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Defense Expenditure and Economic Growth: Empirical Study on Case of Turkey View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Calhoun, Institutional Archive of the Naval Postgraduate School Calhoun: The NPS Institutional Archive Theses and Dissertations Thesis Collection 2008-06 Defense expenditure and economic growth: empirical study on case of Turkey Tekeoglu, Ertugrul Monterey, California: Naval Postgraduate School, 2008. http://hdl.handle.net/10945/10351 NAVAL POSTGRADUATE SCHOOL MONTEREY, CALIFORNIA MBA PROFESSIONAL REPORT Defense Expenditure and Economic Growth: Empirical Study on Case of Turkey By: Ertugrul Tekeoglu June 2008 Advisors: Robert E. Looney Raymond Franck Approved for public release; distribution is unlimited THIS PAGE INTENTIONALLY LEFT BLANK REPORT DOCUMENTATION PAGE Form Approved OMB No. 0704-0188 Public reporting burden for this collection of information is estimated to average 1 hour per response, including the time for reviewing instruction, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington headquarters Services, Directorate for Information Operations and Reports, 1215 Jefferson Davis Highway, Suite 1204, Arlington, VA 22202-4302, and to the Office of Management and Budget, Paperwork Reduction Project (0704-0188) Washington DC 20503. 1. AGENCY USE ONLY (Leave blank) 2. REPORT DATE 3. REPORT TYPE AND DATES COVERED June 2008 MBA Professional Report 4. TITLE AND SUBTITLE Defense Expenditure and Economic Growth: 5. FUNDING NUMBERS Empirical Study on Case of Turkey 6. AUTHOR Ertugrul Tekeoglu 7. PERFORMING ORGANIZATION NAME(S) AND ADDRESS(ES) 8. PERFORMING ORGANIZATION Naval Postgraduate School REPORT NUMBER Monterey, CA 93943-5000 9. SPONSORING /MONITORING AGENCY NAME(S) AND ADDRESS(ES) 10. SPONSORING/MONITORING N/A AGENCY REPORT NUMBER 11. SUPPLEMENTARY NOTES The views expressed in this thesis are those of the author and do not reflect the official policy or position of the Department of Defense or the U.S. Government. 12a. DISTRIBUTION / AVAILABILITY STATEMENT 12b. DISTRIBUTION CODE Approved for public release; distribution is unlimited 13. ABSTRACT This thesis set out to find the relationship, if any, between defense spending and economic growth for Turkey, and to discuss the policy implications of the empirical results. Since Turkey has one of the largest defense budgets within the Middle East and also NATO, this question has important implications for Turkey’s future economic well-being and political stability. Taking into account the difficulties present in previous military expenditure studies, an econometric model was specified and empirically tested using Turkish data for 1969-2004. Results suggested that there is a negative linkage between military expenditure and economic growth. The second part of the empirical study tested the defense-welfare relationship for Turkey using expenditures on health and education as welfare proxies. The empirical findings suggested that there are tradeoffs between military expenditures and welfare spending. However, there seems to be a positive relationship between military expenditures and education. The Turkish Republic’s defense policy has been continually guided by Ataturk’s proverb of “peace at home, peace in the world.” However, sustaining a peaceful environment has required a high level of military expenditures. What makes Turkey’s military expenditures relatively high? Is it possible to draw inferences that high military expenditures are a requirement for Turkey? To answer these questions, factors that are major reasons for high military expenditures are also discussed in this thesis. These include strategic factors, conflicts with PKK terrorism, disputes with Greece, the military modernization program, and the economic environment of Turkey. 14. SUBJECT TERMS 15. NUMBER OF Defense-growth relationship, defense spending, Turkish defense expenditures, defense tradeoff PAGES 111 16. PRICE CODE 17. SECURITY 18. SECURITY 19. SECURITY 20. LIMITATION OF CLASSIFICATION OF CLASSIFICATION OF THIS CLASSIFICATION OF ABSTRACT REPORT PAGE ABSTRACT Unclassified Unclassified Unclassified UU NSN 7540-01-280-5500 Standard Form 298 (Rev. 2-89) Prescribed by ANSI Std. 239-18 i THIS PAGE INTENTIONALLY LEFT BLANK ii Approved for public release; distribution is unlimited DEFENSE EXPENDITURE AND ECONOMIC GROWTH: EMPIRICAL STUDY ON CASE OF TURKEY Ertugrul Tekeoglu First Lieutenant, Turkish Air Force B.S., Turkish Air Force Academy, 2002 Submitted in partial fulfillment of the requirements for the degree of MASTER OF BUSINESS ADMINISTRATION from the NAVAL POSTGRADUATE SCHOOL June 2008 Author: ______________________ Ertugrul Tekeoglu Approved by: _______________________________________ Robert