Military spending and economic growth: a panel data investigation

The present study examines the worldwide effect of military spending on economic growth for the period 1960–2017 utilizing the dynamic common correlated effects estimator that accounts for country heterogeneity and cross-sectional dependence, while it provides not only sample-average coefficients but country-specific coefficients as well. Overall, the worldwide effect of military spending on economic growth over the period 1960–2017 appears to be negative, and this originates from the cold war and early post-cold war era and is especially evident for the North Atlantic Treaty Organization countries. For the post-cold war era, a neutral effect (i.e., no statistical significance) is apparent for the majority of countries. At the country-specific level, there are some economies that consistently benefit or suffer from military spending, while the type of the individual impact for most of the countries varies over different time periods, with no clear pattern.

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Notes

Popular estimation techniques in the literature are the fixed effects (FEs) and the generalized method of moments (GMM). However, FE does not perform well when heteroskedasticity is present, and the GMM partially accounts for it and is sensitive to outliers. Furthermore, these approaches focus on the average impact, while the DCCEE gives additional information for country-specific impact.

Tables 1 and 2 are also estimated using FE and GMM. The FE method found qualitatively similar impact for all variables, though the magnitude was weaker, and the GMM methodology found more frequently lack of statistical significance for all variables, and when it found statistical significance, the magnitudes were similar to those of the FE. It should be noted that their essential econometric differences (individual vs average effect) with the DCCEE method make any direct comparisons not meaningful.

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Acknowledgements

The authors would like to thank the editor and the anonymous reviewers for their valuable comments. The usual disclaimer applies.