Pakistan Institute of Development Economics



Defence Spending and Economic Growth: Re-examining the Issue of Causality for Pakistan and India

Author: Rizwan Tahir

What is the impact of carrying a heavy defence burden on the country’s economic development and growth? Views expressed in the literature1 argue that national defence is a consumption good which reduces economic growth by reducing saving and capital investment. A number of empirical studies have investigated the possible trade-offs between defence spending and other government expenditures like health and education. Empirical evidence concerning the relationship between defence spending and economic growth for developed countries is not inconsistent with the view that defence reduced the resources available for investment and hurts economic growth. See, for example, Benoit (1973). The evidence for developing countries, however, has not been entirely consistent or conclusive.2 Benoit (1978), using data on 44 less developed countries (LDCs) for the period 1950–65, found a strong positive association between defence spending and growth of civilian output per capita. Fredericksen and Looney (1982), using data for the period 1960–78 on a large cross-section, concluded that increased defence spending assists economic growth in resource-rich countries and not in resource-constraint ones. Using a sample of 54 LDCs pertaining to the period 1965–73, Lim (1983) found that defence spending hurts economic growth. Biswas and Ram (1986) in a sample of 58 LDCs for time-periods 1960–70 and 1970–77, using conventional and augmented growth models, concluded that military expenditures neither help nor hurt economic growth to any significant extent.

Rizwan Tahir