Defense Expenditure and Income Inequality: Evidence for China, 1980—2010

The possible theory causality mechanisms that defense expenditure may affect economic inequality from different perspectives were discussed including the Keynesian point of view, labor revenue of the defense industry base, composition of defense expenditure, and crowding effect. Then, the paper discussed the possible mechanisms according to the special case of China from the following perspectives: the redistribution channel, the personnel expenditure channel, the army industry channel, the household register channel, the R&D channel, and the area regional economy channel. After that, we examined the relationship between defense spending and income inequality in China for the period of 1980—2010.Utilizing basic cointegration and causality tests, we aimed to add to the literature by providing evidence that defense expenditure did not cause the income inequality for the case of China. China should balance economic development and national defense further to exert the economic welfare effect of defense spending according to the mechanisms under the development strategy of civil-military integration.