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).

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*All line graphs were generated from http://www.barchart.be/xychart.jsp