The Islamic Republic of Iran shares many of the same problems facing other countries in the global South. The economy is largely underdeveloped, highly dependent on one export commodity, and the state is unable to meet many of the lingering demands of the population. These contradictions in the political economy of development in Iran serve as the backdrop of the ongoing nuclear debate, the controversial re-election of President Mahmoud Ahmadinejad and relationship with the rest of the Muslim world.
The historical origins of Iran's current development process began before the Islamic regime existed. Mohammad Rezā Shāh Pahlavi was the Western-backed ruler of Iran whose legendary mis-management of Iranian society and economy led to the Iranian revolution of 1979. He was the last monarch of the House of Pahlavi of the Iranian monarchy. The shah of Iran initiated a series of economic and social reforms that modernized the country and set a new course for full integration into the world-economy.
But the shah also widened class-lines and sharply divided Iran into a dual society characterized by structural inequalities between the rich and poor. On the one hand were elites with close linkages with the oil industry and on the other religious clergy, rural masses, and the middle-class. This contradiction caused Iran to be dependent on oil exports and imports of expensive manufactured products. Iranians viewed the shah as largely corrupt and unable to provide basic services in education, health care and housing. The shah purchased billions of dollars in US arms building up a level of regional military might to control vital oil lifelines and exert influence in the region. Economically, the US used Iran as an economic proxy and supplier of a cheap flow of oil to the Western world. A US intelligence official once remarked,
"Iran in the 1970's was widely regarded as a significant regional if not global, power. The United States relied on it, implicitly if not explicitly, to ensure the security and stability of the Persian Gulf sector and the flow of oil from the region to the industrialized Western world on Japan, Europe, and the United States, as well as to lesser powers elsewhere."
The Iranian revolution of 1979 caused the once reliable proxy for Western influence in the middle-east to delink from the economic order, and carve out its own autonomous path toward industrialization. The revolution also sought to reverse the dual economy of the shah on behalf of the popular classes of the nation. The Iranian revolution and movement toward socio-economic transformation frightened many business professionals, technocrats and industrialists who fled to countries in the West. Many of these emigrants have been the source of external pressure on the Islamic Regime to reform.
Since coming to power though the Islamic regime has had to face perpetual economic crisis. The causes of the crisis varied from regional war, misdirected state priorities, and economic sabotage by the U.S. In the 20 years following the Iranian revolution, per capita income declined by 45 percent and inflation remained around 20 to 30 percent every year. Unemployment rose to as high as 20 percent as new entrants to the labor force could simply not find jobs in the heavily export-oriented domestic economy. As a result some 3 millions Iranians have emigrated to other countries. The rural to urban migration in Iran rapidly intensified as well with the capital city of Tehran growing from 4.5 million to 12 million people putting an enormous strain of public service delivery.
The Iranian government has continued to collect most of its non-tax revenues from exporting oil to consumer markets around the world. But despite attempts to diversify the economy, Iran has remained vulnerable to price shocks in the international petroleum market. The weakening of demand in wealthier industrialized nations during the current recession has further exposed Iran's dependency on oil to develop. Iran has failed to successfully raise oil production to collect greater state revenues. To raise production the Islamic Republic will need greater capital investment and intensive drilling technologies. In recent years, Iran has sough to improve relations with the European Union as a potential ally in the development of undercapitalized domestic petroleum.
Even with the economic crisis the Islamic regime was able to score some notable achievements of redistribution including public-spending for infrastructure development including roads, schools, and public libraries. Unlike the former shah, the Islamic regime also prioritized rural development extending running water and electricity to more than half of the villages. The regime successfully carried out a popular ambitious agrarian reform agenda confiscating half a million hectares of arable land to peasant farmers.
Most recently the administration of President Ahmadinijad has generated support from many due to his populist distributional policies within Iran. In response to energy shortages, Ahmadinejad began rationing fuel, and increasing state subsidies for items like sugar and cooking oil. During the first-term President Ahmadinejad, the Iranian government also radically increased the amount of public spending on construction. All of the increased spending kept the economy from total collapse but never tackled the profound level of dependency on oil and created a high level of inflation. Both of these problems are root concerns of the liberal opposition movement.
Reformist rivals of Mahmoud Ahmadinejad saw the last two presidential election cycles as opportunities to reverse the past statist economic policies of the government. These opponents had expected the Islamic regime to phase out public subsidies and liberalize the Iranian economy for the first time since the 1979 revolution. The president before Ahmadinejad, Muhammad Khatami was supported by the disaffected urban middle-classes, college educated professionals and labor movement who were looking for a change of course. The reformers were distraught at the landslide run-off election which elected Ahmadinejad in 2005. President Ahmadinejad's support from some ultra-conservative Iranian political parties and the poor led to a resounding mandate and presented a major setback to the reformist movement. The recent 2009 elections were seen as fraudulent by the reformists who looked forward to regaining their momentum.
Despite the television images of political repression of protests there is some support within the Islamic regime for liberal change. The reformist movement in Iran also consists of high-level clerics and many of their aims were supported by the Supreme Leader himself. In 2006, Ayatollah Ali Khamenei ordered the government to sell 80 percent of all state-owned enterprises in order to increase economic efficiency. Most clerics in Iran actually favor the conventional capitalist model of economic development. They widely support privatization of state-industries, and the development of the private sector.
However, others view such economic liberalization as an attack against the fundamental character of the Islamic revolution. These so called "hardliners" believe that maintaining tight economic control is essential to the political and social continuity of the Islamic regime. Like President Ahmadinejad, they favor central-planning, state industries, national self-reliance and a development agenda that includes poverty eradication, land redistribution, and employment in line with the objectives of the 1979 revolution.
The reformists have explicitly opposed the allocation of scarce resources to support militant Islamist forces throughout the middle-east. Groups such as Hezbollah in Lebanon and Hamas in Palestine have all been sponsored by the Islamic regime in Iran. One of the most influential moves by Iran to support such groups was the creation of the infamous al-Quds force, a highly specialized unit of Iran's military which organizes, trains, and finances Islamic revolutionary movements. The United States military has waged a series of intense counter-operations in order to neutralize key leaders within the organization and slow-down their operations.
The al-Quds Day – literally Jerusalem Day – was created by Ayatollah Ruhollah Khomeini,at the founding of the Islamic regime, and is commemorated on the last Friday of Ramadan in solidarity with the Palestinian struggle for national liberation. During the last weeks events the "Green Movement" of reformists marched through the streets chanting "Not Gaza, Not Lebanon. We are ready to die for Iran," in a direct challenge to the purpose of the gathering its self. There have been previous chants of "Death to Russia" by the reformists as well indicating a deep suspicion of the strategically close relationship between Russia and Iran. The reformists would rather see the Islamic regime focus on domestic economic and political reform than seeking to play spoiler to US hegemony in the middle-east. Many reformists believe that Iran's counter-hegemonical posture has isolated it economically and are convinced that a softening of the country's posture in the eyes of the US could help the economy.
The evolving political saga in Iran signals an intensification of a debate surrounding the nation's distributional policies. The reformists major aim was not to overthrow the Islamic regime, nor to challenge its fundamental structure. Rather the reform movement is mostly seeking to liberalize the political economy of Iran, improve ties with the United States and end financial support for resistance movements in the middle-east. The response of the Islamic regime to these internal pressures for reform will likely define Iran's development path moving forward. In the final analysis, the success or failure at which the Iranian government manages the national economy could be the most important determiner of the country's future.