Military Spending and Economic Growth: Threshold Effects in Nato and Non-Nato Countries

Lijun Wang, Anindya Banerjee and Yiannis Karavias

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: Rising geopolitical tensions have renewed the urgency of an old question: how does military spending affect economic growth? Yet the answer has proven elusive, due to two salient characteristics of the data: endogeneity and nonlinearity. Using a dynamic panel threshold model that allows for both, estimated on 116 countries over 1994–2023, we find that military spending has a positive and significant effect on growth both below and above an estimated threshold of 2.506% of GDP, although the effect roughly halves beyond this point. This result masks substantial heterogeneity by alliance membership. For NATO countries, the threshold is estimated at 2.396% of GDP, close to the alliance’s previous 2% benchmark, and spending above it yields no further growth benefit. Non-NATO countries face a higher threshold (3.041% of GDP) and retain a significant, if attenuated, positive effect beyond it, consistent with defence spending substituting for the security provided by alliance membership. These findings suggest that, for NATO members, the growth gains from military spending are largely exhausted not far above the previous 2% benchmark, so the growth case for the new commitment of 3.5% of GDP for core defence is limited.

Keywords: Defence expenditure; Economic growth; Dynamic panel threshold regression; Endogeneity; NATO; Alliance burden-sharing (search for similar items in EconPapers)
JEL-codes: C23 C24 H56 O47 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2026-10-01
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