An Empirical Analysis of Defense-Economic Growth Relationship in Pakistan

Muhammad Tayyab Sohail (Department of Management, Xi’an Jiaotong University Shaanxi Xi’an China)
Qaiser Jamal (School of Public Policy, National Defence University Islamabad Pakistan)

Abstract


Since the last quarter of 20th century the macroeconomic impact of defense spending on the economic growth have attracted the attention of many researchers, academician and policy makers. During the cold war the US defense strategy against the Soviet Union was the first time when it was derived. After the cold war a reduction in defense spending was observed which was named as “Peace Dividend”. Most of the developing and developed countries try to make peace and promote it but still it is seen that large portion of the overall global GDP is spent on the defense sector. This study surveys defense-growth nexus by incorporating openness to trade, external debt, gross capital formation and labor force in production function. The study uses annual time series data over the period 1972-2016. For estimation purposes, the study employed ADF unit root test and P-P unit root test for testing stationarity properties, ARDL Bound test to cointegration used for testing long run relationship. The empirical evidence of the study reveals that Economic growth is positively affected by spending on defense sector, capital investments, labor force, and openness to trade in long run while external debt has a negative effect on economic growth. Apart from this, empirical evidence also suggests that in short run; there is positive imperative role of capital investment, defense spending, and openness to trade in growth process, while external debt retards the pace of economic growth. Results of the study indicates that defense spending could be used as a fiscal tool for achieving sustainable growth, government should invest high R&D in defense sector in order to produce modernize defense products which would reduce high importation cost of expensive defense products, and through selling these defense products, not only the defense sector would be self-sufficient but would also contribute to growth process by exporting the defense products.


Keywords


Defense Spending; Economic Growth; Feder-Ram model; Pakistan

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References


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DOI: https://doi.org/10.30564/jbar.v1i1.224

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