Volume 11, Issue 1

An attempt is made to measure the loss of productivity and growth due to excessive military expenditures of five countries in the Southern Cone of Latin America during the 1970's and 1980's. These countries are Argentina, Bolivia, Chile, Paraguay and Peru. A transcendental production function that incorporates a ratio of military expenditures to GDP as a separate input factor is estimated for each country. The elasticity coefficients demonstrate a significant trade-off between military and nonmilitary spending from the supply side. For every one percentage aggregate growth point, growth of military share saps 0.048 in Argentina, 0.013 in Bolivia, 0.043 in Chile, 0.173 in Paraguay, and 0.071 in Peru. A counterfactual new scenario is simulated by reducing military shares of GDP to one percent. The results show that these five countries lost on an average 1.5 percent of growth due to excessive defense burden during 1971-1991.