The effect of military spending on output: New evidence at the global and country group levels using panel data cointegration techniques

Abstract

The objective of this research is to examine the effect of the growth rate of military spending on the growth rate of real output in 126 countries using panel data for 1980–2016. We used data from the World Development Indicators of the World Bank and from the Stockholm International Peace Research Institute. With the aim of capturing the heterogeneity among countries by income level, we divided countries into four groups: upper income, upper middle income, lower middle income, and lower income. Using cointegration and causality techniques for panel data, we found robust empirical evidence that suggests that military spending and real output have long and short-term equilibrium relationships in the different income groups. The results of the causality test suggest that there is a unidirectional causal relationship from real output to military spending in high income countries; and from military spending to real output in upper-middle and lower-middle income countries, and that no causal relationship in either direction exists in lower income countries. A policy implication derived from our research is that medium-low and low-income countries should redirect military spending toward more productive activities to increase long-term economic growth.