On January 10, Secretary of State Mike Pompeo and Secretary of the Treasury Steve Mnuchin announced new economic sanctions imposed on Iran in response to its missile strikes against US forces in Iraq. The sanctions target enterprises operating in the manufacturing, textile, construction, and mining sectors. President Trump said that “These punishing sanctions will remain until the Iranian regime changes its behavior.”
The Iranian strikes were in retaliation to the US drone attack that killed Qasseim Soleimani, the powerful Iranian general and leader of the Quds Force. Thankfully, President Trump has chosen not to respond with any military action so as to avoid a full-blown war.
Nevertheless, new sanctions on Iran probably won’t change much. A long history of failed sanctions, which weren’t able to change the opposing regimes, can attest to that.
The Unintended Economic Consequences of Trade Sanctions
Almost ten years ago, Jonathan Catalán wrote an article on this same issue for the Mises Wire. Things haven’t changed since then. Governments continue to enforce trade restrictions on rival nations. Catalán explained that:
Trade sanctions are meant to destabilize regimes, forcing them to compromise with the aggressing government. Sanctions do this by threatening the regime’s survivability, by undermining any support it may have amongst the population.
Indeed, the target of these measures is the population of the nation, not its government. In a weakened economy, people may turn against the regime they live under. In Iran this has not occurred, although the regime has had embargoes placed on it since the Revolution of 1979.
Sanctions weaken these nations’ economies, because they prevent exchanges that would have been made otherwise. Since any exchange is only made because it’s mutually beneficial, both parties end up worse off. We can illustratethis in terms of a trade between two individuals. Suppose Jim works for the textile industry in Iran and wants to buy cotton from Josh, who grows it in New Zealand. With the new embargoes, Josh’s cotton becomes too expensive, and Jim is forced to buy from a less productive national dealer. If Jim can’t cut costs, he must raise prices and his business might even become unprofitable outright.
Josh is also worse off in this scenario. He has lost a client, perhaps a long-time and trustworthy one. Both sides of the transaction lose with a prohibition such as this. Not only do Iranian importers lose their ability to buy cheaper and/or better products from abroad, but foreigners likewise lose their ability to buy Iranian products.
Sanctions destroy the international division of labor, which, as Ludwig von Mises explained, is the foundation of civilization itself. If the division of labor allows for specialization in an economy, the resources tend to shift to those locations where they are more value productive, and sanctions hamper this wealth generation and distribution mechanism.
Of course, the size of the harm is proportionate to the strength and scope of the embargo. In Iran, we have seen various cases of the consequences of disrupting these individuals’ and enterprises’ position on the global market. Catalán continu
trade sanctions that have been in place since 1979 have made it too difficult for Iranian airlines to modernize their aircraft fleets, or to procure the spare parts necessary to maintain them. The unfortunate result has been an increasing rate of aerial accidents, leading to the injury and death of at least dozens—if not hundreds—of individuals. It could not possibly be the fear that spare parts meant for Iranian civilian airlines may be used to maintain Iranian combat aircraft. It’s doubtful that two very complex and very different machines use the same parts.
In addition to that, the most recent sanctions on financial institutions have caused medicine shortages. Although the trade of humanitarian goods is still allowed, many foreign banks and outside suppliers are breaking off their relations with Iranian partners, which endangers the importation of vital goods and equipment used in the treatment of serious illnesses.
In an article written for the medical journal The Lancet, three doctors working at MAHAK Pediatric Cancer Treatment and Research Center in Tehran noted that the establishment of sanctions have caused a “scarcity of drugs due to the reluctance of pharmaceutical companies to deal with Iran.” They also warned that
Within the next 3 months, shortages of vincristine and ifosfamide will prevent proper treatments of CNS tumours, lymphomas, Wilms’ tumour, sarcomas, and retinoblastoma. An unsustainable situation will rapidly develop because essential medicines for paediatric cancer treatments in low-income and middle-income countries listed by WHO are the 30 most prescribed drugs in our hospital. The purchase of any medical equipment…will become all but impossible and further jeopardise treatment conditions. During the previous embargo, radiation treatments in our hospital were interrupted for 2 months until spare parts could be imported.
The Failed History of Trade Sanctions
But what if, from the point of view of the US government, the trade sanctions meet their objectives? Couldn’t these undesired consequences just be the opportunity cost of a peaceful and prosperous Iran of the future, when the current regime is dethroned and a democratic regime instituted for the rest of time?
