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Federal Reserve Bank of San Francisco
Working Paper Series
Military expenditure, threats, and growth
Joshua Aizenman
Reuven Glick
Abstract

This paper clarifies one of the puzzling results of the economic growth literature: the impact of military expenditure is frequently found to be non-significant or negative, yet most countries spend a large fraction of their GDP on defense and the military. We start by empirical evaluation of the non- linear interactions between military expenditure, external threats, corruption, and other relevant controls. While growth falls with higher levels of military spending, given the values of the other independent variables, we show that military expenditure in the presence of threats increases growth. We explain the presence of these non-linearities in an extended version of Barro and Sala-i-Martin (1995), allowing the dependence of growth on the severity of external threats, and on the effective military expenditure associated with these threats.


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Joshua Aizenman & Reuven Glick, Military expenditure, threats, and growth, Federal Reserve Bank of San Francisco, Working Paper Series 2003-08, 2003.
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Keywords: Defense industries ; Econometric models ; Economic development
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