The G.I. Joe Stimulus: Are U.S. Troops Good for Growth?

Garett Jones - Economist at George Mason University.  Follow him on Twitter: @GarettJones

Ever since Adam Smith entitled his book The Wealth of Nations, economists have tried to explain why some countries are so much richer than others.  One important channel, discussed in Acemoglu and Robinson's new book Why Nations Fail, is that outsiders come in and impose new rules of the game. Sometimes they impose good rules, sometimes bad.

Classic examples: North vs. South Korea, or East vs. West Germany.  In both cases, large numbers of U.S. troops were present in the countries that grew richer.  Might that be part of a larger pattern?  Have U.S. troops been a guarantor of good rules of the game?  Are U.S. troops a good predictor--maybe even a cause--of long-term economic growth?

With Hudson Institute economist Tim Kane, I looked into this question.  We found that countries with more U.S. troops had faster economic growth, the relationship was not small, and it wasn't just driven by post-war rebuilding.  Amity Shlaes did a great job summing up our work over at Bloomberg.

How is this troops-growth story supposed to work?  Kane and I have our own opinions -- troop presence is a reasonable sign of higher medium-term security (compared to the no-troop alternative) and U.S. military presence tends to spread U.S. institutions (an improvement for most countries). 

But research that follows up on our work shows that two particular channels may be quite important: Trade and foreign direct investment.  More troops predict more two-way trade between the U.S. and the host country; and more troops predict more FDI from the US to the host country. The second channel is probably extremely important for causing economic growth in the host country. FDI often brings valuable corporate skills to nations that need them.

Where security and better institutions exist, trade and FDI are likely to follow.  But there's something else at work here: Mental proximity. We tend to interact with people we are close to, and we tend to learn more from people we feel close to. And when U.S. troops are in a country, Americans probably feel closer to that country. 

The trade/troops study suggests that trade flows between the U.S. and countries that host American troops are higher than you'd expect based on the host's GDP, population, physical distance from the U.S., and other factors. 

Just as important: Foreign aid failed to predict trade. Kane and I found the same non-relationship between foreign aid and economic growth.  So while the muddled debate continues over whether foreign aid helps poor countries grow (summed up in Easterly's Elusive Quest for Growth) there's real evidence that a solid U.S. military presence predicts, and maybe even causes, long-lasting economic progress.