GLOBAL TRANSFER OF ARMS TECHNOLOGY AND ITS IMPACT ON ECONOMIC GROWTH

I. INTRODUCTION In a broad sense, technology is defined as the differences in productivity across nations (Fuhrer and Little, 1996). It is well known that technologies are embodied in physical capital. The adoption of the definition also suggests that technologies are embodied in human capital, which includes technical knowledge and labor skills, and organizational and managerial abilities as well as economic culture. Technology can be created domestically through innovation. International transfer of technology can be made through contractual arrangements such as licensing, direct foreign investments, and joint ventures. Such arrangements are made not only between businesses to transfer commercial technology but also between countries to transfer military technology (Cole and Cooper, 1996). One country also can obtain technology from another country through technology diffusion, which can be viewed as a spillover process. Jaffe (1996) suggests that there are three types of spillovers: (i) knowledge spillovers, (ii) market spillovers, and (iii) network spillovers. Knowledge spillover refers to the use of the knowledge of one agent by another with or without compensation minus the value of the knowledge. An example of this type of spillover is the departure of an economic agent from one firm to assume a position in another firm or to create a business. The career change of the agent is accompanied by a flow of knowledge from one firm to another. The impact of market spillovers occurs when new products, improved products, or existing products are marketed below their respective intrinsic value. Thus, market spillovers are expected to result in consumer surplus and cost saving. A product has a network spillover effect if its arrival is critical to the development of many technology-related products or businesses. The economic impact of arms trade on the importing countries is difficult to measure (Ferrari et al., 1987). Benoit (1973) and Neuman (1979, 1985, and 1993) suggest that arms trade accelerates economic growth, while Ball (1981, 1983) and Lim (1983) take the opposite view. The controversy is far from settled (Ferrari et al., 1987; Chatterji, 1992). Philosophical, cultural, and political differences aside, the use of different database, variables, and analytical tools contributes to this long lasting controversy. Surprisingly, none of the above-cited studies links arms trade to recent theoretical developments in technology transfer and economic growth. Thus, their conclusions lack theoretical underpinning and justification. The purpose of this paper is to provide a theoretical framework to estimate the impact of arms trade on economic growth. These impacts are measured in terms of technical changes, efficiency changes, and Malmquist indices. Because the model adopted for this study is non-stochastic, the impacts of arms trade on economic growth cannot be expressed in statistical terms. II. LITERATURE REVIEW The general technology level of an arms-importing country may be upgraded through the transfer of defense technology. This transfer may lead to human capital improvement, infrastructure construction, and installation of dual-use equipment in the recipient country (Neuman et al., 1979; Neuman, 1985; Neuman and Sahu, 1993). Estimating the impact of arms trade on economic growth requires an understanding of how the transfer of military technology affects the growth rate. The first attempt to link growth theory to military spending was made by Lim (1983), who incorporated the defense expenditure into the Harrod-Domar model. Because technology is not specifically taken into consideration in this strain of growth theory, the use of the Harrod-Domar growth model, in retrospect, might be questionable theoretically. However, this issue of technology and growth has been addressed by the neoclassical growth theory. The growth models proposed by Solow (1956) and Swan (1956) explicitly takes technology into consideration. …