The main feature of the economic system formed in Iran after the 1979 Islamic Revolution was government domination. Note that the government was a mighty power in the economic system even before the revolution, particularly in the years leading to the revolution. In fact, the increase in oil revenues gave the monarchical regime the delusion that the economy faces no financial constraints and the implementation of any ambitious plan to reshape Iran into a “great civilization” was possible. Mousa Ghaninejad, an economist, prefaced his article for the Persian daily Donya-e-Eqtesad with this note. A translation of the text follows:
Golden Decade
Before the increase in oil revenues, the government was always short of financial resources and needed the private sector to boost the national economy. Therefore, it did not curb the private sector’s rapid expansion, rather it helped expedite its growth by devising appropriate commercial, financial and monetary policies and setting the stage for the emergence of the “golden decade” of Iran’s economy, i.e., the 1960s.
A Game Changer
However, the unprecedented increase in oil revenues in the early 1970s was a game changer. Thanks to the oil bonanza, the government and the Shah no longer felt the need for the private sector and foreign loans.
Given his socialist tendencies, the Shah did not have a favorable opinion of an independent private sector and saw the growth and political independence of the private sector as a threat, calling it an “industrial feudalism”. Therefore, it was no wonder that he prioritized the public sector as soon as oil revenues increased.
Since then, large state projects and investments were placed on the agenda. The private sector could only play the role of a consultant or junior partner in these projects. This accelerated the centralization of Iran’s economy in two ways. First, with the government becoming the big employer and second, through the increasing interventions of state agencies in markets to control prices, or more precisely the inflation that was on the rise following the unrestrained injection of financial resources.
At that time, like today, disturbances caused by the state economy and misguided policies were attributed to “enemies”, which required a political and security tackling. As expected, the problem compounded and the public became more dissatisfied.
Last Nail in Private Sector’s Coffin
On the eve of the Islamic Revolution of 1979, Iran’s economy drifted far away from the golden decade in terms of structure and policymaking; the private sector was no longer the driver of the economy and the great entrepreneurs of the golden decade were marginalized.
The policy of stabilizing the exchange rate, despite the sharp increase in the inflation rate, had destroyed the production sector by fueling the Dutch disease and practically pushing the domestic industrial enterprises toward imports instead of production in the final years of the monarchy.
The Islamic Revolution took place amid this turbulent economic situation; in fact, it was the final nail in the coffin of private sector. Almost all the major entrepreneurs of the golden era of Iran’s economy were stripped of their ownership; the management of their large enterprises was given to young revolutionaries who were fundamentally opposed to capitalism or the free market economy. As a result, Iran’s economy entered a different era that has prevailed to this day.
Rise of Ideological Decision-Making
It is true that the Shah was against a large and politically independent private sector because of his socialist tendencies, but he knew that the market system, especially international trade, has its own rules that should be considered from an expert and scientific point of view. He occasionally imposed his opinions on economic policymaking, but the system of planning and selection of senior managers was not ideological; experts and elites were also employed by the system.
After the Islamic Revolution, the approach of revolutionaries was not only very hostile toward capitalism, both domestic and international, but also the economic policymaking and planning system were heavily influenced by ideology.
The revolutionaries were mainly influenced by the communist ideology of dividing society into insiders and non-insiders, as well as prioritizing loyalty over expertise when it came to appointing managers.
This approach, which has been pursued since the beginning of the revolution, led to the systematic selection of loyal insiders and exclusion of experts not considered as insiders.
As a result, despite the presence of experts and elite forces, policymaking became the domain of insiders and loyal forces who, regardless of their previous failed experiences, often tested “new” theories that are new on the surface but are in fact the tinted versions of the same old experiences.
During the administrations of Akbar Hashemi Rafsanjani and Mohammad Khatami, the quality of policymaking and the professional status of managers improved compared with the first decade after the revolution but with the continuation of ideological decision-making, reforms could not be sustained.
Abyss of Populism
With the inauguration of the Mahmoud Ahmadinejad administration, with its most prominent feature, i.e., widespread populism, Iran’s planning system plummeted into an abyss; an abyss so deep that it was practically impossible to pull out despite the best efforts of moderate figures. The current government, which is the heir of the populist government of Ahmadinejad to a large extent, has failed to propose effective solutions to domestic and foreign challenges.
If the significant oil revenues of Ahmadinejad’s governments could conceal his misguided domestic and foreign policies from the public, the current government is deprived of this advantage.
Today, everyone can feel the adverse effects of these wrong policies. The general and expert knowledge of officials in the executive and legislative branches of the government is low; with the current financial and monetary policies, you cannot have a positive outlook for the economy in the next year. The fluctuations of macroeconomic variables, i.e., inflation and exchange rate, are highly likely to continue.
In addition, the nuclear negotiations and sanctions are also in a deadlock, they greatly fuel the pessimistic expectations of economic players and make the business environment even more unfavorable. Under the circumstances, overhauling the decision-making system is complicated and time-consuming. The best course of action in the short term for improving the economy is to amend foreign relations and settle nuclear issues to alleviate the burden of sanctions, create optimism in the business environment and generate employment and growth.
The recent agreement with Saudi Arabia is an effective step in this direction; the positive effects of the move were immediately visible in some important economic indicators. It is clear that these measures are the first step in the direction of fundamental reforms.
As long as the system of planning and the logic behind it, i.e., the ideological selection system and prioritizing “loyalty” over expertise, is not transformed, there is no guarantee for the success of reforms in the long run.