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Military Expenditure, Endogeneity and Economic Growth

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  • d'Agostino, Giorgio
  • Dunne, John Paul
  • Pieroni, Luca

Abstract

The debate over the economic effects of military spending continues to develop, with no consensus, but a deepening understanding of the issues and limitations of previous work. A recent survey has suggested that the inclusion of post Cold War data has tended to make finding a negative effect more common, but issues remain (Dunne and Tian, 2013). One particularly important issue that has not been adequately dealt with, is the possible 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 the likely importance of endogeneity, using conflict onset as an instrument for military spending in an endogenous growth model for a panel of African countries 1989-2010. Following a brief review of the literature the theoretical and empirical models are outlined and the use of conflict onset as an instrumental variable for military spending in the panel estimates is justified. The empirical analysis suggests that endogeneity is likely to be an important issue and using IV estimation provides a larger significant negative effect for military spending on growth than OLS. It also identifies a further potential bias in the same direction in studies not including non-military spending in the growth equation. These results imply that the damaging effects of military spending on growth in Africa are being underestimated in most studies. While it is clear that conflict onset is a suitable and successful instrument in this analysis, the results are not directly generalisable. Conflict onset is unlikely to be applicable to a larger and more diverse panel of countries. What is of general concern is the finding that endogeneity is important and is likely to be influencing the results of studies of military spending and growth. It is important that future research tries to deal with endogeneity and the search for reasonable instruments is one that needs to engage researchers.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45640.

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Date of creation: 28 Mar 2013
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Handle: RePEc:pra:mprapa:45640

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Keywords: Military expenditure; economic growth; development; instrumental variables;

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References

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  1. Christopher Blattman & Edward Miguel, 2009. "Civil War," NBER Working Papers 14801, National Bureau of Economic Research, Inc.
  2. Paul Collier & Anke Hoeffler, 2004. "Greed and grievance in civil war," Oxford Economic Papers, Oxford University Press, vol. 56(4), pages 563-595, October.
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  6. Giorgio d'Agostino & Luca Pieroni & J Paul Dunne, 2011. "Corruption, Military Spending and Growth," Working Papers 1103, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
  7. Hahn, Jinyong & Todd, Petra & Van der Klaauw, Wilbert, 2001. "Identification and Estimation of Treatment Effects with a Regression-Discontinuity Design," Econometrica, Econometric Society, Econometric Society, vol. 69(1), pages 201-09, January.
  8. d'Agostino, Giorgio & Dunne, Paul J. & Pieroni, Luca, 2012. "Government spending, corruption and economic growth," MPRA Paper 38109, University Library of Munich, Germany.
  9. J Paul Dunne & Ron Smith & Dirk Willenbockel, 2004. "Models of Military Expenditure and Growth: A Critical Review," Working Papers 0408, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
  10. Luca Pieroni, 2009. "Military Expenditure And Economic Growth," Defence and Peace Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 20(4), pages 327-339.
  11. Philip Oreopoulos, 2006. "Estimating Average and Local Average Treatment Effects of Education when Compulsory Schooling Laws Really Matter," American Economic Review, American Economic Association, American Economic Association, vol. 96(1), pages 152-175, March.
  12. J Paul Dunne & Nan Tian, 2013. "Military expenditure and economic growth: A survey," Economics of Peace and Security Journal, Economists for Peace and Security (UK), Economists for Peace and Security (UK), vol. 8(1), pages 5-11, April.
  13. Angrist, Joshua D, 1995. "The Economic Returns to Schooling in the West Bank and Gaza Strip," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1065-87, December.
  14. J Paul Dunne & Samuel Perlo-Freeman & Ron P Smith, 2007. "The Demand for Military Expenditure in Developing Countries: Hostility versus Capability," Working Papers 0707, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
  15. John Shea, 1996. "Instrument Relevance in Multivariate Linear Models: A Simple Measure," NBER Technical Working Papers 0193, National Bureau of Economic Research, Inc.
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  17. Giorgio d'Agostino & Luca Pieroni & J Paul Dunne, 2010. "Assessing the Effects of Military Expenditure on Growth," Working Papers 1012, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
  18. Angus Deaton, 2010. "Instruments, randomization, and learning about development," Working Papers, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies. 1224, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
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Cited by:
  1. Goodness C. Aye & Mehmet Balcilar & John P. Dunne & Rangan Gupta & Renee van Eyden, 2013. "Military Expenditure, Economic Growth and Structural Instability: A Case Study of South Africa," Working Papers 201344, University of Pretoria, Department of Economics.

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