The authors of this article noted a large body of anecdotal evidence suggesting a link between corruption and high levels of military spending in a country. They set out to empirically determine if such a link existed using historical data to compare economic trends and corruption over the same time periods in over 120 different countries.
First, the researchers developed a theoretical model comparing military spending to overall government expenditure and taxation levels as economic trends in an idealized, corruption-free situation. Once the ratios involved were calculated for each country, the researchers compared the results with the Transparency International (TI) corruption indicator index and the International Country Risk Guide index.
The research team then proceeded to analyze the relationships between corruption and military spending using annual data for ~120 countries from 1985-1998. The team performed a cross-sectional analysis and panel-regression analysis to explore these relationships and consider alternative variables such as time, arms imports, education rates, defense spending in neighboring countries, and other factors.
Their conclusion provided a basis a solid analytic tool for estimating corruption levels in a given country: "Corruption is associated with higher military spending as a share of both GDP and total government spending...[this] can be interpreted as evidence that defense spending may be used as a component of an indicator of the quality of governance."These results were statistically significant at the 10% level.
The authors also concluded that these findings, with further research, could lead to policy development aimed at reducing corruption by focusing on non-military productivity, or including defense contracts in freedom-of-information legislation for additional international oversight.
Gupta, S., de Mello, L.,& Sharan, R. (2001, November) Corruption and military spending. European Journal of Political Economy. Vol. 17, Issue 4. Pages 749-777. Available at http://www.sciencedirect.com/science/article/pii/S0176268001000544.