Economic Implication of Military Expenditure on Economic Growth: Evidence from Ethiopia
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Date
2019-06
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Addis Ababa University
Abstract
This study was carried out to empirically examine the policy implication of military expenditure on economic growth in Ethiopia. Although national defense is an important function of government and security from external and internal threats that contributes to economic development, high military expenditures for defense or civil conflicts burden the economy and may impede growth. Thus, the paper was aimed at investigate the empirical economic implication of military expenditure on economic growth of Ethiopia and the paper also examined moderating effects of inflation and unemployment on the relationship between military expenditure and economic growth. The research employed secondary data for the period 1974/5-2017/18. In analyzing the long run and short run relationship between military expenditure and economic growth, Johansen’s co-integration test, VECM, and Granger causality test was applied. Further, forecast Error Variance Decomposition was obtained using the cholesky decomposition of the VECM and used the generalized impulse response function. The study found that military expenditure affect economic growth negatively. The finding showed that there was a unidirectional causality running from economic growth to military expenditure in the long run. From the empirical finding, impulse response function suggested that military expenditure negatively impacts economic growth and Variance Decomposition also revealed that military expenditure has no important impact on future growth rate of output in Ethiopia. The empirical finding also found out that inflation and unemployment have significant moderating effects on the relationship between military expenditure and economic growth in the long run. Finally, this study recommends policy makers to consider the effects of military expenditure and spend more resources on productivity, which is growth enhancing, reducing unemployment, stabilizing inflation as well as foreign exchange market.
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Keywords
Economic Growth, Ethiopia, Granger-Causality