Can local and global geopolitical risk predict governments' military spending behaviour? International evidence

Abstract

Geopolitical risk, encompassing wars, terrorism, and tensions between states, exerts a significant impact on global affairs. Previous studies have examined the relationship between geopolitical risk and military spending. However, these studies were limited by certain shortcomings in the measurement tools used to assess geopolitical risk. The introduction of a new geopolitical risk index, leveraging textual analysis technology, offers a way to overcome some of these limitations. Despite this advancement, research exploring the predictive capacity of this geopolitical risk index on military spending behaviour remains scarce. Specifically, no previous studies have investigated the predictive power of both local and global geopolitical risk indices on military spending behaviour. To bridge this gap, this study employs panel VAR analysis for 34 countries worldwide, spanning from 1993 to 2022. The results indicate that the military spending behaviour of countries is significantly influenced by local geopolitical risk rather than global geopolitical risk. Furthermore, the findings also reveal that an increase in geopolitical risk during a given year can predict military spending behaviour in the subsequent 2 years. These findings provide valuable insights for policymakers seeking to understand governments' behaviour regarding military spending.