Defence Expenditure and Economic Growth in South Asian Countries: An Econometric Analysis

Abstract

This research study gives a comprehensive and objective discussion vis-a-vis critical analyses pertaining to the cointegration and causal relationship between defence expenditure and economic growth of selected South Asian countries namely Bangladesh, India, Pakistan, Sri Lanka and Nepal. Further this work examines the factors which determine the budgetary allocation of deference expenditure in south Asian countries in a panel framework, given their socioeconomic, political and strategic circumstances. The time series data on GDP, defence expenditure, inflation rate, size of the army, consumption expenditure, population size and inflation rate from 1973 to 2018 have been used and econometric techniques like Johansen Cointegration Test, Vector Autoregression (VAR), Granger Causality approach, Random Effects model (REM), Fixed Effects Model (FEM), Generalized Method of Moments (GMM) and pooled regression have been applied. While time series approaches, Johansen Cointegration Test, Vector Autoregression (VAR) and Granger Causality approach are employed to assess the cointegration relationship and pairwise causality among the variables; the panel approaches, REM, FEM and GMM are applied to evaluate the factors which determines the volume of the defence expenditure controlling the possible bias in panel data in term of endogeneity and heterogeneity. Results of Johansen cointegration test indicate the cointegrating relationship among the variables - GDP, defence expenditure, inflation rate, size of the army, consumption expenditure, population size and inflation rate for south Asian countries namely Bangladesh, India, Pakistan, Sri Lanka and Nepal at various levels. Vector autoregression analysis confirms this long-run relationship. Granger causality results show that unidirectional causality between defence expenditure and economic growth in some cases and bidirectional causality in other cases. Results of FEM, REM and GMM, on the one hand, show the relationship among defence expenditure, economic growth, army size, inflation rate, per capita income, consumption expenditures in south Asian countries at various degrees and magnitudes; and on the other hand highlight that population size, size of the army, lagged military expenditure and economic growth are most influencing factors which determine the size of defence expenditures of five countries namely Bangladesh, India, Pakistan, Sri Lanka and Nepal. Therefore, it is recommended that policies ought to be directed to accelerate improvements of defence sector through more budgetary allocation as these countries need to strengthen this sector in terms of bolstering security which create more congenial investment climate nationally and internationally that in turn help boost economic growth. Hence to ensure optimum use of defence expenditure, efforts should be taken towards the improvements in modernization of the defence sector. This can be achieved by planning and implementation of more military industries with a view to increase export from defence sector.