Guns and Blood: A Review of Geopolitical Risk and Defence Expenditures

Abstract

ABSTRACT This study evaluates the possibility of having a causal link between geopolitical risk (GPR) and defence expenditure (DE) by employing panel bootstrap Granger causality method. The results highlight the causality running from GPR to DE in China, India, and Saudi Arabia. In other words, the GPR in the form of border disputes, wars and terrorism threats can pursuade countries to increase their defence expenditure. The results we obtain for these three countries are also supported by the neoclassical model, which asserts that GPR is a significant contributor to DE. Contrary to above, there are evidences for reverse causality as well where DE is causing GPR in South Korea and Turkey. The most probable reasons for reverse causality could be the various alliances for regional security by the countries and their dependency on the import of military equipment. The results indicate an insignificant relationship between GPR and DE in Brazil, Israel, and Russia; where the DE is mainly determined by the internal political system and its contribution towards employment generation. On the basis of our results, it can be inferred that the convergence of regional interests in the form of a peaceful solution of disputes may guarantee security. Also, the formulation of the policies that are independent and isolated from the influence of external powers, can help in controlling the ever-increasing DE and GPR in these countries.