Introduction: Symposium on defence economics

This study revisits the relationship between defence spending and economic growth via a Keynesian model in Pakistan using the autoregressive distributive lag bounds testing approach to cointegration. Empirical evidence suggests a stable cointegration relationship between defence spending and economic growth. An increase in defence spending reduces the pace of economic growth confirming the validity of Keynesian hypothesis in this case. Current economic growth is positively linked with economic growth of previous periods while a rise in non-military expenditures boosts economic growth. Interest rate is inversely associated with economic growth. Finally, unidirectional causality running from military spending to economic growth is found.     

DOES DEFENCE SPENDING STIMULATE ECONOMIC GROWTH IN INDIA? A REVISIT

This study reinvestigates the effect of defence spending on economic growth using Zivot and Andrews and Lee and Strazicich, structural unit root tests and the autoregressive distributed lag bounds testing approach to cointegration in augmented version of Keynesian model for India. Study confirmed long run relationship among variables studied show that economic growth is positively affected by defence spending (also negative impact after a threshold point), investment and trade openness while negatively by interest rate. Granger causality analysis revealed bidirectional causal relationship between defence spending and economic growth as probed by variance decomposition approach.     

Guns for Butter? Empirical Evidence from China

Abstract

This study examines the causal nexus between defence spending and education expenditure in China using the bootstrap Granger full-sample causality test and sub-sample rolling window estimation. The full-sample result indicates that there is no causality between defence spending and education expenditure. By adopting a time-varying rolling window approach to revisit the dynamic causal relationships, this article identifies a negative unidirectional causality running from education expenditure to defence spending. The finding suggests that it is the education expenditure crowds out defence spending in China rather than reverse. No causality is demonstrated from defence spending to education expenditure, indicating that an increase in military spending will not crowd out expenditure on education. The results could be partly explained by that the education expenditure in China is below the requirement of corresponding economic growth, urging for more financial budget. Whereas the findings support a negative trade-off between defence and education expenditures, they refute the theory of ‘guns for butter’.     

The interrelationship between defence spending,public expenditures and economic growth: evidence from China

This study examines the relationship between defence spending, other components of public spending and economic growth for the 1952–2012 period in China using Granger causality tests and generalised impulse response functions based on vector error correction models. The empirical results reveal two long-run equilibrium relationships among the variables and also show that defence spending inversely and unidirectionally Granger impacts economic growth. Furthermore, empirical findings point to a trade-off relationship between defence spending and public expenditures in China. From a policy maker’s perspective, the findings reported herein imply that a decrease in defence spending may stimulate economic growth.     

Country survey XI: Defence and the Israeli economy

The literature on economic aspects of defence in Israel is critically reviewed by subject: measuring the defence burden, the determinants of defence spending, the effects of defence spending on the economy, and the military‐industrial complex. An overview of the Israeli economy is provided, and some new econometric findings on the determinants of defence spending are presented. The paper concludes by addressing policy issues in the context of Israel's jubilee.     

Country survey X: Defence spending in Turkey

This paper provides a country survey of the Turkish defence economy. Turkey is a member of NATO alliance and is strategically located between Europe and Middle East. Moreover, Turkey has a high defence burden and high economic growth. The first part of the survey presents a brief economic background of Turkey, its armed forces, the defence industry, its modernisation and trends in Turkish defence expenditure. The rest of the paper focuses on the relationships between defence spending and economic growth. The effect of defence spending on economic growth is econometrically estimated using a supply side model. Both externality effects and the size effect of defence spending are estimated for Turkey. The study concludes that defence expenditure stimulates economic growth while externalities from the defence sector to the rest of economy are negative for Turkey.     

The Effects of Defence Spending Reductions: A CGE Estimation of the Foregone Peace Dividend in the Case of Greece

With the collapse of bipolarity and the end of the East-West armaments race, defence budgets have shrunk and military expenditures across many countries have fallen, opening-up the prospect of potential beneficial economic spin-offs. In the case of Greece, a country with a higher than average defence burden, military spending has not exhibited similar downward trends as it has done in other members of NATO and the European Union. The paper, using a Computable General Equilibrium model, estimates through simulations the effects on the Greek economy had reductions in current defence spending been equal to the NATO average. The results from the CGE estimations suggest that a shift of expenditure from defence into non-defence public spending would have an appreciable beneficial impact.     

