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Relationship between oil price volatility and military expenditures in GCC countries

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Abstract

Natural resource-rich countries transfer more sources to military expenditures due to extreme security concerns. As public revenues have declined due to the decline in oil prices, military expenditures have been cut in many countries. Nevertheless, this is not valid for all countries. Even in some countries, despite the decrease in oil prices and volatility, military expenditures increase. The aim of this study is to investigate the relationship between volatility in oil prices and military expenditures in GCC countries (United Arab Emirates, Bahrain, Qatar, Kuwait, Saudi Arabia, and Oman). The analysis period was determined differently for each country depending on the availability of data. UAE and Qatar were excluded from the analysis as the defense expenditures data of these countries could not be provided regularly. ARDL model was preferred for the research. According to the bound test results, there is a cointegration relationship between the variables in all countries. Besides, the long-term results showed that the volatility in oil prices in all countries, except for Bahrain, positively affects military expenditures. The error correction model indicated that there is a reverse relationship between oil price volatility and military expenditures. These findings indicated that despite the volatility in oil prices, military expenditures in GCC countries are not reduced.

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Notes

  1. Bove and Brauner (2016) found that the transfer of sources to military expenditures and the use of military expenditures as an instrument in the countries governed by the autocratic regime may differ according to the types of these regimes. The authors divided the dictatorship regimes into three groups: the military regime, single-party states, and the personalist regime. By analyzing the data of the 64 countries governed by these regimes for the 1960–2000 period, the authors found that military expenditures were the highest in military regimes but the lowest in personalist dictatorships.

  2. The problem of the natural resource curse is expressed in the literature by the concept of the resource curse hypothesis. According to this hypothesis, the abundance of natural resources negatively affects economic growth. Auty’s (1994) and Sachs and Warner’s (1995) studies on the natural resource hypothesis are the pioneer studies to contribute to the development of the literature. There is a large literature investigating the validity of this hypothesis. See, for example, Apergis and Payne (2014), Tiba and Frikha (2018), and Bildirici and Gokmenoglu (2019).

  3. One of the main reasons for volatility in oil prices is the war threat of the regions that oil-exporting countries are located. For example, the long-standing conflict between the USA and Iran triggers oil supply instability and oil price fluctuations (Estrada et al. 2020).

  4. When calculating the annual volatility, the maximum value for each year is also calculated. In addition, the total volatility variable was created for each year, and each variable was estimated separately in the models. The analysis results were similar.

  5. In order to take into account the impact of the Gulf War, models for Kuwait were estimated including the dummy variable for 1990 and 1991.

  6. CUSUM and CUSUMSQ tests were used to determine whether regression coefficients follow a stable path and no structural break was determined in regression coefficients. These test results were not reported to save space.

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Authors and Affiliations

  1. Department of Economics, Faculty of Political Sciences, Istanbul Medeniyet University, Istanbul, Turkey

    Seyfettin Erdoğan & Ayfer Gedikli

  2. Department of Economic, Faculty of Economics and Administrative Sciences, Tekirdag Namik Kemal University, Tekirdag, Turkey

    Emrah İsmail Çevik

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  1. Seyfettin Erdoğan
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  2. Emrah İsmail Çevik
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  3. Ayfer Gedikli
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Correspondence to Ayfer Gedikli.

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Erdoğan, S., Çevik, E.İ. & Gedikli, A. Relationship between oil price volatility and military expenditures in GCC countries. Environ Sci Pollut Res 27, 17072–17084 (2020). https://doi.org/10.1007/s11356-020-08215-3

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