Guns versus Butter

Current conventional wisdom suggests that military expenditure may affect economic growth through the creation of additional aggregate demand, the whole host of spin-offs that result from military spending, the possible reduction of investment, and the displacement of talent from the most dynamic sectors of civilian production. Earlier empirical studies on the subject have reported conflicting research findings, attributed to the use of cross-sectional analysis, sample variations and differences in specificational choices, time periods examined, and databases used. These considerations point to the need for case-specific studies using time-series data for individual countries. This article investigates the growth-defense relationship in the case of Greece over the period from 1960 to 1993. Results show that the annual output growth rate in Greece is negatively affected by the size of the defense sector, as measured by real military expenditure. They indicate that the post-1974 threat of war facing Greece as well as the oil-price shocks of the 1970s have retarded economic growth in this country.

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