Defence Spending, Economic Growth and Regional Balance: Evidence from Azerbaijan and Armenia

Abstract

Military expenditures have a significant impact not only on the socioeconomic condition of a state but also on the regional balance of power. In this study it will be examined the relationship between military expenditures and economic conditions in Azerbaijan and Armenia and impacts of military expeditures on the regional balance. In the context of the diplomatic history from the First Karabakh War to the Second Karabakh War, the regional balance between the two states is clarified. Then the complex relationship between military expenditures and economic conditions is empirically analyzed via using non-linear ARDL and ARDL limited test methods. The empirical findings indicate that in Azerbaijan, military spending aligns with the Military-led Standard of Living Improvement Hypothesis, whereas its positive effect on well-being in Armenia is minimal. Specifically, military expenditure positively influences the standard of living and well-being in Azerbaijan, as evidenced by both the ARDL Bound and multiplier effect. Conversely, according to the Military Burden Hypothesis, military spending poses a burden on the budgets of both countries. Nevertheless, this burden is more pronounced for Azerbaijan compared to Armenia, where the adverse impact of military expenditure is comparatively lesser.