Prague, 11 February 1999 (RFE/RL) -- At the start of the Islamic Revolution, Iran's ruling clerics methodically set about destroying the capitalist economy of the Shah to build a paternalistic welfare state free of ties to the West.
But two decades later, revolutionary central planning is giving way increasingly to free market mechanisms in the face of growing economic difficulties. While reliable statistics are hard to obtain, many analysts say the country now suffers from unemployment of 20 percent or more.
Since last year, Iran's economic problems have been aggravated by the drop in worldwide oil prices. As the price of crude has dropped to its lowest levels in 10 years, the Iranian government estimates it has lost 40 percent of its foreign currency earnings.
At the same time, the Iranian population has increased rapidly since the revolution. With almost half of the population now under the age of 18, there is a strong need for the economy to expand and create jobs.
Iranian President Mohammad Khatami publicly acknowledged the country's economic ills in a televised statement to his countrymen in March. He called the economy "sick" and said structural reforms are needed.
Analysts say Iran's leadership is now embroiled in a fierce debate over what shape those reforms should take. Some factions want more of the state control of almost every sector which now forms the basis of the Islamic Republic's economy. But other factions are arguing equally forcefully for more market liberalization.
Jahangir Amuzegar, an international economic consultant, traces the economic problems to what he calls the Islamic Revolution's ideological bias. The revolution sought to create an idealized theocracy with a centrally planned and fully self-sufficient economy but ran into a chain of practical problems.
"This bias was reflected in a series of official proclamations ... reversing the Shah's course of modernization and secularization ... encouraging population growth in order to breed and train new soldiers of Islam ... developing a consumption model to encourage frugality ... aiming at internal self-sufficiency, paying off foreign loans and seeking no new ones, making agriculture the pivot of economic development ... limiting oil production to domestic economic need, and diverting foreign trade from the West and the United States to Islamic countries."
Those ideals directly repudiated the Shah's equally ambitious efforts in the opposite direction. He had tried to turn Iran into an industrial and regional superpower in a single generation using Iran's oil wealth. The Islamic Republic's 1979 constitution declared the economy, to quote, not an end in itself but only a means of moving toward God.
But the Islamic Republic's uncompromising rejection of the past set off a mass exodus of professional talent and capital which crippled its economic plans from the start. Jahangir Amuzegar:
"The whole idea of Islamization ... of the economy required in fact that the managers and the technocrats who were running the show at the time should be expelled, purged or eliminated. And as a result, a large number of them ... between two to three million people, have left Iran and they were all in these categories of professional, middle-class people and managers of various enterprises. And they were replaced by people on the basis of their loyalty to the new government and their fealty to Islam."
Iran's productivity in all sectors plunged and remains low. Washington's freezing of Iranian assets abroad following the 1979 seizure of the U.S. diplomats in Tehran and the 1980-1988 war between Iraq and Iran damaged the economy still further.
Analysts say the military hardware and capital accumulated by the Shah sustained Iran through its war with Iraq, when Tehran was isolated by most of the world. But the need to reconstruct afterward forced the Islamic Republic to rethink its economic strategy. Ever since it has been slowly moving away from its official policy of self-sufficiency and a rejection of materialism back to greater industrialization and development. Jahangir Amuzegar:
"They have adopted strict population control to deal with growing unemployment of high school and college graduates, abandoned the idea of self-sufficiency, encouraged trade with the West, gone after foreign loans ... and emphasized oil and gas development ... as a source of income for other development projects. Except for subsidies to the poor and a couple of other minor things, there has been a 180 degree change from the original bias."
So far, Iran's course back toward a market model remains slow and fitful. According to Amuzegar, the state remains the largest employer and directly or indirectly controls some 80 percent of the economy. And the state sector continues to suffer low productivity. Oil revenue still accounts for a huge portion of the state budget.
Many analysts believe that unless Iran's economy substantially restructures, it ultimately may be unable to provide enough jobs for its increasingly youthful population. The problem of unemployment is particularly acute among Iran's urban youth who after graduation are unable to find jobs in the stagnating public sector.
Amuzegar predicts that the pressure for work will force the government to further privatize its money-losing state industries and encourage entrepreneurship in hopes the country's now small private sector can generate the needed jobs.
But he warns such steps will not come easily. Much of Iran's economy today is controlled by the quasi-state foundations that after the revolution took over the businesses which once belonged to the supporters of the previous regime. The foundations are now reluctant to lose the profits and power they inherited.
And there is another problem. Every new change of Iran's economic model requires the leaders who carried out the Islamic Revolution 20 years ago to still further rethink their political and ideological preferences. And that pits reformers, who believe the revolution must change to survive, squarely against conservatives, who believe the changes will ultimately betray the revolution itself.
(This is the second part of a three-part series on the 20th anniversary of Iran's Islamic. Part three discusses Iran�s foreign policy.)