Sunday, February 27, 2011


Shirzad Azad *

Following two decades of failed economic liberalization programs since 1989, Iran has stepped up its privatization policy. This article explores the factors that have motivated the government of President Ahmadinejad to push for privatization, despite its anti-capitalist rhetoric and lack of adequate economic preparations, and whether this policy can bring the intended results.

Aside from the controversial presidential election in June 2010 and the ensuing political turmoil, privatization has been one of the most debated topics about Iran in both domestic and foreign circles. The Islamic Republic has embarked on a large-scale privatization effort and now competes not only with Middle Eastern countries but also with Western European nations in terms of selling off state assets.
Despite the shift toward economic liberalization, privatization in Iran is not new; it had already begun in the late 1980s, when the phenomenon was becoming common in both developed and developing countries. The policy was created by the first administration of Hashemi Rafsanjani in 1989. It has since been continued with its ups and downs throughout the Rafsanjani, Muhammad Khatami, and Mahmoud Ahmadinejad presidencies. For over two decades of privatization and economic liberalization policies in Iran, however, the state (including revolutionary and religious foundations) has remained the dominant force in the country’s economy.

All businesses, whether public or private, depend at least as much on the whims of government regulators as on business acumen. For years, profits came primarily from privileged access to foreign exchange at the ridiculously low official rate. However, since the unification of the exchange rate, significant profit has come from access to bank loans at interest rates well below the inflation rate. In addition, Iran’s economy remains highly regulated, with much opportunity to protect favored firms (e.g., the recent decision to raise the already sky-high tariff on automobiles, in order to protect Iran’s car manufacturers).

Has the Islamic theocracy in Iran any real faith in market system and liberal economy? Despite its anti-capitalist rhetoric, why has the Iranian political system engaged in a large-scale privatization? What are the major driving forces behind this policy, and why did the previous measures taken fail to bring desirable results? Does the Iranian government privatize for economic reasons, or are there other, non-economic motivations behind this strategy? While Iran’s economy and its institutional structure are not quite ready for speedy privatization, do Iranian officials truly wish to relinquish the state-controlled economic policy? This article seeks to answer these questions.

Privatization in the Islamic Republic of Iran is examined herein as a process with significant political and economic dimensions. Concerned with the interaction of political and economic factors that have shaped privatization policy in Iran, this article investigates the issue using a political economy approach. Thus, it focuses on the country’s political and economic processes and the interactions between the two, the distribution of wealth and power among different groups and individuals, and on the mechanisms that create, sustain, and transform these relationships over time.

The distribution of power in society determines the ability of various groups and stakeholders to acquire special ownership benefits within a privatization program. The political economy approach implies that Iran’s privatization policy cannot be separated from the political factors that motivate it. A political economy orientation helps to explain the Iranian government’s decision to limit the state’s role in the country’s economic affairs and to improve the role of market forces. Privatization has important politico-economic dimensions because it involves changing ownership patterns, which unavoidably affect income distribution, employment patterns, and control of crucial economic sectors.[1]

First, the role of natural resource revenues in increasing the state’s presence in the Iranian economy is evaluated. Second, the Islamic Republic’s 1979 nationalization policy and the decade of statism that followed will be examined. Third, the article discusses the main reasons for the implementation of the economic liberalization and privatization policy as well as impediments to its success from 1989 until 2010.


Here, the concept of “state capitalism” is employed to explain the changes in the nature and the role of the state in contemporary Iran, particularly its economic intervention and regulation since the 1960s. State capitalism emphasizes the state’s role in accumulating capital and its means of controlling the economy. A distinctive feature of state capitalism is that the major means of production are owned and run by the state. While a private domestic capitalist sector in commerce, industry, agriculture exists, it is small and weak.[2]

The flow of resource revenues in Iran since the late 1950s and early 1960s has consolidated the government’s indispensible role in collecting capital and managing the economy. Since the 1960s, natural resources have played a major part in Iran’s domestic and foreign affairs, including in political, social, and cultural developments.

Despite Iran’s long history of capital accumulation, industrial development, and the existence of non-energy resources, since early 1960s, natural resource revenues--oil in particular--have gradually come to dominate its economic structure, and dependency on oil revenues has in fact increased under the Islamic Republic. While the Iranian state has long played a central role in the economy, the growing importance of state-controlled oil revenues led to expanded state intervention. Therefore, control of the capital accumulation process inevitably moved from private capitalists to rulers and public sector bureaucrats.

Resource revenues were not only a source of competition for influence and wealth; they caused a reallocation of human capital from productive entrepreneurship to destructive rent-seeking. The concentration of sources of wealth in the government’s hands strengthened the state and the bureaucracy at the expense of a prosperous private sector.[3] Oil revenues provided the rentier state with economic power and financial independence from the society, making it a distributor of economic rent rather than collectors and redistributors of tax.

At the same time, resource revenues played a crucial role in the country’s rapid economic development and growth rate during the 1960s and 1970s. During the period between 1960 and 1977, Iran’s real growth rate was almost 9.6 percent, a record that few other countries achieved in that period.[4] The oil revenues and the government’s increasing capacity for sound economic management were behind this achievement. Thanks to its successful economic policy, by 1979, as many as a million foreign workers were employed in Iran, a majority of them skilled and experienced. In 1977 alone, 60,000 work permits were issued to foreign nationals.[5]

The former regime’s ambitious development plans also increased the state’s involvement in the economy and enlarged public sector participation in those parts that were not attractive to the private sector, from building massive dams to providing industrial credit. The rise of the capitalist state as part of an intensive development process has been marked by the fact that between 1949 (when Iran launched its development plan) and the beginning of the Fifth Development Plan (2010), the government’s investments in economic development increased 1,000 fold, from US $68 million (1949-1955) to $68.6 billion (1973-1977)[6]. As a result of the state providing some 70 percent of the total investment funds in the economy, during the period of 1959 to 1977, the average growth rate of non-oil GDP in constant prices was more than ten percent annually.


With the fall of the Pahlavi regime in February 1979, state involvement in the Iranian economy became even greater. In the summer of that year...



*Shirzad Azad is a Ph.D. scholar at the Australian National University (ANU). This article is an extended version of a seminar on Iranian studies convened in January 2010 at the ANU's Center for Arab and Islamic Studies (Middle East and Central Asia) in Canberra.
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