Politics, Economics, and Defense Spending in South Korea

Abstract

With the recent North Korean nuclear crisis, along with President Roh Moo Hyun’s emphasis on a self-reliance defense policy, the level of defense spending in South Korea has increased in recent years. Due to the sluggish economy, these increases in defense spending have been a cause for public concern. By developing a multilink defense-growth model based on macroeconomic theories while still accounting for political factors (such as transition from authoritarian rule to democratic government), the authors test the direct and indirect effects of defense spending on economic growth in South Korea via investment and unemployment from 1963 to 2001. The authors find that the overall impact of defense spending on economic performance is not harmful. One reason for this finding might be that high interest rates help maintain high rates of domestic savings, which prevents private investment decline. This experience may provide an important lesson to other countries