The Impact of UN and Us Emonomic Sanctions on Gdp Growth

Introduction

In these days and ages, economic sanctions are considered as a ubiquitous foreign policy tool used by many countries to demand a change in the action of a target state (Afesorgbor and Mahadevan, 2016). These measures could be defined as the withdrawal of customary trade and financial relations for foreign and security policy purposes. Even though violence is excluded, and characterized as more humane alternative to military invention, their imposition is very often criticized. The critic is based in the unpleasant reality to the state’s public that has to face the aftermath, while these measures are supposed to be directed against the very country’s government. This result could be unbearable when lack of democratic legitimation is observed in the regime against which the sanction is directed.

There is a huge and vibrant literature on the adverse effects of economic sanctions on target states' humanitarian situation. Those are debated to have decimating consequences for the civilian population as they could negatively affect the available resources of food and clean water (Cortright and Lopez, 2000; Weiss et al., 1997), access to medicine and health-care services (e.g., Garfield, 2002; Gibbons and Garfield, 1999), or even cause detrimental impact on life expectancy and infant mortality (e.g., Ali Mohamed and Shah, 2000; Daponte and Garfield, 2000). Big percentage of the research is qualitative; however, and based on single-country case studies. Quantitative assessments of sanctions usually focus on their impact on human rights (e.g., Peksen, 2009; Wood, 2008), political stability of the target state (Allen, 2008; Marinov, 2005), the level of democracy (Peksen and Drury, 2010), or their success in achieving the desired objectives (e.g., Hufbauer et al., 2009; Drury, 1998; Dashti-Gibson et al., 1997). The findings are discouraging. For example, Peksen (2009) reports the deterioration of government’s respect for human rights, because of economic sanction, while Peksen and Drury (2010) suggest that economic sanctions have a huge impact on the level of democracy. What is more, economic sanctions do not succeed to achieve their purposes at a 65–95% level of the cases in which they are imposed (e.g., Hufbauer et al., 2009; Pape, 1997, 1998).

The after effects of economic sanctions present scarcity of empirical research. Evenett (2002) estimates the impact of eight industrialized countries' sanctions against the South African Apartheid regime on these countries' bilateral trade relations with South Africa between 1978 and 1999. His results recommend that the powerful influence on South African exports came from the US Anti- Apartheid Act. Hufbauer et al. (2009) rely on a large sample of bi- and multilateral economic sanctions and estimate gravity models. Their findings show significant reduction to the extent of bilateral trade between the imposer of economic sanction, and the target state.

This very paper is based on the very first econometric assessment of the impact economic sanctions have on targeted countries’ overall development (Neuenkirch and Neumeier, 2015). More specific, an analysis of the effect economic sanctions have on the target countries’ GDP growth rate is included focusing on (I) multilateral sanctions imposed by the United Nations and (II) unilateral sanctions imposed by the United States. The UN Security Council (UNSC) should call its member states to partially or completely interrupt their economic relations with the state threatens or defaults international peace and security. A First attempt was in 1965 against Rhodesia, this measure had become increasingly popular during the past two decades (Fig. 1). All UN member states have the obligation of adopting each sanction measures determined by the UNSC, which is why those sanctions are expected to be more effective. On the United States point of view, no other country in the world has imposed more economic sanctions than the US (Hufbauer, 1998; Hufbauer et al., 2009). Although unilateral, the importance of the United States to the entire economy might make its sanctions an influential policy tool.

A unique dataset was compiled with the precious help of Matthias Neuenkirch and Florian Neumeier, editors of the first econometric assessment of the impact sanctions have on sanctioned countries real GDP growth rate, including all the UN and US sanction episodes between 1981 and 2009. The results show the significant influence on the economic growth to the target countries’ because of the imposition of sanctions by the United Nations. On average, target countries’ annual per capita GDP diminishes by almost 1.4 percentage points (pp), while for the U.S. it is almost -0.75 percentage points. Second there is a categorisation of the U.S. sanctions depending on the president in each period. I split the data into four different eras, which are 1981-1989, 1989-1993, 1993-2001 and 2001-2009 with Ronald Reagan, George Herbert Walker Bush, Bill Clinton and George Walker Bush as presidents of the United States at each period respectively. This categorisation is needed to have a clear view of the influence each president had in crucial decisions like imposing sanctions in targeted countries. The results show that different precedencies have different approaches in respect of sanctions and as an aftermath the target countries’ annual per capita GDP fluctuates depending on the period, with an average value within those years up to -0.57 percentage points change in GDP. The differences between the values might occur because of different reasons, those could be wars like the Gulf War, the international conflict that triggered because of the Iraq’s invasion in Kuwait on the 2nd of August 1990, different policies that each president follows because of different era or the most memorable event on the 9th of September with the fall of the Twin Tower, the symbols of America's power and influence.

