The Effect of Military Expenditure on Economic Growth of Ethiopia

Abstract

Military expenditure is an expenditure which includes all current and capital expenditure on the armed force. The objective of the study was to examine the effect of military expenditure on economic growth in Ethiopia, using a time series analysis. To achieve the objective of this study, various types of literature situate reviewed. Although national defense is an important function of government and security from external and internal threats that contributes to economic growth, high military expenditures for defense or civil conflicts burden the economy and may impede growth. Thus, the paper was aimed at investigating the empirical effect of military expenditure on economic growth of Ethiopia. The research used secondary data for the period 1991/92-2021/22. In analyzing the long run and short run relationship between military expenditure and economic growth, Johansen’s co-integration test, VECM, and Granger causality test was applied. Further, forecast Error Variance Decomposition was obtained using the cholesky decomposition of the VECM and used the generalized impulse response function. The study found that military expenditure affect economic growth negatively. The finding showed that there was a unidirectional causality running from economic growth to military expenditure in the long run. From the empirical finding, impulse response function suggested that military expenditure negatively impacts economic growth and Variance Decomposition also revealed that military expenditure has no important impact on future growth rate of output in Ethiopia. Finally, this study recommends policy makers to consider the effects of military expenditure and spend more resources on productivity, which is growth enhancing, reducing unemployment, stabilizing inflation, increase foreign direct investment, as well as foreign exchange market