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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. d'Agostino, Giorgio & Dunne, Paul J. & Pieroni, Luca, 2012. "Government spending, corruption and economic growth," MPRA Paper 38109, University Library of Munich, Germany.
  2. Joshua Aizenman & Reuven Glick, 2003. "Military Expenditure, Threats, and Growth," NBER Working Papers 9618, National Bureau of Economic Research, Inc.
  3. Angus Deaton, 2010. "Instruments, randomization, and learning about development," Working Papers 1224, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
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  8. 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.
  9. Edward Miguel & Shanker Satyanath & Ernest Sergenti, 2004. "Economic Shocks and Civil Conflict: An Instrumental Variables Approach," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 725-753, August.
  10. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
  11. Giorgio d’Agostino & John Paul Dunne & Luca Pieroni, 2012. "Corruption, Military Spending And Growth," Defence and Peace Economics, Taylor & Francis Journals, vol. 23(6), pages 591-604, December.
  12. Imbens, Guido W & Angrist, Joshua D, 1994. "Identification and Estimation of Local Average Treatment Effects," Econometrica, Econometric Society, vol. 62(2), pages 467-75, March.
  13. 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.
  14. John Shea, 1997. "Instrument Relevance in Multivariate Linear Models: A Simple Measure," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 348-352, May.
  15. Shantayanan Devarajan & Vinaya Swaroop & Heng-fu Zou, 1996. "The composition of public expenditure and economic growth," CEMA Working Papers 77, China Economics and Management Academy, Central University of Finance and Economics.
  16. 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), vol. 8(1), pages 5-11, April.
  17. Luca Pieroni, 2009. "Military Expenditure And Economic Growth," Defence and Peace Economics, Taylor & Francis Journals, vol. 20(4), pages 327-339.
  18. Philip Oreopoulos, 2006. "Estimating Average and Local Average Treatment Effects of Education when Compulsory Schooling Laws Really Matter," American Economic Review, American Economic Association, vol. 96(1), pages 152-175, March.
  19. J. Paul Dunne & Ron Smith & Dirk Willenbockel, 2005. "Models Of Military Expenditure And Growth: A Critical Review," Defence and Peace Economics, Taylor & Francis Journals, vol. 16(6), pages 449-461.
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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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