IN THE SEARCH FOR DEFENSE SPENDING IMPACT: LITHUANIAN CASE STUDY, 2009-2018.

AuthorPalavenis, Donatas
  1. Introduction

    Does a nexus between defense spending and economic growth exist? Is there a universal theory describing that relationship?--These two questions raise great discussions in defense economics worldwide. The majority of studies and theories on this issue were developed during the Cold War, when defense spending increased considerably. Discussions continue with new approaches introduced to address this phenomenon. Despite the fact that Emile Benoit's theory has its pro et contra, these were the primal studies which concluded that defense spending could stimulate economic development (Benoit 1973, 1978).

    Previously, interrelations between defense expenditure and economic growth in Lithuania were studied for different timeframes using different analytics. Dudzeviciute et al. (2016) studied defense expenditure trends of Baltic states (Estonia, Latvia and Lithuania) during 2007-2014 and revealed a negative correlation between defense expenditure and economic growth in Lithuanian. Other studies have not focused on Lithuania in particular as they use only statistical data as raw material for other topics. Financing for the Lithuanian Armed Forces increased by 628 million Euro between 2013-2018 (MoD 2017). Such considerable defense spending increases suggest an imprint on stronger defense capabilities and could have an influence on overall economic picture in Lithuania.

    The aim of this study is to discuss nexus between defense spending and certain economic variables in Lithuania during 2009-2018. The impact of defense spending on the Lithuanian economy during 2009-2018 is analyzed for the first time. Therefore, this paper has an intention to contribute for ongoing discourse on the impact of defense spending while examining a single-country case; provide specific details on Lithuanian economy for follow-up analysis; reveal enhanced security perception effects for national economy in post-2014 period, and introduce the security fluctuate factor as a tool to measure it.

    To investigate the case, further tasks were set: indicate contact points for the methodological approach by reviewing theoretical ideas in relation to nexus; assess national and international shifts in defense posture reinforcing deterrence and enabling economic development; discuss the impact of defense spending for the economic situation in Lithuania while prior reviewing the key state economic variables.

    The correlation between defense spending and the main economic variables such as Gross Domestic Product (GDP), Foreign Direct Investment (FDI), and unemployment indexes are investigated using comparable and correlation analyses. Data sets are processed from primary and secondary sources. The scope of this analysis is limited to the mentioned variables and does not include other relevant data found in other similar studies, i.e. GDP per capita, education, debt, etc. Increased manning in the Armed Forces is considered as a consequent effect of increased defense spending.

    The time period 2009-2018 is analyzed to consider any interrelation between the defense spending and economic variables of two distinctive periods in relation to the Ukraine crisis. In 2014-2018 defense expenditures were increased as a reaction to possible threats, while the 2009-2013 timeframe marks anterior 5-year equivalent as a period of stability in the security domain.

    Based on the fact that the impact of security investments on state well-being is visible over time, the hypothesis describing cohesion between military investments and state economy is presented in this paper for the first time. Herein, the term security fluctuate factor is proposed to describe the yearly security investment responsiveness for the state economy during insecure period. Correlation analysis (Pearson coefficient model) is used in pursuit of validating the hypothesis of security fluctuate factor in Lithuania.

  2. Continuous nexus discourse between military expenditure and economic growth

    Countless numbers of studies have been committed to investigating the links between defense spending (otherwise military expenditure) and economic growth. However, since the 1970s there is a lack of consensus regarding direct or inverse impact of military expenditures on economic growth. The disagreement is caused and strengthened by theoretical and methodological distinctions, along with differences in assessments and estimation techniques (Arshad et al. 2017, Sandler and Hartley 2007, Ram 1995).

