“Democratic and undemocratic regimes: their
response to economic sanctions”
Master Thesis
Author:
Constantijn Driessen | s1412213
Supervisor: Mrs. van der Zwan
Assistant Professor at the Institute of Public Administration
Leiden University
Preface
After a period of brainstorming on possibly interesting topics for my thesis, I decided to choose for a topic that is currently all over the news: economic sanctions. I was (and am) very interested in the motives for states to impose sanctions, as well as the reaction of the targeted state. The latter aspect is the major focus of this research project, which involves four case studies on economic sanctions. My ultimate goal is to inform the reader about the response to economic sanctions of democratic and undemocratic regimes.
Acknowledgements
I would like to thank my supervisor, Mrs. van der Zwan, Assistant Professor at the Institute of Public Administration, Leiden University, for her help and guidance.
Table of Contents
1 ... 6
Introduction ... 7
1.1 Research question ... 8
1.2 Relevance ... 9
1.3 Structure of the thesis ... 9
2 ... 11
Theory ... 11
2.1 Response of target states ... 11
2.2 Democratic versus undemocratic ... 12
2.3 Economic indicators ... 17 2.4 Hypothesis ... 17 3 ... 18 Research design ... 18 3.1 Research methods ... 18 3.2 Independent variable ... 19 3.3 Dependent variables ... 19 3.4 Economic indicators ... 19 3.5 Operationalization ... 20 3.5.1 Independent variable ... 20 3.5.2 Dependent variables ... 21 3.5.3 Economic indicators ... 21
3.6 Units of analysis and units of observation ... 22
3.7 Case selection and case introduction ... 23
4 ... 26
Economic sanctions Iran (1979-2015) ... 26
4.1 Economic consequences ... 29 4.1.1 GDP ... 30 4.1.2 Inflation ... 30 4.1.3 Unemployment rate ... 32 4.1.4 Conclusion ... 32 4.2 Iran's response ... 33 4.2.1 Diplomacy ... 34 4.2.2 Media ... 37 4.2.3 Military ... 38 4.2.4 Conclusion ... 38 5 ... 40
Indian sanctions against Nepal (1989-1990) ... 40
5.1 Economic consequences ... 42 5.1.1 GDP ... 42 5.1.3 Unemployment rate ... 44 5.1.4 Conclusion ... 44 5.2 Nepal's response ... 45 5.2.1 Diplomacy ... 45 5.2.2 Media ... 48 5.2.3 Military ... 48
6 ... 51
South African sanctions against Lesotho (1983-1986) ... 51
6.1 Economic consequences ... 53 6.1.1 GDP ... 53 6.1.2 Inflation ... 54 6.1.3. Unemployment rate ... 55 6.1.4 Conclusion ... 55 6.2 Lesotho’s response ... 56 6.2.1 Diplomacy ... 56 6.2.2 Media ... 57 6.2.3 Military ... 58 6.2.4 Conclusion ... 59 7 ... 60
Turkish sanctions against Armenia (1993-) ... 60
7.1 Economic consequences ... 63 7.1.1 GDP ... 63 7.1.2 Inflation rate ... 64 7.1.3 Unemployment rate ... 65 7.1.4 Conclusion ... 66 7.2 Armenia’s response ... 66 7.2.1 Diplomacy ... 67 7.2.2 Media ... 69 7.2.3 Military ... 70 7.2.4 Conclusion ... 70 8 ... 71 Discussion ... 71 9 ... 75 Conclusion ... 75
9.1 Strengths and limitations ... 75
9.2 Suggestions for future research ... 76
Bibliography ... 77
Abstract
This research seeks to evaluate the reaction of democratic regimes and undemocratic regimes to economic sanctions. Four cases from different time periods will be
discussed; per case will be determined how a regime reacts: does it want to negotiate, does it threaten the imposing state etc. The hypothesis is: “The response to economic sanctions of democratic states is different from the response to economic sanctions of undemocratic states.” Based on the results of the case studies, the hypothesis (that presumes there is a relation between regime type and the response to sanctions) has been accepted.
1
Introduction
Economic sanctions are currently a “hot topic” (Bermingham, 2014), especially because of the recent sanctions between the EU/US and Russia. The US and Western countries decided to impose sanctions on Russia, as a response to Russia’s occupation of the Crimea and its support for pro-Russian separatists in Eastern Ukraine (Ray, 2014). The Russian government has decided to counteract, and imposed its own sanctions on the West: an extensive ban of food imports (Al Jazeera, 2015).
So what are economic sanctions exactly? According to Brohamer (2010, p. 59) economic sanctions are a policy instrument that aims to persuade a state to change its behavior. They include the imposition of forcing measures, in order to make the targeted state change their policy or destabilize its regime (ibid.).
Analyzing the motives as well of the success/failures of economic sanctions is the key area of a lot of research. An example is the research by Hufbauer, Schott, and Elliott (1990); the authors extensively study over a hundred cases, in which they compare the successes of economic sanctions. They state that sanctions are successful if the
targeted state complies with sanctions, and the desired foreign policy goal is met (Hufbauer et al., 1990, p. 9).
There has been a lot of research on the reasons for governments to impose economic sanctions on other states, especially on their main motives: political, cultural etc. An example of a case in which political motives were the reason for imposing economic sanctions, is the OPEC (Organisation of the Petroleum Exporting Countries) refusing to sell oil to Western countries during the oil crisis in the 1970’s. The main reason for imposing these sanctions was the fact that these Western states supported Israel (Issawi, 1978, p.3). Although the response of the Western countries is described, the issue is discussed from the sender states’ perspective, whereas my research will be focused on the target states’ perspective.
This is not the first research to do so however: some scholars have studied states’ reactions to economic sanctions. These studies will be elaborated on in the “Theory” chapter; as an introduction though, it is essential to explain in short why these studies are not sufficient in terms of analyzing targeted states’ decision-making. Most authors perfectly describe the whole process: motives, imposing sanctions, and the
consequences for the targeted state. These scholars fail to conclude however, what kind of state responds in a certain way to economic sanctions: does a democratic state respond differently to the sanctions than an undemocratic state?
Other scholars have discussed differences in decision-making and policy choices between democratic regimes and undemocratic regimes. An example of such a research is the study by Schultz (1998); he concludes that in a democratic system the political opposition can force the ruling party to comprise on policy decisions, which increases the chance of resolving disagreements with another state (Schultz, 1998, p.842). Similar studies will be discussed in the next chapter, and are the basis for the theoretical framework of this research.
1.1 Research question
The conclusions of current research studies indicate that there are major differences between the way democratic and undemocratic regimes conduct politics, and the goal of this research is to find out to what extent this is also relevant for the way regimes respond to economic sanctions. The research questions is therefore:
“To what extent do democratic regimes respond differently to economic sanctions than undemocratic regimes?”
Democracy is the independent variable; a state is either democratic or undemocratic. The response of states is the dependent variable. Four cases will be studied in order to see if regime type could play a role in a regime’s response to economic sanctions.
