Growth, political instability and the defence burden

I develop and test a model to examine the economic effects of political instability and military expenditure. Defence plays three important roles in the model: (i) it provides insurance against political instability; (ii) it augments the human capital stock by training the labour force; but (iii) it comes at the expense of consumption. The resulting theory predicts that increased political instability or increased defence can inhibit economic growth. Using panel data, I find that increases in political instability do decrease growth while increases in defence do decrease political instability. I also find that increases in defence have a direct negative effect on growth, although the relation is weak.