Editor’s Note: This essay is a condensed version of a paper originally commissioned by the Korea Economic Institute (KEI) for its Academic Paper Series.

South Korea is currently engaged in a large-scale, expensive modernization of its military that aims to provide the country with a more robust and self-sufficient defense. The timing of this considerable increase in military spending might seem, at first glance, rather odd. Korean economic growth has been relatively anemic in the past few years. Meanwhile, the conventional military power of its chief adversary, North Korea, has steadily declined and, until recently, South Korean leaders were committed to expanding inter-Korean cooperation. In another irony, the current Lee Myung-bak administration has simultaneously pushed a much harder line on North Korea and reduced the level of spending projected by the previous Roh Moo-hyun government.

Although the North Korean threat still serves to justify military spending in the South, other rationales have gained prominence, such as perceptions of a weakening U.S. security commitment, “unspecified” threats or insecurity in the region, and the technological requirements of the Revolution in Military Affairs (RMA). But another rationale has shaped South Korean military spending, and this rationale may become even more salient during this period of global economic crisis. Successive South Korean governments have argued that growing the military and localizing production is good for the economy.

On the face of it, this economic argument makes intuitive sense. Large-scale military spending accompanied South Korea’s spectacular rise to the commanding heights of the global economy. Indeed, the defense industry in some ways led the industrialization process. “We made tanks before we made cars,” recalls Kim Jong-dae, editor of Diplomacy and Defense Focus. Today, the country’s military industry employs a little more than 20,000 people directly and more than 50,000 indirectly, and it accounts for sales of roughly $5.7 billion, including more than $1 billion in exports in 2008. These aren’t small figures. Yet critics charge that government funds could be more profitably invested in civilian sectors of the economy to better utilize research and development (R&D) funds and contribute more to economic growth. The flip side of the economic argument — that a national economic slowdown intensified by a global recession necessitates a less ambitious military modernization — has generated a different set of controversies concerning the sequencing of defense reform and the allocation of scarce resources.

Economic arguments for increased military spending in South Korea, however, are at best weak, at worst counterproductive, and, in general, irrelevant. For all the effort expended by economists and government officials to translate military spending into economic advantage, the primary rationales for the size and type of defense spending are noneconomic. Ultimately, then, the debate over South Korean military spending, whatever its economic implications, must take place at a different level of discourse.

Push Factors

When it comes to the economics of military spending — as with the economics of development overall — South Korea has been somewhat of an outlier. After many economists had concluded that high rates of military spending diverted precious investment resources in developing countries, South Korea proved to be an “interesting anomaly” as it devoted huge resources to the military and yet made almost unprecedented leaps in economic growth. After many economists had concluded that small countries couldn’t profitably maintain indigenous arms manufacturing capabilities, South Korea again proved them wrong by becoming a leading arms-exporting nation. Just as it deliberately “got the prices wrong” on economic development, in Alice Amsden’s memorable phrase, South Korea also seemed to get the prices wrong on military development, at least as it related to the economy.

From nearly its inception as a country, South Korea has devoted a significant portion of government spending to the military, as much as 6.3% of gross domestic product in 1976. This percentage declined steadily declined through the 1990s, reaching 2.5% in 2006. Despite this declining percentage, however, South Korea’s expanding economy guaranteed larger and larger shares for the defense sector, with an overall 81% increase in military spending from 1999 to 2007 (44% increase in inflation-adjusted dollars).

The latest modernization plan, launched by the Roh Moo-hyun administration in 2006, consisted of several interlocking proposals. Among these, the Korean government proposed to:

• Increase significantly its military spending — by approximately 10% a year between 2008 and 2020 — with a focus on “force improvement projects”;
• Reduce military manpower by approximately 25% by 2020;
• Localize more arms production and take advantage of “spin-on” technologies; and
• Shift budget priorities from the army to the navy and air force in order to bolster rapid-response capabilities.