The following cases will be discussed:
- the American sanctions against the undemocratic regime of Iran (1979-2015) - the Indian sanctions against the undemocratic regime of Nepal (1989-1990) - the South African sanctions against the undemocratic regime of Lesotho (1982-1986)
- the Turkish sanctions against the democratic regime of Armenia (1993-)
It is a qualitative study, in which the response of all target states are being discussed, and ultimately, compared.
1.2 Relevance
The relevance of this research is two-folded; if there seems to be a relation between democracy and response to sanctions, scholars could conduct subsequent research in order to truly determine if there is a relation. This could help predict the behavior of democratic and undemocratic regimes in dealing with economic sanctions. Also, such research could maybe be used by targeted states to determine how to successfully react to the sanctions, from their own perspective (either compliant or defiant): the societal relevance. It could benefit these states to know why certain policy choices did not work out well for targeted states in the past; this research is a starting point, but may already contain information on certain policies that governments could learn from.
1.3 Structure of the thesis
In the second chapter, current research in the field of economic sanctions will be discussed. Also, an overview will be given of research studies in which major differences between democratic and undemocratic regimes in terms of political characteristics, motives, and subsequent policy-making are analyzed. This will help the reader to gain a better understanding of both regime types; at the end of the chapter will be explained how and why the current literature connects to the research question. Also, the hypothesis will be given, and explained. The research design,
Chapters four till seven consist of the case analyses; each case analysis starts with background information on the economic sanctions, followed by a section on the economic situation before and after the sanctions are imposed. The last section of every case analysis focuses on the response of the regime. In the eighth chapter, the outcomes of every case with regard to the response of the regime are being compared, and the hypothesis will subsequently be accepted or rejected. The ninth and last chapter summarizes the main findings, discusses limitations, and gives suggestions for future research.
2
Theory
In this chapter, current literature in the field of economic sanctions and regime types will be discussed. Mostly and more specifically, literature on how economic sanctions can succeed and are perceived by the target state, and on fundamental differences between democratic and undemocratic regimes in terms of domestic and foreign policy. Especially literature from the latter category is relevant for this research, because its findings suggest that there are policy-related differences between
democratic and undemocratic regimes; this is the basis of the theoretical framework of this research study.
Hufbauer, Schott, and Elliott (1990) analyze the impact of economic sanctions on foreign policy; from World War I up until the US economic sanctions against Ecuador in 2000. By assessing the situation in 174 cases, they evaluate the effect of the
imposed sanctions by states. Like other studies on economic sanctions, it focuses highly on the success of sanctions. The success is measured by determining whether the desired policy outcome has been reached; besides a thorough cost analysis for both sender and target country, it involves an analysis of economic and political factors that could increase the effectiveness of economic sanctions. Their conclusion is that economic sanctions are more likely to be effective on countries with which relations have been friendly, rather than unfriendly” (Hufbauer et al., 1990, p.100).
2.1 Response of target states
Hakimdavar (2014) describes both the motives for imposing economic sanctions, as well as the reaction to these sanctions. He points out that the reaction to sanctions is often uncertain: “The target’s reaction to positive or negative sanctions is
unpredictable as the target’s rational motives might be increased by power, or the target may be driven by irrational motives” (Hakimdavar, 2014, p. 148).
Von Amerongen (1980, p.159) mentions that a targeted state's policy effectiveness is affected by the success, strength and intensity of trade relations of the domestic economy. This conclusion suggests the importance of including trade relations in a research on states’ behavior in terms of policy-making. In this research, we will also discuss if the loss of trade relations due to sanctions plays a role in the economic consequences of sanctions.
In his research, Brohamer (2010) investigates how states perceive economic sanctions. He stresses that there has been that has not been a lot of research in this particular field (Brohamer, 2010, p.59). He studies how economic sanctions can lead to so-called unintended consequences. His research includes a study on two states that were subject of economic sanctions: South Africa in the Apartheid era and Iran
directly after the Islamic revolution. He stresses that responses of target regimes can be diverse, and counterproductive to the goals of the imposing regime; this can lead to unintended consequences. Examples of these consequences are: the creation of
alliances against the imposing regime, and heavily investing in military by the target state (ibid., p.2).
In this research, we will not discuss whether sanctions will lead to unintended consequences however; discussing the study above is merely meant to illustrate the variety of possible responses. In the discussion, we will see if such variety applies to the responses of the target regimes. The possible differences between the response of democratic regime and undemocratic regime will be the main point of discussion.
So there are studies that discuss the relations between imposing and targeted state, as well as the response of the targeted state. These authors have however not studied whether democratic states respond differently to economic sanctions than
2.2 Democratic versus undemocratic
The assumption is that undemocratic states might deal with economic sanctions in a
different way than democratic states. Gaubatz (1996) discusses the fact that
institutions and values in (liberal) democratic states include certain fundamental elements that enable these states to maintain international relations and subsequent political commitments. Diplomatic talks are an important aspect of such commitments (ibid., p.110), and are therefore subject to analysis in this research: it will help to explain if there is a difference between the response to economic sanctions of
democratic regimes and undemocratic regimes. Gaubatz (1996) further discusses that democratic states – unlike undemocratic states – in essence constraint majority rule; this severely limits the possibility of decision makers to quickly adopt a certain approach towards a state it has a conflict with: laws and bills have to be passed by a parliament for example, and this takes time (ibid., p. 136).
Democratic states are transparent: everyone is able to monitor the political process and policy decisions, and there is freedom of speech and press. Public opinion in democratic states is a powerful actor; when a decision maker makes certain policy decisions and later abandons them for whatever reason, this can have negative consequences for his/her position (ibid., p.122). The public could turn against its leader, if he/she fails to live up to promises regarding a certain approach (threats for example) to the other state. These aspects can also logically be derived from the definition of a modern democracy: a political system in which decision makers are held responsible for their policy choices by the public, which can exercise its power through political representatives (Schmitter & Karl, 1991, p.76).
Risse-Kappen (1991, p.50) agrees with Gaubatz (1996) on the power of the public in his study on four democratic states, and concludes that democratic regimes never ignore so-called public consensus. In Japan, where foreign policy was not considered very important, public opinion still put pressure on policy makers in this field. The results for the US are even more convincing: a strong relationship has been identified between policy change and public opinion, in the period from 1935 until 1979.
More than 50 percent of the times, a changing public opinion was followed by policy change (ibid.). Due to this strong position of the public in democratic states, its leaders are more inclined to “think twice” before they openly make crucial decisions. Therefore, when trying to solve a conflict with another state, democratic leaders tend to be more reliable and realistic in their communication (Schultz 1998, p. 830). This is another reason that decision makers in democratic states are not likely to quickly or impulsively make certain decisions in domestic and foreign politics. Unlike the undemocratic North Korea, which has reacted to economic sanctions from the West in a hostile way from the start. Chang (2006, p.109) states that policies of North Korea were conflicting with US laws; consequently, this led to economic sanctions against North Korea. North Korea however, kept behaving like "a bewildered animal stepping on a hunter's trap” (Chang 2006, p. 109).
