Economic Development and Defense Expenditure

Abstract

Developing countries spend large amounts of scarce resources on military expenditure. The effect of defense spending on economic growth and development is an important topic and merits close scrutiny from development economists. The main purpose of this paper is to analyze the interrelationships among defense burden, saving, and economic growth within the context of a fully specified empirical model. Since Benoit's seminal work, published in this journal and elsewhere,' started the recent debate and controversy, it is necessary to discuss his findings in some detail. Benoit made a forceful and interesting case for the existence of a causal relationship between defense expenditure and growth in less developed countries (LDCs). His main hypothesis was that defense burden is positively correlated to growth rates in LDCs. Furthermore, the chain of causation is such that a high defense burden causes the growth rate to rise. Defense helps development. Policy implications of such a hypothesis are then spelled out. The purpose of this section is to evaluate Benoit's thesis and critically analyze its conclusions. The main finding is that for a large sample of 44 countries there exists a positive correlation between rate of growth and defense burden (defense expenditure as a proportion of national income). Benoit used the growth rate of nondefense civilian output for the index of growth to avoid the criticism of double counting. There is an interesting definitional question that arises regarding the variables used by Benoit here. He defined growth in civilian output as growth in GDP minus growth in defense spending (all in real terms). Defining GDP as Y, civilian output as V, and defense spending as D, we may write