Defense spending and economic growth in developing countries - A causality analysis

Military spending can affect economic growth either negatively, through a crowding out of investment, or positively, through an expansion of aggregate demand. Using Granger causality methods extended to incorporate non-stationarity and cointegration, this paper evaluates the causal relations between defense spending and economic growth in 62 developing countries. The results showed that unidirectional causality was found in 23 countries, from either defense expenditures to economic growth or vice versa, while bidirectional causality existed in 7 countries. Causality did not exist in 18 countries that were integrated of the same order, while in 14 countries the data were integrated of differing orders. The long-run effects were distinguished from short-run causality when cointegration existed. Some of the limitations of the methods and results were also discussed. (C) 2001 Society for Policy Modeling. Published by Elsevier Science Inc.