Military Expenditure, Threats, and Growth

This paper clarifies one of the puzzling results of the economic growth literature: The impact of military expenditure is frequently found to be non-significant or negative, yet most countries spend a large fraction of their GDP on defense and the military. We start by empirical evaluation of the non-linear interactions between military expenditure, external threats, corruption, and other relevant controls. While growth falls with higher levels of military spending, given the values of the other independent variables, we show that military expenditure in the presence of threats increases growth. We explain the presence of these non-linearities in an extended version of Barro and Sala-i-Martin (1995), allowing the dependence of growth on the severity of external threats, and on the effective military expenditure associated with these threats.

Keywords: Economic growth, military expenditure, external threats, corruption

JEL Classification: E62, F43, N10, O41, O47

Suggested Citation: Suggested Citation

Aizenman, Joshua and Glick, Reuven, Military Expenditure, Threats, and Growth (March 2003). UC Santa Cruz Economics Working Paper No. 537; UC Santa Cruz Center for International Economics Working Paper No. 03-3, Available at SSRN: https://ssrn.com/abstract=390764 or http://dx.doi.org/10.2139/ssrn.390764