How Military Spending Determines Growth Rate In Developed Countries
The Challenges Faced in Analyzing the Economic Impact of Military Spending
How Military Spending Determines Growth Rate in Developed Countries.
In economic literature, the defense is viewed as a country’s sovereign duty par excellence. Spending on the military is viewed as a special form of public expenditure and is usually shrouded in secrecy making it difficult to accurately estimate what percentage of the military’s budget is spent on what. The opacity associated with military spending has led to the economists investigating its impact on the economy facing some challenges. The challenges that they face include the inefficiency of reliable statistical data associated with military spending; which prevents econometricians from being able to provide empirical verification. Moreover, they are faced with the problem of identifying the differentiated effects of military expenditure, with a multifaceted role in the economy that is quite complex to disentangle for mathematical formalization and the third challenge is the need to combine strategic and economic consideration when performing the analysis so as to result to a more realistic and sophisticated modeling.
In most slandered defense economies ranging from the neoclassical mainstream to Keynesianism spending on the military has been a subject of great interest to theoreticians especially on the impact of military defense on a country’s economies. One pertinent question that most theoreticians seek to answer is how military spending determines the growth of nations in developed countries. The answer to this question will help in identifying the relationship that exists between military spending and the economic growth of developed countries. It is important to understand this relationship as military spending has resulted in some nations suffering from the consequences of having a volatile security situation in the world.
It is not surprising that the increase in military spending by these nations has significantly affected growth within their respective borders. Then, what makes developed countries military expenditures relatively high? The most important reason to maintain a high military spending is that it will give a country enhanced national defense capabilities. It is obvious that increasing the budget of the military will serve to protect the citizenry better as far as the homeland security is concerned. Within in the United States, military expenditure reached an all-time peak in 2010; now the military expenditure is showing a decrease in trend because of the withdrawal of US armed force from Iraq and Afghanistan.
Theoretical critics have realized that military spending in developed countries is directly proportional to the country’s GDP growth. By running a staggering statistic data, this paper will demonstrate how 15 countries, are responsible for 81% of the world’s aggregate military expenditure.
Theoretical and Empirical Evidence on the Relationship between Military Spending and Economic Growth
To paint a better picture of the pertinent questions raised by this paper, the paper will provide theoretical foundation based on Solow-Swan model, the generic equation used for any growth based model, the military spending variable, which will be denoted as M, will be incorporated into this so as to ascertain the impact that military spending has in the growth of the nation. To assist in digging up reliable data, the SIPRI military expenditure database will be used as it provides long-term and historically consistent series of military expenditure data with global coverage. Also, military expenditures compare spending on defense programs for the most recent year available as a percent of gross domestic product (GDP) in World Bank datasets.
In an article titled, “Defense Expenditure and Economic Growth: Evidence from India,” the authors apply the VECM analysis to Dreger model, to investigate the relationship that exists between India’s Defense expenditure and economic growth in the country. In the research, the authors determine that there exists a bi-directional causality between a country’s defense expenditure and its Gross Domestic Product (GDP). The investigations also determined that there exists a unidirectional causality from the country’s GDP to its merchandise trade and from its gross domestic savings to its product trade. No causality was determined between any of the countries test variables with its gross domestic product.
Based on the investigation it was determined that an increase in the GDP or defense expenditure of the country would bring about momentum which will result in both of them increasing over time. From the analysis, it was evident that increase in the country’s defense expenditure would likely lead to increases in trade both in and outside the country as the military develops or acquires new technology. The increase in trade results to an increase in the economic standing of the country. In the study on defense spending in India, it was revealed that sudden increase in the country’s defense expenditure gives a positive indication to the country’s domestic savers as their sense of safety in the country increases, this results in an increase in domestic savings thereby providing the banks and government with enough resources to significantly invest in the markets.
The investments in the markets generate a positive trend in the economy which in turn leads to economic development. The increase in the countries defense expenditure is also linked with an increase in diplomatic tensions between the country and its neighbors as the neighbors view it as an aggressive stance. This serves to hinder trade between that country and its neighbors, as a result, impacting negatively on economic growth.
Using Regression Analysis to Model the Relationship between Military Spending and Economic Growth
In the article titled, “The Relation between Military Expenditure & Economic Growth in Developing Countries Evidence from a Panel of 41 Developing Countries,” by Ohiul Islam, the author indicates that defense expenditure can either have positive or negative impact on the GPD of a country depending on the certain specific effects of the country one of which is the status of its economy.
In the article, the author indicates that when one is analyzing the impact of military spending on the economic growth of the country, it is essential to analyze the country’s specific effects; its population. The researcher utilized data derived from the SIPRI and reviewed 41 of the top 74 developing countries in the world. In the research, it was revealed that countries with the high populations invested significantly in the acquisition of military resources which served to increase the amount of money that it spent on the military thereby serving to increase the country’s military expenditure thereby increasing the percentage of the GDP that was spent on military expenditure.
