Download An Analysis of Defense Expenditures

Annex 2
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PEACE DIVIDEND ANALYSIS OF MILITARY DEMOBILIZATION
A. Introduction
1.
Background. Cambodia’s two recent attempts at demobilization have not materialized. In 1993,
the four fighting factions were to unite and demobilize from a unified army under UNTAC supervision.
The eventual refusal of the Khmer Rouge to participate in this program led to incomplete demilitarization
and in fact prolonged the armed conflict. In 1995-96, the government prepared the comprehensive
Cambodia Veterans Assistance Program (CVAP) which also foresaw the reintegration into civilian life of
several thousand Khmer Rouge defectors. Owing to the political turbulence that led the July 1997 events,
the CVAP has yet to be implemented.
2.
As a result of these two aborted demobilization attempts, defense continues to absorb a large
portion of government resources, thereby preempting developmental expenditures. Table 1 clearly
demonstrates the very high portion of defense expenditures compared with other countries.
Table 1: Central Government Budget - International Comparison 1/
Country
Cambodia
India
Syria
Yemen
Turkey
Philippines
Guatemala
Croatia
Defense (%) Social (%)
44.4
14.5
28.2
30.3
15.8
10.6
15.2
21.1
21.7
11.9
26.8
30.8
21.6
26.3
38.4
60.9
Def./soc.
2.04
1.22
1.05
0.98
0.73
0.40
0.40
0.35
Country
Cameroon
Mongolia
Malaysia
Kenya
Albania
Ghana
Indonesia
Sri Lanka
Defense (%) Social (%) Def./soc.
9.4
11.5
12.7
6.2
7.1
4.9
6.2
2.6
29.0
38.8
48.0
27.1
40.2
42.3
70.4
46.2
0.32
0.30
0.26
0.23
0.18
0.12
0.09
0.06
1/ For other countries, data are for 1995 or the most recent year; for Cambodia, data are for 1995.
Source: World Bank, World Development Report 1997.
3.
Objective. The objective of this Chapter is twofold. First, defense expenditure is analyzed in
relation to key economic and financial data to assess the importance of reining and rationalizing defense
expenditure in economic development, thereby identifying a financial rationale for demobilization.
Second, the dimensions and financial benefits of implementing the CVAP are investigated under
different demobilization scenarios, from a comparative static and a dynamic vantage point. The aim is to
assess the long-term sustainability of military restructuring relative to economic development.
4.
Data Sources. Accuracy in military expenditure data in developing countries is almost always
an elusive goal. Military investment often bypasses the official budget. The size of the army is frequently
overstated by the military so that certain individuals can benefit from payments to “ghost soldiers”.
Where average army wages are low, such overstatement may be a deliberate decision by unit
commanders to enable them to more properly feed and house their troops. In Cambodia, the government
budget does not include military investment data, and no attempt is made here to trace any such possible
expenses. This chapter deals with recurrent data only.
5.
Three main sources are used for analysis: (i) staff estimates and projections of GDP and other
macroeconomic data based on data provided by the government; (ii) the government’s official budget
data; and (iii) data on army size and remuneration by rank from the Royal Cambodian Armed Forces
-64(RCAF). Not surprisingly, deviations--sometimes substantial--arise during the comparison of data
analyzed from these three sources.
6.
Particular uncertainty pertains to the size of the army, which is officially estimated in early 1998
to have been over 138,000. However, the identification and registration process planned under the CVAP
has not yet been initiated. Hence, actual numbers may be higher (in particular when local militia have
been included) or lower. As a result of such data limitations, this discussion is not intended to be precise
in its estimations. Rather, it attempts to give indications of the order of magnitude as much as possible.
B. Analysis of Defense Expenditure
7.
Throughout the 1994-97 period, recurrent defense expenditure decreased in real terms, from CR
392 billion in 1994 to CR 305 billion in 1997 (in 1997 prices). This decrease is almost entirely due to
the reduction in non-wages, whereas wages essentially remained constant at an average of around CR
200 billion. Between 1994 and 1997, non-wages declined from CR 194 billion to CR 96 billion. In
relative terms, the share of wages and non-wages in the recurrent defense budget changed from 49.5
percent each in 1994, to 66.5 percent for wages and 31.4 percent for non-wages in 1997. This reduction
reflects the RCAF's intention to maintain, to the extent possible, the troops while suspending many
administrative functions (Table 2).
