AN EMPIRICAL RESEARCH ON THE RELATIONSHIP BETWEEN DEFENSE SPENDING AND AGGREGATE OUTPUT OF CHINA

Transcription

1 Review of he Air Force Academy No 1 (25) 2014 AN EMPIRICAL RESEARCH ON THE RELATIONSHIP BETWEEN DEFENSE SPENDING AND AGGREGATE OUTPUT OF CHINA 1. INTRODUCTION The quesion of defense spending and is effec on growh has received considerable aenion in he defense lieraure. The sudies published in recen years, however, do no yield a coheren conclusion. Some sudies indicae ha defense spending has a posiive effec while ohers reveal no effec and ye ohers indicae a negaive effec on oupu. More ineresingly, Smih and Tule (2008) found ha real oupu played an imporan role in deermining real defense spending in he US, bu found lile evidence supporing a posiive or negaive effec in real oupu from defense spending changes. In conras o Aesoglu (2002), hey did no find suppor for his conclusion ha miliary spending promoes real aggregae oupu. Bu in his laes paper, Aesoglu () argued back ha defense spending has a posiive effec on aggregae oupu. To conribue o he exising pool of lieraure, he purpose of his aricle is o sudy he relaionship beween defense spending and aggregae oupu in China. There have been some lieraures focusing on he relaionship beween defence spending and economic growh in China. Chien-Hsun Chen (1993) examines he causal relaionship beween defence spending and economic growh in China over he period Jiang Yiwen, Guo Zhonghou Miliary Economics Academy, Wuhan, China Absrac: In his aricle he effec of defense spending on aggregae oupu is discussed. Recen publicaions in his area are reviewed and new addiional evidence is provided. In he period of 1978, he findings repored here imply ha a rise of defense spending should bring significan increase in China economy; in he period of 1978-, a rise of defense spending should bring significan decrease in China economy. Therefore defense spending maers. Bu in he long-run period, a rise of defense spending should bring lile decrease in China economy. Keywords: defense spending, aggregae oupu, ineres-rae augmened Keynesian cross-model, coinegraion The resuls show ha defence spending is no coinegraed wih he real economic growh rae, implying he lack of any longrun equilibrium relaionship beween he wo variables. In addiion, Granger causaliy ess indicae causal independence beween he wo variables. (D E) Abdul M.M. Masih & Rumi Masih & Mohammad S. Hasan (1997) examine empirically he causal relaionship beween defence spending and economic growh in China. The resuls indicae a posiive unidirecional causaliy flowing from defence spending o economic growh. They broadly indicae ha defence spending and economic growh did share a common rend over he sample period under analysis, bu i was he former which simulaed he laer. Moreover, i is defence spending ha has a much more percepible and prolonged effec on economic growh, giving rise o implicaions ha alhough expendiure on defence may have been poliically moivaed, over he long-run his spending did play a significan indirec role in enhancing he growh poenial of his, for many years, closed-door economy. (D E) Yemane Wolde-Rufael (2001) challenges he claims of a previous aricle which esed he long-run relaionship beween economic growh and defence spending for China for and saed ha he wo series were inegraed of he same order bu no Granger-causally relaed o each oher in any direcion. 5

2 An empirical research on he relaionship beween defense spending and aggregae oupu of China There is a unidirecional Granger causaliy running from defence expendiure o economic growh. (D E) Chung-Nang Lai & Bwo-Nung Huang & Chin-Wei Yang (2005) employs boh linear and non-linear models o invesigae he relaionship beween naional defense spending and economic growh for China. Using daa from on defense spending, GDP, impor, expor and capial, hey find ha China's naional defense is found o lead economic growh. (D E) In he case of China, Rudra Prakash Pradhan (2010) finds bidirecional causaliy beween economic growh and public deb in China, and unidirecional causaliy from defense spending o economic growh in China. (D E) Why are here so many differen resuls on he relaionship beween defense expendiure and economic growh? Dunne, J. Paul and Smih, Ron (2010) have given us good answer, we cie heir words here. A large lieraure has used ess for Granger (1969) non-causaliy, GNC, o examine he ineracion of miliary spending wih he economy. Such ess answer a specific hough quie limied quesion: can one rejec he null hypohesis ha one variable does no help predic anoher? If his null is rejeced, here is said o be Granger causaliy, GC. Alhough he limiaions of GNC ess are well known, hey are ofen no emphasized in he applied lieraure and so may be forgoen. Firs, he ess may no be informaive abou he subsanive issue, he ineracion of miliary expendiure and he economy. The difficuly is ha Granger causaliy, incremenal predicabiliy, does no correspond o he usual noion of economic causaliy. To deermine he relaionship of he wo noions of causaliy requires an idenified srucural model. Second, he ess are very sensiive o specificaion. GNC esing is usually done in he conex of a vecor auo regression, VAR, and he es resuls are sensiive o he variables and deerminisic erms included in he VAR, lag lengh, sample or observaion window used, reamen of inegraion and coinegraion and level of significance. Saisical crieria may no be very informaive abou hese choices. Third, since he parameers are no srucural, he es resuls may no be sable over differen ime periods or differen counries. The sudies summarized above sugges ha one should be careful when making declaraions abou he effec of defense spending on aggregae oupu. The resuls as a whole seem o indicae ha findings are sensiive o he models, economeric mehods, and esimaion periods employed. In his paper we will borrow model from Aesoglu () o discover he relaionship beween defense spending and is effec on growh in China. 2. THE MODEL Borrowing from Aesoglu (2002), he radiional Keynesian cross is defined as: Q = C + I + X + M + G (1) WhereQ is real GDP, C is real consumpion spending, I is real invesmen, X is real ne expors, M is real defense (miliary) spending, and G is real non-defense (non-miliary) governmen spending. Consumpion is defined as some level of auonomous consumpion (a) plus he marginal propensiy o consume (b) imes disposable income: C = a + b( Q T ) (2) Where T is defined as real axes, and equals: T = n + gq (3) Invesmen is a negaive funcion of real ineres raes: T = n + gq (4) Real ne expors are a negaive funcion of real oupu and real ineres raes: X = z mq nr (5) The reduced form soluion for real oupu, including a sochasic error erm, is: Q = α + βm + δg λr + u (6) where α = ( a nb + e + z) /(1 b(1 g) + m) β = δ = 1/(1 b (1 g) + m) and λ = ( f + n) /(1 b(1 g) + m),. 6

