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Defence and Peace Economics

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Military Expenditure, Economic Growth

and Heterogeneity
a

J. Paul Dunne & Nan Tian

a

School of Economics and SALDRU, University of Cape Town, Cape

Town, South Africa
b

School of Economics and DPRU, University of Cape Town, Cape

Town, South Africa
Published online: 09 Dec 2013.

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To cite this article: J. Paul Dunne & Nan Tian (2015) Military Expenditure, Economic Growth and
Heterogeneity, Defence and Peace Economics, 26:1, 15-31, DOI: 10.1080/10242694.2013.848575
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Defence and Peace Economics, 2015

Vol. 26, No. 1, 1531, http://dx.doi.org/10.1080/10242694.2013.848575

MILITARY EXPENDITURE, ECONOMIC GROWTH AND

HETEROGENEITY

Downloaded by [University of Sussex Library] at 07:36 15 December 2014

J. PAUL DUNNEa* AND NAN TIANb

a

School of Economics and SALDRU, University of Cape Town, Cape Town, South Africa; bSchool of
Economics and DPRU, University of Cape Town, Cape Town, South Africa
(Received 16 December 2012; in nal form 12 April 2013)

This paper examines the impact of military expenditure on economic growth on a large balanced panel, using an
exogenous growth model and dynamic panel data methods for 106 countries over the period 19882010. A major
focus of the paper is to consider the possibility group heterogeneity and non-linearity. Having estimated the model
for all of the countries in the panel and nding that military burden has a negative effect on growth in the short
and long run, the panel is broken down into various groupings based upon a range of potentially relevant factors,
and the robustness of the results is evaluated. The factors considered are different levels of income, conict
experience, natural resources abundance, openness and aid. The estimates for the different groups are remarkably
consistent with those for the whole panel, providing strong support for the argument that military spending has
adverse effects on growth. There are, however, some intriguing results that suggest that for certain types of
countries military spending has no signicant effect on growth.
Keywords: Military expenditure; Economic growth; Conict; Development
JEL Codes: O11, H56

INTRODUCTION
There is an impressively large and growing literature on the effects of military spending on
economic growth that reects a continuing lack of consensus. As more data become
available that do not reect the particular geopolitical environment of the cold war, there is
more information in the data, which should help researchers in identifying any relation with
economic factors. Certainly, the end of the cold war saw sizeable reductions in military
expenditure internationally and in recent years the declining trend has bottomed out and
military expenditure is once again on the increase, across the medium- and high-income
groups. The lowest income group continues to experience declines in military spending and
military spending as a share of gross domestic product (GDP) remains the lowest for the
low-income countries relative to the other income groups (SIPRI, 2012). World military
*Corresponding author. School of Economics and SALDRU, University of Cape Town. E-mail: John.Dunne
@uct.ac.za
An earlier version of this paper was presented at the 16th Annual International Conference on Economics and
Security, American University of Cairo, Egypt, 2122 June 2012 and we are grateful to the participants for
comments.

2013 Taylor & Francis

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16

J. P. DUNNE AND N. TIAN

expenditure in 2010 reached $1.6 trillion, representing 2.6% of global GDP or equivalent to
$236 per person. While the end of the cold war meant fewer major international conicts,
there was an increase in internal conicts in the developing world and while the number of
conicts has been declining more recently, they remain a major concern for the developing
world.
This paper contributes to the existing literature by continuing this investigation with a
particular focus on parameter heterogeneity using a post cold war balanced panel of 104
countries for 19882010. The next section briey reviews the existing literature for
developing countries and provides an exposition of the growth model based on Dunne,
Smith, and Willenbockel (2005), which includes military spending and overcomes some of
the limitations of earlier models. Section 3 provides a discussion of the data-set. Section 4
presents the results of the estimated growth model using the cross-country data and
considers the variation in results across various subsamples when the sample is stratied by
developed, non-developed; income groups (low, medium, high); conict (conict or not;
civil, interstate); conict and income groups; net recipients of aid; natural resources; and
trade openness. The nal section presents some conclusions.
MILITARY SPENDING AND GROWTH
It is important to have a theoretical model for empirical work, but since most economic
theories do not have an explicit role for military spending there is no obvious choice.
Indeed, as there is no agreed theory of growth among economists, there is no standard
framework to t military spending into. In most recent empirical work, some form of
neoclassical growth model has been used, exogenous or endogenous, to provide a consistent
and exible framework for the analysis (Dunne, Smith, and Willenbockel, 2005). These will
inevitably focus on particular aspects of the growth process and may miss complexities,
such as the effect of institutions, natural resources, strategy, conict, etc.
The empirical debate over the relation between military expenditure and growth was
started by the contributions of Benoit (1973, 1978) which found positive association. This
led to a large amount of research activity and an impressive build-up of literature that has
tended not to support Benoits initial ndings. Opinions on the effects of military spending
are divided among two groups; the pro group that views military spending as a guarantee
of peace, security and welfare, while the against group sees such spending as a wasteful
enterprise that inuences the economy beyond the resources it takes up. Although the
effects of military expenditure have been debated for almost 40 years, the answer is almost
always an empirical one. Irrespective of which perspective one takes the topic of military
expenditure is, most denitely, non-trivial; often leading to important economic
consequences.
A number of researchers have tried to survey the existing literature; Ram (1995), Dunne
(1996) and Smith (2000) nding no empirical regularity, positive or negative, though Smith
did indicate that there could be a small negative effect in the long run, however, more
sophisticated techniques are required to nd such a relationship. Dunne and Uye (2010) in
a survey of 102 studies on the economic effects of military spending show that negative
effects of military spending on growth were reported in 39 and 35% of cross-country and
case studies, respectively. Only 20% found positive effects for both types, while over 40%
found unclear results.
What is clear is past research has not been able to provided consensus on the economic
effects of military spending, though more recent studies do seem to be providing more

