Sri Lanka's Peace Dividend: What the Numbers Say

Throughout its long years of civil war, Sri Lanka maintained a healthy rate of GDP growth and increasing levels of military spending. Now that the war has ended, Sri Lanka faces the challenge of rebuilding and switching to a peace-time economy with potentially lower levels of defense spending. We employ a cointegration analysis to examine the relationship between non/military spending in Sri Lanka and identify the possible economic benefits of decreased military spending. We find that GDP growth in Sri Lanka is generally not responsive to military spending, but may be significantly boosted by non-military spending. This is encouraging regarding the possible economic benefits of peace in Sri Lanka, but also raises disturbing questions concerning the economic potential squandered through many years conflict there.