Impact of Arms Production on Income Distribution and Growth in the Third World

Abstract

While common sense suggests that increased defense expenditures are likely to harm a less developed country's (LDC's) development efforts, economic theory does not provide any clear prediction of how the net impact of an increase in the military burden would influence growth, development, or welfare. 1 Classical theory, for example, would predict on the basis of resource allocation that increases in defense will decrease investment and/or civilian consumption and thus reduce growth or welfare. Keynesian theory, on the other hand, implies that in the presence of inadequate effective demand the operation of the income multiplier would imply an increase in national product, resulting from additional defense expenditures. Thus, there are purely economic rationales for increased military spending. More specifically, for economies operating with substantial excess capacity, additional demand and output from expanded military expenditure will increase capacity utilization, thereby increasing the rate of profit and possibly accelerating investment. Whether in the short and long run the former or latter effect dominates will determine the final outcome of defense on growth.