The Peace Dividend: Military Spending Cuts and Economic Growth

Empirical results suggest that lower military spending in the late 1980s --- plus further cuts in military spending should global peace be secured --- could produce a substantial long-term peace dividend in higher capacity output. Conventional wisdom suggests that reducing military spending may improve a country's economic growth, but empirical studies have produced ambiguous results on this point. Extending a standard growth model, Knight, Loayza, and Villanueva exploit both cross-section and time-series dimensions of available data to get consistent estimates of the growth-retarding effects of military spending. Military spending is growth-retarding because of its adverse impact on capital formation and resource allocation.