The domestic factors behind these changes often came with economic justifications. For instance, advocates of the dramatic spending increases pointed to the decline in GDP percentage devoted to military spending in the 1990s, and argued that this had resulted in an insufficiently equipped and trained military. A second domestic push factor was technology. The RMA, which applied the latest information and communication technologies to the security sphere, first swept through the Pentagon and subsequently through the armies of U.S. allies. As a leader in information technology (IT) and communications, South Korea was well placed to initiate this RMA, which it did under Kim Dae-jung (and continued under Roh Moo-hyun). It relied on spin-on innovations coming from these sectors — as well as heavy machinery, shipbuilding, transportation, and aerospace — to upgrade its military capabilities. A third imperative was demographics. The South Korean army could count on approximately 400,000 draft-age young men annually from 1977 to 2003. Because of Korea’s falling birthrate, the number was expected to drop to 317,000 in 2008 and 233,000 by 2025. This stark reality informed the Defense Reform 2020 directive to reduce Korean military manpower from its level of nearly 700,000 soldiers in 2005 to 500,000 by 2020.

To address these issues of insufficiency, technology, and demographics, the Korean defense reform proposed significantly higher spending on new high-tech equipment, which would simultaneously compensate for lower military manpower, correct the downward trajectory of overall military spending as a percentage of GDP, and transform capabilities in the direction of RMA. The new capabilities, concentrated in the navy and air force, were dazzling in many respects: a blue-water navy with the first Aegis-equipped destroyers, SM-6 ship-to-air missiles, AWACS aircraft, new F-15K fighters, and Global Hawk unmanned aerial vehicles. These capabilities did not come cheaply. One Aegis-equipped destroyer alone cost the Korean government approximately $1 billion.

The Defense Reform 2020 plan wasn’t implemented quite as planned. Not surprisingly, the army resisted the cutbacks in manpower and the preferential treatment accorded the navy and air force. Conservatives wanted to refocus on the North Korean threat rather than on regional insecurity. Critics complained that the Roh government based its projections on the unlikely prospect of GDP growth continuing at a 7% rate, and the Korea Institute for Defense Analyses (KIDA) recommended reducing budget increases on the front end in favor of greater increases down the line. One side claimed that the increases were not sufficient for “true military self-reliance.” The other side — progressive groups outside the administration and the Ministry of Planning and Budget from within — complained that the military spending increases were too high.

In the end, economics proved decisive. Roh, on discovering that there simply weren’t enough funds to cover his proposed changes, reduced the average increases from roughly 10% annually to roughly 8% in 2006. Lee Myung-bak, on taking power, reduced the 2009 budget figure further to 7.5%, with at least a partial restoration of emphasis on the army to counter the North Korean threat. The global financial crisis, in depressing South Korean growth rates even more, may contribute to these downward pressures.

The Role of North Korea

The external pull factor that has traditionally served as the rationale for increases in South Korean military spending is North Korea — though actual military increases rarely corresponded to specific improvements in North Korean capabilities. Nevertheless, the country that once could match South Korea in spending and capabilities was but a shadow of itself by the 1990s.

Even though it continued to allocate a large percentage of government spending to the military (somewhere between 14-33%, depending on whether you listen to Pyongyang or Washington), and even though its defense budget has been rising in absolute terms (to around $470 million in 2006), North Korea has simply not been able to keep up. A country spending approximately half a billion dollars on defense each year can’t compete with one spending more than $20 billion. Indeed, it’s been evident since the late 1990s that “the South is far superior to the North in military as well as overall capabilities,” which a focus on bean counting (numbers of soldiers, numbers of tanks) often obscures. Moreover, whereas North Korea might have been able to count on allies to make up the difference in capabilities in the 1970s and 1980s, those allies shifted into neutral in the 1990s — at least on the issue of supporting any North Korean military offensive. In addition to the decline in North Korea’s conventional capabilities, the two Koreas began an intensive process of rapprochement in the late 1990s. By 2004, South Korea stopped labeling North Korea as its “main enemy” in its defense white papers. And the Roh administration launched its Defense Reform 2020 plan “amid expectations that the North Korean military threat would be decreased further.”