E. Looney, Lead Advisor _______________________________________ Raymond Franck, Support Advisor _____________________________________ Robert N. Beck, Dean Graduate School of Business and Public Policy iii THIS PAGE INTENTIONALLY LEFT BLANK iv ABSTRACT This thesis set out to find the relationship, if any, between defense spending and economic growth for Turkey, and to discuss the policy implications of the empirical results. Since Turkey has one of the largest defense budgets within the Middle East and also NATO, this question has important implications for Turkey’s future economic well- being and political stability. Taking into account the difficulties present in previous military expenditure studies, an econometric model was specified and empirically tested using Turkish data for 1969-2004. Results suggested that there is a negative linkage between military expenditure and economic growth. The second part of the empirical study tested the defense-welfare relationship for Turkey using expenditures on health and education as welfare proxies. The empirical findings suggested that there are tradeoffs between military expenditures and welfare spending. However, there seems to be a positive relationship between military expenditures and education. The Turkish Republic’s defense policy has been continually guided by Ataturk’s proverb of “peace at home, peace in the world.” However, sustaining a peaceful environment has required a high level of military expenditures. What makes Turkey’s military expenditures relatively high? Is it possible to draw inferences that high military expenditures are a requirement for Turkey? To answer these questions, factors that are major reasons for high military expenditures are also discussed in this thesis. These include strategic factors, conflicts with PKK terrorism, disputes with Greece, the military modernization program, and the economic environment of Turkey. v THIS PAGE INTENTIONALLY LEFT BLANK vi TABLE OF CONTENTS I. INTRODUCTION........................................................................................................1 II. DEFENSE ECONOMICS AND EXPENDITURES.................................................3 A. DEFINITION OF DEFENSE ECONOMICS ...............................................3 B. RELATIONSHIP BETWEEN DEFENSE ECONOMICS AND THE TREND IN WORLD DEFENSE SPENDING ..............................................4 III. BACKGROUND AND LITERATURE REVIEW ...................................................9 A. LITERATURE REVIEW ...............................................................................9 1. General Framework of Literature Review........................................9 2. Criticism of Emile Benoit’s Study among Literati..........................11 3. Turkish Literature Review................................................................13 4. Related Surveys for Further Information .......................................16 B. CONCLUSION ..............................................................................................16 IV. OVERVIEW OF DEFENSE-GROWTH RELATIONSHIP.................................17 A. DEFENSE-GROWTH RELATIONSHIP ...................................................18 1. The Supply-side Effects .....................................................................18 a. Negative Effects.......................................................................19 b. Positive Externalities—Spinoff and Spillovers......................20 2. The Demand-side Effects...................................................................22 3. Security Effects...................................................................................22 4. What Makes the Economic Effects of Defense Spending Different?............................................................................................23 B. CONCLUSION ..............................................................................................26 V. DIFFICULTIES OF MILITARY EXPENDITURE STUDIES ............................27 A. CONCEPTS, METHODOLOGICAL, AND PRACTICAL PROBLEMS ...................................................................................................27 1. Problem in the Definition of Military Expenditures.......................27 2. Methodological Problems..................................................................29 a. Deflator Factor........................................................................29 b. Conversion Factor ..................................................................30 3. Problems in Collecting Data .............................................................31 4. Conclusions.........................................................................................32
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