Is Geopolitical Risk a Reason or Excuse for Bigger Military Expenditures?

Abstract

This study aims to investigate the relationship between military expenditures and geopolitical risk using the Panel Fourier Toda-Yamamoto Causality test over the 1993-2020 period. Considering structural changes, the findings reveal that geopolitical risk fluctuations in Colombia, India, South Korea, Russia, Saudi Arabia, Ukraine, and the USA affect military expenditures. Conversely, the results point out that for Chile, Israel, Russia, Taiwan, and the UK, military expenditures appear to cause geopolitical risk. This highlights that changes in military spending across nations trigger an arms race due to the perception of increased threat by neighbours and/or interest groups. In a nutshell, the results show a complex interplay between military expenditures and geopolitical risk, where changes in one can affect the other. Based upon this, policymakers must prioritize diplomacy, utilize international mediation/peacekeeping initiatives, develop military alliances, and commit to non-threatening military expenditures for regional stability.