Tyranny of numbers

The cost of sanctions for Iran’s economy

Posted in General, Macroeconomy, Sanctions by Djavad on July 23, 2018

There is no easy way to determine the impact of international sanctions on Iran’s economy, but looking at the growth rate of the GDP after 2011, when international sanctions tightened, is a good place to start.  The question has become more than an historical curiosity since Trump decided to pull the US out of the Iran nuclear deal and reimposed sanctions.  

To measure the cost of sanctions in terms of economic growth, we need a counterfactual (what would have happened if sanctions had not tightened in 2011), which we obviously do not have.  But we can use the growth trajectories of Iran’s two neighboring economies and regional rivals, Turkey and Saudi Arabia, as benchmarks.  They are of similar size to Iran’s and share common features with it.  Turkey has the same population size and is similar in economic diversity, while Saudi Arabia shares dependence on oil with Iran.

Economic size
Let’s begin with the comparison of the size of these economies and then move on to GDP per capita. The figure below plots the GDP data from the World Bank WDI databank using its 2011 Purchasing Power Parity (PPP) constant USD series.  These series have the advantage of measuring the size of each economy using US prices, which gets us closer to a comparison of quantities than the nominal values of goods and services produced in each country.

Figure 1. Gross Domestic Products of Iran, Turkey, and Saudi Arabia

Notice that during 1996-2011 the three economies were of roughly similar size, and in some years (2001-2005 and 2008-2010) Iran was in fact in the lead. Interestingly, last March, Saudi Arabia’s Deputy Crown Prince Mohammad Bin Salman claimed on the CBS 60 Minutes program that, “The Saudi economy is larger than the Iranian economy. Iran is far from being equal to Saudi Arabia.”  This figure confirms the first but not the second sentence in this quote.

Around 2011, Iran’s growth rate turned sharply negative, costing the country the narrow lead it briefly held in the three prior years.  The gap since 2011 is large and, in view of the return of sanction, likely to continue for a while.  Since for a long period — 15 years — the size and growth trajectories of the three economies were very similar, it is plausible to attribute the shortfall in Iran’s GDP since 2011 to sanctions.  The negative oil shock, which affected both Iran and Saudi Arabia, came three years later, in 2014, and even then it resulted in only a slowdown and a small recession in the Saudi economy (2014-2016).

To put some numbers down for the cost of sanctions, we have to decide on a counterfactual.  If you believe that without the sanctions Iran would have grown like Turkey, you should add up the gaps in their GDPs over the six years 2012-2017, which yields a whopping figure of $2.4 trillion for the cost of sanction. If, on the other hand, you believe, as I do, that Iran would have stayed closer to the path followed by Saudi Arabia, the figure would be $1.1 trillion.  Either way, the sums are staggering.

Of course, besides sanctions and low oil prices, there were other factors that inhibited (and continue to inhibit) economic growth in Iran — the banking crisis, price distortions, corruption, mismanaging the exchange rate, etc. — but many of these factors existed before 2011, so I suspect that the sharp downturn after 2011 is primarily due to sanctions.  (Some would put the subsidy reform of 2010 in this list, but it does not really belong there.) Even if half of the shortfall in growth is due to sanctions, it is still half a trillion dollars!

Living standards
Economic size is important for geopolitics, but it is living standards, measured here by GDP per capita, that matters for people.  Using the same GDP series but in per capita terms, the comparison between Iran and Turkey remains the same, but the story for Saudi Arabia is quite different. To no one’s surprise its per capita GDP is much higher then the other two thanks to its vast oil exports. But what may surprise some is how close Iranian GDP per capita was to Turkey’s until 2011, after which the two diverged.  This comparison should be interesting for those who believe (as do many in Iran) that Iran’s economy has been on a downward spiral for the last thirty years, as well as those who believe that sanctions have not done much harm to Iran’s living standards.

Figure 2. GDP per capita

The figure also shows that the brief economic recovery during 2016 and 2017, thanks to the nuclear deal and the easing of sanctions, may have made the economic race more competitive but, alas, it did not last.

5 Responses

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  1. […] economist Djavad Salehi-Isfahani estimates that the Obama sanctions 2011-2016 cost the Iranian economy $1.1 trillion– a staggering sum. […]

  2. […] bellicosity. It’s wishful thinking that a passive Iran would simply accept the harsh effects of U.S. sanctions on its economy without resorting to appropriate countermeasures. By waging economic warfare against Iran, the […]

  3. Mohsen said, on August 2, 2018 at 10:16 am

    Thanks for the article! Well-written as always. I do have a quick question though: from around March when Trump pulled out of the deal, the overall economy appears to be heading down very sharply, although sanctions are not imposed yet. Would it be safe to say that “mismanagement” and “corruption” are the more dominant factors this time? Or do you think sanctions still play the most significant role?

    Thanks,
    Mohsen

  4. Hazhir said, on July 23, 2018 at 10:03 pm

    Nice article. Would be nice to create a more formal synthetic control for Iran economy and use it for similar counterfactuals.

    • Djavad said, on July 24, 2018 at 8:35 am

      Thanks, Hazhir! I guess a more formal synthetic control would come from a structural model of the economy, which one could use to predict GDP in the absence of sanctions. Someone must have done that.

      From: Tyranny of numbers <comment-reply@wordpress.com> Reply-To: “comment+2i1eh_sdetiv-9f1uczhm3-g6@comment.wordpress.com” <comment+2i1eh_sdetiv-9f1uczhm3-g6@comment.wordpress.com> Date: Monday, July 23, 2018 at 10:03 PM To: Djavad Salehi-Isfahani <salehi@vt.edu> Subject: [Tyranny of numbers] Comment: “The cost of sanctions for Iran’s economy”


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