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ECONOMIC GROWTH AND MILITARY EXPENDITURE IN ECUADOR: A

COINTEGRATION AND CAUSALITY APPROACH.
María Gabriela CUEVA-JIMÉNEZ*
Ronny CORREA-QUEZADA
Ana Belén TULCANAZA-PRIETO
Lucía CUEVA-RODRÍGUEZ

Summary: This research analyzes the relationship between military spending and
Ecuadorian economic growth, for the period 1960-2019, using econometric techniques of
cointegration (trace tests, maximum eigenvalue, limits test) and causality. The different
cointegration tests suggest that there is no long-term equilibrium relationship between the
variables of interest. In terms of causality, a unidirectional relationship is found from
economic growth to military spending. There is no evidence of causality in the opposite and
bidirectional direction.

Abstract: This research analyzes the relationship between military spending and Ecuadorian
economic growth, for the period 1960-2019, using econometric cointegration techniques
(trace tests, maximum eigenvalue, limits test) and causality.
The different cointegration tests suggest that there is no long-term equilibrium relationship
between the variables of interest. In terms of causality, a unidirectional relationship is found
from economic growth to military spending. There is no evidence of causality in the opposite
and bidirectional direction.
Keywords: economic growth, military spending, cointegration, causality.
JEL Classification: C32, H56, E22, E23, O54

1. Introduction

The relationship between military spending and economic growth has been the subject of
extensive empirical study in defense economics; however, there is no consensus on the
effects of defense spending on growth, because empirical evidence suggests effects.
positive, negative or null. For example, Alptekin and Levine (2012) indicate a positive effect
in developed countries; Dunne and Tian (2013) highlight that recent work presents evidence
in favor of a negative effect; and, Yesilyurt and Yesilyurt (2019) maintain that the influence
of military spending on growth is not significant.

-------

María Gabriela Cueva-Jiménez, e-mail: gabrielacuevaj@gmail.com.

https://orcid.org/0000-0002-3835-0431,
Doctorate Studies at Camilo José Cela University,
Madrid, Spain. Ronny Correa-Quezada https://orcid.org/0000-0003-4613-8331, Department of Economics of the
Private Technical University of Loja, Ecuador. Ana Belén Tulcanaza-Prieto, https://orcid.org/0000-0002-9201-6848,
Place Middle Society Research Group (LMS), University of the Americas, Quito, Pichincha, Ecuador. Lucía Cueva-
Rodríguez, https://orcid.org/0000-0001-5021-7193, Master in Economic Development at the Latin American Faculty of
Social Sciences, Quito Ecuador, Researcher and Consultant in Economics.

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The lack of consensus on the economic effects of military spending may be due in part to differences in
the coverage of the study period, the construction of the database (time series, panel data and cross-
sectional data), weaknesses of the models. theoretical models used (Feder-Farm, augmented Solow
and Barro models), diversity of econometric techniques and specification problems of the estimated
models (heterogeneity, endogeneity and non-linearity) (Dunne and Smith, 2019; Aziz and Asadullah,
2017; Dunne, Smith and Willenbockel, 2005; Huang, Wu and Liu, 2016)

In the particular case of the Ecuadorian economy, two studies were identified that implicitly address, in
the context of Latin American countries, the link between defense spending and economic growth with
different conclusions that do not clarify their link. The relevance of studying this relationship is due to the
fact that the theoretical review indicates that military spending can boost growth through the effects of
the multiplier of spending, security and spillovers from military research and development. However,
important opportunity costs have also been identified, in which military spending represents a state
burden, since it displaces resources that can be allocated to more productive sectors of the economy
(Desli, Gkoulgkoutsika and Katrakilidis, 2016; Sempere, 2018 ).

In this context, this research analyzes the relationship between military spending and economic growth
during the period 1960 – 2019 for the Ecuadorian case, using cointegration and causality techniques for
the analysis of time series. The document is organized into five sections. After the introductory part, the
theoretical framework is presented, describing the channels through which military spending affects
economic growth, as well as the empirical evidence. The third section reviews the variables, database
and econometric methods. The fourth section corresponds to the results. The document closes with the
main findings.

