Is the End of Trade Sanctions a Good Thing for the Iranian Regime?

Since the signing of the nuclear agreement in July, there's been a lot of talk about the impact of lifting various economic sanctions on Iran. Articles like this one from Foreign Policy have noted the high hopes of most Iranians for an economic bonanza once sanctions end. International firms like Morgan Stanley have flagged the potential gains from economically opening a country with a large, well-educated population and major hydro-carbon resources.Contrarian that I am, I wonder if lifting  sanctions may not in the end disappoint Iran's people and potential economic partners--and backfire on its leaders. Sure, sanctions have hurt the Iranian economy, for example by boosting the scarcity and price of many imports while hamstringing their ability to export oil and gas. The real constraints to lasting prosperity in the Islamic Republic, though, appear to be deeply structural:

  • the distortions caused by the Dutch disease endemic to any economy that, like Iran's, is highly dependent on energy or other raw commodity exports;
  • the current sustained depression in global oil prices, which is likely to be reinforced by Iran's return to the market as sanctions are eased;
  • the many regulatory and political restraints on real private enterprise (i.e.,  not dependent on the good will of regime insiders); and
  • high susceptibility to political business cycles caused by politicians' manipulation of spending and tax policies to garner support.

In addition to these economic considerations, trade sanctions' political effect to date may have been to strengthen the regime—similar to the effect of sanctions from Cuba to Zimbabwe. Sanctions typically create market distortions that regime insiders are best placed to exploit, and they serve as a convenient scapegoat for economic woes that have really been inflicted by the local government's own predations and mismanagement. (This is a tactic that los hermanos Castro in Cuba have honed to perfection for a half-century.)For these reasons, I suspect that lifting sanctions may in the short term produce a sort of economic sugar high, as car parts, computers, and Cocoa Krispies become more readily available for most Iranians. Without serious reforms in the structure of Iran's economy, though, this sugar high could be followed by the type of crash and crankiness that all parents have endured from a toddler who has just enjoyed too much birthday cake.Prominent Iranians may even share my analysis. Supreme Leader Khamene'i last year warned that the United States and other "enemies" of Iran will try to subvert the regime with "money and sexual attraction"--weapons that no doubt will be easier to smuggle into the Islamic Republic in a post-sanctions world.

Image credit: Centre for Research on Globalization and Associated Press.