How much does military spending affect growth? Causal estimates from the World's non-rich countries

Giorgio d'Agostino, John Dunne and Luca Pieroni

No 196, SALDRU Working Papers from Southern Africa Labour and Development Research Unit, University of Cape Town

Abstract: While not always a concern for the general economic growth literature, the debate over the effects of military spending on growth continues to develop, with no consensus, but a deepening understanding of the limitations of previous work. One important issue that has not been adequately dealt with, is the endogeneity of military spending in the growth equation, mainly because of the difficulty of finding any variables that would make adequate instruments. This paper considers this issue, using an endogenous growth model estimated on a large sample of 109 non-high income countries for the period 1998-2012. The empirical analysis is framed within an instrumental variable setting that exploits the increase in military spending that occurs when unrest in a country escalates to turmoil. The estimation results show that endogeneity arising from reverse causality is a crucial issue, with the instrumental variable estimates providing a larger significant negative effect of military spending on growth than OLS would. This result is found to be robust to different sources of heterogeneity and different time periods.

Keywords: Military spending; economic growth; reverse causality; instrumental variable; panel data. (search for similar items in EconPapers)
JEL-codes: C26 C33 H00 O40 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-gro and nep-pke
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Persistent link: https://EconPapers.repec.org/RePEc:ldr:wpaper:196

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