2. Theoretical framework

The dominant literature on economic growth does not identify defense spending as a significant variable
for growth (Dunne, Smith and Willenbockel, 2005). For example, in the work Barro (1989), with cross-
country data, found that national defense spending is not significant for economic growth; and, more
recently, Sala-I-Martin, Doppelhofer and Miller (2004) study the determinants of long-term economic
growth in 67 variables, including the share of defense spending; The results indicate that there are 18
variables that contribute significantly and are not related to the defense sector. On the other hand, in the
defense economics literature, an important debate has developed

theoretical and, mostly, empirical about the economic relevance of defense spending, however, there
seems to be no consensus on the economic effects of military spending.

From the theoretical framework, the defense sector can positively influence the economy when it creates
security, which promotes trade and investment, through infrastructure and human capital that can be
used in other economic sectors and through the multiplier effect of spending that increases the aggregate
demand (Simpere, 2018). Barro (1989 and 1991) mentions that spending on national defense can have
repercussions
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in the productivity of the private sector or in property rights and, consequently, in

private investment. Similarly, Desli, Gkoulgkoutsika and Katrakilidis (2016) argue
that military spending can positively affect economic growth through spillover effects
from military research and development, and if it stimulates aggregate demand and
reduces excessive capacity through Keynesian militarism. The Keynesian militarism
approach refers to the allocation of public resources to the armed forces in order to
stimulate economic growth (Custers, 2010).

For Dunne, Smith and Willenbockel (2005) the economic effects of military spending
can be transmitted through demand, where the essential elements are the level and
composition of spending; through supply effects, which depends on the availability of
production factors, and; through the security effect, where military spending increases
security and, consequently, production. In contrast, spending allocated to the defense
sector has important opportunity costs, because it can displace other types of more
productive expenses or public needs such as investment, health, education,
consumption and private savings. Furthermore, the research and development
generated in the defense sector can displace or replace that of the civil sector (Desli,
Gkoulgkoutsika and Katrakilidis, 2016; Sempere, 2018).

The first works to analyze the relationship between military spending and economic
growth correspond to Benoit (1973 and 1978) where an association was found
positive between defense spending and economic growth, which comes mainly from
defense spending. However, extensive empirical evidence suggests both positive
and negative economic effects of defense spending and even unidirectional causality
relationships from economic growth to military spending and bidirectional causality
between the two variables (Deger and Sen, 1983; Yakovlev, 2007; Dunne and
Vougas, 1999; Aizenman and Glick, 2006;

The absence of a significant relationship between defense spending and economic

growth has also been evidenced (Yesilyurt and Yesilyurt, 2019), as in Dunne and
Smith (2019) who, using econometric methods for panel data in the period 1960-
2014, argue that there is no evidence of a strong relationship between military
spending and economic growth and investment. Heo (2000 and 2010) presents
similar findings for the United States economy where they support that defense
spending does not have significant economic effects. In the case of a group of
countries in the European Union, the military burden does not drive growth; on the
contrary, the effect can be negative or null (Dunne and Nikolaidou, 2012).

The lack of consensus can be explained by the sample composition, model

specification and estimation methods (Dunne and Smith, 2019, Aziz and Asadullah, 2017);
issues of endogeneity of military spending that have not been adequately addressed (d'Agostino, Dunne,
and Pieroni, 2018); weaknesses of the theoretical models, for example, the Feder-Ram model is prone to
theoretical misinterpretations and its econometric estimation presents problems of simultaneity bias,
alternatively the Barro and augmented Solow models offer fewer deficiencies (Dunne, Smith and 93
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Willenbockel, 2005); and, possible sample heterogeneity and non-linearity (Dunne and Tian, 2015;
Huang, Wu and Liu, 2016).

3. Empirical evidence

3.1. Nexus between military spending and economic growth

This section presents some more recent works on the link between military spending and economic
growth. In relation to a positive effect, Yildirim and Öcal (2014) take into account the spatial effect,
through spatial econometric methods applied to cross-sectional data from 128 countries, for the period
2000-2010.
The findings indicate a positive effect of military spending on economic growth with significant spatial
dependence.

The same link is investigated by Kollias and Paleologou (2017). The study corresponds to the period
1971-2014 and covers 65 countries (full sample) that are categorized according to income level into
subgroups. The findings indicate that the economic growth rate positively affects military spending in
low- and middle-income countries and in the full sample, while in high-income countries the relationship
is the opposite, defense spending favors economic growth. and the investment.

