Academic journal article Pakistan Economic and Social Review

Defense Spending-Economic Growth Nexus: A Case Study of Pakistan

Academic journal article Pakistan Economic and Social Review

Defense Spending-Economic Growth Nexus: A Case Study of Pakistan

Article excerpt

Byline: MUHAMMAD AZFAR ANWAR, ZAIN RAFIQUE and SALMAN AZAM JOIYA

Abstract. Defense spending of Pakistan remains high in order to sustain a credible deterrence, significant geopolitical position in Afghan wars and combat terrorism. The present study analyzes the defense spending in light of perceived and real threats to Pakistan's security and its linkages with economic growth. By developing a theoretical framework to explore the different dimensions of relationship, the study empirically investigates the relationship between defense spending and economic growth. Econo- metric techniques such as Johansen Cointegration and Granger Causality tests have been applied to obtain empirical results by using a time series data from 1980 to 2010. The results indicate that there exists a long-run relationship between defense spending and economic growth whereas economic growth granger causes defense spending.

Keywords: Defense spending, Economic growth, Security of Pakistan

JEL classification: H56, H72, Q43, Q47

I. INTRODUCTION

Defense expenditure is professed as undesirable spending and burden on an economy because expenditure on defense diverts the resource allocation of that economy from development projects. Above and beyond this perception and criticism nation-states continue to add to their defense expenditures and to develop their military stockpile and take it as a primary duty of governance for many reasons. According to Stockholm International Peace Research Institute (SIPRI), world military spendings have crossed the figure of $ 1.63 trillion in 2010, which shows a 1.3 percent increase in real terms from 2008 military spending and 50 percent increase since 2001. This can be thought by considering defense expenditure as a component of government spending which is used as a fiscal policy tool to correct short-run economic fluctuations explained by Military Keynesianism. It can be characterized as state's responsibility to pursue the goals of security and prosperity.

Pakistan is a poor country with a ranking of 156th in world per capita purchasing power parity (PPP) adjusted gross national income of $ 2,600, human develop index (HDI) ranking 125th, peace ranking 145th and stands 35th in defense spending ranking. Defense expenditure of Pakistan remains high and takes a large portion of gross domestic product (GDP) 4.5% on average from 1995 to 2009 due to longstanding conflicts and arms race with India and its geopolitical position in Afghan war and internal incidents of terrorism. These high defense spendings have attracted many researchers from within (Tahir and Sajid, 1999; Khilji and Mahmood, 1997) and outside the country (Henderson, 1993; Looney, 1998a; 1998b). There are economic effects of these expenditures and enough literature is available which shows the relationship between defense spending and economic growth and indicates the direction of this relationship.

Recently there is a decline in defense spending from 6.4% in 1995 and 4.1% in 2000 to 3.1% of GDP in 2009.

The present study aims at finding out the determinants of high defense spending and to gauge the relationship between defense spending and economic growth in Pakistan. Keeping this in view, the paper has been organized on the following lines. Section II explains theoretical framework and literature review is given in section III. Section IV explores the dynamics of defense spending; section V presents methodology and data sources; section VI gives result; and section VII concludes the study. Lastly some recommendations are given in section VIII.

II. THEORETICAL FRAMEWORK

Defense economics studies the defense expenditure management during peace and war and analysis its externalities on other sectors of the economy. Generally defense expenditure is considered as public good expenditure of an economy but defense economics analyzes the integration of defense expenditure and growth of that economy through various routes (Ando, 2009). …

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