The Military Expenditure – Economic Growth Nexus Revisited: Evidence from the United Kingdom

Robert Hanson; Joo Young Jeon

doi:10.1515/peps-2023-0059

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The Military Expenditure – Economic Growth Nexus Revisited: Evidence from the United Kingdom

Robert Hanson und Joo Young Jeon

Veröffentlicht/Copyright: 22. Mai 2024

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Aus der Zeitschrift Peace Economics, Peace Science and Public Policy Band 30 Heft 2

Abstract

The relationship between government defence expenditure and economic growth is a debated topic. This study uses UK data for the period of 1960–2012 and applies two of the most prevailing theories used within the literature, the ‘Feder-Ram’ and the ‘augmented Solow’ models, to assess this question. We utilise traditional model specifications, alongside extensively altered versions of both models, enabling a comprehensive comparison between them. The alterations to the models include re-evaluating how core variables are expressed, inclusion of measures of conflict, the impact of recession, etc. The results show that the augmented Solow model outperforms the Feder-Ram model, and we provide some explanations for this result. In addition, our results suggest that military expenditure has a positive effect on economic growth within the UK, implying that the decision to reduce defence spending may have been detrimental to the UK economy.

Keywords: military expenditure; economic growth; UK; Feder-Ram; augmented Solow

JEL Classification: D74; H56; O41; O45

Corresponding author: Joo Young Jeon, Department of Economics, University of Reading, Reading RG6 6AA, UK, E-mail: j.jeon@reading.ac.uk

The results and views expressed in this article are solely that of the authors and do not necessarily reflect the views of the authors’ employer or other associated parties. We thank three referees, Raul Caruso, Subhasish M. Chowdhury, and the seminar participants at the University of Reading for useful comments. Any remaining errors are our own.

Appendix

Appendix Table 3:

Unit root tests for Feder-Ram and augmented Solow models.

Unit root test for:	Change in GDP, Δ GDP
	Test statistic	10 % critical value	P-value
Augmented Dickey-Fuller	−5.210	−2.600	0.0000
Phillips-Perron	−5.063	−2.600	0.0000

Unit root test for:	Capital investment, I Y

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−12.681	−2.599	0.0000
Phillips-Perron	−15.010	−2.599	0.0000

Unit root test for:	Labour, L ˙

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−12.681	−2.599	0.0000
Phillips-Perron	−15.010	−2.599	0.0000

Unit root test for:	Changes in defence spending share of GDP, D Y D ˙

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−4.391	−2.928	0.0003
Phillips-Perron	−4.379	−2.928	0.0003

Unit root test for:	Changes in non-defence government spending share of GDP, N Y N ˙

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−4.997	−2.599	0.0000
Phillips-Perron	−4.913	−2.599	0.0000

Unit root test for:	Changes in defence spending share of government spending, D G D ˙

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−4.372	−2.599	0.0003
Phillips-Perron	−4.359	−2.599	0.0003

Unit root test for:	Changes in non-defence government spending share of government spending, N G N ˙

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−4.916	−2.928	0.0000
Phillips-Perron	−4.828	−2.928	0.0000

Unit root test for:	Defence sector externality, D ˙

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−4.884	−2.599	0.0000
Phillips-Perron	−4.846	−2.599	0.0000

Unit root test for:	Non-defence sector externality, N ˙

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−4.893	−2.599	0.0000
Phillips-Perron	−4.806	−2.599	0.0001

Unit root test for:	Arms exports, A E Y A E ˆ

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−11.117	−2.599	0.0000
Phillips-Perron	−10.918	−2.599	0.0000

Unit root test for:	Arms imports, A I Y A I ˆ

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−6.146	2.599	0.0000
Phillips-Perron	−6.127	−2.599	0.0000

Unit root test for:	Military equipment expenditure, E Q G t − 1 E Q ˆ

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−7.482	2.599	0.0000
Phillips-Perron	−7.501	−2.599	0.0000

Unit root test for:	Military personnel expenditure, P E G t − 1 P E ˆ

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−7.118	−2.599	0.0000
Phillips-Perron	−7.124	−2.599	0.0000

Unit root test for:	Military infrastructure expenditure, I N G t − 1 I N ˆ

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−6.755	−2.599	0.0000
Phillips-Perron	−6.745	−2.599	0.0000

Unit root test for:	Military other expenditure, O T G t − 1 O T ˆ

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−6.073	−2.599	0.0000
Phillips-Perron	−6.100	−2.599	0.0000

Unit root test for:	Military equipment expenditure growth, E Q ˆ

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−5.755	2.599	0.0000
Phillips-Perron	−5.739	−2.599	0.0000

Unit root test for:	Military personnel expenditure growth, P E ˆ

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−5.281	−2.599	0.0000
Phillips-Perron	−5.264	−2.599	0.0000