Table 2: Recurrent Defense Expenditure
(millions of riel in 1997 prices)
Salaries and indemnities
Administration
Public interventions
Total
1994
1995
1996
1997
194,103
194,008
3,728
391,839
223,143
153,763
4,446
381,352
197,196
114,489
6,545
318,230
202,567
95,556
6,620
304,743
Source: Data provided by the government.
8.
The share of national defense in the government’s recurrent expenditure has been decreasing
fairly steadily. National defense accounted for 37.3 percent of total recurrent expenditure in 1997, down
from 46.4 percent in 1994. Combined, public security and national defense reached a staggering 58.6
percent in 1994, and remained above 50 percent throughout the period. Over 1994-97, the share of
national defense in GDP decreased from 5.0 percent in 1994 to 3.3 percent in 1997.
9.
In 1997 the share of social and economic services in the government’s recurrent budget reached
23.5 percent and 7.5 percent, respectively. Combined, they reached only about 80 percent of defense
spending that year, up from almost two-thirds in 1994. Similarly, defense expenditure in real terms per
person decreased from around CR 40,000 in 1994 to CR 29,000 in 1997 (Table 3). Yet, defense’s
importance remains striking. Comparing recurrent defense expenditure to the government’s fiscal
situation, recurrent defense expenditure represented, on average, over 60 percent of the overall deficit
during the 1995-97 period. (It should be noted that these expenditures included some spending of social
and economic nature such as allocations for the families of defected Khmer Rouge soldiers and
infrastructure rehabilitation for them.) Overall, total recurrent expenditure decreased from CR 861
billion in 1996 to CR 816 billion in 1997. Noteworthy in this respect is the nominal increase of 4.4
percent in 1997 in defense expenditure when social services and economic services decreased by 3.8
-65percent and 16.9 percent, respectively, reflecting the events of July 1997 and the subsequent increase in
the officially estimated size of the RCAF from 125,000 in 1996 to 138,000 in 1998.1
Table 3: Defense and Social/Economic Services
Defense/GDP
Social Services/GDP
Economic Services/GDP
Defense/Social Services
Defense/Economic Services
Defense/Social and Economic Services
Real Per Capita Defense Expenditure (riel)
1994
1995
1996
1997
5.0%
2.3%
0.8%
4.5%
2.2%
0.7%
3.6%
2.4%
0.9%
3.3%
2.1%
0.7%
2.2
6.2
1.6
2.0
6.2
1.5
1.5
4.0
1.1
1.6
5.0
1.2
39,984
38,135
31,199
29,023
Source: Staff estimates.
10.
Defense wages and Non-wages. Army wages include a salary and a variety of indemnities: (i) a
20 percent bonus on the base wage, which differs by rank; (ii) monthly child and spouse allowances; (iii)
a daily food allowance; (iv) a monthly rice ration; and (v) an annual clothing allowance. All allowances
and rations are independent of rank. A socioeconomic profile developed in 1995-96 in the preparation of
the CVAP determined that a soldier has on average 2.8 children and that two-thirds of soldiers are
married. With these assumptions and using RCAF data, per capita allowances and rations, monetized,
amount to CR 805,500 annually.
11.
This amount compares to median salaries (including bonus) of CR 820,800 for generals and CR
300,960 for privates. Because of the substantial allowances and rations, the official wage structure is
fairly egalitarian, with median annual wages ranging from CR 1.6 million for generals to CR 1.1 million
for privates. The total wage bill amounts to an estimated CR 163 billion, leading to an average wage of
1.2 million annually.2 This compares with an estimated CR 867,000 per capita GDP in 1997. The
average family size as determined by the socioeconomic profile was 4.5. If a soldier was the sole
breadwinner in a family, his wage would be abysmally low and completely insufficient to cover daily
needs.
