Defence spending and economic growth: A causal analysis for Greece and Turkey*

Abstract

There are a number of studies which consider the relation between military spending and economic growth using Granger causality techniques rather than a well-defined economic model. Some have used samples of groups of countries, finding no consistent results. Others have focused on case studies of individual countries, which has the advantage of the researchers bringing to bear much more data than the cross country samples and a greater knowledge of the structure of the economy and the budget. This paper adds to the literature by providing an analysis of two countries, Greece and Turkey, which are particularly interesting case studies given their high military burdens, the poor relations between the two and the resulting arms race in the area. In addition to analysing the data using standard "pre-cointegration" Granger causality techniques, this paper employs modern vector autoregressive (VAR) methodology that utilises cointegration via Granger's representation theorem. The standard Granger causality tests suggest a positive effect of changing military burden on growth for Greece, but this is not sustained when the cointegration between output and military burden is taken into account. The only evidence of significant Granger causality is a negative impact of military burden on growth in Turkey.

An Analysis of Defence Expenditure and Economic Growth in South Africa

“…Conversely, looking on the other hypothesis this is interesting that military expenditure seem to granger cause gross domestic product per capita at 5 percent significance level. Also these findings are similar to Dunne, Nikolaidou and Vougas (1998) specifically for Turkey case study. Based on causality outcomes of the study it is recommended to policy makers that the decision for military expenditure should not be based on gross domestic product as a stick-yard.…”

“…It was concluded by the study that military expenditure and economic growth are cointegrated, and causality runs from economic growth to defence spending. As is the trend in the literature that military expenditure is causally prior to economic growth, Dunne, Nikolaidou and Vougas (1998) empirically investigated the hypothesis in Greece and Turkey. Their study indicates that for Greece there is a positive impact of military expenditure on economic growth.…”

Does Defence Spending Impede Economic Growth? Cointegration and Causality Analysis for Pakistan

“…Broadly speaking, the findings are mixed and inconclusive with results depending on the country or sample of countries, the time period or the methodology used (for a survey of the findings and the issues see Dunne et al, 2005). In a number of cases, findings suggest that defence expenditures stimulate economic growth through the demand stimulation channel (inter alia: Fredericksen and Looney, 1982;Stewart, 1991;Ward et al, 1991;Dunne et al, 2001;Atesoglu, 2002Atesoglu, , 2009Yildirim et al, 2005). Military expenditures may also lead to improvements in infrastructure while a similar positive effect is also postulated when it comes to the labour force and the technical skills acquired during military training that can then be useful endowments for the civilian life of soldiers once decommissioned (MacNair et al, 1995).…”

Defense Spending and Economic Growth in China, India, Nepal and Pakistan: Evidence from Cointegrated Panel Analysis

“…There are two ways we can see the relationship between defense spending and economic growth: first, regression approach, where the direction of causality does not serious matter and second, time series approach, where the direction of causality does serious matter. A number of research papers have been concerned with the empirical relationship between defense spending and economic growth in different countries over different periods (see Hirnissa et al, 2008;Yildirim and Ocal, 2006;Yildirim et al, 2005;Reitschuler and Loening, 2005;Yildirim et al, 2005;Halicioglu, 2004;Kollias et al, 2004;Ocal, 2003;Shieh et al, 2002;Atesoglu, 2002;Dakurah et al, 2001;Dunne et al, 2001;Stroup and Heckelman, 2001;Frederiksen and McNab, 2001;Kollias and Makrydakis, 2000;Dunne and Vougas, 1999;Georgiou et al, 1996;Nadir, 1993;Chowdhury, 1991;Frederiksen, 1991;Alexander, 1990;Frederiksen and LaCivita, 1987;Looney and Frederiksen, 1986;Joerding, 1986). The empirical findings are, nevertheless, very contradictory.…”