Shadow Economies and the Success of Economic Sanctions: Explaining Why Democratic Targets Are Disadvantaged

Abstract

The sanctions literature has identified numerous mechanisms by which the adverse economic effects of sanctions impact their success rate. This body of work, however, has mostly focused on targets' formal economies and has thus overlooked whether sanctions-induced changes in shadow (also known as informal) economic activity influence sanctions' effectiveness. In this article, we develop two rival arguments that can potentially explain how shadow sector growth affects sanctions' outcomes. Our grievance mitigation theory argues that increased shadow sector activity decreases the political pressure on leaders to capitulate to sanctions, while our disadvantaged democracy theory asserts that shadow economies create budgetary resource demands and deficits that disproportionately hamper democratic targets' ability to resist sanctions. We assess the empirical merits of the two theories using time-series cross-national data for 1950-2005. We find robust evidence that the growth of shadow economies increases the likelihood of sanctions' success in democratic targets while not significantly affecting the success rate of sanctions against non-democratic regimes. Our findings shed new light on the processes by which the economic disruptions and hardships created by sanctions translate into pressure on targeted regimes to concede to sanctions.