Economic history of Iran

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History of Iran
Mythological history Pishdadian dynasty Kayanian dynasty
Ancient period BC Prehistory of Iran Ancient Times–4000 Kura–Araxes culture 3400–2000 Proto-Elamite 3200–2700 Jiroft culture c. 3100 – c. 2200 Elam 2700–539 Akkadian Empire 2400–2150 Kassites c. 1500 – c. 1155 Neo-Assyrian Empire 911–609 Urartu 860–590 Mannaeans 850–616
Imperial period Median Empire 678–550 BC (Scythian Kingdom) 652–625 BC Neo-Babylonian Empire 626 BC–539 BC Achaemenid Empire 550–330 BC Kingdom of Armenia 331 BC – 428 AD Atropatene 320s BC – 3rd century AD Kingdom of Cappadocia 320s BC – 17 AD Seleucid Empire 312–63 BC Kingdom of Pontus 281–62 BC Frataraka dynasty 3rd-century BC – c. 222 AD Parthian Empire 247 BC – 224 AD Suren Kingdom 119 BC – 240 AD Sasanian Empire 224–651 Zarmihrids 6th century – 785 Qarinvandids 550s – 11th century
Medieval period Rashidun Caliphate 632-661 Umayyad Caliphate 661–750 Abbasid Caliphate 750–1258 Dabuyids 642–760 Bavandids 651–1349 Masmughans of Damavand 651–760 Paduspanids 665–1598 Justanids 791 – 11th century Alid dynasties 864 – 14th century Tahirid dynasty 821–873 Samanid Empire 819–999 Saffarid dynasty 861–1003 Ghurid dynasty pre-879 – 1141 Sajid dynasty 889–929 Sallarid dynasty 919–1062 Ziyarid dynasty 930–1090 Ilyasids 932–968 Buyid dynasty 934–1062 Ghaznavid dynasty 977–1186 Kakuyids 1008–1141 Nasrid dynasty 1029–1236 Shabankara 1030–1355 Seljuk Empire 1037–1194 Khwarazmian dynasty 1077–1231 Eldiguzids 1135–1225 Atabegs of Yazd 1141–1319 Salghurids 1148–1282 Hazaraspids 1155–1424 Mihrabanids 1236–1537 Kurt dynasty 1244–1396 Ilkhanate Empire 1256–1335 Chobanid dynasty 1335–1357 Muzaffarid dynasty 1335–1393 Jalairid dynasty 1337–1376 Sarbadars 1337–1376 Injuids 1335–1357 Afrasiyab dynasty 1349–1504 Marashis 1359–1596 Timurid Empire 1370–1507 Karkiya dynasty 1370s–1592 Kara Koyunlu 1406–1468 Aq Qoyunlu 1468–1508
Early modern period Safavid dynasty 1501–1736 (Hotak dynasty) 1722–1729 Afsharid dynasty 1736–1796 Talysh Khanate 1747–1826 Zand dynasty 1751–1794 Qajar dynasty 1789–1925
Modern period Pahlavi dynasty 1925–1979 Interim Government 1979 Islamic Republic 1979–present
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Prior to 1979, Iran's economic development was rapid. Traditionally an agricultural society, by the 1970s the country had undergone significant industrialization and economic modernization.^[1][2] This pace of growth had slowed dramatically by 1978 as capital flight reached $30 to $40 billion 1980 US dollars just before the revolution.^[3]

After the Revolution of 1979, Iran's government proceeded with 4 reforms:

1. First they nationalized all industry, including the NIOC, and all Iranian banks.
2. The new Constitution divided the economy in 3 different sectors, namely "State", "Cooperative" and "Private", with the majority being state-owned businesses.
3. The Government started using central planning to control the economy, having the Supreme Leader, the President and Majlis creating 5-year socio-economic plans.
4. The State took control of setting prices and subsidies.

