The Case Against Smart Sanctions

Much hope is vested in the ability of so-called smart sanctions to convince Iranian authorities to abandon their nuclear ambitions and to persuade Syrian authorities to step aside and stop abusing their population. Smart sanctions are designed to limit negative humanitarian consequences to civilian populations. Instead, they target elites whose support is crucial for the rogue regime in question. They do so through travel restrictions, trade restrictions on luxury goods or other goods on which elites depend, and, crucially, through financial sanctions; including the freezing of  financial assets and bans on financial transactions with foreigners.

It is easy to see why smart sanctions carry such appeal. No-one wants to harm innocent civilians and few have pity with the elites who have enriched themselves through exploitation and now find their foreign bank accounts blocked and their summer homes on the Cote d’Azur inaccessible. Scholars, like Dan Drezner, have pointed out (ungated, pdf)  that states and international institutions have not been terribly successful in executing smart sanctions in a smart way. Yet, support for the idea of smart sanctions remains broad.

A recent article (earlier ungated version here)  in the American Political Science Review by John Freeman and my colleague Dennis Quinn suggests, however, that the idea of smart sanctions may not be so clever after all. To be sure, the article is about democratization, revisiting Daron Acemoglu and James Robinson’s work on the economic orgins of democracy. Yet, the argument has clear implications for smart sanctions. Freeman and Quinn’s core finding is that:

Financially integrated autocracies, especially those with high levels of inequality, are more likely to democratize than unequal financially closed autocracies.

They argue that this effect occurs because in countries where elites can engage in financial transactions with foreigners, their reliance on the regime becomes weaker:

[..] modern portfolio theory recommends that asset holders engage in international diversification, even in a context in which governments have forsworn confiscatory tax policies or other policies unfavorable to holders of mobile assets. Exit through portfolio diversification is the rational investment strategy, not (only) a response to deleterious government policies. Therefore, autocratic elites who engage in portfolio diversification will hold diminished stakes in their home countries, creating an opening for democratization.

This suggests an argument very similar to that advanced by those who argue that ICC indictments create obstacles for peaceful resolutions to conflicts because they limit exit options for elites. By limiting cross-border financial transactions and freezing assets, the exit options for elites become less attractive thus raising their stakes in the survival of the regime.

As always, there are counterpoints; ranging from problematic normative implications of this argument to the long-term incentives: it may be that the risk of financial sanctions leads elites to pressure governments to limit their repression in a similar way that ICC punishment could deter future violators. Nevertheless, it strikes me as an argument that ought to be part of the conversation when we debate how to best apply sanctions to undermine regimes like those in Iran and Syria. For example, there could be ways to reward defectors by promising renewed access to assets. Travel restrictions seem especially short-sighted as they make defection more difficult. Despite our understandable desire to want to isolate members of despicable regimes as much as possible, unlimited restrictions may not always be the best policy option.

• Become A Funded Futures Trader