MM Rahmatullah: Iran is the 18th largest country of the world.  It stretches from the Caspian Sea in north to the Persian Gulf in the south.  Iran is one of the world’s major countries in oil export and it is rich in natural resources.  It has land borders with Armenia, Azerbaijan, and Turkmenistan in the north, Afghanistan and Pakistan on the east, and Iraq and Turkey in the west. Iran has been home to organized urban settlements since at least 4000 BC and even from those times the history of Iran has been intertwined with the history of the region as a whole.

Systematic analysis of governance and interactions among its constituent elements is key to understanding a nation’s development trends. This paper attempts to provide such an analysis by evaluating the quality of governance in Iran over the past half-century. To this end, a multidimensional framework is employed to describe the evolution of the state (the power deploying institution within the system of governance), the rule of law and accountability and their relations with economic growth, the state’s legitimacy, and social mobilization in contemporary Iran. Four distinctive time periods have been considered in this analysis: the prerevolutionary period (1970–79), early stage of the revolutionary state (1979–89), the period known as reconstruction and reforms (1989–2005), and the period of governance deadlock and economic stagnation (2005–present).

The main dynamics of governance in each period are discussed by focusing on the evolution of the above institutions and the interactions among them. The paper argues that Iran’s major challenges are rooted in its poor governance. Today, as a result of the low and non-inclusive growth of the past four decades, the signs of stress in the Iranian economy and society are multiplying. Widespread poverty and growing inequality, low labor force participation and high unemployment, human capital flight, declining productivity, banking and pension crises, high and rising public debt, loss of social capital, and serious environmental issues are among the challenges currently facing the country. In the meantime, corruption has become systemic and turned into a downward spiral that reinforces itself over time. Considering the poor outcomes of Iran’s state-dominated development strategy—which to some extent had hoped to copy the China model—the paper highlights the urgency of implementing a transformational approach to governance to reduce the discretionary actions of the political institutions, improve transparency and accountability, and allow for the establishment of a strong civil society. Without these changes, development in Iran is unlikely to proceed much further regardless of the prevailing political system in the future. Furthermore, given the extensive range and depth of Iran’s internal challenges—which will likely be exacerbated in the long term by exogenous factors (e.g., physical impacts of climate change, global efforts to move away from fossil fuels, and the diminishing potential of cheap labor as a driver of growth due to automation)—the window of opportunity for Iran to overcome its development logjam and avoid a dire future in the coming decades is closing rapidly.

Iran had an estimated Gross Domestic Product (GDP) in 2017 of US$447.7 billion, and a population of 80.6 million people. Iran’s economy is characterized by the hydrocarbon sector, agriculture and services sectors, and a noticeable state presence in manufacturing and financial services. Iran ranks second in the world in natural gas reserves and fourth in proven crude oil reserves. Economic activity and government revenues still depend to a large extent on oil revenues and therefore remain volatile. Iranian authorities have adopted a comprehensive strategy encompassing market-based reforms as reflected in the government’s 20-year vision document and the sixth five-year development plan for the 2016-2021 periods. The sixth five-year development plan is comprised of three pillars, namely, the development of a resilient economy, progress in science and technology, and the promotion of cultural excellence. On the economic front, the development plan envisages an annual economic growth rate of 8 percent and reforms of state-owned enterprises, the financial and banking sector, and the allocation and management of oil revenues among the main priorities of the government during the five-year period.

Iran’s GDP growth in 2017/18 dropped to 3.8 percent as the effect of a large surge in oil revenues in the previous year dissipated. The overwhelming majority of growth came from the non-oil sectors out of which more than half can be attributed to services growing by 4.4 percent. Oil, agriculture and services sectors are now back above the levels of activity they were prior to sanctions in 2012/13. But in the past two years, there has not been a strong bounce back in key sectors such as construction and trade, restaurant and hotel services following the stagnation in growth during the sanctions period and the overhang from the problems of the banking sector. The oil and gas sector witnessed a growth of 0.9 percent, limited by the OPEC+ quota for the agreed period. The unemployment rate remains high, at 12.1 percent as of Apr-Jun 2018, while it represents a moderate improvement compared to the same period of the previous year (12.6 percent). Male and female unemployment rates of 10.2 and 19.7 percent respectively, suggest continued gender gaps in the labor market. Youth (15-24 years) unemployment at 28.3 percent in June 2018 remains high compared to earlier periods and regional average. The labor force participation rate edged up to 41.1 percent in June quarter 2018, its highest level in more than 10 years. Female labor force participation rate continued to improve to around 19.8 percent in 2017/18. The country ranks among the top countries that improved the participation of females in the labor force, although considerable differences between male and female labor force indicators remain.

Poverty is estimated to have fallen from 13.1 percent to 8.1 percent between 2009 and 2013 (US$5.5 a day line in 2011 PPP). This was likely due to a universal cash transfer program in late 2010, which preceded the elimination of subsidies on energy and bread. The program appears to have more than compensated for the likely increase in energy expenditures of less-well-off households, thus contributing to positive consumption growth of the bottom 40 percent of the population, even though overall consumption growth between 2009 and 2013 was negative. However, poverty increased in 2014, which may have been associated with a declining social assistance in real terms due to inflation. Looking ahead, the falling real value of cash transfers due to inflation may counterbalance the positive impact on wellbeing from economic growth in 2016/17 and 2017/18 and exacerbate the impact of predicted negative growth after last fiscal year.