While Iranian diplomats and their fellow travelers in some universities and think tanks blame the Islamic Republic’s economic woes on sanctions, most Iranians understand the real problem is Iran’s economic model. As the regime teeters, the question is whether Iranian leaders after the Islamic Republic’s demise will embrace a better model, or whether political and cultural forces will remain an impediment.
Iranians today associate the Pahlavi era with Iran’s modernization. There is truth to the assertion that Iran progressed during the Pahlavi era. The notion that “the grass is always greener” on the other side, however, leads many Iranians to mis-analyze or overstate Iran’s economic condition under the shah. After all, the failures of his central planning contributed to the 1979 Islamic Revolution.
The shah’s government also imposed high tariffs to boost Iranian industrial products.
In 1963, the shah announced the White Revolution, a series of progressive reforms. He granted women suffrage and no longer required the exclusive use of the Qur’an upon which officials took their oaths of office. The shah also redistributed land purchased from large landowners among peasants. To fulfill his ambition to transform Iran from an agrarian society into an economic and military power, he jump-started industrialization. Ruhollah Khomeini, then an obscure cleric, rose to prominence with his denunciations of these changes.
Oil money greased this economic transformation, leading to high inflation. The shah’s government also imposed high tariffs to boost Iranian industrial products. After the shah bought the rights to produce Hillman Hunter automobiles in Iran, he increased foreign car tariffs to over 200 percent to support the domestic industry. This scheme failed. Millennial Iranians negatively remember riding in Hillman Hunters, but they fail to grasp that the poor quality of the cars they grew up with were the result of protectionism.
The rapid shift away from agrarianism and toward industrialization led newly landowning peasants, who did not know how to work the land as a business, to sell their lands and move to cities. These new urbanites faced three problems. They struggled to find employment, inflation devalued the proceeds of their sales, and, being religious and conservative, they were struck by culture shock. The 1970 movie Mr. Simpleton highlighted this dynamic. They could not signal their dissatisfaction through the ballot box, and so they turned toward Khomeini.
The Islamic Republic added a second layer to this model: cronyism. Under the shah, corruption existed, but the Islamic Republic transformed that corruption into policy under its political economy. The current regime’s foreign policy ambitions have made it dependent on the Islamic Revolutionary Guard Corps, which controls between a quarter to half of the economy. Its political power also discourages growth. Small businesses resist expansion because too much success puts them at the risk of being confiscated by an Islamic Revolutionary Guard Corps crony. The most famous example is Digikala, modeled after Amazon, which the regime cronies usurped, forcing one of its founders to leave Iran.
Elected politicians and intellectuals bemoan rent-seeking, but nobody can do anything about it because it is imperative to the Islamic Revolutionary Guard Corps’ work. Many of the Iranian American hostages for whom the Obama and Biden administrations paid ransom did not run afoul of the regime for political disagreements—indeed, most were sympathetic to the regime reformists—but, rather, because their business activities competed with Islamic Revolutionary Guard Corps business interests.
It is reasonable to expect that a future Iranian regime would excise Revolutionary Guard control, but could it counter the predominant economic culture? A 2021 survey found that 86 percent of Iranians blame government structures for their poor economic conditions, rather than sanctions. The problem is that Iranians still look to their government to fix those problems for them.
When Iranians discuss the structural problems of the economy, they often refer to rent-seeking and corruption.
The Washington-based, pro-Pahlavi National Union for Democracy in Iran’s Iran Prosperity Project magnifies this view. A Pahlavi-endorsed blueprint of transition politics after the fall of the Islamic Republic, it includes good ideas; however, economically, it heavily relies on managerialism. Oil has funded the central government’s self-defeating projects since its nationalization in 1951, but the white paper makes no reference to privatizing it. This risks that future governments under a new regime will rely on oil-funded development, only to face old problems, from inflation to societal disruption.
When Iranians discuss the structural problems of the economy, they often refer to rent-seeking and corruption. Otherwise, they prefer a centralized economy because that is the only government with which they are familiar. Fears that local empowerment could fuel secession compound the embrace of centralization.
They also emphasize industries of the future, rather than those that make economic sense. Iranians, for example, talk about how missile scientists could make Iran a leader in the aerospace industry. They dismiss building dairies because they associate it with traditionalism.
To blame Iran’s economic failure only on corruption and mismanagement but fail to learn the mistakes of pre-Revolutionary Iran could condemn Iranians to repeat and compound past failures. Iran’s future freedom and prosperity depend on a leader who will challenge the Iranian society’s fantasies about itself, rather than one who feeds into unwarranted and self-defeating Iranian egotism.
