September 27, 2023

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Index – Abroad – To what extent do sanctions divert economic growth?

In addition to greater globalization indicators and trade openness, today’s economic sanctions are more impactful than ever, and they are no longer confined within the borders of countries, but affect the global economy as a whole.

During the Cold War, several UN and Western sanctions allowed Rhodesia (today’s Zimbabwe), the apartheid South African Republic, and the Americans to Cuba and Iran. None of these countries were dominant in the world economy at the time. Currently, measures against North Korea or Venezuela are more serious than Russian sanctions, but these countries also participate with a moderate weight in world trade. If we want to evaluate the sanctions against Russia, we should be very careful compared to previous cases.

Russia is currently the world’s 11th largest economy and, in the case of many products, is a major commodity exporter and has a decisive role in metal, agricultural and energy markets. After the economic downturn of the early 1990s, the country moved rapidly towards greater trade openness.

Today, the ratio of trade to GDP shows a value of almost 50 percent.

Mussolini was admitted

To find an example like the Russian case in the global economy, we have to go back about a hundred years. In October 1935, Italy under Mussolini wanted to invade Ethiopia, and the League of Nations immediately created sanctions against the move. At the time, the Italian economy was the eighth largest in the world. At the time, 52 of the world’s approximately 60 sovereign nations allowed imports from Italy, embargoed arms, froze financial transactions, and banned trade in raw materials needed for war production. At this time, the Italian economy was struggling with a current account deficit, so the restriction of exports caused more economic damage to Italy.

Between October 1935 and June 1936, Italian industrial production fell 21.2 percent, while exports fell 47 percent in the first five months of the embargo. The trade embargo imposed on Italy raised international prices for foodstuffs such as meat, fruit and butter, as well as for raw materials and goods such as wool, textiles and leather goods.

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However, these sanctions could not stop Italy completely because the world’s first and third largest economies at the time (the United States and Germany) did not join the effort, and Italian coal and oil imports could continue and the Italians survived. Eight months is a tough time.

It worked against Japan

In the late 1930s Japan was the seventh largest economy in the world, and at the time more open to trade than Italy. Between the summer of 1939 and August 1941, a growing coalition of Western powers seeking to contain Japan’s war of conquest imposed economic sanctions that significantly reduced the number of available trading partners. With the outbreak of World War II, the British Empire and its colonies and dominions in Asia and the Pacific (India, Australia, New Zealand, and Canada) severely restricted the export of strategic raw materials and prioritized their use within the Empire. Towards a kind of automation. As a result, Japan became more dependent than ever on US raw material imports (mainly oil, iron ore, copper, and scrap metal). However, in response to the Japanese victories in 1940 and 1941, the United States introduced strong economic control measures, and finally, along with the British Empire and the Netherlands, they ordered a complete oil embargo.

The results of the measures were spectacular, because by the end of 1941, Japan’s trade had fallen by 20-25 percent in just 18 months.

To secure access to key imports, Japan attacked the American and European colonies in Southeast Asia. He did this to gain access to the raw materials needed to maintain the war machine. While Italy bore the brunt of the export embargo relatively well, Japan was hit hard by the freezing of foreign assets and the ban on the purchase of imported raw materials.

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Iranian direction

An empirical study covering several countries was prepared in 2015 when the authors were looking for answers on how sanctions introduced by the UN and the US affect the GDP of the countries concerned. According to research covering 68 countries studied between 1976 and 2012, the UN Sanctions reduced target countries’ per capita GDP growth by 2.3-3.5 percent. These adverse effects often persisted for 10 years. Comprehensive economic sanctions, such as blanket sanctions, have reduced GDP growth by more than 5 percent. If “only” the United States had imposed restrictions, the effects would have been more modest, and over a roughly seven-year period, target countries’ GDP growth would have declined by 0.5 to 0.9 percent.

Another study focused on Iran and US sanctions and found that over a three-year period between 1980 and 1994, the country’s GDP fell by 17.3 percent. The most significant decline occurred in 2012, immediately after the restrictions became more comprehensive from 2011.

Since the annexation of the Crimean peninsula in 2014, Russia has been hit by more extensive sanctions. The impact of trade restrictions at that time is still difficult to accurately assess, and is dwarfed by current sanctions. According to a 2016 study, the effect of the 2014 measures on Russian GDP was -1.97 percent on a quarterly basis, but no significant negative impact on the economic performance of Eurozone countries appeared. According to another study, Russia’s GDP may have fallen by 2.4 percent in 2017.

Research last year showed that sanctions can cause a slowdown in economic growth even before the measures are introduced, which could be roughly 9 percent in the three years before the actual introduction. It is also true that trade, multilateral and trade sector barriers can cause a sudden drop in growth. Another interesting fact is that most of the costs are incurred by the population of the states affected by the sanctions.

In the light of all this, it can be said with certainty that the sanctions introduced always have the effect of reducing growth, they usually restructure the income structure, and the longer the sanctions policy lasts, the more visible its effects at the national level. Income.

At the same time, based on studies, a more accurate analysis of the impact of more serious economic sanctions introduced against Russia from 2022 will happen only after a delay of many, many years, and until then it is real. A decline in economic performance may still be a matter of speculation. However, based on the Italian and Japanese cases, it becomes clear

The more a national economy is linked to global trade, the more severe the impact of sanctions on economic growth.

Sanctions can have an impact not only on the affected country, but on trading partners and the entire global economy.

The author is a senior researcher at the Economous Foundation for Economic Research

(Cover image: Old women selling used goods in Moscow. Photo: (Constantin Savrajin/Getty Images Hungary)