Through the model employed in the research, it was evident that there exists a relationship between a country’s factors of production, its GDP, and the military expenditure. The study also reveals that the growth of a country’s military expenditure about its GDP and the growth rate of the country are positively related to one another. This implies that as the GDP growth rate of the country increases, the military expenditure for that country increases. It also indicates that the military expenditure of a country cannot be increased without an increase in the GDP growth rate.
Through the use of the Paris -Winsten model, the author was able to draw an effective nexus between the GDP of a country and the Military expenditure in that particular country. Through the model, it was made evident less developed industrialized countries have a positive relationship between the countries GDP and its military expenditure. It further proceeded to reveal that developing highly industrialized countries demonstrate a negative relationship between economic growth rate and military expenditure. Based on the analysis provided in the articles this paper seeks to analyze the relationship that exists between economic growth rate and military expenditure in developed countries.
Through the use of the linear regression model it will be possible to model the relationship that exists between the independent and the dependant variable by applying the linear equation the data. The linear equation used to determine the relationship that exists between the countries economic growth and military spending is given by Y=a+bX where X is the independent variable, Y is the dependant variable, b is the slope and a is the intercept. Due to the fact that military spending depends on economic growth, it is logical to conclude that in the case under scrutiny, economic growth is the independent variable X and military expenditure is the dependant variable Y.
The Role of Population in Military Expenditure in Developed Countries
The a and b in the equations stands for external factors that may influence the relationship between a country’s economic growth and military spending like the population and each individual country’s GDP. Through the use of a linear regression model, it is evident that the relationship between a developed country’s economic growth and military expenditure is largely affected by its population. Developed countries that had the largest population like the U.S, Brazil, Japan and the United Kingdom spent the most on defense than those that had smaller population.
This phenomenon can be attributed to the fact that developed countries with large populations had much higher economic growth due to the increased productivity in this countries and as a result the country had much more resources to spend on the military. This is quite interesting as the opposite is the fact when dealing with under developed countries. In the literature review of under developed or developing countries, it was evident that countries that had the largest population spent the least on military expenditure as a significant percentage of the resources went into welfare programs.
In using Eplison’s description of the random component of linear relationships that exists between Y and x it is evident that y1=α+ β* X1+ ?1. When the formula is taken in context of the paper, it implies that in developed countries, economic development of a country is non linear to military expenditure. This serves to imply that in developed countries military spending serves more to hurt the economic growth of the country than to aid it. However, it is essential to point out that the model is susceptible to external geopolitical factors.
Through the model, it was depicted that in developed countries an increase in military spending is not positively related to the country’s growth rate. This was revealed in the fact that Turkey had the highest economic growth rates and a relatively small GDP when compared to other country sin the list.
The U.S, on the other hand, had a relatively small growth rate despite the fact that it is the largest military spender among the countries under review and that it has the largest growth rate. The GDP of the U.S is a major determinant of how the military investments influence the country’s growth rate. The fact that the U.S’s GDP is the highest among the countries under review serves to indicate that it has the highest income per capita and as a result the highest production rate.
External Factors that May Affect the Relationship between Military Spending and Economic Growth
This is reflected in the fact that the Y value for the U.S is 41086.76. This is an indicator that the country has the highest production rate among those listed in the top 15. Production is associated directly with a country’s economic growth rate. Countries that have high production rates have a higher economic growth rate than those that do not account for some reasons. Increased production in a country indicates increased trade which in turn results in increased profitability for the country. Therefore in the case of the United States, it is logical to include that increased military spending is positively related to economic growth and economic growth is positively related to military spending. This is explained by the fact that as a country grows economically; it invests significantly in the acquisition of new military technology so as to be able to protect its resources.
Capital is deemed to be finite; this implies that the capital invested in one sector results in a decline of money available to be spent in another area. This is largely seen in the military where the money that could be spent on the enhancement of human welfare is spent on the acquisition of military resources. As government spending exceeds revenue, the government is forced to borrow the funds from other sources thereby leading to an increase in national debt. An increase in the country’s national debt due to military spending and other forms of overspending by the government leads to increased national debt.
This leads to an increase in the country’s interest rate which in turn results in reduced borrowing. The reduced borrowing hampers economic growth in the country as the number of sources needed for development decrease significantly. Another impact of increased military expenditure is increased employment opportunities, the military provides a lot of employment opportunities and increased funding will lead to an increase in the number of employment opportunities across the state. This will serve to promote economic growth as an increased percentage of the country’s population will have access to gainful employment there serving to increase the economic standing of the country.