It seems that the evidence mostly suggests a negative and significant economic effect. For example,
Dunne and Tian (2015) examine the economic impact of military spending in a panel of data from 104
countries for the period 1988 -2010, using econometric techniques that allow heterogeneity and non-
linearity to be taken into account.
The authors find a significant negative effect, in the short term and long term, on economic growth.

The results are robust to different sample specifications and control variables. Aziz and Niaz Adadullah
(2017) carry out the analysis for a panel of countries during the period 1990-2013 using OLS, fixed
effects, random effects and generalized method of moments (GMM). They found that there is a negative
and statistically significant effect of military spending on economic growth.

Likewise, d'Agostino, Dunne and Pieroni (2017) study the long-term economic importance of military
spending through the combined mean group (PMG) estimator and the dynamic fixed effects method for
panel data during the period. 1970-2014.
The findings indicate that military spending has a long-term negative effect on economic growth.

The results are consistent across different time and country specifications. d'Agostino, Dunne and
Pieroni (2018), through instrumental variables to control the endogeneity of defense spending, in the
period 1998-2012, conclude that there is a negative and significant effect of military spending on
economic growth, which has been underestimated when using Ordinary Least Squares. d'Agostino,
Dunne, Lorusso et al. (2020), using the ARDL approach for panel data, find that both military spending
and corruption have a long-term, negative and significant effect on economic growth.

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In terms of causality, Farzanegan (2012) during the period 1959-2007 and using the
Granger causality technique, find evidence in favor of a unidirectional causality relationship
from military spending to economic growth. Huang, Wu and Liu (2016) for a panel of 77
countries in the period 1996-2014. They employ a smooth transition vector autoregressive
model to address endogeneity, heterogeneity, and nonlinearity.

The conclusions indicate the existence of a bidirectional causality between the variables of
interest, non-linear and varying over time and between countries. The impact of military
spending on economic growth is negative, the reverse effect is also negative.

Desli, Gkoulgkoutsika and Katrakilidis (2016) investigate the dynamics between military
spending and economic growth in 138 countries for the period 1988-2013 using
cointegration and causality techniques for panel data. The entire sample is classified into
subsamples according to income level. The results suggest that there is cointegration in
the full sample, group of developed and developing countries, but in the less developed
countries the tests tend not to reject an absence of long-run equilibrium relationship.

In terms of causality, in the long run, there is bidirectionality in the full sample and in
developing countries. In developed countries, causality is unidirectional from economic
growth to military spending. In the short term, there is no evidence of causality for the less
developed countries and in the rest of the groups the direction of causality is from economic
growth to military spending.

In the particular case of Ecuador, Kung and Min (2013) study the causal link for 16
countries in Latin America and South America in the period 1988-2010 using the Granger
causality approach for panel with Bootstrap sampling. The authors found a unidirectional
causal relationship from economic growth to military spending for the Ecuadorian economy.

On the other hand, Kollias, Paleologou, Tzeremes et al. (2017) analyze the same nexus in
13 Latin American economies in the period 1961-2014, using econometric techniques of
cointegration and causality (linear and non-linear) for time series. The specific results for
Ecuador indicate a stable long-term relationship, however, there is no evidence of linear
and non-linear causality between the variables military spending and economic growth, but
there is a unidirectional linear causality relationship from military spending to investment.
Overall, the link between the variables appears to be weak.

On the other hand, Guisan (2022) examines the relationship between Military Expenditure
per inhabitant (MEH= Military Expenditure per inhabitant), Production per inhabitant (PH)
and other development indicators, with a sample of 154 countries, finding that there is a
clear evidence regarding the direct and positive impact of increasing PH on MEH.
Generally there is no direct impact of MEH on PH, but there may be an indirect influence,
to the extent that MEH contributes to ensuring factors that have a positive influence on PH,
as highlighted in the studies by Guisan (2021).

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on the impact of Quality of Government (measured by the Voice of Citizens indicator ),

Guisan(2022) on Political stability, and Guisan(2023 b) on Economic Freedom. The
average of military spending over GDP, in the sample of 154 countries with available
data, was 1.79% in 2019 and 1.82% in 2019. Of the 154 countries, only 10 had spending
greater than 4% and another 10 between 3% and 4%. Of the remaining 134 countries,
24 had spending between 2% and 3% and 110 had spending less than 2% of GDP.

3.2. Economic growth and development of Ecuador in 1990-2019

In this context, it is necessary to understand that the Ecuadorian economy is small and
open, with a pattern of primary-export productive specialization.