3 Review of he Air Force Academy No 1 (25) 2014 As noed by Aesoglu (2002), his model differs from he normal Keynesian cross in is reamen of R (invesmen normally modeled as a funcion of nominal ineres raes), while ne expors are normally assumed o depend only on real income, versus real income and real ineres raes as in his model. 3. THE EVIDENCE OF CHINA In he case of China, is economy is ransforming from planned economy o marke economy. There are wo differen periods since 1949: closed-door economy before 1978 and opened-door economy afer While GDP increases 8.5% each year since 1952 o, he average GDP growh rae is 5.9% before 1978 and 10.5% afer Table 1 Growh Raes of GDP, Defense Spending and Non-Defense Governmen Spend growh rae of GDP 8.5% 5.9% 10.5% growh rae of Defense Spending growh rae of Non- Defense Governmen Spending 5.2% 3.4% 5.8% 8.9% 7.6% 9.7% From Table 1 we can see ha growh raes of defense spending are less han hose of GDP and non-defense governmen spending. Table 2 Defense Spending as a Share of GDP and Governmen Spending Fig 1 GDP, Non-defense Governmen Spending and Defense Spending Defense Spending as a share of GDP Defense Spending as a share of Governmen Spending 1.7% 5.4% 1.4% 9.0% 18.5% 8.0% Fig 2 Growh Raes of GDP Fig 3 Defense Spending as Share of GDP and Governmen Spending 7

4 An empirical research on he relaionship beween defense spending and aggregae oupu of China 4. METHODOLOGY AND RESULTS 4.1 Daa The annual daa used come from wo sources. Gross Domesic Produc (GDP), aggregae defense (miliary) spending (ME), and aggregae non-defense (non-miliary) spending (GE) are available from he China Saisical Yearbooks. The real ineres rae (R) used are oneyear deposi raes from People's Bank of China. Finally, real GDP, defense spending, and non-defense spending variables are ransformed ino naural log levels, denoed respecively by LGDP, LME, LGE. 4.2 Daa properies Before esimaing he parameers of equaion (6), he daa generaing process for each variable is considered. For his purpose, he Augmened Dickey-Fuller (ADF) uni roo es was made. The ADF es resuls indicae ha series are likely o be firs-order inegraed and hey are difference saionary. These findings sugges ha here may be a long-run equilibrium relaion among hese non-saionary variable in equaion (6). If hese variables move sysemaically ogeher over ime, hey may be coinegraed. Coinegraion analysis is concerned wih esimaion mehods ha uilize he informaion abou boh long run and shor run dynamics. There is some evidence ha he Johansen mehod is superior o oher mehods esing for coinegraion. Accordingly, in his paper, he Johansen mehod is used for esing coinegraion and esimaing he coefficiens of equaion (6). Number of Coinegraing Vecors Table 3 Coinegraion Tes Resuls Trace Saisic 0.05 Criical Value None A mos A mos A mos Resuls obained wih he Johansen mehod for equaion (6) are Q = M G R (7) (-0.360) (11.514) (-0.528) where sample is 1952, a deerminisic rend is included for he daa, and lag inerval: 1 o 4. The lag inerval seleced is he convenional lag inerval adoped in macroeconomic models. Empirical resuls deailed above uniformly indicae a coinegraion relaion among he variables in equaion (6). Signs of he esimaed coinegraion coefficiens in equaion (7) are consisen wih hose required heoreically by equaion (1), and, according o heir sandard errors repored in parenheses under each coefficien, he esimaed coefficiens are saisically significan. I is seen ha a 1% rise in real defense spending would lead o abou a 0.05% decrease in real GDP. A 1% rise in real non-defense governmen spending should bring abou a 1.13% rise in real GDP. A 1% rise in he real ineres rae, represening he moneary secor, leads o abou a 0.004% decrease in real GDP. We also us anoher wo group daa o es: he firs is 1978 and he second is The resuls are he following. 1978: Q = M G R (7.772) (8.178) (-1.786) I is seen ha a 1% rise in real defense spending would lead o abou a 1% decrease in real GDP. A 1% rise in real non-defense governmen spending should bring abou a 1.76% rise in real GDP. A 1% rise in he real ineres rae, represening he moneary secor, leads o abou a I is seen ha a 1% rise in real defense spending would lead o abou a 0.468% increase in real GDP. A 1% rise in real nondefense governmen spending should bring abou a 0.493% rise in real GDP. A 1% rise in he real ineres rae, represening he moneary secor, leads o abou a 0.007% decrease in real GDP. 8

