Investigating the Dynamic Interaction between Military Spending and Economic Growth

• DOI: http://doi.org/10.1111/rode.12268
• Date: 01 August 2017
• Published date: 01 August 2017
• Author: C. Katrakilidis,A. Gkoulgkoutsika,E. Desli

Investigating the Dynamic Interaction between

Military Spending and Economic Growth

E. Desli, A. Gkoulgkoutsika, and C. Katrakilidis*

Abstract

The relationship and interaction of military spending and economic growth have been theoretically and

empirically investigated since the 1970s but it still cannot provide conclusive evidence towards the

direction and the quantification of the impact between the two magnitudes. The use of different data sets

in terms of time periods, and number and geographic location of countries, different theoretical

background leading to different econometric specifications, and single type of econometric methodology,

make any comparison impossible. This paper looks into the dynamic interaction between military

spending and economic growth during the period 1988–2013 that includes the recent years of economic

crisis covering 138 countries without making any prior assumptions about the theoretical channels of

influence, while not limited to a single estimation method but employing a wide range of methodologies

in order to form a complete picture of the long- and short-run interaction. Furthermore, as such

interaction might not be linear, we create three groups of countries based on the countries’ income

developmental stage. Overall we find no evidence of long- and short-run causality from the military

spending to economic growth except for the developing countries (positive in the long run). However,

from economic growth to military spending we find a positive impact for all groups except the least

developed countries. We also notice the interaction was more prominent prior to the start of the

economic crisis.

1. Introduction

Military spending has been steadily reducing from a worldwide country average

closer to 4% of gross domestic product (GDP) in the 1980s to 2.3% of GDP in

2013 but it still consumes a significant share of global resources with the overall

level of military spending being close to US$1.7 trillion (in constant 2005 prices).

2013 was the first year to experience a military spending reduction (of 2.4%) since

1998. Overall, during the years after the Cold War ended military spending was

decreasing but it doubled since 1998. The increase was particularly pronounced

among larger economies, both developing and developed, with the lion’s share

belonging to the developed countries (69% of the total military spending in 1990,

87% in 2000 and 91% or more since 2006) and the USA leading the way (around

35% of the total military expenditure). The developing countries spend well over

3.5% of their GDP in military related expenses and at the same time the least

developed countries on average are reducing this type of spending to below 2% of

their GDP especially after the start of the economic crisis. The level of military

spending is influenced by international factors and events, like foreign policy

objectives, exogenous real or perceived threats, armed conflict or military alliances

and policies to contribute to multilateral peace-keeping operation as well as

*Desli (Corresponding author), Gkoulgkoutsika and Katrakilidis: School of Economics, Aristotle

University of Thessaloniki, 54124, Greece. E-mail: desli@econ.auth.gr. We would like to thank the two

anonymous referees for their comments and suggestions. All remaining errors are our own.

Review of Development Economics, 21(3), 511–526, 2017

DOI:10.1111/rode.12268

©2016 John Wiley & Sons Ltd

domestic reasons. The decision to authorize spending for national defence is the

result of the central government’s allocation process of public spending among

competing objectives that are served by the government. Hence, military spending

is expected to influence a country’s economic growth via a variety of channels. On

one hand, the military expenditure is frequently viewed as unproductive public

expenditure or “crowding out” other public spending that is considered more

effectively contributing to economic development or competing with civilian

activities for labor, capital and other production related resources and subsequently

distorting the demand and the resulting market price for them, and hence, it is

expected to undermine economic growth. On the other hand, military spending

could promote economic growth by stimulating aggregate demand for goods and

services and reducing excess capacity (“military Keynesianism”), or through

“spillover effects” from military research and development (R&D) of

technologically advanced products to civilian spin-off products.

The literature on the interaction of military spending and economic growth dates

back in the 1970s with the Benoit Hypothesis (Benoit, 1973, 1978), that military

spending stimulates the economic growth rate, being tested numerous times.

However, the empirical results since then have been inconclusive and rather

confusing with the interaction between military spending and economic growth and

the direction of the influence between these magnitudes being one way or mutual,

positive or negative or absent depending on the set of countries under study, the

sample period, the theoretical channels linking these two magnitudes and/or the

applied econometric methodology. A great number of studies use cross-sectional

country based data and hence ignore the impact of time, which might result to

biased outcomes as well as their contribution is limited to the historic length of the

sample period. The remaining majority of studies focuses on a specific country or a

pair of countries or a narrow geographic area with preference to developing

countries and thus they cannot be compared as they refer not only to different

countries but also to frequently different time periods. Therefore, most of the

existing studies have limited universal application with even more time-limited

relevance. A few recent papers have used more broad data sets and applied panel

data estimation techniques (Kollias et al., 2007; Chang et al., 2011; Chen et al.,

2014) contributing significantly to the debate but also adding some contradictory

results (e.g. Chang et al. (2011) find that there is a negative influence from military

spending to economic growth while Chen et al. (2014) find no causality for the

European region) and in general not producing comparable results owing to either

the investigation of different set of countries in their data samples and/or the use a

different econometric specifications and estimation techniques. Furthermore, the

time periods in these papers do not capture the most recent years of the economic

downturn. The inclusion of the most recent time period in the analysis becomes

more significant as the contemporary belief since the start of the economic

recession is that there is high opportunity cost in the military spending especially

for the hardest hit countries by the financial crisis. Additionally, the vast majority

of the studies that look to more than a pair or a small group of countries look only

on the causality of military spending on the economic growth and ignore that a

reverse relationship might also hold. Finally, the comparison of the findings might

be not be feasible because of the use of different data sources and different

definitions of military spending.

The question of interest in this paper is whether and to what extent the military

spending dynamically interacts with the economic growth on a global scale without

512 E. Desli, A. Gkoulgkoutsika and C. Katrakilidis

©2016 John Wiley & Sons Ltd