The economic performance during the 1990s, especially at the end of the decade, was
marked by political instability, inflationary crisis, external shocks such as the El Niño
phenomenon, drop in oil prices and the financial crisis of 1999 (Díaz, 2018). . After the
dollarization of the economy in 2000, positive economic growth rates were observed for
fifteen consecutive years, consolidating this into the longest period of economic growth
since there have been statistical records (De la Cruz, Manzano and Loterszpil, 2020).

This process was accompanied by profound transformations driven mainly by the raw
materials boom and the implementation of reforms such as dollarization and strict fiscal
rules in the first years of the century; and, growth in social spending (in education, health,
social welfare, housing, among others) and public investment (mostly directed towards
the transportation and energy sectors), promoted since the late 2000s (Carrillo Maldonado
and Díaz-Cassou, 2020; Díaz, 2018).

Significant social and investment spending since the late 2000s led to a notable
improvement in terms of inequality and poverty. Particularly, in terms of security, in the
period 1990-2002 and 2007-2019, a continuous reduction in the homicide rate was
evident, reaching the lowest levels in 2017 with a rate equivalent to 5.81% per 100,000.
population. Likewise, the economic performance of the last decade coincides with higher
levels of military spending as a percentage share of the Gross Domestic Product,
specifically, in 2009 the highest figure for military spending in the last three decades was
presented, equal to 3.12% as a percentage. of GDP; Furthermore, military spending in
the last decade of the study period is relatively higher when compared to the first two
decades (Graph 1).

Some indicators of economic growth and development, population, quality of life and security, which offer
a more general perspective of Ecuadorian economic performance in comparison with some countries in
the Latin American region and the world average, are presented in the annexes to Table A2- A4.
Specifically, Table A2 compares the real GDP, GDP per capita (PH) and population size of Ecuador with
the world average, for the period 1990-2019. It is evident that, during the period of interest, the real GDP
of Ecuador has multiplied by 2.33, the Population by 1.66 and the GDP per inhabitant (PH) has multiplied
by 1.40, a value lower than that observed in the world average.

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Graph 1. Homicide rate and military spending as a percentage of GDP

3.50 20.00

18.00
3.00
16.00
2.50 14.00

12.00
2.00
10.00
expenses

1.50
Military

8.00

Homicide
rate
%
1.00 6.00

4.00
0.50
2.00

0.00 0.00
1990

1998
1994

2002
2000

2006

2008

2010

2016

2018
2004

2014
1992

nineteen

2012
ninety
six

Homicide rate Military Spending (% of GDP)

Source: Prepared by authors with data from the World Bank (2024). Note: in the period 2003-2006 there is
no information on the homicide rate.

Table A3 shows the evolution of manufacturing production per inhabitant, total production per capita and
average years of schooling in Ecuador in the context of several Latin American countries and the world
average.

It can be seen that Ecuador, despite having an educational level indicator slightly higher than the world
average in the period 1995 and 2019, per capita production is lower than the world average.

In relation to the per capita added value of manufacturing, a low value is observed both in the year 2000,
as well as in 2010 and 2015, in comparison with the world average and with the countries that have the
highest values (Argentina, Chile and Mexico). Finally, Table A4 shows several indicators of economic
freedom, political stability and peace. Based on these indicators, the importance of promoting the factors of
political stability, peace, security and economic freedom, among others, can be highlighted to promote
investment, domestic and foreign, which is essential to stimulate economic activity.

3. Methodology

The relationship between economic growth and military spending is analyzed from a cointegration and
causality approach. Cointegration will allow us to examine whether there is a long-term equilibrium
relationship between economic growth and military spending; whereas, causality will identify the direction of
causality. The variables of interest are Gross Domestic Product (GDP) per capita, military spending, and
investment measured by gross fixed capital formation. The information on GDP per capita and investment
is collected from the World Bank's open access database and military spending is 97
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obtained from Stockholm International Peace Research Institute (SIPRI). All variables are measured at
constant prices and transformed to logarithms. The study period corresponds to 1960-2019; However,
information is also presented for the period prior to the financial crisis (1960-1998) for greater
robustness of the results.
Table 1 summarizes the variables of interest, abbreviation and database.

