The impact of defence spending on economic growth∗

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Abstract
There is much controversy in the literature over whether military spending has a positive or a negative impact on economic growth. Some previous approaches in this area omit relevant variables, while others are not soundly based on theory, but rather on an ad hoc justification of their chosen explanatory variables. This paper models the effect of military spending on economic growth by specifying four sectoral production functions. This approach allows for the generation of externality effects by some sectors on others, as well as the possibility of inter‐sectoral productivity differentials. The model is confronted with data from a group of developed countries. It is concluded that the gross effect of military spending on growth is neither significantly positive nor negative, although the defence sector is substantially less productive than the “rest” of the economy.

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