The ongoing isolation of Iran from the international community continues to be the most significant challenge for its economy. This isolation has hindered the growth of its markets in both the short and long term, limited its access to advanced technology, and impeded foreign investment. The isolation of Iran is a result of the xenophobia of its conservative politicians, who are wary of foreign entanglements after the country’s history of imperialism, as well as the sanctions imposed by the international community, particularly the United States, which accuses Iran of supporting terrorism. The Iran and Libya Sanctions Act of 1996 expanded the existing U.S. embargo on Iranian petroleum imports to include extensive bans on investment by both U.S. and non-U.S. companies in Iran. These prohibitions included bans on foreign involvement in Iranian petroleum development, the export of advanced technology to Iran, and the import of various Iranian products into the United States. While reform-minded Iranian politicians have made efforts to open the country to foreign investment, these attempts have had limited success, and U.S. sanctions remained in place in the early 21st century.
Since the 1979 revolution, Iran’s long-term goals have been economic independence, full employment, and a high standard of living for its citizens. However, by the end of the 20th century, the country faced numerous obstacles to achieving these objectives. The population of Iran more than doubled during this period, with a growing proportion of young people. Despite traditionally being a rural and agrarian society, agricultural production consistently declined since the 1960s, leading to Iran becoming a major food importer by the late 1990s. Economic difficulties in rural areas have driven a significant number of people to migrate to larger cities. While Iran has high rates of literacy and life expectancy compared to the region, it also faces high unemployment rates and annual inflation of around 20 percent. The country remains heavily reliant on its major industry, petroleum and natural gas extraction for export, and the government struggles to provide opportunities for a younger, more educated workforce. This has resulted in growing frustration among lower- and middle-class Iranians.
Nevertheless, the government has made efforts to develop the country’s communication, transportation, manufacturing, and energy infrastructures, including its nuclear power facilities. It has also started integrating its communication and transportation systems with those of neighboring states.
The national constitution of Iran divides the economy into three sectors: public, cooperative, and private. The public sector includes major industries, banks, insurance companies, utilities, communications, foreign trade, and mass transportation. The cooperative sector involves the production and distribution of goods and services. The private sector consists of activities that supplement the first two sectors. The constitution also provides guidelines for the administration of the nation’s economic and financial resources. After the revolution, the government declared any law or section of a law that violated Islamic principles null and void. This includes the prohibition of charging interest on loans, which is considered illegal under Islamic law, and placing limits on certain types of financial speculation. These restrictions have made Iran’s participation in the international economic community problematic, leading to harsh financial conditions and a heavy reliance on local markets.
Since the early years of the revolution, two factions have been advocating for their own interpretation of Islamic economics within the government. Islamic leftists have called for extensive nationalization and the expansion of a welfare state. On the other hand, conservatives within the religious establishment, who have close ties to the merchant community, have defended the rights of property owners and emphasized the importance of maintaining privatization. Both factions, however, have generally supported the government’s restrictions on Western banking practices. Although Ayatollah Ruhollah Khomeini, Iran’s first postrevolutionary leader, did not take sides in the leftist-conservative debate, the Iran-Iraq War (1980-88) led to increased state intervention in the economy. The government gained control over income-producing activities by nationalizing private banks and insurance companies and increasing its control over foreign trade.
Despite Iran’s transition away from public control of the financial system after the war in 1990, the economy has still struggled. The election of President Mohammad Khatami in 1997 brought hope for social and economic reform, with reformist clergy and technocrats taking key government positions. However, little progress has been made in reducing state control of the economy and promoting privatization, leaving the government’s economic policies uncertain. U.S. sanctions have further hindered Iran’s economy by limiting access to Western technology, although some European and East Asian companies have disregarded these measures. While conservatives within Iran’s government have occasionally eased restrictions on interest-bearing transactions, they have opposed reformists’ plans to attract significant foreign capital, particularly from the United States. Foreign investment remains a contentious issue due to the negative social and political consequences of past economic entanglements with foreign entities in Iran.
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