Table 1. Variables, abbreviations and sources of information

Variables Abbreviation Fountain

Dependent
GDP per capita lnpib_pc world Bank
variable

Independent Military expenses lngm SIPRI

variables Gross fixed capital formation lnfbkf world Bank

Own elaboration

There are several methods to test cointegration and in the present study the following methods are used.
tests by Johansen (1998, 1991), Johansen and Juselius (1990) that are based on a Vector
Autoregressive (VAR) model. The approach is advantageous when testing long-run relationships on
more than two variables, compared to Engle and Granger's (1987) two-step procedure (Levendis,
2018); However, it is very sensitive to the choice of lag length, loses power and presents bias problems
in small sample sizes (Zhou, 2001; Mah 2000). Therefore, the limits test of Pesaran, Shin and Smith
(2001) is incorporated.

The procedure of Johansen (1988, 1991), Johansen and Juselius (1990), consists of the maximum
eigenvalue and trace tests, which will allow us to know the number of cointegrating vectors. The first
poses as the null hypothesis that the rank of the matrix r is zero, while the alternative is equal to one.
The second suggests a similar null hypothesis, while the alternative indicates that the range is greater
than one.
The two tests are sequential in terms of the range of the matrix, so it is expanded
the range in hypothesis tests until the null cannot be rejected. The tests are performed on the following
vector specification of a VAR in the form of an error correction model (VECM):

ÿ=+ÿ+ÿ ÿ+...+ÿ ÿ+

Where is a vector containing the variables of interest (lnpib_pc, lngm and lnfbkf); is the constant; contains
the adjustment speed parameters (ÿ) and the coefficients of the cointegrating vectors (ÿ'); and, is the
error term. The choice of lags is based on the Akaike criterion. Because the Johansen (1998, 1991) and
Johansen and Juselius (1990) method requires that the variables have the same order of integration, I(1),
the traditional Augmented Dickey Fuller [DFA] unit root tests are implemented ( Dickey Fuller, 1979) and
Phillips and Perron [PP] (Phillips and Perron, 1988). The first uses the number of lags suggested by
Akaike's (1974) information criterion and the second specifies the Newey and West (1994) lags. In both
tests, the null hypothesis indicates that the time series have a unit root, 98
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while, the alternative states that the variables are stationary. Two cases are tested,
the first excludes the trend; and, the second, includes the trend and intercept terms.

The DFA and PP tests ignore the effect of structural breaks. According to Stock
and Watson (2012), when there are structural breaks, regression models can
generate misleading results. Specifically, Perron (1989) demonstrates that in the
presence of structural changes, standard unit root tests are not consistent or lose
power. Consequently, the Zivot and Andrews [ZA] (1992) test is implemented,
ideal for taking into account a structural break. The null hypothesis states that the
series contains a unit root with the absence of structural changes and the
alternative suggests that the series is generated by a stationary process with an
endogenously determined structural break.
In relation to the limits test, it is carried out based on the estimation of an
Autoregressive Distributed Lag (ARDL) model. The ARDL approach provides
consistent estimates of the long-run coefficients regardless of whether the
regressors are I(0) or I(1) and is better suited to small samples (Pesaran and Shin,
1997; Pesaran and Shin, 1999; Mah 2000). The limits test does not require
knowing, in principle, the order of integration, since it is used when the series are
I(0), I(1) or mutually cointegrated.
The null hypothesis indicates that there is no relationship in level and is rejected when
the F ot statistics are greater than the highest critical value. The test is inconclusive
when the statistics fall between the lower and upper limits of the critical value; and, it
cannot be rejected when the statistics are less than the lowest value of the critical value
(Pesaran, Shin and Smith, 2001). The test is performed on the estimation of the following ARDL equation
in the form of an error correction model:

ÿ1 ÿ1

= ÿ( ÿ

+ ÿ
+
0 ÿ1 ÿ1
) + ÿ yi ÿ

+ÿÿ ÿ

=1 =1

Where is the dependent variable (lnpib_pc); 0 is the intercept; corresponds to the control variables;
represents the adjustment speed coefficient; and, the long-term coefficients. The validity of the test
depends on the non-violation of the assumptions of normality, absence of correlation and homoscedasticity
of the residuals, and stability of the coefficients over time (Kripfganz and Schneider, 2018).

