Military expenditure and economic growth across different groups: A dynamic panel Granger-causality approach

Applying GMM (Arellano and Bond, 1991) to panel data of 90 countries spanning over 1992-2006, this paper explores possible relationships between military expenditure and economic growth. Based on the definitions of income levels by the World Bank - high, middle and low - our results indicate military spending leads negatively economic growth for the panels of low income countries with a marginally significance level of 10%. Of four different regional panels (Africa, Europe, the Middle East-South Asia and Pacific Rim), a negative but stronger (5% significance level) causal relationship from military expenditure to economic growth is found for the Europe and Middle East-South Asia regions.

► Using a dynamic panel data model, we explore the defense spending growth nexus. ► We find a weak negative causality of the two variables for low income group. ► We find a strong negative causality for the Middle East-South Asia region.