C. Cambodia Veterans Assistance Program
1 An estimated 20,000 Khmer Rouge fighters have joined the RCAF since the short civil war in 1997. The
number of FUNCINPEC soldiers currently in exile or in the bush as well as the remainder of the Khmer Rouge is not
known. Hence, the figure of 138,000 may be more an indication of the potential maximum size of the RCAF with all
groups incorporated, rather than its actual strength.
2 Comparing budget and RCAF data leads to an interesting observation. Using RCAF data, the wage bill amounts
to CR 163 billion whereas salaries and indemnities as reported in the budget amounted to 203 billion in 1997. The
budgeted average wage is thus CR 1.5 million, or one-quarter higher. Possible explanations for this difference, which
cannot be clarified from either source, may include: the inclusion in the budget (but not in the RCAF) of local
militia, a change in the socioeconomic profile of RCAF soldiers, an underestimate of the official RCAF size (up to a
maximum of 34,100), and/or the diversion of funds to other uses (up to a maximum of CR 40 billion). Using budget
data it is also interesting to note that the average wage decreased from CR 1.6 million in 1996 to approximately 1.4
million in 1997, given the absorption of defected Khmer Rouge fighters.
-66-
12.
The CVAP foresaw the demobilization in three phases and the subsequent reintegration into
civilian life of 40,000 RCAF soldiers as well as the reintegration of 3,000 additional Khmer Rouge
defectors. The program included the provision of a transitional safety net (“departure allowance”) for the
most critical reinsertion phase as well as support for their social and economic reintegration, with a focus
on the disabled and chronically ill. The total departure allowance was calculated at CR 2.25 million per
soldier (US$900 at 1996 exchange rates), irrespective of rank or years of service. On a per capita basis,
these US$900 would have placed a veteran’s family in the upper fourth decile of the country’s income
distribution scale. Total program costs were estimated at US$72.7 million. The government remains
committed to the CVAP as a sign of both demilitarizing society and restructuring public expenditure
toward productive purposes.
13.
Scenarios. Using the parameters of the CVAP, the program would reduce the RCAF by 43,000,
from 138,500 to 95,500 (Scenario 1). The current rank structure is biased in favor of higher ranks;
hence, demobilization would reduce the number of generals and commissioned officers by almost 29,000.
In comparison, the ranks of non-commissioned officers and privates would be reduced by only 14,000,
increasing their share in the post-demobilization RCAF to almost three-quarters. However, the events of
1997/98 led to the defection of Khmer Rouge fighters and their subsequent incorporation into the armed
forces. Hence, the CVAP requires updating, especially regarding the number of soldiers (and defectors)
to be demobilized. For illustrative purposes, therefore, an additional analysis was undertaken, assuming
the demobilization of 78,300 soldiers, to reach a force of 60,200 (Scenario 2). The calculations for both
scenarios and methods assume that wage and non-wage costs per soldier do not increase in real term as a
result of demobilization.
14.
Methods. The budgetary impact of both scenarios is calculated using two methods: (i) a static
analysis and (ii) a dynamic analysis. The static analysis presents a hypothetical case which assumes that
other government expenditures remain constant. It determines the effect of military downsizing if the
CVAP were implemented within one year. Though unrealistic, the static analysis provides an illustration
of the budgetary savings had demobilization occurred in 1997. The dynamic analysis traces the impact
over time to assess the long-term sustainability of military restructuring. As planned in the CVAP, both
scenarios are calculated using three phases of demobilization over a three-year period. The assumed
demobilization calendars are as follows: (i) 15,000 in 1999, 15,000 in 2000, and 13,000 in 2001; (ii)
25,000 in 1999, 25,000 in 2000, and 28,300 in 2001. In both cases, it is assumed that the lower ranks
would be demobilized first, and that generals and commissioned officers would not be demobilized
before 2001. Furthermore, each phase of demobilization is assumed to be undertaken at the beginning of
the respective year.
D. Static Impact Analysis of Military Demobilization
15.
