Arms Race, Economic Growth, and Government (Military and Non Military) Expenditure: Empirical Investigation for India and Pakistan

Abstract

This study examines the relationship of economic growth with civilian and military portions of government expenditure for two neighboring countries and nuclear powers; India and Pakistan. Considering the rough bilateral relationship between the two countries, the paper also seeks to determine the existence of arms race between them. For this purpose, Johansen cointegration and Granger causality tests are applied while taking account of the limitations of time series data.  Our cointegration results indicate a positive impact of military spending on economic growth for India and a negative impact for Pakistan. In case of government civilian expenditure and economic growth, the relationship is statistically insignificant for Pakistan while it is negative and significant for India. The Granger causality results show lack of any causal relationship of economic growth with government and military spending for Pakistan. In case of India, economic growth is Granger caused by government as well as military expenditure. Bidirectional causality is found between defense spending of India and defense spending of Pakistan.

Keywords: Government expenditure, Military expenditure, Economic Growth, Arms race, Cointegration, Granger causality