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DEFENCE AND PEACE ECONOMICS

17

consistent support for a negative effect of military spending on growth (Dunne and Tian,
2013). The more recent cross-country studies have also shown increasing concern over
group heterogeneity, endogeneity and non-linearity. These include Smaldone (2006) who
suggested that differences in results for Africa reect countries experience of conict,
Tiwari and Shabiz (2012) who considered non-linearities, Looney and McNab (2008) who
considered economic freedom and governance, and Dunne (2012) who allows for
non-linearity and conict experience in SSA.
Following on from these contributions, this paper estimates a growth model for the
sample of 104 countries and then stratied into sub-samples to compare the results across
income groups, developed and developing countries, conict experience, natural resource
abundance, net recipients of aid and trade openness. This sample stratication method is
used because rstly, the concern is with investigating the application of the specied theoretical growth model and secondly many of the factors are invariant over time and so indicators could not be introduced as explanatory variables.
Conict experience would seem to be an important potential source of heterogeneity. As
mentioned, Smaldone (2006) argued that military burden within Africa generally
corresponds to the security realities and affects the relationship between military spending
and growth. Dunne (2012) provides support to this claim. As is common in the literature
conict is dened here as having at least 25 combat-related deaths per year, but a cumulative
battle death of over 1000 throughout the duration of the conict is also considered.
Natural resource endowment has been investigated as having an impact on conict and is
a good candidate for a factor that might inuence the relation between military spending
and growth. Collier and Hoefer (2004) found that where rebellions/civil wars are
motivated by greed, primary commodity exports can substantially increase conict risk.
They argue that in the presence of natural resource abundance, opportunities arise through
extortion and looting of prots for those in control of the resource, thus making conict/
rebellion feasible or perhaps even attractive. Other research suggests similar hypotheses,
Sarr et al. (2011) explains that in a resource-rich country, an unchecked ruler can use
resources as collateral and facilitate acquisition of loans and loot the economy. Looting then
leads to political instability and hence diminished growth. It certainly seems a reasonable to
suggest that resource abundance countries may differ in their relation between military
spending and growth. Following conventions in the literature, natural resource dependence
is measured as the ratio of mineral exports to total exports and a country is considered mineral dependent if mineral exports constitute more than 25% of a countrys total exports.
This is consistent with the IMFs denition of export dependence.
Another potentially important variable is foreign aid. In the conict literature, Collier and
Hoefer (2004) identify diaspora and their impact on conict through ows of funds that
can support insurrection. In the growth literature, recent developments have considered the
impact of aid on developing countries, with no consensus. Burnside and Dollar (2000)
concluded that aid has a positive impact on growth in developing countries with good
policies (scal, monetary and trade) and no impact in the presence of poor policies. On the
other hand, Easterly, Levine, and Roodman (2004) and Hansen and Tarp (2000) rebut
Burnside and Dollar (2000)s claim and nd that aid works for countries with poor policies.
While there is no consensus regarding the impact of aid on growth, it is recognised that aid
fungibility can result in discretionary spending. Thus, it is reasonable to suppose that the
impact of military spending may differ between countries that are net aid recipients and
those that are non-recipients.
A nal issue that has been highlighted in the literature is the impact of openness of
economies on growth. There is no consensus, with proponents of trade openness having a

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18

J. P. DUNNE AND N. TIAN

positive effect on development including Edwards (1998), Frankel and Romer (1999) and
Dollar and Kraay (2004) and those nding that nd trade openness has a negative effect on
growth including Yanikkaya (2003), with Rodriguez and Rodrik (2000) nding little
evidence that open trade policies are associated with economic growth. There is also a
substantial literature on trade and conict, suggesting that countries that trade are less likely
to ght (Polachek, 2007). In addition, involvement in the arms trade can impact upon
economic growth for a given level of military expenditure (Yakovlev, 2007). In 2011,
according to SIPRI, the top seven suppliers or arms in the world (USA, Russia, Germany,
France, China, the UK and Italy) are also within the top 10 of the worlds top military
spenders. The majority of the worlds economies are arms importers; hence, a more open
economy could represent greater net arms imports than the equivalent closed economy. This
represents an opportunity cost since the resources used for arms imports could be used for
developmental purposes. The openness variable is calculated by taking the sum of a countrys imports and exports and dividing that by its GDP, with a country considered open if it
is above the value for the world average and vice versa for a closed economy.
MODELLING MILITARY SPENDING AND GROWTH
For the empirical analysis, the model developed by Dunne, Smith, and Willenbockel (2005)
is used, whereby the effect of military spending on economic growth is based on the
augmented Solow growth model with Harrod-neutral technical progress, similar to Knight,
Loayza, and Villanueva (1996). The key assumption within this exogenous growth model is
that military spending share m = M/Y affects factor productivity via a level effect on the
efciency parameter, which controls Harrod-neutral technical change. Putting it differently,
a permanent change in m does not affect the long-run steady-state growth rate, but has the
potential to have a permanent effect on per capita income along the steady-state growth
path. The share of military spending can also affect the transitory growth rates along the
path to the new steady-state equilibrium.
The starting point of the model is an aggregate neoclassical CobbDouglas production
function featuring Harrod-neutral technological progress.
Y t Kta AtLt1a

