Military Expenditure and Economic Growth in China

Abstract

Purpose: In this study, we contribute to the existing literature by examining the relationship between military spending changes and economic growth in China over the period 1995 to 2018 using granger causality test. We would also explore short and long run relationship between GDP growth and military expenditure of China.

Approach/Methodology/Design: Data used in this study are yearly data covering the period of 1995 to 2018 and the variables are Gross Domestic product (GDP) and Military Expenditure (ME). Data were collected from World Bank. GDP is at 2010 constant US prices and ME is expressed as a percentage of economic growth. All variables are transformed into the natural logarithm to obtain growth effects.

Findings: Using causality test, the causal relationship between the variables revealed that the alternative hypothesis should be accepted which is lagged GDP variable (proxy of economic growth) does not cause ME in our first VAR granger causality Wald test model. However, we discover and verified that there is one-way causality from economic growth to military spending, but no causality from military spending to economic growth is observed in this study. China’s positive economic growth can finance its military expenditure.

Practical Implications: The study will contribute positively to the understanding of influence of GDP on military expenditure for emerging and developed economies.

Originality/value: This study innovates by using co-integration, E-granger and granger causality test to find out economic growth causing military expenditure in developing economies like China.