Even under Roh Moo-hyun North Korea retained a measure of threat. In its 2006 white paper, the Korean government argued that “North Korea’s conventional forces, its nuclear test, weapons of mass destruction and the forward deployment of troops are a serious threat to our security.” South Korean military officials worried about North Korea’s “asymmetrical capabilities,” namely weapons of mass destruction and artillery pieces within range of Seoul. And the Lee administration, with its traditional view of North Korea, has amplified the rhetoric on the importance of combat readiness.

But neither North Korea’s declining capabilities under the two Kims, nor rapprochement under Roh, nor more aggressive rhetoric under Lee appears to have had the direct effect on the levels of South Korean military spending that one might expect from the Cold War dynamic on the Korean peninsula. South Korean spending went up in the first two cases — and most dramatically at precisely the time of greatest rapprochement — and moderated in the last case. To understand the dynamics of South Korean military spending, we must look to other external factors.

The U.S. Factor

Chief among these has been the United States. Significant spikes in South Korean military spending have occurred three times in South Korean history, each one corresponding with perceived or actual changes in U.S. defense posture in the region. The first, Park Chung-hee’s emphasis on a self-reliant defense, came in the wake of U.S. troop reductions pushed through by President Richard M. Nixon in the early 1970s. The second came at the end of the 1980s when Roh Tae-woo used similar language — the “Koreanization of Korean defense” — in response to U.S. military transformation at the end of the Cold War. Finally, the efforts by Kim Dae-jung and particularly Roh Moo-hyun have represented a third wave in Korean military spending, again a modernization effort in response to U.S. global force transformation.

In this most recent modernization, the drawdown of U.S. troops, the relocation of U.S. bases, the removal of the U.S. trip wire, and the handover of wartime military control — changes largely planned since the 1990s but accelerated during the tenure of Secretary of Defense Donald Rumsfeld — all contributed to intensifying fears of entanglement prominent among Roh Moo-hyun supporters and raising fears of abandonment. South Korean officials began to look into acquiring many, if not all, of the high-tech capabilities provided by the United States in order to fill the anticipated gap. As military analyst Hamm Taik-young points out, the traditional “division of labor [was] between U.S. software and Korean hardware.” So, South Korea rushed to acquire surveillance and command, control, computers, communications, and intelligence (C4I) capabilities. But in the alliance relationship, the United States has also traditionally provided naval and air force power, while South Korea has concentrated on the army. In its modernization, then, South Korea also began to beef up naval and air power (KDX-III, F-15K), and army firepower (self-propelled artillery). The shift in wartime military control created additional anxieties that U.S. forces — such as battle groups — would be either unavailable or delayed if requested by South Korea in an emergency. This anxiety persisted despite arguments that, although the shift in wartime control would weaken alliance cohesion, “it would not necessarily trigger a reduction and withdrawal of American forces.” Gen. Walter Sharp’s recent reassurances about U.S. commitments and capabilities did little to assuage these anxieties, since Washington is simultaneously planning to transfer 40 Apache helicopters from South Korea to Afghanistan, forcing Seoul to consider additional helicopter purchases to compensate for the loss.

The United States influenced South Korean military spending in other ways as well. There are the costs of the alliance in general (South Korea will pay 760 billion won in 2009 for joint operations and will increase its share each year until 2013) and the ongoing base relocation in particular (South Korea will pay 5.59 trillion won for the Yongsan relocation while the United States will provide 4.4 trillion won). Then there is the cost of maintaining the interoperability of allied forces through the import of U.S. military goods. In 2007, South Korea bought about $900 million worth of arms, 95% of which came from the United States. This figure will likely grow as the U.S. Congress recently upgraded South Korea’s military procurement status to the level of Australia, New Zealand, Japan, and NATO members.

The United States has used interoperability as a way to influence South Korea’s purchasing decisions, for example, twisting arms to persuade South Korea to purchase Boeing F-15Ks rather than French Rafales or Russian Sukhoi Su-35s. Also, as the United States upgrades its forces in line with RMA, South Korea has no choice but to do the same, for the dance partner who fails to follow the lead will eventually be exchanged for another. These overall alliance costs fall into the category of “asset specificity,” namely the capabilities that have built up over the course of the U.S.-ROK military alliance and that require continual funding to sustain. Also part of the economic equation is the large amount of money that United States Forces Korea has directly contributed, through purchasing, to the Korean economy.