The government's long-term objectives since the revolution have been economic independence, full employment, and a comfortable standard of living for citizens, but at the end of the 20th century, the country's economy faced many obstacles.^[4] Iran's population more than doubled between 1980 and 2000 and grew increasingly younger. Although a relatively large number of Iranians are farmers, agricultural production has consistently fallen since the 1960s. By the late 1990s, Iran had become a major importer of food. At that time, economic hardship in the countryside resulted in vast numbers of people moving to cities.^[3]

The eight-year war with Iraq claimed at least 300,000 Iranian lives and injured more than 500,000. The cost of the war to the country's economy was some $500 billion.^[5][6] After hostilities with Iraq ceased in 1988, the government tried to develop the country's communication, transportation, manufacturing, health care, education and energy sectors (including its prospective nuclear power facilities), and began the process of integrating its communication and transportation infrastructure with that of neighboring states.^[7]

Since 2004, Supreme Leader Khamenei and President Ahmadinejad have tried to implement reforms that will lead to the privatization of Iran but they haven't worked out yet, making Iran a command economy in transition towards a market economy.

Pahlavi Era (1925–79)

Reza Shah Pahlavi (r. 1925–41) improved the country’s overall infrastructure, implemented educational reform, campaigned against foreign influence, reformed the legal system, and introduced modern industries. During this time, Iran experienced a period of social change, economic development, and relative political stability.^[8]

In the interwar period, modern industries were introduced. Whereas fewer than 20 modern industrial plants existed in 1925, by 1941 more than 800 new plants had been established, with the intention of reducing the country’s dependence on imports. The state encouraged industrialization by raising tariffs, financing modern industries, and imposing government monopolies. Changes in the legal system, tax structure, and trade policies attracted domestic financial resources and led to the emergence of a group of new, young entrepreneurs. The shah’s court became the biggest investor in the new industries. Primarily by confiscating real estate, the shah himself became the country’s richest man. Increased investment in mining, construction, and the manufacturing sector occurred, and infrastructure investment grew significantly. Iran had only 250 kilometers of railroads and 2,400 kilometers of gravel roads in 1925; by 1938 these totals had increased to 1,700 and 12,000 kilometers, respectively. Industrial growth was not balanced, however. Integration among sectors and industries was absent, and the new industries met only part of the growing domestic demand. Agriculture, from which 90 percent of the labor force made its living, did not benefit from economic reform. Furthermore, the expanding areas of the economy were not labor-intensive. Modern sectors (Caspian Sea fisheries, railroads, seaports, the oil industry, modern factories, and coal fields) absorbed a total of only about 170,000 workers, less than 4 percent of the labor force.^[8]

The government managed the expansion of international trade by techniques such as the foreign exchange controls imposed in 1936. Many new items were among the imported goods required by industry, the military, railroads, and other areas of infrastructure investment. Traditional agricultural and industrial export products were replaced by oil exports. Germany became Iran's primary trading partner by 1940, accounting for 42 percent of its foreign trade; the United States was second, with 23 percent. The Soviet Union also was a major trading partner in this period. Despite many advances in domestic and foreign economic policy, however, Iran remained an exporter of raw materials and traditional goods and an importer of both consumer and capital goods in the years before World War II.^[8]

Reza Shah Pahlavi, who abdicated in 1941, was succeeded by his son, Mohammad Reza Shah Pahlavi (r. 1941–79). No fundamental change occurred in the Iranian economy during World War II (1939–45) and the years immediately following. However, between 1954 and 1960 a rapid increase in oil revenues and sustained foreign aid led to greater investment and fast-paced economic growth, primarily in the government sector. Subsequently, inflation increased, the value of the national currency (the rial) depreciated, and a foreign-trade deficit developed. Economic policies implemented to combat these problems led to declines in the rates of nominal economic growth and per capita income by 1961.^[8]

Abadan Refinery, built 1913.

In response to these setbacks, Iran initiated its third economic development plan (1962–68) with an emphasis on industrialization. New economic policies significantly altered the role of the private sector. The expansion of private and public banks, as well as the establishment of two specialized banks, provided reliable credit markets for medium- and large-scale private manufacturing enterprises. Not limited to cheap credit, government programs also included a wide range of incentives to encourage investment in new industries by both Iranian and foreign businesses. Most new investment was a joint effort between either the public sector and foreign investors or private businesses and foreign corporations. Investment in roads, highways, dams, bridges, and seaports also increased. With government support, part of the agricultural sector also attracted significant investment. Many large-scale agricultural operations in meat, dairy products, and fruit production were established. Small-scale farmers, however, did not benefit from the new investment opportunities.^[8]

