This paper proposes to test the relationship between military expenditure and economic growth by including
the impact of the share of military and civilian components of government expenditure in an economic
growth model with endogenous technology. In this framework, we empirically consider the hypothesis of a
nonlinear effect of military expenditure on economic growth. The comparison between costs and benefits of
defence sector has traditionally explained the nonlinear relationship. This paper suggests that shocks to
insecurity may also be a source of nonlinearity as they determine a re-allocative effect within government
expenditure.
While parametric partial correlations are in line with empirical findings, the robustness of estimations is
tested by using a nonparametric approach. The negative relationship between military expenditure and
growth in countries with high levels of military burden predicted by theory becomes significant only after
including a proxy for re-allocative effects in the growth equation.