North Korea and the United States aren’t the only external factors behind South Korean military spending. Most controversial are the “unspecified threats.” At least with North Korea and the United States, the drivers of military spending increases provide some target figures: balancing North Korea’s defense spending or capabilities, compensating for the loss of U.S. troops or technology. Unspecified threats — like countering terrorism, protecting sea lanes for commercial shipping, or preparing for potential conflicts with China or Japan — form an open-ended category. “This is the problem,” says Suh Choo-suk of KIDA. “How much sufficiency do we need to face unspecified threats?” According to Kim Jong-dae, some conservatives within Korean society have grander ambitions: “‘Why are we only thinking about North Korea, why don’t we become a superpower?’ they ask. That acts as a reason for developing the air force and navy.”

Domestic Impact of Military Spending

A battle has raged in the academic literature for the better part of 50 years over the economic impact of military spending. Those who advocate the advantages of military spending focus on the boost to employment, the contribution to infrastructure development, and the effect of scientific and technological spinoffs on the civilian economy. Those who focus on the disadvantages point to the way the military establishment monopolizes capital and robs the private sector of additional opportunities to grow.

South Korea has no shortage of studies on the impact of military spending on the economy. Some show a positive relationship between government investment in the economy and overall economic performance — economic growth, after all, took place during a period of large military budgets. Others assert that a shift from military to nonmilitary expenditures would stimulate economic growth because nonmilitary government expenditures produce a net positive gain. Finally, some studies assert that military spending has very specific negative effects within South Korea, such as excessive investment in the chemical industry in late 1970s, greater waste and inefficiency, inflationary pressures, a ratcheting up of debt through foreign purchases, and an increase in the tax burden at the expense of the savings rate. In general, the studies suggest that whatever advantages military investments offers to the overall the economy are minimal and overwhelmed by the opportunity costs of not investing in the civilian sector.

Central to any self-sufficient military is an indigenous capacity to produce arms. Korean firms now make a range of products. These include the K-1 tank, the KDX destroyer, surface-to-air missile systems, short-range ballistic missiles, and the K-9 howitzer. Between 2001 and 2007, when the Korean government focused investments in the IT sector, localization rates in defense sectors connected to IT and telecommunication rose from 72% to 85%. A similar rate increase took place in precision guidance weapons, but there was a slight decline in the rate for aerospace.

Still, after enormous effort, South Korea is not self-sufficient in arms production, except in a couple areas (small arms, ammunition, and armored vehicles). “Even after more than 30 years of significant public and private inputs in infrastructure and technology, South Korea still possesses only limited capacities for self-reliant arms production,” conclude military analysts Richard A. Bitzinger and Mikyoung Kim. “In general, indigenous arms production has turned out to be neither technologically feasible nor cost-effective.” But that hasn’t stopped South Korea (and many other countries) from pursuing this chimera.

Indigenous arms production, however, doesn’t simply reduce the costs of foreign inputs. It can also boost the economy through exports, a particular focus of Roh Moo-hyun. In 2006, Korean foreign military sales amounted to $250 million. By 2008, the figure had grown to more than $1 billion. These sales have included aircraft to Turkey, Indonesia, and the Philippines as well as warships to Malaysia. Arms exports allow manufacturers to reap greater economies of scale, gain necessary hard currency, and increase employment in the defense sector. They also raise the capacity of Korean defense industries, which operated between 1999 and 2004 at a roughly 50% rate compared with an industry average around the world of roughly 80%.

Finally, there’s the political impact of the industry. Under Park Chung-hee, the military’s importance was not only in external deterrence but internal regime legitimacy. As a cornerstone of state power, the Korean military helped maintain the machinery of the coercive state. But with democratization, defense spending became more externally focused even as it remained concentrated in a few businesses. Today there is some disagreement over whether a proper military-industrial complex has emerged in South Korea. “Defense contractors have very limited influence,” Moon Chung-in argues. Instead of responding to pressure from the defense industry, Kim Jong-dae says, “the Korean air force thinks about demand while reading U.S. catalogs.” But military analyst Suh Jae-jung identifies the emergence of a “dense network between the government, the military, and the defense industry” that depends on government largesse, is staffed via a revolving door (326 retired officers working in defense industries in the mid-1990s), and is facilitated by research centers both inside and outside academia. All of this created a strong constituency that lobbied for more military spending, particularly if it meant lucrative contracts that relied on indigenous spin-on technologies.