(1)

where Y denotes aggregate real income, K is the real capital stock, L is labour and A is the
technology parameter evolving according to:
At A0 egt mth

(2)

where g is the exogenous rate of Harrod-neutral technical progress and m is the share of
military expenditure in total output (GDP). Together with the standard Solow model
assumptions of an exogenous savings rate s, constant labour force growth rate n and
constant rate of depreciation ; one can display the dynamics of physical capital
accumulation by:
@ ln ke
k_ e t sK kea t  n g dk_ e ,
sea1 ln ke  n g d
@t

(3)

K
where ke AL
denotes the effective capital-labour ratio and is the constant capital-output
elasticity. The steady-state level of ke is:

DEFENCE AND PEACE ECONOMICS

~k 
e

s
ngd

19

1=1a
(4)

where the asterisk denotes the steady-state value of the variable. It is now possible to solve
for the steady-state value of output. Linearising (3) via a truncated Taylor series expansion
around the steady-state1 level and substituting (4) we get:
@ ln ke
a  1n g dln ke t  ln ke 
@t

(5)

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Y 
and since ln ye ln AL
a ln ke then:
@ ln ye
a  1n g dln ye t  ln ye 
@t

(6)

where the steady-state level of output per effective worker is:

~ye

s
ngd

a=1a
(7)

Equation (6) estimates the transitory dynamics of output per effective worker in the neighbourhood of the steady-state level. Following Dunne, Smith, and Willenbockel (2005), (6)
is integrated forward from t 1 to t giving:
ln ye t ez ln yt  1 1  ez ln ye ; z a  1n g d

(8)

Now using Equations (2), (7) and (8), ye is related to observable per capita income y = Y/L
via:
n
ln yt ez ln yt  1 1  ez  ln A0

o
a
ln s  lnn g d
1a
h ln mt  ez h ln mt  1 t  t  1ez g

where z is still equivalent to ( 1) (n + g + ), while is the elasticity of steady-state

income with respect to the long-run military expenditure share. Equation (9) provides the
basis for the empirical analysis Dunne, Smith, and Willenbockel (2005) suggest that the
dynamic panel model specication can now be written in the form:
ln yi;t ; c ln yi;t1

3
X
j1

ln zk;i;t1 gt li ti;t ;

bj ln xj;i;t

2
X

ak

(10)

k1

i 1; 2; . . .; N ;

t 1; 2; . . .; T

where x1 s = the gross investment/GDP, x2 =ni;t g d = labour force growth rate

plus g d which is a constant, assumed to be equal to 0.052, x3 mi;t which is equal to
1
2


0 

Re-writing (3) in the form du
dt f u; u ln ke , the linearised form is f u f u ut  u 
The assumption that (g + ) = 0.05 follows from Mankiw et al. (1992)

20

J. P. DUNNE AND N. TIAN

military spending as a share of GDP, z1 mi;t1 and z2 si;t1 which is the lagged variable
of military spending and gross investment as a share of GDP, respectively. The variable
nt reects the time specic effects, lt represents group specic effects and vi;t is the error
term. We also follow from Knight, Loayza, and Villanueva (1996) and Islam (1995) in
treating s and n as variant across countries and time; while taking g and to be constant
and exogenous across time and country.

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DATA DESCRIPTION
The balanced panel is composed of annual data for 104 countries covering the period
19882010. This includes all countries that had a maximum of three missing observations
for the military expenditure variable. Military expenditure as a share of GDP was taken
from the Stockholm International Peace Research Institute (SPIRI). Other economic
variables, real per capita GDP (growth), gross-xed capital formation as a share of GDP
(used as a measurement of capital) were taken from the World Banks World Development
Indicators database (WDI). Due to difculties in obtaining reliable data for the average
growth rate of the labour force, population growth is used. Classications of countries that
are either developed or non-developed and income groupings are also taken from the
WDI.3 In order to homogenise the sample size for the different income groupings, the lowincome and low-middle-income countries were combined to form low-income countries,
while high-middle-income countries were dened as middle-income and the high-income
denition left unchanged. The conict indicator was taken from the Uppsala Conict Data
Programme and International Peace Research Institute Oslo (UCDP/PRIO) database. A
country is given a numerical value of one if it has experienced a conict between the periods 19882010. A civil war and interstate war variable was constructed, dividing countries
into those that had experienced either a civil war or interstate war.
Natural resource abundance was measured by mineral exports as share of total exports,
using data from Haglund (2011) and UNCTADstat. The focus was on the six types of fuels
and non-fuel minerals as dened by the Standard International Trade Classication (SITC)
codes shown in Table I.
The natural resource indicator was divided into three variables, with each variable given
a value of one or zero. The rst variable, (comnat), characterises whether a country is
natural resource dependent via a combination of fuel and non-fuel minerals, the second
variable, ( fuel ), indicates whether a country is fuel dependent and the third variable,
(non-fuel), records countries that are non-fuel, mineral dependent. The mineral dependence
variable (where mineral exports constitute at least 25% of total exports) was based only on
the year 2010 data, but this seems reasonable given the variable is unlikely to show much
variation over time.
Aid was taken from the World Banks WDI, by dividing the sample into countries that
are net recipients of aid compared to those that are not. As the net recipients of aid is
measured as a share of GDP any country that on average received less than 0.01% of aid as
a share of GDP was considered as non-aid recipients. Aid recipients were then divided

