In 2010-2014, Indonesia expenditure increased by 366 percent from defense sector needs approximately Rp279.8 US$1.93 billion to US$7.05 billion. It trillion, which will be allocated to decreased in 2005 and 2008, but overall it developing the MEF (Sukma, 2012). In experienced an absolute rise. In 2010, the political aspect, Indonesia military country with the biggest relative increase of expenditure is very changeable compared to military expenditure in Asia is Indonesia by other government expenditures. 28 percent, followed by Mongolia by 26 It is because most stakeholders do not percent and Philippines by 12 percent think that military expenditure will give (SIPRI, 2010). much effect on economic growth. In some This trend seems to be supported by the theories, government expenditures have argument that military expenditure has heterogeneous effect (Pieroni, 2009). The positive multiplier effect on economic effects can be either positive or negative to growth. Benoit (1973, 1978) concludes that the economic growth. military expenditure has positive The empirical phenomenon of the relationship with economic growth. constant rise of Indonesia military Eichenberg (1984), studies Germany expenditure, coupled with the various military expenditure and finds that it has arguments about the relationship between the smallest trade-off compared to other military expenditure and economic growth, public expenditures. The study shows a make the topic of the relationship in more specific factor, i.e. the positive Indonesia context very interesting. The relationship between the increase of previous studies that discuss this topic military expenditure and the urge to specifically are not widely available and increase tax revenue that can consequently only in very few number. Therefore, this be used to fund social spending. study aims to revisit the relationship Contrary to that argument, there are between military expenditure and economic also studies that show negative relationship growth in Indonesia, given new theoretical between military expenditure and economic development and newly available empirical growth, e.g. Hong (1979), Lim (1983), Deger data. (1983), Smith and Dunne (1994), Heo (2010), 108 Military Expenditure and Economic Growth Graphic 1 Indonesia military expenditure in constant 2011 USD, 1988-2012 Source: SIPRI Military Expenditure Database Literature Review First Preposition: Negative Relationship The first proposition argues that The following literature review sees military expenditure has negative effects on several theoretical and empirical studies economic growth. This relationship is that discuss the relationship between related to the Production Possibility military expenditure and economic growth Frontier model applied to the trade-off specifically and between the defense sector between the defense sector and the civilian and the economy generally. The results find sector, often termed as “guns versus three propositions: butter”. In this model, the state must choose 1. the relationship between military between two sectors to spend its limited expenditure and economic growth is resources (represented by the GDP): the significant and negative; guns (defense sector) or the butter (civilian 2. the relationship between military production). There are various explanations expenditure and economic growth is not to this proposition, which have been significant; clustered as follow. 3. the relationship between military expenditure and economic growth is Productivity significant and positive. This explanation argues that the defense sector can decrease domestic productivity, The explanation of each proposition is caused by the trade-off between the as follows. productivity of the defense sector and of the civilian sector. Hong (1979; cited in Heo, 2010), shows empirical evidence of a U.S. productivity decline due to a resource shift Journal of ASEAN Studies 109 from civilian to military use. This human resources for private industries. explanation is in line with Ward and Davis Deger (1986) similarly argues that military (1992) who find that the factor productivity expenditure diverts the limited resources of the civilian sector in the U.S. is higher away from the civilian economy. Goldstein than that of both the military and the (1988) argues that a 1 percent increase in the nonmilitary public sectors. Aizenman and defense share of Gross National Product Glick’s study (2003) also tell that the impact (GNP) in the United States reduces of military expenditure on growth is found economic growth by about 1.5 percent to be non-significant or negative. because of the opportunity costs, i.e. a Grobar and Porter (1989) study several trade-off in the budget and the bottleneck empirical literatures and uncover the effect of defense spending on capital stock. negative effect of defense spending and Cuaresma and Reitschuler (2004) also argue economic growth, e.g. Kaldor (1976), who that defense expenditure can be samples 40 least developed countries unproductive, although they provide (LDCs) for 1963-1973 and produces a insurance against wars. Dunne and Uye correlation coefficient of -0.18 between (2009) review several empirical literatures military burden and the rate of growth. and find results showing negative or There was also Lim (1983), who reexamines insignificant effects of military spending. Benoit’s analysis (that military expenditure Blond (1980) finds that the average 10 affects growth through aggregate demand) percent rise in military budget of the United for 54LDCsover 1965-1973 period within the States can reduce employment by 0.6 to 2.4 context of Harold-Domar growth model of percent.
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