Unit root test for:	Military infrastructure expenditure growth, I N ˆ

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−8.645	−2.599	0.0000
Phillips-Perron	−8.749	−2.599	0.0000

Unit root test for:	Military other expenditure growth, O T ˆ

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−5.849	−2.599	0.0000
Phillips-Perron	−5.778	−2.599	0.0000

Unit root test for:	Change in logged GDP, Δ ln GDP

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−4.650	−2.600	0.0001
Phillips-Perron	−4.594	−2.600	0.0001

Unit root test for:	Capital investment lagged GDP, ln I Y t − 1

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−7.536	−2.930	0.0000
Phillips-Perron	−7.707	−2.930	0.0000

Unit root test for:	Labour, ln (g + n + d)

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−5.023	−2.928	0.0000
Phillips-Perron	−5.030	−2.928	0.0000

Unit root test for:	Military spending share in lagged GDP, ln m

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−11.063	−2.930	0.0000
Phillips-Perron	−11.223	−2.930	0.0000

Unit root test for:	Military spending share in lagged gov spending, ln d g t − 1

	Test statistic	10 % critical value	P-value

Augmented Dickey-Fuller	−11.063	−2.930	0.0000
Phillips-Perron	−11.223	−2.930	0.0000

Appendix Table 4:

Variance inflation factor results for Feder-Ram models 10–12.

Feder-Ram models 10–12	Variance inflation factor (VIF)
Variables	Model 10	Model 10a	Model 11	Model 12
Capital investment, I Y t − 1	1.10	1.13	1.14	1.34
Labour, L ˆ	1.13	1.116	1.16	2.21
Defence expenditures, D Y D ˆ	22.92	4.11	–	–
Defence sector externality, D ˆ	20.69	–	3.86	–
Non-defence expenditures, N Y N ˆ	163.43	4.12	–	–
Non-defence sector externality, N ˆ	152.54	–	3.88	–
First difference, defence sector externality, D ˆ	–	4.06	–	3.98
First difference, non-defence sector externality, N ˆ	–	4.40	–	4.92
Defence expenditures as share of lagged gov spending, D G t − 1 D ˆ	–	–	4.37	4.42
Non-defence expenditures as share of lagged gov spending, N G t − 1 N ˆ	–	–	4.07	5.28
First difference, inflation Π	–	–	–	2.73
Recession dummy	–	–	–	2.71
Medium intensity conflict dummy	–	–	–	2.05
High intensity conflict dummy	–	–	–	2.02
Arms exports, A E Y A E ˆ	–	–	–	1.47
Arms imports, A I Y A I ˆ	–	–	–	1.35
Mean VIF	60.30	3.10	3.12	2.88

Appendix Table 5:

Variance inflation factor results for Feder-Ram models 13–13a.

Feder-Ram models 13–13a	Variance inflation factor (VIF)
Variables	Model 13	Model 13a
Capital investment, I Y t − 1	4.42	4.75
Labour, L ˆ	2.16	2.26
First difference, non-defence sector externality, N ˆ	4.53	4.79
Non-defence expenditures as share of lagged gov spending, N G t − 1 N ˆ	2.26	2.38
First difference, inflation Π	–	3.31
Recession dummy	–	4.38
Medium intensity conflict dummy	–	1.99
High intensity conflict dummy	–	2.39
Arms exports, A E Y A E ˆ	–	1.72
Arms imports, A I Y A I ˆ	–	1.39
Military equipment expenditure, E Q G t − 1 E Q ˆ	2.20	2.51
Military equipment expenditure growth, E Q ˆ	2.34	2.50
Military personnel expenditure, P E G t − 1 P E ˆ	4.65	4.94
Military personnel expenditure growth, P E ˆ	4.63	4.92
Military infrastructure expenditure, I N G t − 1 I N ˆ	2.01	2.16
Military infrastructure expenditure growth, I N ˆ	1.50	1.64
Military other expenditure, O T G t − 1 O T ˆ	2.25	2.51
Military other expenditure growth, O T ˆ	2.23	2.50
Mean VIF	2.93	3.21

Appendix Table 6:

Variance inflation factor results for augmented Solow models 24–26.

