National and Regional Economic Consequences of Swiss Defense Spending

Abstract

The effects of defense spending on economic performance and, in particular, on economic growth have been studied extensively in the literature. The empirical findings have been ambiguous so far, partly reflecting the econometric difficulties involved in the estimation of this relationship. The authors study the implications of Swiss defense spending for economic growth and unemployment in Switzerland, using both national aggregate and cross-sectional (cantonal) data. Such analysis may be more informative than similar analyses that rely on time series for individual countries (due to spurious time effects) or averages for different countries (due to strong cross country variation in country characteristics). The findings indicate that although defense spending has had a positive effect on the rate of economic growth of Switzerland in the presence of an external threat (Cold War), the distribution of defense spending across cantons has not contributed to the dispersion of cantonal growth rates. Nonetheless, cantons in which military employment is a large share of total employment have enjoyed lower and more stable unemployment rates. These findings suggest that in order to uncover the full implications of defense spending, it is necessary to go beyond the defense spending—growth nexus. The findings seem relevant for many other countries because the allocation of national defense employment and spending is rarely uniform across the regions of any country.