Hit me and I get stronger – the effects of long-term sanctions

Is there anyone who does not know about the sanctions against countries like Iran, Cuba, or North Korea and now against Russia? If one looks at the news only, sanctions appear to be a very effective means of turning violent regimes into purring kittens.

Well, are they?

Let’s take a look at some of the more popular examples.

Cuba is probably the most famous sanctions example. Since October 1960 it has been under the spell of a total embargo by the US, its archenemy. Its extreme proximity to the North American continental landmass also makes it a very special example.

Cuba is being reprimanded by the US for being a stiff communist country and a threat to the country. National security concerns dictate that it must be contained.

I will not discuss the legitimacy of any kind of sanctions here. This is the realm of other, way more political blogs. We will only look at the consequences those sanctions produce and if they are an effective means of long-term containment.

Cuba has been under sanctions for the longest time and they are on their knees – economically at least. The country is horribly impoverished, it often cannot afford to cover the most basic needs of its population anymore and there is always an eerie feeling that the system might collapse at any moment.

But does it? And is the economic hardship really due to sanctions?

Cuba is one of the last pure communist bastions. There are not many of those on the planet anymore. Most so-called communist countries have in time transformed into something else – in the case of China into a nationalistic, pretty capitalist system under one-party rule. Real unfettered communism as it ruled a large part of the world just about 30 years or more ago is more or less extinct.

If one pragmatically looks at things, one must admit that any country, that has or had stifled the entrepreneurial spirits of its population for a long enough, went to the dumpers – economically at least. The Soviet Union disintegrated because of its inability to keep its population motivated to take measured risks and strike out as entrepreneurs.

It was a state-only economy and a feeling in the overall population that the only way to meaningfully advance would be a party career. This would cripple even the richest society in the end. No sanctions are needed to achieve this effect.

One might say that the Soviet Union was under some sort of US sanctions because through the Cold War trade between the two blocs had naturally been zero. They were enemies in the end. But then this would have meant that the mighty Soviet empire was not able to survive without economic aid from its arch enemy, the US and this is not what we want to believe, do we?

Back to Cuba. The country is under US sanctions but pretty much anyone else had no problem with doing business with the Rum Island and still, they are in big trouble. Sanctions have very little to do with that. The country is big enough to function without any exchanges with North America or indeed the rest of the world.

Autarky is not a worthy goal for any country in today’s world but if a country was forced to live in autarky by any accident, it would still thrive if only its people were allowed to thrive.

Let’s turn the argument around. What makes people and hence the countries they live in succeed? Is it heavenly bliss or hardship?

Evidence suggests that a population that lives in relative peace and security will go decadent and the population will give in to laziness and inaction. That’s how people are naturally made.

Much more than the desire for riches, entrepreneurial spirits are often awakened by a situation of need. Don’t find a job and some will strike out on their own. If they had found a job in the first place, they would never have gone entrepreneurial.

Carefree systems and societies where there is a strong feeling that the state shall and will take care of everything and blending in is the recipe for personal success that must crumble in the long run. We have a taste of that in my own home country Austria, home of the most entrepreneurial economic school which today languishes in a quagmire. And there are no sanctions to speak of.

Let’s take this from another angle. Are sanctions completely worthless then? Very obviously they are not.

They are a sign by the rest of the global community that a country does not conform to whatever minimum rules are supposed to be followed. Again, I am not discussing what those supposed norms are as I believe many of those displayed by many politicians today are fundamentally flawed.

When Russia got engaged in Ukraine the world reacted by heaping sanctions on them. It clearly hurts them as Russia has not been subject to sanctions before and has settled into a state of exchanges with the rest of the world that suits them. Unraveling those exchanges and forcing them to develop alternatives hurts them. It hurts the sanctioning countries as well as ties are always bilateral but it hurts Russia much more.

If this short-term pain produces an effect, the sanctions work. And this is often enough the case. Very few leaders want their countries to go the full way into long-term isolation.

But if a country decides to not budge as Cuba could (otherwise its entire system of government would have to be removed) or if an object of national pride and interest is being touched, then countries might decide to go for the long, hard haul. Iran is such a country.

Not only is it under US sanctions but also much of the world has enacted sanctions because of its nuclear program. In a letter to President Obama, I have made it abundantly clear that not only are the sanctions not working but also I questioned the real danger that a nuclear Iran would pose.

Iran has been under sanctions for so long, that they have become a part of its national identity. And looked at it from today’s point of view it has made the country incredibly strong and resilient. Why did Iran not go to its knees like Cuba did?

Iran’s economy is, unlike Cuba’s, a pretty diversified affair. Sure, the state has its fingers in everything and very large monopolies dominate whole swathes of the economy. It’s by no means as strong and performing an economy as it potentially could be but it has a very strong and solid entrepreneurial undercurrent.

Private business is everywhere in the country and despite sanctions, despite a bloated state sector; Iran is fundamentally way healthier as a country than many others we would consider good strong economies.

This mixture of a decent degree of economic freedom and the permanent incentivizing stimulation through sanctions has made Iran an incredibly resilient country. Sanctions have made the people strong and infused them with resolve and pride. Lifting sanctions today will have its effect but it will be measured as the real success will come from a strong population.

Sanctions are a short-term tool as they inflict short-term pain. Once they become more or less permanent, people and systems adapt and get immunized. Just like slowly increasing doses of poison have made you immune to the poison, increasing doses of sanctions immunizes against economic punishment. And it often works as a workout producing a strong and creative population.

Think about that next time when a sanction becomes too permanent.