Defense–Growth Causality: Considerations of Regime-Switching and Time- and Country-Varying Effects

This paper develops a panel smooth transition vector autoregressive model to investigate the economic growth–defense causality. This model simultaneously resolves the estimation problems of endogeneity, heterogeneity, and nonlinearity. Empirical results support that the causality is bidirectional, nonlinear, time- and country-varying. Economic growth has a negative impact on military spending and vice versa. The larger the HDI, the smaller the negative causality. Evidently, the increase in the level of country development can reduce the negative impact of military outlays on economic growth. Reducing the ratio of military spending to GDP is beneficial for countries with low HDI scores; however, moderately increasing the share of military expenditure is favorable for countries with extremely high HDI scores. Policy authority needs to set optimal education, health, and economic development shares of GDP for purchasing a maximum economic growth rate.     

Defence spending and economic growth: A causal analysis for Greece and Turkey*

There are a number of studies which consider the relation between military spending and economic growth using Granger causality techniques rather than a well‐defined economic model. Some have used samples of groups of countries, finding no consistent results. Others have focused on case studies of individual countries, which has the advantage of the researchers bringing to bear much more data than the cross country samples and a greater knowledge of the structure of the economy and the budget. This paper adds to the literature by providing an analysis of two countries, Greece and Turkey, which are particularly interesting case studies given their high military burdens, the poor relations between the two and the resulting arms race in the area. In addition to analysing the data using standard “pre‐cointegration” Granger causality techniques, this paper employs modern vector autoregressive (VAR) methodology that utilises cointegration via Granger's representation theorem. The standard Granger causality tests suggest a positive effect of changing military burden on growth for Greece, but this is not sustained when the cointegration between output and military burden is taken into account. The only evidence of significant Granger causality is a negative impact of military burden on growth in Turkey.     

Military expenditure and economic development in China: an empirical inquiry

Increases in military spending have a big impact on the socioeconomic conditions in any country. However, there is no consensus as to whether the rising military expenditure is beneficial or detrimental to economic growth. The present study chose China as a case study to empirically examine a complex relationship between military expenditure and economic development. The findings from the Johansen cointegration test indicated that there existed a long-run relationship between China’s military spending and economic growth. Furthermore, the Granger causality test detected a unidirectional causality from economic development to military expenditure. These results were further confirmed by the findings from the impulse response function. This means that China represents an example of a developing economy where the size of military expenditure expands in the process of economic transformation.     

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’.     

Military Spending and Economic Growth in the Middle East Countries: Bootstrap Panel Causality Test

This study revisits the causal relationship between military spending and economic growth in 10 Middle East countries via a panel causality analysis that accounts for cross-sectional dependence and heterogeneity across countries. Our results indicate unidirectional causality from military spending to growth for Turkey; one-way causality from economic growth to military spending for Egypt, Kuwait, Lebanon, and Syria; bidirectional causality for Israel; and no causality in either direction for Jordan, Oman, and Saudi Arabia. The empirical evidence does not provide consistent results regarding the causal relationship between defense expenditure and economic growth in these countries.     

National security,military spending and the business cycle

This paper develops a Dynamic Stochastic General Equilibrium model where national security is an argument in the agent’s utility function and the government chooses optimally the level of military spending to maximize social welfare. National defense depends on military expenditure and on the strategic environment reflecting a potential hostile external threat. We use aggregate data on consumption, investment, and military spending for the US economy to estimate the parameters of the model. Estimation results suggest that consumption and national defense are complements and that military spending variability is mainly explained by external threat shocks although it also depends on the macroeconomic conditions. We compute impulse response functions of the main macroeconomic variables to several shocks: a total factor productivity shock, a defense technology shock, and a strategic environment shock. Surprisingly, we find that the optimal response to an increase in the external threat (a worsening in the strategic environment) will rise output by reducing consumption and increasing investment.     

