Conflict Risk and Defense Expenses and Their Impact on the Economic Growth

Conflict Risk and Defense Expenses and Their Impact on the Economic Growth

Hasan Dinçer (Istanbul Medipol University, Turkey), Ümit Hacıoğlu (Istanbul Medipol University, Turkey) and Serhat Yüksel (Istanbul Medipol University, Turkey)
DOI: 10.4018/978-1-5225-4778-5.ch001

Abstract

The main purpose of this chapter is to identify the effects of conflict risk and defense expenses on economic growth. Within this scope, annual data of 17 emerging economies for the period between 1989 and 2014 were analyzed. In addition to this situation, Dumitrescu Hurlin panel causality test was taken into consideration in order to reach the objective. As a result of the analysis, it was determined that there is a causality relationship between conflict and defense expenses for these countries. This situation shows that emerging countries, which have high conflict risk, also increase defense expenses so as to minimize the negative effects of these conflicts. Additionally, it was also identified that economic growth is a significant reason of high defense expenses. In other words, it can be said that when the economy of an emerging country is developed, it gives more importance to defense expenses in order to take action for this conflict.
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Introduction

Globalization eliminated economic borders among the countries (Baylis et al., 2017). Owing to this situation, investors had a chance to access new markets. Therefore, globalization contributes economic growth by increasing the investment amount in the countries (Wu et al., 2017). On the other side, this condition causes many risks for the countries as well. As an example, because globalization increased international trade, this aspect also caused currency risk for the countries (Broner & Ventura, 2016). Due to the fact that this risk could not be managed, many financial crises were occurred. As a result of this situation, lots of people became unemployed and many companies went bankruptcy (Yüksel et al., 2015).

Additionally, since every country could not have the same chance to access natural resources, globalization also increased income inequalities between the countries (Smeeding, 2002). In other words, while some countries had economic improvement very much, some others were not as successful as the others. This is such an important situation that according to United Nations Warming Report, global competition for energy sources will cause significant problem in the world, such as migration.

Especially after the collapse of the Bretton Woods system in 1973, it was seen that there was a radical increase in the number of conflict in the world (Monnet, 2017). The main reason behind this situation is that after the end of this system, US dollar started to become overvalued in comparison with other currencies, so market risk of the countries dramatically went up (Bernstein, 2016). This condition led to many economic crises in the world that caused significant financial problems for these countries. Because of this issue, the number of conflict in the world increased very much (Lahiri, 2010; Hacıoğlu et al., 2013).

While considering these aspects, it can be said that globalization leads to conflict risk for some countries (Chisadza & Bittencourt, 2016). It refers to the risk of violence in a country or a region due to the disagreement among people regarding social, cultural, ethnic, religious and economic reasons (O’Loughlin, 2012). It is such a significant type of the risk that it has many adverse effects on different areas. Although it is mainly associated with the social and political factors, it also affects the financial variables in the market negatively. In other words, it increases volatility in the market which is not a preferred condition by the investors. Owing to this issue, country may have some financial problems because investors do not prefer to make investment (Baker et al., 2016).

Conflict risk leads to increase in the defense expenses because of the security problem. This situation negatively influences budget balance of the country (Hacıoğlu et al., 2013). As a result of this issue, this country has to increase the debt amount in order to close the budget deficit. Consequently, higher defense expenses cause economic growth to reduce. On the other side, when there is a conflict in the country, there is a risk of capital outflow from this country due to the financial risk caused by conflict. In other words, parties do not prefer to make investment in a country in which there is a conflict risk. Hence, so as to prevent this problem, this country has to increase its defense expenses (Collier & Hoefler, 2006).

Key Terms in this Chapter

Foreign Direct Investment: It means the investment made by a company that operates in another country.

Developing Country: It is the country which is not yet highly industrialized.

Defense Expense: It refers all the costs of the countries defining the military expenditures.

VAR: It refers to the vector autoregressive model.

Economic Growth: It shows the per cent change of any economic variable in a given time point vis-à-vis a base time point.

G7 Economies: World’s seven most industrialized economies.

Current Account Balance: It is the difference between the goods and services imported and exported.

Inflation: It shows the increase in price levels of the goods in the market.

Unemployment Rate: It is the ratio of people who do not have a job.

Emerging Economies: They are the economies promise huge potential for growth together with some risks.

Dumitrescu Hurlin Panel Causality Analysis: It is accepted as an advanced form of Granger causality analysis.

OPEC: It refers to the organization of the petroleum exporting countries.

BRICS: It includes Brazil, Russia, India, China, and South Africa.

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