Who are the Main Losers When Sanctions are Imposed?

This research note presents the main findings of a paper published online in the Economics & Politics Journal in December 2021. The original article can be seen at this link.

Since the 1979 Islamic revolution, Iran has experienced several rounds of sanctions mostly imposed by the United States and the European Union. However, the most severe sanctions against Iran were imposed in 2012. In January, the US defined sanctions targeting the Central Bank of Iran. In July, the EU imposed a total ban on imports of Iranian crude oil, impacting around one-fifth of Iran’s total oil sales. Finally, in October, the EU imposed financial sanctions on Iran, prohibiting most transactions between European banks and their Iranian correspondents. In the face of these sanctions, Iran’s currency lost about two‐thirds of its value compared to the US dollar, to which it was previously pegged (Ghomi 2021). In 2015, Iran reached a nuclear agreement with the P5+1, known as the Joint Comprehensive Plan of Action (JCPOA). The deal provided Iran broad relief from UN, EU, and US secondary sanctions, which were lifted in January 2016. This study investigates the aggregate and heterogeneous effect of the sanctions on Iran's economy between 2012 and 2015 and the impact on households.

The Aggregate Effects of the Sanctions

It is difficult to compare the economic performance of Iran with its potential path in the absence of the sanctions. Confounding factors in this period include the 1% drop in global GDP in 2012 and the roughly 60% drop in the oil price in 2014. These developments could have affected Iran's economy irrespective of sanctions. For that reason, I adopt the synthetic control methodology to measure the effect of sanctions on Iran's economy in 2012–2015. This method compares Iran with a counterfactual benchmark created using a weighted average of economic variables in similar countries. The result of this exercise suggests a considerable, severe, and persistent effect of sanctions on the Iranian economy. During the 4 years after implementation of sanctions until the JCPOA agreement, Iran's real GDP dropped significantly in comparison to its counterfactual, reaching a maximum divergence of 19.1% of GDP in 2015. The negative effect of sanctions persisted for 2 years after the removal of the sanctions and kept the Iranian economy more than 5% below its potential growth path. Gharehgozli (2017) shows a similar result for the first 3 years after the implementation of the sanctions.

Heterogenous Effect on the Poverty Mobility

To study poverty mobility, I use the household income and expenditure survey data provided by the Statistical Centre of Iran. Each year, the survey gathers data from 38,000 households including their social characteristics, living facilities, expenditures, and total income. The main shortcoming of this database is that the survey sample is updated each year and households cannot be directly compared in two different survey rounds. Using the methodology in Dang et al. (2014), I use time‐invariant characteristics to construct their income dynamics from the last year before sanctions (Iranian calendar year 1390) until the last year before the JCPOA agreement from (Iranian calendar year 1393).  

According to the results, on average 5.8% to 9.6% of the households in the sample remained in chronic poverty, between 3% to 6.7% moved out of poverty, while 6.4% to 10.2% of households slid into poverty during the sanctions. In the poverty literature, this last group is usually denoted as the vulnerable group that needs social support to remain above the poverty line. Since government income dropped substantially during the sanctions years, vulnerable households lacked adequate support.

However, from both an economic policy and sociological perspective, it is important to understand the distributional effects of the sanctions. To compare the welfare change during this period using a simple poverty ratio can be misleading. Poverty mobility analysis is a preferable approach as it allows us to assess the nature of these changes and distinguish the issue of chronic poverty from that of more volatile poverty due to the distributive effects of sanctions. Different policy responses are needed to address chronic and volatile poverty.

The below table summarises the estimation results for mobility bounds. According to the results, households with a female head have a slightly higher rate of moving into poverty than households with a male head. Looking across different sectors of activity, households in which members are employed in the public sector suffered much less than those in which members were employed in the private sector, held no  permanent jobs, or those dependent on other sources of income. Looking across different educational characteristics, those households headed by an illiterate person had the highest propensity to fall into poverty, likely due to a lack of financial literacy or employment prospects. Households characterised by high levels of educational attainment were the least likely to slide into poverty. 

With respect to age groups, younger generations have a higher rate of moving into poverty. Also, there is a significant difference between the corresponding probabilities for religious groups, which supports the claim that religious minorities suffered disproportionately. To summarise, rural households, those without a permanent and stable job or those working in the private sector, households with less access to the public resources (like religious minorities), and households with young heads or heads with limited education have the highest rate of downward mobility into poverty.

Finally, I classify households based on their per capita expenditure before the sanctions and analyse how the mobility dynamics compare in those different quintiles in the pre‐ and post‐ sanctions periods. The upper bound estimates of this exercise are depicted in the figure below. When looking at the 0–20 percentile of the expenditure distribution, poverty mobility increased significantly during the sanctions period (2011-2015) relative to the period before sanctions (2008-2011).

Immobility for the lowest percentile group has increased from 33% in the 2008–2011 period to about 50% during the sanctions period of 2012-2015. Moreover, middle‐income households have a drastically higher rate of downward mobility compared to the pre-sanctions years. Households in the middle two income quintiles experienced between 39%  and 48% mobility to a lower expenditure percentile, respectively, which is about 12 percentage points higher than the 2008‐2011 period.

Conclusion

In summary, accounting for poor domestic policies, sanctions have had a significant negative impact on the Iranian economy. Public sector employment and high levels of educational attainment reduce the likelihood that a household slides into poverty following the imposition of sanctions. This suggests that the economic consequences of the sanctions are inconsistent with claims that the measures are targeted at the government—vulnerable households are the main losers when sanctions are imposed. Policymakers in Iran should offer more support to vulnerable groups by providing more transfers or other forms of social support. 

References

Dang, H.‐A., Lanjouw, P., Luoto, J., & McKenzie, D. (2014). “Using repeated cross‐sections to explore movements in and out of poverty.” Journal of Development Economics, 107(2014), 112–128.

Gharehgozli, O. (2017). “An estimation of the economic cost of recent sanctions on Iran using the synthetic control method.” Economics Letters, 157, 141–144.

Ghomi, M. (2021). Who is afraid of sanctions? The macroeconomic and distributional effects of the sanctions against Iran. Economics & Politics, 1– 34. https://doi.org/10.1111/ecpo.12203