According to a report produced by the Stockholm International Peace Research Institute (SIPRI), in the year 2016 countries around the world spent a total of $1.686 trillion on arms indicating a 0.4% increase in the total amount spent on the military by all the countries in the world. In the report, it was evident that the United States retained its position as the largest military spender having spent $611 billion representing a total of 36% of the global total. It was evident that the amount the U.S spends on its military is three times that of second-place China which spent $215.0 billion representing 13% of the total expenditure. Russia, Saudi Arabia, India, United Kingdom, Japan, Germany, South Korea, Italy, Australia., Brazil, UAE and Israel spent $69.2, $63.7, $55.9, $48.3, $46.1, $41.1, $36.8, $27.9, $24.6, $23.7, $22.8 and $18.0 billion respectively.
According to the report, Tension in Europe between Russia and NATO countries have led to an increase of 2.4% for countries in Western Europe with Italy having the most notable increase of 11 percent. From the 2016 SIPRI report on military spending, it is evident that the top 15 countries spent contributed to 77.4% of the total amount that spent on the military for that year. An analysis of the data provided by SIPRI also reveals that there exist some other factors that drive military spending in developed countries.
One of the main drivers of military spending in developed countries is regional politics. The increase in regional political tensions leads to an increase of money developed countries spend on the military on the other hand regional peace leads to a reduction in the amount spent by the military in a country. In reviewing the military spending habits of the U.S China and Russia, which are three of the most developed countries in the world, it is evident that a significant percentage of military spending goes to technological development. Most of the technology that it is developed by the military gets transferred off to the public for commercial purposes.
Based on these revelations, it is logical to indicate that increase in military spending leads to technological advancements which in turn results in economic development as the technology is used to increase production efficiency thereby leading to enhanced economic growth in the country. One very significant example of this was witnessed in the case of the internet which was initially developed from military funding. The internet has since been transferred to the public sector where it has provided a platform for the creation of numerous businesses which have helped significantly develop the economy of the country and the entire globe.
Another major example of how military expenditure serves to spur the economic growth of the country is seen in the case of drones. Drones were initially developed for the military objective, but the autonomous flight technology has since been transferred to the commercial sector where it is being used in the development of commercial drones and is currently being used in the creation of self-driving cars. The commercial drone industry is currently one of the fastest rising industries with some individuals utilizing drones for recreational purpose increasing significantly within a short period.
Conclusion
From the discussion provided, it is evident that military spending and the economic growth of a country are related in some ways. One can utilize different growth models for him/her to determine the relationship that exists between expenditure in the military and economic growth. From the discussion, it is evident that the relationship being investigated varies depending on the developmental stage of the country. In developing countries, it was evident that military investment leads to increased economic growth for the country because it breeds technological advancement which can be employed by the country to aid it in its developmental processes. From the Solow-Swan model, it was evident that the growth rate of a country does not depend on its saving rate and as a result expenditure does not in any way impact the country’s growth rate. When both K and Y are constant, the growth rate isn’t affected by the countries saving rate.
The effects of military expenditure on the economic growth of the 15 developed countries under review were evaluated using the Solow-Swan model. The analysis revealed some mixed results but on average it was evident that military spending has the capacity of influencing the economic growth of developed countries negatively. This is largely because unlike developing countries which utilize the technology created by the military for economic advancement purposes, in developed countries like the U.S the technological sector is usually well developed and the public does not rely on military spin-offs. In the planning of their expenditures, governments usually attempt to implement policies that will serve to promote the countries development.
The growing tension in the Korean Peninsula, the Proxy war in Syria, and the increasing terror threat caused by international terror organizations like ISIS have led to most of the developed countries in the world investing significantly in their military expenditure. The significant investments in defense have resulted in their being little resources left to invest in other developmental activities in the country. This serves to slow down economic growth in the country.
In analyzing military expenditure data for the countries under review in the year 2015 and the year 2016, it is evident that as the governments increased their expenditure on defense, the country’s economic growth rate experienced a gradual decline. In the development of more defense oriented programs, it was clear that more R&D activities need to be conducted which requires more resources. From the study, it is evident that increased government spending on the military serves to decrease social welfare. The importation of military equipment also serves to create a negative impact on the balance of payment.
Based on the discussion it is evident that military spending leads to economic growth. From this it is logical for one to recommend that for a country to obtain economic growth, it has to increase its military spending. However, the spending should be focused around areas that can have a direct impact on the economy. Military spending on technology has a direct positive impact on the economy of a country as the developed technology can be repurposed for the civilian market. An example of this is seen in the case of Global Positioning System technology which was developed for military use and later on transferred into the civilian market. The technology has since been used in a number of sectors leading to economic growth.
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