Does Military Spending Impede Income Inequality? A Comparative Study of Pakistan and India

Abstract

There are few empirical models that analyse the interactive relationship between defence spending and income inequality in economic theories (Meng, Lucyshyn, & Li, 2013). This proposition is addressed in the present study with sound statistical investigation by utilizing annual time series data from 1980 to 2014. The autoregressive distributed lag (ARDL) bound testing cointegration approach, Johansen and Juselius cointegration approach and Gregory and Hansen structural break cointegration approach altogether confirm the valid long-run relationship between military expenditure and income inequality in both countries. Results of long-run analysis also indicate the positive significant effect of military expenditure on income inequality in both India and Pakistan. A bidirectional causal relationship between military spending and income inequality is found from the variance decomposition method in case of India. However, for Pakistan, there exists a unidirectional causality of military expenditure with income inequality. The direction of this causal relationship is run from excessive military spending leading to higher income inequality in the country. Lastly, the results of rolling window analysis established that the coefficient of military expenditure remained positive for last 16 years, that is, from 1999 in both countries. The result endorsed that military spending is an essential factor of income inequality and, thus, the policymaker should focus on this option to regulate income inequality in Pakistan and India. Furthermore, policymakers should also emphasize on categorizing their budget expenditures on more social and developing welfare expenditure as an alternative to improve the standards of living and reduce the income inequality in Pakistan and India.