Budgetary Impacts of Third World Arms Production

One of the more intriguing empirical findings in recent years is evidence that a number of Third World economies experience a positive relationship between military expenditures and overall rates of economic growth. While this result has been found in a number of individual studies, no satisfactory explanation has been put forth -presumably defense expenditures have both positive spin-offs, tending to support growth, and a number of negative aspects such a crowding out of private sector investment which tend to reduce overall growth. It is something of a tautology therefore to argue that those countries experiencing net positive benefits from defense expenditure simply have an environment where the net positive effects predominate. The purpose of this paper is to show that Third World arms producers differ considerably in terms of budgetary priorities from their non producer counterparts. More importantly it can be demonstrated that differences in budgetary priorities between these two groups of countries is consistent with the fact that arms producers tend to obtain net positive benefits from military expenditures while non-producers find their overall rates of growth declining with increased allocations to defense.