Military expenditure and economic growth in Middle Eastern countries and Turkey: a non-linear panel data approach

The economic growth effects of military expenditure have been the subject of a large literature in defence economics. Theories on the economic impacts of military expenditure greatly differ and include arguments that they either enhance economic growth or crowd out productive investments. Empirical literature on defence expenditure and economic growth nexus generally employs linear specifications to investigate the impact of defence expenditures on economic growth. Although it is now well established that many economic variables may have a non-linear data-generating mechanism, it seems that this reality has long been neglected in empirical work on defence–growth nexus. This paper attempts to fill this gap by employing non-linear panel data models to examine the effects of military expenditures on economic growth for Middle Eastern countries and Turkey, for the time period 1988–2012. Results show that the effect of military expenditure on economic growth is nonlinear such that the state of the economy actually determines the effect of the former on the latter. This is important not only in showing asymmetric relationship between these variables but also in revealing the reasons of mixed results of earlier literature.     

Military expenditures,economic growth and spatial spillovers

The relationship between economic growth and military expenditure has been the subject of a large literature in defence economics. This study analyses the influence of military expenditures on economic growth in a global perspective for the time period 2000–2010 taking spatial dimension into account. The augmented Solow model is employed to investigate the defence-growth nexus using the cross-sectional data relating to 128 countries. Following a traditional regression analysis, spatial variations in the relationships are examined utilizing different spatial econometric specifications estimated by maximum likelihood. The regressions are compared with each other via likelihood ratio tests, and the spatial Durbin model is found to be the most appropriate one suggesting that the typical least-squares model is misspecified. Empirical evidence indicates that military expenditure has a positive effect on economic growth with a significant spatial dependence for the time period under consideration.     

Measuring the Impact of Military Spending: How Far Does a DSGE Model Deviate from Reality?

Dunne, Smith, and Willenbockel (2005) argue that the mainstream growth literature has not found military spending to be a significant determinant of economic growth, yet much of the defense economics literature has noted significant effects. This paper revisits this issue by using a DSGE-VAR approach, combining both theoretical and empirical methods. We present that the DSGE approach (estimated with the Bayesian technique) and the Bayesian VAR with the Minnesota Prior both lead to worse in-sample fit than our proposed DSGE-VAR framework. The DSGE-VAR approach reveals that a positive military spending shock boosts the U.S. economy, increasing per capita real GDP growth, consumption, inflation and interest rate. Our results are robust to alternative model specifications. Future investigations such as exploring an optimal military spending policy could adopt the approach in this paper to determine the best model – empirical, theoretical, or a combination of the two.     

THE RELATIONSHIP BETWEEN EXTERNAL DEBT,DEFENCE EXPENDITURES AND GNP REVISITED: THE CASE OF TURKEY

This paper contributes to the continuing debate on the economic effects of military expenditure by undertaking a case study of Greece. Within Europe Greece provides a particularly interesting object of study. It has the highest military burden in Europe and NATO, is the only European Union country situated in the unstable environment of the Balkans, faces a military threat from Turkey, and has a very weak economy. After some background analysis of the economy and military expenditure, the paper investigates the determinants of Greek military expenditure as well as whether the high military burden has played an important role in Greece's poor economic performance over the period 1960–1996. It estimates a Keynesian simultaneous equation model with a supply side, which allows the indirect effects of military expenditure to be captured explicitly. It concludes that the major determinants of Greek defence spending are not economic but strategic (the threat of war) and that the direct effect of defence spending on economic growth as well as the indirect effects through savings and trade balance are all significantly negative. On the basis of such strong results, the paper concludes that defence spending is harmful for the Greek economy.     

Panel Causality Analysis Between Defence Expenditure and Economic Growth in Developed Countries

There is much controversy in the literature over whether military expenditures have a positive, negative or no relation impact on economic growth. The aim of this paper is to determine the relationship between GDP and defence expenditure. The study analyses GDP and defence expenditures of the developed countries with cross-sectional ADF and SURADF unit root tests using annual data for the years 1980–2007. We conclude that in the long term, according to the Pedroni cointegration test, there exists a relationship between defence expenditure and economic growth. Furthermore, by utilizing the Granger causality test, we find that defence expenditure is a factor in economic growth. In other words, our study validates the hypothesis that defence spending by economically developed countries positively contributes to their economics.     

Asymmetric effects of military expenditure between Turkey and Greece

One of the major topics of the defense economics literature regarding Turkey and Greece has been the empirical modeling of various aspects of arms racing. However, despite a considerable amount of research, little evidence has been found in favor of an arms race between the two countries. In the literature, this failure of applied studies has been attributed, among other reasons, to the sensitivity of the results to the underlying model specification, to small sample size, and to measurement issues. This study uses novel, nonlinear, models to investigate the possible relationship between the military expenditures of the two countries. It is assumed that if there are two regimes characterizing the low (or negative) and high-growth military expenditure periods, the growth rates of one country's military expenditure may have distinct effects on the military expenditure regimes of the other country or may contribute to the change from one regime to another. The nonlinear models examined are Smooth Transition Regression models (STRs). Strong evidence of nonlinearity for Greece is found, with asymmetry relating to two distinct regimes through lagged Turkish military expenditure changes.     

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.     

Military expenditure and unemployment in the OECD

The effect of military expenditure on employment is a matter of considerable importance. However, few of the standard economic analyses of unemployment take any explicit account of variations in military expenditure in their models. The purpose of this paper is to assess whether the prevalent neglect of this variable in labour economics is justified.

