Military expenditure, economic growth and structural instability : a case study of South Africa

Abstract

This paper makes two contributions to the growing literature on the military expenditureeconomic growth nexus. It provides a case study of a developing country, South Africa, and considers the possibilities of structural breaks in the relationship, applying newly developed econometric methods. Taking annual data from 1951 to 2010 and full sample bootstrap Granger non-causality tests, initially we find no causal link between military expenditure and GDP. Then, using parameter instability tests, the estimated VARs are found to be unstable. However, when a bootstrap rolling window estimation procedure is used to deal with time variation in the parameters, bidirectional Granger causality between the two series becomes evident in various subsamples. While military expenditure has positive predictive power for GDP at certain initial periods, it has negative predictive power at some later periods in the sample. Similar results were obtained for the causality running from GDP to military expenditure. These findings illustrate that conclusions based on the standard Granger causality tests, which neither account for structural breaks nor time variation in the relationship may be invalid.