3
Country classications for developed/non-developed are taken from the World Bank. Income groups are also taken
from the World Bank, the detailed criteria are as follows: the WB divides economies into income groups according
to 2010 gross national income (GNI) per capita. The groups are: low-income, $1005 or less; lower-middle income,
$10063975; upper-middle income, $397612,275; and high-income, $12,276 or more.

DEFENCE AND PEACE ECONOMICS

21

TABLE I Types of Minerals as Classied by SITC Codes

SITC code and description

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SITC 27: Crude fertilizers, other than those of division 56, and crude minerals
(excluding coal, petroleum and precious metals)
SITC 28: Metalliferous ores and metal scrap
SITC 68: Non-ferrous metals
SITC 667: Pearls and semi-precious stones
SITC 971: Gold, non-monetary
SITC 3: Mineral fuels (including natural gas), lubricants and related materials.

Non-fuel
Minerals

Fuel

TABLE II Variable Description and Summary Statistics

Variable
name
y
m
k
ly
lm
lk
lpop
ly1
lm1
lk1
cly
clm
clk
lngdpop
dev
cont
inc.
conict
civilwar
intwar
aid
aid2
fuel
nonfuel
nat
comnata
open00
open09
a

Variable description

Mean

Std.
Dev.

Real per capita GDP

Military expenditure as share of GDP
Gross xed capital formation as share of GDP
Natural log of real per capita GDP
Natural log of military expenditure as share of GDP
Natural log of gross xed capital formation as share of GDP
Natural log of total population
Lagged natural log of real per capita GDP
Lagged Natural log of military expenditure as share of GDP
Lagged Natural log of gross xed capital formation as share of GDP
Growth rate of real per capital GDP (log)
Growth rate of military expenditure as share of GDP (log)
Growth rate of xed capital formation as share of GDP (log)
Population growth rate (clpop) + 0.05 (assumed value for g+d) used in Solowstyle regressions
Development indicator (1 = Developed, 0 = Non-developed)
Continent indicator (1 = Africa, 2 = N & S. America, 3 = Asia & Oceania, 4 =
Europe, 5 = Middle East
Income indicator (1 = Low income, 2 = Middle income, 3 = High income)
Conict indicator (1 = Conict, 0 = No conict)
Civil war indicator (1 = Civil war, 0 = No civil war)
Interstate war indicator (1 = Interstate war, 0 = No interstate war)
Aid Indicator (1 = Net recipient of aid, 0 = Non-net recipient of aid)
Aid Indicator (0 = Non-net recipient of aid, 1 = Low aid, 2 = Medium aid, 3 =
High aid)
Fuel dependent countries (1 = fuel dependent, 0 = non-dependent)
Non-fuel mineral dependent countries (1 = dependent, 0 = non-dependent)
Aggregate natural resource dependence (Inc. fuel and non-fuel) (1 = dependent, 0
= non-dependent)
Combined fuel and non-fuel natural resource dependence.
(1 = dependent, 0 = non-dependent)
Openness indicator (1 = open, 0 = not open) in 2000
Openness indicator (1 = open, 0 = not open) in 2009

12,157
2.74
21.28
8.73
0.71
3.02
16.25
8.73
0.72
3.02
0.02
0.02
0.00
2.74

12,718
3.73
6.57
1.29
0.75
0.30
1.71
1.30
0.75
0.30
0.05
0.20
0.15
0.18

0.27
2.71

0.44
1.35

1.93
0.37
0.32
0.11
0.63
1.39

0.84
0.48
0.47
0.31
0.48
1.28

0.17
0.18
0.35

0.38
0.39
0.47

0.41

0.49

0.76
0.75

0.43
0.43

Refer to Footnote 8 and 10 for the difference between the variable nat and comnat.

22

J. P. DUNNE AND N. TIAN

TABLE III The Growth Effects of Military Expenditures in the Solow Growth Model

Sample variables
clk
clm
lngdpop

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ly1
lk1
lm1
Year
Constant

Observations
Number of id
R-squared

(1)
All countries
cly

(2)
Developed
cly

(3)
Non-developed
cly

0.0554***
(8.53)
0.0280***
(5.69)
0.0542***
(-6.09)
0.0917***
(12.16)
0.0273***
(5.63)
0.0170***
(4.81)
0.00199***
(9.01)
3.369***
(8.5)

0.213***
(15.03)
0.0181***
(3.22)
0.0925***
(7.13)
0.0443***
(3.6)
0.0233**
(2.53)
0.00933
(1.59)
0.0001
(0.28)
0.0441
(0.08)

0.0431***
(5.75)
0.0283***
(-4.54)
0.0451***
(4.17)
0.0940***
(10.52)
0.0230***
(4.02)
0.0179***
(4.29)
0.00252***
(9.28)
4.430***
(8.97)

