Economic Transition in Iran

The first Revolutionary Decade

Term Paper (Advanced seminar), 2010

24 Pages, Grade: 1,7


Table of contents

A) The Iranian Revolution and its Repercussions

B) Economic Transition - The First Revolutionary Decade
I. The Shah’s Economic Legacy
II. The Struggle for Sovereignty
III. The Iran - Iraq War
IV. Readjustments in the Wake of War

C) Facing Economic Challenges

D) Charts and Tables

E) References

A) The Iranian Revolution and its Repercussions

The declaration of the Islamic Republic of Iran, following the referendum on April 1st, 1979 shocked most Western spectators. It was not just one revolution out of many; it was a signifi- cant geopolitical change in the Gulf area that troubled both the United States and the Soviet Union. For the United States a valuable ally had been lost, whereas the Soviet Union was en- couraged to invade Afghanistan to create a buffer zone against Islamist tendencies in its own backyard. In addition to the geopolitical realm, the revolution had significant impacts on world economy. Due to revolutionary turbulences, the oil production of Iran considerably tapered, which triggered a surge in prices.1 In addition, Iran became more and more isolated on the diplomatic stage, which included provocations from an apparently bellicose regime in neighboring Iraq under Saddam Hussein. Last but not least, there was the constant threat of a counter revolutionary coup from within the military ranks. A host of contemporary commen- tators did not consider in the Islamic Republic of Iran (IRI) to be able to survive politically or economically. In this essay, I will attempt to outline the process of economic transition after the revolution and during the war with Iraq. The paramount objective here is to sift through the economic measures that were necessary to surmount the external challenges and which were implanted mainly out of ideological reasons.

B) Economic Transition - The First Revolutionary Decade

I. The Shah’s Economic Legacy

The economic policy of the preceding regime was two-fold. On the one hand, the adherence to Western economic principles and the utilization of state-of-the-art technology produced respectable annual GNP growth rates of 11% on average from 1963 to 1972.2 Conversely, the confidence derived from this success blinded the political leadership to steer clear of misallo- cations, derived from the unexpected upsurge in oil revenues in 1973. First of all, it is pivotal to keep in mind which policies spurred Iran’s remarkable economic growth. After the White Revolution in 19633, the Shah consistently pursued a policy of “growth first, redistribution later”4. That is, all resources were allocated to develop urban industrial areas while rural agri- cultural provinces were neglected. Moreover, the prominent goal of export promotion facili- tated growing influence of foreign corporations in Iran. In conjunction with multinational en- terprises came a significant disparity between local and foreign wages. From an overall pers- pective, it is safe to say that Mohammed Reza Shah Pahlavi promoted uneven economic growth to the benefits of a marginal group of wealthy employers.

In 1973, given an increase in oil revenues by 287%5, misallocations started to affect the ma- cro-economic level. As a result, the economy heated up considerably between 1974 and 1976. Potent inflation and ubiquitous shortages plagued the economy until pervasive measures were enacted to tame demand-pull inflation. However, high-cost emergency programs, anti- profiteering campaigns and subsidies, meant to alleviate the situation, further deteriorated the economic prospects. In the end, a complete economic standstill paved the way for deflation in 1977. At that point, the Shah was so unpopular that even civil servants joined the strike of industrial workers and bazaaris.6 When employees of private and public banks joined the strikes in concert with workers of the National Oil Company, the situation became impregna- ble. The stark scarcity in financial means tightened the stranglehold on the Iranian economy. In addition, paucity in produced oil curtailed the regime’s main source of income and created a shortage of consumer fuels.7

To summarize, both the challenge of a rigidly top-down economic management, combined with an arbitrarily intervening ruler, that alienated his own government, and the externality of exceedingly high oil revenues set the stage for the new regime. Even though the ensuing eco- nomic problems contributed to bring about the demise of the monarchy, they also proved to be a stumbling block for the Islamic Republic. Ultimately, the new Bazargan cabinet had to deal with an all-time high deficit spending, a significant trade deficit, decreasing oil revenues and protracted stagflation.8

There was significant pressure from both the inside and the outside. While the Islamic mullahs interfered in economic policy, according to Khomeini’s principle of velayat-e-faqih,9 hostile nations, such as the United States, boycotted trade with Iran. In short, the quest to create a new political and economic system was far from straight forward.

II. The Struggle for Sovereignty

This section tackles the initial phase of economic transition dependent on the ruling party and deals with attempts of intervention of foreign powers.

Amirahmadi10 divides the strive for power within the Islamic state into two main phases.11 He defines the first phase as the period from 1979 to 1980. First the Provisional Revolutionary Government (PRG) contended with the Revolutionary Council (RC) and later President Banisdr tried to assert himself vis-à-vis the Islamic Republic Party (IRP). The PRG and President Banisadr12 can be described as relative moderate forces who tried to maintain remnants of the Shah’s institutions whereas the IRP did unite fundamentalist forces. In the end, the IRP managed to impose their calls for a just economy over the preferences of more moderate parties. This victory is reflected in the Iranian constitution that condemns “concentration and accumulation of wealth and maximization of profit”.13 In contrast, the constitution mandates the government to pursue the subsequent economic goals.

