What is Crowding-Out Effect

Endogenous growth theories refer that public spending has a considerable bearing on economic growth. Rise in public spending retards rate of economic growth. As the economic structure across the developed and developing countries varies significantly, the effect of public spending on non-productive activities may differ across these countries. In this context, the authors develop a comparative study for looking at the dynamic relationship between public expenditure on defense activities and pattern of economic growth between developing and developed countries across the globe over the period 1960-2015. Using data from SIPRI and World Bank, the authors invoke the panel data regression with panel co-integration test followed by panel VAR. Findings indicate that developed countries have positive impact of defense spending on growth, and the relationship is bi-directional, whereas the impact is found to be negative in developing nations.