Defense Spending, Economic Structure, and Growth: Evidence among Countries and over Time

A macro model of the impact of arms spending serves as the basis for investigating whether a greater military effort slows down or accelerates a country's output growth. In a regression equation estimated for 69 countries (developed, developing, and otherwise) over some or all of the period 1952-1970, an increase of 10% in the share of defense in gross domestic product (GDP) leads to a reduction of annual growth by 13%, a nontrivial loss. Furthermore, for the same sample of countries and time period, increases in military spending are related to lower saving and investment shares in GDP, a greater tax burden, and a shift in economic activity from agriculture to manufacturing. While a time-series estimation for India reveals a strong positive relationship between investment share and the defense burden, the increased capital accumulation does not lead to faster growth.