Military Expenditure Economic Growth Nexus in Jordan: An Application of ARDL Bound Test Analysis in the Presence of Breaks

ABSTRACT

The Hashemite Kingdom of Jordan is a nation that has persisted through turbulent times. The country’s leaders have long attempted to balance the allocation of resources between a strong military and a developing economy in their quest for stability, peace and prosperity. This paper examines and sheds further light on the relationship between Jordan’s military expenditure and its economic growth during the period 1970–2015. Using the Gregory -Hansen cointegration technique allowing for structural breaks, and the ARDL methodology this paper tests the short – and long–run equilibrium relationship between military expenditure and economic growth in Jordan. Furthermore, with the error correction model (ECM) and the CUSUM and CUSUMSQ tests, we examine the stability of the above relationship. The results reveal positive short – and long–run relationships between military expenditure and economic growth in Jordan, during the period under study. This finding has important policy implications for the Jordanian state, as it justifies the transfer of resources to the military, showing that it has not had a negative impact on economic growth.

KEYWORDS:

• Jordan
• economic growth
• military spending
• cointegration
• ARDL

JEL CLASSIFICATION:

• C22
• H30
• O40

Acknowledgments

The authors thank Professor Ron Smith for his perceptive reading of an earlier version of this paper and his valuable recommendations and two anonymous referees for their constructive suggestions. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. According to the CIA World Factbook (2013), Jordan was among the 12 countries with the highest military spending as a percentage of its GDP (4.31%), in 2015 figures.

2. The Jordanian Government follows a state market continuum model ‘based along five continua: contribution to the economy; involvement in planning; institutional development; support for the private sector; and government ownership of productive assets’ (Knowles 2005, 43).

3. Potential structural breaks can undermine the existence of the long-run relationship between GDP and milex. (e.g. the structural weaknesses in the Jordanian economy during the 1980s that led to the financial crisis of 1988–1989).

4. That is supported further by (2018) with an average score of 66% from 1995 to 2019 (the countries with a score from 60% to 70% are considered as moderately free). In addition, the average value for governmental spending for Jordan during the period 1970–2015 was 24.03% of the GDP (own data). According to Chobanov and Mladenova (2009, 9), ‘the optimal government size (total government spending as a share of GDP) is between 17% and 40% of GDP’.

5. Almost one-third of the country’s labour force was working in the Gulf, remitting an annual average of US$918 million between the mid-1970s and the mid-1980s, amounting to more than 21% of the GDP at market prices (Knowles 2005).

6. See Yildirim, Sezgin, and Öcal (2005) for a discussion on the changes in military balances in Middle Eastern countries.

7. See Al-Hamdi and Alawin (2017) for the reasons behind the peaceful changes and developments between Jordan and its neighbours. See also Chen, Feng, and Masroori (1996) for a detailed discussion regarding the collective action problem and increases in milex for the countries neighbouring Israel and the motives for Jordan’s involvement in the Israeli wars.

8. Those employed by the military and security agencies and their families also have medical insurance and receive assistance with their housing, education and social security. Additionally, thousands of physicians, engineers, computer technicians and others have been trained by the military. Thus, military expenditure helps not only security but the national economy as well (The Jordan Times 2012).

9. Jordan is a member of this group.

10. For a detailed discussion regarding the choice of the Barro-style model and variables, see: Dimitraki and Menla -Ali (2015).

11. Any policy evaluation based on conventional methods ignoring the structural break can be grossly misleading.

12. Level shift means that there is a shift in the constant term of the cointegrating equation.

13. Gregory and Hansen (1996a) found that the power of the conventional ADF test with no allowance for regime shifts falls sharply.

14. The description here is based on the Gregory and Hansen (1996b) tables.

15. See Harrigan, El-Said, and Wang (2006) for a detailed discussion of the IMF’s and World Bank’s liberalisation programme.

16. The implementation of the IMF/WB-sponsored economic-adjustment and austerity plan in 1989, had violent results with riots across the country. See more in Ryan (1998).

17. According to Bannerjee, Dolado, and Mestre (1998) the ECM coefficient shows how quickly or slowly the variables return to the equilibrium path and it should have a significantly negative coefficient. It is also further proof of the existence of a stable long–term relationship.

18. The notion that military expenditure promotes economic growth by stimulating the aggregate demand and reducing the excess capacity.

19. We have also tested the direction of the relationship between milex and economic growth by employing a bivariate Granger causality test that proves that military expenditure (Granger causes) drives changes in economic growth in the period under study but not the other way around. The results are available on request.

20. If the plots of the CUSUM and CUSUMQ statistics stays within the 5% significance level (portrayed by two straight lines, the equations for which are given in Brown, Durbin, and Evans (1975), then the coefficient estimates are said to be stable.