Welfare Effects of Economic Sanctions :The Case of Iran

Abstract

Economic sanctions are a low-cost tool that replaces military action with a high economic, political and human cost. The severity of the effects of sanctions depends on the degree of dependence of the target economy on the outside world, the cooperation of the international community with the ones imposing sanctions, and the potential ability to substitute domestic production with imports. If domestic supply is sufficiently resilient, sanctions act, such as an import substitution policy, can lead to higher growth and more employment. Otherwise, sanctions will act as a lack of domestic supply. This study evaluates the welfare effects of sanctions on basic items - whose rising prices affect living standards. We use a multiple choice model and logit function, the income and cost effects of sanctions as well as the impact of exchange rate changes on the price of basic goods on the welfare standard and the probability of households joining the poor group are considered. The results show that, due to the inelastic domestic supply, the possibility of substituting imports is limited, so the cost effects are dominant for the year 2019, in the effective exchange rate scenario, poverty growth is estimated at %2.2 (about 1828 thousand people, and in the official exchange rate scenario, poverty growth is 3.1 percent (and about 2575 thousand People have joined the poor group).

Keywords

• sanctions
• welfare
• poverty
• exchange rates
• multiple choice model