National Defence Under Alternative Trade Policy Regimes: Theory and Evidence from Developing Countries

AuthorTonmoy Chatterjee,Nilendu Chatterjee
Publication Date01 Feb 2021
National Defence Under
Alternative Trade Policy
Regimes: Theory and
Evidence from
Developing Countries
Tonmoy Chatterjee1 and
Nilendu Chatterjee2
Defence mechanism for any nation is the way through which internal as well as
external geo-political condition can be stabilised. Moreover, defence sector can
also be treated as one of the most potential sectors regarding financial transac-
tions and the relevance of it is valid both in autarky and in the regime of inter-
national trade. Using Granger Causality for a panel of 27 developing countries
across Asian and South American continents, we have found that different trade
measures are playing major role in the way of functioning of national defence.
For further analytical purpose and also to select the most effective trade policy
regime among the alternatives, we have adopted a trade theoretic framework.
In this regard, we have used a four-sector general equilibrium trade model with
special emphasis on defence as well as R&D to defence to illustrate the impact of
trade liberalisation on defence system. From such setup and by using bootstrap
policy simulation we have found that trade liberalisation in the form foreign direct
investment (specific to the R&D to defence) as the most effective trade regime
to claim gains from trade in the presence of defence dualism for any small open
developing economy. Such comparative statics is critical from the policy perspec-
tive. Policymakers should be cautious before defence industry liberalisation.
JEL Codes: H56, C33, F11, F14, F21, D58
1 Department of Economics, Ananda Chandra College, Jalpaiguri, India.
2 Department of Economics, Bankim Sardar College, South 24 Parganas, India.
Corresponding author:
Nilendu Chatterjee, Department of Economics, Bankim Sardar College, South 24 Parganas, West
Bengal 743329, India.
Foreign Trade Review
56(1) 31–59, 2021
© 2020 Indian Institute of
Foreign Trade
Reprints and permissions:
DOI: 10.1177/0015732520961346
32 Foreign Trade Review 56(1)
Defence, R&D, trade policy, panel Granger causality, Dumitrescu–Hurlin panel
causality, general equilibrium
Defence expenditure or military expense is one of the most important issues for
any economy. It generally takes up a part of GDP, which, in some cases, is even
more than the share of health or education, and thus generates conflict among the
politicians and economists. The conflict lies in the fact that whatever resource
defence sector uses up generates an opportunity cost for other sectors. Again,
more expenditure on defence may claim bar in front of growth paths of an econ-
omy (Eshag, 1983; Fontanel, 1995; Giray, 2004; Looney, 1997). However, one
cannot deny the fact that a nation needs military security and its improvement for
being on the safe side from domestic and external threats. Post–Cold-War era has
seen a considerable fall in the defence expenditure in a few parts of the world,
whereas other parts have seen an upsurge along with few wars as well. Of late,
defence expenditure has again gained an upsurge, especially, on parts of the
developing nations. In 2017, global military spending has witnessed a growth rate
of 1.1 per cent (Stockholm International Peace Research Institute), which is high-
est ($1.739 billion) since the end of cold war. In 2017, we have witnessed four
developing nations, namely, China, Saudi Arabia, India and South Korea, ranked
amongst the top 10 nations in defence spending (World Economic Forum).
Nations have realised that poor military base could result in domestic conflicts,
oppression and uncontrolled agitation from anti-national groups coupled with
various severe problems at the global level. Therefore, many nations have
increased their expenses on defence because of tensions in their national bounda-
ries, or to be in the safe-zone against its powerful rival neighbours, or even for
announcing itself as one of the best military powers in the world (Hacıoğlu et al.,
2013). There are developing nations which are, right now, important regional
players or on the verge of transubstantiating from being a regional player to the
one with global importance.
Regarding military expenditure for developing nations, we mostly get data
on the expenditure as a whole and not on its components, such as wages and
salaries of the military personnel, R&D undertaken for defence sector, etc. It is
quite obvious that due to the lack of infrastructural facilities and underdevel-
oped manufacturing sector within domestic economy, developing nations gen-
erally import a huge part of military equipment which use up a considerable
amount of foreign exchange reserves and therefore making the opportunity cost
of defence expenditure even more important. But, globalisation has made it
somewhat easier. FDI in defence sector is an important aspect now for almost
every developing nation. This has twin positive impacts on the developing
nations—first, it gets foreign investment or precious foreign currency and sec-
ond, it gets upgraded foreign technology to strengthen its defence base. FDI

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