Military Expenditure and Economic Growth

This paper proposes to test the relationship between military expenditure and economic growth by including the impact of the share of military and civilian components of government expenditure in an economic growth model with endogenous technology. In this framework, we empirically consider the hypothesis of a nonlinear effect of military expenditure on economic growth. The comparison between costs and benefits of defence sector has traditionally explained the nonlinear relationship. This paper suggests that shocks to insecurity may also be a source of nonlinearity as they determine a re-allocative effect within government expenditure. While parametric partial correlations are in line with empirical findings, the robustness of estimations is tested by using a nonparametric approach. The negative relationship between military expenditure and growth in countries with high levels of military burden predicted by theory becomes significant only after including a proxy for re-allocative effects in the growth equation.