Defense Spending And Economic Growth In China

In the academia,the relationship between defense spending and economic growth has arisen a great concern and controversy for a long period.Some people think defense spending will impede economic growth because of "crowding-out effect" while the others think defense spending can promote economic growth through transfering technology,enhancing human capital and so on.This paper uses chinese data from 1952 to 2007 to reserch the relationship between defense spending and economic growth.Firstly,we use the ARIMA model to carry out a time series analysis.Secondly we use the Unit Root Test to judge the stationarity of defense spending and economic growth,as well as Cointegration analysis to confirm the long-run equilibrium relationship between them.Finally,Granger causality methods are applied to examine the causal relationship between them.The results show that there is a long-term equilibrium relationship between them,but causal relationship doesn't exit over the period 1952～2007.Furthermore,there are a long-term equilibrium relationship and a unidirectional causality between them over the period 1979～2007.The impulse response analysis between them over the period 1979～2007 indicates that defense spending has a negative impact to economic growth in the short run.Additionally,it causes a positive effect in the long-term and the effect shows a two years' lag.This article establishs a endogenous growth model introducing defense spending, economic growth and financial spending as variables.The regression results demonstrated that defense spending and financial expenditure from 1994 to 2007 are lower than the optimal level.We can conclude that the economic growth rate of China does not reach the optimal level unless our government makes an appropriate change in defense spending share according to the gradient vector which is calculated in this paper.