Can buying weapons from your friends make you better off? Evidence from NATO

In this paper we analyse the effect of multilateral defence alliances and arms trade on economic growth of allies. Previous literature shows that military alliances may improve institutional development and efficiency in defence budget allocation, with consequent enhancement of economic performance. We postulate that importing advanced weapons from allies can bring about technology diffusion. This conjecture is developed theoretically assessing the effect of arms imports on domestic military technology and output. The model is tested for the countries that have a partnership relationship with the North Atlantic Treaty Organization for years 1990 to 2019. We confirm empirically the theoretical suggestion of military technology spillovers, namely, that imports of frontier technology arms from allies, have positive effects on output and productivity through a diffusion of foreign knowledge. Our findings imply that policy makers should have in mind that foreign policy issues, security matters in this case, can interact with economic goals.

Automated summary

In this paper, we analyze the impact of multilateral defense alliances and arms trade on the economic growth of allied countries. Previous studies have shown that military alliances can improve institutional development and efficiency in defense budget allocation, leading to enhanced economic performance. We propose that importing advanced weapons from allies can facilitate technology diffusion. Through theoretical analysis and empirical testing on countries in partnership with NATO from 1990 to 2019, we confirm the positive effects of importing frontier technology arms on output and productivity through the diffusion of foreign knowledge. Our findings highlight the interaction between foreign policy, particularly security matters, and economic goals.