How Did the 1979 Iranian Revolution Influence Iran’s Economy?

Before the Iranian Revolution, the Shah of Iran had attempted extreme Westernization within the country. A major facet of this was industrialization and modernization. While many of the Shah’s policies succeeded, the country’s percolating unrest could not be stymied by a growing economy. When the Islamic Republic was formed, the Shah’s policies were nearly all reversed and replaced to make way for an economy that relied on Islam for its inspiration. Here are the effects that the 1979 revolution had on Iran’s economy.

During the rule of Shah Mohammad Reza Pahlavi, Iran was transformed from a majority agricultural economy to one of industry and foreign exports. The country performed on a great scale because of the modernization efforts – its low cost of credit, import control, and privatization of business made it a smooth-running free-market system. Before the 1970s, Iran’s annual growth was double the average for a country of its size and infrastructure.

Social welfare, by Western standards, was greatly improved under the Shah’s regime. He built out an economy that sustained advancements in education, healthcare, and general well-being for Iranians. However, most of this growth was based on oil exportation. In 1973, oil prices spiked and reached record inflation, as the war between Syria and Egypt affected the ability to export. After the initial inflation, however, industrialization increased, allowing the domestic economy to keep trending upward.

The middle class in urban centers expanded as oil revenues and public spending increased. The ability to expand educational opportunities meant that women were able to take up skilled roles in a capacity never seen before. With the expansion of the middle class came the expansion of a skilled pool of academics interested in different sectors of the economy. Some wished to develop the agricultural economy or domestic manufacturing. While this was the hope of the increasingly educated middle class, Iran’s economy became almost solely dependent on oil revenue and foreign investment.

Coupled with the distaste for foreign meddling in economic affairs was the public’s unrest with the Westernization that the Shah so desperately wanted for his country. His investments leaned heavily on foreign connections and trade and, in doing so, polarized the domestic economic interests away from the industries that were developing the economy. The Shah’s political power bled into his economic interests. He was happy to keep buying power within reach of those whom he deemed close enough to his interests while ignoring the economic potential of most of his citizens.

Thus, despite the steady growth of the state’s overall economy, the Shah’s regime could not handle the political and social unrest that came about in the late 1970s. Several Islamist, nationalist, and liberal groups who called for reform were a part of the intelligentsia that was being pushed out of their economic interests in favor of the Shah’s Western dreams. This, along with the Shah’s absolutist political power, was enough to inspire protests beginning in 1978.

After the monarchy was deposed, Ayatollah Ruhollah Khomeini established himself as the Supreme Leader of Iran. He, along with his Guardian Council and Assembly of (Islamic) Experts, developed a constitution in line with the tenets of Sharia. The entirety of Iran’s government was, in the eyes of the theocracy, to be inseparable from Islam. This meant that the economy of Iran had to be self-sufficient, or, more accurately, the opposite of what the Shah’s economy looked like.

There was, as Middle East Institute scholar Jahangir Amuzegar says, “no clear economic agenda beyond repudiating Pahlavi strategies and policies.” The theocracy had several problems with the Shah’s economy, namely, its ignorance of non-oil exports, its ostracization of non-cosmopolitan industries and, therefore, people, widening social strata and creating a Western consumer economy. Khomeini’s government was intent on solving these problems through the lens of religion. To fit the economy into the mold of Islam, the 1979 constitution declared that the economy of Iran must not be an “end” in and of itself but rather a means to an end, the end being obedience to God.

In the constitution, the economy is thus laid out to be self-sufficient. If the citizens want to be obedient to God, then their leaders must provide them with the economic means to do so. This created the ideal of the theocracy-controlled industry, in which the government provided jobs, education, healthcare, and other opportunities to its citizens uniformly, disallowing hindrance to their relationship with God.

The state nationalized nearly all of the major players in Iran’s economy. Banks and insurance companies were brought fully under state control, as were most large industries. This included manufacturing, farming, and trade. Thus, the actor that held the most power in post-revolutionary Iran’s economy was the state itself. The private sector was a facet of business in Iran but in a much smaller part than the state’s industries.

The Islamic Republic of Iran also established a comprehensive welfare system that was effective in assisting those who lived in rural or poor areas of Iran. The Shah had focused his efforts on growth in urban centers, which, when attempting to rapidly industrialize, makes sense. However, Khomeini’s government saw this as a slight to the agricultural sector of Iran, and their program of social justice was aimed at improving the lives of those who lived outside of cities. The welfare program was focused on education, healthcare, and basic infrastructure.

After the death of Ayatollah Khomeini in 1989, successive leaders have attempted to move away from an economy focused on the basic needs of its citizens and towards growth. These structures, such as the partial privatization of several assets owned by the government, have worked in varying degrees throughout the last 30 years, with the economy transforming from primarily state-owned to more of a mix between nationalized industry and private business.

When the theocracy took over from the monarchy, it is thought that the stronger economy of the Shah’s regime helped in keeping Iran from all-out economic disaster. The economy in Khomeini’s government was mostly state-owned, which never allowed it the growth it had during the reign of the Shah. The Islamic Republic saw privatization as an allowance of foreign influence into the economy, but as they moved toward maintaining Iran’s economy from the inside, it became increasingly clear that they would never reach pre-revolutionary highs, particularly in the oil industry.

