MILITARY EXPENDITURE AND INVESTMENT FLOWS IN SUB-SAHARAN AFRICAN COUNTRIES: DOES CROWD-OUT EFFECT EXIST?
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Abstract
This study examines the effect of military expenditure and insecurity on investment flows in Sub-Saharan Africa (SSA) from 2000 to 2023, focusing on both domestic investment and foreign direct investment (FDI). The analysis reveals a dual impact of military spending: while it positively influences domestic investment, supporting the crowd-in hypothesis, it has a negative impact on FDI, confirming the crowd-out hypothesis. Insecurity further exacerbates the negative effect on FDI, signaling instability to foreign investors.
However, military expenditure can restore investor confidence domestically by improving security and fostering a safer environment for long-term investments. The study also explores the interaction between military spending and insecurity, finding that increased military expenditure in the presence of insecurity deepens the adverse effects on both domestic investment and FDI.
These findings suggest that military expenditure alone cannot resolve the region’s security challenges and could harm foreign investment prospects. The study concludes that while military spending may boost domestic investment, it deters foreign investors, particularly in insecure regions. Policymakers are advised to adopt comprehensive approaches, including institutional reforms and conflict resolution strategies, to mitigate the impact of insecurity and create a more conducive environment for investments in SSA.
Keywords: Crowd-out, Expenditure, Investment flows, Insecurity, Military, SSAJEL CODE: E6, F2, H5