Empirical Economics

, Volume 57, Issue 6, pp 2013–2041 | Cite as

Trade openness, political institutions, and military spending (evidence from lifting Iran’s sanctions)

  • Sajjad Faraji DizajiEmail author


Under the recent nuclear deal on Iran’s nuclear program, many of the most punishing sanctions are poised to be lifted. This study examines how trade openness (due to lifting the sanctions against trade) could affect the political institutions and military expenditure in Iran based on the available dataset for the period of 1960–2011. Using impulse response functions (IRF) and a variance decomposition analysis (VDC) on the basis of a vector autoregressive (VAR) model, the results imply that the response of political institutions to an improvement in international trade is negative and statistically significant, whereas that of military spending is positive and significant. Moreover, the shocks to trade openness influences military spending more than non-military spending over the all years after the initial shocks. These results are robust to other indicators of political institutions, different orderings of variables in the VAR and alternative specifications of trade, and government revenues and expenditures.


Political institutions Military spending Sanctions Iran VAR modeling 

JEL Classification

F13 F14 F51 



This paper was written while I was a visiting scholar at the International Institute of Social Studies of Erasmus University Rotterdam. I would like to thank ISS for hospitality and support. Special acknowledgement is due to Prof. Peter A. G.van Bergeijk for comments and helpful suggestions. Also, I would like to thank the two anonymous reviewers for their reading of this manuscript and their insightful comments.