After the Iran-Iraq War and the death of Ayatollah Khomeini, several attempts by successive leaders to privatize industry never fully worked. The private sector is still the smallest among the trading firms in the Tehran exchange, and the country’s economy has sat at a standstill as far as debt is concerned for the last several decades. This is due in large part to the fact that Iran’s economy is largely informal, meaning that at least a third of its activity is not reported. This informality enriches merchant classes and significantly affects income equality. It also creates financial instability in government finances, as underground trade is not eligible for social security, nor is it subject to taxation that would enrich government holdings.

Iran has attempted to move away from oil revenue as the standard of economy, but the energy industry still plays a large role in the economy. However, the service industry is the largest sector of Iran’s economy, accounting for 45 percent of its total gross domestic product (GDP). This reliance, not necessarily solely on energy exports, has led to the insulation of Iran’s service industry even in times of high inflation and stagnation. The economy is also still dependent on the volatile revenues of oil and petroleum-based products, as noted by the World Bank, so its lack of economic policy means the economy is heavily affected every time oil revenues change.

In the place of a firm economic structure provided by the government, much of Iran’s economy is based on trial-and-error policies. Two policy constants have remained since the revolution: that the private sector is undermined, and the investment system is unstable. Iran has never been able to reduce the national debt, unemployment, or increase exportation. This is primarily based on the fact that the state and semi-state businesses are not as efficient for competition and investment, and there is no stable policy to uphold the economic activity of these sectors, much less the private sector.

Some aspects of the theocracy’s vague economic policy have helped the country, namely in education and poverty reduction. Socioeconomic quality of life is fairly consistent, thanks to the government’s policies of blanket welfare and its focus on expanding funding for education and poverty relief. However, the absence of a policy for expanding the domestic economy and little action in reducing unemployment has greatly contributed to the inability of Iran’s economy to grow at the rate it wishes to.

Despite Iran’s many setbacks, it cannot be said that its economy is completely failing. It is highly diverse and combines classical mercantilism with modern industry. Its focus on education has also produced a highly educated generation of young people looking to help improve the economy. However, without stronger policy, any strong factors of the economy are somewhat moot, as without structure and guidance, the economy will remain stagnant, and its problems will be exacerbated.

The first major external factor to affect Iran’s economy following the 1979 revolution was the Iran-Iraq War of 1980 to 1988. Its economy was given no headstart, as it quickly drained the equivalent of approximately $500 billion. The government then set up no strong policies to support the post-war economy. It shifted between focusing on central planning, political flaws, and coverage of basic needs. This led to the dependence of Iran’s economy on oil revenue, which has, in general, led to increased inflation due to its volatile nature.

As could be expected, sanctions imposed by the United States, most recently in 2018, have affected Iran’s ability to trade globally for essentially its entire post-revolutionary history. The sanctions range in their reasoning from the hostage crisis in the late 1970s to Iran’s withdrawal from 2015’s Joint Comprehensive Plan of Action (JCPOA) concerning nuclear threats. The last four decades have shown that Iran has had trouble attracting foreign investment due to its lack of organization in policy surrounding exportation. It has managed to cultivate relationships with regional partners, exporting mainly energy products, such as petrochemicals and natural gas. China is a significant trade partner for Iran and accounts for all of its crude-oil purchases, along with 30 percent of its non-oil trade.

International sanctions over the last 40 years have left Iran stranded on the global financial stage. It simply cannot fully circumvent trade restrictions. The sanctions imposed on Iran have, for the most part, raised inflation, induced recession, and weakened the Iranian rial. However, Iran still attempts to mitigate these sanctions by increasing non-oil trade with its closest neighbors, as well as concealing oil movements and heavily discounting prices for any country willing to take oil exports.

The economy of Iran has also been significantly impacted by its focus on importation, as it has failed to reach its goal of self-sufficiency. External imports greatly outnumber exports, which has created problems when the government attempts to reform economic policy. The theocracy has carried on, however, intending to insulate its economy with domestic investment and central planning. This policy is akin in English to a strategy of domestic resilience, but without the technology and financial capital to achieve an economy independent of foreign influence, Iran’s economy remains in a state of “stagflation,” facing the problems of fluctuating inflation and stagnation without strong policy to enact change.

The Vision of 2025, drafted in 2005, stated that Iran would be a “knowledge-based economy,” which would serve it well in global markets and financial investment, allowing the government to shift from economic management to policy making. This has not developed as they hoped it would, mainly from the external hardships the government has faced in attempting to build its economy from the inside out. In comparison to several other countries that sought industrialization in the early 20th century, Iran has fallen behind since the 1979 revolution.

The government of Iran has never been able to form a concrete doctrine on economic development, nor has it established meaningful foreign economic partners. Politicization versus economization, a remnant of revolutionary ideology, has remained and will continue to do so without significant action from Iran’s theocratic government.