Iran

IRAN

Islamic Republic of Iran

Jomhuri-ye Eslami-ye Iran

COUNTRY OVERVIEW

LOCATION AND SIZE.

Iran, a country slightly larger than Alaska, is located in the Middle East, bordering the Gulf of Oman and the Persian Gulf in the south and the Caspian Sea in the north. It covers an area of 1.648 million square kilometers (636,296 square miles) and is edged between Iraq, with which it shares a border of 1,458 kilometers (906 miles), and Pakistan and Afghanistan in the east, with which Iran has 909 kilometers (565 miles) and 936 kilometers (582 miles), respectively, of common borderline. Iran also shares 499 kilometers (310 miles) of borderline with Turkey, 992 kilometers (616 miles) with Turkmenistan, 432 kilometers (268 miles) with Azerbaijan, and some 35 kilometers (22 miles) with Armenia, the latter 3 states formerly being part of the USSR.

Most of the 2,440 kilometers (1516 miles) of coastline are on the Persian Gulf and the Gulf of Oman. The 2 gulfs are connected by the strategic strait of Hormuz. Iran has dozens of islands in the Persian Gulf, many of which are uninhabited but used as bases for oil exploration. Those that are inhabitednotably Qeshm and Kishare being developed, attracting investors and tourists. The Iranian coast of the Caspian Sea is some 740 kilometers (460 miles) long. Apart from being home to the sturgeon that provides for the world's best caviar, the Caspian Sea is the world's largest lake, with an area of some 370,000 square kilometers, and is co-owned by Azerbaijan, Russia, Kazakhstan, and Turkmenistan.

In general, Iran consists of an interior plateau, 1,000 meters to 1,500 meters (3,000 feet to 3,500 feet) above sea level, ringed on almost all sides by mountain zones. The Elburz range with the Iranian capital, Tehran, at its feet, features the country's highest peak, the snowcapped volcanic cone of Mt. Damavand, at 5,604 meters (18,386 feet). To the north of the range there is a sudden drop to a flat plain occupied by the Caspian Sea, which lies about 27 meters (89 feet) below sea-level and is shrinking alarmingly in size. The larger Zagros mountain range runs from north-west Iran down to the eastern shores of the Persian Gulf, and then eastward, fronting the Arabian Sea, and continuing into Pakistan.

The interior plateau of Iran is mostly desert, and the settled areas are generally confined to the foothills of mountains, though oasis towns, such as Kerman, are growing in size. Major towns and historical centers are spread all over the country, such as the country's largest cities of Tabriz (1.2 million) in the far northwestern corner; Mash-had (1.9 million) in the far northeastern corner; Esfahan (1.3 million) to the south; and Shiraz (1.1 million) to the distant south of the capital, Tehran (6.8 million).

POPULATION.

Iran's population was estimated to total 65.6 million in July 2000 according to CIA figures. Almost two-thirds of Iran's people are of Aryan origin their ancestors migrated from Central Asia. The major groups in this category include Persians, Kurds, Lurs, and Baluchi. The remainder are primarily Turkic but also include Arabs, Armenians, Jews, and Assyrians. Iran's ethnic diversity is reflected in the variety of languages Iranians speak, with 58 percent speaking Persian and Persian dialects, 26 percent speaking Turkic dialects, 9 percent Kurdish, and 7 percent other languages. Persian an Indo-European language almost unchanged since ancient times with a share of Arabic, Turkic, and European wordsis now spoken by the majority of Iranians as their first language and operates as a lingua franca for minority groups. Although granted equal rights by the constitution, ethnic minorities are second-class citizens.

Iran's population is approximately 99 percent Muslim, of which 89 percent are followers of the state religion, Shi'a Islam. Some 10 percent are followers of the Sunni branch of Islam (mostly Turkomen, Arabs, Baluchs, and Kurds living in the southwest, southeast, and northwest). Sufi Brotherhoods (mystical religious orders) are popular, but there are no reliable figures available to judge their true size. Baha'is, Christians, Zoroastrians, and Jews constitute less than 1 percent of the population. The largest non-Muslim minority is the Baha'i faith, estimated at about 300,000 to 350,000 adherents throughout the country. Estimates on the size of the Jewish community vary from 25,000 to 30,000. These figures represent a substantial reduction from the estimated 75,000 to 80,000 Jews who resided in the country prior to the 1979 Revolution. The Christian community is estimated at approximately 117,000 persons. According to government figures the size of the Zoroastrian community was estimated at approximately 35,000 adherents. Zoroastrian groups cite a larger figure of approximately 60,000. Zoroastrianism was the official religion of the pre-Islamic Sassanid Empire and thus has played a central role in Iranian history. Zoroastrians are mainly ethnic Persians concentrated in the cities of Tehran, Kerman, and Yazd. In general, society is accustomed to the presence of Iran's pre-Islamic, non-Muslim communities. However, the government restricts freedom of religion, creating a threatening atmosphere for some religious minorities, especially Baha'is, Jews, and evangelical Christians.

