Military Expenditure and Economic Growth: A Panel Data Analysis

Amna Arshad, Shabib Haider Syed and Ghulam Shabbir

Abstract

This paper seeks to reinvestigate the relationship between military expenditure and economic growth by making use of the augmented Solow growth model. It also tends to explore the combined effect of military spending and armed conflicts on growth rate. Since the literature pertaining to defense economics depicts no consensus over the effects of military expenditure on the economy, the ongoing debate still becomes a topic of interest for many economists. This study reviews the recent publications in this regard and aims to contribute to the existing literature by making use of the most recent data for a pool of 61 countries. The theoretical framework is based on the augmented Solow growth model introduced by Mankiw et al. (1992) and first applied by Knight et al. (1996). Incorporating the same model used by Dunne (2005), this paper endeavors to access the impact military expenditure exerts on growth. Data for the period of 1988-2015 is employed for a pool of countries and a well-known theoretical model, fixed effect estimator, also known as the Least Square Dummy Variable (LSDV) has been used as a robust econometric technique. Findings of our empirical estimation suggest that military expenditure and arms imports have a negative impact on GDP per capita but military expenditure in the presence of external conflicts also has a negative and significant impact on growth, which is contrary to most of the earlier findings in literature. Our results imply that while spending on military acts as a burden for the economic growth, frequent interstate conflicts make it crucial for countries to spend further on their military sector which can slow down the economic growth.