So the totalitarian regime of North Korea was certainly not willing to conform to US policies. This non-conformity has resulted in decades of ongoing economic sanctions against the country by the West. But was North Korea’s response typical for
undemocratic regimes? Only after the case discussions, we can conclude if this statement is likely true, or likely false. It is now crucial to identify additional arguments that clarify why democratic states could respond differently to economic sanctions than undemocratic states do. Gaubatz (1996, p.136) discussed the fact that democracy constraints majority rule; Schultz (1998, p. 829) confirms this by stressing that an opposition party can effectively limit the power of the ruling party. He adds that public competition between the ruling party and an opposition party increases the chance that a state will resolve its disagreement with another state (ibid., p. 842).
Leeds & Davis (1999, p.5) state that democratic regimes are generally more cooperative in international politics than undemocratic regimes, which tend to be more conflict-oriented. This may sound rather general (since there is no direct link to economic sanctions), but it is another indication that there are indeed differences between democratic and undemocratic regimes with regard to foreign policy. There is also research that relates economic sanctions to different regime types.
Lektian & Souva (2003, p. 641) conclude that there is a relation between democracy and economic sanctions; they generally focus on the sender states’ perspective however, and stress that democratic states impose economic sanctions more often than undemocratic states. They do however briefly stress that targeted democratic regimes are more inclined to meet the demands of economic sanctions, because public welfare plays an important role in democracies; negotiating and meeting the imposing regime’s demands, means the sanctions are lifted, and the economy is no longer harmed by the negative consequences of sanctions (ibid., 657). As mentioned before, their study focuses on the sender state’s perspective, and this statement on targeted democratic states does not seem to be based on their findings. This makes this research all the more relevant, because it can support or reject their assertion.
Both scholars have also conducted another research study, on the difference in success between economic sanctions imposed on democratic states and undemocratic states. According to their findings, economic sanctions imposed on democratic states are more likely to be successful (to bring about policy change) than economic
sanctions imposed on undemocratic states. They have two explanations for this: first, economic sanctions enable undemocratic leaders to extract so-called rent.
Second, the pressure to comply with the sanctions depends on what groups are affected by them (Lektian & Souva, 2007, p. 849). Extracting rent refers to the ruling regime increasing its capital, through certain provisions provided to supporters of the regime. It means that supporters of the regime receive money to engage in political activism; this strengthens the current regime, and makes it harder for the opposition to influence the state’s politics, and achieve political change. Undemocratic leaders (autocrats) are more capable of extracting rent than democratic leaders, because they have a stronger grip on the economy (ibid., p. 853). When a regime starts to extract rent, economic sanctions can become particularly harmful for citizens outside the group of regime supporters (Anguelov, 2015, p. 55). Then the second point: the pressure to comply with sanctions is not that high when the economic sanctions do not target the right groups in an undemocratic state.
The sanctions have to be more narrowly aimed at the ruling regime and its institutions; in a democracy on the other hand, broader sanctions are effective, because there are a lot of groups that can be targeted at the same time (Lektian & Souva, 2007, p. 849). Both scholars agree with Gaubatz (1996) that democratic leaders have more accountability; there is more emphasis on general economic wellbeing in democracies, because democratic leaders have more reason to fear for consequences, if they cannot guarantee decent public policies and a good economic environment (Lektian&Souva, 2007, p. 852).
Gaubatz (1996) and Schultz (1998) discuss the pressure to perform for democratic leaders; Lektian & Souva (2007) explicitly link this pressure to perform for
democratic leaders to economic sanctions. Democratic states have larger “winning coalitions”, or people that support the party/regime that is in power (Lektian & Souva, p. 853). Because these coalitions are larger in democratic states, democratic leaders consider public goods more important. In undemocratic states, this is quite the
opposite: these coalitions are smaller, and the regimes do not value the protection and provision of public goods as much. Because of these institutional motivations, it is implied that economic hardship as a result of sanctions will not generate high political costs for undemocratic regimes. They are therefore less inclined to meet the demand for policy change of the imposing state (ibid.).
Current research suggests that there are indeed major differences between democratic and undemocratic regimes, with regard to foreign policy. Scholars seem to agree that the position of democratic leaders/regimes is more vulnerable, because the people and the opposition are in a much more powerful position. Because the opposition is more powerful, it can publicly compete with the ruling party over certain issues. The policies of the ruling party are being reviewed and revised; this reflection on past and current policies increases the chance that a state will resolve a conflict with another state (Schultz, 1998, p.842). Also, it is implied that the commitment of democratic regimes to public goods and general welfare will influence policy decisions (Lektian & Souva, 2007, p.852). A democratic target state, according to this theory, would be more likely to come to terms with the imposing state, when the sanctions result in too much damage to economy and welfare.
The theoretical framework of this research is based on the findings of the studies that are discussed above, and will now be summarized in short. As current research suggests, there are major differences between democratic and undemocratic regimes in terms of power distribution, priorities and values. Some scholars have indeed mentioned that these differences result in a dissimilar approach in foreign policy and international politics. The assumption is that, subsequently, there will also be a difference in the response to economic sanctions of democratic and undemocratic regimes.
2.3 Economic indicators
In addition to an analysis of the response of every regime, the economic situation (before and after sanctions were imposed) will be discussed. Quantitative data on three indicators (GDP, inflation and unemployment rate) will be given, in order to illustrate the impact of the economic sanctions on the economy of the target state. Together with qualitative data from literature it should enable the reader to gain a better understanding of the “whole situation” in which the target regime responds. Richard Yamarone (2007) mentions these indicators as part of his analysis on key economic indicators. He discusses 12 indicators in total; since it is not the key area of this research, including this many indicators seemed a bit redundant. Therefore, only three indicators have been picked. It could very well be that these indicators do not tell the entire story about (shifts in) the economy; the reader is therefore requested to avoid assigning too much significance to these results.
2.4 Hypothesis
The hypothesis is: “The response to economic sanctions of democratic states is different from the response to economic sanctions of undemocratic states.”
Only when the response to the sanctions of the democratic regime is different than the response of the undemocratic regimes, the hypothesis will be accepted. Three
undemocratic states (Iran, Nepal, Lesotho) are included in the research. The “Turkey-Armenia” case will serve as a negative case; it studies the response of the only democratic target state in this research.
3
Research design
In this chapter, the following aspects will be discussed: the aim, research methods, variables, operationalization, methods of analysis/observation, and the case selection.
The aim of this research is to determine to what extent the type of regime affects the response of a state’s government to economic sanctions. To investigate whether there is a causal relationship between the two variables would be a bridge too far for this particular research; since there are only four cases, a possible correlation could be demonstrated at most.
The research design is a comparative case study; the economic consequences for the targeted states will be described and compared. Four states will be discussed, three undemocratic states and one democratic state. The case involving the latter will serve as a negative case; this will determine if there is a likely correlation between
“democracy” and economic consequences. Because this research seeks to provide a co-variational correlation between the independent variable and dependent variable, we can speak of a co-variational analysis.
