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Military Expenditure, Threats, and Growth

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Joshua Aizenman
Reuven Glick

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Abstract

This paper clarifies one of the puzzling results of the economic growth literature: the impact of military expenditure is frequently found to be non-significant or negative, yet most countries spend a large fraction of their GDP on defense and the military. We start by empirical evaluation of the non-linear interactions between military expenditure, external threats, corruption, and other relevant controls. While growth falls with higher levels of military spending, given the values of the other independent variables, we show that military expenditure in the presence of threats increases growth. We explain the presence of these non-linearities in an extended version of Barro and Sala-i-Martin (1995), allowing the dependence of growth on the severity of external threats, and on the effective military expenditure associated with these threats.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9618.

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Date of creation: Apr 2003
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Handle: RePEc:nbr:nberwo:9618

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Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Landau, Daniel, 1996. "Is one of the 'peace dividends' negative? Military expenditure and economic growth in the wealthy OECD countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(2), pages 183-195. [Downloadable!] (restricted)
  2. B. Douglas Bernheim & John B. Shoven, 1991. "National Saving and Economic Performance," NBER Books, National Bureau of Economic Research, Inc, number bern91-2.
  3. Robert J. Barro, 1991. "A Cross-Country Study of Growth, Saving, and Government," NBER Chapters, in: National Saving and Economic Performance, pages 271-304 National Bureau of Economic Research, Inc. [Downloadable!]
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  4. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August. [Downloadable!] (restricted)
  5. Nancy Louise Happe & John Wakeman-Linn, 1994. "Military Expenditure and Arms Trade: Alternative Data Sources," IMF Working Papers 94/69, International Monetary Fund.
  6. Jack Hirshleifer, 1995. "Theorizing About Conflict," UCLA Economics Working Papers 727, UCLA Department of Economics. [Downloadable!]
  7. Paul Dunne & Sam Perlo-Freeman, 2003. "The Demand for Military Spending in Developing Countries," International Review of Applied Economics, Taylor and Francis Journals, vol. 17(1), pages 023-048, January. [Downloadable!] (restricted)
  8. Ram, Rati, 1995. "Defense expenditure and economic growth," Handbook of Defense Economics, in: Keith Hartley & Todd Sandler (ed.), Handbook of Defense Economics, edition 1, volume 1, chapter 10, pages 251-274 Elsevier. [Downloadable!] (restricted)
  9. Skaperdas, Stergios, 1996. "Contest Success Functions," Economic Theory, Springer, vol. 7(2), pages 283-90, February.
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  10. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October. [Downloadable!] (restricted)
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  11. Knight, Malcolm & Loayza, Norman & Villanueva, Delano, 1996. "The peace dividend : military spending cuts and economic growth," Policy Research Working Paper Series 1577, The World Bank. [Downloadable!]
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  12. Hamid Reza Davoodi & Vito Tanzi, 1997. "Corruption, Public Investment, and Growth," IMF Working Papers 97/139, International Monetary Fund.
  13. Barro, Robert J, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 407-43, May. [Downloadable!] (restricted)
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  14. Sanjeev Gupta & Raju Sharan & Luiz de Mello, 2000. "Corruption and Military Spending," IMF Working Papers 00/23, International Monetary Fund.
  15. Hirshleifer, Jack, 1995. "Theorizing about conflict," Handbook of Defense Economics, in: Keith Hartley & Todd Sandler (ed.), Handbook of Defense Economics, edition 1, volume 1, chapter 7, pages 165-189 Elsevier. [Downloadable!] (restricted)
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  1. Jesús Crespo Cuaresma & Gerhard Reitschuler, 2004. "A non-linear defence-growth nexus? evidence from the US economy," Defence and Peace Economics, Taylor and Francis Journals, vol. 15(1), pages 71-82, February. [Downloadable!] (restricted)
  2. Ari Francisco de Araujo Junior & Cláudio D. Shikida, 2008. "Military Expenditures, External Threats and Economic Growth," Economics Bulletin, Economics Bulletin, vol. 15(16), pages 1-7. [Downloadable!]
  3. Andrés F. Arias & Laura Ardila, 2003. "Military Expenditure and Economic Activity: The Colombian Case," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE. [Downloadable!]
  4. Chad R. Wilkerson & Megan D. Williams, 2008. "How is the rise in national defense spending affecting the Tenth District economy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 49-79. [Downloadable!]
  5. Jesús Crespo Guaresma & Gerhard Reitschuler, 2003. ""Guns or Butter?" Revisited: Robustness and Nonlinearity Issues in the Defense-Grotwth Nexus," Vienna Economics Papers 0310, University of Vienna, Department of Economics. [Downloadable!]
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  6. Luca Pieroni, 2007. "Military Spending and Economic Growth," Discussion Papers 0708, University of the West of England, Department of Economics. [Downloadable!]
  7. J Paul Dunne & Ron Smith & Dirk Willenbockel, 2004. "Models of Military Expenditure and Growth: A Critical Review," Discussion Papers 0408, University of the West of England, Department of Economics. [Downloadable!]
    Other versions:
  8. Axel Dreher & Thomas Herzfeld, 2005. "The Economic Costs of Corruption: A Survey and New Evidence," Public Economics 0506001, EconWPA. [Downloadable!]
  9. Nelson Ramírez-Rondán & Saki Bigio, 2006. "Corruption and Development Indicators: An Empirical Review," Working Papers 2006-007, Banco Central de Reserva del Perú. [Downloadable!]
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