Guardians of (In)Equality: Unmasking the Role of Military Spending in Shaping Income Inequality

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.