Military expenditures and shadow economy in the Baltic States: Is there a link?

Fedotenkov, Igor and Schneider, Friedrich (2017): Military expenditures and shadow economy in the Baltic States: Is there a link?

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 Baltic States. The empirical investigation is done over the years 2003-2014 for Estonia, Latvia and Lithuania. We showed that there is a highly 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 higher shadow economy and this result is robust to different model specifications. In order to demonstrate the importance of our highly statistically significant 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 doubled: In Estonia such an expansion would have led to an increase in the size of the shadow economy from 27.1% to 30.1%, in Latvia from 24.7% to 26.1% and in Lithuania from 27.1% to 28.4% in 2014.

• Item Type: MPRA Paper
• Language: English
• Keywords: Shadow economy, military expenditures, Baltic States
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E26 - Informal Economy ; Underground Economy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance; H - Public Economics > H5 - National Government Expenditures and Related Policies > H50 - General; H - Public Economics > H5 - National Government Expenditures and Related Policies > H56 - National Security and War; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements

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