THE ROLE OF INSTITUTIONS IN DETERMINING MILITARY EXPENDITURE: EVIDENCE FROM EASTERN EUROPE

Abstract

The purpose of the present paper is to analyse the impact of institutional factors on the level of military expenditure of post-socialist countries of Eastern Europe. The dramatic shift in the European security architecture has compelled these nations to substantially increase their defence budgets. Whilst the extant academic literature thoroughly covers traditional determinants such as external threats and economic development, the specific role of the institutional environment is often addressed in simplistic terms. The present study aims to investigate the causal relationship between institutional determinants and the share of national income allocated to defence, thus filling a significant gap in the existing literature. Methodology. The analysis is based on a quantitative assessment of a panel dataset covering 19 post-socialist countries from 2002 to 2023. To account for unobserved country-specific characteristics and common time shocks, a two-way fixed effects model was employed. To ensure valid and robust statistical inference, the estimations utilise Driscoll–Kraay standard errors. The results of the study showed that different aspects of the institutional environment have opposing effects on defence spending. The study demonstrated a statistically significant positive correlation between controlling corruption and military expenditure. This finding lends weight to the hypothesis that less corrupt states have stronger fiscal capabilities, enabling them to mobilise resources effectively and fund core state functions, including national security. Conversely, the study identified a statistically significant negative correlation between the strength of the rule of law and defence spending. This finding supports the hypothesis that robust legal institutions with inherent checks and balances, as well as greater public oversight, act as a restraint on executive power. This limits the growth of defence budgets in favour of other public priorities. Furthermore, the model confirmed that countries with larger populations tend to allocate a smaller proportion of their GDP to defence. Practical implications. The findings suggest that, since different institutional changes produce opposing outcomes, policymakers should adopt a more considered approach. For example, policies aimed at reducing corruption may increase a state’s fiscal capacity to fund defence, whereas strengthening the rule of law may introduce accountability mechanisms that limit such spending. Value / Originality. The research aims to provide a detailed analysis of the institutional determinants of defence expenditure, offering robust empirical evidence of the dual and contradictory roles played by different institutions in this area.