S8 Ep63: Do sanctions work?

Episode Summary

Executive Summary: Moritz Schularick discusses historical evidence on sanctions, arguing that they impose real economic costs but rarely cause rapid regime collapse. Effects depend on how much trade is covered, how many countries participate, and the target’s trade structure. Financial sanctions can bite harder than trade restrictions. Russia illustrates both the limits of incremental sanctions and the political trade-offs involved: stronger measures might have increased pressure, but policymakers feared effects on energy prices and domestic support.

Main Topics: Economic theory versus real-world resilience: Traditional trade models treat international openness as insurance: countries can find alternative suppliers, so sanctions may be less devastating to the target than expected. The severity depends on what counts as a significant economic loss. Historical evidence and measuring sanction intensity: The research extends back to the 19th century and distinguishes partial from comprehensive sanctions by measuring the share of a target’s trade and trading partners covered, rather than using only a yes-or-no indicator. Sanctions impose costs but rarely topple regimes: Sanctions can reduce output, halt growth, and raise unemployment, but the guest argues that typical effects are not depression-level collapses or a reliable mechanism for regime change. Longer restrictions may also erode potential growth through reduced access to technology and trade. Financial sanctions and concentrated Western leverage: Financial measures, such as exclusion from SWIFT, are found to reduce trade and GDP more than trade sanctions. Their reach extends beyond direct trade with sanctioning countries because access to dollars, euros, and Western financial markets matters to third parties. Russia sanctions and energy-market trade-offs: Russia’s concentrated export base made it potentially vulnerable to coordinated sanctions. Policymakers were cautious about oil restrictions because removing Russian supply could raise global prices, harm consumers, and weaken public support for sanctions and Ukraine. Incremental policy and lessons for future crises: The guest says a more comprehensive early response could have increased pressure on Russia and signaled stronger support for Ukraine, while acknowledging that politicians often prefer gradual, risk-minimizing steps. Better empirical evidence can help make future sanctions more deliberate.

Key Arguments: Sanctions work in the sense that they inflict economic harm, but they are not a magic wand: under realistic circumstances, they typically do not cause immediate economic collapse or force regime change. Sanction impact depends on coverage and structure. Restrictions that cover a larger share of the target’s trade and involve more sanctioning countries are more consequential than narrow, partial measures. The paper’s estimated effects suggest sanctions can remove roughly 2–3% of GDP; the guest gives Russia’s 2023 growth as an example of growth being brought to zero rather than a collapse. Over a five-year horizon, a mean estimate discussed is a GDP loss of about 5%, conditional on the completeness and enforcement of sanctions and compared with a plausible counterfactual. Financial sanctions are more effective than trade sanctions at reducing trade and GDP, in part because Western control over major currencies and financial infrastructure creates indirect pressure on third countries. A tougher, earlier sanctions package against Russia may have imposed more economic costs, but policymakers worried that restricting oil supply would raise world prices and undermine domestic support. Sanctions design involves a political-economy trade-off: governments must balance pressure on the target against costs to their own consumers and the durability of public backing.

Data Points: Historical span of the sanctions data: Back to the 19th century - The research studies historical trade and financial sanctions to build a broader evidence base. Typical GDP impact discussed: About 2–3% - The guest describes this as a realistic order of magnitude for GDP taken off through sanctions, not a depression-level collapse. Russia’s 2023 growth: Zero growth, versus a possible 2–2.5% absent the shock - The guest uses this comparison to illustrate sanctions’ capacity to halt growth without causing the regime’s immediate collapse. Illustrative five-year GDP effect: About 5% - A mean estimate of the cumulative loss over five years, dependent on how comprehensive and strictly enforced sanctions are. Germany’s energy consumption supplied by Russian energy: Roughly one-third, or somewhat more - The scale of Germany’s exposure before the Russian gas disruption is used to illustrate the size of the shock. Russia sanctions packages: 19 packages - The guest notes that the number of packages illustrates the incremental approach and raises questions about the effectiveness of earlier measures. Nicaragua sanctions example: Two stages: US sugar exports, then all US-Nicaragua trade - The 1980s example shows how sanctions can expand from a targeted product to a country’s entire bilateral trade while leaving trade with other countries open.

Pivotal Quotes: "sanctions work, they're painful, but there are no magic wand." — Moritz Schularick: His central conclusion about sanctions: they hurt the target but do not usually produce immediate collapse. "What you can do is you can make an okay economic situation problematic." — Moritz Schularick: He characterizes sanctions as a way to halt growth and increase economic pressure rather than guarantee regime change. "Financial sanctions is just much more concentrated Western power and finance than in trade." — Moritz Schularick: He explains why financial restrictions can be more binding and affect transactions beyond direct trade with sanctioning countries.

Implications: Sanctions are likelier to have meaningful effects when broad, coordinated, and tailored to a target’s trade dependencies. Policymakers must weigh those gains against costs to their own economies and public support; stronger historical evidence can improve the design of future measures.