In 2020, global defence spending has reached $1.83 trillion, which is around a 3.9% increase in real terms from the previous year. This means that, as a proportion of gross domestic product (GDP), spending increased from 1.85% on average in 2019 to 2.08% in 2020 despite the economic contractions caused by the pandemic and lockdowns.[1] This constant increase in military spending is one of the reasons why the evaluation of the economic and social effects of military expenditure remain an intriguing area of research. Similarly, achieving sustainable economic growth and prosperity in the long run is one of the main macroeconomic objectives of both developing and developed countries. However, previous studies and literature on the particular link between military or defence expenditure and economic development have been somewhat contradictory; some suggest it is beneficial and others see it as detrimental to economic growth.

Theoretical Framework

According to the Keynesian approach, military spending is a component of government expenditure. Keynesians believe that, because prices are rigid, fluctuations in any component of spending, which consist of consumption, investment, or government expenditure, cause output to increase or decrease. Therefore, an increase in defence spending is noted as a rise in government spending, and when all other spending components remain constant, output increases. In other words, according to this view, since output increases mean an increase in economic growth, military spending stimulates the economy. Several previous studies have drawn conclusions supporting this Keynesian view that there is a positive influence of military expenditure on economic growth. For instance, in a study by Lobont et al. (2019), it is established that military spending has numerous positive effects on capital, labour, growth, and the effective use of existing resources in the economy.[2]

On the other hand, as noted by Deger and Smith, the classical school of thought argues that an increase in defence spending is likely to hinder economic growth.[3] This is because an increased defence spending leads to a rise in the interest rate, which then implies a lower level of private investment, savings and consumption due to a fall in aggregate demand.

Overall, the kind of theoretical prediction based on the Keynesian model is less clear since firstly, it is based on the assumptions such as the rigidity of prices, and secondly, other factors are omitted from the argument. Foremost, there is the most direct economic criticism of military Keynesianism: other public goods such as education, transport and healthcare create more jobs for the same amount of spending. Therefore, even if there is a positive relationship between military spending and growth, this is less than the optimal that could have been achieved with the same number of resources. Additionally, externalities are not considered when calculating the multiplier effect of increased spending on aggregate demand. The multiplier effect here refers to the proportional amount of increase, or decrease, in economic growth that results from an injection, or withdrawal, of government spending in the form of military expenditure. While for other kinds of government spending (education, healthcare) this might be minimal or non-existent, for military spending, there exist serious externalities (negative consequences not directly related to GDP), such as the destruction of human and resource capital In other words, while calculating the multiplier effect of military expenditures, only increased weapon sales are calculated while the people killed and the properties destroyed are not considered.

Empirical Studies

When it comes to empirical studies, we again see a division; several studies support the positive effect of spending while others suggest that higher military spending leads to sluggish growth.

On one hand, several studies support the positive relationship between increased military spending and growth such as Atesoglu who observed the existence of a significantly positive association between military outlays and aggregate output in the case of the United States from 1947 to 2000.[4] In this paper, a 4% rise in defence spending is shown to lead to no less than a 2% rise in aggregate real output, which is an indicator for economic growth. Likewise, Narayan and Singh verified that military expenditure positively causes exports, which in turn positively causes GDP in the short run for Fiji over 1970–01.[5] The authors also note that since 1987 military expenditure has grown at an annual average rate of 8.4% in Fiji and this growth has provided employment to approximately 6% of the labour force. Lastly, Borch and Wallace found that in the United States during 1977–04, states with high levels of spending on military contracts were found to have lower unemployment rates, higher levels of median family income, lower levels of income inequality, and lower poverty rates over time.[6]

On the other hand, there are vast empirical studies suggesting a negative correlation between military spending and growth. In a study done for 69 countries between 1952-1970, Faini et al. suggested that a 10% increase in military expenditure leads to a fall in annual economic growth by 0.13%.[7] Similarly, the empirical findings of Deger revealed that overall the direct and indirect effects of military expenditure will dampen the growth rate in a panel of 50 developing economies during 1965–73.[8] He estimated that a unit percent increase in military burden decreases growth rate by around a half of a percent and the coefficient -0.42 is significant. Comparably, Chang et al. proposed that military spending leads to deleterious growth for 90 low-income countries during 1992–2006 with a significance level of 10% and coefficient of -0.236%.[9] Of four different regional panels (Africa, Europe, the Middle East–South Asia and Pacific Rim), a negative but stronger causal relationship from military expenditure to economic growth is found for Europe and the Middle East–South Asia regions.

