Higher Rock Education - Economics Blog

Friday, February 24, 2017

Do Economic Sanctions Work?

Sunday, China announced that it would discontinue purchasing coal from North Korea following its launch of a ballistic missile that can transmit a nuclear weapon. The hope is to strong-arm Kim Jong Un, the supreme leader of North Korea, to halt his threatening development of nuclear weapons. But, do sanctions work? When are they effective? The thought of North Korea further developing their nuclear weapons capability is terrifying – especially when considering that Kim Jong Un believes that developing the nuclear arsenal is essential for retaining his power.

What are Sanctions?

Economic sanctions are punitive actions taken by governments against another government for violating human rights issues, building weapons of mass destruction, or violating international law. Sanctions are normally imposed to punish a country with the objective of forcing the country to change. The problem is – sanctions normally do not work. The most comprehensive study, Economic Sanctions Reconsidered, concluded that sanctions worked only 33 percent of the time between 1960 and 2006. The authors reviewed 200 sanctions and identified the features that improve the effectiveness of sanctions.

In some cases, sanctions hurt the sanctioning country. Newsweek published Do Sanctions Work an article by Mark Malloch Brown and Harry Gibson on December 22, 2014. They estimated that in 1980, the US sanctioned the USSR and prohibited the sale of grains. The USSR promptly purchased its grain from other countries. It is estimated that the sanctions cost the US agricultural industry $2.3 billion, while costing the Soviet Union only $233 million. This illustrates the importance of multilateral sanctions where many nations act together.

Castro, Putin, and Kim Jong Un may have used the sanctions imposed on them to strengthen their positions. Their message is the world is against us. We and our allies must band together and strengthen our resolve by exerting our rights. In the case of Kim Jon Un, the message includes the need for weapons of mass destruction to defend North Korea.

Let's examine a few sanctions.

Cuba – For over half a century the US imposed sanctions against Cuba. The stated intent of the embargo was to induce the government to move toward a more democratic government and improve their human rights record. On March 15, 2016, more than half a century later, President Obama relaxed the embargo by lifting travel restrictions and permitting some commerce. But a Castro remains in power. Proponents of continuing the embargo argue that the leadership has failed to comply with the original requirements and continues to violate human rights. Those who favor lifting the embargo argue that the policy has not worked for over 50 years and hurts the citizens of Cuba. The best way to promote democratic reform is to reestablish commercial interests.

South Africa – Sanctions were imposed in 1986 by the US, Japan, and most of the European countries with the objective of ending apartheid, the discriminatory policy of segregation that economically and politically oppressed blacks. The sanctions were repealed in 1991 following the end of apartheid. The sanctions covered trade and finance and were imposed shortly after the economic crisis of 1985 when the South African economy was struggling. The sanctions against South Africa are frequently cited as an example of how sanctions can work. It is true that apartheid ended, but critics argue that the economic sanctions were only a small part. Apartheid stifled the growth of companies that needed more workers. The government invested heavily in defense. The South African economy was experiencing a recession. The international sentiment and political unrest following the Sharpeville massacre of 1960 and the unrest in Soweto in 1976 made it untenable for foreign companies to invest in South Africa. Many firms left the country prior to the economic sanctions.

Iran – The United States and the European Union imposed sanctions against Iran following the seizing of hostages in 1979. They were expanded in 1995 and again in a UN Security Council Resolution in 2006. The objective changed. Initially it was to prompt a change in leadership. Later, a change of leadership remained an objective along with ending the research and development of weapons of mass destruction. The sanctions created much economic hardship to a struggling Iranian economy. Many goods and services were only available through a growing black market which increased prices in Iran. Inflation rose to over 40 percent in 2013. Many believe the sanctions helped draw the government to the negotiating table and write the agreement to discontinue its nuclear program. In 2016, the US and many other countries reached an agreement with Iran to curtail its quest for a nuclear weapon. But Iran's leadership remains aggressive towards the west in its rhetoric and actions. On February 2, 2017, the Iranian military launched a ballistic missile. This was not in violation of the nuclear ban, but it violated a UN Resolution. President Trump has not ruled out military action against Iran. He and many senators have called for stiffer sanctions in response. Read this article written in the Military Times to learn more.

Frequently the public of the sanctioning countries lose site of the cost they pay for the sanctions. Businesses lose opportunities to trade with other countries. In the case of Iran, the consumer pays a higher price for gasoline resulting in a decrease in the supply of oil. In an article prepared for the National Federal Trade Council in November 2008, Dean A. DeRosa and Gary Clyde Hufbauer concluded:

Provided no offsets to production occur elsewhere in the OPEC area, increased oil production by Iran could reduce the world price of crude petroleum by 10 percent, saving the United States annually between $38 billion (at the 2005 world oil price of $50/bbl) and $76 billion (at the proximate 2008 world oil price of $100/bbl).

Russia – Sanctions were imposed on Russia by President Obama and the EC following its conquest of Crimea in 2014. Since then Russia's economy has suffered. However, critics will point to the fall in oil prices as the reason for the recession. Rebecca Nelson concluded in her article published February 17, 2017 for the Congressional Research Service that "many economists, including at the IMF, have argued that the twin shocks of multilateral sanctions and low oil prices were the major driver behind Russia's economic challenges in 2014 and 2015". Meanwhile, Putin has used the sanctions to bolster his claim that Russia is threatened by the west and should build up its military. The sanctions have not deterred Russia from its aggression in Syria, and its hacks of the Democratic party and attempts to influence the election. Many Senators have encouraged additional sanctions. Proponents believe Putin would be even more aggressive without them.

North Korea –The international community has sanctioned North Korea since October 14, 2006 after testing a nuclear weapon. Sanctions may have slowed development by making it more difficult to acquire the resources needed to develop the technology and build the weapons, but it has not changed Kim Jong Un's behavior. In fact, the sanctions have increased the resolve of the leadership to manufacture weapons of mass destruction. CNBC recently reported that North Korea has turned to Africa for trade to lessen the impact of sanctions and lessen its dependency on China. Countries include: Uganda, Zimbabwe, Nigeria, Tanzania, Ethiopia, and the Democratic Republic of Congo. The sanctions have cost North Korea dearly. It is the most isolated country in the world. Its economy is a mess. According to a CIA report, "A large portion of the population continues to suffer from prolonged malnutrition and poor living conditions". Capital for economic growth is lacking partly because the leadership employs much of its capital in maintaining a large army and developing nuclear weapons. To read a comparison between South Korea and North Korea's economies read our free lesson, Economic Systems.

What are the Alternatives to Sanctions?

Is there an alternative to sanctions? While effectiveness of sanctions is limited; they are a better alternative to war. Wherever possible, improved relations built on commerce and diplomacy in theory should be part of the equation because all parties would benefit. However, I realize that it would be naive to believe this is feasible when a country's leadership does not respect the rights of others. Implementation of sanctions should strive to be multilateral. Enforcement is needed, and countries who choose not to directly support the sanctions should be dissuaded from helping the sanctioned country achieve its primary objective. Finally, economic sanctions are more effective when they have specific attainable objectives with a "reward" for good behavior, where a leader recognizes that a change in behavior is a viable option. Read our lesson, Supply and Demand – The Costs and Benefits of Restricting Supply to learn more.

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