Confrontation with the West and Long-Run Economic and Institutional Outcomes: Evidence from Iran

TL;DR

This study examines Iran's prolonged confrontation with the West, revealing significant long-term economic and institutional damages comparable to civil war impacts, using advanced synthetic control methods.

Contribution

It introduces a novel application of synthetic control techniques to quantify Iran's long-term economic and institutional effects of confrontation with the West.

Findings

Large, persistent GDP and GDP per capita losses

Sharp declines in foreign investment and trade

Deterioration in political stability and rule of law

Abstract

This paper studies the long-run economic and institutional consequences of Iran's confrontation with the West, treating the 2006-2007 strategic shift as the onset of a sustained confrontation regime rather than a discrete sanctions episode. Using synthetic control and generalized synthetic control methods, I construct transparent counterfactuals for Iran's post-confrontation trajectory from a donor pool of countries with continuously normalized relations with the West. I find large, persistent losses in real GDP and GDP per capita, accompanied by sharp declines in foreign direct investment, trade integration, and non-oil exports. These economic effects coincide with substantial and durable deterioration in political stability, rule of law, and control of corruption. Magnitude calculations imply cumulative output losses comparable to civil-war settings, despite the absence of internal armed conflict. The results highlight confrontation as a deep and persistent economic and institutional shock, extending the literature beyond short-run sanctions effects to sustained geopolitical isolation.