  1. Acemoglu D, Robinson J (2006) Economic origins of dictatorship and democracy. Cambridge University Press, CambridgeGoogle Scholar
  2. Acemoglu D, Ticchi D, Vindigni A (2010) A theory of military dictatorship. Am Econ J Macroecon 2:1–42Google Scholar
  3. Acemoglu D, Ticchi D, Vindigni A (2011) Emergence and persistence of inefficient states. J Eur Econ Assoc 9:177–208Google Scholar
  4. Ades A, Di Tella R (1999) Rent, competition, and corruption. Am Econ Rev 89:982–993Google Scholar
  5. Alesina A, Perotti R (1994) The political economy of budget deficits. IMF working paper no. 94/85. International Monetary Fund, WashingtonGoogle Scholar
  6. Alexeev M, Conrad R (2009) The elusive curse of oil. Rev Econ Stat 91:586–598Google Scholar
  7. Barro RJ (1995) Optimal debt management. NBER working paper no. 5327, National Bureau of Economic Research, CambridgeGoogle Scholar
  8. Bevan D (1999) Trade liberalization and the budget deficit. J Policy Model 21:653–694Google Scholar
  9. Bohn H (1990) Tax smoothing with financial instruments. Am Econ Rev 80:1217–1230Google Scholar
  10. Boix C (2003) Democracy and redistribution. Cambridge University Press, CambridgeGoogle Scholar
  11. Brauner J (2015) Military spending and democracy. Def Peace Econ 26:409–423Google Scholar
  12. Bretschger L, Hettich F (2002) Globalisation, capital mobility and tax competition: theory and evidence for OECD countries. Eur J Polit Econ 18:695–716Google Scholar
  13. Brown D, Hunter W (1999) Democracy and social spending in Latin America. Am Polit Sci Rev 93:779–790Google Scholar
  14. Cameron D (1978) The expansion of the public economy: a comparative analysis. Am Polit Sci Rev 72:1243–1261Google Scholar
  15. Cashin P, Pattillo C (2000) Terms of trade shocks in Africa: Are they short-lived or long-lived? IMF working paper no. 00/72, International Monetary Fund, WashingtonGoogle Scholar
  16. CBI (2014) Annual national accounts of Iran, Central bank of IranGoogle Scholar
  17. Clements MP, Hendry DF (1995) Forecasting in cointegrated systems. J Appl Econ 10:127–146Google Scholar
  18. Collier P, Gunning JW (1999) Trade shocks in developing countries. Oxford University Press, OxfordGoogle Scholar
  19. Combes JL, Sedik TS (2006) How does trade openness influence budget deficit in developing countries? IMF working paper No. 06/3, International Monetary Fund, WashingtonGoogle Scholar
  20. Dickey DA, Fuller WA (1979) Distribution of the estimators for autoregressive time series with a unit root. J Am Stat Assoc 74:427–431Google Scholar
  21. Dizaji SF (2014) The effects of oil shocks on government expenditures and government revenues nexus (with an application to Iran’s sanctions). Econ Model 40:299–313Google Scholar
  22. Dizaji SF (2016) Oil rents, political institutions, and income inequality in Iran. In: Alaedini P, Farzanegan MR (eds) Economic welfare and income inequality in Iran: developments since the revolution. Springer, Berlin, pp 85–109Google Scholar
  23. Dizaji SF, Bergeijk PAG (2013) Potential early phase success and ultimate failure of economic sanctions: a VAR approach with an application to Iran. J Peace Res 50(6):721–736Google Scholar
  24. Dizaji SF, Farzanegan MR, Naghavi A (2016) Political institutions and government spending behavior: theory and evidence from Iran. Int Tax Public Finance 23:522–549Google Scholar
  25. Doces JA, Magee CSP (2015) Trade and democracy: a factor-based approach. Int. Interact 41:407–425Google Scholar
  26. Doyle MW (1986) Liberalism and world politics. Am Polit Sci Rev 80:1151–1169Google Scholar
  27. Eichengreen B, Leblang D (2008) Democracy and globalization. Econ Polit 20:289–334Google Scholar
  28. Engle RF, Yoo BS (1987) Forecasting and testing in co-integrated systems. J Econ 35:143–159Google Scholar
  29. Farzanegan MR (2011) Oil revenue shocks and government spending behavior in Iran. Energy Econ 33:1055–1069Google Scholar
  30. Farzanegan MR, Markwardt G (2009) The effects of oil price shocks on the Iranian economy. Energy Econ 31:134–151Google Scholar
  31. Freeman J, Quinn D (2012) The economic origins of democracy reconsidered. Am Polit Sci Rev 106:58–80Google Scholar
  32. Fuller WA (1976) Introduction to statistical time series. Wiley, New YorkGoogle Scholar
  33. Garen J, Trask K (2005) Do more open economies have bigger governments? Another look. J. Dev Econ 77:533–551Google Scholar
  34. Garrett G (1998) Global markets and national policies: collision course or virtuous circle. Int Org 52:787–824Google Scholar
  35. Hamilton JD (1994) Time series analysis. Princeton University Press, New JerseyGoogle Scholar
  36. Hoffman DL, Rasche RH (1996) Assessing forecast performance in a cointegrated system. J Appl Econ 11:495–517Google Scholar
