Public Expenditure on Defense and Economic Development: A Comparative Study on India and China

Public Expenditure on Defense and Economic Development: A Comparative Study on India and China

Partha Mukhopadhyay (National Institute of Technology Durgapur, India), Madhabendra Sinha (National Institute of Technology Durgapur, India) and Partha Pratim Sengupta (National Institute of Technology Durgapur, India)
DOI: 10.4018/978-1-5225-4778-5.ch009

Abstract

There is a direct relationship between public expenditure on defense and economic development such as technological up gradation, increase in steel, and allied production, etc. To identify the impact of public expenditure on defense along with economic growth in India and China, this study investigates the long-run equilibrium relationship between them. This chapter uses Stockholm International Peace Research Institute (SIPRI) data and Johansen co-integration test approach to examine the relationship between public expenditure on defense and economic development in India and China on a comparative basis over the period of from 1989 to 2016. The findings imply a significant relationship between public expenditure on defense and economic development in India but no long run cointegrating relation was found in case of China.
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Introduction

An enormous investment on defense items particularly by the developed countries started after World War I and II. Military expenditure is an important component of public expenditure on the basis of perceived threat perception of political elites of nation states. It is argued and justified usually in terms of the need to maintain national security, law and order and to combat internal disturbances, etc. India and china have partially been stirred by the observed rising share of their military spending in the total global military expenditure. China and India will exercise increasing impact in worldwide issues in the coming decades. As prominent members of the G-20, their impact will be showing in the global economy, in global politics, and in the global security environment. China and India are the only country in the world with more than one billion people. In 1989, Military Expenditure Per Capita China was 10 and India was 12.4. In last 25 years, the changing scenario is revolutionary. In 2016, Military Expenditure Per Capita of China was 155.7 and India stands on 42.1. Expenditure composition to payments for the purchase of refined weapons of which, over 75% of global arms imports is made by developing nations. Such a huge expenditure initiated cries in economic development and resulting from negligence of education, health and infrastructure (UNDP, 1991; UN, 2006; Todaro & Smith, 2006). One of reasons for the increases in military expenditure has been given as the countries’ endorsement of military oriented education, health, infrastructure and innovations including inter alia: nuclear and helicopter discoveries that benefit all citizens because they reject the country's manufacturing possibilities (Benoit, 1978). Theoretical discussion of military expenditure just like any other fiscal component plus its security implication articulates a possible link between military outlays and economic growth. In this context the present study further reviews empirically whether there is any sort of causal link between Public Expenditure on Defense and Economic Development of the India and China of different status of developments for the period 1989-2016.

Figure 1.

Military expenditure in India and China, 1989-2016

Source: (Stockholm International Peace Research Institute (SIPRI), 2016)

The classical school of thought argues that military expenditure can reduce economic growth. This argument is based on the evidence that the higher the cost of military spending and the low cost of domestic savings and lower collective demand, lower costs. This can be explained specifically as followed. The military expenditure will increase the interest rate of a higher level, which will be crowded by private investment. However, Keynesian thought that by increasing the burden of increasing military burden, increasing purchasing power and national production, and creating positive outlook (Narayan & Singh, 2007). Endogenous growth theory makes it clear that the public spending on long-term growth rates has an important effect. Its impact depends on government intervention and various aspects of government expenditure.

In addition, there has been discrimination in economic growth at various types of government expenditure. For example, public infrastructure, research and development and public education are often considered public goods which have a positive impact on economic growth. On the other hand, the increase in government spending is mainly based on the cost of expensive expenditure, with the increase in income; it can be assumed that the impact of the negative impact on the government's intervention is its impact. Governments also have a significant role in financial military sector financing. Endogenous development theory provides the basis for the relationship between military expenditure sharing and long-term economic growth, a contrasting hump-shaped link prediction (Pieroni, 2009).

Key Terms in this Chapter

Economic Development: An increase in the amount of goods and services produced per head of the population over a period of time to keep all the people in minimum inequitable position.

Defense Expenditure: A military spending plan (or military expense), which is known as a defense budget of a nation is the amount of financial resources devoted to preservation of an armed force or different techniques of defense purposes.

Johansen Cointegration Test: Cointegration is a statistical property of a collection of time series variable. First, all of the series must be integrated of order 1. Next, if a linear combination of this collection is integrated of order zero, then the collection is said to be co-integrated. Cointegration has become an important property in contemporary time series analysis. Time series often have trends-either deterministic or stochastic. The residuals vary based on which time series is designated as the dependent variable, and the tests may give different results. One important test for cointegration that is invariant to the ordering of variables is the full-information maximum likelihood test of Johansen.

Military Expenditure: Military expenditure is the amount of financial resources dedicated by a nation to raising and maintaining an armed forces or other methods essential for defense purposes.

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