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The Peace Dividend; Military Spending Cuts and Economic Growth

  • Malcolm D. Knight
  • Delano Villanueva
  • Norman Loayza

Although conventional wisdom suggests that reducing military spending may improve a country’s economic growth performance, empirical studies have produced ambiguous results. This paper extends a standard growth model and estimates it using techniques that exploit both cross-section and time-series dimensions of available data to obtain consistent estimates of the growth-retarding effects of military spending via its adverse impact on capital formation and resource allocation. Model simulations suggest that a substantial long-run “Peace Dividend”--in the form of higher capacity output--may result from: (i) markedly lower military expenditure levels achieved in most regions during the late 1980s; and (ii) further military spending cuts that would be possible in the future if a global peace could be secured.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 95/53.

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Length: 40
Date of creation: 01 May 1995
Date of revision:
Handle: RePEc:imf:imfwpa:95/53
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  1. Biswas, Basudeb & Ram, Rati, 1986. "Military Expenditures and Economic Growth in Less Developed Countries: An Augmented Model and Further Evidence," Economic Development and Cultural Change, University of Chicago Press, vol. 34(2), pages 361-72, January.
  2. Malcolm Knight & Norman Loayza & Delano Villanueva, 1993. "Testing the Neoclassical Theory of Economic Growth: A Panel Data Approach," IMF Staff Papers, Palgrave Macmillan, vol. 40(3), pages 512-541, September.
  3. T. W. Swan, 1956. "ECONOMIC GROWTH and CAPITAL ACCUMULATION," The Economic Record, The Economic Society of Australia, vol. 32(2), pages 334-361, November.
  4. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  5. Swan, Trevor W, 2002. "Economic Growth," The Economic Record, The Economic Society of Australia, vol. 78(243), pages 375-80, December.
  6. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
  7. Jong-Wha Lee, 1992. "International Trade, Distortions and Long-Run Economic Growth," IMF Working Papers 92/90, International Monetary Fund.
  8. Robert J. Barro & Jong-Wha Lee, 1993. "Losers and Winners in Economic Growth," NBER Working Papers 4341, National Bureau of Economic Research, Inc.
  9. Chamberlain, Gary, 1982. "Multivariate regression models for panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 5-46, January.
  10. Landau, Daniel, 1993. "The economic impact of military expenditures," Policy Research Working Paper Series 1138, The World Bank.
  11. De Gregorio, Jose, 1993. "Inflation, taxation, and long-run growth," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 271-298, June.
  12. Thompson, Earl A, 1974. "Taxation and National Defense," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 755-82, July/Aug..
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