The rest of the paper has the following structure. In section 2 the theoretical background on why sanctions may have adverse effects for the countries targeted is provided and the research hypothesis is outlined. In the next section the empirical methodology and dataset is introduces and is followed by the results in the next section, while the 5th explores the robustness of the findings and the last concludes everything.

Theoretical consideration and hypotheses

Economic sanctions are compulsive measurements that fall between simple diplomatic pressure and the extreme of a military invasion (Neuenkirch and Neumeier, 2015). Based on the former UN Secretary-General Kofi Annan, sanctions “represent more than just verbal condemnation and less than the use of armed force.” Or, as it is set by the former US President Woodrow Wilson: “A nation boycotted is a nation that is in sight of surrender. Apply this economic, peaceful, silent, deadly remedy and there will be no need for force” (quoted in Heine-Ellison, 2001: 83). In a theoretical point of view economic sanctions seem to be effective due to their potential to impose economic damage. Thus U.N. and U.S. economic sanctions are expected to inflict a detrimental impact on the economic development of the targeted country, nevertheless there is scarcity of empirical assessment of the economic costs occurred by sanctions.

Targeted countries’ economic growth could be adversely affected by sanctions through different channels. The most usually used is the depreciation in imports and exports, the loss of power in bargaining on international markets, and the contraction of international capital flows, the termination of foreign direct investment, foreign aid, or financial grants (Hufbauer et al., 2009; Evenett, 2002). Nevertheless, those kind of effects could be faced even when trade embargoes or suspensions of international help and capital flows are not clearly imposed (Neuenkirch and Neumeier, 2015). There is usually a symbolic attitude behind the imposition of economic sanctions with the purpose of stigmatizing political regimes (Whang, 2011). Reputation casualties, associated, could result the isolation of the targeted countries within the international community with the deterioration of aid and investments by benefactors as an aftermath.

The main target of an economic sanction is a political change or in some rare circumstances, even the entire collapse of a certain political regime. What is more, one could possibly reckon a potential gradation in terms of state’s or society’s conflicts of the targeted country, by taking into account that sanctions could provide an early warning signal. Thus, no one could deny that sanctions could possibly indicate the crucial threat the target state’s political stability confronts and could also give rise to a great deal of uncertainty about the future of the political and legal system. That kind of uncertainty could easily reveal the devastating results in the trading fields, the financial relations of the sanctioned country, or even its own domestic and foreign direct investment. As a matter of fact, empirical evidence has shown the connection between sanction episodes and political turmoil and transition (Peksen and Drury, 2010; Allen, 2008; Marinov, 2005). To make things worse, researches have proved the adverse correlation of political stability and economic growth (Alesina et al., 1996; Alesina and Perotti, 1996; Aizenman and Marion, 1993). In more details, it could be said that the negative affect of sanctions in terms of the cost of credit on international credit markets the target countries have to bear might provide a sense of concern about solvency or the payment practises for the future upcoming regime.

Moreover, imposing economics sanctions have as an aftermath the increase of shadow economy. This also known as underground economy, includes not only activities but also unreported income from the production of legal goods and services, either from monetary or barter transactions. Hence, the shadow economy comprises all economic activities that would generally be taxable were they reported to the tax authorities (Imf.org, 2018). It could be said that in the case of multilateral sanctions, shadow economy might be a determining factor, because of the stigmatization and reduction in the number of legal trading and in wider aspect, change in the number of business partners. The result shows an increased scope for sanction-busters and smugglers, as the rents from ending sanction measures might be higher when multilateral sanctions are in effect. Target governments may even promote illegal economic activity in order to generate funds, secure supplies, and strengthen their power. (Neuenkirch and Neumeier, 2015). Also, it could not be denied that government, targeted by economic sanction, usually fail to foster with laws because of the progressive loss of authority and legitimacy. Moreover, the increase in political instability followed by the reduction in government authority, provides fertile ground for corruption. The result; many resources are often used unproductively and the cost of transactions increases.

As suggested by Oechslin (2014), the political leadership of sanctioned countries, might as well reinforce the negative impact on the domestic economy. An overview of his theoretical model suggests that political elite, all over the globe, would worsen the economic suffering of the targeted state in order to hinder the people from revolting. A deduction in economic productivity and the upcoming decrease of income makes it more expensive for citizenry to revolt as the decrease in utility by political transitions becomes stepper.