3.1 Research methods
Literature from scholars in the field of economic sanctions, as well as information from primary sources (news articles) is being consulted and analyzed. The goal is to find out if the theory on the political differences between democratic and
undemocratic regimes is also relevant for the response to economic sanctions. The main point of focus therefore is the response of democratic and undemocratic regimes to the sanctions. Again, the goal is not to prove a causal relation, but to illustrate the difference in reacting to economic sanctions.
3.2 Independent variable
The independent variable is regime type. The data on this variable is retrieved from the Quality of Government Standard Dataset of the University of Gothenburg, Sweden. This dataset includes over 2000 variables on political systems, economies, environment, and more. Unlike other datasets, this one includes relatively old data, from many decades ago. Because this data was required for my research, the QoG Standard Dataset has been used for the case selection.
3.3 Dependent variables
Only after all four cases have been discussed, we could possibly identify a correlation between the response of democratic states/undemocratic states and the severity of the economic consequences. The independent variable in this research study is regime type (democratic or undemocratic), and the dependent variable is the response of the state’s government to the economic sanctions. For every case, the following aspects are being discussed: background information on the economic sanctions, the
economic consequences, and an analysis of the inflicted state's response. A state's response is being measured on the basis of the following sub-variables:
1) Diplomacy 2) Media activity 3) Military
Discussing these aspects will hopefully provide a good insight in the way democratic and undemocratic states deal with economic sanctions. The length of the sections on the aspects varies; when there is less relevant information about a certain aspect, the section will naturally be shorter.
3.4 Economic indicators
The research consists of two types of data: the earlier mentioned data that shows if the states are democratic or undemocratic, and data on the economic consequences of sanctions. The data on the economic situation indicates if a country’s economy could be affected by the sanctions. The reason for including this data is merely to illustrate the economic situation of the targeted state; both before and after the sanctions are imposed. This way we can identify if the sanctions possibly led to certain economic consequences; qualitative data on the economic situation is included (in the case analyses) for the same reason.
The following indicators for economic consequences are included: – GDP
– inflation
– employment rate 3.5 Operationalization
In this section, the independent and dependent variables as well as the economic indicators will be operationalized.
3.5.1 Independent variable
The figure below depicts the scores of each country.
Figure 1: Democracy scores (0=undemocratic, 1=democratic)
Iran 0
Nepal 0
Lesotho 0
Armenia 1
Source: QoG Standard Dataset Score on Democracy, n.d.
The democracy scores indicate whether a regime is democratic or not. The scores are based on a set of criteria, which will be given next.
Both the executive and legislative branches have to be elected by popular vote, multiple political parties are allowed, there are multiple opposition parties, there are multiple parties in the legislative branch, and incumbency advantage should not be enabled. The latter aspect can refer to the unlawful closure of parliament or the deliberate postponement of elections.
3.5.2 Dependent variables
The main dependent variable (response to economic sanctions) is broken down into “smaller variables.” The first of these variables is diplomacy. According to the
definition, diplomacy is “the art and practice of conducting negotiations between
nations” (Marks, 2015). Therefore, we will focus on negotiations and meetings between the imposing and targeted regimes. The second variable is media activity. According to the theory, democratic leaders are more inclined to be more careful in their public communication; hence, it is interesting to see if this is indeed true. The utterances in the media by regime leaders of the targeted states will therefore be studied. The last variable concerns the military aspect. As we have learned from the theory, undemocratic regimes tend to be more conflict-oriented than democratic regimes. We will discuss if the target regime threatened to start a military conflict against the imposing regime, and/or actually engaged in such conflict.
3.5.3 Economic indicators
The data on the three economic indicators is derived from World Bank datasets: GDP at market prices (current $), inflation of consumer prices (annual%), and
unemployment, total (% of total labor force).
All data on the indicators is derived from official international sources. It offers the most precise and up-to-date information in the field of economic development; regional, national, and global estimates are included (The World Bank, n.d.).
The GDP is measured per year, and it is the sum of the total value of all domestic
producers, plus product taxes, minus subsidies that were not included in the products’ value. No depreciation deductions for manufactured assets or for exhaustion and deprivation of natural resources were made in the calculation (The World Bank, n.d.).
The inflation is also measured per year, and it shows the change in consumer costs; the costs for a set of goods and services. The Laspeyres formula has mostly been used for the calculation (The World Bank, n.d.).
This is one of the methods to measure the consumer price index (Statistics Bureau Japan, n.d.). The unemployment rate, the third indicator, is measured per year, and represents the percentage of the total labor force that has no job, but is available for employment (The World Bank, n.d.)
The graphs that present the data have been made in Excel, and solely include World Bank data.
3.6 Units of analysis and units of observation
While states are being studied, the units of analysis are the moments at which states react to the economic sanctions. The unit of observation is democracy; a state is
either democratic or not. It is essential to make the right observations in terms of the
behavior of all four states; otherwise, the conclusions on the role of the variables could be false. A state complies with economic sanctions, when it obeys to the will of the imposing state, more precisely: bringing about a policy or institutional change in the target country. A state defies economic sanctions when it does the opposite: ignoring sanctions and not meeting the imposing state’s demand for policy or institutional change.
This research knowingly avoids a black-and-white conclusion, in which states are simply put in either a complying or defying category without a nuanced explanation. If for example the economic consequences are not that severe, this could influence a regime’s persistency to defy the economic sanctions. The discussion will therefore strongly emphasize on context. All regimes will be marked “compliant/cooperative” or “defiant.” This enables the reader to quickly see how the regimes responded. When accepting or rejecting the hypothesis, we will not solely look at these two categories (compliant and defiant); two regimes can both be defiant or compliant, while the actual motives and the decision-making process has been different. When a regime is very cooperative, but the imposing regime refuses to lift the sanctions, this will certainly be discussed therefore.
If there turns out to be a difference in the responses (between the democratic regime and undemocratic regimes), the hypothesis will be accepted; otherwise, it will be rejected.
3.7 Case selection and case introduction
Four cases will be studied:
• The American sanctions against Iran (1979–2015)
• The Indian sanctions against Nepal (1989–1990)
• The South African sanctions against Lesotho (1982-1986)
• The Turkish sanctions against Armenia (1993-)
The criteria for the case selection will now be discussed briefly. First, three regimes of target states have to be either all democratic or undemocratic, while the fourth regime has to be of the other kind. This is necessary because it helps explaining if democratic regimes can respond differently to sanctions than undemocratic regimes; only studying a group of states with the same regime cannot lead to any conclusions on responses that are typically democratic or undemocratic. Second, the same state cannot be subject to analysis in more than one case; in every case, a different imposing and target state are studied. The reason for this is that the sample must be representative of the entire population (in this case democratic and undemocratic regimes); therefore every case contains two “new” states. A short description of every case can be found below.