5 Review of he Air Force Academy No 1 (25) 2014 The empirical resuls reveal ha defense spending has a significan and posiive effec on real GDP in China : Q = M G R (-4.674) (10.724) (-0.131) I is seen ha a 1% rise in real defense spending would lead o abou a 1% decrease in real GDP. A 1% rise in real non-defense governmen spending should bring abou a 1.76% rise in real GDP. A 1% rise in he real ineres rae, represening he moneary secor, leads o abou a 0.001% decrease in real GDP. The empirical resuls reveal ha defense spending has a significan and negaive effec on real GDP in China elasiciy of defense spending % 0.468% -1% 5. CONCLUSION The empirical resuls deailed in his paper are in conformiy wih hose repored by Dunne, J. Paul and Smih, Ron (2010). In he period of 1978, he findings repored here imply ha a rise of defense spending should bring significan increase in China economy; in he period of 1978-, a rise of defense spending should bring significan decrease in China economy. Therefore defense spending maers. Bu in he long-run period, a rise of defense spending should bring lile decrease in China economy. The enaive conclusion ha follows is ha he effecs of defense spending in China appear o be sensiive o he various models, economeric echniques and mosly, he sample periods employed. ACKNOWLEDGMENTS Suppored by he Naional Social Science Foundaion of China No. 11GJ elasiciy of non-defense governmen spending 1.13% 0.493% 1.76% elasiciy of ineres rae % % % 9

6 An empirical research on he relaionship beween defense spending and aggregae oupu of China REFERENCES 1. Aesoglu, H.S. (2002) Defence spending promoes aggregae oupu in he Unied Saes. Defence and Peace Economics 13(1) Aesoglu, H.S. () Defence spending and aggregae oupu in he Unied Saes. Defence and Peace Economics 20(1) Chang, T., Fang, W., Wen, L.F. and Liu, C. (2001) Defense spending, economic growh and emporal causaliy: Evidence from Taiwan and mainland China, Applied Economics 33(10), Chen, C-H. (1993) Causaliy beween defence spending and economic growh: he case of mainland China, Journal of Economic Sudies, 20, Chung-Nang Lai & Bwo-Nung Huang & Chin-Wei Yang, (2005) Defense spending and economic growh across he Taiwan srais: a hreshold regression model. Defence and Peace Economics16(1) Dunne, J. Paul; Smih, Ron (2010) Miliary Expendiure and Granger Causaliy: A Criical Review. Defence and Peace Economics 21(5-6) Jeffrey S. Smih and M.H. Tule (2008) Does defense spending really promoe aggregae oupu in he Unied Saes? Defence and Peace Economics 19(6) Lai, C.N., Huang, B.N. and Yang, C.W. (2005) Defense spending and economic growh across he Taiwan Srais: A hreshold regression model. Defense and Peace Economics 16(1). 9. Masih, A. M. M., Masih, R. and Hasan, M. S. (1997) New evidence from an alernaive mehodological approach o he defence spending-economic growh causaliy issue in he case of mainland China, Journal of Economic Sudies, 24, 123± Rudra Prakash Pradhan, (2010) Defense Spending and Economic Growh in China, India, Nepal and Pakisan: Evidence from Coinegraed Panel Analysis, Inernaional Journal of Economics and Finance, 2(4 ) 11. Yemane Wolde-Rufael (2001) Causaliy beween defence spending and economic growh - The case of mainland China: a commen. Journal of Economic Sudies, Emerald Group Publishing 28(3)