Under the fourth and the fifth economic development plans (1968–73; 1973–78), the Iranian economy became increasingly open to imports and foreign investment. A combination of oil revenues, public spending, and foreign and domestic investments enlarged the middle class in major cities, particularly Tehran. In the wake of the spike in crude oil prices that followed the 1973 war pitting Egypt and Syria against Israel, the process of industrialization and consumption grew rapidly. Between 1973 and 1977, the specialized banks provided more than 200 billion rials to the manufacturing sector, and the increase in investment averaged 56 percent per year. A flood of imported goods and raw materials overwhelmed the capacity of seaports and warehouses. The military was also a beneficiary of the new economic and social conditions. Military personnel, modern artillery and equipment, and military training absorbed a major part of the budget.^[8]

Shah's portrait at the 1000 Iranian rial bank note

Between fiscal year 1964 and FY 1978, Iran’s gross national product grew at an annual rate of 13.2 percent at constant prices. The oil, gas, and construction industries expanded by almost 500 percent during this period, while the share of value-added manufacturing increased by 4 percent. Women’s participation in the labor force in urban areas increased. Large numbers of urban Iranian women, from varying social strata, joined the semiskilled and skilled labor forces. In addition, the number of women enrolling in higher education increased from 5,000 in FY 1967 to more than 74,000 in FY 1978.^[8]

Economic growth, however, became increasingly dependent on oil revenues in the 1970s. By 1977, oil revenues had reached US$20 billion per year (79 percent of total government revenues). Other sectors of the economy and regions of the country did not experience a uniform pattern of growth during this period. Agriculture, traditional and semi-traditional industries, and the services sector did not thrive to the same extent as the “modern” state-sponsored manufacturing industries, which accounted for only 6 percent of industrial employment. As employment opportunities in rural areas and traditional industries decreased, public employment in urban areas increased. The proportion of self-employed Iranians remained stable.^[8]

Accelerated development of the middle class was a major outcome of the 1960s and 1970s. Among this class were the new professional intelligentsia, called motekhassesin (experts). Their common denominator was the professional, cultural, or administrative expertise acquired through modern education. Nevertheless, the patterns of economic growth and regional development along with the political underdevelopment of the shah’s regime in areas such as civil institutions, human rights, and property rights limited opportunities for the majority of Iranians to develop fully their social and economic potential. Economic and social polarization minimized competition among businesses and limited development to the part of the economy concerned with the interests of dominant groups closely tied to the shah’s court and the state. Most Iranians were excluded from political and economic decision making.^[8]

After the 1979 revolution

Iran: GDP, CPI and Current account data (1980-2010)

According to the 1979 Iranian Constitution, it is the duty of the Islamic government to furnish all citizens with equal and appropriate opportunities, to provide them with work, and to satisfy their essential needs, so that the course of their progress may be assured.^[9] Iran's long-term objectives since the 1979 revolution have been economic independence, full employment, and a comfortable standard of living for citizens, but at the end of the 20th century, the country's economic future faces many obstacles. Iran's population more than doubled in a 20-year period, with an increasingly young population. Although a relatively large part of the population engages in farming, agricultural production has fallen consistently since the 1960s. By the late 1990s, Iran was a major food importer, and economic hardship in the countryside had driven vast numbers of people to migrate to cities.

The rates of literacy and life expectancy in Iran are high for the region, but so is the unemployment rate, and inflation is in the range of 20% annually. Iran remains highly dependent on one major industry, the extraction of petroleum and natural gas for export, and the government faces increasing difficulty in providing opportunities for a younger, better educated workforce. Such lack of opportunities has led to a growing sense of frustration among lower- and middle-class Iranians.

Following the nationalizations in 1979 and the outbreak of the Iran–Iraq War, over 80% of Iran's economy came under the control of the government.^[10] After the end of hostilities with Iraq in 1988, the government tried to develop the country's communication, transportation, manufacturing, health care, education and energy infrastructures (including its prospective nuclear power facilities) and has begun the process of integrating its communication and transportation infrastructure with that of neighboring states.^[11] It is estimated that Iran sustained a loss of $500 billion through the Iraq war.^[12]

In 1996, the U.S. Government passed the Iran and Libya Sanctions Act (ILSA) which prohibits U.S. (and non-U.S. companies) from investing and trading with Iran for more than $20 million annually,^[13] with the exception, since 2000, for items like pharmaceuticals, medical equipment.

See also

• Economy of Iran
• Privatization in Iran
• Iranian Economic Reform Plan
• Demography of Iran
• Education in Iran
• Science and technology in Iran
• International rankings of Iran

References

Bibliography