International Sanctions and Economic Complexity in developing Countries

Since the end of the Cold War, international sanctions have become a popular tool for developed countries and some international organisations to express their dissatisfaction with the behaviour of certain countries. The issue of the effectiveness of sanctions is increasingly being debated with the annexation of Crimea in 2014 and the recent Russian invasion of Ukraine. While several empirical studies have questioned the effectiveness of international sanctions, especially with regard to their adverse effects on the well-being of populations, surprisingly little is known about the cross-country effect of sanctions on economic complexity. This study therefore investigates, as a first attempt, the effects of international sanctions on economic complexity in 76 target developing countries over the period 1998-2019. Our baseline model includes UE, US, and UN sanctions, and the empirical results show that international sanctions reduce economic complexity, with UE sanctions being more detrimental for target countries. These results are robust when considering alternative measures of international sanctions (including unilateral, plurilateral, economic, non-economic, financial, travel, trade, military, arms, and intensity of sanctions), alternative measures of economic complexity, and the instrumentation with the share of important votes in the UN General Assembly. Furthermore, we also test for potential channels and show that human capital, foreign investment, institutional quality, and terrorism are mechanisms through which international sanctions could affect economic complexity.