Effects of Military Spending on the Size of Shadow Economy: An Empirical Investigation

Despite the extensive literature on the military spending, little is known about the empirical relationship between military spending and the size of shadow economy. This study investigates the impact of military spending on the shadow economy for 30 Asian economies from 1995 to 2017 by applying DOLS, and FMOLS techniques. Empirical finding indicates that an increase in military spending leads to an expansion of the informal economy. Our empirical results also show that enhancing economic growth and attracting more foreign direct investment appears to reduce the shadow economy in Asian countries. Therefore, policies targeting reducing the shadow economy should be considered with conventional economic policies on economic growth, trade, and unemployment.