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Growth, political instability and the defense burden

  • S. Brock Blomberg

This paper develops a model to examine the economic effects of political instability and military expenditure. In the model, "kleptocracies" use defense as "imperfect" insurance against the probability of being overthrown. Increasing defense has a secondary effect of augmenting the human capital stock (a spin-off effect). However, defense investment comes at the expense of consuming scarce resources (a crowding out effect). The paper's central contribution is to model each of these effects and their relationship to one another. The resulting theory predicts that the equilibrium is Pareto inefficient and that increased political instability and increased defense can inhibit economic growth. Empirically, increases in political instability are found to decrease growth while increases in defense are found to decrease political instability. The paper also finds that increases in defense have a direct negative effect on growth, although the relation is weak. The weak relation implies the aforementioned crowding out effect is largely mitigated by the spin-off effect.

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Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9420.

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Date of creation: 1994
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Handle: RePEc:fip:fednrp:9420
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  1. Kenneth Rogoff & Anne Sibert, 1986. "Elections and Macroeconomic Policy Cycles," NBER Working Papers 1838, National Bureau of Economic Research, Inc.
  2. Faini, Riccardo & Annez, Patricia & Taylor, Lance, 1984. "Defense Spending, Economic Structure, and Growth: Evidence among Countries and Over Time," Economic Development and Cultural Change, University of Chicago Press, vol. 32(3), pages 487-98, April.
  3. Alberto Alesina & Sule Ozler & Nouriel Roubini & Phillip Swagel, 1992. "Political Instability and Economic Growth," NBER Working Papers 4173, National Bureau of Economic Research, Inc.
  4. Skaperdas, Stergios, 1991. "Conflict and Attitudes toward Risk," American Economic Review, American Economic Association, vol. 81(2), pages 116-20, May.
  5. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  6. Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March.
  7. Smith, R P, 1980. "The Demand for Military Expenditure," Economic Journal, Royal Economic Society, vol. 90(363), pages 811-20, December.
  8. Smith, R P, 1977. "Military Expenditure and Capitalism," Cambridge Journal of Economics, Oxford University Press, vol. 1(1), pages 61-76, March.
  9. Smith, Ron P, 1978. "Military Expenditure and Capitalism: A Reply," Cambridge Journal of Economics, Oxford University Press, vol. 2(3), pages 299-304, September.
  10. Smith, Ronald P., 1980. "Military expenditure and investment in OECD countries, 1954-1973," Journal of Comparative Economics, Elsevier, vol. 4(1), pages 19-32, March.
  11. Londregan, J. & Poole, K.T., 1991. "The Seizure of Executive Power and Economic Growth: Some Additional Evidence," GSIA Working Papers 1991-6, Carnegie Mellon University, Tepper School of Business.
  12. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  13. Deger, Saadet, 1986. "Economic Development and Defense Expenditure," Economic Development and Cultural Change, University of Chicago Press, vol. 35(1), pages 179-96, October.
  14. Newey, Whitney K., 1987. "Efficient estimation of limited dependent variable models with endogenous explanatory variables," Journal of Econometrics, Elsevier, vol. 36(3), pages 231-250, November.
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