The Peace Dividend: Military Spending Cuts and Economic Growth

IMF Working Papers, May 1, 1995

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The Peace Dividend: Military Spending Cuts and Economic Growth

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Bibliographic details

• Authors: Malcolm D. Knight, Delano Villanueva, Norman Loayza
• Published: May 1, 1995
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451847338.001

Summary

• Conventional wisdom suggests that reducing military spending may improve a country’s economic growth performance, but empirical studies have produced ambiguous results.
• The paper extends a standard growth model and estimates it using techniques that exploit both cross-section and time-series dimensions of available data to obtain consistent estimates of the growth-retarding effects of military spending.
• Growth-retarding effects operate via military spending’s adverse impact on capital formation and resource allocation.
• Model simulations suggest a substantial long-run “Peace Dividend” in the form of higher capacity output may result from:
  • (i) markedly lower military expenditure levels achieved in most regions during the late 1980s; and
  • (ii) further military spending cuts that would be possible in the future if a global peace could be secured.

Empirical approach and estimates

• Methodology:
  • Extension of a standard growth model.
  • Estimation techniques exploit both cross-section and time-series dimensions of available data to obtain consistent estimates.
• Key transmission channels identified:
  • Adverse impact on capital formation.
  • Adverse impact on resource allocation.

Model simulations and scenarios

• Simulated outcomes:
  • A substantial long-run “Peace Dividend” is possible, measured as higher capacity output.
• Scenarios described in simulations:
  • Realized reductions in military expenditure in most regions during the late 1980s.
  • Potential further military spending cuts under a hypothetical global peace.

Policy-relevant conclusions

• Reductions in military spending can generate higher capacity output over the long run, conditional on:
  • The magnitude of cuts achieved (historical late-1980s reductions cited).
  • The possibility of additional cuts if global peace were secured.
• Attention to capital formation and resource allocation is critical when assessing the growth effects of military spending cuts.

Publication and metadata

• Authors: Malcolm D. Knight, Delano Villanueva, Norman Loayza
• Date: May 1, 1995
• Series: IMF Working Papers
• Working Paper No.: 1995/053
• Issue: 053
• Volume: 1995
• Pages: 40
• DOI: https://doi.org/10.5089/9781451847338.001
• Stock No: WPIEA0531995
• ISBN: 9781451847338
• ISSN: 1018-5941

Subjects and keywords

• Subject: Capacity utilization, Defense spending, Expenditure, Human capital, International trade, Labor, Production, Production growth, Trade barriers
• Keywords: Capacity utilization, country, country group, Defense spending, Eastern Europe, estimate, estimation work, growth model, Human capital, investment ratio, Middle East, military spending, North Africa, panel estimate, Production growth, rate of growth, ratio, regression equation, research and development expenditure, resource allocation, simple average, spending, standard deviation, Sub-Saharan Africa, Trade barriers, Western Hemisphere, WP

IMF Working Paper: "The Peace Dividend: Military Spending Cuts and Economic Growth" (Working Paper No. 1995/053), Malcolm D. Knight, Delano Villanueva, Norman Loayza, May 1, 1995.