The role of military expenditures on economic growth in Italy

Abstract

Abstract. The purpose of this paper is to evaluate the likelihood of a nexus between economic growth and defense spending in Italy. With the US urging its NATO allies to stop “free-riding” through diminishing budget allocations to military expenses, and European policymakers hard-pressed by populist tail-winds, the debate on the effects of military expenditure on the economy is more current than ever. I briefly review the literature supporting each of the three possible effects: positive, negative, and insignificant. Scholars use various economic models like the Feder-Ram model (Biswan & Ram, 1986), the augmented Solow model (Mankiw, Romer, & Weil, 1992), and endogenous growth models to investigate whether military spending affects economic growth and the degree and direction of causality. In this paper, Ido notutilize econometric models to establish a relationship between the two variables, but rather leverage on existing research and my analysis to formulate an educated guess. The relevant studies, on countries similarly industrialized, lean towards a negative or insignificant relationship between economic growth and defense expense. Based on the evidence presented in the paper, I postulate that the role of military expenditure on economic growth is insignificant in Italy. Nevertheless, investing in the national defense industry to consolidate and advance Italy’s ninth position as a global exporter of arms, would bring benefits regarding both balance of trade and strategic long-term partnerships.

Keywords. Defense spending, Economic growth, Italy.

JEL. H50, H56, H60, H63, O40, O49.