Military Expenditure, Endogeneity and Economic Growth

d'Agostino, Giorgio and Dunne, John Paul and Pieroni, Luca (2013): Military Expenditure, Endogeneity and Economic Growth.

Abstract

The debate over the economic effects of military spending continues to develop, with no consensus, but a deepening understanding of the issues and limitations of previous work. A recent survey has suggested that the inclusion of post Cold War data has tended to make finding a negative effect more common, but issues remain (Dunne and Tian, 2013). One particularly important issue that has not been adequately dealt with, is the possible endogeneity of military spending in the growth equation, mainly because of the difficulty of finding any variables that would make adequate instruments. This paper considers the likely importance of endogeneity, using conflict onset as an instrument for military spending in an endogenous growth model for a panel of African countries 1989-2010. Following a brief review of the literature the theoretical and empirical models are outlined and the use of conflict onset as an instrumental variable for military spending in the panel estimates is justified. The empirical analysis suggests that endogeneity is likely to be an important issue and using IV estimation provides a larger significant negative effect for military spending on growth than OLS. It also identifies a further potential bias in the same direction in studies not including non-military spending in the growth equation. These results imply that the damaging effects of military spending on growth in Africa are being underestimated in most studies. While it is clear that conflict onset is a suitable and successful instrument in this analysis, the results are not directly generalisable. Conflict onset is unlikely to be applicable to a larger and more diverse panel of countries. What is of general concern is the finding that endogeneity is important and is likely to be influencing the results of studies of military spending and growth. It is important that future research tries to deal with endogeneity and the search for reasonable instruments is one that needs to engage researchers.

• Item Type: MPRA Paper
• Language: English
• Keywords: Military expenditure; economic growth; development; instrumental variables
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C26 - Instrumental Variables (IV) Estimation; H - Public Economics > H5 - National Government Expenditures and Related Policies > H56 - National Security and War; N - Economic History > N1 - Macroeconomics and Monetary Economics ; Industrial Structure ; Growth ; Fluctuations > N17 - Africa ; Oceania; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development

References

Aizenman, J. and Glick, R. (2006). Military expenditure, threats, and growth. Journal of International Trade & Economic Development, 15 (2), 129-155.

Angrist, J. D. (1995). The economic returns to schooling in the west bank and gaza strip. American Economic Review, 85 (5), 1065-87.

Angrist, J. D., Imbens, G. W. and Rubin, D. B. (1996). Identifi�cation of causal e�ects using instrumental variables. Journal of the American Statistical Association, 91 (434), pp. 444-455.

Barro, R. J. (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy, 98 (5), S103-26.

Benoit, E. (1973). Defence and Economic Growth in Developing Countries. Boston: Lexington Books. Benoit, E. (1978). Growth and defence in ldcs. Economic Development and Cultural Change, 26, 271-280.

Blattman, C. and Miguel, E. (2010). Civil war. Journal of Economic Literature, 48 (1), 3-57.

Bound, J., Jaeger, D. A. and Baker, R. M. (1995). Problems with instrumental variables estimation when the correlation between the instruments and the endogeneous explanatory variable is weak. Journal of the American Statistical Association, 90 (430), pp. 443-450.

Chan, S. (1987). World Military Expenditures and Arms Transfers, US Arms Control and Disarmament Agency, chap. Military Expenditures and Economic Performance.

Collier, P. (1999). On the economic consequences of civil war. Oxford Economic Papers, 51, 168-183.

Collier, P. (2007). The Bottom Billion. Oxford University Press.

Collier, P. and Hoeffler, A. (2004). Greed and grievance in civil war. Oxford Economic Papers, 56 (4), 563-595.

d'Agostino, G., Dunne, J. and Pieroni, L. (2012a). Corruption, military spending and growth. Defence and Peace Economics, 23 (6), 591-604.

d'Agostino, G., Dunne, J. and Pieroni, L. (2012b). Government spending, corruption and economic growth. SALDRU Working Papers 74, Southern Africa Labour and Development Research Unit, University of Cape Town.

d'Agostino, G., Dunne, J. and Pieroni, L. (2012c). Oxford Handbook of the Economics of Peace and Conflict, Oxford University Press, chap. Assessing the E�ffects of Military Expenditure on Growth.

Deaton, A. (2010). Instruments, randomization, and learning about development. Journal of Economic Literature, 48 (2), 424-55.

Devarajan, S., Swaroop, V. and Heng-fu, Z. (1996). The composition of public expenditure and economic growth. Journal of Monetary Economics, 37 (2-3), 313-344.

Dunne, J. P. (1996). Economic E�ffects of Military Expenditure in Developing Countries: A Survey, vol. Gleditsch, Nils Petter, Adne Cappelen, Olav Bjerkholt. London: PRIO, Sage.

Dunne, J. P. (2012). Military spending, conflict and growth. Defence and Peace Economics, 23 (2), 549-557.

Dunne, J. P. and Coulomb, F. (2008). Peace, War and International Security: Economic Theories (trial entry). Developing Quantitative Marxism 0801, University of the West of England, Department of Economics.

Dunne, J. P., Perlo-Freeman, S. and Smith, R. (2008). The demand for military expenditure in developing countries: Hostility versus capability. Defence and Peace Economics, 19 (4), 293-302.

Dunne, J. P., Smith, R. and Willenbockel, D. (2005). Models of military expenditure and growth: A critical review. Defence and Peace Economics, 16 (6), 449-461.

Dunne, J. P. and Tian, N. (2013). Military expenditure and economic growth: A survey. The Economics of Peace and Security Journal, 8.

Dunne, J. P. and Uye, M. (2009). Military Spending and Development, vol. The Global Arms Trade. London: Tan, Andrew.

Fearon, J. D. and Latin, D. D. (2003). Ethnicity, insurgency, and civil war. American Political Science Review, 97, 75-90.

Hahn, J., Todd, P. and Van der Klaauw, W. (2001). Identification and estimation of treatment effects with a regression-discontinuity design. Econometrica, 69 (1), 201-09.

Imbens, G. W. and Angrist, J. D. (1994). Identi�fication and estimation of local average treatment e�ffects. Econometrica, 62 (2), 467-75.

Miguel, E., Satyanath, S. and Sergenti, E. (2004). Economic shocks and civil conflict: An instrumental variables approach. Journal of Political Economy, 112 (4), 725-753.

Oreopoulos, P. (2006). Estimating average and local average treatment eff�ects of education when compulsory schooling laws really matter. American Economic Review, 96 (1), 152-175.

Pieroni, L. (2009). Military expenditure and economic growth. Defence and Peace Economics, 20 (4), 327-339.

Ram, R. (1995). Handbook of Defense Economics, Elsevier, chap. Defense Expenditure and Economic Growth., pp. 251-73.

Shea, J. (1997). Instrument relevance in multivariate linear models: A simple measure. The Review of Economics and Statistics, 79, 348-352.

Smaldone, J. P. (2006). African military spending: Defence versus development? African Security Review, 15, 18-32.

Smith, R. P. (2000). Defence Expenditure and Economic Growth, vol. Gleditsch, Nils Petter, Goran Lindgren, Naima Mouhleb, Sjoerd Smit and Indra de Soysa. California: Regina Books.

World-Bank (several year). World Development Indicators. Tech. rep., Washington, DC.