I. US- Iran (1979-2015)
The US is has the second third economy in terms of total GDP, after China and the EU (The World Factbook, n.d.) It has a large amount of trading partners worldwide; US trade with its top 15 trading partners totaled 3,846.4 billion dollars in 2013 (United States Census Bureau, n.d.). Iran (Persia until 1935) is an Islamic Republic since the revolution of 1979. In this year, the liberal regime of Shah Mohammad Reza Pahlavi was replaced by the conservative theocratic rule of Ayatollah Ruhollah Khomeini (The World Factbook, n.d.).
Since the regime change in Iran, relations between the US and Iran deteriorated, and the two states suspended their diplomatic ties with one another in 1980. Also, the US imposed economic sanctions, which became more extensive throughout the years (Estelami, 1999).
II. India - Nepal (1989-1990)
India is the world second most populous nation, after China. There is extensive poverty and corruption, but the annual GDP growth rate is significant; total nominal GDP in 2013 was about $1.877 trillion, which ranks India fourth globally (The World Factbook, n.d.). Its relatively large share of young people is a big competitive
advantage; many other countries (like the US) cope with an aging workforce, which means higher wages and more health and disability expenses (Moeller, 2013). In 1989 - the year it imposed sanctions on Nepal - its economy was a lot smaller: its GDP was a little over $301 billion, more than six times less than in 2013. At the time, India’s trade as a percentage of GDP was 13 percent, against 53 percent in 2013 (The World Bank, n.d.). Still, India was already one of the major powers in the world, not only because of its booming economy, but also militarily: its total armed forces consisted of 1.260,000 personnel, and had nuclear weapons at its disposal (The World Bank, n.d.). Nepal is situated between India and China, and is completely landlocked by these two states. In 1989, Nepal had almost 17 million inhabitants (ibid.), making it India’s little neighbor. After Nepal started to cooperate closely with China, the Indian government decided to impose economic sanctions on Nepal.
III. South Africa - Lesotho (1983-1986)
South Africa is the southernmost country of Africa, and an emerging market with a lot of natural resources (The World Bank, n.d.). Lesotho is around 30,000 square
kilometers (the size of Belgium) and completely landlocked by its big neighbor South Africa. Before 1966, it was called Basutoland; after it gained independence from the United Kingdom, it was named Lesotho. (The World Factbook, n.d.). Because
Lesotho produces only 20 percent of national demand for food, it is highly dependent on imported products; 90 percent of the imported goods are from South Africa. South Africa imposed economic sanctions on Lesotho from 1983 to 1986, because it wanted to return ANC members to South Africa (Motshabi, 1989, p. 123).
IV. Turkey – Armenia (1993-)
Turkey has a free-market economy with a focus on industry and services. The part of Turkey west of the Bosporus strait is European, the part west of this strait is Asian (geographically). It borders several countries; one of these countries is Armenia (The World Factbook, n.d.).
Armenia is about the size of Belgium, and borders Azerbaijan in the east, and Turkey in the west. Its relationship with Turkey has not been good since the genocide of 1.5 million Armenians by the Turks in 1915 (Nicoll & Delaney, 2009). In 1993, Turkey imposed economic sanctions on Armenia, because of its military involvement in the Nagorno-Karabakh province (Mirzoyan & Badem, 2013, p.83). Despite several attempts to reconcile, an agreement has yet to be reached.
4
Economic sanctions Iran (1979-2015)
The revolution of 1979 was rather unique, because there was no direct cause for change: Iran was a modern country with a booming economy. The Shah – the leader of the country up until the revolution – decided to flee the country in early 1979, and was granted permission to live in the US. Supporters of the new regime under Ayatollah Khomeini occupied the American embassy in Tehran, where they captured 52 American diplomats, and held them hostage for 444 days (PBS, 2009). The US government responded by freezing all assets of all Iranian government officials in the US (Caswell, 1981) A mission to get the diplomats back failed, and 8 US soldiers were killed in doing so. By signing the Algiers Accords in 1981, Iran was obliged to end the hostage situation. In exchange, the US should not interfere in Iranian matters; it also removed trade the economic sanctions it had imposed since earlier (Levs, 2012).
The US realized that a strong Iran under the Islamic regime could de-stabilize the region. The end of the Shah’s leadership meant that US economic and political interests were no longer sustained in the Persian Gulf region (Fayazmanesh, 2001, p.221). In 1979 and 1980, the first sanctions against Iran were imposed. With the Executive Order of November 14, 1979, the US blocked property of the Iranian government, and in April, 1980, the sanctions were extended with the ban of all commerce and travel between the two states (ibid.). Sanctions became even more drastic in 1984, when the US designated Iran as a supporter of international terrorism; Iran was blamed for the bombing of US Marine Peacekeepers in Lebanon (United States Institute of Peace, n.d.), and the Arms Export Control Act and Export
Administration Act prohibited the export of certain products to Iran (Estelami, 1999).
In 1987, no Iranian goods were allowed into the US (Fayazmanesh, 2001, p.221).
After the Iraq-Iran war (1980-1988) - in which the US supported Iran against Saddam Hussein - it tried to contain both economies, making sure neither of them would be a threat to the region. Therefore, in 1993, the Dual Containment Policy was issued by President Clinton in order to “curb the economic development of both Iraq and Iran” (Estelami, 1999). He notes that it not only comprised of the imposition of additional economic sanctions, but was also meant to politically isolate Iran.
That same year, the Iran-Iraq Nonproliferation Act was signed by the governments of Iran and Iraq, under supervision of the US government. It banned all transfer that supported Iranian and Iraqi efforts to acquire nuclear, chemical, or biological weapons (Fayazmanesh, 2001, p. 222). In 1995, the Clinton Administration imposed new economic sanctions on Iran. The reasons for imposing the sanctions were: (according to Torbat, 2005, p. 407) Iran’s support for terrorist activities, pursuing the use of nuclear weaponry, and its support of violent groups that oppose the peace in the Middle East. The Executive Order of March 15, 1995, prohibited US citizens from being involved in agreements on financing and managing Iranian petroleum resources. Executive Order 12957 of May 6, 1995 eliminated the export of technology, goods, and services from the United States too (Fayazmanesh, 2001, p.222).
The Iran and Libya Sanctions Act of 1996 added an imposition of sanctions against businesses or individuals doing business with Iran (and Libya). With these sanctions, the US wanted to hamper the development of Iran's oil industries, which should lead to a serious blow to the Iranian economy (Esfahani & Pesaran, 2009, p. 208).
These sanctions effectively banned all trade activities with Iran (Fayazmanesh, 2001, p.230).
The table below shows the sanctions per year.
Figure 2: overview of economic sanctions on Iran
1979 Blocking of property Iranian government
1980 Ban of all commerce and travel
1984 Limiting export of US firms to Iran
1993 Dual Containment Policy
1995 US citizens no longer allowed to do
business with Iran’s oil industry
1996 Individuals and businesses no longer
allowed to do business with Iran and Libya
2010 Iranian carpets and foodstuffs not allowed
to be imported into the US
2011 More restrictions on companies that
support Iran’s oil industry; prohibition of groups that cooperate with Iranian financial institutions
Source: Levs (2012)
According to Iranian officials, the economic sanctions have been a disaster for the Iranian economy. In his “Study of Iran’s Responses to U.S. Economic Sanctions”, Estelami (1999) discusses Iran’ reaction on the consequences of the economic sanctions throughout the years. The following table shows that Iran increased trade with other states, while trade with the US decreased and ultimately, disappeared.
