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World > Middle East > Iran > Economy (Notes)

Iran - Economy (Notes)


ECONOMY
Pre-revolutionary Iran's economic development was rapid. Traditionally an agricultural society, by the 1970s Iran had achieved significant industrialization and economic modernization. However, the pace of growth had slowed dramatically by 1978, just before the Islamic revolution. Since the fall of the shah, economic recovery has proven elusive thanks to a combination of factors, including fluctuations in the global energy market. Economic activity was severely disrupted additionally by years of upheaval and uncertainty surrounding the revolution and the introduction of statist economic policies. These conditions were worsened by the war with Iraq and the decline in world oil prices beginning in late 1985. After the war with Iraq ended, the situation began to improve: Iran's GDP grew for two years running, partly from an oil windfall in 1990, and there was a substantial increase in imports. However, Iran had suffered a brain drain throughout the previous decade and wartime policies had resulted in a demographic explosion.


A decrease in oil revenues in 1991 and growing external debt dampened optimism for recovery. In March 1989, the government instituted a new 5-year plan for economic development, which loosened state control and allowed Iran to seek greater latitude in accessing foreign capital. Mismanagement and inefficient bureaucracy, as well as political and ideological infighting, hampered the formulation and execution of a consolidated economic policy, and the Iran fell short of the plan's goals while economic inequality was aggravated. Today, Iran's economy is a mixture of central planning, state ownership of oil and other large enterprises, village agriculture, and small-scale private trading and service ventures. Former President Khatami followed the market reform plans of his predecessor, President Rafsanjani, and indicated that he would pursue diversification of Iran's oil-reliant economy, although he made little progress toward that goal. High inflation and expansive public transfer programs, as well as powerful economic-political vested interests created obstacles for rapid reform.


During the 2005 election campaign, President Ahmadi-Nejad promised to redistribute oil revenues to the impoverished, fund large infrastructure projects, and privatize Iranian state enterprises. He has been criticized within Iran for not carrying through on many of his promises. While establishment of the Imam Reza fund for cheap loans to youth has been popular, a law increasing the minimum was revoked because of the huge strain on employers. The 'Shares of Justice' program--distributing shares of state-owned enterprises to the poor--faces a number of potential problems.


Unemployment was estimated to be 20% for 2007, according to the International Monetary Fund. Unemployment, a major problem even before the revolution, has many causes, including population growth, high minimum wage level and other restrictive labor policies. Farmers and peasants enjoyed a psychological boost from the attention given them by the Islamic regime but hardly appear to be better off in economic terms. The government has made progress on rural development, including electrification and road building, but Iran still faces inefficiencies related to agricultural land usage which are politically difficult to reconcile. Agriculture also has suffered from shortages of capital, raw materials, and equipment, problems dating back to the 1980-1988 war with Iraq. (See Foreign Relations below.)


Although Islam guarantees the right to private ownership, banks and some industries--including the petroleum, transportation, utilities, and mining sectors--were nationalized after the revolution under Marxist-influenced economic policies. Starting under President Rafsanjani, Iran has pursued some privatization through its nascent equities markets. However, the industrial sector remains plagued by low labor productivity and shortages of raw materials and spare parts, and is uncompetitive against foreign imports.


Increases in the price of oil starting in 2003 have increased state revenue enormously and permitted a much larger degree of spending on social programs than previously anticipated. However, this has not eased economic hardships such as high unemployment and inflation. The proportion of the economy devoted to the development of weapons of mass destruction and military spending overall remains a contentious issue with leading Western nations.


Earnings from Iranian oil exports, projected at $57-$87 billion for 2007-2008, are placed into the Oil Stabilization Fund (OSF), originally designed as a Treasury safety net if oil prices dropped below $20/barrel. In practice, the government has drawn upon the OSF to cover overexpenditures. Iran relies on oil for 80% of its export revenue, and 40% of total revenues. (Note: Iran's refining capacity is limited, and Tehran is a net gasoline importer, spending $2.6 billion for foreign gas in 2005.)


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Notes and Commentary: People - Economy - Government and Political Conditions - Historical Highlights - Foreign Relations - Relations with U.S.



Facts at a Glance
Geography
People
Government
Economy
Communications
Transportation
Military
Climate
Current Time
Ranking Positions


Notes and Commentary
People
Economy
Government and Political Conditions
Historical Highlights
Foreign Relations
Relations with U.S.





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