Punishing the State: How Do International Sanctions Shape Domestic Capacity?

<title>Abstract</title> <p> This paper, as the first of its kind, investigates the effect of international sanctions on state capacity, following earlier contributions that suggest sanctions deter economic outcomes. It builds on the idea that sanctions are punitive measures that undermine state capacity by generating uncertainty, downgrading economic outcomes, and altering the institutional framework. Using a global sample from 1950 to 2022, we provide evidence that international sanctions adversely affect state capacity. This finding remains robust even when employing alternative estimation methods, different samples, and varying types of sanctions. However, accounting for cross-country heterogeneity reveals that sanctions may enhance state capacity in developed and high-income countries. Overall, this paper makes a significant empirical contribution by highlighting the collateral effects of international sanctions on a state's institutional capacity. Additionally, it calls for a careful review of current practices, advocating for more targeted measures and establishing support mechanisms to mitigate institutional erosion. <bold>JEL:</bold> F02, F51, F59, F55, H11 </p>