The present general ordering of military versus civilian priorities probably will persist through this decade even if Mao passes from the scene. The basic rationale for this ordering the high cost and the technical difficulty of a more ambitious strategic weapons effort and the urgency of the claims of the agricultural and industrial sectorswill continue throughout this decade and beyond. The change in the nature of the military forces puts the emphasis on resources in which China is comparatively weak. The small burden of the former groundbased PLA is being replaced by the large burden of an evolving modern defense establishment.

TABLE 1.-Estimated military spending as a percent of GNP, 1974

Source for countries other than China: The Military Balance 1974-75, London, The International Institute for Strategic Studies, pp. 78-79.

THE ECONOMIC CONSEQUENCES OF DEFENSE
EXPENDITURE CHOICES IN CHINA

By ROBERT F. DERNBERGER

When the Chinese Communists swept into power and established the People's Republic of China at the end of the 1940's, their success was largely, but not solely, attributable to the field armies of the People's Liberation Army. The PLA had its origin (only two decades earlier) in the Communist guerrilla base areas and received its training in the Communist's struggle against both a militarily powerful foreign invader, the Japanese, and a better equipped domestic rival, the Nationalists, during the Second World War. As a result of their remarkable success against such overwhelming odds and their sincere dedication to serving "the people," members of the PLA have enjoyed a position of honor and respect as one of the most important elite groups in Chinese society and government today. The initial flush of victory in the Civil War did not, however, serve to resolve the monumental task of providing China with the defense prerequisites of a major world power.

At the end of the 1940's, the PLA consisted of a sizable force of capable, dedicated, well-disciplined, and mobile field armies, without any significant air or naval forces. Its domestic economic base was not only underdeveloped with a relatively small industrial sector, what industry did exist would have to be reconstructed merely to reestablish the relatively low prewar levels of production. Moreover, the PLA was still responsible for the continued conflict with the Nationalists who had fled to the island of Taiwan, less than 100 miles off the coast of the mainland, and would shortly enter the Korean conflict against the strongest military power in the world.

Despite this disadvantageous and inauspicious situation at the beginning of the period and the several ensuing internal political leadership crises which saw the demise of many of its most prominent leaders, only a superficial review of the history of the PRC is necessary in order to determine that the PRC today is a major world power with credible defense capabilities and has an economy which not only feeds and clothes one-fourth of the world's population but also is becoming a major industrial power as well.

Given the constraints presented by China's resource endowments, and present level of development, however, China's military potential and capabilities still derive from China's manpower resources. Thus, in terms of manpower alone, China's armed forces are on a par with those of the two major superpowers (the United States and the Soviet Union) and are slightly larger in size than the total armed forces in NATO.1 In terms of modern armaments and supporting services, such

1 Based on estimates of 3.5 million military personnel for the Soviet Union, 3.1 million for the PRC, and 3.1 million for the United States. The data used in this paragraph are from the statistical tables in the annual reports of the U.S. Arms Control and Disarmament Agency. The estimates for military manpower and expenditures in China are based on fragmentary data and are knowledgeable guesses at best. Nonetheless, they are sufficiently accurate for the purposes of the discussion in this paragraph.

as air and naval power, however, China ranks far behind the major superpowers with annual defense expenditures less than one-fifth those in the United States and the Soviet Union and less than one-half those in the NATO countries combined. In terms of annual defense expenditures per man in the armed forces, therefore, the comparison shows an even greater gap between China and the other superpowers.

This atypical mix of manpower as against modern, sophisticated weaponry, and air and naval power explains why China has been able to provide the third largest military force in the world, even though China is an underdeveloped country. In absolute and aggregate terms, China's economy is the seventh largest in the world, but its per capita income is still less than 200 U.S. dollars. The emphasis on a manpower intensive military in a labor abundant country such as China, therefore, has only served to keep within manageable limits the economic burden of China's recognized military capabilities. Given China's desire to equip its armed forces with some modern weapons and to provide a creditable military threat by means of carefully selected modern weapon systems, however, means that the economic burden of China's defense expenditures still claims a significant share of China's production about one-tenth of China's total GNP. To put it in the popular terminology, China's emphasis on manpower in its military strategy has allowed the Chinese to obtain the biggest bang for their buck, but to obtain that bang they still have found it necessary to spend a significant share of the bucks they have available.

Attempts to evaluate the total burden of China's defense expenditures could conclude that the economic burden of these defense expenditures has been relatively small because they have not precluded the Chinese from obtaining considerable progress in their civilian economic development program. On the other hand, a similar study could conclude that this burden has been relatively large because the Chinese obviously could have achieved significantly higher rates of growth if they had devoted these expenditures to investments and output in other sectors. Still other studies could seek to determine the economic burden of an attempt by China to create a military force comparable in size and composition to that possessed by the Soviet Union or the United States, concluding the economic burden of such a military strategy would be beyond China's present capabilities.

Attempts to estimate the economic burden of China's existing defense expenditures are important and useful in providing for a better understanding of the resource flows in China's economy and the economic consequences of the military policies and strategies China's leaders have adopted. Nonetheless, provision of a creditable military threat will continue to be a priority objective of China's leaders, no matter what the results of these studies would show, and the same would be true of any responsible leadership group of any country desiring to be a major power in today's world.

