Do Military Expenditures Crowd-out Health Expenditures? Evidence from around the World, 2000–2013

Abstract

The paper examines the relationship between health and military expenditures using pooled cross-sectional (197 countries) and time series (2000–2013) data. Simultaneous equation models were employed to estimate the relationship between an array of public sector expenditures in order to address potential endogeneity. Our empirical findings strongly support the crowding-out hypothesis whereby increased military expenditures reduce the capacity of government to direct expenditures to health expenditures. These findings were robust to alternative specifications explored in the sensitivity analyses. Compared with upper-middle-income countries, the crowding-out effect became more pronounced among lower-middle-income countries. Consequently, this study shows that increased military expenditures negatively impacts health expenditures, and therefore poses as an important risk factor for population health and individual well-being. Moreover, it is the poorest of nations that are most sensitive to the negative effects of increased military expenditures.

Keywords:

• Health expenditures
• military expenditures
• crowding-out
• simultaneous equation models

Notes

1. The 16 countries are American Samoa, Aruba, Bermuda, Cayman Islands, Faeroe Islands, French Polynesia, Greenland, Guam, Hong Kong, Isle of Man, Macao, New Caledonia, Sint Maarten (part of the Kingdom of the Netherlands), St. Martin (part of France), Virgin Islands (US), West Bank and Gaza.

2. Please refer to http://www.eiu.com/home.aspx.

3. Please refer to https://www.transparency.org/research/gcr/.

4. The Global Conflict Risk Index is formed as a combined index of internal/external conflict based on regression method developed by the Joint Research Centre of the European Commission in collaboration with an expert panel. Please refer to http://conflictrisk.jrc.ec.europa.eu/.

5. The equations are just identified if K = M, and over-identified if K > M.

6. We only present the outcomes in Equations (1) and (2), because we focus on the relationships between the health and military spending

7. Lower-middle-income and upper-middle-income economies are separated at a gross national income per capita of $4125. http://data.worldbank.org/news/2015-country-classifications.