Guardians of (In)Equality: Unmasking the Role of Military Spending in Shaping Income Inequality
-
Nadezhda V. Baryshnikova
and
Shuhrat Yarashov
Abstract
For the last three decades, the ex-Soviet republics have been facing a dual challenge: moving away from communism and dealing with a tricky geopolitical reality. In this context, it is interesting to investigate the role that military spending in shaping the inequitable income distribution of their societies. Employing Two-way fixed effects and Two-stage least squares models, we estimate the causal relationship between these variables, mitigating concerns about endogeneity and shedding light on potential mechanisms at play. Our analysis reveals a generally positive effect between military expenditure and income inequality, where increased military spending appears to lead widening the income inequality gap in our sample countries context. However, the opposite one another effects emerge while we estimate high- and middle-income countries separately. For the high-income countries, defence expenditure is mitigating the income gap, while it is deepening the situation in the middle-income countries case. Further, we also disaggregate military expenditure and income distribution indicators into subsets in order to provide more detailed understanding of the mechanisms underlying this relationship. Notably, our decomposition techniques yields that focusing on troop number expansion and their welfare within military expenditure can exacerbate income inequality while prioritizing investment in the military-industrial complex, particularly heavy weapons manufacturing, can reduce such disparity. Finally, we employ the number of granted patents as a mediating factor to reveal the basic mechanism of this linkage. This approach demonstrates the presence of crowding-out and spillover effects, depending on the context. These insights offer valuable guidance for informing public policy discussions on equity and efficient resource allocation, especially in the context of our sample states where they are trying to maintain a balanced approach.
A Appendix: Variables Information
Definition, relevance, and source of variables.
| Definition | Relevance | Source |
|---|---|---|
| Voice and accountability, % rank from 0 to 100 | This indicator captures democratic governance and citizen participation, which can influence both social justice and income distribution. Higher values often correlate with lower income inequality. | World Development Indicators |
| Rule of law, % rank from 0 to 100 | An effective rule of law supports equitable economic development and protects property rights, which can impact the distribution of income across society. | World Development Indicators |
| Political stability, % rank from 0 to 100 | Political stability fosters a conducive environment for economic development, which in turn can affect the fairness of income distribution. Instability can widen income inequality. | World Development Indicators |
| Total export of raw materials, % of total export | Economies that rely heavily on raw material exports often experience unequal wealth distribution, as resource wealth is frequently concentrated among elites. This makes it a critical control in the context of our sample. | World Development Indicators |
| Gross saving of GDP, % of GDP | Savings rates are a proxy for financial stability and development, which can have significant distributional effects within a society. Higher savings can be associated with lower inequality. | World Development Indicators |
| Net migration of people, mln people | Migration flows can alter the labor market, affecting wages and unemployment, which directly impacts income inequality, especially in countries undergoing rapid economic transition. | World Development Indicators |
| Rural population, % of total population | A higher rural population is often associated with less income inequality, as rural areas tend to have a mitigation power in the context of supply and demand of resources in macro level, infrastructure expansion, and job opportunities. This is a key demographic control. | World Development Indicators |
| Rail lines, length in Tkm | Infrastructure, represented by rail line length, facilitates economic activity and market access, which can help reduce inequality, particularly in transitioning economies. | World Development Indicators |
| Tax revenue of GDP, % of GDP | Tax policies are a crucial mechanism for redistributing the income. Higher tax revenues are often associated with greater redistribution efforts, reducing inequality. | World Development Indicators |
| Conflicts dummy, which is defined as the use of armed force between two parties that results in at least 25 battle deaths in a year. | Conflicts devastate economies, exacerbate poverty, and worsen income inequality. This dummy variable captures whether a country experienced conflict in a given year. Specifically, our investigation of military spending influence on income inequality, makes this variable one of the important controls. | UCDP/PRIO armed conflict dataset |
| Corruption ranking | Corruption tends to worsen income inequality by allowing the powerful people to pull the resources to themselves, which would otherwise be used for public welfare and redistribution. | Transparency international |
| International trade, % of GDP | Openness to trade can reduce income inequality by spurring growth, but it may also increase inequality if the benefits are unevenly distributed. | World Development Indicators |
| Inflation rate, in % | Inflation disproportionately affects lower-income groups, as their purchasing power diminishes, thus making it a crucial factor to control for in income inequality studies. Having hyperinflation cases within our sample increases the relevancy of this control variable. | World Development Indicators |
| Unemployment, in % | Higher unemployment rates tend to exacerbate inequality by reducing income for a significant portion of the population, making it a vital control variable. | World Development Indicators |
| Old-age dependency: 65 and older people share in the total population aged 15-64 | A higher dependency ratio increases the economic burden on the working population, which can influence income distribution and exacerbate inequality. | World Development Indicators |
| Economic freedom index, % rank from 0 to 100 | Economic freedom is associated with growth and wealth creation, but excessive freedom can lead to inequality if wealth accumulation is unchecked. Thus, it is included as a measure of regulatory balance. | Heritage Foundation |
| Mobile cellular subscriptions, per 100 people | Access to communication technologies facilitates economic inclusion, helping reduce barriers to employment and education, which can decrease inequality. | World Development Indicators |
| Education exp of GDP, % of GDP | Investment in education, as a main component of social expenditure, tends to reduce inequality by increasing opportunities for all segments of society to participate in economic growth. | World Development Indicators |
| GDP growth rate, in % | Macroeconomic growth affects income distribution, as higher growth can either lift all income groups or exacerbate the gap between rich and poor, depending on how wealth is distributed. | World Development Indicators |
B Appendix: Bootstrapping Results
Comparison of initial and 1,000 times bootstrapped results.
