Do the state of governance, military expenditure, institutional quality and economic growth have temporal causal links?

Abstract It is widely acknowledged that quality institutions and strong governance measures are critical to ensure the assets of the country are managed effectively and yield a higher return on value to all stakeholders in the economy. The primary objective of this study is to study the complex relationships between institutional quality, state of governance, military expenditure, and economic growth in 79 low-income countries over the period 2005-2019. Here, we assess if military spending in these countries contributes positively or negatively to economic growth, in the presence of institutional quality and state of governance variables. We use a panel causality test embedded in the panel vector error-correction model for this purpose. The study shows there are strong endogenous and varied links between the variables in the short run. The long-run links are more straightforward: institutional quality, state of governance, and military spending have a strong impact on the economic growth trajectories of the sample countries. The key policy implications from this study are that policymakers should pursue co-development policies that simultaneously improve institutional quality and state of governance, and allocate military expenditure optimally to ensure long-term economic growth. JEL Classification : O43, O16, E44, E31