The Impact of Oil Rents on Military Spending in the GCC Region: Does Corruption Matter?

Abstract

This study shows how the level of corruption matters in the way oil rents affect a state's military spending. Using panel data covering the 1984–2014 period for the Gulf Cooperation Countries (GCC), we find that the effect of oil rents on military budgets depends on the extent of political corruption. Oil rents are negatively associated with military spending of the GCC countries. However this, in turn, is moderated by higher levels of corruption. For comparison, we examine this association in non-GCC countries in the MENA region, finding a positive effect of higher oil rents on military spending: this effect is larger in corrupt polities within non-GCC countries. The intermediary role of corruption in the military-oil nexus is robust, controlling for a set of variables that may affect military spending.

Keywords:

• military spending
• corruption
• oil rents
• panel regressions
• MENA
• GCC

ORCID

Mohammad Reza Farzanegan http://orcid.org/0000-0002-6533-3645

Notes

1 World Bank, “World Development Indicators” (2017).

2 We use the International Country Risk Guide (ICRG) corruption index. It is originally from 0 to 6 (most corrupt to least corrupt), but we re-scaled it from 1 to 7 (least corrupt to most corrupt). In the MENA sample, this re-scaled corruption index varies from the minimum of 2 (e.g., Israel in some years) to the maximum of 6 (e.g., Iraq, Lebanon, and Libya in some years).

3 Bjorvatn and Farzanegan, “Resource Rents, Balance of Power, and Political Stability”, Journal of Peace Research 52.6 (2015), pp. 758–73; Bjorvatn and Farzanegan, “Natural-Resource Rents and Political Stability in the Middle East and North Africa”, CESifo DICE Report 13.3 (2015), pp. 33–7.

4 For a new empirical evidence on the increasing effect of oil rents on risk of conflict in a worldwide sample see: Farzanegan, Lessmann, and Markwardt, “Natural Resource Rents and Internal Conflicts: Can Decentralization Lift the Curse?”, Economic Systems 42.2 (2018).

5 Our results are robust; up to four years of lag for our key independent variables, i.e., oil, corruption, and their interaction term. For control variables, we use a one-year lag in all specifications.

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9 See, for example: Chan, “Defense Burden and Economic Growth: Unraveling the Taiwanese Enigma”, The American Political Science Review 82.3 (1988), pp. 913–20; Lebovic and Ishaq, “Military Burden, Security Needs and Economic Growth in the Middle East”, Journal of Conflict Resolution 31.1 (1987), pp. 106–38; Mintz and Huang, “Defense Expenditures, Economic Growth and the Peace Dividend”, American Political Science Review 84.4 (1990), pp. 1283–93; Asseery, “Evidence from Time Series on Militarising the Economy: The Case of Iraq”, Applied Economics 28.10 (1996), pp. 1257–61.

10 Gupta, De Mello, and Sharan, “Corruption and Military Spending”, European Journal of Political Economy 17.4 (2001), pp. 749–77.

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12 Bjorvatn and Farzanegan, “Resource Rents, Balance of Power”, pp. 758–73.

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17 It is less likely that this increase in Saudi military spending is due to the regional competition with Iran. Iran’s military spending in GDP was 2.3% in 2014, and reached 2.5% in 2015. Israeli military burden even shows a decline for this example (from 6% to 5.4%).

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59 Bjorvatn and Farzanegan, “Resource Rents, Balance of Power”, pp. 758–73.

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65 Gupta, de Mello, and Sharan, “Corruption and Military Spending”, pp. 749–77.

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67 Bjorvatn and Farzanegan, “Resource Rents, Balance of Power”, pp. 758–73; Bjorvatn and Farzanegan, “Natural-Resource Rents and Political Stability”, pp. 33–7.