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Defense Spending and Economic Growth : A Causal Analysis for an oil-rich country , Saudi Arabia

The causation relationship between economic growth and military expenditures in developing countries has received growing focus in recent years. One of the arguments in this field is that military spending absorbs a significant proportion of the limited financial resources in LDCs. The present study examines the causal relation in two models: defense spending with total real economic growth and defense spending with non-oil real growth, in the case of an oil-rich country, Saudi Arabia, for the period 1970-2003. Using Johansen’s cointegration procedure, VECM, and standard Granger causality, the study showed that bidirectional causality exists in the two models. Moreover, the dynamic effect of one variable on the other beyond the sample period was assessed.