Military Aid and Economic Growth

1. MILITARY AID AND
Economic Growth
Identifying Transmission
Mechanisms in Sub-Saharan Africa
Joshua M. Weinberg
International and Development Economics
University of San Francisco

2. How does Military Development
effect Economic Development?

3. Military as Institution
Sovereignty and Security
External Threats and Internal Rebellions
Humanitarian Disasters
Internal Local Security
Border Security

4. Military as Institution
Challenges to Development
Professionalism and Capacity
Sectional and Political Interests
Civilian Oversight
Economic Resources
Human Rights

5. Role of Military Aid
Positive
Transfer institutional qualities
Build professionalism
Increase security
Negative
Increase military expenditure
Grow bad institutions
Increase conflict/insecurity

6. Military Aid
International Military Training and Education (IMET)
Military training provided by the US for select
foreign nation personnel in the US and overseas
Training is both…
•Tactical (war fighting)
•Institutional (professional development)

7. Military Aid
International Military Training and Education (IMET)
Military training provided by the US for select
foreign nation personnel in the US and overseas
Training is both…
•Tactical (war fighting)
•Institutional (professional development)

8. Military Aid
IMET Stated Goals
Defense relationship/Interoperability
Institutional capacity/self-sufficiency
Exposing foreign civilian and military officials to:
• Democratic values
• Role of the military in a civilian-led government
• Military professionalism
• International norms of human rights

9. Military Aid
IMET Stated Goals
Defense relationship/interoperability
Institutional capacity/self-sufficiency
Exposing foreign civilian and military officials to:
• Democratic values
• Role of the military in a civilian-led government
• Military professionalism
• International norms of human rights

10. Military Aid
Foreign Military Finance (FMF)
Grants and loans to foreign nations for acquisition of:
• Military equipment (e.g. weapons, vehicles)
• Military services (e.g. logistical support)
• Military training (tactical and institutional)

11. Military Aid
FMF Stated Goals
Support regional stability
Interoperability with US and coalition forces
Enable allies to improve defense capabilities

12. Military Aid Funding
Budget Request
(President)
Appropriation
(Congress)
Allocation
(State Dept.)
Implementation
(Dept. of Defense)

13. Military Aid Funding

14. Panel Data
1995-2007
Military Aid data limitation
Structural change in Military Aid since Cold War
Sub-Saharan Africa (SSA)
45 Countries
Unique Characteristics

15. Methodology Literature
Growth Empirics Literature
“Aid and Growth in Sub-Saharan Africa”
• Gormanee, Girma and Morrissey (2005)
“Regime Change, Economic Policies and the Effect of
Aid on Economic Growth”
• Islam (2005)
Military Aid Literature
“The Fiscal Impact of US Military Assistance Program”
• Stein, Ishimatsu and Stoll (1985)

16. Transmission Mechanisms
Military Aid

17. Transmission Mechanisms
Institutions
Military Aid Conflict
Fiscal Policy

18. Transmission Mechanisms
Institutions
Economic
Military Aid Conflict
Growth
Fiscal Policy

19. Transmission Mechanisms
Institutions
Economic
Military Aid Conflict
Growth
Fiscal Policy

20. Residual Instruments – Formal Model
Y = μX + γ ( X − X ) + U
* *

21. Residual Instruments – Formal Model
Y = μX + γ ( X − X ) + U
* *
Y ≈ Growth
X ≈ Transmission Mechanism
Z ≈ Covariates (including Military Aid)

22. Residual Instruments – Formal Model
Part of X explained by
factors other than Z
Y = μX + γ ( X − X ) + U
* *
Y ≈ Growth
X ≈ Transmission Mechanism
Z ≈ Covariates (incl. Military Aid)

23. Residual Instruments – Formal Model
Y = μX + γ ( X − X ) + U
* *
X = X + η = ωZ + η
*
Y ≈ Growth
X ≈ Transmission Mechanism
Z ≈ Covariates (incl. Military Aid)

24. Residual Instruments – Formal Model
Y = μX + γ ( X − X ) + U
* *
X = X + η = ωZ + η
*
Strength of link between X and Z
Y ≈ Growth
X ≈ Transmission Mechanism
Z ≈ Covariates (incl. Military Aid)

25. Residual Instruments – Formal Model
Trans. Mechanism = X = κ1 + κ 2 MilAid

26. Residual Instruments – Formal Model
Trans. Mechanism = X = κ1 + κ 2 MilAid
Part of the Transmission Mechanism that
is not attributed to Military Aid

27. Residual Instruments – Formal Model
Trans. Mechanism = X = κ1 + κ 2 MilAid
Estimated from the residual of regressing the
Transmission Mechanism on Military Aid

28. Residual Instruments – Formal Model
′
g = β1 X + β 2 MilAid + β Z z + U

29. Residual Instruments – Formal Model
′
g = β1 X + β 2 MilAid + β Z z + U
Growth

30. Residual Instruments – Formal Model
′
g = β1 X + β 2 MilAid + β Z z + U
Transmission Mechanism

31. Residual Instruments – Formal Model
′
g = β1 X + β 2 MilAid + β Z z + U
Military Aid

32. Residual Instruments – Formal Model
′
g = β1 X + β 2 MilAid + β Z z + U
Vector of covariates

33. Residual Instruments – Formal Model
′
g = β1 X + β 2 MilAid + β Z z + U
substitute…
X = κ1 + κ 2 MilAid

34. Residual Instruments – Formal Model
′
g = β1 X + β 2 MilAid + β Z z + U
substitute…
X = κ1 + κ 2 MilAid
Residual from first stage equation

