Defense Expenditure, External Threats and Economic Growth: An Empirical Study of Iran

One of the most important issues in defense economics is the impact of defense spending on economic growth, and so far numerous studies have been carried out using various models. In a new specification, Aizenman & Glick (2003, 2006) assume that the effect of defense spending on economic growth is a nonlinear function of the effective military threats of foreign countries, and if there are large external threats, increasing defense spending can help boost economic growth. In this regard, the main objective of this study is to investigate the effect of defense expenditures on Iran's economic growth according to the level of external threats during the period of 1979-2015. For this purpose, based on the Aizenman & Glick (2003, 2006) studies, a model for Iranian economy has been designed and to estimate it, is used the Johansen-Juselius co-integration method. Also, the average defense burden of the Middle East countries has been used as an indicator of external threats. The findings of this research show that the impact of defense burden on Iran's economic growth depends on the level of the external threat index. As the level of external threats increases, the negative impact of defense spending on economic growth decreases, and it can be expected that with the passage of external threats from its threshold, the impact of defense spending on the economic growth will be positive.