Defense Expenditure Convergence in Selected MENA Countries: Nonlinear NCADF Approach

External threats have been always one of the most important determinants of countries’ defense expenditure. Iran is located in a region which is and always has been unstable and full of conflict Undoubtedly, being in such an unstable environment, will result in arms race in the region. In this regard, the main objective of this study is to examine defense expenditure convergence and the effectiveness of rival’s military status in defense sector budgetary decision-making process in MENA countries. To this end, annual data of 13 region’s selected countries over the period 1988-2017 has been used. The unit root test is one of the methods commonly applied in assessing convergence hypothesis. In this study, NCADF unit root test has been used. This test, under the alternative, has a nonlinear form and also can incorporate cross section dependence and coefficient heterogeneity in unit root test. Since defense expenditure convergence can be nonlinear, as a result this test has a significant superiority over the other methods. Results confirm the convergence of defense expenditure in MENA countries. Results show that 5 countries converge to Region’s Average, 4 countries to The Jerusalem-Occupying Regime, 2 countries to Iran and 2 countries converges to Turkey. According to the results, Iran’s military expenditure converges to region’s average, The Jerusalem-Occupying Regime and Saudi Arabia’s defense expenditures. Results also indicate that The Jerusalem-Occupying Regime is the biggest threat in the region.