Does Military Spending Really Matter for Economic Growth in China and G7 Countries: The Roles of Dependency and Heterogeneity

This study revisits the causal linkages between military spending and economic growth in China and G7 countries (i.e. Canada, France, Germany, Italy, Japan, the UK, and the USA) by focusing country-specific analysis for the period 1988–2010. The panel causality analysis, which accounts for both cross-country dependency and heterogeneity across countries, is employed in this study. Our results find evidence of the neutrality hypothesis for Italy, France, and Germany, the military spending–growth detriment hypothesis for both Canada and the UK, and one-way Granger causality running from economic growth to military spending for China. Furthermore, we find a feedback between military spending and economic growth in both Japan and the USA. Thus, our results do not support that one size fits all.     

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.     

The Long-run Causal Relationship Between Military Expenditure and Economic Growth in China: Revisited

This paper re-examines the long-run causal relationship between military expenditure and economic growth in China over the period 1952–2010. An empirical econometric analysis based on a Barro-style growth model is conducted. By employing the Bartlett corrected trace test, which provides better approximations of the finite sample distribution to determine the rank of cointegration, the results support the existence of a single long-run equilibrium relationship between the variables. Furthermore, it is confirmed that the cumulated shocks of military expenditure primarily originate from different components of shocks that relate to economic development rather than the other way round.     

DEFENSE SPENDING AND ECONOMIC GROWTH IN TURKEY: A LINEAR AND NON‐LINEAR GRANGER CAUSALITY APPROACH

This paper uses linear and non‐linear Granger causality methods to determine the causal relationship between defense spending and economic growth in Turkey for the period 1949–2004. The innovative feature of this paper is that it provides evidence regarding the nonlinear causal dependence between military spending and economic growth in Turkey. The empirical results contribute to the empirical literature by indicating support for both linear and non‐linear causality between military expenditures and economic development and they may prove useful in theoretical and empirical research by regulators and policy makers.     

MILITARY EXPENDITURE AND UNEMPLOYMENT RATES: GRANGER CAUSALITY TESTS USING GLOBAL PANEL DATA

This paper investigates the empirical relationships between military expenditure and unemployment rates. A set of global panel data on 46 countries is utilized, and a panel data version of the Granger causality test is applied. The results indicate that there is little evidence of the causality running from unemployment to military expenditure regardless of how we measure military spending and determine group countries. In contrast, the causality running from military expenditure to unemployment receives empirical support if military expenditure is measured in terms of its share of GDP and if data are taken from middle‐ and low‐income countries or non‐OECD countries.     

Measuring hard power: China’s economic growth and military capacity

China’s rapid economic growth is facilitating massive increases in its military spending and causing increased security concerns in Asia and the Western Pacific. But there is uncertainty over how large China’s military spending is relative to other countries, or how fast it is growing in real terms. We address this issue by deriving a relative military cost price index based on the relative unit costs of inputs. We find that China’s real military spending is much larger than suggested by exchange rate comparisons, and even larger than standard purchasing power parity comparisons. We also find, however, that the real growth of China’s military spending has been smaller than conventionally thought. This is due to rapidly growing wages in China and the large share of personnel in China’s military budget.     

The growth in military expenditure in Germany 1951–2011: did parties matter?

We examine whether government ideology was correlated with the growth in military expenditure in Germany over the period 1951–2011. Using various measures of government ideology, the results do not show any effect. The exception is an ideology measure based on the Comparative Manifesto Project (left-right scale): using this measure, the results show that the growth in military expenditure increased by about 2.4 percentage points, when the ideology variable (right-wing) increased by one standard deviation. This effect, however, is based on observations until the early 1960s and cannot be generalized. The major political parties agreed on how to evaluate international risks and threats. Government ideology retired to the background. We conjecture that the consensus among the major parties will persist – even if military spending needs to be increased in response to new international risks and threats.     

Causal analysis of Australian economic growth and military expenditure: A note

Chowdhury (1991) applied Granger causality methods to military expenditure and economic growth series in 55 developing countries. This note applies a similar approach to Australia and finds no causal relationship between military expenditure and growth in either direction.     