The common pattern of the first set of studies is that they are either done in a specific country or over a short period of time, which leads to the questioning of their validity for a general result. The vast majority of the papers which suggest a positive effect of military spending on the economy have studied only certain types of countries or periods in time. These biased results could be caused by external social, political or economic factors which are omitted in the analysis. For instance, the paper by Atesoglu which includes the longest data set (amongst those mentioned in the first paragraph) only finds the partial confirmation of their argument in a specific country i.e., the United States.[4] Additionally, the paper is only focused on the Cold War era. This is a similar trend within the past research; military spending data from the Cold War era is used extensively. The importance of this point is that after the Cold War, the economic environment became highly different since reduced military spending was matched with a period of strong economic growth. Lastly, the short time periods commonly used to prove the Keynesian view could indicate fluctuations in the relationship. One possible candidate reason for the varied research is that in the short run, military spending leads to increased economic growth but then this is reversed in the long run.

First, to overcome the limitations mentioned above, D'Agostino et al. analyse military spending by a large diverse group of countries over 45 years, with particular attention to global events that could alter the relationship.[10] Additionally, the data obtained from SIPRI provides country-specific per capita GDP, private investment, employment growth, and current GDP, allowing the authors to accurately compare a country’s military spending to its economic growth.

The results of the paper show that increased military spending has consistently negative impacts on a country’s economic growth. This result remains unchanged even in different time periods and countries with varying GDPs. Collective analysis of all countries shows that over a 20-year period, an increase of 1% in military spending causes a fall in economic growth by 9%. Although the researchers also find a negative economic impact on military spending in non-OECD (Organisation for Economic Co-operation and Development) countries, the negative economic impact in OECD countries is more significant and greater in magnitude.

Policy Implications

There is a popular assumption discussed widely, especially during election times: increased military spending helps boost the economy. Perhaps, this is true in the short-run since the increase in government investment into war-related industries can lead to short-term gains. However, not only these gains are likely to be short-lived, but they also only affect certain industries (“war profiteers”) and are not a strong argument for the long-term economic cost of war.

Besides, in most cases, and especially in developing countries, an expanded military budget cannot be used to improve economic growth since any positive impact it would have on the economic growth through amplified demand, modernisation, and resource outset, can be offset by the negative effects of reduced investment on economic growth.

Economic concerns are consistently mentioned among voters as a top issue. Since candidates know that a growing health economy is important for their citizens, they often introduce tightening government spending, changing the directory of funding between programs or pitching stimulus packages in their campaigns. However, whenever national defence is discussed, it is likely to be kept separate from economic issues on the basis that they seem to be unrelated from a naïve perspective.

Nevertheless, the current literature leans in favour of the link between increased military spending and decreased economic growth. This finding should be a motivator for policymakers, candidates and voters to introduce military spending in their economic debates and discussions. Increased military spending should not only be discussed as a security concern but as an economic one. Additionally, voters should question whether increased military spending actually provides the increased security that is often promised.

References

[1] McGerty, F. Global defence-spending on the up, despite economic crunch. The International Institute for Strategic Strategies. https://www.iiss.org/blogs/military-balance/2021/02/global-defence-spending-increases#:~:text=As%20a%20proportion%20of%20GDP,around%20the%20world%20in%20response (2021).

[2] Lobont, O.R., Glont, O.R., Badea, L., Vatavu, S. Correlation of Military Expenditures and Economic Growth: Lessons for Romania. Quality & Quantity. (2019).

[3] Deger, S., Smith, R. Military expenditure and growth in less developed countries. Conflict Resolut. 27 (2), 335–353. (1983).

[4] Atesoglu, H.S. Defense spending promotes aggregate output in the United States evidence from cointegration analysis. Defence Peace Econ. 13 (1), 55–60. (2002).

[5] Narayan, P.K., Singh, B. Modelling the relationship between defense spending and economic growth for the Fiji Islands. Defence Peace Econ. 18 (4), 391–401. (2007).

[6] Borch, C., Wallace, M. Military spending and economic well-being in the American states: the post-vietnam war era. Soc. Forces 88 (4), 1727–1752. (2010).

[7] Faini, R., Annez, P., Taylor, L. Defence spending, economic structure and growth: evidence among countries and over time. Econ. Dev. Cult. Change 32 (3), 487–498. (1984).

[8] Deger, S. Economic development and defense expenditure. Econ. Dev. Cult. Change 35 (1), 179–196. (1986).

[9] Chang, H.-C., Huang, B.-N., Yang, C.W. Military expenditure and economic growth across different groups: a dynamic panel Granger-causality approach. Econ. Modell. 28, 2416–2423. (2011).

[10] d’Agostino, G., Dunne, J. P., & Pieroni, L. Does military spending matter for long-run growth?. Defence and Peace Economics, 1-8. (2017).