  37. Huntington S (1991) The third wave: democratization in the late twentieth century. University of Oklahoma Press, NormanGoogle Scholar
  38. Iversen T, Cusack T (2000) The causes of welfare state expansion: Deindustrialization or Globalization? World Polit 52:313–349Google Scholar
  39. James P, Solberg E, Wolfson M (1999) An identified systemic model of the democracy-peace nexus. Def Peace Econ 10:1–38Google Scholar
  40. Johansen S, Juselius K (1990) Maximum likelihood estimation and inference on cointegration—with applications to the demand for money. Oxford Bull Econ Stat 52:169–210Google Scholar
  41. Karl T (1997) The paradox of plenty: oil booms and petro-states. University of California Press, BerkeleyGoogle Scholar
  42. Kaufman RR, Segura-Ubiergo A (2001) Globalization, domestic politics, and social spending in Latin America. World Polit 53:553–587Google Scholar
  43. Kimenyi MS, Mbaku JM (1995) Rents, military elites, and political democracy. Eur J Polit Econ 11:669–708Google Scholar
  44. Lebovic JH (2001) Spending priorities and democratic rule in Latin America. J Confl Resolut 45:427–452Google Scholar
  45. Li Q, Reuveny R (2003) Economic globalization and democracy: an empirical analysis. Br J Polit Sci 33:29–54Google Scholar
  46. Lindbeck A (1976) Stabilization policies in open economies with endogenous politicians. Am Econ Rev 66:1–19Google Scholar
  47. López-Córdova JE, Meissner C (2008) The impact of international trade on democracy: a long-run perspective. World Polit 60:539–575Google Scholar
  48. Lütkepohl H (1991) Introduction to multiple time series analysis. Springer, New YorkGoogle Scholar
  49. Marshall MG, Gurr TR, Jaggers KT (2012) POLITY™ IV PROJECT: Dataset users. manual center for systemic peaceGoogle Scholar
  50. Maxfield S (2000) Capital mobility and democratic stability: comparing East Asia and Latin America. J Democr 11:95–106Google Scholar
  51. Mork KA (1994) Business cycles and the oil market. Energy J 15:15–38Google Scholar
  52. Nordhaus W, Oneal JR, Russett B (2009) The effects of the security environment on military expenditures: pooled analyses of 159 Countries, 1950–2000, Cowles Foundation Discussion Paper No. 1707Google Scholar
  53. Olson M (1993) Dictatorship, democracy, and development. Am Polit Sci Rev 87:567–576Google Scholar
  54. Oneal JR, Russett BM (1997) The classical liberals were right: democracy, interdependence and conflict, 1950–1985. Int Stud Q 41:267–294Google Scholar
  55. Pesaran MH, Shin Y (1998) Generalised impulse response analysis in linear multivariate models. Econ Lett 58:17–29Google Scholar
  56. Rodrik D (1998) Why do more open economies have bigger governments? J Polit Econ 106:997–1032Google Scholar
  57. Rosendorff BP (2001) Choosing democracy. Econ Polit 13:1–29Google Scholar
  58. Ross M (2001) Does oil hinder democracy? World Polit 53:325–361Google Scholar
  59. Ruggie JG (1982) International regimes, transactions and change: embedded liberalism in the post war economic order. Int Organ 36:379–416Google Scholar
  60. Runkle DE (1987) Vector autoregression and reality. J Bus Econ Stat 5:437–442Google Scholar
  61. Russett BM (1993) Grasping the democratic peace: principles for a post-cold war world. Princeton University Press, PrincetonGoogle Scholar
  62. Schulze G, Ursprung HW (1999) Globalization of the economy and the nation state. World Econ 22:295–352Google Scholar
  63. Sims CA, Zha T (1999) Error bands for impulse responses. Econometrica 67:1113–1156Google Scholar
  64. Skocpol T (1982) Rentier state and Shi’a Islam in the Iranian revolution. Theory Soc 11:265–283Google Scholar
  65. Stijns JP (2006) Natural resource abundance and human capital accumulation. World Dev 34:1060–1083Google Scholar
  66. Stock JH, Watson M (2001) Vector autoregressions. J Econ Perspect 15:101–115Google Scholar
  67. Talvi E, Végh CA (2000) Tax base variability and procyclical fiscal policy, NBER working paper no. 7499, National Bureau of Economic Research, CambridgeGoogle Scholar
  68. Tijerina-Guajardo JA, Pagán JA (2003) Government spending, taxation, and oil revenues in Mexico. Rev Dev Econ 7:152–164Google Scholar
  69. Vanhanen T (2011) Measures of democracy 1810–2010., FSD1289, version 5.0. Tampere: Finnish Social Science Data ArchiveGoogle Scholar
  70. Wintrobe R (2001) How to understand, and deal with dictatorship: an economist’s view. Econ Gov 2:35–58Google Scholar
  71. Wintrobe R (2012) Autocracy and coups d’état’. Public Choice 152:115–130Google Scholar
  72. Yildirim J, Sezgin S (2005) Democracy and military expenditure: a cross-country evidence. Transit Stud Rev 12:93–100Google Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of EconomicsTarbiat Modares UniversityTehranIran

Personalised recommendations