Pre-revolutionary Iran's economic development was rapid. Traditionally an agricultural society, by the 1970s Iran had achieved significant industrialization and economic modernization based on an import-substitution model, largely aided by the growing worldwide demand for oil. 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 due to a combination of factors, including state interference in the economy and fluctuations in the global energy market. Economic activity was further disrupted by years of domestic political upheaval immediately following the revolution. These conditions were worsened by the war with Iraq and the decline in world oil prices beginning in late 1985. After the Iran-Iraq war, Iran’s economic situation began to improve: GDP grew for 2 consecutive years, partly from an oil windfall in 1990, and there was a substantial increase in imports. Iran's social policies during the Iran-Iraq war additionally resulted in a baby boom, which has left Iran with a large, underemployed youth population today. As a result, Iran suffers from a "brain drain" as its educated youth leave the country to pursue better economic opportunities abroad.
In March 1989, the government instituted a new 5-year plan for economic development, which loosened state control and allowed Iranians greater latitude in accessing foreign capital. However, mismanagement and inefficient bureaucracy, as well as political and ideological infighting, hampered the formulation and execution of a consolidated economic policy, and Iran fell short of the plan's goals. Economic growth was further hindered by a decrease in oil revenues in 1991 and growing external debt. 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; high inflation and expansive public transfer programs, as well as powerful economic and political vested interests, posed obstacles for rapid reform during the Khatami era.
Unemployment, a major problem even before the revolution, has continued to plague Iran. However, unemployment statistics only tell part of the story--underemployment continues to affect a large portion of Iran’s young, educated workforce. Although Iran’s poorer, rural population initially enjoyed a psychological boost from the attention given them by the new Islamic government, they are only marginally better off in economic terms. The government has made some progress on rural development, including electrification, road building, and increased access to education, but Iran still suffers from inefficiencies related to agricultural land usage that are politically difficult to reconcile. The agriculture sector still suffers from shortages of capital, raw materials, and equipment--problems that date back to the 1980-1988 Iran-Iraq war.
Although Islam guarantees the right to private ownership, banks and some industries--including the petroleum, transportation, utilities, and mining sectors--are owned or controlled by the government. Under President Rafsanjani, Iran first began to pursue some privatization through its nascent equities markets. However, the industrial sector, plagued by low labor productivity and shortages of raw materials and spare parts, remains uncompetitive against foreign imports.
Today, Iran's economy is struggling as a result of sanctions, a bloated and inefficient state sector, and an overdependence on the oil sector. Although the Supreme Leader issued a decree in July 2006 to privatize 80% of the shares of most government-owned companies, private sector activity is typically limited to small-scale workshops, farming, and the service industry. As a result of inefficiencies in the economy, significant informal market activity flourishes and shortages of goods are common. A combination of price controls and subsidies continues to weigh down the economy, while administrative controls and widespread corruption undermine the potential for private-sector-led growth. Previous government-led efforts at economic reform--such as fuel rationing in July 2007 and the imposition of the value added tax (VAT) in October 2008--were met with stiff resistance and violent protests. In 2010, the Iranian Government passed the Targeted Subsidies Reform, which aims to remove state subsidies on certain commodities and replace them with direct monthly social assistance payments.
Inflation and the unemployment rate continue to be in the double digits. Widespread underemployment amongst Iran’s educated youths has convinced many to seek employment overseas. While Iran’s economic quandary may look grim, Iran has fared worse--notably during the Iran-Iraq war.
Sources:CIA World Factbook (February 2012)
U.S. Dept. of State Country Background Notes ( February 2012)