Military Spending and Economic Growth in the OECD Countries

Abstract

Cross-national comparisons of industrialized countries indicate that countries with a high defense burden (military spending as a share of GDP) tend to have lower rates of economic growth than do countries with a low defense burden. On the other hand, longitudinal data for several industrial countries indicate that economic growth is higher in periods with a high defense burden. This study attempts to overcome this apparent contradiction by pooling cross-sectional and longitudinal data within the framework of a model of economic growth. The data are for 17 OECD countries for the period 1960-1980. A simple mathematical model based on economic theory is used to analyze the interrelationships between economic growth, manufacturing output, investment, and military spending, both for the whole sample and for three relatively homogeneous subgroups of countries. Confronting the model with data, military spending was generally found to have a positive impact on manufacturing output, but a negative effect on investment. These two effects have an opposite impact on economic growth. The net effect is that military spending has an overall negative effect on economic growth for the whole sample of countries and for the subgroups, except for the Mediterranean countries.