The effect of international sanctions on the size of the middle class in Iran

Abstract

This study examines the impact of international economic sanctions, imposed on Iran due to its nuclear program, on the development of its middle class. Specifically, it investigates how Iran's middle class would have evolved absent sanctions post-2012. Using the Synthetic Control Method (SCM) with nested optimization, we construct a counterfactual scenario for Iran based on a weighted average of comparable countries that mirror pre-2012 Iran but without significant sanctions. Our SCM results indicate that sanctions led to an average annual reduction of 17 percentage points in the size of Iran's middle class from 2012 to 2019. Our Synthetic Difference-in-Differences (SDID) analysis, however, provides a more conservative estimate of a 12 percentage points average annual loss, reinforcing the robustness of the findings. These estimates capture the total effect of sanctions, encompassing both their direct economic shocks, and Iran's policy responses. These results are validated through extensive sensitivity checks, including in-space and in-time placebo tests, leave-one-out analyses, and bias-corrected SCM. We also identify real GDP per capita, merchandise imports and exports, investment, industry value added, informal and vulnerable employment as key channels through which sanctions negatively impact the middle class.