Impact of Defence Expenditure on Total Factor Productivity: New Insights from Panel Bootstrap Granger Causality

Khalid Khan, Adnan Khurshid and Javier Cifuentes-Faura

Defence and Peace Economics, 2025, vol. 36, issue 4, 493-508

Abstract: Geopolitical risk and rising military expenditure may have severe consequences for economic output. Thus, this study analyzes the causal nexus between defence expenditure and total factor productivity in the highest defence-spender countries during 1994-2022, employing panel bootstrap Granger causality. The findings suggest that total factor productivity has a significant effect on defence expenditure in China, Germany, Russia, and the UK. Similarly, the results reveal the existence of causality running from defence expenditure to total factor productivity in China, India, Japan, and Russia. Likewise, the results indicate no causal relationships in France, South Korea, and the US implies the presence of other factors for defence expenditure and total factor productivity. The policy recommends a balanced approach to defense expenditure reductions: prioritizing essential capabilities and redirecting savings to investments in productivity.

Date: 2025
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DOI: 10.1080/10242694.2024.2367410

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