Defense Budget

Seoul's defense budget increased in proportion to the growth of the national economy throughout the 1970s and 1980, demonstrating how strongly national leaders felt about improving the armed forces. Between 1971 and 1975, defense spending increased from US$411 million to US$719 million. Defense expenditures averaged about 4.5 percent of the country's gross national product. In 1976, the first year that the government included proceeds from the defense tax in published figures for military expenditures, the budget for the armed forces and defense industries increased 100 percent over the 1975 figure to US$1.5 billion. The costs involved in initiating weapons production and the loss of military grant aid from the United States were the major reasons for the gradual increase of defense spending from 5.2 percent of GNP in 1979 to 6.2 percent of GNP in 1982. By 1990 defense spending had increased to almost US$10 billion a year, but because of the dramatic growth in the country's economy, this figure was below 30 percent of the government's budget and less than 5 percent of GNP for the first time since 1975.

Annual defense budgets are proposed by the Ministry of National Defense and approved by the president following consultations with the National Assembly. Beginning in fiscal year 1979, the Ministry of National Defense adopted a budget management system based on the United States Department of Defense project planning budget system. The South Korean system focused on force modernization and the maintenance of military organizations in peacetime at 70 percent of their wartime strength. The government's mobilization and resource management plans for support of the military were designed to bring the armed forces up to full strength quickly and to maintain the country's capability to supply the military during wartime. Under the 1987 Constitution, the National Assembly was accorded more responsibility to review the defense budget and to recommend appropriate levels of spending. In 1990, however, the president continued to have the final say on budget matters.

Approximately 40 percent of the defense budget was devoted to weapons and equipment modernization in 1990. Defense planners established a number of long-range goals: to establish an independent reconnaissance system with intelligence satellites and early warning aircraft; to improve the quality of firepower and the accuracy of domestically produced weapons; to deploy indigenously produced surface-to-air and tactical surface-to- surface missiles; and to replace outdated fighter aircraft and naval vessels with technologically advanced models that would neutralize the threat of North Korea's modern weapon systems.

The operational costs of the three armed services constituted approximately 35 percent of the defense budget. Improvements in training, logistical support to combat units, and pay and benefits provided to military personnel were a part of the increased cost of supporting the armed forces. The acquisition of sophisticated new types of weapons, although contributing to national security, also increased operational costs.

The remaining 25 percent of the defense budget was mostly allocated among the armed forces reserves; South Korea's share of the United States-Republic of Korea combined defense improvement program; research into new defense technologies; and construction and maintenance of military installations.

Between 1974 and 1996, Korea spent a total of USD 246 billion on domestic and foreign procurement in order to improve and upgrade its national defense capabilities. This represents 31.8 percent of the nation's total defense budget. The remaining 68.2 percent has been used to maintain the Korean armed forces at a high degree of readiness, due to the often tense political and military environment on the Korean peninsula.

                   (BILLION KOREAN WON)
Year      1971  1976   1981   1986   1991    1996    1997    1998
Budget     174   442   2,764  4,158  7,524  12,243  13,787 14,628
Budget      26   206   1,085  2,317  3,568   4,310   4,218  2,799
Percent of
Total     14.9   46.6   39.3   55.7   47.4    35.2    30.6   19.1
Exchange Rate: Based on the current exchange rate as of
September, 1998(currently one USD equals 1,400 Korean Won)

The ROK'sspectacular economic growth permitted the allocation of increasingresources to defense throughout the 1980s and much of the 1990s. The result was that although defense expenditure as a proportion of GNP slipped from 6.0% to 3.3% between 1980 and 1995, the actual amount spent showed a massive increase, year on year, rising to $15.7 billion in 1996. According to the trends of the MND's defense procurement budget from 1971 to 1998, the 1997 budget was 165 times higher than that of 1971.

The Five-year Force Improvement Program (FIP) announced in December 1995 envisioned a military expenditure budget between 1997 and 2001 totalling $115 billion, 26.9% of which would be earmarked fordefense procurement. The annual defense budget for 2001 was projected to be $30.7 billion, putting the ROK into the military expenditure catego-ry of major western European countries. The gravity of the 1997-1998 economic recession, however, produced a decrease in purchasing power of the Korean won of around 50% and led, in 1998, to a major revision of the military budget, with a reduction of 4.9% in the allocation to FIP equipment.

Because of the economic crisis in 1998, Korea's procurement budget was slashed to a level only 108 times higher than the 1971 budget. Furthermore, the procurement budget now accounts for only 19 percent of the total defense budget. Most importantly for U.S. suppliers, the foreign procurement budget was cut 23 percent to 651 billion Korean Won.