35. Residual Instruments – Formal Model
′
g = β1 X + β 2 MilAid + β Z z + U
X = κ1 + κ 2 MilAid
g = β1 ( X − κ 2 MilAid ) + β1 (κ 2 MilAid ) + β 2 MilAid + β Z z + U
′

36. Residual Instruments – Formal Model
′
g = β1 X + β 2 MilAid + β Z z + U
X = κ1 + κ 2 MilAid
g = β1 ( X − κ 2 MilAid ) + β1 (κ 2 MilAid ) + β 2 MilAid + β Z z + U
′
g = β1κ1 + ( β1κ 2 + β 2 ) MilAid + β Z z + U
′

37. Residual Instruments – Formal Model
′
g = β1 X + β 2 MilAid + β Z z + U
X = κ1 + κ 2 MilAid
g = β1 ( X − κ 2 MilAid ) + β1 (κ 2 MilAid ) + β 2 MilAid + β Z z + U
′
g = β1κ1 + ( β1κ 2 + β 2 ) MilAid + β Z z + U
′

38. Residual Instruments – Formal Model
′
g = β1 X + β 2 MilAid + β Z z + U
X = κ1 + κ 2 MilAid
g = β1 ( X − κ 2 MilAid ) + β1 (κ 2 MilAid ) + β 2 MilAid + β Z z + U
′
g = β1κ1 + ( β1κ 2 + β 2 ) MilAid + β Z z + U
′
Effect of Transmission Mechanism (no change in coefficient)

39. Residual Instruments – Formal Model
′
g = β1 X + β 2 MilAid + β Z z + U
X = κ1 + κ 2 MilAid
g = β1 ( X − κ 2 MilAid ) + β1 (κ 2 MilAid ) + β 2 MilAid + β Z z + U
′
g = β1κ1 + ( β1κ 2 + β 2 ) MilAid + β Z z + U
′
Only changes the coefficient on Military Aid
(includes effect via Transmission Mechanism)

40. Residual Instruments – Interpretation
If effect of Transmission Mechanism on Growth is..... +
…and effect of Military Aid on Transmission Mechanism is… +
…therefore, change in Military Aid coefficient will be… +
If effect of Transmission Mechanism on Growth is… -
…and effect of Military Aid on Transmission Mechanism is… +
…therefore, change in Military Aid coefficient will be… -

41. Institutions
Institutions Index based on six indicators:
Voice and Accountability
Political Stability and Absence of Violence
Government Effectiveness
Regulatory Quality
Rule of Law
Control of Corruption
Principle Component Analysis

42. Institutions
Adapted Islam (2005) Institutions Equation:

43. Institutions
Adapted Islam (2005) Institutions Equation:
Growth:
• Gross Domestic Product (GDP) per capita (% annual change)

44. Institutions
Adapted Islam (2005) Institutions Equation:
Growth:
• Gross Domestic Product (GDP) per capita (% annual change
Military Aid:
• Log Transformed Moving Average (3 year window)

45. Institutions
Adapted Islam (2005) Institutions Equation:
Growth:
• Gross Domestic Product (GDP) per capita (% annual change
Military Aid:
• Log Transformed Moving Average (3 year window)
Fixed Effects

46. Institutions
Adapted Islam (2005) Institutions Equation:
Growth:
• Gross Domestic Product (GDP) per capita (% annual change
Military Aid:
• Log Transformed Moving Average (3 year window)
Fixed Effects
Year Dummies

55. Fiscal Policy
Adapted Stein et al. (1985) Policy Equation
Possible effects of Military Aid
Additive
Stimulative
Substitutive

56. Fiscal Policy
Variables Considered
Domestic Military Expenditure
Social Programs
Government Consumption
Tax Revenue
Public Investment

57. Fiscal Policy
Variables Considered
Domestic Military Expenditure
Social Programs
Government Consumption
Tax Revenue
Public Investment

65. Growth Regression
Potential Problems
Endogeniety
• Instrumentation Strategies
Single Years vs. Multi-Year Blocks

66. Growth Regression
Adapted Islam (2005) Growth Equation
Policy Index
• Inflation
• Trade (% GDP)
• Trade Openness Rating
Financial Depth
• M2/GDP

75. Residual Instruments – Interpretation
If effect of Transmission Mechanism on Growth is..... +
…and effect of Military Aid on Transmission Mechanism is… +
…therefore, change in Military Aid coefficient will be… +
If effect of Transmission Mechanism on Growth is… -
…and effect of Military Aid on Transmission Mechanism is… +
…therefore, change in Military Aid coefficient will be… -

76. Residual Instruments – Results

84. Further Research
Individual Country Case Studies
Military Institutional Index
Possible Indicators

85. Thank You