Iran’s revolution at 44: A struggling economy with big potential

Maysam Bizaer , The Cradle, February 11 2023 — Forty-four years on from the Islamic Revolution, Iran boasts a more diversified economy, advances in technology, and major development milestones — despite decades of western sanctions aimed at hindering such progress.

Iran’s economy underwent significant changes after the Islamic Revolution of 1979. Prior to the revolution, Iran had a mixed economy with a strong private sector and heavy reliance on oil exports. After the revolution, the government nationalized many industries and implemented an economic system based on central planning and state control.

According to the World Bank, Iran’s economy is dominated by the hydrocarbon sector, agriculture, and services sectors. Although there have been some liberalization efforts, most privatizations have resulted in ownership being transferred from the government to large conglomerates, with the actual private sector playing a smaller role in small and medium-sized enterprises.

Main Sectors

Pre-revolutionary Iran’s economy was primarily comprised of four main sectors, with the oil and mining sector being the largest, accounting for 75 percent of the GDP. The services sector, industry, and agriculture followed with 13 percent, 9 percent, and 2 percent of the GDP respectively.

Over time, Iran has transformed into a diverse economy, with the services sector now being the primary driver, (+57 percent of the GDP). This is followed by the industry and mining sector (19.5 percent), agriculture (10.7 percent), petroleum (approximately 8 percent), and construction with 4.3 percent as of the end of the last Iranian calendar year, 1400, on 20 March, 2022, according to data from the Central Bank of Iran.

Oil, Gas, and Petrochemicals

Iran’s oil sector has faced numerous challenges since the revolution, including western sanctions and the destruction of facilities during the devastating eight-year Iran-Iraq war in the 1980s. While Iran saw its highest crude oil production of 6 million barrels per day (bpd) in 1974, the oil industry has never reached this volume in the past 44 years.

The highest crude oil production recorded after the revolution was 3.8 million bpd in 2018, before the US unilaterally withdrew from the nuclear agreement known as the Joint Comprehensive Plan of Action (JCPOA) and reimposed sanctions on Tehran.

As part of its policy to reduce crude oil export, Iran has significantly increased the number of its petrochemical plants to not only reduce or totally eliminate its local demands for strategic goods such as gasoline or urea, but to also maximize its foreign currency income by exporting a variety of petrochemical goods which reached $24 billion in the last Iranian year (March 2021-22).

Despite the downturns in crude oil production, Iran has significantly increased its gas production in several major gas fields such as the South Pars, becoming the third largest gas producer after the US and Russia in 2021 by producing 256.7 billion cubic meter of natural gas. While most of Iran’s natural gas production is consumed by the country’s residential, industrial, and power plants, it continues to export a portion of it to neighboring countries such as Iraq and Turkey.

Agriculture

Agriculture has also undergone significant changes since the revolution, with the government placing importance on food security through self-sufficiency. Although production has increased, the sector has faced challenges, including drought, mismanagement, and lack of needed investment to modernize the industry, which have led to a decline in productivity.

Pursuing a self-sufficiency policy for strategic products such as wheat has long been sought as the state’s policy to reduce its dependency. The sector remains an important source of employment and income for rural communities and small farmers, although its share has been decreasing in recent years.

Services

The services sector, including finance, retail, and tourism, has seen the greatest expansion and growth in post-revolutionary Iran. Although recent anti-government protests and government restrictions on the internet have impacted businesses in the sector, the sector has benefited from advancements in technology, which has enabled businesses to reach a wider customer base and enhance their services in both urban and rural areas.

The country’s scientific and technological advancements, combined with its young and highly educated workforce, has made the services sector the main contributor to the GDP and the primary source of job opportunities.

Industry & Mining

In recent decades, Iran has developed a wide range of industries including petrochemicals, automotive, mining, and manufacturing. The country now produces minerals like iron ore, copper, and gold, and the manufacturing sector has grown to produce goods like textiles, food products, steel, pharmaceuticals, and consumer goods.

These are just some of the main technological and industrial advances that Iran has achieved over the past decades either by expanding and modernizing the previously existing industries in the pre-revolution era or by creating them from scratch

Employment

According to the latest data by Iran’s Statistic’s Center, the largest sector of employment in Iran is the service sector, with 51.3 percent of the country’s workforce, followed by the industry sector with 34.6 percent, and the agriculture sector with 14.3 percent.

The current unemployment rate in Iran is 8.2 percent, the lowest it has been in 17 years, although high unemployment rates still persist among the youth (27 percent) and women (29.5 percent).

Iran’s ‘high human development’

The overall advancements in Iran’s economy have contributed significantly to the improvement of its ranking in the United Nations Development Programme’s (UNDP) Human Development Index (HDI). Iran’s HDI improved from 0.601 in 1990 to 0.774 in 2021, putting it at 76th place among countries ranked by HDI – in the top tier of states that have achieved the high human development category, and ahead of China, India, and Brazil.

According to the UNDP, the country has made substantial progress in the three basic dimensions of human development: a long and healthy life, knowledge, and a decent standard of living.

The challenges ahead

Despite 44 years of transformation, Iran’s economy faces a number of persistent challenges that threaten its growth and stability. Sanctions and political tensions with the west continue to limit Iran’s access to the international financial system and hinder its ability to trade, something officials in Tehran describe as “economic warfare.”

Additionally, mismanagement by the government, dependence on oil exports, high inflation rates, high unemployment, and limited foreign investment present major obstacles to the country’s economic progress. Although Iran has a large and well-educated workforce, it needs investment in key sectors such as technology, infrastructure, and manufacturing to unlock its full potential.

However, political, legal, and operational uncertainties, as well as capital flight, are also hindering investment and growth. According to the World Bank’s MENA Economic Update report, Iran’s real GDP was projected to grow by 2.9 percent in 2022 and 2.2 percent in 2023, a downward revision from previous forecasts. As long as sanctions and tensions with the west remain high, the outlook for Iran’s economy will remain uncertain and its growth will likely be limited.

Bleak but not hopeless

Despite its progress over the past 44 years, Iran remains a vastly underutilized market, missing out on opportunities and international investment worth billions that has led to its absence in the global supply chain despite its vast industrial, manufacturing, and scientific advances.

The economy is still grappling with high inflation, a plummeting currency, corruption, and limited access to global markets. The poverty rate which had exceeded 25 percent in the 1970s, dropped to below 10 percent in 2014, but has been on the rise again in the aftermath of major economic downturns and intensified sanctions since 2018, reaching as high as 27.6 percent in 2019. As such, the country’s ailing economy has become a major source of discontent among its youthful population.

While the situation in Iran’s economy may appear bleak, it is important to note that it has not yet reached a breaking point. The country is backed by a large, educated population, strong universities, and innovative startups that provide resilience and flexibility in the face of change, as seen repeatedly over the past decades.

The situation may continue as long as the sanctions and tensions with the West – especially in the aftermath of the Ukraine war and Iran’s strategy of the look to the East – remains high, keeping the Iranian economy ticking with limited growth much lower than its full capacity.

While Tehran continues to proactively pursue trade and economic growth with its neighbors and alternative partners outside the western-led global financial system – such as through accession to the Shanghai Cooperation Organization (SCO), its upcoming free trade agreement with the Russian-led Eurasian Economic Union (EAEU), and its application to join the Global South’s BRICS+ expanded format – it remains to be seen to what extend these measures will assist the Islamic Republic to make up for its current economic constraints.