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This is a Working Paper and the author would welcome any comments on the present text. Citations should refer to a Working Paper of the International Monetary Fund, men-'.tioning the author, and the date of issuance. The views expressed are those of the author and do not necessarily represent those of the Fund.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. . Palgrave Macmillan Journals and International Monetary Fund are collaborating with JSTOR to digitize, preserve and extend access to Staff Papers -International Monetary Fund.Although conventional wisdom suggests that reducing military spending may improve a country's economic growth performance, empirical studies have produced ambiguous results. This paper extends a standard growth model and obtains consistent panel data estimates of the growth retarding effects of military spending via its adverse impact on capitalformation and resource allocation. Simulation experiments suggest that a substantial long-run "peace dividend"-in the form of higher capacity output-may result from markedly lower military expenditure levels achieved in most regions during the late 1980s, and the further military spending cuts that would be possible if global peace could be secured. [JEL 041, 047] T HERE IS A WIDELY HELD view that political tensions and associated high levels of military spending are likely to detract from a country's longrun economic growth performance. In an insecure region, so the argument goes, each country must devote a disproportionate share of its endowment of scarce economic resources to "unproductive" military spending. In the absence of international cooperation to reduce political tensions, military

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