Under Scenario 1, other things being equal, after completion of the demobilization exercise,
annual savings in the government’s wage bill would amount to CR 52 billion, using RCAF data.
Reducing non-wage costs proportionally (i.e., keeping total per capita costs constant at predemobilization levels) would reduce expenses by another CR 44 billion, resulting in an overall savings
(“peace dividend”) of CR 96 billion, or 11.8 percent of the total 1997 recurrent budget (1.1 percent of
GDP). Post-demobilization defense expenditure would amount to CR 208 billion. Using the 1997 budget
and assuming the savings from demobilization are used to increase spending on general (1/4), social (1/2)
and economic (1/4) services, the share of the recurrent defense budget in total government expenditure
would be reduced to 25.5 percent. Other things being equal, the recurrent defense budget’s share in GDP
(base 1997) would decrease to 2.3 percent. The ratio of defense expenditure over social and economic
services combined would decline to 0.6 (Table 4).
-67Table 4: Static Impact Analysis
(millions of riel)
1997
General Services 1/
Defense and Security
National Defense 2/
Public Security
Social Services 1/
Economic Services 1/
Other
Total
Defense/Social & Economic Service (ratio)
Defense/GDP (base 1998)
136,088
419,336
304,744
114,592
189,700
61,310
9,576
816,010
Share
Scenario 1 Scenario 2
(%)
(%)
(%)
16.7
19.6
22.0
51.4
39.6
30.1
37.3
25.5
16.1
14.0
14.0
14.0
23.2
29.2
33.9
7.5
10.5
12.8
1.2
1.2
1.2
100.0
100.0
100.0
1.2
3.3
0.6
2.3
0.3
1.4
1/ Savings from demobilization are used to increase services.
2/ Post-demobilization per capita costs are constant.
Scenario 1 (2): demobilization of 43,000 (78,300) soldiers.
Source : Staff estimates.
16.
Under Scenario 2, other things being equal, reducing non-wage costs proportionally, the peace
dividend would amount to approximately CR 173 billion, and the share of national defense in the total
recurrent budget would decrease to 16.1 percent, a reduction of 21.2 percent compared with predemobilization recurrent expenses. The post-demobilization share of national defense in GDP (base
1997) would decline to 1.4 percent, and the ratio of defense expenditure over social and economic
services combined would decline to 0.3.
E. Dynamic Impact Analysis of Military Demobilization3
17.
Scenario 1: 43,000 soldiers. With per capita costs constant, the share of defense in total
recurrent expenditure would decrease from 37.3 percent in 1997 to 16.0 percent in 2002. Defense
expenditure would decrease by over 10 percent annually during the period 1999-2001, finally reaching
CR 210 billion in 2002. The non-defense budget would increase on average by almost one-third during
the same period and would amount to CR 1,104 billion in 2002. The demobilization of 43,000 soldiers in
three phases would reduce the recurrent deficit by 36.6 percent in 2000 and 49.1 percent in 2002, with
per capita costs constant. (Table 5).
18.
Scenario 2: 78,300 soldiers. With per capita costs constant, the share of defense in total
recurrent expenditure would decrease from 37.3 percent in 1997 to 10.1 percent in 2002. Defense
expenditure would decrease by on average almost one-quarter annually during the period 1999-2001,
finally reaching CR 132 billion in 2002. The non-defense budget would increase by on average over onethird during the same period and would amount to CR 1,181 billion in 2002. The demobilization of
78,300 soldiers in three phases would reduce the recurrent deficit by 60.9 percent in 2000, with per
capita costs constant. (Table 6).
3
The dynamic impact analysis is based on the high case scenario, which presupposes the implementation of the
CVAP. Preliminary figures for 1998 indicate a stagnant real GDP and a stark decline in real government
expenditure. Compared to the budgeted amounts, defense spending already crowds out other civilian expenditure. It
is assumed throughout the dynamic impact analysis that defense expenditure would ultimately reach the level of
1997, whereas non-defense expenditure would bear the necessary adjustment within a fixed budget of CR 896 billion
in nominal terms.
