ARMS TRADE, MILITARY SPENDING, AND ECONOMIC GROWTH

Abstract

There is a large literature on the relationship between economic growth and defense spending, but its findings are often contradictory and inconclusive. These results may be partly due to non‐linear growth effects of military expenditure and incorrect model specifications. The literature also appears lacking an empirical analysis of interaction between military spending and the arms trade and the impact of these two on growth. This paper investigates this non‐linear interaction in the context of the Solow and Barro growth models recommended by Dunne et al. 1 (2005). Using fixed effects, random effects, and Arellano–Bond GMM estimators, I examine the growth effects of military expenditure, arms trade, and their interaction in a balanced panel of 28 countries during 1965–2000. The augmented Solow growth model specified in Dunne et al. (2005) yields more robust estimates than the reformulated Barro model. I find that higher military spending and net arms exports separately lead to lower economic growth, but higher military spending is less detrimental to growth when a country is a net arms exporter. 1 I would like to thank Paul Dunne, Ron Smith, and Dirk Willenbockel (2004) for sharing their data.