IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_6088.html
   My bibliography  Save this paper

Does Development Aid Increase Military Expenditure?

Author

Listed:
  • Sarah Langlotz
  • Niklas Potrafke

    ()

Abstract

The diversion of development aid to the recipient’s military may be one explanation why aid is often found to be ineffective in promoting economic growth and development. Previous studies have not derived the causal effects of development aid on military expenditure. Using a new instrumental variable strategy, we examine whether bilateral development aid increases military expenditure in recipient countries. The instrument is the interaction of donor government fractionalization and the probability of receiving aid. The dataset includes new data on military expenditure for 124 recipient countries over the 1975-2012 period. While development aid has a positive effect on military expenditure in the full sample, the effect vanishes when we exclude outliers. However, we find that aid provided by coordinated market economies increases military expenditure in the full sample of recipient countries, even after controlling for outliers. Coordinated market economies have been found to deliver more government-to-government aid, which has a higher risk of capture compared to aid delivered through non-state development actors.

Suggested Citation

  • Sarah Langlotz & Niklas Potrafke, 2016. "Does Development Aid Increase Military Expenditure?," CESifo Working Paper Series 6088, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_6088
    as

    Download full text from publisher

    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp6088.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Axel Dreher & Sarah Langlotz, 2015. "Aid and Growth. New Evidence Using an Excludable Instrument," CESifo Working Paper Series 5515, CESifo Group Munich.
    2. Nicolas Van de Sijpe, 2013. "Is Foreign Aid Fungible? Evidence from the Education and Health Sectors," World Bank Economic Review, World Bank Group, vol. 27(2), pages 320-356.
    3. Brech, Viktor & Potrafke, Niklas, 2014. "Donor ideology and types of foreign aid," Journal of Comparative Economics, Elsevier, vol. 42(1), pages 61-75.
    4. Nordhaus, William & Oneal, John R. & Russett, Bruce, 2012. "The Effects of the International Security Environment on National Military Expenditures: A Multicountry Study," International Organization, Cambridge University Press, vol. 66(03), pages 491-513, July.
    5. van de Walle, Dominique & Mu, Ren, 2007. "Fungibility and the flypaper effect of project aid: Micro-evidence for Vietnam," Journal of Development Economics, Elsevier, pages 667-685.
    6. Khilji, Nasir M. & Zampelli, Ernest M., 1994. "The fungibility of U.S. military and non-military assistance and the impacts on expenditures of major aid recipients," Journal of Development Economics, Elsevier, vol. 43(2), pages 345-362, April.
    7. Cashel-Cordo, Peter & Craig, Steven G., 1990. "The public sector impact of international resource transfers," Journal of Development Economics, Elsevier, pages 17-42.
    8. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
    9. Pack, Howard & Pack, Janet Rothenberg, 1990. "Is Foreign Aid Fungible? The Case of Indonesia," Economic Journal, Royal Economic Society, vol. 100(399), pages 188-194, March.
    10. Feyzioglu, Tarhan & Swaroop, Vinaya & Zhu, Min, 1998. "A Panel Data Analysis of the Fungibility of Foreign Aid," World Bank Economic Review, World Bank Group, vol. 12(1), pages 29-58, January.
    11. Eric Werker & Faisal Z. Ahmed & Charles Cohen, 2009. "How Is Foreign Aid Spent? Evidence from a Natural Experiment," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(2), pages 225-244, July.
    12. Björn Kauder & Niklas Potrafke, 2016. "The growth in military expenditure in Germany 1951--2011: did parties matter?," Defence and Peace Economics, Taylor & Francis Journals, vol. 27(4), pages 503-519, August.
    13. Bun, Maurice J.G. & Harrison, Teresa D., 2014. "OLS and IV estimation of regression models including endogenous interaction terms," School of Economics Working Paper Series 2014-3, LeBow College of Business, Drexel University.
    14. Martin C. McGuire, 1982. "U.S. Assistance, Israeli Allocation, and the Arms Race in the Middle East," Journal of Conflict Resolution, Peace Science Society (International), vol. 26(2), pages 199-235, June.
    15. McGuire, Martin C, 1987. "Foreign Assistance, Investment, and Defense: A Methodological Study with an Application to Israel, 1960-1979," Economic Development and Cultural Change, University of Chicago Press, vol. 35(4), pages 847-873, July.
    16. Round, Jeffery I. & Odedokun, Matthew, 2004. "Aid effort and its determinants," International Review of Economics & Finance, Elsevier, vol. 13(3), pages 293-309.