Firstly, the government is responsible for all basic necessities to enjoy a minimum living standard. This encompasses nutrition, housing, healthcare and support for families. Secondly, the state is obliged to ensure full employment. Thirdly, the government is obligated to preserve and protect the natural environment. Fourthly, the constitution explicitly calls for growing output in agriculture, animal husbandry, and industries. Finally, the constitution calls for special endeavors to reach a level of economic autarchy.14

While the duties of the government were stringently made plain, private property remained a less tangible issue. Foreign companies could not hope for protection of their property rights, as they endangered national self-sufficiency. Even for Iranian citizens, the definition of pri- vate property was far from clear-cut. According to Ayatollah Khomeini, the Islamic jurist (or velayat-e-faqih; See p. 5) can expropriate any individual that threatens the welfare of Mus- lims.15

All these dimensions added up to a new economic order that can be best described as Islamic State Capitalism. Islamic because the government, nominated by the clergy, had to strive for the realization of the Islamic goals delineated above. State Capitalism accounts for the fact that the state was the main economic actor that directly controlled the largest economic sector, the public sector. Moreover, the state was assigned the task to monitor the compliance of the cooperative sector with Islamic principles. In return, the third economic private sector was endowed with complementary activities in agriculture, husbandry, industry, services and commerce.16

A further vital aspect was the nationalization of all banks in Iran and the merger of the General Assembly of Banks. The vast majority of banks were run according to principles of Islamic Banking. Thus, the whole banking sector was subject to state control.

Moreover, a significant proportion of the industrial sector and the most of the land was natio- nalized. Last but not least, direct government interventions, such as controls on interest rates, price controls and foreign exchange controls, cemented the newly acquired dominance of the State within the Iranian economy.17

Against this backdrop, it is interesting to note how the nationalization, promoted by the con- stitution, affected economic performance. Most notable was a significant reduction of income per capita of 34.5% (at constant 1974 prices). This equals a loss of GDP of one third in the first three years after the revolution. By virtue of plummeting national income, saving rates significantly decreased. Consequently, gross investment continued to contract until unex- pected oil revenues alleviated the situation in 1982.18 The impact on individual purchasing power was even more devastating, given a population growth rate between 2.71% in 1976 and 3.91 in 1986. This means Iran’s population experienced a net increase of almost 17 million in this decade.19 The vast population growth combined with a shrinking GDP represented additional economic and social pressure for the Islamic regime.

Another effect of the nationalization policy was a considerable rise in inflation. The official figures suggest annual inflation rate between 10% and 25%. Estimates indicate an accumu- lated rate of 400% from the revolution until the end of the war in 1988.20 It is safe to say, that the Islamic Republic succeeded in creating a new economic order. The cost for this enterprise, however, was exorbitant. So far I focused on inner struggles and poli- cies. Subsequently, the dimension of external intervention is a further aspect worth mention- ing.


1 The world market oil price passed 20 $/bbl in 1979. See World Bank (2005), p. 29.

2 Compare Amirahmadi (1990), p. 16.

3 The White Revolution was an extended reform program that included among others a land reform, women’s rights to vote and a profit sharing scheme for industrial workers.

4 Amirahmadi (1990), p. 16.

5 See Razavi & Vaki (1984), p. 65.

6 See Amirahmadi (1990), p. 20.

7 See Razavi & Vaki, pp. 103 f.

8 See Amirahmadi (1990), p. 21.

9 Farsi: The government of the jurist (religious); See Zubadia (1989), p. 59

10 See Amirahmadi (1990), p. 21.

11 The second phase is not relevant until the end of the war. The outcome was simple: In the quest for a new leadership after the death of Khomeini and in presidential elections both pragmatists and conservatives prevailed. Compare Amirahmadi (1990), p. 22.

12 Banisadr was impeached in June 1981 and had to flee from Iran. This left the clerics in absolute power. Con- sequently, the economic discussion between a populist-statist approach and a laissez-faire tendency was li- mited to debates within the clergy. Until the end of the war, populism prevailed. See Behdad (2000), p. 104.

13 Article 44 of the Constitution of Islamic Republic of Iran, quoted by Behdad (2000), p. 102.

14 See Rashidi (1994), p. 52.

15 See Behdad (2000), p. 102.

16 Articles 44 & 45 of the Constitution of Islamic Republic of Iran summarized by Rashidi (1994), p. 53.

17 See Hakimian & Karshenas (2000), p. 34.

18 See Pesaran (2000), p. 64.

19 See Hakimian (2000), pp. 180 f.

20 See Farhadian (2002), p. 79.

Excerpt out of 24 pages


Economic Transition in Iran
The first Revolutionary Decade
University of Haifa
Political Economy of the Middle East
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ISBN (eBook)
ISBN (Book)
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Persia, Iran, Islamic Revolution, Economy, Irak, USA, Iran-Iraq War, Khomeini
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Daniel Müller (Author), 2010, Economic Transition in Iran, Munich, GRIN Verlag,


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