Military Spending: Is the Peace Dividend Real or Illusory

This paper investigates the relationship between defense spending and real per capita gross domestic product for the G-7 nations during the years 1963-1990. Using a two-way, fixed-effects regression model, time series and cross sections are pooled. Per capita real GDP is assumed to be a function of per capita military spending, per capita government spending for nonmilitary purposes, per capita capital stock, per capita investment, mean years of secondary education, percentage of the population between the ages of 15 and 65, and population growth rate. Results from the fixed effects model indicate a statistically significant, inverse relationship between defense spending and per capita GDP. Results also tend to verify the importance of investment, human capital, and size of the labor force relative to total population