Our purpose in this paper, however, is not to analyze and estimate the absolute economic burden or consequences of any one particular, past or potential future level or pattern of defense expenditures in the PRC. Rather, taking China's present defense expenditures and their costs as given we proposed to determine the economic consequences of

An attempt to evaluate the economic burden of China's recent defense expenditure patterns is the subject of another paper included in this volume, see Jammes, supra.

any changes in their present level and composition. These marginal changes in the level and composition of China's defense expenditures are the actual choices available to China's leaders in their determination of China's future military policies and strategy and the economic consequences of these various choices can be expected to play a significant role in determining the resulting choice that is made.3

The importance of the economic consequences of these various choices would hold true even if the economic burden of China's present defense expenditures were determined to be relatively small and manageable within the existing resource flows in China's economy. Any marginal change in China's present defense expenditures which called for either an increase in total expenditures or a greater share of those expenditures being devoted to the production of military hardware would have an economic cost of much larger proportions than is true of the absolute costs of China's present total defense expenditures, i.e., the marginal costs would be much larger than the average costs. On the margin, additional defense expenditures-especially those on military hardware-require the use of high priority inputs from other sectors where scarcities and imbalances already exist. For example, an increase in the level of defense expenditures or change in their composition in favor of more military hardware reduces the potential supply of producer's goods for civilian use, the demand for which is increasing rapidly; reduces the supply of exports and increases the demand for imports, although the Chinese balance of trade has required China to use its scarce holding of foreign exchange in recent years; and would reduce the potential standard of living of the civilian labor force which is already relatively low and the source of potential public discontent and opposition.

Thus, as China's leaders consider the various defense expenditure choices available, they obviously will be heavily influenced by the economic consequences of these choices. It is the purpose of this paper to draw up preliminary and tentative set of estimates for the relative magnitude of these economic consequences of the various defense expenditure choices involved.

METHODOLOGY

To obtain our estimates we do not propose to spell out in detail the various military expenditure choices the Chinese leaders will actually consider, let alone forecast the particular choice they are likely to make. That would involve an evaluation of what Chinese leaders will be making the choice, their objectives, and the international political situation they are likely to be confronted with, as well as the domestic economic consequences of the military expenditure choices available. Our purpose in this paper is much more limited and concentrates on the analysis of several readily definable defense expenditure patterns which are illustrative of the most clearcut choices available to China's leaders. Although the actual policies to be considered in the future undoubtedly will be a combination of various elements among the different alternatives selected for analysis in this paper the results obtained from our analysis will be indicative of the types of economic

3 The utility of the military strategy choices available to China's leaders also is the subject of another paper included in this volume, see Fraser, supra.

consequences and their relative magnitude for any particular mix of military expenditures which may be chosen.

A second qualification which must be emphasized at the outset is to repeat that our results are indicative or illustrative of the types and relative magnitudes for the economic consequences of China's military expenditure choices; they are not meant to be taken as the accurate or absolute point estimates of real costs which would be incurred were the Chinese to pursue the particular options studied. The lack of sufficient empirical data on a sector-by-sector basis, especially for the defense sector, precludes an attempt to obtain accurate estimates. Moreover, the methodology used to obtain our results, although it may appear to be somewhat sophisticated, is really rather crude and relies on too many simplifying assumptions to permit us to claim a high degree of accuracy for our results, even if the data base used were accurate. No matter, accurate estimates would really tell us little more than our crude estimates of relative magnitudes inasmuch as it is probably only a vague impression of these relative magnitudes for the economic consequences of these military expenditure alternatives, rather than specific cost-benefit calculations, which actually influence the Chinese leaders decisions.

Finally, as any observer of the Chinese experience over the past 25 years must know by now, the Chinese leaders do not passively accept the unexpected or expected, but underestimated, economic consequences of their policy decisions. Undesirable or unaccepted results of one policy soon generate new policies to ameliorate those results; the Chinese leadership has shown itself to be remarkably willing and able to experiment within the basic context of their ideological premises and innovate with considerable ingenuity to counter and eliminate the undesirable consequences of their policies. The estimates for the economic consequences of any particular military expenditure choice presented in this paper, however, are obtained by simply tracing the expected direct and indirect effects of that choice throughout the economy, without allowing for any corrective reaction on the part of China's leaders. In short, the undesirable economic consequences estimated for any military expenditure choice represent an overestimate in that they exclude from consideration the almost certain reaction to these consequences by China's leaders which would aim to prevent any undesirable consequences predicted from actually taking place.

Our estimates for the economic consequences of any particular military expenditure choice, therefore, are determined by analyzing the effects of that choice alone while holding all other economic and military policies unchanged. Our analysis would become terribly complicated, if not impossible, if we were to try and derive our estimates while continuously introducing new policies. Events in the real world, of course, do represent the two-directional interaction between observed results and policy formation, but we are forced to analyze that reality by means of a more simplified and tractable model in which the policy chosen is the initial cause and the ensuing changes in economic events is the effect. Nonetheless, the first approximation for determining an optimum policy mix is the prior knowledge of the economic consequences of each individual policy and the purpose of this paper is to estimate the economic consequences of a few alternatives in the area of military expenditure choices.