National and Regional Economic Consequences of Swiss Defense Spending
| Author | Thomas Bernauer,Vally Koubi,Fabio Ernst |
| Published date | 01 July 2009 |
| DOI | 10.1177/0022343309334617 |
| Date | 01 July 2009 |
| Subject Matter | Articles |
467
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vol. 46, no. 4, 2009, pp. 467– 484
Sage Publications (Los Angeles, London, New Delhi,
Singapore and Washington DC) http://jpr.sagepub.com
DOI 10.1177/0022343309334617
National and Regional Economic Consequences
of Swiss Defense Spending*
THOMAS BERNAUER
Center for Comparative and International Studies, ETH Zurich
VALLY KOUBI
Department of Economics and Oeschger Center, University of Bern;
and Center for Comparative and International Studies, ETH Zurich
FABIO ERNST
Swiss Armed Forces Planning Staff
The effects of defense spending on economic performance and, in particular, on economic growth have
been studied extensively in the literature. The empirical findings have been ambiguous so far, partly reflect-
ing the econometric difficulties involved in the estimation of this relationship. The authors study the impli-
cations of Swiss defense spending for economic growth and unemployment in Switzerland, using both
national aggregate and cross-sectional (cantonal) data. Such analysis may be more informative than similar
analyses that rely on time series for individual countries (due to spurious time effects) or averages for differ-
ent countries (due to strong cross country variation in country characteristics). The findings indicate that
although defense spending has had a positive effect on the rate of economic growth of Switzerland in the
presence of an external threat (Cold War), the distribution of defense spending across cantons has not con-
tributed to the dispersion of cantonal growth rates. Nonetheless, cantons in which military employment is
a large share of total employment have enjoyed lower and more stable unemployment rates. These findings
suggest that in order to uncover the full implications of defense spending, it is necessary to go beyond the
defense spending–growth nexus. The findings seem relevant for many other countries because the alloca-
tion of national defense employment and spending is rarely uniform across the regions of any country.
Introduction
The impact of defense spending on eco-
nomic performance has been the subject of a
voluminous literature. Most of this literature
has focused on economic growth. Theory
predicts an ambiguous relationship between
economic growth and defense spending.
The main arguments suggesting a positive
relationship can be summarized as follows:
(1) Defense spending produces security,
which allows private economic agents to carry
out productive economic activities without
fear of foreign appropriation. (2) In many
countries, part of defense spending is devoted
to research and development (R&D) activi-
ties. Military R&D leads to innovations that
* We are thankful to the Swiss Defense Ministry (VBS) for
providing us with the defense spending data. We would
also like to thank Michael Brzoska and the reviewers for
their helpful comments and suggestions. The data used in
this article are available at: http://www.prio.no/jpr/datasets
or upon request from Vally Koubi at vally.koubi@vwi.
unibe.ch. EViews 4.0 was used to generate the statistical
results presented in this article.
journal of PEACE RESEARCH volume 46 / number 4 / july 2009
468
subsequently lead to applications in the civil-
ian sector, raising productivity and income.
The phenomenal growth in the post-World
War II period is often – partly – attributed to
the significant military inventions that took
place during the war. (3) Defense spending
may produce positive externalities for human
capital formation. Benoit (1973, 1978), for
example, argues that the military contributes
to the improvement of human capital by
providing vocational and technical training,
which might be used later in the private sec-
tor. And (4) the military’s capital expenditures
(e.g. for roads, bridges, airports) increase
public capital and enhance the productiv-
ity of private capital, stimulating investment
and growth (Benoit, 1973, 1978; Barro &
Sala i Martin, 1995).
The main arguments suggesting a negative
relationship can be summarized as follows:
(1) Defense spending – like all other govern-
ment spending – requires taxation. Taxes
not only reduce the amount of resources
available to the private agents but they also
affect relative prices – for instance, real wages
and the real interest rates – and thus dis-
tort economic decisions. Moreover, private
investment, a key determinant of economic
growth (Levine & Renalt, 1992), is adversely
affected and this may have a negative effect
on economic growth. (2) Defense spending
may reduce – crowd out – other types of gov-
ernment spending that could be allocated to
human capital formation, such as education
and health, or to other sources of produc-
tion externalities. This may lead to higher
or lower growth, depending on which cat-
egory of government spending generates the
greatest production externalities (Shieh, Lai
& Change, 2002). And, (3) military spend-
ing may create bottlenecks in the demand
for highly qualified labor and take resources
away from civilian R&D activity. Because of
the governmental sector’s low productivity,
the diversion of these resources from civilian
to military purposes can have a detrimental
long-term effect on a country’s productivity,
technological position, and growth.
The empirical literature is also volumi-
nous, but rather inconclusive. Researchers
have employed a variety of methodologies –
ranging from single equation, single coun-
try to pooled data analysis (time series in a
cross-section of countries) – but have failed
to establish convincingly the existence of a
particular, general pattern (the main find-
ings of the empirical literature are reviewed
below). While studies with pooled data tend
to be statistically more reliable than single-
country studies, the strong variation in unob-
servable or unaccountable country-specific
characteristics and the possibility that such
characteristics may be systematically related
to defense spending decisions make such
studies vulnerable to biased estimates.
The effects of defense spending on
employment have received less theoretical
scrutiny. Holding total government spend-
ing fixed, changes in defense spending will
affect total employment only to the extent
that defense spending is associated with a
different (Keynesian) multiplier and has a
different effect on labor productivity than
other components of government expendi-
ture. The above arguments on output growth
can be adapted to refer to the level of output
and productivity instead and can thus be
used to discuss employment effects.
The objective of this article is to examine
the effects of defense spending on economic
growth and unemployment in Switzerland.
The data on the cantonal allocation of
defense spending and defense personnel are
available only for the period 2000–03. This
means that for the study of the cross-sectional
(cantonal) distribution of unemployment
and growth, we have to restrict ourselves to
this short sample. Nonetheless, we can also
study the behavior of the growth rate of
output for the country as whole for a longer
period, as this only requires information on
the total defense budget, which is available
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