Figure 3: Percentages of imports, major trading partners of Iran
Share (in%) of Iran’s imports
Time Period US Western
Europe
Japan Other
Pre-revolution (1975-1978) 18.5 48.7 15.8 17.0
Revolution and Iraq War (1979-1988) 1.8 47.8 13.0 37.4
Postwar Reconstruction (1989-1992) 2.1 52.1 11.4 34.4
Dual Containment (1993-1996) 3.3 45.8 8.3 42.6
Iran-Libya Sanctions (1996-2011) 0.0 44.9 6.4 48.6
Source: Estelami (1999)
The figure only includes data up until 2011: after that, the sanctions were renewed in the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (US Treasury, n.d).
4.1 Economic consequences
As described above, the economic sanctions became truly severe when the US banned all Iranian products. The US and Iran were good trading partners (Estelami, 1999), and Iran's GDP started dropping in 1987. We cannot conclude that the two events are linked, but there seems to be a correlation. Because US economic sanctions against Iran were imposed in phases, we should consistently analyze the economic indicators right after a “new” economic sanction comes into force. This way, we can establish if the economic situation changes after sanctions are imposed. If the economic situation changes, it is plausible to assume that there is a correlation between the sanctions and the economic consequences. This section will be relatively short in comparison with the chapter on the response to the economic consequences; the economic situation before and after the economic situations will be discussed. Again, the same order of discussion will be applied to the other cases. First, we will analyze (the change of) Iran's GDP.
4.1.1 GDP
Iran's GDP was 147,222,000 dollars in 1983 and 153,067,000 dollars in 1984, it had dropped to 127,852,000 dollars in 1987. Until 1993, the GDP kept plummeting (World Bank Data – GDP of Iran, n.d.). From 2001 till 2011, the GDP increased steadily however. This, and the fact that Iran’s GDP was not directly decreasing after (new) sanctions, might very well have to do with a major increase in trade with other states, as will be discussed in the next chapter. In the graph below, the data is shown per year. From the crucial year 1996 (major trade sanctions) until 2001, the GDP declined (World Bank data – GDP of Iran, n.d.)
Figure 4: Iran’s GDP (1979-2014)
Source: The World Bank, n.d.
0 10000 20000 30000 40000 50000 60000 70000 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 x 10, 000, 000
GDP (current US$)
GDP (current US$)4.1.2 Inflation
The inflation rate had been declining rapidly since 1983, but started increasing in 1985, the year after the first tough sanctions were imposed. The inflation rate kept rising, only to decline in 1988.
The inflation rate was at its peak in 1995, and declined in the following years. More recently, the inflation rate started to climb, as discussed by Klein (n.d.), who states that Iran's hyperinflation is the clearest sign that the sanctions are working. Before they were implemented in June 2010, Iran’s monthly inflation rate was 0.7 percent; since 2010, the inflation rate started to increase substantially.
Figure 5: Iran’s inflation rate (1981-2013)
Source: The World Bank, n.d.
0% 10% 20% 30% 40% 50% 60% 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
In>lation (average consumer prices)
In=lation (average consumer prices)4.1.3 Unemployment rate
Unlike the other two indicators, there is no data available on the unemployment rate of Iran for the period before 1991. Let us however see if we can identify a possible correlation between the economic sanctions and the economic consequences.
The data on the employment rate does not indicate that the economic sanctions had a drastic effect on the employment rate.
Figure 6: Iran’s unemployment rate (1991-2013)
Source: The World Bank, n.d.
4.1.4 Conclusion
When we look at the history of US economic sanctions on Iran, we can conclude that Iran's economy was declining consistently (especially the GDP) right after new sanctions were imposed. This suggests that there could be a possibility that a link exists between the economic sanctions and consequences. However, it is not sufficient to determine whether there is indeed a strong relation between sanctions and economic consequences.
0 2 4 6 8 10 12 14 16 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Unemployment rate (percentage of total labor
force)
Unemployment rate (percentage of total labor force)4.2 Iran's response
How did Iran's leaders deal with the economic consequences of the sanctions, and did their actions and policies towards the US change over the years?
First, relevant events with regard to Iran’s diplomacy will be discussed; second, the role in the media of Iranian leaders will be debated; and third, the military aspect (armed conflict and or militarily threatening) will be highlighted. Naturally, in the chapters on the other cases, these aspects will be discussed in the same manner.
During the Iraq-Iran War from 1980 till 1988, Iran started using new trade routes, decreasing economic reliance on the West.
Iran – as a major oil exporter – was severely hit by the war, in which several oil fields were damaged (Estelami, 1999). The US economic sanctions certainly did not
improve the economic situation, so Iran had to find alternative ways of generating money: non-oil exports. Dried fruits and carpets became increasingly important for the export market, and the government stimulated the production of these products (ibid.).
Iran' s leaders soon realized that its strategic geographical location should be used optimally for the export and shipping of its products; a good example is the agreement with Turkey on a 1500-km pipeline to Turkey for transporting gas. Also, an
agreement was reached with Kazakhstan, which ensured the mutual exchange of oil between the countries (ibid.). This information supports the statement of Esfahani & Pesaran (2009, p. 209) that “imports and non-oil exports have become much more geographically diversified.” In other words, Iran was seeking for alternative trade partners. Especially the United Arab Emirates and China became major trade partners (ibid.). These measures undoubtedly contributed to the fact that Iran's economy started recovering a bit; in the early 1980's the inflation rate and the unemployment rate were both falling again, while the yearly GDP increased (figures above).
Later, after the 1995 economic embargo was imposed, the same kind of behavior (finding new trading partners) can be identified. In December 1995, Iranian President
The major purpose of this trip was to enhance trade relations with India. The outcome of the meeting was fruitful: both parties agreed on the establishment of a joint chamber of commerce, and a major fertilizer project in Iran was launched. And again, these developments took place right around the time that the GDP decreased, the inflation rate went up, and unemployment grew, as can be seen in the figures on the previous pages.
Figure 3 shows an increase in trade with the category of ‘Other’ countries. The
United Arab Emirates accounted for a large share of this trade; as Estelami (1999) stresses, trade between the two states quintupled between 1978 and 1996. Not surprisingly, this is a period in which the economic sanctions were imposed, and became more severe throughout this period. Also Turkey became an important trading partner; trade between these two countries was being boosted by shared economic interest in natural resources. Estelami (1999) furthermore mentions Iran’s growing trade with China (building a subway system in Tehran, Malaysia (developing oil/gas fields in the Persian Gulf), and South Africa (major oil purchasing from Iran).