The nexus between military expenditures and economic growth in the BRICS and the US: an empirical note

This empirical note re-examines the causal linkages between military expenditures and economic growth for the BRICS countries (Brazil, Russia, India, China, and South Africa) and that for the USA during the period 1988–2012. Results of Granger causality tests show that military expenditures influence economic growth in the USA, economic growth influences military expenditures in both Brazil and India, a feedback between military expenditures and economic growth in Russia, and no causal relation exists between military expenditures and economic growth in China and South Africa. The findings of this study can provide important policy implications for the BRICS countries and also for the USA.     

The causal nexus between military spending and unemployment in the G7: a bootstrap panel causality test

We revisit the causal relationship between military spending and unemployment in the G7 countries applying a bootstrap panel causality analysis that accounts for both cross-sectional dependence and for heterogeneity across countries. Using per capita real GDP as a controlled variable, we found a unidirectional causality running from military spending to unemployment for Canada, Japan, and the US, one-way causality running from unemployment to military spending for France and Germany, and bidirectional causality for Italy and the UK. The empirical evidence does not seem to provide consistent results regarding the causal relationship between military spending and unemployment in G7 countries.     

The impact of military expenditures on economic growth in the less developed countries∗

This paper presents the results of empirical research on the economic impact of military expenditure — milex — on the less developed countries. The hypothesis is that the impact on growth is a combination of three effects: (1) increased security — positive impact; (2) diversion of resources from productive investment — negative impact; and (3) pressure for more efficient government policies in response to the external threat — positive impact. The combination of these effects would produce a non‐linear relationship with the growth rate at first increasing as milex increased and then decreasing. For the full sample of 71 countries, we found the predicted relationship, however, it is not robust to changes in the sample. The robust conclusion is that there was no evidence of a negative impact of military spending on economic growth.     

Military Expenditure,Endogeneity and Economic Growth

Abstract

While not always a concern for the general economic growth literature, the debate over the effects of military spending on growth continues to develop, with no consensus, but a deepening understanding of the limitations of previous work. One important issue that has not been adequately dealt with is the endogeneity of military spending in the growth equation, mainly because of the difficulty of finding any variables that would make adequate instruments. This paper considers this issue, using an endogenous growth model estimated on a large sample of 109 non-high-income countries for the period 1998–2012. The empirical analysis is framed within an instrumental variable setting that exploits the increase in military spending that occurs when unrest in a country escalates to turmoil. The estimation results show that endogeneity arising from reverse causality is a crucial issue, with the instrumental variable estimates providing a larger significant negative effect of military spending on growth than OLS would. This result is found to be robust to different sources of heterogeneity and different time periods.     

MILITARY EXPENDITURE AND ECONOMIC GROWTH

This paper tests the relationship between military expenditure and economic growth by including the impact of the share of military and civilian components of government expenditure in an economic growth model with endogenous technology. In this framework, we empirically consider the hypothesis of a non‐linear effect of military expenditure on economic growth. Differences between the costs and benefits of the defence sector has traditionally explained the non‐linear relationship suggesting that shocks to insecurity may also be a source of non‐linearity as they determine a re‐allocative effect within government expenditure. While parametric partial correlations are in line with empirical findings, the robustness of estimations is tested by using a non‐parametric approach. The negative relationship between military expenditure and growth in countries with high levels of military burden predicted by theory becomes significant only after including a proxy for re‐allocative effects in the growth equation.     

The impact of military spending and income inequality on economic growth in Turkey

An extensive literature on the effect of military expenditures on economic growth yields conflicting results. However, a crucial issue that has not been investigated in this context is the possible effect of inequality. The impact of military expenditures on economic growth in Turkey has also received substantial attention. Yet, the majority of these studies are not constructed based on a structural model, but rather examine the causality between the variables in question. Considering these two shortcomings in the literature and the lack of consistent results, this study attempts to provide further evidence for the relationship between military expenditures and economic growth for the case of Turkey by considering income inequality within an augmented Solow growth model. Our findings for the 1963–2008 period show that while income inequality has a positive impact on economic growth, military expenditures have no significant effect.