The Effects of Expenditures in Different Military Sectors on Economic Growth A quantitative analysis of NATO countries between 1990 and 2019

Abstract

There is a large literature on the relationship between military spending and economic growth, but there is no general consensus of what the effects might be. The findings are often inconclusive due to the ambiguous effects of supply mechanisms where both positive and negative externalities may arise. However, no previous studies have disaggregated military expenditures into different sectors which may contribute to the ambiguity of the literature. This study therefore investigates the relationship between expenditures in different military sectors and economic growth in NATO countries, in order to fill the research gap of existing literature. Using the theoretical framework of the augmented Solow model, this study argues that military spending in different sectors may have various effects on how effective workers are to produce output. Using country specific and time specific fixed effects models with robust standard errors, this study examines the growth effects of military spending in different military sectors in an unbalanced panel data set of 29 countries between 1990 and 2019. The results suggest that expenditures in the military personnel sector may lead to increased economic growth one year after the initial expenditure, while expenditures in the equipment sector and “other” sector have no effect on economic growth. The results may provide important policy implications for politicians when budget allocation decisions are made.