Issue 8

The Ineffectiveness and Brutality of Economic Sanctions

The recent coup orchestrated by the Tatmadaw (military) in Myanmar has attracted deep concerns and condemnation, with countries calling it a “serious blow to democracy.” In the aftermath, Senior General Min Aung Hlaing is in control of the country, civilian leaders have been detained, the internet has been shut down and a state of emergency has been imposed for a year.

In alignment with the US’s long standing policy against authoritarian regimes, President Joe Biden has threatened to re-impose sanctions on Myanmar that had progressively been rolled back by the Obama administration following the initiation of democratic reforms in 2011. This threat is congruent with the popularly hailed western narrative of Myanmar being a “sanctions success” story. However, a closer look at Myanmar as well as other sanctioned regimes highlights the ineffectiveness of sanctions in attaining desired objectives. Additionally, sanctions have also often exacerbated pre-existing human rights situations, leading to more hardships for the people while regimes have stayed intact.

Economic sanctions are instruments of statecraft where there is a use or threat of use of economic capacity by a state or an international organization against another state or group of states to alter behaviors. These behaviors range from  proliferation of nuclear weapons, compromising human rights, harboring terrorism, engagement in armed aggression and  replacement of incumbent repressive governments. The economic threat is imposed mostly through means such as arms embargoes, asset freezes, trade restrictions, visa and travel bans besides others.

The rational logic behind sanctions is that since actors are concerned about economic outcomes, they would be compelled to commit towards certain behavioral norms as a result of expression of official displeasure through sanctions. Yet surprisingly, a landmark study spearheaded by economist Gary Clyde Hufbauer showed the success rate of sanctions at a meagre 34% in the 116 examined cases since 1914. A further reanalysis of the same data by political scientist Robert Pape pins the figure at an abysmal 4%.

The United States first imposed sanctions against Myanmar in 1988 to curb human rights abuses facilitated by the military regime and more sanctions were added via legislations and executive orders over the following decades. Nevertheless, sanctions failed to bolster the Myanmar government’s scores on measures of civil liberties and political rights from 1990-2011. The government continued the usage of torture, murder and disappearance to clampdown on political dissent and recurrent repression of  ethnic minorities throughout the 1990s and 2000s. Extensive sanctions did not prevent India and Pakistan from acquiring nuclear capabilities, nor did sanctions against Russia prevent excesses in Ukraine or the undemocratic annexation of Crimea. Similarly, North Korea had conducted six nuclear tests despite the imposition of multilateral economic sanctions by the US in 2002 and the United Nations Security Council in 2006 with respect to the pursuance of its nuclear program.

Sanctions primarily fail due to the globalized world  we live in. When sanctions lead to  closure of one market, targeted nations have the liberty to shift their economic focus to other markets and trading partners in order to maintain a respectable volume of trade. The big players like the US or the EU imposing sanctions is treated as an opportunity by other emerging yet major economies like India, China, South Korea. The differences in foreign policy among countries has an instrumental role to play in the survival of sanctioned economies. For example,  China’s long-term foreign policy of non-interference in the internal affairs of another state has been essential to the rise of China as Myanmar’s dominant economic ally since sanctions were imposed in the 1980s. World Bank figures indicate that Myanmar does $5.5 billion worth of trade with China each year, constituting 33% of all imports and exports. In stark contrast, the US foreign policy’s incessant emphasis on the spread of democracy has meant that the US is not in the country’s top 5 trading partners. China has also continued to have sizable economic ties with heavily-sanctioned North Korea, with bilateral trade increasing ten-fold between 2000-2015, reaching a peak in 2014 at $6.86 billion.

Barring effectiveness, precedents such as Iraq, North Korea and Iran also bear testimony to the gargantuan humanitarian crises that such sanctions trigger. Owing to prior reliance on imports for two-thirds of its food supply, the punitive financial and trade embargo imposed on Iraq in 1990 due to the invasion of Kuwait led to a price-rise of basic commodities by an astonishing 1000 percent between 1990-1995. This resulted in a 150 per cent increase in infant mortality rate and at least 6,70,000 children under-five died due to  impoverished conditions. Parallelly, the World Food Program estimates from 2019 show that approximately 43.4% (11 million) of the population in North Korea remains undernourished. The report states that the international trade restrictions only exacerbate the pre-existing food insecurity and malnutrition. Although Iranis cited as a sanctions-success story due to the signing of the Iran Nuclear Deal in 2015, the economic burden of these sanctions had already pushed 30% of the population into absolute poverty by 2017-2018. This segment of the population was estimated to be living on $1.08 a day. The Iranian Parliament’s Research Center also estimated that the sanctions-induced inflation will result in nearly 57 million Iranians living in poverty by March 2020.

Sanctions are regarded as an inexpensive and peaceful alternative to war, as a means of enforcing discipline and promoting peace. However, the accompanying  human costs  raise pertinent questions about their feasibility. In an interconnected world like ours, isolationist measures like unilateral or bilateral economic sanctions are bound to fail unless there is widespread international cooperation and consensus. However, distinct approaches to foreign policy have ensured the unattainability of such a consensus. Additionally, isolationist sanctions have inevitably pushed authoritarian regimes into the orbits of other similar regimes as demonstrated by China’s support for the Myanmar military as well as the North Korean government. Considering these consequences, there rises a need for reassessment of the usage of economic sanctions as a disciplinary instrument by the great powers. 

