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.
TopIntroduction
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).
As it can be understood from the aspects emphasized above, it is very important to determine the economic results of the conflict risk. However, there are a few studies in the literature which focused on this subject. Within this context, the purpose of this study is to evaluate the impact of conflict risk and defense expenses on the economic growth. Within this scope, annual data of 17 emerging economies for the periods between 1989 and 2014 will be analyzed. In order to reach this objective, Dumitrescu Hurlin panel causality test will be taken into the consideration. As a result of this analysis, it will be possible to understand this relationship and make a recommendation to the countries that have conflict risk. Therefore, this study will make an important contribution to the literature by making analysis of a significant subject that was not considered very much.