Moderating Effect of Terrorism in the Income Inequality-Military Expenditure Nexus: Evidence from Transition Economies

Prior studies point to a significant correlation between income inequality and military expenditures. This study started by questioning whether the impact of terrorism on this relationship may have been neglected. The main purpose of the study is to demonstrate whether the terrorism variable has a significant effect on the direction and strength of the nexus between military expenditures and income inequality. As such, the effect of terrorism has been analyzed using as a moderator variable. Forecasts for 26 transition economies and the 2002–2020 period have been performed using three different models. The first two models are baseline models, and in the third model, the moderator effect is included with all the control variables. Three different income groups (top 10, middle 40, and bottom 50) have been selected as indicators of income inequality. We also confirm the results by utilizing the income inequality indicator (gini_disp) of the Standardized World Income Inequality Database (SWIID). All three model findings signalize a positive finding similar to previous literature in the relationship between income inequality and military expenditure. However, the stand-alone and moderator effects of terrorism vary between income groups. For the top 10 and middle 40 income groups, terrorism correlates inversely with income inequality according to Model 1 findings, and in the same direction for the bottom 50. For the top 10 and middle 40 income groups, the moderator effect of terrorism in the inequality-military expenditure relationship is positive (Model 2). The direction of the effect is positive when control variables are added (Model 3). For the bottom 50 income group, the moderator effect of terrorism is in the same direction (positive) for Models 2 and 3. Our results illustrate that decision-makers in terrorism-affected transition economies may be puzzled regarding the opportunity cost of social welfare expenditure for low incomes against military expenditure.