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Table 5: Dynamic Impact Analysis - Scenario 1
(in millions of riel in 1997 prices)
Total Current Expenditure
Defense 1/
Defense/Total Current Expenditure
Defense/GDP
RCAF Strength
Per Capita Wages (Riel)
1997
1998
1999
816,009
304,743
37.3%
3.3%
755,300
304,743
40.3%
3.3%
969,969 1,083,512 1,212,330
271,740
238,737
210,136
28.0%
22.0%
17.3%
2.9%
2.4%
2.0%
138,506
1,173,907
138,506
1,173,907
123,506
1,173,907
2000
108,506
1,173,907
2001
95,507
1,173,907
2002
1,313,783
210,136
16.0%
1.9%
95,507
1,173,907
1/ Per capita wage and non-wage costs constant in real terms.
Source: Staff estimates.
Table 6: Dynamic Impact Analysis - Scenario 2
(in millions of riel in 1997 prices)
Total Current Expenditure
Defense 1/
Defense/Total Current Expenditure
Defense/GDP
RCAF Strength
Per Capita Wages (Riel)
1997
1998
816,009
304,743
37.3%
3.3%
755,300 1,103,215 1,216,759 1,356,585 1,363,779
304,743
249,738
194,732
132,453
132,453
40.3%
25.7%
18.0%
10.9%
10.1%
3.3%
2.6%
1.9%
1.2%
1.2%
138,506
1,173,907
138,506
1,173,907
1999
113,506
1,173,907
2000
88,506
1,173,907
2001
60,200
1,173,907
2002
60,200
1,173,907
1/ Per capita wage and non-wage costs constant in real term.
Source: Staff estimates.
19.
Scenario without Demobilization. Assuming that (i) the government would not embark on
downsizing the military and that (ii) per capita wages and non-wages would remain constant in real
terms, the share of defense in total recurrent expenditure would decrease from 37.3 percent in 1997 to
23.2 percent in 2002. Defense’s share in GDP would decline from 3.3 percent in 1997 to 2.7 percent in
2002.
20.
Summary of the Costs and Benefits of Demobilization. Table 7 presents a summary of the
impact of demobilization in relation to total recurrent expenditure and GDP. Without demobilization, the
share of defense in GDP would decrease from 3.3 percent to 2.7 percent. The demobilization of 43,000
and 78,300 soldiers would reduce this share to 1.9 percent and 1.2 percent, respectively. Table 8 shows
the costs and benefits in financial resources. The demobilization of 43,000 and 78,300 ex-combatants
would lead to annual savings of US$25 million and US$45 million, respectively, starting from 2001. In
contrast, total costs for implementing demobilization and reintegration of 43,000 and 78,000 soldiers
would amount to US$73 million and US$125 million.
-69Table 7: Impact of Demobilization
(in percent)
Without CVAP
1997
2002
Defense/Total Current Expenditure 1/
Defense/GDP 1/
37.3
3.3
23.2
2.7
Scenario 1
1997
2002
37.3
3.3
Scenario 2
1997
2002
16.0
1.9
37.3
3.3
10.1
1.2
1/ Assuming per capita wage and non-wage costs remain constant in real terms.
Sources: Staff estimates.
Table 8: Costs and Benefits of Demobilization
(in millions of US$)
Defense Expenditure 1997
Defense Expenditure 2002 (w/ demobilization) 1/
Savings (w/ demobilization) 1/
CVAP costs (1999-2002)
Scenario 1
Scenario 2
80.7
55.7
25.1
72.7
80.7
35.1
45.6
124.5
1/ Per capita wage and non-wage costs constant in real terms.
Source: Government budget data, staff estimates.
21.
Comparison of Financial Returns to Demobilization. Demobilization and reintegration
programs have been undertaken in increasing numbers, especially on the African continent. A recent
Bank study on the experiences with and lessons from such programs attempted to quantify the financial
returns to demobilization so as to make them comparable across countries. Table 9 presents a
comparison between the two scenarios in Cambodia and the results in Ethiopia, Namibia, and Uganda on
the basis of three-year averages before and after demobilization.4 In Ethiopia, for example,
demobilization was undertaken in the immediate aftermath of war. Hence, budgetary savings cannot be
attributed to military downsizing alone. Uganda, on the other hand, implemented a peacetime program.