Augmented solow models 24–26	Variance inflation factor (VIF)
Variables	Model 24	Model 25	Model 26
GDP t − 1, ln y _t−1	1.19	2.37	2.89
First difference, capital investment, ln s y	1.09	–	–
First difference, capital investment share of lagged GDP, ln s y t − 1	–	1.36	1.56
Labour, technical progress and depreciation, ln(g + n + d)	1.19	2.37	2.28
Defence expenditure, ln d	1.10	–	–
Defence expenditure t − 1, ln d _t−1	1.09	–	–
Defence expenditure share of lagged gov spending, ln d g t − 1	–	2.50	3.05
Defence expenditure share of lagged gov spending_t−1, ln d g t − 1 t − 1	–	1.45	1.49
Inflation, ln Π	–	–	1.34
Recession dummy	–	–	1.33
Medium intensity conflict dummy	–	–	2.06
High intensity conflict dummy	–	–	2.08
Arms exports expenditures share of lagged GDP, ln a e y t − 1	–	–	1.15
Arms imports expenditures share of lagged GDP, ln a i y t − 1	–	–	1.15
Mean VIF	1.13	1.90	1.80

Appendix Table 7:

Variance inflation factor results for augmented solow models 27–27a.

Augmented solow models 27–27a	Variance inflation factor (VIF)
Variables	Model 27	Model 27a
GDP_t−1, ln y _t−1	1.67	1.72
First difference, capital investment share of lagged GDP, ln s y t − 1	1.48	1.56
Labour, technical progress and depreciation, ln(g + n + d)	2.45	2.82
Military equipment expenditure, ln eq	1.99	2.03
Military personnel expenditure, ln pe	2.56	3.09
Military infrastructure expenditure, ln in	1.38	1.39
Military other expenditure, ln ot	2.34	2.61
Lagged military equipment expenditure, ln eq _t−1	1.56	1.93
Lagged military personnel expenditure, ln pe _t-1	1.36	2.64
Lagged military infrastructure expenditure, ln in _t−1	1.01	1.24
Lagged military other expenditure, ln ot _t−1	2.04	2.29
Inflation, ln Π	–	1.52
Recession dummy	–	1.68
Medium intensity conflict dummy	–	2.09
High intensity conflict dummy	–	2.26
Arms exports expenditures share of lagged GDP, ln a e y t − 1	–	1.42
Arms imports expenditures share of lagged GDP, ln a i y t − 1	–	1.26
Mean VIF	1.80	1.97

Appendix Table 8:

VAR model with two lags, GDP and military expenditure.

Sample: 1963-2012		Coefficient (standard error)
Lags: 2		Coefficient (standard error)
GDP (first differenced)	First lag GDP	0.5703***
		(0.2203)
	Second lag GDP	−0.3751*
		(0.2233)
	First lag military expenditure	−7.8781
		(7.8702)
	Second lag military expenditure	0.2095
		(8.0743)
	Constant	4.76e+10***
		(1.70e+10)
Military expenditure (first difference)	First lag GDP	0.0108*
		(0.0064)
	Second lag GDP	−0.0117*
		(0.0065)
	First lag military expenditure	−0.1162
		(0.2318)
	Second lag military expenditure	0.2423
		(0.2379)
	Constant	1.18e+09***
		(5.02e+08)

*P < 0.10, **P < 0.05, ***P < 0.01.

Appendix Table 9:

VAR stability condition.

Eigen value	Modulus
0.2102599 + 0.5744609i	0.611731
0.2102599 − 0.5744609i	0.611731
0.5032038	0.503204
−0.469638	0.469638

All eigenvalues lie inside the unit circle. VAR satisfies stability condition.

Appendix Table 10:

Lag selection criteria.

Sample: 1963–2012							Number of observations: 50
Lag	Log likelihood (LL)	Likelihood ratio (LR)	Degrees of freedom (df)	P-value	Final prediction error (FPE)	Akaike’s information criterion (AIC)	Schwarz’s Bayesian information criterion (SBIC)	Hannan and Quinn information criterion (HQIC)
0	129.2				2E-05	−5.0881	−5.01156*	−5.05892*
1	134.1	9.8381*	4	0	0.0002*	−5.12481*	−4.89537	−5.0374
2	135.8	3.421	4	0	2E-05	−5.0332	−4.65082	−4.8876

Appendix Table 11:

Johansen test for cointegration.

Sample:		1962–2012
Number of observations:		50
Lags:	2
Maximum rank	Parms	Log likelihood (LL)	Eigen value	Trace statistic	5 % critical value
0	6	−2533.48		3.3150*	15.41
1	9	−2531.84	0.06219	0.0402	3.76
2	10	−2531.82	0.00079

Appendix Table 12:

Granger causality test for GDP and military expenditure.

Initial variable	Excluded variable	Chi²	Degrees of freedom (df)	P-value
GDP	Military expenditure	1.0127	2	0.603
Military expenditure	GDP	4.8198	2	0.09

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Received: 2023-10-03

Accepted: 2024-03-31

Published Online: 2024-05-22

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Artikel in diesem Heft

https://doi.org/10.1515/peps-2023-0059

Schlagwörter für diesen Artikel

military expenditure; economic growth; UK; Feder-Ram; augmented Solow