Thursday, August 16, 2007

Perverse Effects of Sanctions

It can be amusing how an idea that sounds so very sensible in the world of politics ends in precisely the opposite effect that may have been intended. A Reuters article appeared Monday in the Washington Post in which British officials called the embargo of the Palestinian authority in Gaza "counterproductive." An embargo does have a substantial negative impact on a country, especially if that country is small and lacks sufficient allies to make the threat of cooperative retaliation tangible and credible. But the punitive effect of the embargo is no "free lunch"-- countries that impose the sanctions will also experience a small loss in welfare.

These welfare effects for the sanction-imposing countries aside, do the punitive effects lead to the desired effect? In rare cases they may, but there is not much evidence that shows sanctions to have any effect than to lead the offending country to dig in its heels and become more belligerent. It seems that in the cases of most of the usual suspects (Iran, Iraq, North Korea, Libya, Cuba, the Palestinian Authority), the demagogues in charge of these areas managed to use the embargo to rally support around them.

This just seems to be another case where trade gets perversely tangled up where it has no business being drug in. My rules for public policy are simple: (1) achieve your goal; (2) minimize unintended consequences. In most cases trade-related solutions are second-best at best.

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