Defence Expenditure and Economic Growth: A Cross-Country Analysis of Peaceful and Conflict-Prone Countries

Abstract This study uniquely examines the relationship between GDP growth and several key variables, including gross fixed capital formation (GFCF), secondary school enrollment, military expenditure, and innovation (measured by patents), in 13 peaceful countries and 8 conflict-prone countries from 2007 to 2022, as categorized by the Global Peace Index (GPI). To evaluate long-run effects, the analysis utilizes panel fixed-effects models, panel regression with Driscoll and Kraay standard errors, and the Generalized Method of Moments (GMM). The findings from the panel regression models show that GFCF strongly boosts GDP in peaceful nations, with weaker effects in conflict-prone regions. While education is not a significant driver in peaceful countries, it is vital for growth in conflict-affected areas. Military spending has minimal impact in peaceful nations but significantly hampers growth in conflict-prone countries. Innovation, indicated by patents, contributes positively to economic growth across all countries. The panel ARDL and asymmetric ARDL models show that innovation drives short-run growth in peaceful countries, while military expenditure inhibits it in conflict-prone regions. Long-run findings confirm that GFCF is critical to growth across all nations. Policy recommendations include reducing military spending, fostering education, promoting innovation, and ensuring stable governance. JEL Classification: O11, O31, O57