| Variable | Initial results | Bootstrapped results | ||
|---|---|---|---|---|
| Point estimate | Standard error | Point estimate | Standard error | |
| Panel A. 2FE model | ||||
| DefenceexpofGDP | 0.233*** | 0.064 | 0.233* | 0.126 |
| Control variables | Yes | Yes | ||
| R 2 | 0.90 | 0.90 | ||
| χ 2 | 3,465.83 | 5,340.41 | ||
| Panel B. 2FE-2SLS model | ||||
|
|
0.692*** | 0.121 | 0.692*** | 0.132 |
| Control variables | Yes | Yes | ||
| R 2 | 0.88 | 0.90 | ||
| χ 2 | 3,598.67 | 5,064.52 | ||
C Appendix: Correlation Matrix
Correlation Matrix of our three defence Measures.
| Defence in GDP (SIPRI) | Defence in GDP (BVC) | Militarisation index | |
|---|---|---|---|
| Defence in GDP (SIPRI) | 1.0000 | ||
| Defence in GDP (BVC) | 0.8273 | 1.0000 | |
| Militarisation index (BICC) | 0.7097 | 0.6937 | 1.0000 |
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Articles in the same Issue
- Frontmatter
- Advances
- A Matter of Minutes: Unexpected FOMC Communication and Fed Credibility
- Do Firm-Level Shocks Generate Aggregate Fluctuations? A Cross-Country Analysis
- Financial Frictions at Entry, Average Firm Size, and Productivity
- Healthy Grands, Fertility and Pensions
- Contributions
- Robust Optimal Monetary Policies in Behavioral New Keynesian DSGE Models
- On the Impact of Fiscal Policy on Inflation: The Case of Fiscal Rules
- Gini in the Taylor Rule: Should the Fed Care About Inequality?
- Housing Booms and Busts: Dissecting Housing and MBS Markets Linkages
- Guardians of (In)Equality: Unmasking the Role of Military Spending in Shaping Income Inequality
- Natural Disasters and Capital Accumulation: The Role of Precautionary Saving and Capital Market Openness
- Short-Run Impacts of Floods: A Case Study from India
Articles in the same Issue
- Frontmatter
- Advances
- A Matter of Minutes: Unexpected FOMC Communication and Fed Credibility
- Do Firm-Level Shocks Generate Aggregate Fluctuations? A Cross-Country Analysis
- Financial Frictions at Entry, Average Firm Size, and Productivity
- Healthy Grands, Fertility and Pensions
- Contributions
- Robust Optimal Monetary Policies in Behavioral New Keynesian DSGE Models
- On the Impact of Fiscal Policy on Inflation: The Case of Fiscal Rules
- Gini in the Taylor Rule: Should the Fed Care About Inequality?
- Housing Booms and Busts: Dissecting Housing and MBS Markets Linkages
- Guardians of (In)Equality: Unmasking the Role of Military Spending in Shaping Income Inequality
- Natural Disasters and Capital Accumulation: The Role of Precautionary Saving and Capital Market Openness
- Short-Run Impacts of Floods: A Case Study from India
