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Do Sanctions Really Constrain Iran’s Military Spending?

Do Sanctions Really Constrain Iran’s Military Spending?

Do sanctions reduce the military spending in Iran? This is the question we sought to answer by modeling the effects of sanctions on military spending in Iran to investigate the impact of unilateral sanctions (where only the United States sanctions Iran) and multilateral sanctions (where the United States acts in conjunction with other countries to sanction Iran). The results show that the increasing intensity of sanctions dampens the military budget of Iran. But by separating unilateral and multilateral sanctions, we show that only multilateral sanctions have a statistically significant and negative impact on Iranian military spending.

The Trump administration’s effort to change the political and military behavior of Iran has raised the important question of the effectiveness of sanctions. Will banking, energy and economic sanctions imposed by the United States hinder the ability of the Iranian government to expand its military ambitions? This is not the first time Iran is experiencing sanctions pressures. The Islamic Republic has been subject to different kinds of political and economic embargoes, which were mostly imposed by the US government. However, there were particular periods in political life of Iran where other global powers, such as the European Union joined US sanction initiatives under the endorsement of the United Nations Security Council resolutions and through the imposition of their own sanctions regimes.

Beginning around 2005, Iran was subjected to a growing range of multilateral sanctions imposed by the US, the EU and the UN with involvement of other main economic powers. The most expansive of these sanctions were implemented in 2012 when the US and the EU agreed to impose an oil embargo against Iran and to restrict Iran’s ties to the global financial system. Following a series of intense negotiations and the compliance by Iran to international monitoring standards, most sanctions were lifted on 16 Jan 2016 as part of implementation of the Joint Comprehensive Plan of Action (JCPOA). Notably, Iran’s military expenditure reduced by 30 percent between 2006 and 2015, one of the highest percentage decreases in military spending globally.

In May 2018, however, president Trump withdrew from the JCPOA. He criticized the deal and claimed that the lifting of sanctions had helped Iran to expand its military budget and develop its nuclear-capable missiles, support terrorism, and cause havoc throughout the Middle East and beyond. The US administration has now reimposed sanctions lifted as part of the nuclear deal. However, the difference with earlier experiences is the lack of international agreement, especially among European governments, about supporting the Trump administration’s strategy given doubts over efficacy. The US has failed to gain support for its new sanctions from the main European powers (e.g., Germany, France and United Kingdom) as well as Russia and China. A timely question that arises is to what extent the now unilateral sanctions of the Trump administration will be successful in reducing the military spending of Iran.

Multilateral Sanctions Constrain Military Spending

The first figure below shows the historical development of military spending in Iran (in USD $m., at constant 2016 prices and exchange rates). We observe that the military spending under the multilateral sanctions from 2006-2015 is consistently falling while a similar consistent reduction is not observed during the prior period of unilateral sanctions (1979-2005). Following the implementation of the JCPOA and lifting of multilateral sanctions, we observe a rise in real military spending of Iran (2015-2017).

 
 
 

The Role of Sanctions Intensity

The difference between the unilateral and multilateral sanctions periods raises the question of whether the intensity of sanctions important for controlling the military spending. In order to answer this question we apply an ARDL approach to the evolution of military spending in Iran over the period of 1960-2017 using strategic and socio-economic determinants while focusing on the effect of the intensity of sanctions. For this purpose we use an ordinal variable (0-3) in our military spending equation, which includes the categories of no sanctions (0), limited sanctions (1), moderate sanctions (2), and extensive sanctions (3). This four-category ordinal measure better captures the impact of the sanctions. Specifically, because extensive sanctions place comprehensive economic and financial pressures on the target economy, they are expected to have a greater substantial impact than limited or moderate sanctions (see Caruso, 2003, and Dizaji, 2018a).

The results show that an increase in the intensity of sanctions is associated with a larger decrease in military spending both in short and long run. One level increases in the intensity of sanctions with respect to our coding approach decreases military spending in the long-run by approximately 33 percent, ceteris paribus. Moreover the estimations of the demand equation for Iran’s military spending show that while non-defense expenditures, political institutions and the average of Middle Eastern countries military spending have influenced Iran’s military spending negatively, trade openness and population increase military spending in Iran. Trade openness provides sufficient revenues for Iranian government to expand its military and non-military expenditures (Dizaji, 2018b). The extensive economic sanctions may change the political behavior of Iranian government in order to pay more attention to social expenditures at the expense of reduction in military expenditures (Dizaji and Bergeijk, 2013; Farzanegan; 2011 and Dizaji et al, 2016).

