The Nexus between External Debts and Military Expenditures for the Selected Transition Economies: A Panel Threshold Regression Approach

ABSTRACT

The dissolution of the Eastern Bloc at the end of the Cold War compelled most of the centrally-planned economies to adjust their economic order to become free market economies. During the transition process, most of those countries experienced severe external debt overhang problems, due to excessive budget deficits and rapid liberalization of foreign trade and capital account regimes. In addition, most of those countries were facing political unrest due to internal and external conflicts by the end of the Cold War, with rampant weapons proliferation and the arms race. By employing the fixed effect panel threshold regression approach, we unveil the non-linear relationship between military spending and external indebtedness, which has not been examined for the selected twelve transition economies over the period from 1997 to 2016. Our findings reveal the presence of double threshold effects that are embedded in military expenditure, and the debt-accelerating effect of military spending emerges after the first regime. In the early stages, countries tend to finance military expenditure with the help of domestic savings, whereas the requirement for external borrowing emerges later as domestic savings become inadequate. We have also produced some crucial policy recommendations to reflect our findings.

KEYWORDS:

• Military expenditure
• external debts
• transition economies
• panel threshold regression

JEL CLASSIFICATION:

• C33
• H53
• H56
• P20

Acknowledgments

This paper was presented at Applied Macro Theory and Finance 2018 (AMEF 2018) which was held in Thessaloniki, Greece. The authors are grateful to the participants of the conference, in particular to Thanasis Stengos, Mehmet Pinar, and Ahmad Hassan Ahmad and to the anonymous referees for their precious and illuminative comments during the review process of this study.

Notes

1.. List of the transition economies in the sample by alphabetical order follows Albania, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, The Republic of North Macedonia, Moldova, Russia, Serbia, Ukraine.

2.. According to START in our sample Albania, Belarus, The Republic of North Macedonia, Moldova, Russia, Serbia and Ukraine are involved in Eastern Europe, while Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan are the part of Central Asia. For methodological issues and detailed explanation see START (2018). Global Terrorism Database. Retrieved from https://www.start.umd.edu/gtd.

3.. Under the auspices of the United Nations, the prolonged name dispute between Greece and the FYROM resolved by signing The Treaty of Prespa by changing the latter’s name as ‘The Republic of North Macedonia’. The Treaty of Prespa was ratified by the parliaments of both countries on 25 January 2019 and went into the force on 12 February 2019. For details see the following link: https://www.eu-events.eu/13751-prespa-agreement.html?date=2019-06-12-00-00 Accessed 28 August 2019.

4.. See Paleologou (2013) for details.