The Interrelationship between Military Expenditure and External Debt: Patterns of Causation in Northern Africa Countries

Andreas G Georgantopoulos

doi:10.22610/jebs.v3i4.279

Abstract

It is supported by academics and scholars that defense expenditure can significantly affect a countryâ€™s economic growth and in some cases it influences external debt having implications in various macroeconomic indicators. However, relevant empirical studies have produced contradictory evidence while the literature in this field remains relatively poor. In this spirit, this survey investigates the causal links between military expenditure and external debt for four emerging Northern Africa countries (i.e. Egypt, Tunisia, Algeria and Morocco) during the period 1988-2009. Empirical findings on the long-term relationship between the tested variables are based on cointegration test. The Granger Causality test results using Vector Auto Regression (VAR) estimates and the Error Correction Model imply that there is no dynamic causal link between military expenditure and external debt for Tunisia, Algeria and Morocco. On the other hand regarding Egypt, results imply that a strong unidirectional causality exists running from defense expenditure to external debt. Collectively, empirical calculations show that military burden do not have any significant impact on most Northern Africa countries. The only exception is the case of Egypt; empirical results show that military expenditure robustly affect the countryâ€™s external debt. These are the only findings provided from this study that validate the hypothesis that military burden may be important in determining the evolution of debt in developing countries.

Highlights

Brief Review of Northern Africa Economies: Northern Africa is the northernmost region of the African continent, linked by the Sahara to Sub-Saharan Africa
The central objective of this study is to investigate the causal links between military expenditures and external debt for four emerging Northern Africa economies (Egypt, Tunisia, Algeria and Morocco)
Robust results derived from three forms of Augmented DickeyFuller (ADF) test procedures all indicate that defense expenditure and external debt for the sample of four Northern Africa countries are integrated of order one i.e. I (1)

Summary

Introduction

Brief Review of Northern Africa Economies: Northern Africa is the northernmost region of the African continent, linked by the Sahara to Sub-Saharan Africa. According to United Nations (UN) definition, Northern Africa is consisted by seven countries (or territories); Algeria, Egypt, Libya, Morocco, Sudan, Tunisia, and Western Sahara. The economy of Egypt depends mainly on agriculture, media, petroleum exports, and tourism. Egypt has received U.S foreign aid (since 1979, an average of $2.2 billion per year) and is the third-largest recipient of such funds from the United States following the Iraq war. The economy of Egypt is under rapid economic transformations, which is evidenced by recent International Monetary Fund (IMF) reports that rate Egypt as one of the top countries in the world undertaking economic reforms. Foreign direct investment (FDI) into Egypt has increased considerably in the past few years, exceeding 6 billion U.S dollars in 2006, due to the recent economic liberalization and privatization measures. The United States of America provide an annual military assistance, which in 2009 amounted to 1.3 billion U.S dollars (inflation adjusted US$ 1.33 billion in 2011)

Objectives

Results

Conclusion