Military Expenditure and Economic Development

This working paper evaluates the effect of military expenditure on development in 77 countries from different regions and income groups. In this endeavour, we use a baseline fixed-effects panel data model, the Poisson pseudo-maximum likelihood (PPML) methodology and an instrumental variable (IV) estimation in order to control for endogeneity. The paper also runs robustness checks through several model extensions and spinoffs, and uses a gravity model augmented with the number of bilateral conflict casualties to verify the IV exclusion condition through the channel of trade. Initially, the results show a negative correlation between the military burden and development. This downward influence is most robust in low-income countries; it gradually dissipates as the income level of the country increases. Our findings suggest that when military spending is merely linked to conflicts and counterproductive imports of weapons, its macroeconomic influence spirals further downward. There is also evidence of a potential offsetting combination of positive economic spill-overs (e.g. stable political situation, defence offset contracts, productivity-improving military research programmes) and negative crowding out effects (e.g. less civilian public investment, non-productive military imports) among middle- and high-income countries.