Economic Sanctions and Environmental Performance: The Moderating Roles of Financial Market Development and Institutional Quality

This article examines the impacts of cross-border economic sanction (CES) on environmental performance by using the structural gravity model for 207 target countries during the 1995-2018 period. We consider various forms of sanction, including arms, military, trade, finance, travel, and others, while the environmental performance index (EPI) is used to measure the environmental performance. The results reveal that the imposition of a sanction, especially arm, financial, travel, and other sanctions has a significantly negative effect on the EPI score. The effects are also largely heterogeneous across sanctioned countries in terms of their economic development. The negative impact of sanctions on the environmental performance is found the most evident in developing transition countries, followed by developed economies but insignificant if the target is a developing nation. Furthermore, the properties of the financial market and the institutional quality of the sanctioned states critically affect the relationship between CES and EPI. Particularly, either the better financial market and institution development, the high degree of financial openness, central bank independence, or well-developed institutional quality helps target countries mitigate the consequences of CES on EPI. The empirical findings provide insightful implications about the socially responsible aspect of sanctions and vital lessons for economists and policymakers in the target countries in reducing the environmental costs of sanctions.