Growth, Political Instability, and the Defense Burden

Abstract

This paper develops a model to examine the economic effects of political instability and military expenditure. In the model, "kleptocracies" use defense as "imperfect" insurance against the probability of being overthrown. Increasing defense has a secondary effect of augmenting the human capital stock (a spin-off effect). However, defense investment comes at the expense of consuming scarce resources (a crowding out effect). The paper's central contribution is to model each of these effects and their relationship to one another. The resulting theory predicts that the equilibrium is Pareto inefficient and that increased political instability and increased defense can inhibit economic growth. Empirically, increases in political instability are found to decrease growth while increases in defense are found to decrease political instability. The paper also finds that increases in defense have a direct negative effect on growth, although the relation is weak. The weak relation implies the aforementioned crowding out effect is largely mitigated by the spin-off effect.