Military Spending in Guatemala: The Fiscal and Microeconomic Impact: 1969-1995 Thomas Scheetz
II. Military Expenditure, Economic Development and Social Spending 1. Methodology and Political Implications
Due to the lack of complete data on the public sector in Guatemala, only actual expenditures by the central government were examined. The objective was to calculate the direct economic impact of the armed forces on the Guatemalan economy, particularly on public finances, which is officially documented in actual budgetary commitments. For purposes of this study, the military spending figures cited include direct spending (budgetary commitments) for the public sector in Guatemala derived from the provision of the public good of external defense. This spending can be broken down as follows:
i) All labor costs, both for military and civilian personnel involved in the provision of defense
ii) Operations and maintenance
iii) All acquisitions of military equipment
iv) Military research and development
v) Military construction (when more than 50 percent of its economic end use is linked to the provision of defense)
vi) Military pension funds provided by the National Treasury, e.g., transfers to the Military Pension Institute
vii) Costs incurred by military attachés and secret missions, e.g., confidential military expense accounts
viii) International contributions to military institutions e.g. the Permanent Commission of Central American Armies (COPECODECA)
ix) Civil defense (if its purpose is primarily military)
x) Military public relations programs
xi) Military health and education institutions
xii) Military intelligence, e.g., the "Office of Radio Communication Services"
xiii) Civil-military programs dominated by defense (for example, a radar system used principally by the air force)
Undeniably, certain aspects of this definition (for example, military education, health and pensions) could legitimately be seen as a social expenditures. However, our principal interest is to examine the total direct spending associated with the provision of defense; clearly these services are administered by the military and are more onerous for the treasury than similar services financed for other citizens.
2. Macroeconomic Effect of Military Spending
a) The macroeconomic debate: the effect of military spending on development
Without question, military spending, security and economic development are interrelated variables. However, the empirical nature of this relationship, particularly the impact of military spending on the economies of developing nations, was the subject of ample academic debate during the 1970s and 1980s.
On the one hand, it was argued that military spending stimulated economic growth like any other fiscal expenditure (a typically Keynesian argument). Moreover, claims were made that military spending benefited the economy in other ways, for example, through training recruits for future insertion into the labor market and by providing an important boost to the modernization of the economy through technologically advanced defense industries, the construction of highways and other infrastructure. In addition, the military was said to promote entrepreneurial leadership qualities in its personnel, presumably scarce among civilian elites.
The other side of the debate argued that, while under certain circumstances the military institution could contribute to development, in the vast majority of underdeveloped countries the net effect of military spending has been to retard development. This is due to the fact that military expenditures lack a rate of return on its budgetary outlay. While a tractor, for example, contributes to the grain harvest and a teacher helps increase a country's human capital, a tank does not add anything to economic growth (except for its function as part of an "insurance policy"). On the contrary, the tank is a burden that the economy must bear. While defense industries could contribute to economic growth in the developed world, developing countries that import arms manufactured in wealthier countries create a negative burden for their economies' external sector, especially so in cases where debt is incurred to purchase arms. Thus, instead of facilitating national development, military spending would have exactly the opposite effect.
Academics today have largely reached a consensus regarding the global effects (that is, abstracting from regional or country-specific nuances) of military spending in developing countries. Without denying some beneficial effects, most economists accept the conclusion that military spending generally has had a negative effect in developing countries. As will be seen later, the results of this study tend to support this position in the specific case of Guatemala.
This debate took place almost exclusively at the empirical level using econometric models. A model is a way of formulating the most varied economic relationships found in a country by means of a system of simultaneous equations. Despite the usefulness of this tool, all econometric results must be interpreted with a certain amount of caution, especially those regarding underdeveloped countries. Even while the results may seem mathematically precise, they must be interpreted as indicators of general trends and not as exact figures.
b) Macroeconomic impact of military spending in Guatemala
Our analysis of the macroeconomic impact of military expenditure in Guatemala during the last 27 years (1968 to 1994) presupposes that the impact of this spending could be positive or negative, depending on the specific historical way in which the armed forces were organized and have spent resources. In this regard, we have no theoretical reasons a priori to suppose that the net effect of military spending on the economy will be negative.
Our model consists of 11 simultaneous equations that demonstrate relationships between military spending and consumption per capita, investment in fixed capital, the stock of capital, imports and exports, Gross Domestic Product (GDP), the production function, exchange rates, the price of Guatemalan exports, and internal prices in Guatemala.
Although the econometric model is still being completed, the conclusions obtained so far are robust: military spending in Guatemala has had a negative effect on imports, exports and GDP growth during the last 27 years. The theory that underlies the negative effect on imports suggests that, by using up limited foreign currency reserves, military spending reduces the capacity to import consumer or capital goods for other sectors of the economy. This is the case even after setting aside other more indirect impacts on imports, such as that from the negative effect of military spending on investment. Along with the direct consequences of the civil war, the negative effect of military expenditures on exports probably results from the direction of capital investment away from the creation of competitive national industries with the capacity to sell competitively on the global level. In a similar way, the negative effect on GDP seems to be a direct result of a decline in national investment caused by the war and the levels of military spending. Investment provides the capital equipment which, together with labor, produces the GDP. If no investments are made in capital goods (such as machinery), the economy will not grow and employment levels will not increase. These significantly negative effects are quantified in all the equations.
Some readers may think that the study's results are obvious, but this is not true strictly speaking. While the civil war certainly had harmful economic effects, it is also conceivable that the presence and the power of the army could have created a climate of confidence for many investors (e.g., as occurred in Argentina and Chile in the late 1970s). However, even when taking into account that possibility, it can be argued that the net effect of Guatemalan military expenditure was harmful to the economy from 1968 to 1994. During those years, military expenditures took scarce resources away from the productive sector of the economy without compensating this with a positive contribution (e.g., by creating a secure environment for other investors) sufficient to counterbalance its high economic costs.
3. Fiscal Effects of Military Spending on Guatemala: Analysis of Fiscal Spending
a) Displacement of social spending
A second debate, partially related to the first, concerns the effect of defense expenditures on other types of public spending. For purposes of this investigation it was particularly important to study displacement of social expenditures (health, education and other kinds of social spending) by defense spending. In other words, we examined the competition between defense and other sectors for scarce fiscal resources.
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