The ratios of defense expenditures to GDP and the government budget have changed in line with changes in the security and social environment. Until the early 1980s, the ratios of defense expenditure to GDP and government budget stood at 5% to the GDP and 30% to the government budget respectively, as the MND had steadily promoted projects such as “Yulgok project”since the 1970s to build up military strength for self-reliant defense. But from the late 1980s, the defense budget has been on a downward trend until the early 2000s because of the increasing demand for social welfare, as well as the IMF financial crisis from 1997-1998.

The 2004 defense budget of the Republic of Korea (ROK) was approved by the Korean National Assembly on December 31, 2003. The total defense budget for 2004 is $16.18 billion, up 8.1 percent over 2003. The 2004 budget reflects the government's desire to see the Ministry of National Defense (MND) spend more on "quality of life improvements" --Operations and Maintenance (O&M;)-- and less on Force Investment Plans (FIP). The 2004 defense budget continues the government's trend of compelling MND to spend more on quality of life improvements over force development, by authorizing only a marginal increase in the Force Investment Plan budget for 2004. The overall government budget is set at $100.46 billion, a 1.7 percent increase over the 2003 level. The ROK government is trying to hold the rate of increase in the national budget below expected economic growth rates, in order to reduce the fiscal deficit. The 2004 defense budget share of the overall budget is 16.2 percent, compared to 15.6 percent in 2003. Its proportion to the GDP up by 0.1 percent in 2004 -- to 2.8 percent --, compared to 2.7% in previous years.

The total 2004 defense budget is KW18,941.2 billion is broken down into KW6, 300 billion ($5.38 billion) allocated for FIP -- an increase of 9.8 percent and KW12, 641.2 billion ($10.80 billion) for O&M;, a 7.3 percent increase. All off-shore purchases come out of the FIP budget. The 2004 defense budget breaks down percentage-wise to 66.7% O&M; and 33.3% FIP –which maintains the government's trend of emphasizing FIP expenditures less. The FIP budget is $5.38 billion, up 9.8% over 2003 and 33.3% of the overall defense budget. O&M; is $10.80 billion, up 7.3% and 66.7% of the overall defense budget. Although the 2004-2008 Mid-Term Defense Plan calls for incrementally increasing the FIP share from 32.8% in 2003 to 37.9% in 2008 (to help "lay the foundation for a self-reliant defense capacity by 2010"), rapidly increasing O&M; costs make this virtually impossible.

The ROKG's refusal to authorize a significant 2004 defense spending increase compels the MND to delay further major force development projects. President Moo-Hyun Roh's announcement that the defense budget will probably not reach 3 percent of GDP during his administration does not augur well for future Mid-Term Defense Plans. Defense budget restrictions will continue to force the MND to continue to neglect short-term readiness to fund long-term force development. While the MND recognizes the importance of interoperability with US forces, it is not an overriding factor in procurement decisions because cost is increasingly a key consideration in major procurement programs. US defense industry must also contend with the Korea's increased emphasis on developing the Korean defense industry base.

The total budget for the Defense Reform 2020 between 2006 and 2020 was assessed to amount to 621 trillion won (force improvement projects of 272 trillion won and O & M of 349 trillion won), including 67 trillion won slated only for the defense reform. The MND, the Ministry of Planning and Budget (MPB), and the Korea Institute for Defense Analyses (KIDA) together reached the same conclusion that such amount will be available for the defense reform, given the nation’s economic growth and future government budget trends.

It is desirable that an appropriate defense budget be reached by balancing military requirements commensurate with security threats and the nation’s financial capability. However, the“ security threat environment” has priority in the allocation of defense budget, for national defense is based on the primary goal of securing national survival. In particular, countries either in a direct military confrontation with enemies, such as the ROK and Israel, or with imminent security threats must decide defense expenditures proportional to their “security threat level.” Viewed in this light, even though the ROK is at the top of the “security threat level,” the allocation of resources for national defense remains lower than other countries facing disputes and confrontations.

However, an upward trend for the military budget was established by the Participatory Government to promote “cooperative self-reliant defense.” As a result, the defense budget was 2.6% of the nation’s GDP and 15% of the government budget, as of 2006. The defense budget for FY 2006 concentrated on the reinforcement of self-reliant defense capabilities and the improvement of soldiers’morale as well as welfare in line with the promotion of the “Defense Reform 2020.” Financial resources earmarked for national defense amount to 22.5129 trillion won, up 6.7% from the figure of 21.1026 trillion won (including the revised supplementary budget of 280 billion won) in 2005. Such an amount comprises 15.3% of the government budget and 2.6% of GDP.

To promote the first stage of the “Defense Reform 2020,”the “2007~2011 Mid-Term Defense Plan”was formulated to mainly reflect the requirements for self-reliant war deterrence and advanced defense management. Under the plan, 150.7499 trillion won was allocated, maintaining the average increasing rate of 9.9% per year.


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