The debate over the impact of military spending on economic growth in the LDCs the causal relationship between military expenditure and economic growth for 68 the data was collected and the general lack of equilibrium conditions in the . The relationship between economic development and defence has always been the subject of significant . spending. In general, economic studies on the correlation of the defence sector causal relationship between defense spending and. The results suggest that the relationship between defense spending and economic growth cannot be generalized across countries. The actual relationship may.
Hall and Jones explains Rothschild report that defense Military Expenditure and Economic Growth programs generate employment in the U. This explanation argues that military Cuaresma and Reitschulerin Heo expenditure can stimulate the economy. Mueller and association between the two variables is job Atesogluin their empirical analysis creation. Technology The various explanations of the three This explanation argues that military propositions are summarized in the expenditure allocated to develop military following table: One of the literatures that argue likewise is Adams and Gold's research in which they contend that the defense industry has been a source of significant technological innovation in the U.
In line with this explanation, Deger and Senin Stroup and Heckelmannote that various studies have considered whether technology spin-offs arising from defense weapons production in countries with capital intensive military sectors might enhance growth.
Human Capital This argument sees the relationship between a part of the military expenditure and the development of human capital. Barroin Heonotes that a portion of defense spending is used to support education, which enhances human capital. The Feder- the causality relationship between military Ram model also includes the externality expenditure and economic growth.
The factors from government expenditure Heo, relationship will be tested by using the Despite that, Dunne, Smith, and Augmented Solow growth model, as Willenbockel criticize that there is a suggested by Dunne, Smith, and severe simultaneity problem between the Willenbockel Another model often dependent variable and the independent used to test the relationship between variables in this model Heo, They military expenditure and economic growth further argue that this model has in the literatures of defense economics is the multicollinearity between independent Feder-Ram model.
According to Dumas variables Heo, Therefore, they and Heothis model can recommend the use of Augmented Solow Military Expenditure and Economic Growth growth model commonly used in literatures read Dunne, Smith, and Willenbockel about economic growth. The final model that is tested in this To see the complete explanation about study is: G Proxy by using share of population working in the industry sector in total workforce.
The data of the share of employment in the industry sector is taken from the database of World Development Indicators WDI accessed from databank. Non-spuriousness variables, there are at least three requires this study to eliminate probability requirements: Direction of influence Singleton and Straits, Association is requires the direction of the causal fulfilled when there is strong association or relationship to be clear: If it appears that economic growth the parameter that can estimate the also in turn plays a causal role for military simultaneous relationship between the expenditure, the pattern of causal variables, this study conducts a regression relationship between the two variables using the Three-Stage Least Squares 3SLS becomes unclear.
This shows that both variables have positive relationship, despite not too high. However, there is a probability that This study suspects that other than the the correlation is significant in explaining independent variables in the system, there the relationship between military is also a linkage between the disturbance expenditure and economic growth. Therefore, to test To summarize it, the disturbance factor in whether the data used in this study have each equation is suspected to affect the the probability to produce spurious military expenditure and economic growth.
The result is that all unrelated regression SUR. The result is that the variable of economic growth has simultaneous causality with military expenditure, meaning that not only economic growth is affected by military Military Expenditure and Economic Growth Table 3 Descriptive statistics of variables used in this study Variable Mean Std. It is rather low Constitution, which limits its defense compared to the number of other countries spending to 1 percent of its GDP.
Military Burden and Economic Growth: Evidence from a Multivariate Cointegration Analysis
With the in the region: In an The Theoretically, the higher the number, the higher the technological progress of the economy. Logically the higher the number, the higher the investment or technological advancement needed to produce economic growth. Economic Growth, d ln Yt Economic growth of previous year, d ln Yt-1 0. Capital investment, d ln st 0. Previous growth of military expenditure, d ln Mt Growth of government expenditure, d ln Govt. Therefore, it is expected human capital investment is the dominant that allocation of resources to this factor will element.
Table 4 shows that the steady state result in a higher economic growth than the factor has greater positive impacts 1. It can be interpreted that for seen that military expenditure has positive Indonesian economy, in order to boost effects on economic growth in Indonesia. He uses human capital as a portion of defense a four-equation simultaneous model and spending.
In military expenditure, 3SLS estimation procedure to investigate personnel expenditure can contribute in the relationship between defense spending developing the human capital through and economic growth in Sub-Saharan means of training and community Africa, and withdraws the following involvement conducted by military conclusions from his econometric analysis: Personnel growth through increased supply of expenditure makes up to 48 percent of the skilled labor and decreased investment, total military expenditure inwhile 3.
Having found that African countries' Graphic 2 Indonesia military expenditure defense spending contributes to the by types development of human capital in the form of skilled labors, Gyimah-Brempongp. Appendix 1 of the Presidential Military expenditure is a public Decree No. Whether study can help to elaborate more discussion the influence is positive, negative, or on the results.
Using cross-national data for insignificant does not in Indonesia's case, 39 Sub-Saharan African countries during since Indonesia must inevitably increase its the to period, Gyimah-Brempong military expenditure gradually to meet its also arrives at a relatively similar conclusion MEF requirements. Pos other significant effect from Indonesia M. Hutabarat, explained, the MEF would be military expenditure.
In developed fulfilled approximately in with a countries, military spending tends to have nominal approximately Rp trillion. He an impact on growth through its effects on added that the ideal budget to fulfill technology. The findings tell us that defense requirements, especially in Indonesia defense industry still cannot developed countries, was around 2 to 3 contribute to the advancement of percent of the GDP, while Indonesia technology in Indonesia.