To choose lags, different strategies are followed: i) the Akaike criterion and the
Bayesian information criterion are allowed to optimize; ii) if you choose a maximum
of 5 lags, from which the information criteria choose the optimal length of lags;
and, iii) one and two lags are imposed due to the sample size; The model is
chosen based on compliance with the specification assumptions. The critical
values used correspond to Kripfganz and Schneider (2020) because they cover
all sample sizes and lag lengths, and allow any number of variables to enter the
long-term relationship.

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The existence of cointegration implies that there must be a Granger causal relationship in at least one
direction, although causality does not necessarily guarantee a stable long-term relationship (Levendis,
2018).

Thus, two causality methods are implemented: i) Granger causality (1969); and, ii) causality according to
Toda and Yamamoto (1995). For the first method, a VAR model is specified with stationary variables, that
is, I(0). The second procedure is more flexible and has some advantages compared to Granger's (1969)
approach. It allows testing causal relationships by specifying a VAR with the variables in levels and
regardless of whether the series are stationary and the order of integration or cointegration of the
variables. In essence, it consists of increasing the maximum order of integration (dmax) to the optimal
length of lags k (k+dmax) (Toda and Yamamoto, 1995).

4. Results

The results section begins by presenting some descriptive statistics measures.

of the variables used in the econometric estimates (Table 2). The investment contains the highest average
and maximum value. Military spending presents a greater dispersion of data and exposes the lowest
value. GDP per capita exhibits the lowest standard deviation.

Table 2. Descriptive statistics

Standard
Variables Half Minimum Maximum
deviation

lnpib_pc 8,317 0.261 7,836 8,735

lngm 6,892 0.734 5,458 7,988

lnfbkf 23,044 0.543 22,089 24,061
Own elaboration

The unit root tests of DFA and PP are shown in Table 3.

Table 3. Unit root tests

Levels First Difference
Unit root With
Intercept Intercept With Order of
Variables tests trend
and and trend and Integration
and

no trend no trend intercept

intercept
DFA -1.293 -2,088 -3,801 *** -3,830 ** I(1)
lnpib_pc
PP -1,254 -1,808 -5,255 *** -5,275 *** I(1)
DFA -1.463 -2,518 -7,368 *** -7,341 *** I(1)
lngm
PP -1,344 -2,568 -7,365 *** -7,336 *** I(1)
DFA -0.778 -1,771 -6,869 *** -6,807 *** I(1)
lnfbkf
PP -0.728 -1,725 -6,843 *** -6,777 *** I(1)
**
Significance level *** 1%, 5%, * 10%.

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Both suggest that the level series contain a unit root, while they are stationary with the first difference.

By introducing a structural break, the ZA test confirms that all variables in levels have a unit root and by
applying the first difference they become stationary
(Table 4).

Table 4. Unit root test with a structural break

Levels First difference
Type of Order of
Variables Statistical
break Year Statistical t Year Integration
t

Intercept -3,621 1973 -5,672 *** 1977 I(1)

lnpib_pc Trend -2,932 1975 -5,309 *** 1974 I(1)
Both -3,545 1973 -6,545 *** 1977 I(1)

Intercept -3,797 1999 -7,846 *** 2002 I(1)

lngm Trend -3,234 1976 -7,370 *** 1970 I(1)
Both -3,834 1999 -8,051 *** 2002 I(1)

Intercept -3,206 1983 -7,859 *** 2000 I(1)

lnfbkf Trend -2,082 1998 -6,920 *** 1984 I(1)
Both -3,259 1983 Statistical significance -7,962 *** 2001 I(1)
*** 1%, ** 5%, * 10%.

Because the time series are I(1), the Johansen approach is viable and the results along with the bounds
test are presented in Table 5. Based on the two tests, the null hypothesis cannot be rejected, therefore, no
evidence of a long-term equilibrium relationship is found.

Table 5. Cointegration tests

Johansen test Limits test

Maximum
Trace Lenght of
Maximum range eigenvalue F-statistic
statistician lag
r statistic

0 17,027 11,455 2,396 2

Significance Significance
critical values I(0) I(1)
level level

1% 35,650 25,520 5,550 6,977 1%

5% 29,680 20,970 Statistical significance *** 1%, ** 5%. 3,926 5,102 5%
See Annex 1 for model specificationtests.

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Despite not finding evidence in favor of a long-term relationship, causality tests can still be done to
identify if military spending is a good predictor of the current values of the dependent variable.
Table 6 shows the results.
along with model specification tests.

