From Exports to Defense Spending: Indirect Economic Channels in Israel–MENA Trade

This study examines whether exports from Israel to MENA countries influence Israel’s military expenditure indirectly through Israel’s economic growth during the period 1995–2023. The analysis is conducted for three samples: the aggregate MENA region, MENA countries with diplomatic relations with Israel, and MENA countries without diplomatic relations with Israel. Using Ordinary Least Squares (OLS) estimation and Wald tests, the results indicate that growth in Israel’s exports to the aggregate and diplomatic MENA samples contributes positively to Israel’s economic growth, which in turn significantly increases military expenditure. The indirect effect of exports on military expenditure through economic growth is found to be positive and statistically significant in these two samples. By contrast, no significant direct or indirect effects are observed for trade with non-diplomatic MENA countries. Overall, the findings suggest that trade can influence military expenditure indirectly through economic growth, particularly where stronger diplomatic and economic ties exist.