2148
104
0.127

607
28
0.375

1541
76
0.131

Notes: Dependent variable: Growth rate of real per capita GDP (cly);
t-ratios in parentheses.
***
p < 0.01,
**
p < 0.05,
*
p < 0.1.

further into countries that receive low (less than 1% of GDP), medium (between 1 and 3%
of GDP) and high amounts of aid (greater than 3% of GDP).
The trade openness variable (trade) takes on the value of one for open or zero for closed
economies. The imports, export and GDP gures are recorded in constant US dollars; the
GDP gures have been deated using purchasing power parity. Due to missing
observations, we were unable to take the sample average of a 23-year period or the initial
period (1988). Thus, we have chosen two arbitrary years in our time-series data, namely
2000 and 2009 to identify for changes in openness.4
Table II above provides a summary of the nal data set containing 104 countries over a
23-year period. The sample includes 28 developed countries, 76 developing countries, 29
African countries, 20 Asian and Oceania countries, 26 European countries, 21 North and
South American and 10 Middle East countries.5

4
The full sample is divided into 79 open and 25 closed countries for the year 2000 and 78 open and 26 closed
countries for the year 2009. During the 10-year period countries such as Uganda and China moved from closed to
open while others such as France and Greece moved the opposite direction.
5
A list of countries featured in the sample can be found in Table A1 in the appendix.

DEFENCE AND PEACE ECONOMICS

23

EMPIRICAL ANALYSIS

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In undertaking the empirical analysis of military spending and growth, a major problem has
been poor data quality and the lack of exogenous variation within the data. However, since
the end of the cold war, data quality and leverage has improved and the developments of
panel data techniques has helped overcome limited exogenous variation in the data (Dunne,
Nikolaidou, and Smith, 2002; Dunne, Smith, and Willenbockel, 2004). Panel data methods
such as simple xed effects, random effects and random coefcient estimators have been
increasingly used and as longer time-series data becomes available dynamic specications
have been introduced into panel data methods (Smith and Dunne, 2002). This has raised a
number of issues, as in the following example of a simple bivariate dynamic model:
yit ai b xjt1 kyjt1 uit

(11)

A xed effects estimator would suffer from lagged dependent variable (yit 1) bias, which
biases the OLS estimator (coefcient of xit 1) downwards. It is also not consistent as N
(number of groups) goes to innity for xed T. It is, however, consistent as T goes to
innity and where T is large the bias will be relatively small. There is further heterogeneity
bias when the parameters differ over the groups, but this can be dealt with by estimating
TABLE IV The Growth Effects of Military Expenditure, Stratifying for Income

Sample variables
clk
clm
lngdpop
ly1
lk1
lm1
Year
Constant
Observations
Number of id
R-squared

(1)
Low
cly

(2)
Middle
cly

(3)
High
cly

0.00124
(0.13)
0.0326***
(3.76)
0.0257*
(1.67)
0.0935***
(7.39)
0.0140*
(1.81)
0.0265***
(4.56)
0.00256***
(6.94)
4.500***
(6.6)
821
40
0.127

0.137***
(11.76)
0.0214**
(2.51)
0.0199
(0.92)
0.0953***
(7.26)
0.0384***
(4.42)
0.00421
(0.72)
0.00304***
(6.82)
5.366***
(6.83)
632
31
0.271

0.120***
(9.24)
0.0247***
(3.77)
0.0831***
(8.09)
0.0820***
(6.36)
0.0210**
(2.19)
0.0200***
(3.03)
0.000588
(1.64)
0.609
(0.96)
695
33
0.257

Notes: Dependent variable: Growth rate of real per capita GDP (cly);
t-ratios in parentheses.
***
p < 0.01,
**
p < 0.05,
*
p < 0.1.

24

J. P. DUNNE AND N. TIAN

TABLE V The Growth Effects of Military Expenditure, Stratifying for Conict

(1)
Conict
cly

(2)
No Conict
cly

(3)
Civil War
cly

(4)
Interstate
cly

0.0414***
(4.28)
0.0331***
(4.61)
0.0354***
(2.7)
0.118***
(9.37)
0.0314***
(3.84)
0.0208***
(4.37)
0.00320***
(9.58)
5.607***
(9.29)

0.0646***
(7.41)
0.0234***
(3.5)
0.0715***
(5.86)
0.0710***
(7.5)
0.0227***
(3.69)
0.0180***
(3.33)
0.00104***
(3.43)
1.677***
(3.06)

0.0421***
(4.13)
0.0320***
(4.23)
0.0281**
(2.02)
0.106***
(7.85)
0.0299***
(3.5)
0.0193***
(3.81)
0.00318***
(8.52)
5.644***
(8.34)

0.123***
(5.37)
0.0180*
(1.74)
0.144***
(3.71)
0.126***
(5.27)
0.0765***
(3.99)
0.0138**
(2.12)
0.00264***
(4.28)
4.758***
(4.51)

674
33
0.184

227
11
0.327

Sample variables

clk
clm

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lngdpop
ly1
lk1
lm1
Year
Constant

Observations
Number of id
R-squared

773
38
0.195

1375
66
0.110

Notes: Dependent variable: Growth rate of real per capita GDP (cly);
t-ratios in parentheses.
***
p < 0.01,
**
p < 0.05,
*
p < 0.1.