The Demand for Turkish Defence Expenditure

Although a number of studies concerning Turkish defence-growth relation have been published in recent years, little attention is given the demand for Turkish defence expenditure. This is an important issue for understanding which variables contribute to the determination of the demand for military expenditure. However, it is difficult to develop a general theory or a standard empirical approach for the determination of the demand military expenditure. This study models and estimates the demand for Turkish defence expenditure for the period 1951-1998 using autoregressive distributed lag approach to cointegration (ARDL) following the methodology outlined in Pesaran and Shin (1999). This procedure can be applied regardless of the stationary properties of the variables in the sample and allows for inferences on long-run estimates, which is not possible under alternative cointegration procedures. The findings suggest that Turkish defence spending is determined by NATO's defence spending, Greece's defence spending and some security considerations.     

MILITARY EXPENDITURE AND ECONOMIC GROWTH IN MIDDLE EASTERN COUNTRIES: A DYNAMIC PANEL DATA ANALYSIS

Defence expenditures have both costs and benefits to the economy. The costs of defence expenditures are mainly emphasized as opportunity costs. On the other hand, defence spending may have growth‐promoting potential benefits: a rise in defence spending may result in a higher aggregate demand, production and employment. This paper examines empirically the effects of military expenditures on economic growth for Middle Eastern countries and Turkey, for the time‐period 1989–1999. The relationship between military expenditure and economic growth is investigated by using cross‐section and dynamic panel estimation techniques. Empirical analysis indicates that military expenditure enhances economic growth in the Middle Eastern countries and Turkey as a whole.     

A LONG‐RUN ANALYSIS OF DEFENCE SPENDING IN THE NATO COUNTRIES (1960–99)

This paper analyses the long‐run demand for defence output through a homogeneous treatment of 15 NATO member countries between 1960 and 1999. We carry out a progressive study of the interactions between either defence spending or defence burden and their main determinants: income, external threat and allied military spending. To that end, we use time‐series analysis with endogenously determined structural breaks. We further consider individual country functions related to one another through a common correlated effects method, in order to take into account explicitly the connections between members of an alliance.     

THE DEFENCE SPENDING–EXTERNAL DEBT NEXUS IN ETHIOPIA

The aim of this paper is to examine the impact of defence spending and income on the evolution of Ethiopia’s external debt over the period 1970–2005. Using the bounds test approach to cointegration and Granger causality tests, we find a long run and a causal relationship between external debt, defence spending and income. Defence spending had a positive and a significant impact on the stock of external debt while income had a negative and a statistically significant impact on external debt. Our findings suggest that an increase in defence spending contributes to the accumulation of Ethiopia’s external debt, while an increase in economic growth helps Ethiopia to reduce its external debt.     

Military Debt: Perspectives from the Experience of Arab Countries

The sectoral production function model of Feder (1983) has been widely used to examine the link between defence spending and economic growth. In this paper, the model, for which too much has been claimed in some past work, is examined, and the case is made for using growth in real non‐defence output rather than growth in real aggregate output (inclusive of military spending) as the dependent variable. Attention is restricted to a small group of OECD countries for which reliable labour force and capital stock (as well as defence) data are obtainable. With non‐defence output as the dependent variable and using only high quality data, no evidence in favour of the underconsumptionist (as opposed to the defence as a burden) position is found.     

ANALYSING DEFENCE DEPENDENCY: THE IMPACT OF THE ROYAL NAVY ON A SUB‐REGIONAL ECONOMY

This paper provides a methodology for estimating the economic impact of defence spending at a sub‐regional level. It does so by calculating the income and employment generated by Britain’s Royal Navy and associated defence activities in the City of Portsmouth and its surrounding area, during the financial year 2003–2004. In an era of military consolidation, the paper offers an insight into the multifaceted impact of defence‐related expenditure. Hence, it presents a generic framework that could prove useful to other researchers when seeking to measure the sub‐regional impact of naval, airforce and army facilities in other national contexts.     

To free or not to free (ride): a comparative analysis of the NATO burden-sharing in the Czech Republic and Lithuania

ABSTRACT

The recent rise in the defence budgets among the NATO members reawakens the free-riding dilemma. This article provides an analysis of the defence spending of two new member states, the Czech Republic and Lithuania. Based on the free-riding theory, we explain why some of the new NATO members decide to increase their defence budgets (Lithuania), and others do not (Czech Republic). In contrast to the majority of works which focus either on the US as the biggest spender or on the “old” members of the Alliance, we explain under what circumstances some of the small European states who became new NATO members started to increase their defence budgets even though they do not have to, and the literature suggests that free-riding is easier. In the process, we identify three crucial factors that in?uence the decision-making process in this regard: the level of threat perception, economic situation, and the US pressure.     

