MILITARY EXPENDITURE AND GRANGER CAUSALITY: A CRITICAL REVIEW

A large literature has used tests for Granger (1969) non‐causality, GNC, to examine the interaction of military spending with the economy. Such tests answer a specific although quite limited question: can one reject the null hypothesis that one variable does not help predict another? If one can reject, there is said to be Granger causality, GC. Although the limitations of GNC tests are well known, they are often not emphasised in the applied literature and so may be forgotten. This paper considers the econometric and methodological issues involved and illustrates them with data for the US and other countries. There are three main issues. First, the tests may not be informative about the substantive issue, the interaction of military expenditure and the economy, since Granger causality does not correspond to the usual notion of economic causality. To determine the relationship of the two notions of causality requires an identified structural model. Second, the tests are very sensitive to specification. GNC testing is usually done in the context of a vector autoregression, VAR, and the test results are sensitive to the variables and deterministic terms included in the VAR, lag length, sample or observation window used, treatment of integration and cointegration and level of significance. Statistical criteria may not be very informative about these choices. Third, since the parameters are not structural, the test results may not be stable over different time periods or different 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.     

Military expenditure and income distribution in South Korea

This paper attempts to investigate the long-run and the causal relationship between military expenditure and income distribution in South Korea for the period 1965–2011. Applying the bounds test approach to cointegration, we found a long-run relationship between military expenditure and the Gini coefficient with military expenditure having a positive and a statistically significant impact on income inequality. A 1% rise in military expenditure increased the Gini coefficient by 0.38%. Application of the lag-augmented causality test also reveals a unidirectional causality running from military expenditure to income inequality. The evidence seems to suggest that devoting more resources to the military sector may further worsen income inequality in South Korea.     

Military support and transnational terrorism

Analysing the relationship between the provision of military support and the probability of becoming the target of a terrorist attack, this paper contributes to the literature on the causes of transnational terrorism. We find that deployment of military troops of country X in country Y increases the probability of a terrorist attack on citizens of country X by a terrorist group located in country Y. Exporting weapons to country Y seems to increase the probability of being attacked by the terrorists of this country Y as well. Deploying materials, however, does not seem to significantly influence the probability of attack. Including lagged values for our military support variables ensures that the causality direction is from military support to terrorist attacks. Moreover, these results indicate that while the effect of military deployment on the probability of attack lasts for more than 1 year, the effect is rather short-lived.     

The war after next is here – what does the elephant look like?

A comprehensive paradigm of future wars can be defined, and is called in this article “Extended conflicts.” These can be characterized by strategic attrition, to which all national resources and all possible international legitimacy are mobilized, in order to achieve a resolution by transformation of the opponent. The use of military force in this kind of conflict is limited. The understanding that we are facing an era of extended conflicts will improve the way it is utilized.     

Military Innovation and Tactical Adaptation in the Israel–Hizballah Conflict: The Institutionalization of Lesson-Learning in the IDF

This article highlights a pattern of military adaptation and tactical problem-solving utilized by the Israel Defense Forces (IDF) while engaged in protracted conflict with the Lebanese militant group Hizballah. It discusses the IDF’s recent attempts to institutionalize their historically intuitive process of ad-hoc learning by developing a formal tactical-level mechanism for ‘knowledge management’. The diffusion of this battlefield lesson-learning system that originated at lower-levels of the organization is examined, as well as its implementation and effectiveness during the 2006 Lebanon War. A nuanced analysis of IDF adaptation illustrates the dynamic interplay between both ‘top-down’ and ‘bottom-up’ processes of military innovation.     

Indian Military Modernization and Conventional Deterrence in South Asia

In recent years, headline grabbing increases in the Indian defense budget have raised concerns that India’s on-going military modernization threatens to upset the delicate conventional military balance vis-à-vis Pakistan. Such an eventuality is taken as justification for Islamabad’s pursuit of tactical-nuclear weapons and other actions that have worrisome implications for strategic stability on the subcontinent. This article examines the prospects for Pakistan’s conventional deterrence in the near to medium term, and concludes that it is much better than the pessimists allege. A host of factors, including terrain, the favorable deployment of Pakistani forces, and a lack of strategic surprise in the most likely conflict scenarios, will mitigate whatever advantages India may be gaining through military modernization. Despite a growing technological edge in some areas, Indian policymakers cannot be confident that even a limited resort to military force would achieve a rapid result, which is an essential pre-condition for deterrence failure.     

TIME-VARYING CHARACTERISTICS OF SOUTH KOREA-UNITED STATES AND JAPAN-UNITED STATES MILITARY ALLIANCES UNDER CHINESE THREAT: A PUBLIC GOOD APPROACH

This paper investigates the nature of two military alliances under Chinese threat. The findings are as follows: First, South Korea does not consider China a significant threat while Japan and the United States have recognized China as a serious threat since the 1990s and the 2000s, respectively. Second, the relationship between South Korea and the United States is a true military alliance for all time periods, but the nature of the alliance has changed since the 1970s. Third, although Japan began to form an alliance relationship with the United States in the 1990s, Japan is considered a more significant ally by the United States. This paper implies that, should China provoke a military confrontation, it might be difficult to deduce a common solution among the three countries because of the different response to military threats from China.     

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.     

Workplace goals and output quality: evidence from time-constrained recruiting goals in the US navy

This paper examines how workplace goals affect the quality of worker output, using data from the recruiting command of the US Navy. Recruiting stations and recruiters are assigned monthly goals for the quantity of new recruits that may create an unintended incentive to sacrifice quality, especially towards the end of the month. Using data on the universe of Navy recruits from FY1998 to 2010, we find significant reductions in the quality of recruits towards the end of the contracting month, both in terms of pre-existing quality of recruits and in medium-term outcomes that reflect the quality of the job match.