Academic journal article Asian Social Science

The Macroeconomic Impact of Defense Expenditure on Economic Growth of Pakistan: An Econometric Approach

Academic journal article Asian Social Science

The Macroeconomic Impact of Defense Expenditure on Economic Growth of Pakistan: An Econometric Approach

Article excerpt

Abstract

The broad objective of the present study is to examine whether a long run relationship between defense expenditure and economic growth of Pakistan exist. For empirical investigation, an annual time series data over the period from 1980-2013, and ARDL was used. The empirical results support the existence of long run negative relationship between defense expenditure and economic growth. The results for long run negative relationship between defense expenditure and economic growth was suggested just in case Pakistan MKH does not hold during the period under study. The findings further suggested that the policy makers need to formulate appropriate policy to encourage and not to discourage the economic growth and development of Pakistan.

Keywords: defense expenditure, economic growth, ARDL, Pakistan

(ProQuest: ... denotes formulae omitted.)

1. Introduction

The relationship between defense expenditure and economic growth has attracted considerable interest which has been highly debated among researchers. The military spending is a global issue and the purpose of increasing defense expenditure is mainly to cooperate with local insecurity and arm race. Moreover, developed countries have focus on the point about possible harmful effects of unfettered military expenditure in developing countries. It was argued that military expenditures may lead to problem of balance of payment deficit, decrease in economic growth, and as a result important social and economic expenditure may crowd out. In general, results of previous studies were inconsistent and mix. Hassan et al. (2003) stated that defense expenditure can affect positively through an increase in security or expansion of aggregate demand and affect negatively through crowd out investment. In case of developed countries, increase defense spending is negatively related with economic growth, employment and investment (Ram, 1995; Wilkins, 2004; Pradhan, 2010). In case of developing countries, the situation is unclear and complex. What is the effect of defense expenditure on development? There have been numerous attempted to answer this question since the seminal work of the Benoit (1978). Before the study of Benoit (1978) about "Growth and defense in developing countries", the issue of defense spending in developing countries was not highly debatable among the researchers. Hence, there is a common presumption that the defense expenditure is a burden on the economy and is negatively related to the economic growth. As a classical example, the pioneer study by Benoit (1978) entitled "Bread vs. Guns" can be considered. Benoit (1978) argued that "countries with heavy defense burden show high growth rate and countries with low defense burden show low growth rate". His argument is based on a cross sectional study of 44 developing countries. Therefore, the study stimulated the researchers to further investigate and find out the relationship between military spending and economic growth.

Pakistan needs to acquire and maintain a high GDP growth by spending more on development. The data shows that during 1980-2012, average GDP was estimated at 5.06 which is very low as compare to other Asian countries, such as Malaysia, Singapore, Thailand, Iran and India. The highest GDP growth (9.0 percent) was recorded in 2005, while the lowest GDP growth (1.7 percent) was recorded in 2009 (Economic Survey of Pakistan, 2012, 2013). Despite of facing high inflation, extreme poverty rate, more unemployment, energy crises, debt burden and many other major socio-economic issues, Pakistan spent huge amount on defense as an effort to maintain credibility. Researchers claim that Pakistan spent more on non-developmental projects as compared to developmental projects. Government of Pakistan spent during 1980-2012 on average at 0.75 percent on health, 0.54 percent on education, 4.30 percent on development and 4.88 percent on defense (Economic Survey of Pakistan, 2012, 2013). Figure 1 shows the trend of defense, development and health expenditure of Pakistan. …

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