Three essays on the impact of military spending on economic growth

Wang, Lijun (2023). Three essays on the impact of military spending on economic growth. University of Birmingham. Ph.D.

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Abstract

There are three empirical estimates in the study. In Chapter 1, we discuss whether military spending is beneficial for the economic growth, or to some extent. The motivation came from former U.S. President Donald Trump’s speeches to NATO countries, urging them to keep spending at the agreed 2% of GDP level, as most NATO countries were spending less at the time. We collect a large dataset of 78 NATO and non-NATO countries over 30 years to estimate a novel, non-linear, threshold regression dynamic panel data model, using a generalized method of moment estimation to correct for endogeneity. The paper’s findings suggest significant heterogeneity between NATO and non-NATO countries. For non-NATO countries, the relationship between military spending and economic growth is non-linear, positive up to 3.4% of GDP and then negative. For NATO countries, this relationship is linearly negative, which explains why NATO countries are reluctant to increase military spending. In Chapter 2, we use common correlation estimation to explore the relationship be- tween economic growth and military studies, which is the first paper in the literature to explore two other econometric issues that affect growth regression, namely, heterogeneity and Cross-section dependence. The paper is based on an unbalanced dataset observed over 42 years in 128 countries. These countries are allowed to have cross-sectional dependencies, which is a realistic assumption because of the cross-border trade and military relationships between countries under the open model. Furthermore, the relationship between military spending and economic growth varies across countries. Findings show that the average relationship in the sample is negative, while in terms of individual countries, only a minority of the nine developing countries have positive relationships. Further analysis shows that the positive impact come from three factors: geography and neighbouring countries, internal stability and non-NATO membership. The third chapter is affected by the Russian-Ukrainian conflict in 2022. Given that Ukraine applied for NATO membership, Sweden and Finland also initiated this initiative, this chapter empirically explores the determinants of NATO membership. The paper models NATO membership as a function of country characteristics using a finite dependent variable model with maximum likelihood estimation. These characteristics include economic and geopolitical factors such as economic growth, political stability, and membership in the European Union and the former Soviet Union. This is the first paper in the literature to address this question empirically. The estimated probabilities suggest that the most important factors added are geopolitical rather than economic or related to internal stability. The model predicts that Sweden and Finland are highly likely to become the next NATO countries, while the chances of Ukraine joining are low.

Type of Work:

Thesis (Doctorates > Ph.D.)

Award Type:

Doctorates > Ph.D.

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