    Prior to Benoit's study, economic managers agreed that military spending was redirecting resources from investments to defense. However, Emile Benoit's idea was quite opposite:

    The empirical findings of his [Benoit's] study revealed that a country with a huge defense burden shows a rapid economic growth in general, whereas the country with a very low defense budget depicts a really slow growth rate (Arshad et al. 2017). Pioneer researcher Benoit analyzed the economic situation in 44 less developed countries (LDCs) within a 1950-1965 time period (Benoit 1978). His study showed new correlations as "one-percentage-point rise in the defense burden raises the real GDP growth rate by 0.30 percentage points", and he presented the ways by which defense spending could stimulate economic growth (Grobar and Porter 1989). Interestingly, Benoit's study was done for the US Arms Control and Disarmament Agency using simple regression analysis (Ball 1983). Once the research was released, it faced harsh criticism, which continues to this day. Biswas and Ram (1986) stated that Benoit's findings were due to a particular timeframe and analysis extent. As an argument, they reassessed 58 countries within 1960-1970, while running regression, and found the military burden coefficient as 'statistically insignificant'. In his study, Saadet Deger (1986) showed that, if defense expenditure would rise in a non-developmental way, LDC economy would be unable to 'channelize it into the productive sources', and that would lead to negative correlation between economic growth and defense expenditure. By re-estimating Benoit's data, Deger's correlation between civilian output growth and the military was zero for the 1965-1973 timeframe. Lisa Grobar and Richard Porter (1989) concluded that Benoit findings were deviant. However, their repeated study revealed that, instead of Benoit's positive correlations, negative or statistically insignificant correlation could occur. At the same time, their study indicated that defense spending could affect economic growth through different channels but, nevertheless, the net effect is negative. Authors outlined that "higher military spending reduces national saving rates, thereby reducing the rate of capital accumulation". Robert Alexander (1990) indicated that data used in Benoit's study did not meet any theoretical considerations. According to Daniel Landau (1993), Benoit did not consider driving parameters, such as human capital, technological development, natural resources, and political conditions. Landau indicated 30 possible variables that could be considered. His study, based on 60 countries within the 1960-1980 timeframe, rarely showed positive correlation. As some scholars significantly contributed to the ongoing discussion on Benoit's findings and even tried to re-investigate his case studies, other scholars continued analysis in defining nexus between defense spending and state economics while proposing new approaches and methodologies. However, findings are still diverse.

    D'Agostino et al. (2012) analyzed 28 African countries by using exogenous and endogenous growth models, concluding a negative effect of military spending on economic growth and, moreover, outlined a critique for classical Feder-Ram and Solow models. Another study of the same authors covered multiple countries over the 1970-2014 period, revealing a "significant and persistent negative effect of military burden on economic growth" (d'Agostino et al. 2017). The latest research was based on 109 countries within the 1998-2012 period (d'Agostino et al. 2019). It depicted a significant negative effect of military spending on economic growth in the case of unrest in a country. Paul Dunne (2012) studied 170 countries within the 1988-2006 period using the dynamic first-order model and fixed effect panel data estimation method. He concluded that "there is little or no evidence for a positive effect on economic growth". Dunne and Nikolaidou (2012) studied 15 EU countries in the period 1961-2007 using augmented Solow-Swan model, concluding that military spending does not promote economic growth. Dunne and Tian (2015) analyzed 106 countries over the 1988-2010 period using the exogenous growth model, concluding that the military burden had a negative effect on growth in the short and long run. As a follow-up step, the authors grouped countries based on relevant factors; e.g. levels of income, conflict experience. The results for the different groups were in line with the main findings, nevertheless some results indicated that military spending has no significant effect on growth. Authors (Raza et al. 2017, Shahbaz et al. 2013) analyzed a Pakistan case from 1972 to 2009 using cross-section and time series data analysis with the Kenesian model to investigate the short and long run impact of military spending on economic growth. They indicated a negative effect of military expenditure for Pakistani economic growth. Arshad et al. (2017) analyzed 61 countries in the period 1988-2015 using the augmented Solow growth model. They concluded that "military expenditure and arms imports have a negative impact on GDP per capita; military expenditure in the presence of external conflicts also has a negative <...> impact on growth".

    However, several studies support the positive relationship between military expenditure and economic growth. In his study, Sonmez Atesoglu (2002) introduced co-integration methodology and modelling. He analyzed a US case and...

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