The Demand for Military Expenditure in Europe: The Role of Fiscal Space in the Context of a Resurgent Russia

A variant of established work on the demand for military expenditure is developed based on a practical concept of fiscal space from the perspective of short-term government choices concerning public expenditures. A new indicator, referred to as fiscal capacity, is defined and used as a candidate explanatory variable in an empirical model of European defence spending over the 2007–2016 period. Fiscal capacity is found to outperform simpler measurements of economic conditions, notably GDP growth forecasts, in explaining changes in defence spending efforts as a share of GDP. Regarding security environment variables, the results suggest that Russia has recently come to be seen as a potential military threat by European nations, leading to defence spending increases, the more so the shorter the distance to stationed or deployed Russian forces, and particularly so by those European nations that have a land border with Russia. A prospective exercise is then carried out in order to assess the capacity of EU member states that are also members of NATO to reach NATO’s 2% goal for defence spending over a mid-term horizon.     

Country survey VII: Military spending in Greece

Greece is one of the poorest members of the European Union, yet its defence burden is the highest in Europe and NATO. At around 5.6% of GDP in 1994 it is twice the average NATO and European Union burden. In terms of the human and material resources devoted to defence yearly Greece is in comparative terms the most militarised country in Europe. The purpose of this paper is to examine military spending in Greece. It begins with a brief survey of the Greek economy and its development as it relates to defence. The determinants of Greek military spending are then modelled and analysed. The causes of military spending appear to be primarily regional rivalries and conflicts. In particular the ongoing dispute with Turkey is the main external security determinant of defence spending in Greece. The supply of defence inputs is then examined with reference to equipment procurement and indigenous arms production.     

Defence budgets in the post-Cold War era: a spatial econometrics approach

This paper examines the determinants of national defence budgets in the post-Cold War era employing a spatial econometric framework. Using data for 124 countries over a 16-year time period, I examine spatial relationships in defence spending to investigate how countries account for the military spending of other countries when setting their budgets. Using specially developed weighting matrices, the regression results indicate that defence budgets are positively spatially correlated. These results provide support for the use of ‘external’ factors when examining defence budgets over this time period. The importance of a country’s spatial location when setting its budget is further examined through the identification of regions of high and low defence spending.     

Using the Feder-Ram and Military Keynesian Models to Examine the Link Between Defence Spending and Economic Growth in Sri Lanka

This study uses the Feder-Ram model in conjunction with the military Keynesian model to examine the nexus between defence spending and economic growth in Sri Lanka. We find that the Keynesian aggregate demand model is better suited to analyse the link than the Feder-Ram model for the case of Sri Lanka. Based upon our results we expect a higher economic growth rate in Sri Lanka if more public resources are diverted from the defence to civilian sectors of the economy, now that the war between the government and separatist guerrillas has come to an end. However, recent post war events cast doubt upon whether a diversion of sources from military to non-military spending will actually occur. We conclude that the sanguine predictions of our economic analysis are entirely dependent upon the political decisions of the Sri Lankan government for their realization.     

Does defence expenditure have a spillover effect on income inequality? A cross-regional analysis in China

China’s defence expenditure has been growing rapidly along with GDP growth during the past two decades. Meanwhile, the income gap has continued to increase. There are conflicting views regarding whether the defence expenditure is capable of reducing income inequality. Therefore, this paper investigates the existence of any spillover effect of defence expenditure on income inequality, with a special focus on the regional differences among 31 provinces and 7 military regions in China. We extend panel cointegration and the impulse response function by using panel data during the period of 1997–2012. The empirical results show that the defence expenditure has an impact on income inequality, and the effect varies over different regions in China. The defence expenditure has a spillover effect on income inequality in the full sample panel and the southeastern panel. An increase in the defence expenditure does not crowd out social welfare spending due to the high level of economic development and government expenditure. On the contrary, in the northern panel, the effect is opposite because of the unbalanced economic development levels within the panel. Beijing as the capital of China, benefits more from the expansion of defence expenditure thus widening the income gap. In addition, the impulse response analyses further confirm a stronger effect of the defence expenditure on income inequality in the northern and the southeastern panels over a short period.     

Growth and Fiscal Consequences of Terrorism in Nigeria

Abstract

In spite of government counter-terrorism expenditure and efforts, the incidence of terrorism in Nigeria appears to be rising. This paper examines the growth and fiscal consequences of terrorism in Nigeria by estimating the terrorism–macroeconomy relation using different measures of terror incidence. The results show that terrorism has an economically and statistically significant negative impact on growth; although this impact is considerably small and short-lived, manifesting only after a lag of about three years. Specifically, the cost of terrorism to Nigeria, in terms of lost GDP per annum, is estimated at 0.82%. Moreover, there is evidence that terrorism leads to the reallocation of economic activity away from private investment spending to government spending; that is, terrorism crowds out investment at a higher rate than its potential to crowd in government spending. Lastly, terrorism alters the composition of government expenditure – with the defence component of government expenditure rising vis-a-vis other expenditure items. The results are robust to allowing for dynamic interactions between terrorism and macroeconomic aggregates.