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Military Expenditure, Endogeneity and Economic Growth

Author

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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.

Suggested Citation

  • d'Agostino, Giorgio & Dunne, John Paul & Pieroni, Luca, 2013. "Military Expenditure, Endogeneity and Economic Growth," MPRA Paper 45640, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:45640
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    References listed on IDEAS

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    Cited by:

    1. Ryan A. Compton & Bryan Paterson, 2016. "Military Spending and Growth: The Role of Institutions," Defence and Peace Economics, Taylor & Francis Journals, vol. 27(3), pages 301-322, June.
    2. Sefa Awaworyi & Siew Ling Yew, 2014. "The Effect of Military Expenditure on Growth: An Empirical Synthesis," Monash Economics Working Papers 25-14, Monash University, Department of Economics.
    3. Raul Caruso, 2015. "Beyond deterrence and decline. Towards a general understanding of peace economics," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 128(1), pages 57-74.
    4. repec:spr:qualqt:v:52:y:2018:i:3:d:10.1007_s11135-017-0525-4 is not listed on IDEAS
    5. repec:wfo:wstudy:60595 is not listed on IDEAS
    6. repec:bla:rdevec:v:21:y:2017:i:3:p:511-526 is not listed on IDEAS
    7. Hou Na & Chen Bo, 2014. "Military Spending and Economic Growth in An Augmented Solow Model: A Panel Data Investigation for OECD Countries," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 20(3), pages 1-15, August.
    8. Giorgio d’Agostino & J. Paul Dunne & Luca Pieroni, 2017. "Does Military Spending Matter for Long-run Growth?," Defence and Peace Economics, Taylor & Francis Journals, vol. 28(4), pages 429-436, July.
    9. Julien Malizard, 2016. "Military expenditure and economic growth in the European Union: Evidence from SIPRI’s extended dataset," Economics of Peace and Security Journal, EPS Publishing, vol. 11(2), pages 38-44, October.
    10. Duncan Thomas K. & Coyne Christopher J., 2015. "The Revolving Door and the Entrenchment of the Permanent War Economy," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 21(3), pages 391-413, August.
    11. Eftychia Nikolaidou, 2016. "Greece, Portugal, Spain: New evidence on the economic effects of military expenditure using the new SIPRI data," Economics of Peace and Security Journal, EPS Publishing, vol. 11(2), pages 20-27, October.
    12. Christopher Coyne, 2015. "Lobotomizing the defense brain," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 28(4), pages 371-396, December.
    13. Goodness C. Aye & Mehmet Balcilar & John P. Dunne & Rangan Gupta & Reneé van Eyden, 2014. "Military expenditure, economic growth and structural instability: a case study of South Africa," Defence and Peace Economics, Taylor & Francis Journals, vol. 25(6), pages 619-633, December.
    14. Abdulnasser Hatemi-J & Tsangyao Chang & Wen-Yi Chen & Feng-Li Lin & Rangan Gupta, 2015. "Asymmetric Granger Causality between Military Expenditures and Economic Growth in Top Six Defense Suppliers," Working Papers 201565, University of Pretoria, Department of Economics.
    15. repec:spr:qualqt:v:52:y:2018:i:3:d:10.1007_s11135-017-0512-9 is not listed on IDEAS
    16. repec:eme:jespps:jes-01-2015-0021 is not listed on IDEAS
    17. J. Paul Dunne & Nan Tian, 2016. "Military expenditure and economic growth, 1960–2014," Economics of Peace and Security Journal, EPS Publishing, vol. 11(2), pages 50-56, October.
    18. Christos Kollias & Suzanna-Maria Paleologou, 2016. "Investment, growth, and defense expenditure in the EU15: Revisiting the nexus using SIPRI’s new consistent dataset," Economics of Peace and Security Journal, EPS Publishing, vol. 11(2), pages 28-37, October.
    19. Christos Kollias & Suzanna-Maria Paleologou & Panayiotis Tzeremes & Nickolaos Tzeremes, 2017. "Defence expenditure and economic growth in Latin American countries: evidence from linear and nonlinear causality tests," Latin American Economic Review, Springer;Centro de Investigaciòn y Docencia Económica (CIDE), vol. 26(1), pages 1-25, December.
    20. Christos Kollias & Suzanna-Maria Paleologou & Andreas Stergiou, 2016. "Military expenditure in Greece: Security challenges and economic constraints," Economics of Peace and Security Journal, EPS Publishing, vol. 11(1), pages 28-34, April.
    21. d'Agostino, G. & Dunne, J.P. & Pieroni, L., 2016. "Corruption and growth in Africa," European Journal of Political Economy, Elsevier, vol. 43(C), pages 71-88.
    22. Nusrate Aziz & M. Niaz Asadullah, 2017. "Military spending, armed conflict and economic growth in developing countries in the post-Cold War era," Journal of Economic Studies, Emerald Group Publishing, vol. 44(1), pages 47-68, January.
    23. repec:taf:defpea:v:28:y:2017:i:6:p:703-718 is not listed on IDEAS

    More about this item

    Keywords

    Military expenditure; economic growth; development; instrumental variables;

    JEL classification:

    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • N17 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Africa; Oceania
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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