The Peace Dividend: Military Spending Cuts and Economic Growth

By Malcolm D. Knight, Delano Villanueva, Norman Loayza

May 1, 1995

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Malcolm D. Knight, Delano Villanueva, and Norman Loayza. The Peace Dividend: Military Spending Cuts and Economic Growth, (USA: International Monetary Fund, 1995) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Although conventional wisdom suggests that reducing military spending may improve a country’s economic growth performance, empirical studies have produced ambiguous results. This 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 via its adverse impact on capital formation and resource allocation. Model simulations suggest that 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.

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

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1995/053
Stock No:

WPIEA0531995
ISBN:

9781451847338
ISSN:

1018-5941

Notes

Also published in Staff Papers, Vol. 43, No. 1, March 1996.

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