each equation individually and taking an average of the individual estimates. In the case of
positive serial correlation in the independent variables, the resultant heterogeneity bias will
bias the estimates of upwards.
As the data available are not long enough to use large-N and large-T methods, a dynamic
model is specied and xed effects are used to estimate it. For the long-run estimates, the
overall biases are likely to offset each other due to the estimates of (downwards) and
(upwards) working in opposite directions (Dunne, Nikolaidou, and Smith, 2002). The
estimated general rst-order dynamic model takes the form of:

ln yi;t ; c ln yi;t1

3
X

bj

j1

ln xj;i;t

2
X

ak ln zk;i;t1 gt li ti;t ;

i 1; 2; . . .; N ;

t 1; 2; . . .; T

12

k1

where y is GDP per capita; x1 is gross investment/GDP; x2 is military spending/GDP; x3 is

the labour force growth rate or (n + g + ). The re-parameterised general rst-order dynamic
model is then estimated and the results are presented in Table III, where all variables are in

DEFENCE AND PEACE ECONOMICS

25

TABLE VI The Growth Effects of Military Expenditure, Stratifying for Conict and Income

Sample variables
clk
clm
lngdpop

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ly1
lk1
lm1
Year
Constant

Observations
Number of id
R-squared

(1)
Conict and low Inc.
cly

(2)
Conict and med Inc.
cly

(3)
Conict and high Inc.
cly

0.0210*
(1.93)
0.0343***
(3.78)
0.0302**
(2.06)
0.106***
(7.37)
0.0251***
(2.68)
0.0282***
(4.47)
0.00323***
(7.67)
5.793***
(7.4)

0.181***
(6.73)
0.0226*
(1.84)
0.00729
(0.12)
0.146***
(4.61)
0.0343*
(1.7)
0.00281
(0.35)
0.00366***
(4.11)
6.120***
(4.09)

0.0875***
(3.11)
0.113***
(3.63)
0.0705**
(2.45)
0.450***
(9.41)
0.0923***
(3.37)
0.0575***
(3.84)
0.00775***
(6.69)
11.23***
(5.83)

486
24
0.214

189
9
0.356

98
5
0.574

Notes: Dependent variable: Growth rate of real per capita GDP (cly);
t-ratios in parentheses.
Signicance levels:
***
p < 0.01,
**
p < 0.05,
*
p < 0.1.

logs, c represents the change in the variable and the dependent variable is (cly), representing
the change in per capita GDP. These results show a very well-dened empirical model; all
the variables are statistically signicant with signs as expected and a clear negative
relationship (short and long run) between military expenditure and economic growth.
Considering possible heterogeneity in the sample, Table III also provides estimation results
for developed and non-developed countries, giving results which are similar to the full
sample. In non-developed country groups, there is a negative and signicant relation between
military expenditure and economic growth in the short and long run, while for the developed
countries there is a negative and signicant short-run effect but no long-run effect.
As Dunne (2012) and Pieroni (2007) argue, the effect of military expenditure may well
be very different for countries with different income levels, suggesting a non-linear relation.
To consider such differences, the full sample was stratied into three different income
groups, giving the results in Table IV. The empirical growth model is generally well
specied across the groups. For all three income groups, the effect of military burden on
growth is negative and signicant in the short run, but only evident in the low- and
high-income countries in the long run.6
6

The difference in sample size of 5 countries between the high-income and developed countries are due to countries
classied as high income in terms of per capita GDP (oil economies) but not developed. The 5 countries are Bahrain, Hungary, Kuwait, Oman and Saudi Arabia.

26

J. P. DUNNE AND N. TIAN

TABLE VII The Growth Effects of Military Expenditure, Stratifying for Natural Resource

Sample
variables
clk
clm
lngdpop

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ly1
lk1
lm1
Year
Constant

Observations
Number of id
R-squared

(1)
Natural resource
cly

(2)
No resource
cly

(3)
Fuel
cly

(4)
Non-fuel
cly

0.0416***
(4.49)
0.0247***
(3.31)
0.0472***
(4.12)
0.126***
(9.66)
0.0309***
(3.87)
0.0156***
(2.94)
0.00310***
(9.12)
5.323***
(8.75)

0.0767***
(8.12)
0.0294***
(4.48)
0.0750***
(5.06)
0.0673***
(7.27)
0.0244***
(3.96)
0.0196***
(4.07)
0.00100***
(3.44)
1.657***
(3.15)

0.0202
(1.46)
0.0398***
(3.27)
0.0945***
(4.46)
0.117***
(5.33)
0.0274**
(2.22)
0.0254**
(2.52)
0.00246***
(4.55)
4.156***
(4.36)

0.0507***
(3.65)
0.00612
(0.58)
0.0240*
(1.65)
0.149***
(7.49)
0.0327***
(2.6)
0.00783
(1.16)
0.00365***
(7.24)
6.260***
(6.91)

864
43
0.163

1284
61
0.122

355
18
0.165

380
19
0.192

Notes: Dependent variable: Growth rate of real per capita GDP (cly);
t-ratios in parentheses.
Signicance levels:
***
p < 0.01,
*
*p < 0.05,
*
p < 0.1.

