1 Using the Feder-Ram and Military Keynesian Models to Examine the Link between Defence Spending and Economic Growth in Sri Lanka by Albert Wijeweera 1 and Matthew J. Webb 2 This study uses the Feder-Ram, model in conjunction with the military Keynesian model to examine the nexus between defence spending and economic growth in Sri Lanka, which was embroiled in a vicious internal war with a formidable separatist movement for about three decades. We find that the Keynesian aggregate demand model is better suited to analyze the link than the Feder-Ram model for the case of Sri Lanka. Based upon our results we expect a higher economic growth rate in Sri Lanka if more public resources are diverted from the defence to civilian sectors of the economy, now that the war between the government and separatist group has come an end. However, recent post war events cast doubt upon whether a diversion of sources from military to non-military will actually occur. We conclude that the sanguine predictions of our economic analysis are entirely dependent upon the political decisions of the Sri Lankan government for their realisation. JEL Codes: C23, O47 1. Introduction Studies investigating the nexus between defence spending and economic growth have of late paid more attention to the case of Sri Lanka, a small island nation in the Indian Ocean, for a number of reasons. First, the government there recently won a civil war that had lasted for almost three decades against a formidable separatist guerrilla movement that possessed its own a naval and air wings in addition to a large number of dedicated, well-trained troops including hundreds of suicide bombers. Second, compared to other conflict-ridden developing countries, Sri Lanka possesses a reasonably long time series data set that can be used to estimate econometric models and make more valid statistical predictions concerning the relationship between defence spending and economic growth. Third, and finally, because Sri Lanka was able to maintain a healthy economic growth rate throughout its bloody separatist conflict, the advent of peace promises heightened economic growth following the reallocation of resources from the less productive defence sector to the more efficient civilian sector. Against this promise of a brighter economic future, however, the victorious government has opted to bolster its military capabilities by enlisting more army personal and signing a USD 300 million loan contract to purchase military hardware from Russia (BBC, 6 February 2010). In addition, violent protests between government and opposition party supporters have escalated after the recently concluded presidential election and arrest of the defeated presidential candidate. These events re-emphasise the question of exactly what effect the end of Sri Lanka’s civil war will have upon its economic fortunes. Several studies have attempted to unravel the relationship between defence spending and economic growth in Sri Lanka. However, only a handful of them have conducted a rigorous econometric analysis. Wijeweera and Webb (2009) for instance, employ a vector autoregression analysis to examine the link between the two variables and find that, compared to non-military spending, military spending exerts only a minimal positive impact 1 Albert Wijeweera, College of Arts & Sciences, Petroleum Institute, Abu Dhabi, UAE. Email: awijeweera@pi.ac.ae 2 Matthew J. Webb, College of Arts & Sciences, Petroleum Institute, Abu Dhabi, UAE. Email: mwebb@pi.ac.ae