Monday, June 14, 2010

Sri Lanka's Mammoth defence budget: who would benefit?

By Ranga Jayasuriya - No doubt, Sri Lanka’s defence allocation for year 2010 is phenomenal . The government allocated whopping 201.3 billion rupees, 35 billion rupees higher than the defence allocation in the 2009 budget.

The estimated defence budget for last year was 166.4 billion rupees. But actually spending shot through the roof. The government’s actual military spending for year 2009 was 210 billion rupees, 45 billion more than its initial estimate.

Therefore, defence allocations for 2010 though reported as higher than the previous year, is marginally lower than the actual defence spending of the previous year.

However, a massive defence budget during peace time would sound outrageous to many a citizen. But, the breakdown of the defence budget itself provides the explanation. Of the 201 billion total budget, 191 billion is categorized as recurrent expenditure. Only ten billion, approximately five per cent of the total budget is allocated for capital expenditure: mainly to procure new weapons systems.
The lion’s share of the defence budget will be spent on salaries, uniforms, boots and feeding of the oversized Sri Lanakan defence forces and police, which altogether now number nearly half a million. That also explains why Sri Lanka has the highest per capita military personnel (18.5 to 1000} in South Asia.

Strain on combat capabilities

Hundred and thirty (130) billion rupees, i.e. over half of the total defence budget would be spent on the 200, 000 men strong Sri Lankan army. That Sri Lanka did not concentrate on downsizing the military forces after the war ended means that it would continue to absorb vast sum of money as recurrent expenditure on its personnel. That would, however, cut corners on the modernization program of its weapons systems. This would have a severe strain on combat capabilities of the Sri Lankan army in the 21st century, in an era of Revolution of Military Affairs (RMA) and Network Centric Warfare which have compelled the states to focus on small, smart military forces.

The relationship between defence spending and economic growth is often disputed.
Many argue it is a waste of economic resources which could otherwise be utilized in productive economic activities. However there is a dissenting opinion, supported by research data.. Perhaps the most controversial study on the relationship between defence spending and economic growth, was undertaken by Belgian defence economist Emile Benoit.

Benoit argued that the defence spending had a net- positive impact on the economies of developing countries .

.He came out with his argument after a survey of a sample of 44 Least Developed Countries(LDCs), testing the correlation between their annual military spending and annual economic growth rates.

He argued that in the LDCs in the 60s, only a fraction of resources which were not allocated for defence went to productive investment and that most of the government budget was spent on the consumption and subsidies, which were not related to increasing future production. In contrast, he argued that, money spent on the military contributed to the civilian economy in indirect ways. He admitted that “optimum civilian programs” would make a better contribution to the economy, but cautioned that one must compare defence spending with their ‘objectively probable substitutes’ and not with their optimum substitutes.

Benoit’s argument has its origin in military Keynesianism, the theory which advocates that the government should devote large amounts of funding in order to stimulate or accelerate economic growth. This is a variation of Keynesian economics advocated by John Maynard Keynes. The advocates of this theory argue that military spending would have a greater multiplier effect on the civilian economy. In addition, they argue that the military’s function as the last resort for employment, meaning that militaries recruit from the least qualified segment of the work force and provide them skills and decent living standards. They further argue that R&D of the military sector have a spin off to the civilian sector, which leads to technological innovation and increased growth prospects. Indeed, computers, radar, aviation, nuclear power and internet were invented in the military related research and development. But, in the Sri Lankan context, when a minuscule of allocation is made on R&D at defence sector, which itself is at infancy and is unlikely to grasp technological innovations,it is unlikely to have much spin off to civilian sectors.

The supporters of military Keynesianism cite Nazi Germany in the1930s which achieved high economic growth through heavy military investment as a case in point. Another example is the United States during the Regan administration which pushed for tax cuts and increased military spending. In 1984, the deficit rose to a whopping 6.2 per cent of GDP. Consequently, the economy grew by more than 7 per cent that year.

Income redistribution

Harvard Economist, Martin Feldstein recently argued that if the Obama Administration increases defence spending by 10 per cent, it will stimulate the economy and create 300,000 new jobs.

However, this is a theory which is often contested. Critics of Military Keynesianism argue that it disregards the opportunity cost and that the investment in the non-military sector would create more jobs and produce higher growth rates.
A Congressional report on military spending also states US $10 billion spent in non- military sectors created 40,000 more jobs than a same amount of investment in the military sector.

However, despite the competing schools of thought, a comparison between the net positive impact between investment in military goods and alternative social goods has not been conducted. Equally important, spin off of the military R& D is often exaggerated. While the highly industrialized economies with greater technological incline is at a position to generate greater spin off through military R &D, its impact is relatively low for the developing economies that are not in a position to grasp new technological advances.

However, there is one positive point in the Sri Lanka context, where a vast sum of defence allocation is spent on salaries That provides a decent living for large number of young men, who generally come from least qualified social segment and causes income redistribution. Money spent on salaries, therefore, will have some economic multiplier effects. However, chances are that the same investment in technological education or in a micro credit scheme would have a higher net- positive income. Therefore the debate is not over on the economic impact by defence spending.

However, empirical evidence shows that high military spending would have far reaching societal consequences.

Prolonged high military investment could lead to militarism in the society and create lasting adverse social effects, such as high crime rates, generally associated with military deserters. Heavy military spending at the expense of social welfare is bound to create social unrest and an elite military class, which is not a healthy sign for the social stability.

© Lakbima News

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