Military expenditure and economic growth: Peru 1970-1996

The present study examines the effects of military expenditure on growth in Peru in the period from 1970 to 1996. By using a Deger-type Simultaneous Equations Model it is possible to break up the net effect into supply-and demand-side influences. The former consist of positive externalities of defence activities on the other sectors of the economy, while the latter can be described as crowding-out of civilian investment. Estimations find the supply-side effects to be insignificantly different from zero, while the crowding-out effect of defence spending is significant and substantial. It is thereby established that defence expenditure has a negative overall effect on economic growth in Peru. Although several caveats-including specification problems of the Deger model, the quality of the data used, a relatively small sample and the presence of autocorrelation in the estimations-must be considered, these results turn out to be quite robust with respect to estimation methods (3SLS, 2SLS, OLS) and slight modifications to the model. They are also consistent with previous empirical findings from other countries and cross sectional studies.