Does Development Aid Increase Military Expenditure?

43 Pages Posted: 9 Nov 2016

See all articles by Sarah Langlotz

Sarah Langlotz

Heidelberg University

Niklas Potrafke

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: September 27, 2016

Abstract

The diversion of development aid to the recipient’s military may be one explanation why aid is often found to be ineffective in promoting economic growth and development. Previous studies have not derived the causal effects of development aid on military expenditure. Using a new instrumental variable strategy, we examine whether bilateral development aid increases military expenditure in recipient countries. The instrument is the interaction of donor government fractionalization and the probability of receiving aid. The dataset includes new data on military expenditure for 124 recipient countries over the 1975-2012 period. While development aid has a positive effect on military expenditure in the full sample, the effect vanishes when we exclude outliers. However, we find that aid provided by coordinated market economies increases military expenditure in the full sample of recipient countries, even after controlling for outliers. Coordinated market economies have been found to deliver more government-to-government aid, which has a higher risk of capture compared to aid delivered through non-state development actors.

Keywords: aid, military expenditure, fungibility, instrumental variables, causality

JEL Classification: F35, H56, O11

Suggested Citation

Langlotz, Sarah and Potrafke, Niklas, Does Development Aid Increase Military Expenditure? (September 27, 2016). CESifo Working Paper Series No. 6088. Available at SSRN: https://ssrn.com/abstract=2866383

Sarah Langlotz

Heidelberg University ( email )

Grabengasse 1
Heidelberg, 69117
Germany

Niklas Potrafke (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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