Military Expenditures and Economic Growth

The literature on military spending and growth has become extremely large and diverse and has reached no clear consensus. This chapter argues that this lack of consensus should not be unexpected, as there are a number of issues that make the empirical analysis of the relationship difficult to undertake and to make it difficult to identify the particular impact of military spending on growth. Some of these issues have had relatively little attention in the literature, aside from Smith (2019). It considers how historical context can affect the military spending and growth relation, followed by an overview of the different theoretical perspectives that can be used in any analysis and the numerus channels through which military spending can affect growth. It then explains the roles different econometric techniques and models play, considers issues of identification and offers insights into the nature of the military expenditure data. The observed correlation between output and military expenditure is likely to be negative if the system is driven by strategic shocks and positive if it is driven by economic shocks. Improved military spending data and the existence of some shocks, such as the end of the Cold War, is helping this endeavour. It then provides an up to date survey of the literature, the findings of which are consistent with the earlier surveys and show that in general it is much more likely that military spending will have a negative effect on economic growth than was evident in the past. These issues involved in undertaking any empirical analysis on military spending and growth mean that the debate is likely to continue.