Economic Gains from Turning Swords Into Ploughshares in the Middle East Region

University of Verona

Department of Economics

Research Project

by Elisa Cavatorta PhD candidate

Economic gains from turning swords into ploughshares in the Middle East region.

Military Burden and Economic Growth: Channels of Impact and Economic Effects.

Motivations.

This project aims to investigate the economic implications between military expenditure and national economic growth in the Middle East countries over the period 1970-2005. The defence literature has recently devoted increasing attention to the economic impact of military expenditure in developing countries (Dunne et al., 2002). Nevertheless, the studies focusing on the Middle East region are few, whereas the region may deserve more attention. The quest for security is indeed a main concern for Middle East governments that has led the region to maintain an exceptionally high regional military burden: 6.3% of GDP is devoted to military expenditure, a burden almost three times bigger than the rest of the world (SIPRI, 2007).

The aim of this research is to further investigate the factors governing the relationship between economic growth and defence spending in the region and to identify to what extent the region can reap a “peace dividend” from diminishing its military burden.

The endless warfare which has been wrapping Middle Eastern countries for decades, has soaked resources from productive activities, turning them toward deterrence activities (i.e. military expenditure) and reconstruction for material damages. The socio-economic impact of such an action is not clear-cut. The Keynesian theory suggests that defence spending may spur the economic growth through the stimulus of effective demand: by reducing unemployment, military expenditure may have a multiplier effect on output. Positive outcomes can also arise from technological spillovers into the civilian sectors (R&D and innovation), provision of public infrastructures, commercial spin-off effects, increased human capital formation. They also can occur through the factor mobilisation effect due to conscription and ideological passion (Benoit, 1978; Dunne and Nikolaidou, 2001; Yildirim and Sezgin, 2002; Dunne et al., 2005). On the contrary, some scholars have proven evidence of a negative impact onto the economy: the costs involve crowding out effect of investment, adverse balance of payment and capital (physical and human) destruction (Deger and Sen, 1983; Dunne et al., 2002; Abu-Bader and Abu-Qarn, 2003; Klein, 2004). Some author suggests that the local military industrial capacity in the region is often inefficient and therefore very costly for national economies (Sayigh, 1992). Furthermore, military activities sometimes encourage rent-seeking behaviours which undermines security and allocative efficiency.

The debate is still ongoing and it will be therefore interesting to further investigate the channels through which the defence-growth relationship operates in a such a controversial region.

Objectives.

The main research question of this study is to evaluate whether the region can achieve a sustainable economic growth by unlinking the latter from the spur of a high military expenditure.

To answer this question the study will assess three main objectives.

Firstly, the study will analyse the mechanisms through which the defence expenditure affects the economic performance of Middle East countries’ economies. The project will analyse the different impacts of defence policies among Israel and Arab countries and it will explain the nature of such effects by comparing case studies. It will show that the level of development, the way of financing military outlays and the capacity conditions of the economy are important determinants for the nature of the relationship.

Secondly, the study will aim to test empirically the effect of military expenditure in the region by extending an endogenous growth model to emphasise the importance of some regional-specific determinants of growth. Three crucial factors will be taken into account beside the traditional input accumulation and technological progress: the oil revenues, the demographic “gift” and the institutional factor (Gallup and Saks, 2000; Easterly and Levine, 2002; Nugent and Pesaran, 2007).

Oil and gas reserves are seen as a source of disequilibrium in the regional economies. The oil revenues account for a large amount of government income which is therefore subjected to the volatility of oil prices and oil-consuming countries’ interventions. Secondly, most of those countries have seen a rapid demographic increase but no benefit from this phenomenon has yet been grasped. Productive employment availability does not keep the pace with the growing labour force. Thirdly, the regional institutional reforms have been slow in their implementation which has negatively affected market rigidities.

The third objective of the project is to simulate a defence expenditure retrenchment and to assess its effects in terms of national and regional economic growth.

Expected results.

The study is expected to show two main results.

Firstly, it is expected to prove that a possible peace dividend for the region exists. This will be an important result for understanding the relatively poor performance of the region.

It is expected that the magnitude of the defence expenditure impact on Middle East economic growth largely depends on national determinants, such as the level of development, the defence-financing policies, the capacity conditions and the institutional factor. This study will demonstrate these effects by using a case study analysis: the learning lesson from a comparative perspective will be a useful tools to carry out the patterns of implications that different economic structures have on growth.

Secondly, by empirically assess the opportunity-cost of allocating scarce resources to military spending rather than to other productive, especially export-oriented activities, the study will give a concrete contribution for policy analysis. A military retrenchment may bring about conspicuous economic gains: a comparative static analysis will shed light on this aspect by showing the effects of defence expenditures under different scenarios.

Taking advise from the remarkable growth trends of some countries adopting export promoting policies (e.g. Tunisia and Turkey during the 1990s), special attention will be paid to construct a scenario where export oriented strategies are applied.

This study will be a contribution to the existing literature on defence economics since hitherto, very few studies have tackled the issue of defence policies in Middle East region using case studies in a comparative perspective. Furthermore, the use of the extended growth model will update the contributions of the defence literature specifically focused on Middle Eastern countries by expanding the period of analysis up to the year 2005.

The project will also benefit from a potential visiting at Al Quds Arab University of Jerusalem during next summer. The opportunity to study at Al Quds University would give a special value added to this work for several reasons. Academically, the opportunity of receiving advise from scholars familiar with the subject and the regional constraints will be crucially beneficial to the study. There is widespread consensus in the recent economic literature in that good institutions and informal institutions are fundamental determinants for a strong growth episode to initiate. The staying would give me the opportunity to better understand the role that geopolitical factors, political divisions, governance institutions and natural resources rents play in the growth patterns. This would help this study to model a theoretical framework which is also consistent with the realistic characteristics and peculiarities of these countries.

The visiting might also be occasion for constructing further and more entwined cooperation in common areas of research. The topic of security in the region is a very challenging subject of debate of which as a PhD student I am aware. Its relevance nevertheless goads my intents of carrying it out successfully and a convergence of engagements will be highly beneficial to the outcomes of this study.

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