The Case of Unilateral Sanctions

Another way to look at sanctions is to note the number of states involved. Sanctions may imposed by one country (unilateral sanctions) or a group of countries (multilateral sanctions) against the target country. It is generally argued that multilateral sanctions, due to the cooperative and coercive behavior of players, are more likely to succeed compared to unilateral ones (Caruso 2003, and Dizaji 2018a).

To estimate the impacts of different types of sanctions on Iran’s military spending, we categorize Iran’s sanctions into unilateral and multilateral ones. This categorization leads us to understand how unilateral US sanctions, which are not supported by international community, influence Iran’s military spending. The estimation results confirm the hypothesis that multilateral sanctions have statistically significant effects on military expenditure both in short and long run. The impact of unilateral sanctions on military expenditure is also negative. However, the impact is not statistically different from zero. Multilateral sanctions in place reduce Iran’s military spending about 77 percent in long run, ceteris paribus. 

We have also examined the impact of sanctions on Iran’s military burden (defined as the ratio of military spending to GDP). The overall results support the observed impact on spending. First, economic sanctions have negative impact on Iran’s military burden. Second, the more comprehensive the sanctions are the higher the contracting pressure they put on Iran’s military burden. Finally, while unilateral sanctions are not shown to influence Iran’s military burden significantly, the impact of multilateral sanctions is negative and statistically significant. These results remain robust when we also control for the oil rents as the main source of financing Iran’s military expenditures (Farzanegan, 2011 and 2014). The estimation results show that oil rents have been important drivers of Iran’s military spending.

Our findings have important implications for the current policies of the Trump administration. By pulling out from the Joint Comprehensive Plan of Action (JCPOA) in May 2018, the US government has started to impose a variety of economic sanctions on Iran. The announced purpose is to constrain the military complex in Iran and thereby address Iran’s regional activities. Our analysis, which is based on historical data, shows that the chances of success for the US sanction policy is statistically insignificant in both the short and long run.


Sajjad F. Dizaji appreciates the financial support of the Gerda Henkel Foundation during his visiting research and preparing this paper at the CNMS, University of Marburg. This policy note is based on a Dizaji and Farzanegan (2018).


References

Caruso, R., 2003. The impact of international economic sanctions on trade: an empirical analysis. Peace Economics, Peace Science and Public Policy 9(2), Article 1.

Dizaji, S.F., 2018a. Economic diplomacy in Iran: reorientation of trade to reduce vulnerability. In: Bergeijk, P.A.G. van & Moons, S. (Eds.). Research Handbook on Economic Diplomacy. Edward Elgar (pp. 273-296).

Dizaji, S.F., 2018b. Trade openness, political institutions, and military spending (Evidence from lifting Iran’s sanctions), Empirical Economics. https://doi.org/10.1007/s00181-018-1528-2

Dizaji, S.F., Bergeijk, P.A.G. van, 2013. Potential early phase success and ultimate failure of economic sanctions: A VAR approach with an application to Iran. Journal of Peace Research 50, 721-736.

Dizaji, S.F., Farzanegan, M.R., 2018. Do sanctions reduce the military spending in Iran? MAGKS Papers on Economics 2018-31, Philipps-Universität Marburg, Marburg.

Dizaji, S.F., Farzanegan, M.R., Naghavi, A. 2016. Political institutions and government spending behavior: theory and evidence from Iran. International Tax and Public Finance 23, 522–549.

Farzanegan, M.R., 2011. Oil revenues shocks and government spending behavior in Iran. Energy Economics 33, 1055-1069.

Farzanegan, M.R., 2014. Military spending and economic growth: The case of Iran. Defence and Peace Economics 25, 247-269.

Hufbauer, G. C., Oegg, B., 2003. The impact of economic sanctions on us trade: Andrew rose’s gravity model. International Economics Policy Briefs Nr. PB03-4, Institute for International Economics. Washington, DC. SIPRI, 2018. SIPRI Military Expenditure Database. Stockholm International Peace Research Institute. Solna.








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