Table 6. Causality tests

Method AND x F-statistic Probability
D_lnpib_pc D.lngm 0.888 0.350
D_lnpib_pc D.lnfbkf 0.147 0.703
granger D_lngm D.lnpib_pc 4.231 0.045
(VAR) D_lngm D.lnfbkf 5.349 0.025
D_lnfbkf D.lnpib_pc 1,068 0.306
D_lnfbkf D.lngm 0.720 0.400
lnpib_pc lngm 0.807 0.452
All and lnpib_pc lnfbkf 0.005 0.995
Yamamoto lngm lnpib_pc 3.886 0.027
(VAR lngm lnfbkf 2.031 0.143
increased) lnfbkf lnpib_pc 0.629 0.538
lnfbkf lngm 0.512 0.603
Post-estimation tests Normality Correlation Stability
VAR in differences 0.167 0.945 Stable
VAR increased in levels 0.692 0.583 Stable
Ho: X does not Granger cause Y

There are two unidirectional causal relationships from GDP per capita and investment to military
spending. The procedure proposed by Toda and Yamamoto (1995) confirms that the direction of
causality is from economic growth to military spending. The hypothesis that military spending does
not cause economic growth cannot be rejected.
This may suggest that the resources allocated to the defense sector depend on the performance
of the economy. The relationships found are statistically significant at the 5% level.
The post-estimation tests of the formulated VAR models indicate that there is normality, there is no
serial autocorrelation and they are stable.

For robustness of the results, the cointegration and causality tests are presented for the period prior to
the 1999 financial crisis in Table 7 and Table 8, respectively. The Johansen test does not allow us to
reject the hypothesis of the absence of a long-term relationship. In contrast, the limits test suggests that
there is a long-term relationship stable at 1% statistical significance; However, the model is estimated
with a high number of lags, so the results must be analyzed with caution.

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Table 7. Cointegration tests for the period 1960-1998

Johansen test Limits test
Maximum
Trace Lag length
Maximum range eigenvalue F-statistic
statistician
r statistic
15,338 10,301 9,355 *** 4
0 Significance
critical values I(0) I(1)
Significance level
level 1% 35,650 5% 29,680 25,520 6,128 8,249 1%
Statistical significance *** 1%, 20,970 4,068 5,624 5%
** 5%.

The Granger causality test indicates that there are two unidirectional causal relationships that come from
economic growth to military spending and investment. The Toda and Yamamoto procedure confirms that
the causal link is from economic growth to military spending. In general, the causal relationships for the
period prior to the crisis are similar to those found for the entire period, although at a level of statistical
significance of 10%.

Table 8. Causality tests for the period 1960-1998

Method AND x F-statistic Probability

D_lnpib_pc D.lngm 1,206 0.280

D_lnpib_pc D.lnfbkf 0.299 0.588

granger D_lngm D.lnpib_pc 2,900 0.098

(VAR) D_lngm D.lnfbkf 0.368 0.548

D_lnfbkf D.lnpib_pc 2,922 0.097

D_lnfbkf D.lngm 0.353 0.557

lnpib_pc lngm 1946 0.163

lnpib_pc lnfbkf 0.195 0.824

All and
Yamamoto lngm lnpib_pc 2,559 0.097
(VAR lngm lnfbkf 0.416 0.664
increased) lnfbkf 0.981 0.389
lnpib_pc
lnfbkf lngm 1,301 0.289
Ho: X does not Granger cause Y

In sum, the results in relation to the cointegration and causality approach contrast with the work of Kollias,
Paleologou, Tzeremes et al. (2017), where, for the Ecuadorian case, they found evidence in favor of
cointegration, but not causality between military spending and economic growth. The lack of consensus
may be due to the model specification, measurement of variables and the study period.

On the other hand, it supports the findings Kung and Min (2013) which presents evidence of
unidirectional causality from economic growth to defense spending.

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5. Conclusions

The present study examined the relationship between military spending and Ecuadorian economic
growth, for the period 1960-2019, through econometric techniques of cointegration (trace, maximum
eigenvalue and limit tests) and Granger chance, for series of time. The results suggested that there is no
long-term equilibrium relationship between military spending and economic growth. Likewise, a
unidirectional causality relationship was not evident from military spending to economic growth; on the
contrary, the causality came from economic growth. The causal relationships are robust to the specification
of the study period.

