Defence Spending and Income Inequality in Taiwan

Abstract

The rising trend in income inequality has recently attracted a renewed interest in the determinants of this growing trend across many countries. This article adds to the debate by investigating the impact of defence expenditure as a possible determinant of inequality in Taiwan, a country once was considered to be a poster child of an equitable growth, but now income inequality has become one of the Taiwan’s growing challenges. Applying the bounds test approach to cointegration and four long-run estimators for the period from 1976–2011, we found a long-run relationship between the various measures of inequality and defence expenditure where defence expenditure exerts a positive and a statistically significant impact on the worse income inequality in Taiwan. Further application of the lag-augmented causality test procedure also reveals a unidirectional causality running from defence expenditure to income inequality with defence expenditure causing income inequality to rise.

Keywords:

• Bounds test
• Defence spending
• Granger causality
• Income inequality
• Taiwan

• JEL Codes
• C22
• H56

ACKNOWLEDGEMENTS

Useful comments and suggestions by an anonymous referee are gratefully acknowledged. I am also grateful to Professor Kollias, the Editor for his encouragement. The usual disclaimer applies.

Notes

¹ For an excellent review of the evolution of Taiwan’s defence strategies and policies, see Lin, Wu, and Chou (2012).

² The methodology used here parallels Wolde-Rufael (2009).