    17. Nathan Nunn & Nancy Qian, 2014. "US Food Aid and Civil Conflict," American Economic Review, American Economic Association, vol. 104(6), pages 1630-1666, June.
    18. Oeindrila Dube & Suresh Naidu, 2010. "Bases, Bullets, and Ballots: The Effect of U.S. Military Aid on Political Conflict in Colombia," Working Papers 197, Center for Global Development.
    19. Wagstaff, Adam, 2011. "Fungibility and the impact of development assistance: Evidence from Vietnam's health sector," Journal of Development Economics, Elsevier, pages 62-73.
    20. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages 191-216, June.
    21. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
    22. Bove, Vincenzo & Efthyvoulou, Georgios & Navas, Antonio, 2017. "Political cycles in public expenditure: butter vs guns," Journal of Comparative Economics, Elsevier, pages 582-604.
    23. J. Paul Dunne & Sam Perlo-Freeman & Ron Smith, 2008. "The Demand For Military Expenditure In Developing Countries: Hostility Versus Capability," Defence and Peace Economics, Taylor & Francis Journals, vol. 19(4), pages 293-302.
    24. Khilji, Nasir M. & Zampelli, Ernest M., 1991. "The fungibility of US assistance to developing countries and the impact on recipient expanditures: a case study of Pakistan," World Development, Elsevier, vol. 19(8), pages 1095-1105, August.
    25. Volkerink, Bjorn & De Haan, Jakob, 2001. "Fragmented Government Effects on Fiscal Policy: New Evidence," Public Choice, Springer, vol. 109(3-4), pages 221-242, December.
    26. D. Scott Bennett & Allan C. Stam, 2000. "Eugene : A conceptual manual," International Interactions, Taylor & Francis Journals, vol. 26(2), pages 179-204, March.
    27. Patrick Johnston, 2004. "Timber Booms, State Busts: The political economy of Liberian timber," Review of African Political Economy, Taylor & Francis Journals, vol. 31(101), pages 441-456, September.
    28. Raghuram G. Rajan & Arvind Subramanian, 2008. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 643-665, November.
    29. Axel Dreher & Andreas Fuchs, 2011. "Does terror increase aid?," Public Choice, Springer, vol. 149(3), pages 337-363, December.
    30. Dietrich, Simone, 2016. "Donor Political Economies and the Pursuit of Aid Effectiveness," International Organization, Cambridge University Press, vol. 70(01), pages 65-102, January.
    31. Collier, Paul & Hoeffler, Anke, 2004. "Aid, policy and growth in post-conflict societies," European Economic Review, Elsevier, vol. 48(5), pages 1125-1145, October.
    32. Paul Collier & Anke Hoeffler, 2007. "Unintended Consequences: Does Aid Promote Arms Races?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(1), pages 1-27, February.
    33. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588.
    34. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
    35. Brett Leeds & Jeffrey Ritter & Sara Mitchell & Andrew Long, 2002. "Alliance Treaty Obligations and Provisions, 1815-1944," International Interactions, Taylor & Francis Journals, vol. 28(3), pages 237-260, July.
    36. Arthur Lewbel, 1997. "Constructing Instruments for Regressions with Measurement Error when no Additional Data are Available, with an Application to Patents and R&D," Econometrica, Econometric Society, vol. 65(5), pages 1201-1214, September.
    37. Nicolas Van de Sijpe, 2013. "The Fungibility of Health Aid Reconsidered," Journal of Development Studies, Taylor & Francis Journals, vol. 49(12), pages 1746-1754, December.
    38. Pack, Howard & Pack, Janet Rothenberg, 1993. "Foreign Aid and the Question of Fungibility," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 258-265, May.
    39. Gupta, Sanjeev & de Mello, Luiz & Sharan, Raju, 2001. "Corruption and military spending," European Journal of Political Economy, Elsevier, vol. 17(4), pages 749-777, November.
    40. Morrissey, Oliver, 2015. "Aid and Government Fiscal Behavior: Assessing Recent Evidence," World Development, Elsevier, vol. 69(C), pages 98-105.
    41. Doucouliagos, Hristos & Paldam, Martin, 2011. "The ineffectiveness of development aid on growth: An update," European Journal of Political Economy, Elsevier, vol. 27(2), pages 399-404, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Axel Dreher & Valentin F. Lang & Sebastian Ziaja, 2017. "Foreign Aid in Areas of Limited Statehood," CESifo Working Paper Series 6340, CESifo Group Munich.

    More about this item

    Keywords

    aid; military expenditure; fungibility; instrumental variables; causality;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_6088. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Klaus Wohlrabe). General contact details of provider: http://edirc.repec.org/data/cesifde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.