Defense expenditures and economic growth: An econometric analysis for OECD countries

Defense services, which are characterized as pure public goods, are fundamental functions of the state and are financed through the national budget. In today's world, characterized by geopolitical and geostrategic developments and rapidly expanding areas of conflict, the need for an independent, domestic, and national defense industry has become imperative. On the other hand, the impact of defense expenditures on economic growth remains one of the debated topics in the economics literature. A review of the literature reveals that studies generally align with either the neoclassical perspective which argues that defense spending reduces economic growth due to its crowding-out effect or the military Keynesian view, which holds that defense expenditures, as a form of public spending, create positive externalities and thereby promote economic growth. In contrast, some studies have found no statistically significant relationship between defense spending and economic growth. In this context, the present study analyzes whether there exists a statistically significant relationship between defense expenditures and economic growth in both the short and long term for a selected sample of 36 OECD countries, depending on data availability. For this purpose, annual data covering the period from 1995 to 2022 were used, and panel data analysis was conducted. The results of the analysis indicate that there is a statistically significant relationship between defense expenditures and economic growth in both the short and long term for the countries and period under consideration. Accordingly, the findings of this study support the theoretical implications of the Military Keynesian approach and the Feedback hypothesis.