DEFENSE EXPENDITURES AND ECONOMIC-GROWTH IN ISRAEL - THE INDIRECT LINK

Evidence from Israel suggests that economic growth may benefit from in creased investment rates and cuts in defense spending - in other words , an economic 'peace dividend'. Recent scholarly work, however, focusi ng on short-term, direct impacts, has provided little evidence for the existence of such a peace dividend in other parts of the world or in Israel itself. In this article, we address these competing views by ex ploring some important in-direct, longer-term effects of defense spend ing on the Israeli macroeconomy. Our results indicate that a short-ter m focus fails to reveal the process through which a small, positive ec onomic peace dividend appears to be operating in Israel. Rather, the m ain features of this process are indirect, long-term, and nuanced, ope rating through investment, delayed several years, with non-military go vernment spending acting as a crucial intervening variable in the proc ess. Whether the decline of defense spending will continue to be assoc iated with rapid economic growth in Israel is problematic. However, li ke the defense-economy linkage in Israel, so too may the peace dividen d operate indirectly and only in the long term. Our analysis shows tha t these linkages are not static, but change in important and dramatic ways over time.