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

Abstract

This study revisits the relationship between defence spending and economic growth via a Keynesian model in Pakistan using the autoregressive distributive lag bounds testing approach to cointegration. Empirical evidence suggests a stable cointegration relationship between defence spending and economic growth. An increase in defence spending reduces the pace of economic growth confirming the validity of Keynesian hypothesis in this case. Current economic growth is positively linked with economic growth of previous periods while a rise in nonmilitary expenditures boosts economic growth. Interest rate is inversely associated with economic growth. Finally, unidirectional causality running from military spending to economic growth is found.

An Analysis of Defence Expenditure and Economic Growth in South Africa

“…Hence, any policy suggestion to either of the variable may affect the other. These findings are consistent with the study of Shahbaz, Afza and Shabbir (2013). The secondly, research question was: is there causality existing between defence expenditure and economic growth in South Africa or visa versa?…”

“…The finding in the long run indicates that military expenditure and income shows a negative sign at 5 per cent significance level. The effect of military expenditures on economic growth in Pakistan and its causality analysis were investigated by Shahbaz, Afza and Shabbir (2013). The findings of their study have confirmed the long run equilibrium between military expenditure and economic growth.…”

“…From the economics point of view it means that defence spending compete with all other public goods the inhabitants may need. According to Shahbaz, Afza and Shabbir (2013) there are two paths in which military expenditure may affect economic growth. Firstly, they explains that a rise in military expenditure may increases total demand by stimulating output and ultimately economic growth.…”

The Macroeconomic Impact of Defense Expenditure on Economic Growth of Pakistan: An Econometric Approach

“…In addition, breaking down the SSA group into those involved in conflict and those that are not, provides some further intriguing findings that suggest the value of further work on the impact of conflict on growth. Shahbaz et al (2011) discovered a long run negative relationship between defense spending and economic growth in 1972-2009 for Pakistan. In another study, Shahbaz and Shabbir (2012) study the relationship between military expenditure and economic growth in case if Pakistan.…”

Military Budget, War Against Boko Haram Insurgency, and Its Impact on Nigerian Politics and Economy

“…Dunne and Tian (2013) in their work, attempted to summarize 170 studies and found that more recent studies provide stronger evidence of a negative effect of military expenditure on economic growth. In their study, Shahbaz, Afza and Shabbir (2013) applied the keynessian model in a study using Pakistan as its case where autoregressive distributive lag bounds testing approach to cointegration in their bid to examine the relationship between defense spending and economic growth. In the study, they concluded that defence spending reduces the pace of economic growth which confirms the validity of Keynessian hypothesis.…”