The Nexus Between Conflict, Trade Openness, and Economic Growth: Evidence from Developing Countries Using Driscoll–Kraay Standard Errors

Abstract

This study examines how conflict and trade influence economic growth in developing countries. It uses panel data for 96 countries across Asia, Africa, and Latin America over the period 1982 to 2024. The analysis applies panel data techniques, including pooled OLS, fixed effects, and random effects models. Model selection tests support the fixed effects specification. Diagnostic tests detect autocorrelation and heteroskedasticity. To address these issues, the study employs Driscoll and Kraay standard errors to obtain robust estimates. The results show a consistent negative relationship between military expenditure and economic growth. Higher military spending reduces both GDP and national income. In contrast, trade openness and merchandise exports are positively associated with growth. Physical capital and secondary school enrollment also contribute positively. The findings suggest that conflict diverts resources away from productive activity, while trade integration supports expansion through market access and specialization. Policies that limit unproductive military spending, strengthen institutions, and promote trade and investment can help sustain growth in developing economies.