Military expenditure reduces the negative effect of terrorism on economic growth

In a number of African countries, terrorism has become a major challenge to socioeconomic development. This has spurred research on the extent to which terrorism affects economic growth. But an area that’s been less examined is the influence of military expenditure on the relationship between terrorism and economic growth in Africa.

Let’s take two examples: Nigeria and Somalia. These two countries are among the most prominent cases of insurgencies and acts of terrorism on the continent.

In Nigeria, insurgent groups such as Boko Haram and the Islamic State of West Africa Province have been waging war in the north-eastern zone of the country. This has led to the destruction of economic infrastructure, a reduction in domestic investment and a fall in economic activity. This has, in turn, influenced the growth rate of the country’s GDP.

In Somalia, conflict among clans has enhanced terrorism which has destroyed the Somalian economy. This has led to severe malnutrition, particularly among children.

The default response to increased insurgency and acts of terrorism is to up military spending. This is a longstanding defence policy for counter-terrorism. For instance, since the emergence of Boko Haram in 2009, military expenditure in Nigeria has increased significantly. There was a 36% increase when comparing 2009 and 2018.

In Somalia, there has been a more than 100% increase in military expenditure when comparing 2013 to 2018 figures.

But the effectiveness of higher military spending in mitigating the impact of terrorism on economic growth has not been tested. This is the gap our study sought to fill.

The search for answers

We set out to test the hypothesis that military expenditure mitigates the negative effect of terrorism on economic growth. The study was based on a panel of 24 African countries that had had high levels of terrorist activities and for which data on terrorism was available. The data coverage spanned 18 years (2001 to 2018).

The study used two variables for terrorism – incidents and fatalities. Data for these was sourced from the 2019 Global Terrorism Database. Economic growth, as measured by the growth rate in the gross domestic product (GDP), was sourced from the 2020 World Development Indicator.

The study proxied military expenditure with the percentage of military expenditure in GDP, sourced from the World Development Indicators.

We also used five control variables in the modelling. They included:

  • gross capital formation as a measure of capital

  • population (15 to 64) to capture labour force

  • primary school enrolment as a proxy for education

  • the POLITY2 index, which captures regime type and has been used to measure democracy

  • government effectiveness to proxy the quality of governance.

Our main findings were that:

  • terrorism has a detrimental effect on economic growth in the selected African countries

  • the interactive effect of military expenditure and terrorism on economic growth is significantly positive

  • the net effect of the interaction between military expenditure and terrorism on economic growth is positive when the number of terrorism incidents acts as a proxy for terrorism. But it’s negative when the number of terrorism fatalities acts as a proxy for terrorism. The negative effect is substantially lower when compared to the unconditional effect of terrorism on economic growth in Africa.

The effect of military expenditure

In an effort to mitigate the impact of terrorism on the economy, African countries have increased military spending. A 2019 study showed that military expenditure in Africa had increased by 91% since 2005.

There are two ways in which the increase in military expenditure can mitigate terrorism’s negative effect on economic growth.

The first is via the effect of counter-terrorism. This improves security and leads to the reduction in economic uncertainty, the restoration of economic activity and ultimately increased investment.

The second is the impact of increased military expenditure on economic activity. This happens via a boost to aggregate demand. Four major components affect it. These are consumption, investment, government expenditure and net export. Increased government expenditure on the military would therefore have an impact. But this can be less effective if the capital components of military expenditure are import oriented.

Some academics caution that increased military expenditure can have negative consequences. This includes the risk of the abuse of power and human rights. This can, in turn, also lead to a further deterioration of peace in a country.

Intuitively, it is expected that military expenditure mitigates the negative influence of terrorism on the economy.

However, a study by economists Mete Feridun and ‪Muhammad Shahbaz showed that military expenditure might not necessarily influence terrorism. This would mean that military expenditure might not be able to offset the negative influence of terrorism on the economy. The difference in findings in their study and ours is largely due to regional differences. And it suggests that the influence of military expenditure for counter-terrorism is heterogeneous.

Conclusion

We established three core findings.

The first is that there is an unconditional negative effect of terrorism on economic growth.

The second is that when terrorism interacts with military expenditure, the negative impact on economic growth fizzles out.

The third is that the net effect of the interaction of military expenditure and terrorism on economic growth depends on the proxy for terrorism. However, in both cases, the importance of military expenditure is established.

This means that, overall, military expenditure is a relevant policy variable in reducing the negative effect of terrorism on economic growth in Africa.

But there is also a need for an inclusive growth policies for African economies to increase the opportunity cost of terrorism.

by : Chimere Iheonu, Research Associate, Centre for the Study of the Economies of Africa, Abuja, Nigeria, University of Nigeria

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