Lifting of International Sanctions and the Shadow Economy in Iran—A View from Outer Space

Abstract

With the implementation of the Joint Comprehensive Plan of Action (JCPOA) in 2016, Iran experienced a short period without international sanctions which resulted in an annual increase in the gross domestic product (GDP) in the following two years. However, it was not just the formal economy that was affected by the sanctions. Previous studies have shown that sanctions can negatively affect the shadow (or informal) economy and may even have a larger impact on the informal economy than on the formal economy. Nighttime lights (NTL) data allow us to study shadow economy activities that are not reported in the official GDP. This study uses a panel of NTL (the DMSP/OLS and VIIRS/DNB harmonized dataset) from 1992 to 2018 for 31 Iranian provinces to investigate the association between the lifting of sanctions and the growth of the shadow economy. The empirical results suggest an increase in shadow economy activity with the lifting of sanctions while controlling for other drivers of informal activities.

Keywords

• shadow economy
• Iran
• sanctions
• JCPOA
• nighttime lights