Empirical results suggest that lower military spending in the late 1980s --- plus further cuts in military spending should global peace be secured --- could produce a substantial long-term peace dividend in higher capacity output.
Conventional wisdom suggests that reducing military spending may improve a country's economic growth, but empirical studies have produced ambiguous results on this point.
Extending a standard growth model, Knight, Loayza, and Villanueva exploit both cross-section and time-series dimensions of available data to get consistent estimates of the growth-retarding effects of military spending. Military spending is growth-retarding because of its adverse impact on capital formation and resource allocation.
Model simulation results suggest a substantial long-term peace dividend --- in the form of higher capacity output per capita --- that may result from (1) markedly lower military spending in most regions in the late 1980s and (2) future cuts in military spending if global peace is secured.
This paper --- a joint product of the Macroeconomics and Growth Division, Policy Research Department, and the International Monetary Fund --- is part of a larger effort to understand the link between policies and growth. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Rebecca Martin, room N11-059, telephone 202-473-1320, fax 202-522-3518, Internet address rmartin@worldbank.org. (49 pages)
The full report is available on our FTP server.