This is where military expenditure had merely been Indonesia military expenditure should be under 1 percent. To null this gap, Indonesia highlighted.
By the enactment of Law No. This study concludes that requiring the model to be further modified the relationship between military in order to obtain more robust results. This is because most of Indonesia military expenditure is used About Authors for personnel expenditure, which consequently increases the human capital Tangguh Chairil earned his bachelor's and eventually affects the economy degree in International Relations from Universitas Indonesia in and master's positively.
The findings tell us that degree in Defense Economics at the Indonesia Indonesia needs not to worry about the Defense University in His thesis is titled damaging trade-off between defense and "Determining Factors of Proportion of Military other government spending on civilian Expenditure as Percent of Gross Domestic goods, because the former also reinforces Product of Countries: Cross-Country Statistical the latter, in the form of the development of Analysis".
Currently, he is acting as Special human capital as a portion of military Assistant to the Director of Maritime Security expenditure. He can be contacted at Forces TNI holds the doctrine of tangguhchairil hotmail. Sinaga received his bachelor's degree in Armed Forces with the People and Economics from Universitas Indonesia in The pursue postgraduate study in Defense task is the implementation of Law No. Currently, he is working at the Critical Review. Defence and Peace Economics. Febrianti received her bachelor's Journal of Universitas Paramadina.
She earned the best Conflict Resolution. International Relations graduate student in the 5th Judicium of Universitas Paramadina. An Econometric earned her master's degree in Defense Investigation. Journal of Peace Research. She focused her study in the Heo, Uk. The Relationship defense industry. Case Study of PT. She has also conducted research about United Indonesian Ministry of Defense.
Director- References General of Defense Potential: Theoretical Background What does economic theory say about the effect of government spending on economic growth? This has been the subject of intense debate among economists who adhere to the two different schools of thought, the Classical versus the Keynesians.
The Keynesians are concerned with how the economy performs in the short run as a result of changes in the business cycle. They believe that economic recessions and high rates of unemployment are the direct result of deficient aggregate demand. They advocate the use of expansionary fiscal policy to boost aggregate spending so as to reduce unemployment and enhance the level of economic activity. According to the Keynesians, a one dollar increase in government military spending through the expenditure multiplier effect will increase the equilibrium level of real GDP by more than one dollar.
"A Causal Analysis of Defense Spending and Economic Growth" by Abdur Chowdhury
The Classical School on the other hand is very much concerned with how the economy performs over the long run. They believe that if the economy happens to deviate from its long run equilibrium in the short run, there are internal forces within the economy that will ensure its return to the full-employment equilibrium.
The adjustment process begins in the labor market, characterized by excess supply of labor actual rate of unemployment exceeding the natural rate of unemployment.
A fall in the real wage will lead to an increase in the demand for labor, thereby resulting in full-employment equilibrium in the labor market, which will ultimately make actual real GDP converge to potential GDP. Classical and Neoclassical believe that changes in government spending have no effect on the level of GDP in the long run. Increase in government spending will lead to a fall in national saving and an increase in the real interest rate, which in turn will reduce private investment.
This process is known as the crowding- out effect i. The increase in government spending is offset by a decline in private investment which will leave the level of GDP unchanged. Fiscal Policy is also made less effective by the existence of long time lags from the time a specific need is recognized for taking action to the time of the realized outcome of such an action.
New growth theorists suggest that there is both a temporary effect from government spending during the transition to equilibrium and a long run effect on economic growth. From the discussion that we presented so far we can conclude that there are four possible causal relationships between growth and military spending: In this paper we will attempt to determine the type of causality that exists between growth and defense spending in Algeria by using the appropriate statistical tools of Granger causality [ 2122 ] and the Error Correction Model.
The Econometric Methodology and Data Most empirical studies of the relationship between government spending and economic growth have been conducted using crosscountry data in an attempt to explain observed differences in growth rates across countries. However, cross-section analysis does not capture the country specific nature of the relationship between the relevant economic variables included in the model.
For this reason we have opted for using time-series analysis to investigate not only the type of relationship but also the direction of causality between the variables.
Military spending and economic growth : The case of Iran
Data and definition of variables Within a vector auto regression VAR [ 2324 ] framework, we proceeded to form two systems of causal relationships: Method Engle, Granger, Johansen, Johansen and Juselius [ 25 - 28 ] introduced the co-integration and error correction model ECM to examine the long-run equilibrium, and the short-run relationship among variables in the model. According to Granger [ 25 ], if two series are co-integrated, the dynamic relationship between the two variables could be examined within the framework of an ECM.
The ECM is derived from the co-integrating equations by including the lagged error correction term to recapture the long-run information lost via the differencing of the variables. It states that if two variables are cointegrated of order one, then they can be modeled by an ECM to determine the long-run relationship between two or more variables. The co-integration test involves two steps: The stationary properties of the individual variables in the above two equations are examined by using the unit root tests suggested by Dickey and Fuller [ 3031 ].
Recent developments in the time-series studies have emphasized the importance of testing for unit roots in the series, since the validity of the empirical relationship between times series depends on the requirement that the classical stationary assumptions are satisfied.
Granger, Newbold and Phillips [ 3233 ] argue that the regression results are spurious if the time series involved in OLS are non-stationary. If the variables have unit roots, then the likelihood ratio test is used to find out the number of co-integrating vectors.
If it is found that there are one or more co-integrating vectors, then this will imply that there exists at least one long-run equilibrium in the system of variables. Co-integration test The next step is to test for the existence of long-run equilibrium relationships between government spending and economic growth.
If we let Z be a p x 1 vector that contains: Equation 4 can be re-parameterized as: