Defense Expenditure and Income Inequality: Evidence on Co-integration and Causality for China

Abstract

There are conflicting views as to the relationship between a nation’s defense expenditure (DE) and its population’s income inequality (INEQ). DE, always an important part of government budget, can easily crowd out transfer payments, necessary to improve INEQ; however, these payments may also create a demand that may raise the income levels of the lower income earners. Consequently, the relationship between DE and INEQ is an important question. This paper examines the relationship between DE and INEQ in China for the period of 1989–2012. Utilizing basic cointegration and causality tests, our objective is to add to the literature by providing evidence that China’s DE, in fact, do have an impact on INEQ.

Keywords:

• Defense expenditure
• Income inequality
• Granger causality
• China

JEL Codes:

• H56
• D30

Acknowledgments

This paper is supported by National Social Science Foundation Project (11BJY134) & NUDT Excellent PhD Students Foundation. The insightful comments of an anonymous referee on an earlier version are gratefully acknowledged.