Hadi Salehi Esfahani
University of Illinois at Urbana-Champaign
Institute for Management and Planning Studies
International sanctions are meant to curb economic activity and induce policy or political change in a target country. However, the effects of sanctions on different parts of the economy are complex and could induce expansion in some parts as they cause a contraction in other parts. The channels through which sanctions work could be microeconomic (e.g., trade and supply chain disruption) or macroeconomic (e.g., exchange rate depreciation and finance limitations). Firms and their stakeholders could be negatively affected if their access to imports or export markets become constrained or their domestic output markets shrink. But there may be some benefits for firms that face less competition in their input or output markets or have built up large inventories of goods that become scarce under sanctions. In this paper, we make an attempt to identify some of these channels in the case of Iran’s manufacturing sector during 2012-2013 when Iran faced intensified international sanctions. Our source of data is an annual panel of the Survey of Manufacturing Plants (SMP) carried out by the Statistical Center of Iran since 2003. Our preliminary results indicate that the intensified sanctions caused a contraction in overall manufacturing output primarily through an adverse productivity shock, likely due to trade disruption and scale limitations. Price and wage movements tended to counteract with the productivity effects, but had proved stronger only in a few in a few industries. Price movements were largest in the case of export-oriented firms, but those firms also faced significant productivity and trade shocks. The channels of sanctions’ effects other than productivity and price had positive consequences for employment, capital formation and exports, though no net effect on output.
Hadi Salehi Esfahani is a Professor of Economics and Business Administration at the University of Illinois at Urbana-Champaign. He currently serves as the Director of the Global Studies Program and the Center for South Asian and Middle Eastern Studies at the University of Illinois and the Editor-in-Chief of the Quarterly Review of Economics and Finance. He has also worked for the World Bank as a policy research economist and as a consultant. He holds a B.Sc. in engineering from the University of Teran and a Ph.D. in economics from the University of California at Berkeley. His research focuses on the role of politics and governance in economic policy formation, especially in fiscal, labor, and trade areas. His main area of specialization is the political economy of development in the Middle East and North Africa region.