Armenian State Pedagogical University after Khachatur Abovyan (Chair of Economics and Management, Head of Chair)
from 01.01.2018 until now
Armenia
BBK 65 Экономика. Экономические науки
BBK 6540 Материально-техническое обеспечение
Research of the relationship between economic growth and military expenditures has been one of the central issues in the economic debates since 1980s, but the theorists failed to come to consensus on this issue via empirical studies. Hence, studies of some statistical evidence suggest logical question: whether military expenditures contribute to economic growth, or on the contrary, economic growth enables to increase countries military spending? In this paper, we have analyzed the main economic thought school’s approaches to assessment of military expenditure impact on growth, in order to reveal the mechanisms of this impact. Then by statistical analysis we have found out how the relationship between military expenditure and GDP was manifested in Armenia. Based on the analysis results, we concluded that military expenditures haven’t stimulated GDP growth in Armenia.
military expenditure, economic growth, keynesian approach, neoclassical approach, Granger causality
1. Introduction.
Studies devoted to state military expenses have strategic nature, which are carried out mainly for political grounding of government expenditures. However, the issues of their impact on economic growth also deserve an attention, as their prudent management can lead to significant improvement of certain economic indicators, just as in case of other public expenditure components, but with a stronger multiplier effect. Of course, such view is not always affirmed by empirical research, which sometimes suggests reason for diametrically contrasting assumptions. On this matter, the positions of different schools of economic thought do not coincide as well.
The objective of this research is to study the mechanisms of military spending impact on economic growth and to present the theoretical foundation of this impact assessment, aiming to develope the methodological approaches for assessing the military spending impact on the economy of RA.
Methodology. The mechanisms of influence on economic growth have been identified via comparative analysis of the thesis of main economic thought schools (classical, Marxian, Keynesian, neoclassical). Besides, by statistical analysis we have examined how these mechanisms were manifested in Armenia, and how consistent the country's economic and defense policies are with each other.
Problem formulation. According to the latest data released by Stockholm International Peace Research Institute (SIPRI), the global military expenditures have increased by 55% during 2000-2015 period, in absolute figures rising from $1,132 billion to 1,760 billion US dollar. In Eastern Europe (region that is most interesting for us cause of including Armenia, Azerbaijan, Georgia, Belarus, Moldova, Ukraine and Russia) the state military expenditures have increased by more than three times, reaching from 31.4 billion to 101 billion USD, at that the military expenses in Armenia have also risen by 3 times (from 163 million to 493 million US dollars) and in Azerbaijan this indicator has improved for about 12 times (from 316 million to 3,702 million US dollars) (see Table 1.). These countries have encountered an impressive economic growth for the same period as well: the total GDP of the Eastern European countries have increased by more than 10 times, particularly 8.3 times in Armenia and 12.3 times in Azerbaijan. (Source: UNCTAD Handbook of satatitics-2016, p 22.)
Table 1. Military expenditure by country (Eastern Europe),
in constant (2014) US $ m, 2000-1015
|
|
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
|
Armenia |
68.1 |
66.2 |
64.1 |
76.6 |
98.1 |
141 |
188 |
280 |
396 |
359 |
395 |
391 |
381 |
445 |
458 |
447 |
|
Azerbaijan |
120 |
132 |
140 |
177 |
228 |
305 |
717 |
947 |
1608 |
1473 |
1477 |
3080 |
3246 |
3368 |
3427 |
3021 |
|
Belarus |
140 |
178 |
204 |
232 |
314 |
453 |
632 |
747 |
883 |
675 |
768 |
756 |
817 |
971 |
1011 |
724 |
|
Georgia |
18.8 |
23.8 |
34.0 |
42.6 |
70.4 |
214 |
404 |
932 |
1090 |
604 |
454 |
469 |
492 |
408 |
416 |
327 |
|
Moldova |
5.1 |
6.0 |
7.0 |
8.2 |
9.4 |
12.0 |
16.4 |
22.7 |
36.8 |
24.9 |
18.3 |
23.0 |
23.9 |
26.7 |
27.6 |
23.1 |
|
Russia |
9228 |
11683 |
13944 |
16974 |
20955 |
27337 |
34518 |
43535 |
56184 |
51532 |
58720 |
70238 |
81469 |
88353 |
84697 |
66421 |
|
Ukraine |
1137 |
1089 |
1176 |
1428 |
1685 |
2405 |
2986 |
4096 |
4811 |
3452 |
3730 |
3685 |
4137 |
4386 |
4033 |
3622 |
|
Source: SIPRI Yearbook-2015 |
||||||||||||||||
However, an inverse relationship between these factors can also be represented theoritically and via empirical research. For example, during the same period in Western European developed countries the GDP has risen by about 2 times, while certain reduction in military expenditures has been observed (5.8%). It probably can be explained by the fact that the motivation for military expenses is the effective solution of strategic issues determining the countries national security, and if the security issues are not urgent, then the military budget expansion is not expedient. Hence, studies of such statistical evidence suggest logical question: whether military expenditures contribute to economic growth, or, on the contrary, economic growth enables the countries to increase their military spending?