Historically, this hasn’t been the case at all. Iran is itself a great example. The first embargo, as we have discussed, was issued in 1979, when a terrorist group held hostages at the US embassy in Tehran. This embargo froze Iranian assets in American banks and developed into a full trade sanction. It lasted until 1981, when a deal was signed with the Iranian government.
But sanctions were again instituted in 1987, in 1995, in 2011, and in the last couple of years as well. The United Nations also imposedsanctions in 2006, 2007, 2008, 2010, 2011, 2012, and 2015. Iran hasn’t transitioned to a democratic regime since 1979, and it doesn’t seem to be happening any time soon. The government’s nuclear program isn’t being tossed out, either.
Another example of failed sanctions is Cuba. It has been the target of embargoes since 1960 as a response to the expropriations of Americans citizens and companies by the Cuban revolutionary government. Accordingto Nelson Rodríguez Chartrand:
In 1992, the embargo turned into a law and, in 1996, the United States Congress passed the so-called Helms-Burton Act, which prohibited American citizens from doing business within the Island or with the Cuban government—although the justification for the embargo has been, for long, the lack of civil liberties and the human rights violations by the Cuban regime.
Besides having to endure the regime’s imposed collectivist economy, the population has to live with an additional strangulation of wealth caused by sanctions. Of course, the main cause of Cuba’s poverty is socialism, which makes capital accumulation and a rational resource allocation impossible. But the embargoes do help keep Cubans poorer. Yet, there’s no reason to believe the Cuban population is any closer to overthrowing the Cuban state than it was in 1960. And if the population does rise in revolt, there’s no reason to assume the uprising is due to American sanctions.
Free Markets and Free People
If the history of sanctions is a thoroughly failed one, then what could be a way out for Iran? We have to exchange war, restrictions, and prohibitions for peace, trade, and information.
If history has taught us a lesson, it certainly is that interventionism doesn’t work. In the economic arena it causes impoverishment, and on battlegrounds it causes death, suffering, and unnecessary harm. Now is the time to end impoverishing and ineffective economic sanctions in all their forms.
Although we Latin Americans thought Chile was immune to populism, small protests have grown into the largest ones since the nation’s re-democratization in the 90s. Initially, the protestors were groups of students complaining about a raise in the Santiago subway fare — an increase of 3.75 percent or about five US cents (which could add up to $1.15 during peak hours). They demanded that prices be held lower, and some even called for free passes.
Now, the movement has taken on a whole new character, with protestors’ complaints becoming about income inequality and a poor welfare state. Violence also entered the picture, as protestors started rioting, burning nineteen subway stations. President Sebastian Piñera then declared a state of emergency, calling in troops to restore order.
Who’s to blame? Well, protestors attribute these problems to the nefarious legacies of Augusto Pinochet’s dictatorship and its relentless implementation of a “neoliberal” agenda, with widespread liberalization of the market and privatizations in the 70s and 80s. Are their claims and requests justified? Or are they missing the entire point and advocating for bad policies? To answer these questions, we must look at some history.
Pinochet and his Legacy
Chile has always been a well-known example of successful free market reforms and their positive results. Ironically, all was done under the dictatorial regime of Augusto Pinochet, initiated in 1973, after a coup on President Salvador Allende, a socialist whose interventionist policies had led the country to ruin.
Pinochet and his economic advisors — heavily influenced by Milton Friedman and the Chicago school advisers known as the “Chicago boys” — put forth a radical economic agenda that created a boom for the Chilean economy. In addition to the removing of price controls, privatization, and deregulation, the best-known measure of the Pinochet era is its implementation of a private pension system in place of the traditional pay-as-you-go method, which inspired numerous pension reforms worldwide.
In the following decades, GDP per capita (in terms of purchasing power parity (PPP)) rose by 230 percent, life expectancy increased from 65 to 82, and inflation went down from almost 800 percent to 2 percent, all despite the population having more than doubled. Furthermore, Chile is the leader in social mobility among Organisation for Economic Co-operation and Development (OECD) countries, and its Gini index, which measures inequality, has been constantly decreasing since the 80s.
As we can see, Chile is much better off than its neighbors, and certainly much better off than Chile itself was sixty years ago. This leads to the conclusion that the claims of the students are, at least, exaggerated. But why would they protest an economic scene that has clearly improved their situation? This stems from the fact that, although free markets were largely implemented in Chile, they were not followed by a change in the political culture and in ideology, leaving the door open for statists to take back control of the narrative in the decades following re-democratization.