Cambodia’s demobilization and reintegration program would rank well in terms of financial returns
compared with similar programs undertaken in other countries.
F. Conclusion
22.
If the government were to proceed with the demobilization of 43,000 soldiers as envisaged in the
CVAP, national defense would still account for around one-fifth of total recurrent expenditure if per
capita costs remained constant. However, in view of the improved security situation and the increased
defection rate of Khmer Rouge fighters, the number of soldiers to be demobilized is expected to be
higher, and a reduction of 78,300 soldiers would result in more impressive savings. A revision of the
CVAP is therefore necessary to determine the target number for demobilization and reintegration as well
as the ensuing program costs.
4
The calculations for Cambodia underestimate the long-term savings because the three-year averages are
calculated from 2000-2002, namely, while demobilization is ongoing. A similar limitation applies to Uganda.
-70Table 9: Financial Returns to Demobilization
Cambodia 1 Cambodia 2
Demobilization
Defense Exp./Recurrent Exp. Pre-Demobilization 1/
Defense Exp./Recurrent Exp. Post-Demobilization 1/
Budget Savings/Recurrent Expenditure 2/
Defense/Social Exp. Pre-Demobilization (ratio) 3/
Defense/Social Exp. Post-Demobilization (ratio) 3/
Budget savings/DRP costs (ratio) 4/
43,000
36.7%
18.5%
18.3%
1.58
0.88
0.36
78,300
36.7%
13.0%
23.7%
1.58
0.48
0.38
Ethiopia
475,800
46.6%
16.4%
30.2%
2.50
0.71
1.74
Namibia
49,500
12.4%
6.3%
6.1%
0.36
0.14
0.95
Uganda
36,400
34.9%
25.0%
9.9%
1.43
0.91
0.24
1/ Three-year averages before and after demobilization. Assumption for Cambodia: per capita costs constant in real terms.
2/ Budget savings refer to annual government savings from reduced military expenditure using the three-year averages.
3/ Three-year averages before and after demobilization. Assumption for Cambodia: per capita wage and non-wage costs
remain constant in real term.
4/ Annual post-demobilization savings compared to program costs. The inverse indicates the number of years until DRP
costs have been 'earned'.
Note: Only Uganda, as a peace-time demobilization, is strictly comparable to Cambodia.
Source: Colletta et al. 1996b. Case Studies in War-to-Peace Transition; staff estimates.
23.
To have a lasting impact on development policy, the analysis suggests a more drastic reduction in
the size of the RCAF and an improvement in living conditions (that is, an increase in wages and nonwages) for the remaining soldiers, to improve motivation and discipline. Such a policy, however, requires
higher short- to medium-term investment that is beyond the government’s financial capability. The
currently estimated CVAP budget for 43,000 veterans amounts to US$72.8 million. The demobilization
of another 35,300 soldiers would increase the budget to at least US$125 million. Without full donor
support, neither program is feasible.
24.
It should be noted that the analysis is undertaken for the period up to 2002, and that the full
benefit of military restructuring would be realized over the longer term. Moreover, in the long run, the
peace dividend of army demobilization cannot be seen in financial terms (budgetary savings) only. A
well-trained professional army can enhance security and trust which in turn would improve the
investment climate at both the local and the national levels. An efficiently implemented CVAP would
undoubtedly contribute to such an improved economic environment and to the strengthening of civil
society. In addition, if, after having received reinsertion and reintegration support, veterans’ incomes
would correspond to the (low) national average, veterans would contribute CR 37 billion to national
production in 1997 prices (CR 68 billion under the second scenario). The total resources created annually
after completion of the demobilization program, through (i) budgetary savings (assuming costs per
soldier remain constant in real terms) and (ii) additional personal income, would then amount to CR 132
billion and CR 240 billion, respectively, corresponding to 1.4 percent and 2.6 percent of GDP. Clearly,
demobilization would be an important investment in sustainable development.
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