Image Credits: The Economist 

Saaransh Mishra is a graduate in Political Science and International Affairs. He is deeply fascinated by geopolitics, human rights, the media and wishes to pursue a career in the confluence of these fields. In his spare time, he watches, plays, discusses sports and loves listening to Indian fusion classical music.

We publish all articles under a Creative Commons Attribution-Noderivatives license. This means any news organisation, blog, website, newspaper or newsletter can republish our pieces for free, provided they attribute the original source (OpenAxis).

Issue 5

A case for caution: India’s path to economic recovery

India, as with most of the world has been impacted severely by the coronavirus pandemic and the subsequent lockdown imposed by the government. While we are in the process of reopening the economy, many of us hope for a quick return to normalcy. However, According to the production and inflation data, normalcy might be a far cry for the Indian economy. 

The headline figure of a decline of 23.9% in the GDP for the first quarter of financial year 2020-21 released in July showed the depth of the shock to the economy. Index of Industrial Production (IIP) shows a sharp decline in manufacturing across all sectors. Labour intensive sectors such as textiles (-37.3%), leather (-32.7%) and primary products such as basic metals (-21.6%) have been hit hard by the lockdown(Source- IIP Data and author’s calculations). As more workers get laid off, consumption declines which leads to low demand for manufactured goods, which leads to even more workers getting laid off thus creating a vicious cycle. Many pundits point to the increase in expenditure around the festive season and gradually increasing industrial production as signalling economic recovery. However, as the adage  goes,  one swallow doesn’t make summer, India’s economic recovery may not come easily. It faces more challenges than just production numbers as other core sectors dip significantly. 

Source – IIP Data and author’s calculations

India’s economy is heavily dependent on the services and agricultural sector. The agricultural sector employs more than 50% of the entire workforce while services contributes to 50% of India’s GDP. The services sector has seen a decline of 20.6% in Q1 of FY21 in gross value added (GVA) while the trade, hotels, communication and transport sub sector is facing a decline of 47.0%. 

The only sector that has shown growth is agriculture with an increase of 3.3%. This is expected as the government has imposed the least restrictions on this sector.  A copious monsoon has also led to a good harvest. However since the pandemic has now spread to rural areas it could cause a reduction in the agricultural sector. 

According to SBI research, manufacturing has seen a decline of 38% in gross value added. Net taxes (the difference between GDP and GVA) has declined to 1.36 lakh crore, the lowest in 7 years. The decrease in tax payments also limits the government’s willingness to spend as it increases the fiscal deficit.

The problem facing the Indian economy is threefold- demand has dipped significantly, inflation is rising and the supply chain has been disrupted. In the past year where the economy has seen a slowdown due to disruptions in the credit market, private consumption has been a significant pillar which has stood strong. In 2019, it contributed to about 57% of the total GDP. With private and public investment unlikely to increase due to underutilized capacity, private consumption will be a significant contributor to GDP this year as well. According to an SBI report the private consumption is set to decline by 14% due to the decrease in spending during the pandemic. The expenditure side of the GDP also shows a decline of 22% in demand impulses. Until the government intervenes directly to stimulate demand, we are unlikely to see a quick recovery. 

India is also facing a problem of stagflation (high inflation, low growth, high unemployment) as we take a look at the latest inflation numbers released by the RBI. CPI has gone up by 11.07%, 10.68%, 9.05% in the past three months. In India, inflation is measured using two indices. The Consumer Price Index (CPI), which measures the prices the retail customer gets, and the  Wholesale Price Index (WPI) which measures the wholesale price of goods and services. 

 The WPI came into positive territory only in August. Over the past three months, it has been 0.41%, 1.32% and 1.48%. The numbers show a clear divergence between consumer prices and wholesale prices. While one might point out this divergence may be due to hoarding/overcharging by wholesalers, this is unlikely to be the case. What these numbers point to is a supply chain disruption, wholesalers are unable to supply goods consistently to retailers leading to short term supply drops and increasing prices. This is due to the uncoordinated unlocking between states. As states continue to unlock/impose restrictions on their economies with respect to the number of cases, this trend of disruption seems to continue until next year. 

Source – IIP Data and author’s calculations

Policy Proposals

The Indian establishment faces a unique challenge as the biggest shock of its existence comes to fruition. The RBI has already lowered the repo rates (the rates at which RBI lends money to commercial banks) by 125 basis points this year. By decreasing the repo rates, RBI has made it easier for banks to obtain more money which can be used for loans to the populace.  The finance ministry has announced a slew of measures focusing on emergency credit lines, loan restructuring and providing support to distressed sectors such as housing under the brand name Atmanirbhar Bharat. However, as we see private consumption and investment collapsing, now is the time for even more radical measures to support the rural and urban lower class. 

One way the government can find immediate impact is to increase the outlay towards the National Rural Employment Guarantee Scheme (NREGS). NREGS guarantees 100 days of unskilled work to all households for a fixed wage rate. This can be increased to 150 days to support many migrant workers who have been laid off. The wage rate can also be increased to provide further support to households. Another way of directly stimulating demand is to implement something like stimulus payments like the USA. This would directly put money in the hands of the people helping shore up demand quickly. In the longer term, a Universal Basic Income (UBI) could help mitigate these shocks. While we expect economic recovery to be quick in the coming months looking at festive demand spending and increase in industrial production. The data shows us that the path to recovery requires a lot more proactive measures from the government.  

Rochak Jain is a fourth year student of economics at Ashoka University.

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We publish all articles under a Creative Commons Attribution-Noderivatives license. This means any news organisation, blog, website, newspaper or newsletter can republish our pieces for free, provided they attribute the original source (OpenAxis).