Sanctions and Income Inequality

While many economists argue that trade openness leads to more efficient allocation of factors of production and eventually improves the well being of the society by bringing about economic growth, others emphasize on the associated price that comes with such growth. Due to change in the allocation of factors of production as a result of trade openness, certain economic sectors are better off while others suffer, leading to an increased income inequality. This paper, investigates what will happen to income inequality as a result of the declining level of trade openness, which may results from economic sanctions, natural disaster and wars. In order to study this, a sample of 113 countries, during 1982 and 2001 is used to investigate the effect of lowered trade openness on income distribution. The OLS model as well as fixed effects models has been applied for analyses. The results confirmed the expectation that economic sanctions will decrease income inequality in the society. This paper only focuses on the effects of U.S.A economic sanctions on the target countries, which prevents us to generalize the results to none U.S.A sanctions. Future research should investigate how the negative effects of trade openness could be prevented.