San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

The Economic History and Economy of Iran

The Economy of Iran

The Provinces of Iran

The Economic History and Economy of Iran

Historical Background
Language-Ethnic Groups
Mohammad Mossadeq
The White Revolution
The Political Economic
Philosophy of the
Ayatollah Khomeini
The Economic Record of
the Islamic Republic

Historical Background

Iran has been the home of a culture which has been influential but not mainstream in the history of world civilization. There have been significant contribution to other cultures from Iranian culture but Iranian culture, as a whole, has been an enigma to the peoples of the Mediterranean civilizations and their successors.

One example of the cultural influence of Iran is the element of dualism that has appeared in several religions. Iran has been the source of several religions, such as Zoroastrianism and Manicheaism. Shia Islam, concentrated in Iran but which arose in what is now southern Iraq, is distinctively different from Sunni Islam.

Some believe the social structure of feudalism arose in Iran many centuries before it appeared in Europe. To protect the cities from the nomadic mounted archer warriors from central Asia the defending warriors and their horses had to be protected with armor. The armor was expensive, the horses were expensive and the warriors' training was expensive. The central government gave each local area the responsibility of raising and supporting the armored knights. Over time the armored knights became the rulers of the territories they protected and the feudal social system emerged.

The cultural area of Iranian language speakers extends into Afghanistan (Dari Language) and into central Asia (Tajiks). In ancient times speakers of languages in the Iranian language family, the Scythians and Sarmations, controlled central Asia from the Chinese Empire on the east to the Roman Empire on the west. This specifically included the area north of the Black Sea.

A Brief Chronology of Iranian History

The Language Ethnic Groups of Iran

Mohammad Mossadeq and the Nationalization
of the Anglo-Iranian Oil Company

The White Revolution
(later known as
the Revolution of the Shah and the People)

It is ironic that of all the misdeeds, corruption, and short-comings of the Shah's regime the thing that brought it down was an attempt to better the lot of the Iranian peasants and poor.

During the 1960's and early 1970's Iran experience rates of growth in GDP and consumption in the 10 to 12 percent range. The rates accelerated in the 1970's. Investment, particularly public investment, was growing even faster. The higher revenues from petroleum in the 1970's financed vastly expanded public investment and consumption, so much expanded that by 1975 public investment surpassed private investment by 50 percent and public consumption was equal to 50 percent of private consumption.

The economic philosophy of the leaders in Iran as elsewhere in government around the world is Corporatism. Corporatism differs from socialism in that it allows for private ownership of resources and private production but reserves a strong role for the government in regulating and guiding the economy to promote economic development and social justice.

The Shah's ultimate objective was to strengthen the Iranian State, perhaps resurrect the prestige of the Iranian Empire, by achieving economic development. He chose to further this objective by promoting three immediate goals:

There is a good deal of cart-before-the-horse thinking in these objectives. A welfare state is a luxury that developed economies choose to spend their resources on, not something that is beneficial in achieving development. Infrastructure is something that is creasted to serve the economy in the course of its development. The infrastructure should not be built first in anticipation of development. Also heavy industry, even a petrochemical industry, may not be something that works to Iran's advantage. In the case of petrochemicals it is generally cheaper to ship the crude petroleum to the market and have it processed into petrochemicals at the markets. Arbitrarily chosen industry may have to be subsidized by taking resources away from viable industries.

To create some of the trappings of a welfare state the Shah had the labor legislation modified to provide workers with fringe benefits, profit sharing and job security. Free education was provided from nursery school through universities. To promote this the government nationalized the private schools. Social security, disability benefits and free health care were created. The funding was to be shared by the workers, their employers and the State. This raised the cost of employing labor and contributed to unemployment.

Licensing, tax policy and tariff protection were policy instruments used by the government to control who could and who could not do business.

The regime made available low-cost capital to industrial businesses favored by the regime. This, combined with higher cost of labor, promoted more capital intensive technology. The businesses created under this program tended to be oligopolistic and dependent upon government subsidies and protection. Direct foreign investment in Iran was encouraged. This too tended to create oligopolistic industries dependent upon governmental favors and protection. Thus, the program promoted the exact opposite of what Iran needed. Furthermore the role of the government in protecting and subsidizing industry opened the way for corruption of government officials by actual and potential recipients of these government favors.

Price controls were imposed upon businesses and their profit margins were limited to 15 percent. To enforce the price controls the Government mobilized students to check prices and impose penalties. This earned the Shah the hatred of businesses. It was these disgruntled business people who financed the revolution of 1979. The Shah also forced a land reform program which alienated another class from his program.

The clergy organized the revolution, but without the backing and financial support of small businesses in Iran it is doubtful whether or not the revolution would have succeeded.

The Political Economic Philosophy
of the Ayatollah Ruhollah Khomeini

Ruhollah Khomeini was perceived as being a reactionary Shi'ite Islamic fundamentalist. He was such but his political economic philosophy was more than that. He emphasized goals of social justice within Iran and Iranian nationalism in the international arena. This allowed him to appeal for the support of the more secular leftists, at least initially. He garnered the support of the merchant class because they were alienated by the interventionism and corruption of the Shah's regime and because Islam does not disdain a market economy. By adopting some of the rhetoric of Third World leaders Khomeini could further appeal to the merchant class of Iran who wanted market protection from the Capitalist world.

Thus the revolution was carried out in 1979 with broadbased support. A constitution was adopted which included democratic ideals and some concern for civil liberties. Khomeini once in power then began to systematic eliminate the potential rivals for power. This included the leftists and once they were eliminated the moderates who wanted a real democracy. Khomeini campaigned for the abrogation of the original constitution and its replacement with one that create the office of Supreme Leader for him. The Supreme Leader was above electoral review in much the same way that monarchs were in feudal regimes. The major difference was that the office of Supreme Leader was not heritary the way the monarchy was.

(To be continued.)

The Economic Record of the Islamic Republic of Iran

There have been some notable accomplishments:

But there are some significant short-comings and failures of the regime; notably:

Parvin Alizadeh, the editor of a volume in 2000 entitled The Economy of Iran, says in summary of the economic state of Iran:

The performance of the Iranian economy in the 1980's and 1990's has witnessed a marked deterioration, in absolute terms as well as relative to other countries in the region. The growth of the economy has slackened drastically. The economy, with a rapidly expanding population, has experienced a marked decline in investment, low labor productivity, a widening trade gap, a fast accumulation of debt and, above all, a sharp decline in the standard of living.

On the matter of per capita GDP and income, Hassan Hakimian and Massoud Karshenas, in their article "Dilemmas and Prospects of Economic Reform and Reconstruction in Iran," say

During the two decades before 1975 per capita income in Iran grew faster than in Turkey and kept pace with Korea. By 1975 the level of per capita GDP in Iran was more than double those attended in Korea and Turkey. However, since the late 1970s income per head in Iran has witnessed a rapid decline. . . By 1990, GDP per capita in Iran had declined by half, almost down to the levels prevalent in the early 1960s and falling behind Turkey and Korea.

Source: Parvin Alizadeh (editor), The Economy of Iran, I.B. Tauris Publishers, London, 2000.

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