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Abstract
Over the last decade, the Iranian Government budget on military has been higher than the average of the world. The current increasing international sanctions aim to reduce the military capabilities and capacities of the Iranian Government. We analyze the response of the Iranian economy to shocks in its military budget from 1959 to 2007, using impulse response functions and variance decomposition analysis. The Granger causality results show that there is unidirectional causality from the military spending growth rate to the economic growth rate. The response of income growth to increasing shocks in the military budget is positive and statistically significant.
Acknowledgements
I gratefully acknowledge the useful comments and constructive suggestions by the Editor, Christos Kollias, an anonymous referee and Jessica Dewald on earlier versions of this paper. I would like to thank the ZEW Mannheim for their hospitality during working on this paper. The financial support of the Alexander von Humboldt Foundation is highly appreciated.
Notes
1 For more details see http://www.irantracker.org/us-policy/sanctions-iran-reactions-and-impact (accessed 5 August 2012).
2 For more details see http://www.defenddemocracy.org/issues/iran-sanctions/ (accessed 5 August 2012).
3 For the effects of oil price shocks on other aspects of the Iranian economy such as inflation, real effective exchange rate, and imports see Farzanegan and Markwardt (Citation2009).
4 http://www.bbc.co.uk/news/world-middle-east-10743580 (accessed 5 August 2012).
5 http://sg.news.yahoo.com/irans-revolutionary-guard-gets-gas-project-085035621.html (accessed 5 August 2012).
6 http://www.bbc.co.uk/persian/iran/2011/02/110226_ka_sepah_khatam_oil.shtml (in Farsi, accessed 5 August 2012).
7 http://www.bbc.co.uk/persian/business/2010/06/100605_l01_elec_anniv_khatam.shtml (in Farsi, accessed 5 August 2012).
8 http://zamaaneh.com/news/2009/12/post_11607.html (In Farsi, accessed 14 April 2012).
9 http://www.washingtonpost.com/wp-dyn/content/article/2010/07/22/AR2010072203933.html (accessed 14 April 2012).
10 http://www.ansarbank.com/ (accessed 14 April 2012).
11 http://www.mebank.ir/ (accessed 14 April 2012).
12 Farzanegan (Citation2009) provides some information regarding the role of IRGC in the smuggling, estimating the size of illegal trade in Iran. Alfoneh (Citation2010) also presents some detailed information regarding the economic activities of the IRGC in Iran.
13 Of course, some parts of the military budget may be also spent on special forms of education and training which military organizations design for their current and future personnel. However, this does not mean that the military section is responsible for mass education as may be seen in other countries like in Egypt (thanks to the referee for raising this issue). Iranian military bodies have some universities in which they train their own forces. These centers invest most of their funds in advanced military projects and technologies which has less to do with mass public education. Separation of current and capital (or development) spending in the military industry could provide more interesting insights in such an analysis. However, the Iranian National Accounts do not provide detailed data for the military part of spending.
14 Higher frequency data (e.g. quarterly or monthly) may produce more precise results than annual data on some special occasions. The National Accounts of Iran (produced by the Central Bank of Iran) only present annual figures on government expenditures based on different kinds of functions. The quarterly data are only available for aggregated general government expenditures from 1988 onwards.
15 For more details see http://www.globalsecurity.org/military/world/iran/mod.htm (accessed 5 August 2012).
16 For more details on the sources and method see http://www.sipri.org/databases/milex/sources_methods (accessed 14 April 2012).
17 A recent annual of the SIPRI mentions: ‘Resource revenues are often managed non-transparently and without proper accountability, which may lead to large off-budget military spending and corrupt arms purchases’ (SIPRI, Citation2010).
18 Mbaku (Citation1991) finds a positive and statistically significant effect of income per capita on military expenditures. He uses per capita income as a proxy for technological sophistication in a country. He argues that ‘as countries get richer, we should see a greater willingness, on the part of citizens, to support a better equipped and more technologically-sophisticated defense force.’
19 We also checked these diagnostic indicators for the models with the per capita of military spending instead of the share in total spending. We noticed satisfactory performance in all criteria.
20 The direct sanctioning of the military complex of Iran has already started. See: http://www.defenddemocracy.org/media-hit/sanctioning-irans-military-industrial-complex/.