ABSTRACT
It has been a widespread view to regard military expenditures as public investment while others view it as social costly enterprise that crowds out investment in social welfare. When public program demand exceeds available resources, the program competes for budgetary allocations, and one program wins while others lose. In other words, there is a trade-off relationship among health, education, and military expenditures, as they are the major government budgetary components. It is no doubt that understanding the trade-off among those key expenditures for a government is crucial for fiscal sustainability and ability to operate over long term while maintaining a higher standard of living for the public. Consequently, government may therefore reallocate the resources in different sectors where the opportunity cost is lower. The issue on the crowding-out effect between military spending and social welfare can
be traced back to the seminal work by Russett (1969). Using the data from the USA,
Defence and Peace Economics, 2015 Vol. 26, No. 1, 33-48, https://dx.doi.org/10.1080/10242694.2013.848576
DEFENSE SPENDING, NATURAL RESOURCES, AND CONFLICT
France, and the UK, Russett (1969) concludes that a rise in military spending will reduce the expenditures on health and education. The reason is intuitive in the sense that in the presence of dynamic spillovers from a given government budget, an increase in the military expenditure will crowd out an equivalent amount of all other spending. Thus, education and health expenditures will be reduced proportionately (Domke et al., 1983; Scheetz, 1992; Yildirim and Sezgin, 2002). However, according to Keynesian point of view, an increased military spending is able to promote aggregate demand and in turn stimulate welfare expenditures – indicating a complementarity relationship between military and welfare expenditures. Due to the lack of a coherent theory to justify the so-called ‘guns-butter,’ previous empirical studies tend to obtain mixed results, which are divergent across estimation models and data. As summarized in Yildirim and Sezgin (2002), the causal relationship between military
spending and social welfare expenditures is not clear cut in the literature. Ali (2011) also argues that the crowding-out of social spending by military spending lacks both theoretical and empirical justification. Most of the previous studies reveal either the negative trade-off or non-trade-off relationship, while the positive trade-off is found to be limited. Since there exist a large amount of channels that simultaneously determine the eventual allocation of defense and welfare spending, the endogeneity issue should be well taken care of when conducting the empirical analysis (Deger, 1985). For example, Yildirim and Sezgin (2002) adopt seemingly unrelated regression (SUR) estimation method to investigate the crowdingout effect in Turkey, and Kollias and Paleologou (2011) utilize the vector autoregressive regression (VAR) approach to examine the presence of budgetary trade-offs between expenditure in the case of Greece.
