The nexus of economic growth, military expenditures, and income inequality

Abstract

This paper examines the effect of military expenditures on economic growth by utilizing dynamic panel data analysis for 82 countries for the period of 1988–2008. Considering the possible effect of inequality on the military expenditures–economic growth nexus, this paper incorporates inequality along with its interaction with human capital into an augmented Solow growth model. The general finding is that military expenditures have a negative impact on economic growth, valid for several model specifications and sensitivity analyses. The negative impact holds when heterogeneity stemming from different country groups (e.g., development level, arms trade, fuel dependency) is considered. Also, the findings show that negative impact of military expenditure on growth for arms exporter and/or arms importer countries is weaker than those for other countries. Regarding income inequality and human capital, the findings suggest that human capital has a positive effect on growth, as expected. Income inequality on the other hand, has negative direct effect on economic growth. Considering these two variables together, the findings show that income inequality deteriorates growth for lower levels of human capital, whereas the impact of inequality on growth turns out to be positive for higher levels of human capital.