Back to Interventionism
After the 1988 referendum, Pinochet’s dictatorship gave way to a democracy, and Christian Democrat Patricio Aylwin was elected president. Aylwin and Eduardo Frei Ruiz-Tagle, his successor, generally saw the free market reforms with good eyes and, so, didn’t bother to change the system too much. But this changed with Ricardo Lagos of the Socialist Party, elected in 2000. His Ministry of Planning and Cooperation released a report waging an official war against inequality and undermining the “neoliberal system” — as they called it. The authors went as far as stating that
the current economic system … makes individualism and competition prevail through a socio-political history of domination, exclusion and marginalization, or through class structure, or through cultural factors, like intolerance and an anti-community ethos.
This marked the beginning of the cultural domination by the socialists. Year after year, their presence in universities, the strength of unions and other interest groups, and propaganda by means of the government only grew — especially after Michelle Bachelet’s election in 2006. And it grew with no backlash, since free market advocates thought the game was over, that history had ended — to use Francis Fukuyama’s famous words — and that they could stay home, relaxing. This is, of course, absurd, and the outcome of this cultural domination could have been predicted, as Axel Kaiser did — almost prophetically — in his 2007 book El Chile que viene:
[I]n today’s Chile there is a false sense of security. Many think, for example, that it’s impossible to conceive of large-scale social outbreaks. Not to mention the army in the streets. Some even believe that we march towards development. [Italics are mine.]
In the following years, during both Bachelet’s socialist and Sebastián Piñera’s social democratic administrations, a number of reforms were passed. The tax reforms of 2012 and of 2014 increased taxes on the rich and as well as corporate tax rates — creating a more progressive tax code. The educational reform sought to end profit in education — it set a price ceiling for private schools and permitted universities to charge only the wealthier 10 percent of Chileans. And the labor reform gave more strength to unions negotiate with employers — although it still displeased syndicalist leaderships and entrepreneurs. And today, we see large-scale social outbreaks and the military in the streets.
These and other measures weakened Chile’s strong free market economy, brought about by Pinochet’s constitution of 1980. But because the constitution is so restraining to governments action, protestors are now demanding the writing of a new constitution, from a blank slate. This certainly would result in a regime much more open to interventionism, socializing education and pensions, and creating a strong welfare state.
Reactions to the Protests and Chile’s Future
The pressure seems to be working, as President Piñera has announced a list of measures as an answer to protestors:
Raise in the minimum wage to 350,000 pesos (470 USD) per month. If wages are below this value, the government will provide the remaining.
Raise of 40 percent in taxes for those with an income above 8 million pesos (10,700 USD).
Raise of 20 percent in pension payments.
Price controls on electricity rates, canceling a recent 9.2 percent increase.
A ceiling for health expenditures for families. Government will pay for anything that goes beyond that amount.
Expansion of the deal between the public health system (Fonasa) and pharmacies to provide cheaper medicines.
In addition to that, Piñera also replaced eight of his ministers — in favor of a much younger cabinet — and declared that he is open to any “structural reforms” and hasn’t dismissed the idea of a new constitution. He has thus given in to the populists’ desires, and the future doesn’t look so bright.
Chile is walking on the road to serfdom, because, despite having experienced great free market reforms, there was no campaign to disseminate ideas. Ludwig von Mises taught us that “ideas, and only ideas, can light the darkness,” and Chileans skipped class. After a shock of economic liberalism, the Chicago boys and their friends closed their eyes and didn’t notice the socialists taking back control.
This is why the role of organizations such as the Mises Institute is so important. People are the agents of change, and if people don’t have good ideas, change will be for the worst. Spreading the ideas of freedom is more important than passing any major reform, because, in the long run, socialist mindsets among the people will drive public policy back towards interventionism. For any reform — or a libertarian society, for that matter — to sustain itself, it requires a continuing campaign of education, of self-awareness, and of shifting the culture towards liberty. That is what Chileans forgot.
In his 2007 book, Axel Kaiser noted that Chileans’ “advantage is due to an historical accident, which is now coming to an end.” He predicted that “Chile will show, in the coming years, that it is nothing more than any other Latin-American country.” The prospects are not good, but let’s hope Kaiser is wrong on this one.
Antony Davies is an associate professor of economics at Duquesne University and Mercatus Affiliated Senior Scholar at George Mason University. His primary research interests include econometrics and public policy.
Find Mr. Davies at his website: antolin-davies.com
His podcast: www.wordsandnumbers.org
And on Learn Liberty: http://www.learnliberty.org/speakers/antony-davies/
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