Original scientific paper
https://doi.org/10.1080/1331677X.2021.1931913
Military industry bubbles: are they crowding out utility investments?
Yingying Xu
Zhixin Liu
Chiwei Su
Stefea Petru
Abstract
The rapid growth in defence expenditure in China raises the concern that investments in the defence sector crowd out investments in social sectors, i.e., the ‘guns for butter’ argument. This
article resorts to the bubble testing method to study the trade-off
between defence and utilities sectors in the Chinese capital market. Based upon the generalized sup Augmented Dickey-Fuller
(GSADF) test, this paper captures and date stampings explosive
behaviors in defence and utilities industries using stock indexes.
Empirical results reveal bubbles for defence and utilities sectors in
similar time periods, thus indicating that the factors driving explosive movements are alike for both sectors. However, bubbles in a
certain sector do not necessarily crowd out investments in the
other sector. Through testing bubbles in the ratio of stock indexes
of two sectors, we find that the explosive episodes vanish. The
results indicate that the crowding-out effect between defence
and utilities sectors does not exist in the Chinese capital market.
Increases in the military expenditure in China are necessary to
safeguard the national security because of frequent geopolitical
conflicts and terrorism. However, the defence to utilities ratio is
increasing rapidly, implying the possibility that excessive growth
in military expenditure may generate the ‘guns for butter’ problem, which can be detrimental to economic growth.
Keywords
Crowding-out; bubble; military industry; utilities; GSADF
Hrčak ID:
302015
URI
Publication date:
31.3.2023.
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