Relationship between defense expenses and economic growth in Iran

Defense expenses account for one of the considerable and important public expenditures in most countries which play an important role in maintaining the internal and external security and economic stability and growth directly or indirectly. Undoubtedly, when the security of a country is threatened, more defense expenses are justified and economic and social investments decrease, resulting in lower economic growth. The study of impact of defense expenses on economic growth in Iran is important and necessary for two reasons: Iran's strategic position in the Middle East and the high defense expenses in government budget. For this purpose, Iran’s defense expensesduring 1959-2010are estimated by an augmented Solow model (proposed by Knight, Loayza and Villanueva). Findings show, using co-integration Johanson's and Granger Causality of Toda and Yamamoto Test model, there is a positive impact of defense expenses on economic growth in the long run and bidirectional causality between variables. Thus, although it is inevitable to allocate some portion of the annual public budget for defense expenses, its over-use will have negative impacts on the economic growth, causing stagflation in country.