The Impact of Military Expenditure on Economic Growth in NATO Countries: Evidence from Panel Data

Abstract

This paper examines the relationship between military expenditure and economic growth in NATO member states within the institutional framework of collective security obligations. The analysis is based on a panel dataset of 31 countries covering the period from 2002 to 2024. A fixed effects panel model with Driscoll–Kraay standard errors is employed to ensure robust inference in the presence of heteroskedasticity, serial correlation, and cross-sectional dependence. Defence expenditure is included in natural logarithmic form and includes lagged values to capture potential delayed effects on economic performance. The empirical results indicate that military expenditure does not exert a statistically significant or robust effect on economic growth once dynamic adjustments and cross-country interdependencies are properly controlled for. In contrast, foreign direct investment inflows and domestic growth factors remain consistently positive and statistically significant across all model specifications. The evidence suggests that, for NATO economies, military expenditure has a largely neutral impact on short- and medium-term economic growth, while structural and investment-driven factors play a dominant role. The study provides updated empirical evidence and highlights the importance of applying robust econometric techniques when assessing the economic implications of defence policies.

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