Revisiting the Relationship between Military Expenditure and Economic Growth in Pakistan

Abstract

This study aims to examine relationship of military expenditure and economic growth in different phases of military regimes in the context of Pakistan. This study uses two-state Markov switching models with Constant Transition Probability (CTP) and Time Varying Transition Probabilities (TVTP) for the time period: 1973-2014. This investigation analyses two sorts of relations between military expenditures and economic development through fixed transition probability Markov exchanging models. To begin with, there is negative connection between GDP growth and military expenditures during a high variance state (i.e. having low economic growth). Second, there is positive relation between both variables, during low variance state (i.e. having higher economic growth) which is also supported by idea of Keynesian income multiplier. Another, empirical test of time varying transition probability model was used to capture the switch through indicator variable. Results of the study suggest that chances of switching are increased from low to high economic growth. The chances of switching increase from lower to higher economic growth period (or high variance period) if non-military expenditure increases. The study concludes that military expenditure and economic growth are state dependent. If conditions of economy are stable then increase of expenditure results in positive outcomes, otherwise, it affects negatively. Empirical findings suggest that military spending should be planned in accordance to the economic performance of the country.