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Military Expenditures and Shadow Economy in the Central and Eastern Europe: is There a Link?

Author

Listed:
  • Fedotenkov Igor

    () (Department of Economics, Bank of Lithuania, Vilnius, Lithuania)

  • Schneider Friedrich

    (Department of Economics, Johannes Kepler University of Linz, Linz, Austria)

Abstract

The main goal of our paper is to determine the existence of a link between government (military) expenditures and the shadow economy in the Central and Eastern European countries, which are the members of the European Union. The empirical investigation is conducted for the years 2003–2015. We show that there is a high statistically significant positive dependence between the size of the shadow economy and military expenditures in the Baltic States. Our conclusion is that higher military expenditures indeed lead to a larger shadow economy and this result is robust to different model specifications. In order to demonstrate the importance of our results, we undertook a simulation, where we calculated how much the size of the shadow economy would increase if the size of military expenditure as a percentage of GDP were to double. For example, in the Czech Republic, such an expansion would have led to an increase in the size of the shadow economy from 11.50% to 12.96%, and in Estonia, from 18.34% to 22.72% in 2012.

Suggested Citation

  • Fedotenkov Igor & Schneider Friedrich, 2018. "Military Expenditures and Shadow Economy in the Central and Eastern Europe: is There a Link?," Central European Economic Journal, Sciendo, vol. 5(1), pages 142-153, January.
  • Handle: RePEc:vrs:ceuecj:v:5:y:2018:i:1:p:142-153:n:12
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    More about this item

    Keywords

    Shadow economy; military expenditures; Eastern Europe;

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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