4.2.1 Diplomacy
Throughout time, the US government has tried to make Iran comply (US Institute of Peace, Iran Primer). Such a development however, turned out to be utopian. Ayatollah Khamenei was Iran's president from 1981 until 1989, and responsible for Iran's hostile attitude towards the US. His predecessors only served very short terms: the first Presdident, Banisadr, was impeached, because he opposed the head of the judicial system, and the second President was assassinated after a month (United States Institute of Peace, n.d.). In 1989, Khameini became the Supreme Leader of the Islamic Republic of Iran; the highest political function in Iran. In this role, he took over the supervision of Islamic political beliefs and ideals, which was first carried out by Khomeini (ibid.).
The Supreme Leader is responsible for supervising general policies, which enables him to choose a certain direction in both domestic and foreign politics (PBS, n.d.). The diplomatic ties had been suspended in 1980, and there were no formal negotiations or meetings. However, the climate started to change slightly in 1995, when it became clear that Iran very much wanted to trade with the US.
That year, President Akbar Hashemi Rafsanjani did the unexpected, when he offered American oil company Conoco a contract for 1 million dollars (Wright, 1995). He assumed that President Clinton would adopt a "softer approach" towards Iran, since he had stated multiple times that "economics had to supersede politics" (Murray, 2010, p.100). It led Rafsanjani to believe that trade or economic cooperation between the two states would no longer be off the table (ibid.). This however, turned out to be a false assumption; Clinton responded by threatening with an executive order, if Conoco would accept the deal with Iran (Wright, 1995).
The Iranian government stated that it would not block a peace agreement between Israel and Syria, which was a major concession for Iran. It seems that initially, Rafsanjani was showing signs of goodwill towards the US; he wanted to restore the standard of living to pre-1979 levels, by strategically changing Iran’s foreign and domestic policies. His outreach to the US was part of this new foreign policy (Wright, 1995). After the US threatened with a total trade embargo and forced Conoco to turn down the contract, this goodwill turned into accusations. He stated that the US would have to prove that it had no ill intentions, and he also expressed his belief that the US was helping to deliver nuclear technology to North Korea (Wright, 1995). So instead of trying to enter into talks with the US in order to come to terms, Rafsanjani now accused the US of sponsoring terrorism. These accusations certainly did not improve the situation.
When Khatami was elected in 1997, he succeeded Rafsanjani as President. Like Rafsanjani, he was a moderate President (Hovsepian-Bearce, 2016). Relations with the West improved, because of intensifying diplomatic cooperation (Hovsepian-Bearce, 2016). In a 1998 television interview, he stressed the necessity of a dialogue with the people of the US (BBC News, 2014). As discussed before, Khamenei was (and is) the highest-ranking politician in Iran; and now his absolute power in foreign policy decisions and security issues, became a problem for President Khatami (Kafala, 2001). This political misbalance dragged on until 2005, when a new President was elected.
So was the response to the economic sanctions of this new President different than of the other Presidents? Indeed. The new President, Ahmadinejad, was more conservative than Khatami; relations with the US became less warm.
During the presidencies of Rafsanjani and Khatami, there had been an open door policy towards the US: Rafsanjani's and Khatami's call for democracy and the latter's direct call for negotiating with the US, were all part of this good-naturedly approach towards the West. Khatami's open door policy did not lead to restoring diplomatic relations however (Bakhash, S., n.d.). But although Khatami was ready for a dialogue with the US, he stated that there was no need for mutual ties. This dialogue would be between intellectuals of both countries; Khatami did not urge for talks with the US government, he merely addressed the American people. President Clinton was rather disappointed by this "empty gesture" (CNN World News, 1998).
Although his predecessors (Rafsanjani and Khatami) had been more democratic and progressive, it was Ahmadinejad who wrote a letter to US President Bush, the first direct communication between an Iranian leader and a US President since 1979 (Hauser 2006). In this letter, Ahmadinejad asked how the war on terror could be justified by Christian values; he also questioned how the establishment of Israel could be rationalized (Hauser, 2006). His tone is very formal, he even calls Bush "Your Excellency"; his motive was to give "an opening salvo to the US", by stating that the US simply needs a dialogue with Iran. He did not address the issue on which both states disagree however: Iran's nuclear program (ibid.). A plausible explanation is that Ahmadinejad tried to slow down the decision-making process on imposing sanctions by the UN Security Council, simply because he made the effort to communicate with the US government “out of goodwill.” This clearly slowed down UN proceedings, and it gave Iran the chance to continue its nuclear program (ibid.).
Ahmadinejad’s successor, Rouhani, was the first President that was actually willing to negotiate with the US on Iran's nuclear program. Rouhani stated that the disagreement on Iran's nuclear activities was unnecessary, and after 20 months of diplomatic talks, a deal was struck in July 2015 (Mullen & Robertson, 2015). Khamenei was not happy with the agreement, given the fact that he deliberately delayed his response on Rouhani's letter discussing the results of the sanctions.
He also stated that the agreement has to go through the legal process; yet it is unclear which branch is responsible for this (Khalaji, 2015). Nevertheless, the deal is a milestone in US-Iran relations, and finally resolves many disputes. The upside for Iran is that it can enter the global financial markets again, and its oil exports will subsequently go up (BBC News, 2015). In return, UN agents will be granted constant access to nuclear sites, 98 percent of enriched uranium reserves will be destroyed, two-thirds of nuclear centrifuges will be removed; breaching these conditions, would result in restoring the economic sanctions (BBC News, 2015).
4.2.2 Media
As a president in the 1980’s, Khamenei already was a high-ranking politician; but unlike in many other countries, the president does not have the executive power in Iran, the Supreme Leader does (PNB, n.d.). Especially during his period as the Supreme Leader, he was (and still is) able to set the tone in Iran's politics; his 2000 representatives are often more powerful than the government, which sees about 40 percent of its law proposals rejected by the Supreme Leader (PNB, n.d.) Throughout the years, he has called upon the Iranian people to remain strong and to unite, and he interpreted the economic sanctions as a sign of Iran's nuclear progress (Hovsepian-Bearce, 2016). In his speeches in the media, he emphasized that the economic sanctions were the ultimate test for Iran's economy, and an opportunity for economic self-reliance (ibid.).
Throughout the years, he keeps emphasizing that the West is immoral and brutal, and only wants to humiliate Iran (Khajehpour, Marashi, and Parsi, 2013). His speeches are in line with Iran's decade long reluctance towards a political compromise. Moreover, Iran has used all kinds of threatening measures over the years, which were aimed at the US and its close ally Israel (ibid.). Israel was the archenemy of the Islamic Republic of Iran, although Israel had sold arms to Iran during the Iraq-Iran War. Khamenei had repeatedly called Israel "the little Satan", and the US "the great Satan" (Omer-Man, 2011).
President Rafsanjani’s attempts at rapprochement failed, because the US government simply ignored his gestures, and implemented tougher measures against Iran (Murray, 2010, p.100). The same year, Rafsanjani (in the media) warned the US that further sanctions would lead to an even greater anti-America sentiment.
In an interview with ABC television, he stated that the US simply has no basis to impose a total embargo – there was no proof that Iran was involved in international terrorism (Wright, 1995). In addition to this reasoning, he also spoke some rather determined, tough language: “You should know you can't make the people of Iran surrender by bullying and force” (Wright, 1995).
