Do Defense Expenditures Increase External Debts?

Abstract

Defense expenditures which are always on the agenda for countries follow a fluctuating trend in time. Dizzying advances in technology have leads to the emergence of high value added inventions in the field of defense. While the countries producing technology-based vehicles (combat helicopters and aircrafts, tanks, heavy weapons etc.) are succeed in this field, those, dependent on military products, having to make defense expenditures because of some reasons of their own such as terrorism and geopolitical position, may face with economic difficulties, such as the budget deficit and external debt. Defense expenditures in the countries, which are on conflict with each other because of its geopolitical position and internal threats and have to maintain a certain defense force, reach to higher levels naturally. In this study, the relationship between defense expenditures and external debts in selected countries in the period of 1990-2011 has been analysed by using dynamic panel data methods and Dumitrescu-Hurlin (2012) causality test. Analysis results generally indicate that as increasing in defense expenditures and number of military personnel increased the external debt; whereas, as increasing in GDP decreased the external debt. Causality test has revealed that there is an one-way causality from defense expenditures and GDP to external debt, from external debt to number of military personnel and two way causality between defense expenditures and number of military personnel, GDP and defense expenditures.