The impact of defense spending economic growth Flashcards
military spending in the world. Facts
stagnating in the las few years. now its much her than in WWII
250 USD per person –> very high. 2% of GDP
BIG CONCENTRATION: US 39% of total world spending, 2nd China 9.5%. then Russia, UK and JP.
Declining tendencies in north america and Europe. Asia is catching up!
Relation between defense spending and economic growth
Different models
Modernization model
Capital formation model
the balance-of payment model (or the export-led model of growth)
the technological displacement model
Relation between defense spending and economic growth
Modernization model
military spending can have
3 unfavorable consequences:
- income shift
- productivity effect
- investment effect
3 positivi effect (especially in developing countries)
- introduction of modern skills and attitudes
- military’s capital expenditure help to strengthen a country’s economic infrastructure
- mild inflation which encourages fuller utilization of the existing production facilities
Capital Formation model
stresses the importance of private investment –> negative effects
- increased defense spending entails higher taxes or government borrowing thus absorbs funds that would otherwise have gone partly to investment
- cost-push inflation encourage a immediate consumption and is against savings
The balance of payment model or the export led model of growth
stresses the chronic and serious displacement of capital from the most dynamic sectors of civilian production to military production –> negative effect
- capital spending for defense trends to be concentrated in the more important export sectors (machinery transport and electronics), thus it reduces the available good for export
- slower export growth causes slower economic growth, further reducing a country’s trade competitiveness.
The technological displacement model
stresses R&D as a important determinant of economic growth
Negative effect
- diversion of material and human resources form civilian to military purposes can have detrimental long.-run effect on a country’s productivity and technological position
positive effect
-spillover effects (knowledge and technologies derived originally from military research are adapted from civilian uses. (leasers)
Relation between defense spending and economic growth
whether defense spending helps of hinder economic growth in not solely dependent on the development stage of a particular country.
Other factors seem to play a crucial role such as socioeconomic structure and type of government
–> the relationship cannot be generalized across countries
it is still not known whether defense spending helps or hinder growth because:
- there is a lack of sound theory of defense growth tradeoffs
- most sedulity rely on cross-sectional design that fails to capture the dynamic elements of the relationship
- most studies do not take into account the externality effect
Theoretical argument
Possible positive effect of defense burden of economic growth
A simulative effect from defense expenditure: jobs, investment and technological and managerial spinoff effect transmitted from the defense to the private sectors.
Public sector productivity: social infrastructure (e.g. roads, communication networks) and other humans capital enhancing activities (e.g. military education and training) that may later impact the private sector.
Government activities: the provision of national defense, which maintain property rights, can indirectly support growth by increasing citizens’ incentive to accumulate capital and to produce.
Theoretical argument
Possible negative effect of defense burden of economic growth
the positive negative effect of the defense burden on eco. growth stemming from the conceivable opportunity costs to economic activity from military resources use.
- lower level of public and private investment that are more growth enhancing than defense (the crowding-out effect)
- adverse balance of payment in case of arm importing countries
- inefficient bureaucracies
- a smaller tax base available for providing civilian public sector services
- diversion of R&D activities and well educated workforce from the private sectors
Theoretical argument
Non linear effects of defense burden of economic growth
at low levels of military spending, the net effect on growth may be positive but after a certain maximum influence point, growth declines as military spending continues to expand, and eventually it may turn negative.
Cross section barrio style Regression
Theoretical argument
effect of defense burden of economic growth EU 14
Statistically significant negative correlation between growth and GDP –> conditional convergence
positive effect of education on growth in onde interval
population has negative effect on growth in 5 (out of 8) but is almost alway not statistically significant.
investment have a significant positive eggiest of growth in 2 period
military expenditure is statistically insignificant in 5 periods but in the other 3 periods there is a statistically negative coefficient –> opportunity cost of defense expenditure outweigh any benefits.
negative impact of military spending increases over time. (in 71-75 the coefficient was -0.227 in 96-00 was -1-229=
Barro-Style panel regression
Theoretical argument
effect of defense burden of economic growth EU 14
GDP and growth rate are correlated
Education and population are not statistically significant
investment have positive effect on growth
military spending has negative and significant effect on growth.
–> this is consistent with the prediction of the endogenous growth theory, which suggest that government intervention hinders economic growth through higher taxation and the distortion of private sector incentives.
in the context of a Common European security and defense policy (CESDP), increase in the defense budgets by the european states, needs to support and develop an independent EU defense capability, are likely to hinder european economic growth performance.
effect of defense burden of economic growth
Developing Countires
Methodology
to understand the effect on ME on eco. growth we need 3 equations:
growth equation
saving equation
defense equation
effect of defense burden of economic growth
Developing Countries
growth equation
G = g (s, b, l, m, pcgdp, d)
is a function of
capital growth
- savings-income ration (s) (+)
- the current account share of GDP (b) (+)
Labor growth (l) (+)
tech. progress
-Defense burden: military expenditure as a share of GDP (m) (+/-)
the modernization and resources mobilization (+)
the crowding-out effect (-)
- per capital GDP (-) the higher the per capital GDP, the smaller the gap between domestic technology and world best-practice technology. However, the speed of “catch up” effect may be low in the LDCs since these countries may not have resources of institutional arrangement necessary to fully exploit imported technology.
- gdp deflator (d): (+/-) capture the effect that sustained prices rises may have on consumer behavior
effect of defense burden of economic growth
Developing Countries
The Savings Equation
S = s (m, d, g, b, gy)
saving to income ratio (s)
military burden: military expenditure as a share of GDP (m) (+/-)
- Military spending creates new resources (+)
- Military spending is inflationary (-)
inflation (d) (+/-) depend on whether inflation is expected or not
growth (g) +
trade balance (b) proxy for foreign saving (positive effect through income multipliers and trade taxes
Output growth rate weighted by per capita GDP (gy) (+): the effect of growth on savings is not uniform over time or across income levels, –> growth effect on savings behavior increases as per capita income increases