Previous studies, particularly in Africa, have found differences in the military spending
growth relation for countries in conict and those not (Dunne, 2012), but the results here
do not support this. Breaking the full sample into groups of countries that have experienced
conict (38) and those that have not (66) gave the results in Table V, which show signicant negative effects of military expenditure both in the short and long run irrespective of
whether a country has experienced conict. It is possible that the type of conict may be
more relevant so Table V also reports results for countries that experienced civil conicts
and those that experienced interstate conicts. This gave 33 countries experiencing civil
conict and 11 interstate conict, with six countries experiencing both.7 The estimation
results for countries with civil war experiences (Column 3, Table V) were consistent with
the overall sample, conict and no-conict groups, with signicant negative short- and
long-run effects of military burden.
Conict could have a different effect on countries at different income levels, so to
investigate the 38 countries that have experienced conict, were grouped into low-income,
medium-income and high-income countries. Due to the lack of observations for the
medium- and high-income groups the results show be analysed with caution.8 While
7

Ethiopia, India, Iran, Pakistan, Peru and United Kingdom.

The consistency in the sign and statistical signicance of the Solow growth variables even when the sample is limited to 98 observations or ve countries (conict and high income) provides further evidence towards the welldened nature of our empirical model.
8

DEFENCE AND PEACE ECONOMICS

27

TABLE VIII The Growth Effects of Military Expenditure, Stratifying for Net Recipients of Aid

Sample
Variables
clk
clm
lngdpop

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ly1
lk1
lm1
Year
Constant

Observations
Number of id
R-squared

(1)
Aid
cly

(2)
No aid
cly

(3)
Low aid
cly

(4)
Medium aid
cly

(5)
High aid
cly

0.0300***
(3.82)
0.0305***
(4.75)
0.0427***
(3.87)
0.108***
(10.43)
0.0171***
(2.85)
0.0182***
(4.27)
0.00270***
(9.22)
4.676***
(8.86)

0.165***
(13.45)
0.0212***
(3.02)
0.0868***
(5.69)
0.0692***
(6.6)
0.0468***
(5.35)
0.0171**
(2.51)
0.000968***
(2.76)
1.607**
(2.52)

0.151***
(10.23)
0.00839
(0.92)
0.0908***
(5.6)
0.105***
(5.2)
0.0260***
(2.77)
0.00617
(0.97)
0.00256***
(4.32)
4.500***
(4.37)

0.0384*
(1.88)
0.0377***
(2.67)
0.00642
(0.16)
0.213***
(7.41)
0.0358**
(2.22)
0.0251**
(2.41)
0.00306***
(5.09)
4.412***
(4.32)

0.00607
(0.59)
0.0376***
(4.01)
0.0326**
(2.16)
0.103***
(7.36)
0.0102
(1.24)
0.0254***
(4.07)
0.00295***
(6.87)
5.212***
(6.55)

1325
65
0.131

823
39
0.245

390
19
0.331

239
12
0.227

696
34
0.142

Notes: Dependent variable: Growth rate of real per capita GDP (cly);
t-ratios in parentheses.
Signicance levels:
***
p < 0.01,
**
p < 0.05,
*
p < 0.1.

Column 1 shows negative and signicant short- and long-run effects, Column 2 shows
insignicant effects for medium-income countries experiencing conict, but Column 3 is
consistent with Column 1. Interestingly, the coefcient (on clm) is more than three times
larger than that for the conict affected low-income countries and larger than the overall
conict and civil war sample and the long-run coefcient (on lm1) is twice as large as the
low-income conict affected countries and more than three times greater than the overall
conict and civil war group. This suggests that military spending can have a particularly
damaging impact on growth in high-income countries involved in conict (Table VI).
To consider the possible impact of natural resource differences, the UNCTADstat
database was used to divide the sample into 43 countries that are resource dependent and
61 countries that are not resource dependent. Table VII shows that military burden has
negative and signicant short- and long-run effects of similar size for both countries with
and without natural resource abundance.9 In the rationale for stratifying for natural resource
abundance an indirect hypothesis was that resource-rich countries spend on average more
on military than non-resource-rich countries.10
9
It should be noted that within some natural resource abundant countries (Table VII, Column 1) one type of mineral
export does not constitute more than 25% of total exports, but, the combination of all mineral exports exceeds the
25% threshold amount.
10
See page 6, under natural resources.

28

J. P. DUNNE AND N. TIAN

TABLE IX The Growth Effects of Military Expenditure, Stratifying for Trade Openness

Sample
variables

clk
clm

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lngdpop
ly1
lk1
lm1
Year
Constant

Observations
Number of id
R-squared

(1)
Open 2000
cly

(2)
Closed 2000
cly

(3)
Open 2009
cly

(4)
Closed 2009
cly

0.0358***
(4.87)
0.0310***
(5.24)
0.0454***
(4.13)
0.105***
(11.26)
0.0184***
(3.27)
0.0198***
(4.48)
0.00198***
(7.19)
3.171***
(6.44)

0.154***
(11.5)
0.0146*
(1.82)
0.0632***
(4.69)
0.0653***
(5.47)
0.0522***
(5.42)
0.0112**
(2.17)
0.00207***
(6.23)
3.906***
(6.47)

0.0302***
(4.07)
0.0301***
(5.15)
0.0675***
(5.84)
0.0823***
(9.5)
0.0206***
(3.73)
0.0189***
4.3
0.00156***
(5.56)
2.607***
(5.16)

0.162***
(12.9)
0.0181**
(2.17)
0.0477***
(3.72)
0.120***
(7.3)
0.0611***
(5.98)
0.0129**
(2.33)
0.00265***
(7.74)
4.571***
(7.57)

1630
79
0.115

518
25
0.315

1610
78
0.103

538
26
0.345

Notes: Dependent variable: Growth rate of real per capita GDP (cly);
t-ratios in parentheses.
Signicance levels:
***
p < 0.01,
**
p < 0.05,
*
p < 0.1.

