Assessing the impact of military expenditures on economic growth: A case study of Azerbaijan

Analyzing the connection between military expenditure and economic growth is interesting due to its policy implications, particularly in geopolitically strategic regions. In the case of Azerbaijan, where defense spending accounts for a significant share of the national budget, this relationship is especially relevant. The present study explores the long-term equilibrium between military expenditure, expressed as a percentage of GDP, over a three-decade period marked by consistent economic growth and substantial defense investments. To investigate this relationship, the study applies the Johansen cointegration method to check for a stable long-term relationship. It employs the Granger causality test to determine the causal direction between the variables. The findings show cointegrating relationships, indicating a long-term equilibrium between military expenditure and economic growth. Furthermore, the Granger causality analysis indicates a bidirectional causal link, implying that changes in military expenditure influence GDP per capita growth and vice versa. Specifically, the results show that military expenditure Granger causes GDP per capita at a lag of 3 (p-value = 0.012). Similarly, GDP per capita Granger causes military expenditure at the same lag (p-value = 0.0001). The findings reveal the dual impact of military spending on economic development, providing insights for Azerbaijani policymakers to balance defense needs with economic growth.