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MALCOLM KNIGHT, NORMAN LOAYZA, and DELANO VILLANUEVA

Although conventional wisdom suggests that reducing military spending may improve a country’s economic growth performance, empirical studies have produced ambiguous results. This paper extends a standard growth model and obtains consistent panel data estimates of the growth retarding effects of military spending via its adverse impact on capital formation and resource allocation. Simulation experiments suggest that a substantial long-run “peace dividend”—in the form of higher capacity output—may result from markedly lower military expenditure levels achieved in most regions during the late 1980s, and the further military spending cuts that would be possible if global peace could be secured.