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Military Expenditure and Economic Activity: The Colombian Case

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  • Arias Andrés F.

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  • Laura Ardila

Abstract

We enhance a standard RBC model to account for military expenditure and the costs of an internal conflict or war. The model captures the natural trade-off in military expenditure: crowding out of private consumption and investment but less destruction (and, therefore, higher marginal productivity) of private capital (and labor). Hence, military expenditure below (above) a certain threshold generates a positive (negative) net benefit in terms of output. The model is calibrated to an annual frequency using Colombian data. We find that an increase in military expenditure of 1% GDP (the current policy of Colombian authorities) increases investment and output above the steady state during several periods, before the shock fades away. Even though consumption falls on impact (to open up space for the additional military expenditure and private investment), it increases above its stationary trend after three periods, remains on positive grounds thereafter, and the cumulated net gain is positive.

Suggested Citation

  • Arias Andrés F. & Laura Ardila, 2003. "Military Expenditure and Economic Activity: The Colombian Case," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE, September.
    • Handle: RePEc:col:000090:003895
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    File URL: http://economia.uniandes.edu.co/revistadys/Articulo52_2.pdf
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    References listed on IDEAS

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    1. Daniel Mejía & Carlos Esteban Posada, 2003. "Capital Destruction, Optimal Defense and Economic Growth," BORRADORES DE ECONOMIA 002096, BANCO DE LA REPÚBLICA.
    2. Joshua Aizenman & Reuven Glick, 2006. "Military expenditure, threats, and growth," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(2), pages 129-155.
    3. Michael D. Stroup & Jac C. Heckelman, 2001. "Size Of The Military Sector And Economic Growth: A Panel Data Analysis Of Africa And Latin America," Journal of Applied Economics, Universidad del CEMA, vol. 4, pages 329-360, November.
    4. Collier, Paul & Hoeffler, Anke, 1998. "On Economic Causes of Civil War," Oxford Economic Papers, Oxford University Press, vol. 50(4), pages 563-573, October.
    5. Malcolm Knight & Norman Loayza & Delano Villanueva, 1996. "The Peace Dividend: Military Spending Cuts and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 1-37, March.
    6. Kosuke Imai & Jeremy M. Weinstein, 2000. "Measuring the Economic Impact of Civil War," CID Working Papers 51, Center for International Development at Harvard University.
    7. repec:fth:oxesaf:95-8 is not listed on IDEAS
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    Citations

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    Cited by:

    1. World Bank, 2005. "Colombia : Public Expenditure Review," World Bank Other Operational Studies 8559, The World Bank.
    2. Stéphane Auray & Aurélien Eyquem & Frédéric Jouneau-Sion, 2009. "Riots, Battles and Cycles," Cahiers de recherche 09-01, Departement d'Economique de l'École de gestion à l'Université de Sherbrooke, revised 05 Apr 2009.
    3. Andres F. Arias & Hernan Maldonado, 2004. "FARC Terrorism in Colombia: A Clustering Analysis," INVESTIGACIÓN ECONÓMICA EN COLOMBIA 002715, FUNDACIÓN PONDO.
    4. Andrés Arias & Hernán Maldonado, 2004. "FARC TERRORISM IN COLOMBIA A Clustering Analysis," DOCUMENTOS CEDE 002716, UNIVERSIDAD DE LOS ANDES-CEDE.
    5. Andrés Felipe Mora Cortés, 2013. "Conflicto, violencia socioeconómica y desplazamiento forzado en Colombia," REVISTA CUADERNOS DE ECONOMÍA, UN - RCE - CID, December.

    More about this item

    Keywords

    Real business cycle; stationary state; military expenditure; crowding-out; productivity shock;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • N4 - Economic History - - Government, War, Law, International Relations, and Regulation

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