What Kind of Modernization?

As a result of the global economic crisis, government budgets around the world are shrinking. In Northeast Asia, however, the military portions of the governments seem to be shrink-proof. “Japan, Taiwan and South Korea could resist major cuts in defense spending in the short term due to commitments to ‘recapitalizing their militaries,'” according to Richard Bitzinger. China, too, is better positioned to maintain the pace of its military spending because it, alone among industrial powers, is still anticipating significant, though reduced, growth next year.

The South Korean economy during the fourth quarter of 2008 contracted for the first time (on a year-on-year basis) since the onset of the Asian financial crisis. Yet Defense Reform 2020 is proceeding with only modest changes. Lee Myung-bak has already signaled that he is taking an “economy first” approach by focusing on job creation in the defense sector, boosting arms exports, substituting imports for domestic production (such as buying used Apache helicopters), trimming unnecessary spending, and extending the timeline to 2025. The Defense Ministry also plans to increase the number of conscripts doing alternative service in industrial firms, build new apartments for service members, and apply new Green guidelines to military construction projects. As such, South Korea is edging toward a form of military Keynesianism: using defense subsidies to keep factories humming. The government is likely to employ other economic arguments as well, such as asserting that military spending produces the stable environment necessary — particularly at a time of more aggressive North Korean rhetoric — for attracting foreign direct investment.

The evidence, however, that government investments in the military — at a time of plenty or paucity — are the best growth stimulus is quite weak. Military investments produce jobs and some spinoff technologies. But other government investments contribute more to economic growth. Localization, meanwhile, doesn’t make strict economic sense, given the opportunity costs. Arms exports, although they reduce the costs of localization through economies of scale and boosting the operating capacity of defense sector manufacturing, put South Korea in a difficult position of muscling into a highly competitive field. Arms exports often come with strings — such as reciprocal purchases. Moreover, given the arms race dynamic in the region, government investments even into potentially lucrative arms export sectors can be counterproductive. And armaments, as the United States discovered with al-Qaeda, have a tricky habit of ending up in the hands of those against whom increased military budgets are intended to protect.

Ultimately, however, these arguments based on economic rationales are irrelevant. The Korean government has ignored economic feasibility in the past when allocating money to the military. The push for localization has more to do with nationalism than economic necessity (and echoes North Korea’s vain efforts to achieve food self-sufficiency). Many of the specifically economic arguments — such as the necessity of devoting a certain percentage of the GDP to the military — are arbitrary. Government subsidies of the military, as evidenced by the “national security exception” in free-trade agreements, lie outside the realm of so-called economic laws.

If the economic arguments for increasing military spending are either weak, counterproductive, or irrelevant, why should South Korea continue with Defense Reform 2020, particularly at a time of global economic crisis? Countering North Korea doesn’t require such an upgrade. Replacing U.S. capabilities is sensible — if indeed the United States plans to pull out — but only defers the question: What are all the new weapons for? South Korea cannot compete with Japan, China, or Russia militarily — certain aspirations to superpower status notwithstanding — and its own modernization plans may only encourage greater spending among its neighbors.

From the perspective of comparative advantage, then, South Korea should focus on its “soft power,” which has garnered accolades from both within and outside the country. And it should focus government investments not on the military but on the “green” stimulus that Lee Myung-bak has launched. South Korean diplomacy and green technology: Such smart power makes more economic — and geopolitical — sense than preparing to fight last century’s wars or helping to create the future insecurity that Defense Reform 2020 was meant to address.

The author would like to thank Jae-Young Lee and Young-Jae Hur for their research and translation assistance; the experts in Seoul who agreed to be interviewed for this paper (with special thanks to KIDA for providing statistical information); and Park Kun Young, Kim Jong Dae, and Kim Taeho for reading and commenting on an earlier draft.