2. Literature review
Research of the relationship between economic growth and military expenditures has been one of the central issues in the economic debates since 1980s and 1990s, but the theorists failed to come to consensus on this issue via empirical studies, due to the large heterogeneity of research approaches, differences in the selected sample of countries and the examined time periods [1].
The studies conducted by Benoit in 1973 and 1978 are the most famous and early research [2]. The study based on a sample of 44 least developed countries has allowed him to conclude that the military spending in these countries contributed economic growth, which has been driven by positive externalities of military spending in areas such as education, health and public infrastructure. Besides military spending, participating also in R&D activities in the economy, are provided a significant spillover effects for the private sector. Further economic research has mainly been assigned to establishing or refuting Benois's conclusions [3]․ In particular, Weede (1983) [4], Biswas (1993) [5], Deger (1986) [6], Murdoch et al. (1997) [7] in their studies confirm the findings of Benoit, revealing that a positive impact on growth was mainly due to the human capital accumulation and technology transfer effects. Other researchers, such as Kinsella (1990) [8], Biswas and Ram (1986) [9], DeRouen (1994) [10] in their studies concluded that no significant relationship exists between military spending and economic growth. And Peroni (2009) [11] shows that there is no relationship between military spending and economic growth in countries with low military spending
It should be noted that in the post-Soviet countries studies devoted to the economic impact of military expenditures have started relatively recently (since early 2000s). Moreover, such studies haven’t been fundamental, including only several scientific articles, which in their turn are based on analytical tools of Western Economics thought. Тhis was partly due to the fact, that for a long time the excessive militarization of the economy during the "Cold war" was considered as the main reason for the collapse of the Soviet Union, as well as due to the confidence, that the growth of military expenditures negatively affects the socio-economic development of the country. Those are also the reasons why studies on the military spending effects on economie haven’t been done in Armenia.
As for Russia, the theoretical (e.g. "The military budget: reasoning and analysis methods" [12], "Military security and economic problems" [13]) and empiric research about military spending and military industry have been carried out due to the growing interest in development of military-industrial complex. We will consider any empirical research in more detail. Lavrinov [14] use the correlation coefficient to measure the interrelation between macroeconomic indicators and military spending (for 1994-2005 period). The results reveal that machinery production has the highest correlation with military spending (0.85); a little lower correlation was observed for general industry (0.77) and manufacturing (0.79), while the correlation between military spending and GDP is small (0.57). In the several research papers, another group of scientists [15, 16, 17] suggest a mathematical model to estimate the impact of military expenditures on macroeconomic indicators. Performing scenario analysis based on this model they conclude that increase in state military order will positively contribute to economic growth, besides having minimum inflation pressure due to efficient use of military-production complex capacity, intensification of manufacturing industry and revenue increase in high-tech sector. In addition, they imply that even in case of 2.5-3 times increase in state demand for military production, economic development of Russia won’t be hindered. Menshikov has calculated the military spending multiplier for Russian economy by applying intersectoral dynamic model. According to results of this study, the multiplier equals to 2.2 and real multiplier (i.e. taking into account the inflation) equals to 1.8, which is distributed in the following way: military production growth - 1.0, consumer spending growth - 0.47, capital investments growth - 0.33. [18]
3. Theoretical Glance
Economic thought has applied to the issues of relationship between economic growth and military expenditures since earlier times, and the origins of the research methods differences reach to the fundamental differences between the ideas of main schools of economic thought.
A. Smit was the first tried to discuss military spending issues systematically. The section "Revenue of the Sovereign or Commonwealth" of "Wealth of Nations" (Chapter 1, Book V) is devoted to defense spending of country. He fairly observes that military expenses made during peacetime, such as formation of military forces, special training, and its use during wartime differs depending on the stage of formation and development of society. Furthermore, the more developed and civilized the society is, the greater the state military expenses are. Smith's remarks were mainly related to factors influencing military spending, the most important of which, in his opinion, are the inventions, such as, accidental discovery of gunpowder, which led to enormous growth of military expenses and caused a "natural progression". He also points out that “Among the civilized nations of modern Europe, it is commonly computed that not more than one-hundredth part of the inhabitants in any country can be employed as soldiers without ruin to the country which pays the expanses of their service” [19, p 655], in essence, thereby representing the viewpoint that from some point in time, the relationship between military spending and economic development of the country become invers.
