Abstract
The causation relationship between economic growth and military spending in developing countries was subject to intense debate in recent years. This study examines the causal relationship between aggregate government spending and economic growth in Algeria for the period 1980-2010. We also break down the aggregate government spending into military and civilian spending and assess their impact on economic growth. Both bivariate and multivariate co-integration is utilized to determine the type and direction of causality. Using Johansen’s co-integration procedure and VECM, the study showed the existence of uni-directional causality between economic growth and military spending. This study also uses the variance decomposition analysis to assess the dynamic effect of one variable on the other two variables in the model beyond the sample period.
Highlights
The central theme in all of economics revolves around the efficient allocation of scarce resources among alternative uses
The Augmented Dickey Fuller (ADF) and Phillips-Peron (PP) tests were applied to all the variables in the series and the results are presented in Table 1 below
The purpose of this paper is to investigate the causal relationship between military expenditures and economic growth in Algeria where the government plays a major role in the allocation of the country’s resources
Summary
The central theme in all of economics revolves around the efficient allocation of scarce resources among alternative uses. “The scarcity of resources leads economists to suggest that large defense expenditures undertaken by governments reduces the resources available for investment in other more productive sectors of the economy, and will lead to a slowdown in growth [1]”. The empirical evidence collected for developed countries seem to validate and verify the above statement. The studies that were undertaken for many of the developing countries revealed an entirely opposite pattern as noted by Benoit. “This finding was so unexpected and challenging that it made it worthwhile to undertake this empirical study to shed more light on the underlying relationship between military spending and economic growth in developing countries [1]”. The issue of causality between economic growth and military spending in developing countries has been explored by many researchers during the past few decades with no conclusive results. Some studies have shown the causality to be uni-directional while others showed it to be bi-directional, yet other investigations concluded the absence of causality altogether
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