Military spending and economic growth: Does political instability matter?

Abstract

The purpose of this paper is to assess the interactional impact of military expenditure on economic growth, taking into consideration the levels of political instability in the Middle East, North Africa and Turkey region (MENAT), namely Egypt, Iran, Jordan, Morocco, Saudi Arabia, Tunisia, and Turkey, over the period 1996–2019. In this regard, this study considers the effects of military spending on economic growth in a panel cointegration framework using panel dynamic ordinary least squares (OLS), focusing on the implications of political instability. Our analysis indicates that after controlling for cross-sectional dependence, the typical relationship between military spending and output does not hold in the long run. This relationship, however, is re-established and becomes stronger once we account for political instability in the countries in the region. It is clearly found that political stability indices are more important for developing countries. In the long run, the results of dynamic OLS reveal that military spending has a more elastic relationship with the economic growth rate in the presence of political instability in the MENAT region with a negative effect, while there is a negative relationship between political stability level measured by government effectiveness and economic growth.