The paper briefly surveys previous estimates made of the employment effects of military expenditure. It then considers evidence from the simple dynamic reduced form regressions estimated on long historical series for the US and the UK and pooled post‐war data for 11 OECD countries. It does not suggest that the share of military expenditure is a significant influence on the unemployment rate. This implies that in analysing unemployment no special account need be taken of military expenditure and that the fear that reductions in the share of military expenditure will be associated with higher average unemployment levels is misplaced.     

MILITARY EXPENDITURE AND ECONOMIC GROWTH IN DEVELOPING COUNTRIES: EVIDENCE FROM SYSTEM GMM ESTIMATES

The effect of military expenditure on economic growth in developing countries has been investigated by many empirical literatures. However, there is little consensus of that effect and the diversity seems to come from the use of different models and different estimators. This article applies the Augmented Solow Growth Model to examine the influence of military expenditure on economic growth for 35 developing countries over the period of 1975–2009. By using the system Generalized Method of Moments (GMM) estimators, empirical results indicate that defence has a negative and significant effect on economic growth in the sample countries.     

Defense Spending and Unemployment in France

France has received little attention in the literature of defense economics, despite some outstanding features of the country’s situation. This study attempts to partially fill this gap with new empirical evidence which evaluates the influence of military expenditure on the unemployment rate between 1975 and 2008. Our estimation is based on the ARDL approach to cointegration. The results reveal that both defense and non-defense spending exert a negative influence on unemployment but that defense spending has a higher negative 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.     

The structure of defense production in the United States, 1929‐∗

This article contains a critical review of the literature on the economics of military affairs in Greece and Turkey as of December 1999. In particular, I review (a) arms race models; (b) models of the demand for military expenditure; (c) models measuring the economic impact of military expenditure; and (d) literature and issues related to indigenous arms production. I conclude with a number of summary lessons and observations of how future research might improve upon the existing body of work.     

Debt Burden,Military Spending And Growth In Sub-Saharan Africa: A Dynamic Panel Data Analysis

This article empirically explores the relationship between military expenditure, external debts and economic performance in the economies of sub-Saharan Africa using a sample of 25 countries from 1988–2007. In investigating the defence–external debt nexus, we employ three advanced panel techniques of fully modified OLS (FMOLS), Dynamic OLS (DOLS) and dynamic fixed effect (DFE) to estimate our model. We observe that military expenditure has a positive and significant impact on external debt in African countries. Real GDP affects the total debt stock of African countries with a negative relationship. Our empirical results based on long-run elasticities show that a 1% rise in national output leads to a decline in external debt by 1.52%, on average. Policy-wise, the study suggests that African countries need to strengthen areas of fiscal responsibility and pursue models that encourage rational spending, particularly reductions in military expenditure.     

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.     

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.     

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.     

Military expenditure and economic growth: peru 1970–1996

The present study examines the effects of military expenditure on growth in Peru in the period from 1970 to 1996. By using a Deger‐type Simultaneous Equations Model it is possible to break up the net effect into supply‐ and demand‐side influences. The former consist of positive externalities of defence activities on the other sectors of the economy, while the latter can be described as crowding‐out of civilian investment. Estimations find the supply‐side effects to be insignificantly different from zero, while the crowding‐out effect of defence spending is significant and substantial. It is thereby established that defence expenditure has a negative overall effect on economic growth in Peru. Although several caveats – including specification problems of the Deger model, the quality of the data used, a relatively small sample and the presence of autocorrelation in the estimations – must be considered, these results turn out to be quite robust with respect to estimation methods (3SLS, 2SLS, OLS) and slight modifications to the model. They are also consistent with previous empirical findings from other countries and cross sectional studies.     

Domestic political and external security determinants of the demand for greek military expenditure

By European Union and NATO standards, Greece consistently allocates substantial human and material resources to defence. The Greek defence burden (i.e. military expenditure as a share of GDP) has invariably been appreciably higher than the EU and NATO averages. The paper applies an autoregressive distributed lag model (ARDL) to present cointegrated estimates of the demand function for Greek military expenditure, in which domestic political factors and external security determinants are incorporated. Our empirical findings suggest that Greek defence spending over the period 1960-1998 has been influenced by both external security concerns, namely Turkey, as well as changes in the domestic political scene.     

Life cycle costs for decision support ‐ a study of the various life cycle costs used at different levels of defence policy and management∗

Debates on many aspects of defence economics ‐ on the scale of defence expenditure, on the allocation of that expenditure to various military capabilities, and on the selection of equipment offering the best value for money ‐ are bedevilled by misunderstandings and misconceptions about the costs of defence equipment. This paper seeks to improve understanding of defence equipment costs by defining a hierarchy of defence equipment within which the direct and indirect life cycle costs of defence equipment may be allocated at different levels. Having reviewed the direct and indirect components of the life cycle cost, this paper then shows how different costing studies for different purposes require different approaches to life cycle costing, and that there is no unique life cycle cost which can be assigned to one particular item of defence equipment. There is instead a range oflife cycle costs, each of which is appropriate for a particular study, and it is important that a quoted cost of an item of defence equipment should be used only in the pertinent circumstances. The paper is written from a UK perspective and accordingly uses British nomenclature, but its principles should be relevant to defence cost studies in other nations.     

Does military spending stimulate growth? An empirical investigation in Italy

This paper investigates the effect of military burden on economic growth and extends previous works on the optimal size of government expenditure by exploring how external threat affects the preferences of the households and, in turn, economic growth. Post World War II Italian data are used to estimate nonlinear growth models using time-series semi-parametric methods. The estimates show that total government and civilian burdens are productive, whereas, military burden has significant effects on economic growth through the expenditure for peacekeeping missions, which reduces the insecurity in the home country. This may justify economically the current not negligible budget devoted to peacekeeping and humanitarian missions.