Defense Spending and Economic Growth in South Korea: The Indirect Link

Due to the lingering food crisis, speculations about the collapse of the North Korean regime have intensified in recent years. The collapse of the North Korean regime is expected to generate a tremendous economic burden on the South Korean economy. Moreover, the current economic crisis in South Korea requires a tight fiscal policy. Thus, on the basis of the peace dividend argument, some suggest that South Korea should reduce its military expenditures to prepare for the upcoming extra economic burden. For this reason, the economic effects of defense spending on growth in South Korea are a significant concern for policymakers as well as scholars. I examined the economic effects of defense spending on growth in terms of time and magnitude by investigating the direct effects as well as the indirect impacts (via investment and export) of military spending on economic growth. A three-equation econometric model was specified and empirically tested using South Korean data for 1954-95. The findings of this study reveal that the overall economic effects of defense spending on growth are negative although they seem to be indirect or delayed.