Defense Spending, Nato, And Economic Growth In North Macedonia And Albania

Introduction

The issue of defense spending and correlation with economic growth has been an debatable issue with no unification on whether defense spending affects economic growth on developing countries or not. As mentioned by Jaroslav Usiak, Radoslav Ivancik (2014), defense spending belongs to the very basic economic activities of the state, because of the human, material and financial resources being incorporated in normal economic functionalities. Economy offers the necessary resources to national defense, therefore, state defense is in strong relation with defense spending. But, do defense spending initiate economic growth and how is that possible?

There are many authors that have researched these topics. There are differences in their conclusions and the methodology they used to research the topic. First researchers of this issue are Emily Benoit, Deger and Smith. They examined the relationship between military expenditure and economic growth in less developed countries. Their results are contradictory. Although Benoit (1973) found positive relationship between these two variables, Deger and Smith (1983) points to negative relationship.

Do government expenditure contribute equally to economic growth?

Government expenditure do not equally contribute to economic growth. While spending on one area may increase economic growth for one country, the same does not apply for all countries in that region, especially for developing countries. The evidences taken from Agneszka, Celejewska (2008) analysing 14 European Union countries show that breaking government spending into functions helps forming right spending policy. On top of them, spending on education seems to be the most effective tool to help economic growth, while spending on defense still is debatable.

Usiak J, Ivancik R (2014) state that securing defense may have an negative impact on economic growth because of withdrawing huge parts of means and powers, which may have been used for production of new peaceful economic goods (grocery, automobiles, electronics, furnitures, clothing etc).

Author, Dritsakis (2004) proves there is no cointegrated relationship between the two variables, while the Granger causality results indicate a unidirectional causal relationship between economic growth and defense spending for both countries he investigated in his paper, Greece and Turkey. As stated in Benoit’s work “Defense spending and economic growth in LDCs” (1973) there is positive relation between defense spending and economic growth, while Deger (1986), Lipow and Antinori (1995) argue that defense spending has a negative effect as an investment crowding out effect, or a displacement of an equal amount of civilian resources.

Desli E et all (2017) state that there is no evidence of long and short run causality from military spending to economic growth except for the developing countries, positive in the long run. The author states that on one hand, the military expenditure is frequently viewed as unproductive public expenditure or “crowding out” other public spending that is considered more effectively contributing to economic development or competing with civilian activities for labour, capital and other production related resources and subsequently distorting the demand and the resulting market price for them, and hence, it is expected to undermine economic growth.

On the other hand, military spending could promote economic growth by stimulating aggregate demand for goods and services and reducing excess capacity (“military Keynesianism”),or through “spillover effects” from military research and development (R&D) of technologically advanced products to civilian spin-off products.

Using Toda-Yamamoto and Granger causality methodology. The first notable attempt to investigate this was the work by Benoit (1973, 1978), which found a positive impact of defence spending on economic growth for a group of less-developed countries and was later referred as the “Benoit Hypothesis.”

Authors Muhammed Aminu Umar and Abu Sufian Abu Bakar (2015) using Toda-Yamamoto augmented causality approach have examined the causal relationship between defence expenditure and economic growth in Malaysia.

Desli at all (2017) stated that the subsequent studies that used more years in their sample offered a diversity of findings while the assumed channels of influence between military spending and economic growth and the assumed underlying school of thought (neoclassical, Keynesian, institutionalist, Marxist) steered the outcome of the studies.The neoclassical approach sees the military spending as a public good and the economic effects of the military expenditure will be determined by its opportunity cost and the effectiveness of spending on alternative causes. The Keynesian approach views military spending as one aspect of state spending that increases output through multiplier effects in the presence of ineffective aggregate demand.

The institutionalist approach combines the Keynesian perspective with the viewpoint of military spending spurring industrial inefficiencies as well as maintaining a powerful interest group composed of individuals, firms and organizations who benefit from defence spending regardless of the country’s actual needs. Finally, the Marxist approach sees the role of military spending as necessary in capitalist development and prevention of stagnation, while it is considered a wasteful way for lack of creating any further output in the society and for enhancing class struggle through the presence of the interest group mentioned by the institutionalists Chowdhury (1991), applied Granger causality tests for 55 developing ountries. No consensus of results is found. For 15 countries the results indicate that defense spending causes economic growth.

As used by Dritsakis N (2004) for the empirical investigation for Greece and Turkey, the Johansen cointegration test will be applied to examine the relationship between defense spending and economic growth for North Macedonia and Albania, one aspiring NATO member, and the other an actual member. Author Alper Ozun (2014) used the Toda–Yamamoto approach to Granger causality test in the case of selected NATO countries for the period of 1949-2006. The results show that unidirectional causality exists in seven NATO countries while for five countries no causal relationships were found. On the other hand, Turkey differs from other countries in that the relationship is bilateral.

Conclusion

The relation between two variables, economic growth and defense spending on countries I chosed to examine, North Macedonia and Albania will be analysed with different methods. Republic of North Macedonia is aspiring to be a NATO member therefore the comparation with Republic of Albania will be valuable.

Does defense spending has an impact on economic growth is not an issue that has a definitive answer. Therefore, my intention is to apply the methods used by authors while examining the situation of Greece, Turkey, Malaysia, India and Pakistan in their respected papers and find the correlation between defense spending and economic growth.

As mentioned above, the first authors that analyzed the variables are Benoit, Deger and Smith. They gave different outcomes but the impact on new researchers was big. Defense spending on some countries does have an impact while on other does not. There are factors that make the distinction.