Estimates of the means showed that resource-rich countries allocate on average 3.4% of
their GDP to military expenditure, while non-resource-rich countries spend only 2.3% of
their GDP on the military. This difference of 1.1 percentage points is statistically
signicant. Interestingly, the coefcient estimates suggest that even though on average natural resource abundant countries spend more on military then non-natural resource abundant
countries, the negative effect is less for the resource abundant countries. This could mean
that resources abundance makes military burden more affordable. To consider if there was
any difference in the type of resources, the group was broken down into those that are
resource rich in fuel and those rich in non-fuel minerals, giving the results in Columns 3
and 4. These show clear differences,11 with the results for the fuel resource-rich countries
consistent with the general results, but the non-fuel results showing military spending to
have no effect on growth in the long or short run. This would suggest that the oil
economies in the natural resource sample are driving the negative effects of military burden
in overall estimates of natural resource abundant countries.

11

Note: The difference in sample size between the sum of the fuel and nonfuel minerals countries and the natural
resource abundant countries are the countries that t into the prole identied in footnote 12 above. The six countries are namely, Albania, Brazil, Bulgaria, Canada, India and Norway.

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DEFENCE AND PEACE ECONOMICS

29

Moving to consider the possible impact of aid, Table VIII shows the results for countries
that receive aid and those that do not and the straties those that receive aid into low-,
medium- and high-aid recipients.
The results show negative signicant short- and long-run effect of military burden
irrespective of whether a country receives foreign aid. This also holds for countries
receiving medium and high levels of aid, but not for those receiving low levels of aid.
Furthermore, the negative coefcients of the short-run (clm) and long-run (lm1) military
burden increases in size as we move higher up the levels of aid received.
Finally, the impact of openness is considered.12 As the degree of openness could change
both the opening and closing value of exports plus imports as a share of GDP was used as
a check for consistency, but the results shown in Table IX were very similar. The results
showed negative and signicant effects for military spending on growth in both the short
and long run, albeit only at the 10% level in the short run for closed economies in year
2000. The mean estimates for military burden for the open economies for the years 2000
and 2009 were 2.8 and 3.0% respectively, which were about one half a per cent of GDP
greater than the closed economies. Despite these differences, both groups showed
signicant adverse effects of military burden on growth.

CONCLUSION
Military spending by governments is indeed important in the inuence it has, especially
when it leads or facilitates conict. As a result the economic impact of such spending is of
great concern. This paper develops and analyses a comprehensive post-cold war balanced
panel dataset for the period 19882010, using the modelling framework suggested by
Dunne, Smith, and Willenbockel (2005) and considering possible sample heterogeneities
and non-linearities. The estimation results using the dynamic rst order model with xed
effects provided surprisingly strong support for the negative impact of military burden on
growth for both the short and long run.
When countries were grouped as developed and developing only the long-run effect for
the developed countries was insignicant. Consistent results were observed when countries
were broken into three income groups, with the short-run coefcient estimate negative and
signicant for all three groups and the long-run coefcient estimate negative and signicant
for the low-income and the high-income groups.
While military spending on growth for conict or non-conict affected countries was
both negative and signicant, the expected differences in the effects of military burden on
growth in civil and interstate wars was not apparent. When the type of conict was
considered, both civil and interstate wars groups showed negative and signicant effect of
military spending on growth, though further stratication by income led to insignicant
results for medium-income countries that had experienced conict. Similarly consistent
results were found when grouping countries by their natural resource endowments, aid
dependence and trade openness.
These results do seem to provide valuable robustness checks and support strongly the
view that military spending has an adverse effect on growth. It does seem as though post
12
Stratication of arms imports and exporters was considered as an alternative to using openness, since one might
expect the effect of military spending to be different for a country that is a net exporter compared to a net importer.
However, of the 104 country sample only nine countries were classied as net arms exporters, thus providing insufcient observations for meaningful regression analysis.

30

J. P. DUNNE AND N. TIAN

cold war it is possible to see this result developing as a consensus view. But while a
compelling conclusion can be drawn across countries, care is needed in applying the
conclusion to individual countries, as some groupings of countries did differ, for example
non-fuel natural resource abundance, low-aid recipient countries showed no effect of
military spending on growth. There is, however, certainly no evidence of any signicant
positive effects.

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APPENDIX
TABLE A1 List of Countries in Full Sample
Africa
Algeria
Angola
Botswana
Burkina Faso
Burundi
Cameroon
Djibouti
Ethiopia
Ghana
Kenya
Lesotho
Madagascar
Malawi
Mali
Mauritania
Mauritius
Morocco
Mozambique
Namibia
Rwanda
Senegal
Seychelles
Sierre Leone
South Africa
Swaziland
Tansania
Tunisia
Uganda

N & S. America
Argentina
Belize
Bolivia
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