The economy grew fast under both the shah and the Islamic Republic when oil revenues were high, and faltered after , when sanctions reduced these revenues. Figure 2. Source: Maddison Project Data Finally, to appreciate the extent of social development in the last 40 years, consider the changing composition of social classes before and after the revolution.
Figure 3 shows the proportion of the population in four income groups: the poor, lower middle class, the middle class, and the rich. The data are derived from the household expenditure and income surveys collected by the Statistical Center of Iran for more than half a century, the micro files of which since data are publicly available. The thresholds for these income classes are based on per capita household expenditures, measured in purchasing power parity PPP U.
In , the poor were the largest group, accounting for over 40 percent of the population, and the middle class comprised less than a quarter of the population.
With the first oil boom, the share of the poor dropped to a close to a quarter of the population and the middle class share increased to more than one third, a little higher than the lower middle class share. After the revolution, these proportions remained about the same until the late s, when they began to change dramatically in favor the middle class.
By , before sanctions hit, they accounted for about 65 percent of the population and the poor had dropped to less than 10 percent. As with expenditure surveys in other countries, these surveys miss the very rich, which would raise their shares slightly. While the Islamic Republic has been relatively successful in the expansion of infrastructure for rural development and poverty reduction, it has failed in two important respects.
First, it has failed in providing job opportunities for its youth. The unemployment rate for college-educated youth is alarmingly high. For men and women aged , unemployment rates are The largest obstacle to job creation is the stifling of the private sector under the combined weight of an interventionist government bureaucracy and omnipresent foundations and state enterprises. The state domination of the commanding heights of the economy—the oil and gas sectors, large industries, and the banking system—discourage the rise of the private sector.
Added to these structural impediments is the fact that the flow of oil income encourages corruption as well as anti-growth populist economic policies. Consequently, serious financial sector reforms will be needed to increase the efficiency of the financial sector and reduce inflation.
There is also talk about a possible interim deal that could de-escalate the sanctions pressure. In this scenario, Iran would discontinue higher level uranium enrichment in return for gradual access to its hard currency reserves as well as waivers for the exportation of , barrels per day of petroleum products. Such a development would allow the government to fill some of the financial gaps and give economic players more breathing room. As the access to foreign assets and petroleum exports would be sub-optimal, the government would have to address internal barriers to economic growth, most importantly mismanagement, corruption, and lack of efficiency.
Improved governance and greater energy efficiency could also generate some needed economic growth. A continuation of the status quo would sustain the external pressure and compel the Iranian economy to find new ways of neutralizing the negative impact of sanctions.
As seen above, the policies mentioned have stabilized the economy, but this path cannot be sustained easily, as alternative financial resources such as the sale of government holdings will diminish over time. A potential subsidy reform or a path toward attracting investments from the Iranian diaspora — both solutions that are being debated — would require a political will that is missing at present. Furthermore, a key bottleneck will have to be addressed through workable solutions for international transactions to facilitate trade.
This could happen through cryptocurrency transactions or via closer collaboration with banking systems of key trading partners, i.
China, Turkey, Iraq, and Russia. Only half of the population was settled; the remainder were tribal nomads, mainly engaged in the herding of grazing animals. A system of land assignment was in place, similar to the medieval European system of feudalism, under which the ruler, the shah, granted land to loyal subjects who became absentee landowners, collecting taxes from the peasants on their land.
Economic activity further suffered from the handicaps of topography and climate, as well as prolonged political and social insecurity with constant pressure by foreign powers. Things began to change when Reza Shah Pahlavi, a colonel in the Persian army and founder of the Pahlavi dynasty, seized the throne in and initiated a modernization of Iran's political and economic system, while also changing the country's name from Persia to Iran.
Following World War II the new shah, Mohammed Reza, guided the economy through public planning, urbanization, industrialization, and investment in the infrastructure , and achieved sustained growth, all supported by substantial oil revenues. Compared with other third world countries during the period from , Iran's annual real growth rate of nearly 9.
Therefore, one explanation for the Islamic revolution of is that the modernization program imposed by the shah was too rapid for the Iranian people, who wished to hold on to their traditional values and ways. Another view suggests that in fact, the shah failed to modernize rapidly enough. The Iranian economic and social infrastructure was found increasingly inadequate to meet expectations, despite rising oil revenues that produced a superficial modernism.
During the last years of the shah's reign, per capita income rose less rapidly and living costs soared. In addition, corruption had become widespread. In an Islamic revolution ousted Shah Mohammed Reza Pahlavi from power and placed the Shiite clergy in control of the government of the country.
The revolution was followed by trade sanctions and the freezing of Iranian assets in the United States after radical Iranian students stormed the American embassy in Tehran and held embassy staff as hostages. These measures and the war which broke out between Iran and Iraq in September and lasted for 8 years harmed the development of the Iranian economy considerably. Iran ranks second in the world for natural gas reserves and fourth for proven crude oil reserves and, while relatively diversified for an oil exporting country, economic activity and government revenues still rely on oil revenues and have, therefore, been volatile.
The plan comprises three pillars: the development of a resilient economy, progress in science and technology, and the promotion of cultural excellence. Among its priorities are the reform of state-owned enterprises and the financial and banking sectors, and the allocation and management of oil revenues.
With more than 1. After stricter lockdown measures in late, the number of new, confirmed cases stayed stable and the number of deaths fell below persons a day. However, a gradual relaxation of lockdown measures raises the likelihood of a fourth wave of COVID cases.
The COVID pandemic has, however, severely affected jobs and income in many labor-intensive activities, including high-contact services and the informal sector. Discouragement in the labor market, reflected in lower economic participation—of Since April , the currency has lost half of its value because of US sanctions placed on accessing reserves abroad. Exchange rate volatility and government financing operations had negative spillover in the stock market.
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