The few works that examine the link between military spending and economic growth
They do not do it exclusively for the Ecuadorian economy. Furthermore, in the analysis carried out, the
time horizon is longer and has more recent data, in relation to other known works. Therefore, this research
contributes significantly to the few works focused on analyzing the economic importance of the defense
sector in Ecuador.

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Annex 1. Specification tests of the VAR model and the ARDL model

Table A1. VAR model and ARDL model specification tests

ARDL testing VAR
Normality 0.97552 0.2024
Serial correlation 0.58349 0.4771
Heteroscedasticity - 0.0525
Stability Stable Stable

Annex 2. Growth and development data in Ecuador 1960-2019: Tables A2 to A4

Table A2. Gross Domestic Product (billion constant $), Population (thousands)
Production per capita ($ constant per inhabitant, at 2017 prices and parities).
Year GDP Population PH PH
Ecuador Ecuador Ecuador World
1990 84.85 10450 8120 9718
2000 103.69 12627 8212 11138
2010 155.23 2019 197.55 Source: 14990 10356 13899
World Bank (2024). 17344 11390 16877

Table A3 presents the evolution of the variables:

QMH = Real Added Value of manufacturing production per inhabitant
PH = Real value of the Gross Domestic Product per inhabitant
TYR = Educational level indicator (average number of years of schooling of the adult population.

Table A4 includes 5 positive quality of life indicators, on a decimal scale (0 minimum and 10 maximum),
as well as 2 negative quality of life indicators, which are not on a decimal scale.

Positive indicators, in decimal scale (0 minimum and 10 maximum):

X1=Satisfaction with life
X2= Voice of the citizens
X4= Peace Indicator: low values indicate conflict, high values indicate Peace
X5=Political Stability
X6=Economic Freedom (in decimal scale),

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Negative indicators of quality of life: Pollution and Homicides

X7=PM2.5 pollution indicator: Particles 2.5 microns per m3 of air.

X8=Intentional homicides per 100 thousand inhabitants

Table A3. Development indicators in Ecuador, 6 other Latin American countries and world
average: Manufacturing (QMH), Production (PH), Education (Tyr)
Country QMH QMH QMH PH PH Tyr Tyr
2000 2010 2015 nineteen ninety five 2019 nineteen ninety five 2019
Ecuador 1043 936 1208 8576 11371 6.25 8.9
Argentina 1544 2442 2277 17363 22064 8.12 10.9
Brazil 1347 1307 1036 11251 14759 4.18 8.0
Chili 1781 1496 1853 13288 24969 7.53 10.6
Colombia 965 1102 1176 9400 14585 4.68 8.5
Mexico 2414 2239 2609 14809 19701 6.37 8.8
Peru 950 1283 1294 6154 12854 6.92 9.7
Half World 1651 1723 2048 9886 16135 5.41 8.8
Source: Table 3.3 and other data from Guisán (2021), (2022) and (2023a,b). Prepared from the World Bank. Data
on Added Value of Manufacturing per inhabitant in the years 2000, 2010 and 2015
(QMH) are expressed in Dollars at prices and purchasing parities of the year 2005. PH95 and PH19 is the GDP
per inhabitant in the years 1995 and 2019, expressed in constant Dollars at prices of the year 2017.
Tyr is the average number of years of schooling received by the adult population.

Table A4. Development and quality of life indicators X1 to X8, year 2019
Country X4 x1 x2 X5 X6 X7 X8
Satisfied Voice Peace Stabi Freedom PM2.5 homie
tion ity Economic cides
Ecuador 5.76 4.12 4.89 4.5 5.4 14.9 5.85
Argentina 5.93 4.56 5.14 4.8 5.0 13.3 5.94
Brazil 6.33 4.10 3.93 3.6 5.3 12.7 29.53
Chili 6.17 6.98 5.42 5.0 7.4 21.0 3.46
Colombia 6.01 5.08 3.27 6.32 3.1 6.5 16.5 25.50
Mexico 4.68 3.45 3.3 6.4 20.9 19.26
Peru 5.84 4.52 4.92 4.7 6.6 24.8 7.67
Media Mundo 5.35 5.00 4.80 5.00 5.00 28.41 6.20
Source: Data from x1 to x6, expressed on a decimal scale, prepared by Guisán (2021). (2022). (2023a.b),
based on data published by the World Bank, and other statistical sources cited in said studies.

Regional and Sectoral Economic Studies: https://www.usc.gal/economet/eaat.htm

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