Re-Examining the Displacement Hypothesis for Military Expenditures with Fourier Unit Root Tests: The Fragile Five Case

Year 2025, Issue: 43, 54 - 71, 26.12.2025

Gülgün Çiğdem , Atilla Aydın , Funda Kara

https://doi.org/10.26650/ekoist.2025.43.1615917

https://izlik.org/JA66RF83SZ

Abstract

Public spending is profoundly affected by economic, political, and social shocks in the developing world, making it an extremely important measure of state and economic capacity. The most well-known of these—the displacement hypothesis, first advanced by Peacock and Wiseman (1961), posits that rapid and sustained public-spending increases during difficult periods ultimately alter fiscal conventions. This concept has been explored to some extent in relation to aggregate public expenditures, but in particular regarding the intricate aspects of military spending in poor and dependent economies, it remains under-researched. The present study revisits the displacement hypothesis, focusing specifically on military spending in the nations that have been dubbed the ‘Fragile Five” nations: Brazil, India, South Africa, Türkiye, and Indonesia, as they are the most vulnerable to global shocks, given their weak economies and institutional challenges. Instead, military spending is not only a strategic means of achieving objectives for political stability and national security despite a crisis but also a fiscal response vehicle during the crisis. These processes are captured and analyzed in this study by the ratio of military spending to gross domestic product (GDP) over time from 1960 to 2022 (and 1974 to 2022 in the case of Indonesia). The technique used in the study employs Fourier testing for unit roots (ADF, KPSS, Sollis, and Kruse versions), which is known to be a more efficient technique than linear-based tests when dealing with smooth and structural breaks in fiscal time series. These tests allow a more refined analysis to determine more precisely whether rises in military spending in the wake of a crisis constitute a temporary or permanent shift in spending policy. The findings support the displacement theory in the case of Indonesia and Turkey. The findings supporting the displacement hypothesis indicate that in Türkiye and Indonesia, military spending has continued to grow in the years that followed the crises/military coups. In contrast, Brazil, India, and South Africa show a reversion to pre-crisis levels of spending, which is also indicative of a less strict and expanding fiscal response. These tendencies are confirmed by descriptive statistics; while Türkiye and India are the countries with the highest spending ratios on average, Indonesia and South Africa have strong variance and are markedly positively skewed due to episodic fiscal spikes. In light of the sources of normality deviations in the case of Brazil and Indonesia, the Jarque-Bera test results may also reflect the breaking of economic structures despite crises. Furthermore, beyond the numbers, this is itself an important finding as it portrays more fundamental changes in the economic dynamics in/of fragile states. However, this study, more than anything, should be relevant in the literature for introducing the new way of analyzing defense expenditures’ conduct. Instead of assuming that all public spending is one undifferentiated mass, this paper makes a decision to separate out one form of spending, military spending, to see how the phenomenon of budget displacement works. This evidence has direct implications for policy, in that it raises questions about the manner in which post-crisis budget policies learn to address national security and development concerns. This sort of regional variation must be accommodated in the test of the relationship between the variety of factors tied with military spending and the formation of robust institutions and/or the nature of the crises to obtain a complex and fuller picture of how economies in fragile contexts respond to crises.

Keywords

Displacement Hypothesis , Military Expenditures , Fourier Unit Root Tests

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