`Pouring New Wine into Fresh Wineskins': Defense Spending and Economic Growth in LDCs with Application to South Korea

Abstract

A model of defense spending and economic growth, alternative to the existing ones that have been derived from neoclassical economic theories, is proposed. The new model, which attends to the distinctive conditions and structures of LDCs' political economy, is constructed by integrating key politico-economic variables tapping domestic, international, and system-level dimensions of the relationship. The model is then applied to South Korea. The findings made in this study indicate a non-significant relationship between defense spending and economic growth. It is suggested, however, that the non-significant relationship may be an indication that industrial slack has been modest in South Korea. The growth effect of defense spending may be positive when there is significant slack in the economy, or conversely, it may be negative when there is no slack in the economy. It is further suggested that the effect may manifest itself differently in different conditions of the economy even within the same economy. It may even turn non-significant when the economy is in transition from sluggish to dynamic. Thus, if the level of industrial slack determines the nature of the relationship between defense spending and economic growth, this research bridges a gap between contrasting bodies of theoretical literature on the subject. The extremes of the views may be reconcilable under a new framework that stresses the contingent nature of the relationship. Theoretical and policy implications are also discussed.