Neoclassicals have started to discuss military spending as a factor which impact on the economy largely depending on the fact, how the government manages them. They consider the military spending as a public good and believe that the state, by rational interventions, tries to balance the alternative costs (government civil expenditures serve as an alternative) and benefits of state’s security acquisition, at the same time maximizing the national interests, which is reflected in social welfare function. In other words, the economic impact of military expenditures is estimated by effective compromise choice between civil and military expenditures. Although the neoclassic approach have also given rise to considerable criticism, it has been widely applied in economic analysis of this issue [1].
Unlike the classical approach, which considers state and military expenditures as an unavoidable and automatically presumed base of civilization and sovereignty of states, in his studies devoted to military industry, Marx questions their absolute importance [20], considering that, in reality the military sphere mainly serves the reproduction of the bourgeoisie all over the world. Of course, in his studies Marx hasn’t refered to military expenditures, and so-called Marxian theory of military spending, was developed by his followers mainly based on Marx’s observations regarding economic crisis, rather than military service and soldiery. Marx believed that the soldier saves the time citizens need for self-defense [21, p 293] and thus contributes to the overall increase in labor productivity, but at the same time he believed that warfare (especially in wartime) aberrates an enormous amount of manpower and material resources from productive work for arms production and military service in armed forces, i.e. in economic terms, military consumption doesn’t have a productive nature and causes an irrevocable loss of tangible assets for national economy. According to Marx, "war ... in economic terms ... is the direct equivalent of a nation throwing a part of its capital into the water" [22, p 52]. Hence, the supporters of the Marxian approach find that military expenditures have a contradictory effect on the economy: they are necessary for development of the capitalist system, because it stimulates aggregate demand and restraines the rate of profit falling, which enable to avoid economic decline and crisis. Later, based on this approach several methods have been developed for estimation of economic impact of military expenditures. They vary by their explanation of economic crisis and dependence degree of economy from military expenditures, as well as by interpretation of military-industrial complex role in class struggle.
One of them is the so-called "underconsumptionist approach", which was developed by Baran and Svizii in 1966 [23]. The theory considers military spending as a key factor in overcoming the sales crisis. According to this view, when the capitalist economy begins to grow rich, the surplus formed that can’t be absorbed by consumption and private investments, while military expenditures can absorb this excess without increasing the salary level and therefore maintaining profitability rate. Furthermore, no other form of public spending can have a similar effect. In other words, during economic disequilibrium military expenditures have positive impact on economic growth [24].
Although Keynes too (just as Marx) believed that the economic crisis are caused by contradictions between production and consumption, his approach to military spending and military economy diametrically opposes those of Marx. He considered the development of new industries, external expansion and permanent military economy as equilibrant factors for production and consumption.
Keynes wrote in his article (“The United States and the Keynes Plan”) on military finances prepared especially for “New Republic” magazine in July 1940: “It is, it seems, politically impossible for a capitalist democracy to organize expenditure on the scale necessary to make the grand experiment that would prove my case-except in war conditions… If the United States takes the material and economic aspects of the civilization protection seriously and decides on the colossal loss of resources in the production of weapons, they will feel their power, they will know it as they will never be able to do otherwise, they will receive a lesson that can be used to rebuild the world, and then everyone will understand what are the basic principles of wealth creation ... Preparing for war will not only require sacrifice, but will be an stimulus for the growth of individual consumption and raising the standard of living, moreover such stimulus cannot give neither victory nor Defeat of the "New Deal" [25]. It can’t be denied that, Keynes, without formalities, is represented as a supporter of increasing militarization and military spending, considering the latter as an important factor, which increases the gross output by multiplier effect in case of ineffective aggregate demand. It is no coincidence that, many theories derived from Keynesian theories tried to substantiate the positive impact of military spending on economic growth, by indicating their fostering impact on utilization of production capacity, profit increase and therefore, investments and economic growth. The main disadvantage of this approach is that it ignores the impact of military expenses on aggregate supply, which forced to include production functions in Keynesian model [1].
The most radical followers of Keynesian theory have concentrated on how high military expenses can lead to industrial inefficiencies and to the formation of powerful interest group composed of individuals, firms and organizations (usually referred to as the military-industrial complex), who benefit from state military expenses and via internal pressure forces the government to increase military spendings, even if it is not justified by the need of national security [26].
