What is the Potential Impact of Iran’s Economic Global Integration on Saudi Arabia’s Military Spending?

Abstract

I examine the response of Saudi Arabia’s military spending to a positive shock in Iran’s economic globalization index. Using vector autoregression (VAR)-based impulse response functions with data from 1990 to 2020 and controlling for other key economic and demographic indicators, I find a negative and statistically significant response of Saudi Arabia’s military spending to a positive shock in Iran’s economic integration in the global markets. I also observe a similar decreasing response of Saudi Arabia’s military spending following a positive shock in Iran’s political globalization index. However, I do not find such negative and significant response for positive shocks in other components of Iran’s globalization, such as in the social and cultural aspects. Finally, I do not observe a significant positive response from either country’s military spending to a positive shock in the other’s military spending, suggesting that the military budgeting of either country is not strictly interconnected. In early 2023, both countries reached an agreement to reactivate their political relationship, promising a decrease in regional tension and a favorable outlook for the potential easing of economic sanctions on Iran. This may result in a significant peace dividend, especially for Saudi Arabia.