Military Spending, Investment and Economic Growth in Small Industrialising Economies

An enduring and important debate in economics concerns the effects of military spending on economic growth. It has generated a huge literature, with a variety of results and no clear consensus. The end of the Cold War led to marked reductions in military burdens and to renewed concerns on whether this was likely to lead to a ‘peace dividend’ or a ‘peace penalty’. This paper revisits the debate using a sample of small industrialising economies. It estimates a growth equation and an investment equation, where investment is a function of growth and military expenditure. The data is used to consider the individual economies and to provide some panel time-series results, which show some evidence of a negative impact of military spending on growth and investment. ___________________________ * Professor in Economics, Centre for Applied Research in Economics, Middlesex University Business School and University of Cape Town,**City Liberal Studies, Thessaloniki, and***Professor in Economics, Birkbeck College, University of London. This is a revised version of a paper presented to the African Econometrics Society Conference, 5-7th July, 2000, University of Witwatersrand, Johannesburg, South Africa. We are grateful to the participants for comments and to an anonymous referee. Dunne and Smith are grateful to the ESRC for support under grant R00239388 and L138251003 respectively.