Effects of Defense Spending on Economic Growth and Its Indirect Effects on Private Consumption in Iran: A Supply Side Approach

Defense industry plays an important and strategic function in economy. Defense industry effects economy mainly through security and weapon exports. There has been a growing literature examining military expenditures in developing countries. Theoretically, there is no definite prediction of the direction of causation between economic growth and military spending. The majority of these studies have focused on whether or not defense spending has had a positive, a negative, or no impact whatsoever on economic growth in developing countries. The purpose of this paper is to examine the effects of defense spending on economic growth and private consumption in Iran using time series data for the period 1974 to 2005. A four-sector model based on the Feder approach is employed to detect any likely relationship between those variables. The model comprises consumption sector, defense sector, non-defense government sector, and exports sector. The findings show that there is statistically significant and positive relation between defense spending and economic growth in Iran, while the effects of defense spending on private consumption is negative.