4. Case of Armenia
Going beyond the limits of theoretical discussions and focusing on methodology of empirical analysis for Armenian economy, we can state that none of the proposed theoretical approaches can’t be fully implemented to grounding the military spending changes in a specific country. Actually, the mechanisms of the influence of military expenses on the economy depend from the combination of many interrelated factors, many of which can’t be measured quantitatively (e.g., nation's self-respect, country’s global recognition and respect, degree of peace need satisfaction are not included in social welfare function). Therefore, it is very important to determine the scientific abstraction range, within which the empirical research will be carried out. At the same time, it is necessary to take into account the country’s geopolitical and economic situation, particularly the inevitable need for increasing military expenditures, which makes an alternative costs of military expenses miserable, just equal to zero, because national security is more important.
We have conducted the research of the relationship between military expenditures and economic growth in Armenia, based on comparable data from SIPRI and statistical yearbooks of National Statistical Service of Armenia. At first, we have tried to find out the correlation between the selected variables. As a result, the following coefficients of paired correlation have been calculated: 1) military expenses and GDP (data for 1995-2015), military expenses and industrial production volume (by using data for 1995-2015), military expenditures and manufacturing industry (by using data for 1997-2015), as well as with one-year time lag GDP (1995- 2014) and military expenditures (1996-2015) and vice versa.
The analysis revealed that a low but significant dependence (correlation coefficient- 0.52) appears only in case of juxtaposition the time series of one-year time lag GDP and military expenditures. This demonstrates that, it has been possible to make greater appropriation for military expenses in the following year’s budget, if GDP has grown during the previous year. At the same time, while the examining reverse relationship, the correlation coefficient was close to 0 (0.01), and had a negative trend, which shows that the change in military expenditure has had a little impact on GDP in the subsequent period, but even if it had, then the impact was negative - growth of military spending was followed by a slight reduction of GDP. Of course, it would be logical to assume, that despite GDP reduction in certain years, Armenian Government hasn’t reduced military expenditures. No correlation was observed between military spending and industrial production (0.03), while weak correlation between military spending and GDP (0.32) actually reflects the arithmetic interaction between these indicators. Moreover, the results of relationships between these indicators allow us to conclude, that weak correlation between military spending and processing industry (0.25) has an accidental nature.
Although using Granger causality test is not advisable for low correlations, to confirm our conclusions, the Granger Causality test was also used for relatively high correlation indicators for the taken time series. For GDP = f (MS) hypothesis we got the following results, F-stat. = 0.43168, and P-value = 0.5205, for MS = f (GDP) hypothesis, F-stat = 6.6987, while P-value = 0.01981[1]. It’s obvious that the results confirm military expenditures haven’t stimulated GDP growth in Armenia. Moreover, although GDP growth has caused a slight increase in military spending, the opposite causality can be completely refused. Such results of statistical analysis is compatible with the Armenian economy structure, which is characterized as “consumer” economy (because in 2015 import exceeded export for 2.2 times, moreover, the major part of the latter remains raw materials), where the largest component in GDP is "Trade and Services" (46.4%) and the share of industrial sector is only 16.2% (including energy production). Meanwhile, the effective functioning of mechanisms of military expenses impact on economic growth, requires a healthy economic system with well diversified industrial structure, strong links between the various production sectors and economic signals unobstructed transfer from one sector to another.
5. Conclusion.
The interrelation between military expenditures and economic growth depends on many aspects, which has eventually led to wide diversity of theoretical and methodological approaches for studying the problem. Researchers generally agree that military expenses, as an important component of public spending, can have a significant multiplier effect on economic growth, boost the industrial sector, reduce unemployment and at the same time exert a minimal inflationary pressure on the economy. The main counter argument to this approach is based on the assumption that growth of military expenditures attracts production and financial resources from other sectors of civilian economy, which have a more effective impact on economic growth. Such negative effects conceived more acute, when we take into account that a significant part of military expenses is allocated to the import of military products. The results of statistical analysis confirm that military expenditures haven’t stimulated GDP growth in Armenia, besides it is important to notice that the contradistinction of military expenditure and costs of socio-economic purpose is not relevant here. This would make sense if the economy had free production resources, while in Armenia it is diametrically opposed situation: there are significant unutilized production resources. The reason is rather the imperfect economic structure, the weakness interconnections between production industries and the small volume of dual-purpose production. We should also notice that in case of prudent management and targeted use of state's military expenses (e.g. investments in specialized production of dual use or military products and technologies, which have large external effects (externalities)) can turn them into an essential factor of economic growth.
[1]Calculated by the author using the Eviews 8.0 software.
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