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Military Expenditure and Economic Activity: The Colombian Case

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  • Arias Andrés F.
  • Laura Ardila

Abstract

We enhance a standard RBC model to account for military expenditure and the costs of an internal conflict or war. The model captures the natural trade-off in military expenditure: crowding out of private consumption and investment but less destruction (and, therefore, higher marginal productivity) of private capital (and labor). Hence, military expenditure below (above) a certain threshold generates a positive (negative) net benefit in terms of output. The model is calibrated to an annual frequency using Colombian data. We find that an increase in military expenditure of 1% GDP (the current policy of Colombian authorities) increases investment and output above the steady state during several periods, before the shock fades away. Even though consumption falls on impact (to open up space for the additional military expenditure and private investment), it increases above its stationary trend after three periods, remains on positive grounds thereafter, and the cumulated net gain is positive.

Suggested Citation

  • Arias Andrés F. & Laura Ardila, 2003. "Military Expenditure and Economic Activity: The Colombian Case," Revista Desarrollo y Sociedad, Universidad de los Andes,Facultad de Economía, CEDE, September.
    • Handle: RePEc:col:000090:003895
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    References listed on IDEAS

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    1. Michael D. Stroup & Jac C. Heckelman, 2001. "Size of the Military Sector and Economic Growth: A Panel Data Analysis of Africa and Latin America," Journal of Applied Economics, Taylor & Francis Journals, vol. 4(2), pages 329-360, November.
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    4. Malcolm Knight & Norman Loayza & Delano Villanueva, 1996. "The Peace Dividend: Military Spending Cuts and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 1-37, March.
    5. Kosuke Imai & Jeremy Weinstein, 2000. "Measuring the Economic Impact of Civil War," CID Working Papers 51A, Center for International Development at Harvard University.
    6. Collier, Paul & Hoeffler, Anke, 1998. "On Economic Causes of Civil War," Oxford Economic Papers, Oxford University Press, vol. 50(4), pages 563-573, October.
    7. Aizenman, Joshua & Glick, Reuven, 2003. "Military Expenditure, Threats, and Growth," Santa Cruz Department of Economics, Working Paper Series qt41r4105h, Department of Economics, UC Santa Cruz.
    8. Paul Collier, 1995. "Civil war and the economies of the peace dividend," CSAE Working Paper Series 1995-08, Centre for the Study of African Economies, University of Oxford.
    9. Joshua Aizenman & Reuven Glick, 2006. "Military expenditure, threats, and growth," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(2), pages 129-155.
    10. Daniel Mejía & Carlos Posada, 2003. "Capital Destruction, Optimal Defense and Economic Growth," Borradores de Economia 257, Banco de la Republica de Colombia.
    11. repec:fth:oxesaf:95-8 is not listed on IDEAS
    12. Kosuke Imai & Jeremy M. Weinstein, 2000. "Measuring the Economic Impact of Civil War," CID Working Papers 51, Center for International Development at Harvard University.
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    Citations

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    Cited by:

    1. Adriana Camacho & Catherine Rodriguez, 2013. "Firm Exit and Armed Conflict in Colombia," Journal of Conflict Resolution, Peace Science Society (International), vol. 57(1), pages 89-116, February.
    2. World Bank, 2005. "Colombia : Public Expenditure Review," World Bank Publications - Reports 8559, The World Bank Group.
    3. Adriana Camacho, 2007. "Stress and birth outcomes: evidence from terrorist attacks in Colombia," Documentos CEDE 4014, Universidad de los Andes, Facultad de Economía, CEDE.
    4. Stéphane Auray & Aurélien Eyquem & Frédéric Jouneau-Sion, 2009. "Riots, Battles and Cycles," Cahiers de recherche 09-01, Departement d'économique de l'École de gestion à l'Université de Sherbrooke, revised 05 Apr 2009.
    5. Adriana Camacho & Catherine Rodriguez, 2013. "Firm Exit and Armed Conflict in Colombia," Journal of Conflict Resolution, Peace Science Society (International), vol. 57(1), pages 89-116, February.
    6. Andres F. Arias & Hernan Maldonado, 2004. "FARC Terrorism in Colombia: A Clustering Analysis," Investigación Económica en Colombia 2715, Fundación Pondo.
    7. Andrés Arias & Hernán Maldonado, 2004. "FARC TERRORISM IN COLOMBIA A Clustering Analysis," Documentos CEDE 2716, Universidad de los Andes, Facultad de Economía, CEDE.
    8. Andrés Felipe Mora Cortés, 2013. "Conflicto, violencia socioeconómica y desplazamiento forzado en Colombia," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, December.

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    More about this item

    Keywords

    Real business cycle; stationary state; military expenditure; crowding-out; productivity shock;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • N4 - Economic History - - Government, War, Law, International Relations, and Regulation

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