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Defense Expenditure and Civilian Consumption

Defense Expenditure and Civilian Consumption

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Published by Sukumar Nandi

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Published by: Sukumar Nandi on May 02, 2008
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06/16/2009

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 Defense Expenditure and Civilian Consumption
 Defense Expenditure and Civilian Consumption: The Dynamics of the Interrelationship Introduction
The inter relationship between economic growth and military expenditure has interestedresearchers recently. One way this inter relationship has been studied is the impact of militaryexpenditure on the economic growth, specially in the case of less developed countries.[Benoit(1973, 1978), Kennedy (1974), Degar (1980), Faine, Annez and Taylor (1980, 1984), Degar andSen (1983)]. The debate in this line stated with the finding of Benoit (1973) that militaryspending has source positive impact on economic growth in the less developed countries. Later on his finding has been supported by Kennedy (1974). But other researchers Degar (1974),Degar and Sen (1983), Faine, Annez and Taylor (1980, 1984) have shown that military spendinghas negative impact on economic growth. Even causality between defense expenditure andeconomic growth has been studied extensively in case od developing countries [ Dakurah et el,2001; Deger and Smith, 1983; Kollias et el, 2004; Kusi, 1994 ].A relation between military expenditure and economic growth is established easily from the basic Kegusian framework. In an economy with excess production capacity, increased aggregatedemand from military or any other source will drive up output, capacity utilization and even therate of profit. Investment may increase in response to higher profits, to put the economy on afaster long-term growth path.But such arguments apply more to developed economies than the less developed countries. In thelatter, shortage of crucial inputs such as capital, skilled manpower are likely to affect output in anegative way than its effects on the aggregate demand. But the explanation Benoit (1973)offered for his finding (positive correlation between defence burden and GDP growth) was a productivity shift – newly formed military capital could have supplementary military uses thatwould contribute to overall economic growth. Again military training impact some skill whichwill be used in the economy after the completion of military service. This argument through
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 Defense Expenditure and Civilian Consumption
 plausible, can also be reversed. Military spending can easily divert resources from domesticcapital formation – resources in the form of foreign exchange, skilled manpower and productioncapacity in the non traded goods sector and so on.But to the knowledge of the present research the existing literature does not discuss the impact of economic growth on military expenditure. This hypothesis has not been rigorously tested thoughit has been stated that growth appeared to exert a weak influence on defence expenditure [Benoit(1977, p.276)].Military spending is done to purchase defence against both external threat and internal instability.Moreover, the concept of insecurity comes more from the perception of the citizens about thesurroundings, about the environment. Thus given the stock of arms of neighbouring countries a better perception about the basic insecurity and/ or ease of tension may had to lower demand for defence as a public good and hence lower military expenditure. In the less develop countries wesee another problem – and that is problem of initial security. Society often suffers from violence,secessionist movement and the sort of tension which are sometimes the fall out of organizationalchanges associated with economic growth, like asymmetry in the regional balance within thecountry, change in the distribution of income and a feeling of deprivation among a section of  population.The hypothesis we have here is the following. While economic growth increases the level of civilian consumption, the level of civilian consumption can be taken as an index of economicgrowth. Now with the increase in the level of civilian consumption, the demand for defence goodincreases too. This comes from two sources: First, defence is public good and increasing sense of security increases social welfare given the same level of civilian consumption. Again an increasein social consumption increases the sense of insecurity of the citizens also. This happens becauseof the following: As mentioned earlier a country passes through continuous social change aseconomic growth occurs. This creates some strains in the society. So the problem of initialsecurity increases Further, with the creation of social capital, a country feels increasing need to protect these valuable things against both internal and external threat. These are the basic of our assumption that the consumption has a fall out in the sense that it increases insecurity too.
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 Defense Expenditure and Civilian Consumption
OBJECTIVES OF THE PRESENT STUDY :
For the present study we propose we explore the relationship between consumption and level of insecurity and through this the relation between economic growth and military expenditure. For this we build up a theoretical model which captures their relationship in an optimizingframework. Then we will test relationship by using suitable economic technique.One aspect of this relation is the impact of military expenditure of the economic growth for thecontext of the optimizing model we will study empirically the ‘spin off’ of military expenditureon economic growth.Finally, we propose to define and estimate equilibrium demand for military expenditure for acountry.
The Model
It is assumed that the social economic welfare is measured by a measured by a strictly concaveutility function of current consumption (C) and the state of insecurities (S) which is a stock concept. Such a function follows closely the type of money demand function used in theliterature though objection have been raised in recent time. The marginal utilities of consumptionis positive but diminishing,. The marginal utility of insecurity is negative and decreasing. Thedisutility may be due to aesthetic consideration, fear of the citizens about their security fromexternal threat or internal violence.By consumption we mean civilian consumption.
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