The Effect of Military Expenditure on Economic Prosperity in Croatia

The objective of this study was to empirically evaluate the impact of military spending on the economic well-being of the Croatian economy. The objective of the study was as well to find out if military expenditure could bolster the economic growth. Croatia has been among the European nations with significant military expenditures over the past three decades. However, these expenses have substantially decreased due to successful peace initiatives and the country's accession to the European Union. Reflecting on Croatia's history, notably during the Croatian War of Independence, the government significantly augmented its military expenditures. The sample period of the study was for 40 years from 1981 to 2020. An applied econometrics methodology called the 2-Stage Least Squares with Instrumental Variables was utilised in the study. In the first stage, instrumental variables were used to instrument for the endogenous regressors. In the second stage, the predicted values obtained from the first stage were used as explanatory variables in the main regression equation. The study found that the effect of military expenditure on the economic prosperity of Croatia was positive and highly statistically significant. The study addressed an empirical gap in the literature by integrating distinctive characteristics into the model concerning the long-term relationship between Croatia's military expenditure and economic growth. These factors enhanced empirical accuracy and instilled confidence in the broader and diverse literature concerning military expenditure and economic growth. The implication of this study is that investing in the military provides an enabling environment for economic growth to increase.