4.2.3 Military
Iran has not engaged in a military conflict against the US (apart from its involvement in the Iraq-Iran War), but some of its leaders have uttered threatening language towards the US government, as discussed above. Also, numerous cyber attacks on the US were launched by Iran (Khajehpour et al., 2013), and Iran has frustrated visits from inspectors from the UN International Atomic Agency during Ahmadinejad’s presidency, by delaying access to nuclear sites (BBC News, 2013). It is no surprise then, that – despite some attempts at rapprochement - the aspect of "positive" diplomacy (talks and meetings that constructively seek to resolve the issues between the two states) is not really relevant here. Or has not been relevant for a very long time; the economic sanctions have been lifted after a deal was struck on Iran's nuclear program in July 2015.
4.2.4 Conclusion
To conclude, Iran's attitude towards the US constantly changed over the years. After 36 years, US sanctions were finally lifted in 2015. We have established that Iran’s trade with other states increased after the trade embargo was imposed; the European, Malaysian, Indian, and Chinese companies “filled the void” that was left by American oil firms (Iran Human Rights, 2013). Nevertheless, Iran can start exporting oil to the US again, and billions of dollars in frozen assets will be returned.
20 months of diplomatic talks and negotiations prove that President Rouhani is committed to showing the world that Iran does not strive to become a nuclear power; despite fierce internal opposition by Khamenei and his followers, he managed to secure the deal, giving him great international praise. Obviously, the response to the sanctions has not been one-sided; this mainly had to do with changing Presidents, but especially with the internal power struggle between President and Supreme Leader. Iran's response to the economic sanctions will likely have had its effect on the economic consequences for the country, throughout the years.
5
Indian sanctions against Nepal (1989-1990)
Nepal, a small country between India and China, with a population of around 19 million inhabitants in 1990, depended very much on trade with India. Until the 1950’s, 90 percent of Nepal’s total trade was with India (Encyclopedia of the Nations, n.d.). In 1975, this number had dropped to 70 percent, and in 1989, it was “just” 27 percent (Country Data, n.d.). India accounted for 35 to 40 percent of Nepal’s exports (Blanchard, Mansfield, and Ripsman 2014, p.246). Also, Indian tourists were a major source of income for the country, and about 3 million of Nepalese people worked in India. Nepal was among the poorest countries in the world, and – being completely landlocked - was not in the position to act hostile towards India (ibid.).
In 1950, the leaders of India started to review their northern borders; they claimed that certain areas controlled by Nepal, belonged to India. Their argument was based on the fact that British India comprised a vast area, referred to as "strategic heritage" by Garver (1991, p.956). The same year, an important agreement was reached however; the Indo-Nepal Treaty of Peace and friendship ensured a strategic relationship between the two states. The treaty included a mutual obligation in the field of
security; both states would have the duty to protect each other, if a foreign aggressor would pose a threat (ibid.). The treaty includes a provision for the free movement of people between the countries, as well as close cooperation on security and defense issues.
Between 1956 and 1989, China provided Nepal with assistance on infrastructure projects, especially involving the construction of hydroelectric sites, as well as brick- and papermaking factories (Garver, 1991, p. 957). By 1989, 85 contracts for work projects were signed with China, totaling around $137 million (ibid.). In 1975, King Birendra of Nepal drafted a so-called zone-of-peace proposal that would release Nepal from its security obligations towards India. China supported the zone-of-peace plan, along with 111 other countries (ibid.).
In 1987, the (already strained) relationship between Nepal and India was tested by a new conflict; India expulsed Nepalese settlers from India, and Nepal reacted by requiring a work permit for Indian workers in Nepal.
In 1988, the government of Nepal decided to strengthen its military ties with China, much to the displeasure of India. It purchased military equipment including aircraft artillery and ammunition from China, with a value of about 20 million dollars (Blanchard, Mansfield, and Ripsman 2014, 244). It could be seen as simply a
"symbolic gesture" towards a new ally, as Blanchard, Mansfield, and Ripsman (2014, p.361) stress. Before this arms deal, Nepal and China had signed an agreement on the construction of a road between the two countries. Both agreements were seen by India as a threat to its security, because this deal could lead to more Chinese military
influence in Nepal (Country Data, n.d.).
The actions of the Nepalese government were regarded as a violation of the 1950 treaty, which ensured a unique relationship between Nepal and India (Garver, 1991, p. 957). This was a rather surprising statement, given the fact that this “Treaty of Peace and Friendship” obliged both countries to respect each other’s sovereignty (Country Data, n.d.). India however, expected Nepal to stick to its non-alignment policy, which ensured that Nepal would not seek other political allies than India (Kumar Singh, 2009, p. 247).
In March 1989, India imposed economic restrictions on Nepal, after the latter refused to extend the Nepal-India trade and transit agreements. It did so, because the
agreements restricted Nepal’s freedom in trading with other states; King Birendra did not want to meet India’s concerns on defense and commerce (Country Data, n.d.). Upon this, India decided to close nearly almost all border points (Country Studies, n.d.). India’s economic sanctions over Nepal progressively widened. Shipments of elementary products like salt, food, and medicines were halted, and in April the railway between Calcutta to Nepal was closed. Also, trade credits for Nepal were blocked, and all agreements on trade and oil processing expired (Blanchard et al, p.245).
Figure 7: overview of economic sanctions on Nepal
March 23, 1989 Trade agreements expired, not renewed Late March, 1989 Closing all but two border crossings
Stopping shipments of fuel, medicines, salt
April, 1989 Closing railway from port of Calcutta to
Nepal
Cancelling trade credits for Nepal
Source: Blanchard, Mansfield, Ripsman (2014, p.245)
5.1 Economic consequences
We will now see if there is a possible correlation between the sanctions and the consequences. Unfortunately, there is no data on the unemployment rate of Nepal during this period; we will therefore only discuss Nepal’s GDP and its inflation rate.
5.1.1 GDP
Nepal's GDP growth rate dropped from 9.7% in 1988 (before the sanctions) to 1.5% in 1989 the year of the sanctions, (Blanchard et al. p.247).
Right after the sanctions were imposed, government officials stated that the disagreement with India resulted in a huge decline of Nepal’s GDP (ibid.). This is not in line with the data from the The World Bank, as can be seen below; the GDP rate still increased, although its growth was substantially accelerated after the economic sanctions were lifted, as can be seen in the next figure.
Figure 8: Nepal’s GDP (1988-1991)
Source: The World Bank, n.d.
5.1.2 Inflation rate
The inflation rate starts rising significantly in 1990. Shortages in food and other products were one of the consequences of the economic sanctions according to the literature. When products are scarce, they become more expensive; this may have caused the increasing inflation rate, which started to increase in 1990.
Figure 9: Nepal’s inflation rate (1988-1992)
320,0 330,0 340,0 350,0 360,0 370,0 380,0 390,0 400,0 1988 1989 1990 1991 x 10,000,000
