Is military spending really related to growth? New evidence from NATO allies

Abstract

Recent geopolitical changes have given rise to new challenges placing significant pressure on NATO member states to increase their military spending. Consequently, the question of whether these expenses stimulate economic growth has re-emerged in public debate. This paper provides new evidence regarding this longstanding question which is becoming even more relevant. Using time-series analysis, a growth model has been estimated using an ARDL approach to cointegration to examine the long-run relationship between these variables in a sample of 15 NATO countries over the last 50 years or so. The results show that in eight of these countries–namely Belgium, Canada, France, Greece, Italy, Sweden, Turkey and United States –, military expenditure is positively and statistically significant. The evidence suggests that military spending does not harm growth and may even contribute to it in the long-run. Nevertheless, higher levels of expenditure in relation to that of other countries does not necessarily correspond to a stronger relationship with growth. This implies that the economic effects of increased military spending are highly heterogeneous across member states. It is hoped that the findings presented in this paper can be of use for both academics and decision-makers alike, especially in the current challenging international context.