Iran has a relatively young population, with 34 percent of the population under the age of 14 and 61 percent between 15 and 64 years of age. Thanks to a family planning program, population growth decreased from 3.2 percent in 1984 to 1.7 percent in 1998 and further to 0.83 percent in 2000. Of the population, an estimated 38 million Iranians (or 60 percent) live in urban areas, while approximately 27 million live in rural areas. The population density was 37.6 inhabitants per square kilometer (97 per square mile) in 1998, though many people are concentrated in the Tehran region, and other parts of the country (especially deserts) are basically uninhabited. Basic literacy rates are above the regional average, although uncertain reporting standards give a wide margin for error. In 1997-98 the central bank estimated literacy at 80.5 percent in those over 6 years old, with 75.6 percent of women and 85.3 percent of men judged to be functionally literate, i.e. they were taught to read and write at some point.

Between 1920 and 1960 Iran's population doubled to 23 million, and by 1979 the equivalent to the entire population of the country in 1920 had been added. Most of the increase in population migrated to urban centers and found jobs in industry and services, as opposed to agriculture. In 1960, about one-third of the population lived in towns; by 1979 nearly half the population was urban. Tehran became the center of government, higher education, and industry; in 1976, it contained two-thirds of all university students, and nearly one-third of high school students; about half of all factories were in or around Tehran. After the Islamic revolution of 1979, this trend continued. Currently, around 60 percent of the Iranian population lives in towns. Tehran remains the principal political, economic, and industrial center, with a population of 6.8 million, according to a 1996 census, although it is very likely that the metropolitan area accommodates some 11-12 million people, or 20 percent, of the country's overall population.

The civil war in Afghanistan, the Iran-Iraq war of the 1980s, and Iraqi policies in the aftermath of the Gulf War in 1990-91 have caused a constant influx of refugees to Iran. The country hosts the largest refugee population in the world. According to the government, the total refugee population counts 2 million1.4 million Afghans and 580,000 Iraqiswhile a smaller number have been driven into Iran by the conflict in the Nagorny Karabakh region in Azerbaijan. The Iraqis include Kurds from the north and Arab Shiites from the south. Only 5 percent of refugees live in 30 designated camps, while others are scattered among cities and villages throughout the country. The increase in unemployment and deteriorating economic conditions have somewhat eroded the Iranians' so far rather tolerant and welcoming attitude toward refugees, and more pressure is being exerted for refugees to return to their countries of origin. The Iranian government feels it bears a heavy social and economic burden and believes the international community should share more of this burden.

OVERVIEW OF ECONOMY

Iran has a mixed economy that is heavily dependent on export earnings from the country's extensive petroleum reserves. Oil exports account for nearly 80 percent of foreign exchange earnings. The constitution mandates that all large-scale industries, including petroleum, minerals, banking, foreign exchange, insurance, power generation, communications, aviation, and road and rail transport, be owned publicly and administered by the state. Basic foodstuffs and energy costs are heavily subsidized by the government. Although economic performance improved somewhat during 1999 and 2000 due to the worldwide increase in oil prices, performance is affected adversely by government mismanagement and corruption. Unemployment was estimated to be as high as 25 percent, and inflation was an estimated 22 percent. Iran's gross national product (GNP) is the highest in the Middle East, although its GNP per capita is comparatively low because of Iran's large and growing population.

From medieval times until the 20th century, the socioeconomic structure of Iran remained almost unaltered. Only half of the population was settled; the remainder were tribal nomads, mainly engaged in the herding of grazing animals. A system of land assignment was in place, similar to the medieval European system of feudalism, under which the ruler, the shah, granted land to loyal subjects who became absentee landowners, collecting taxes from the peasants on their land. Economic activity further suffered from the handicaps of topography and climate, as well as prolonged political and social insecurity (with constant pressure by foreign powers). Things began to change when Reza Shah Pahlavi, a colonel in the Persian army and founder of the Pahlavi dynasty, seized the throne in 1925 and initiated a modernization of Iran's political and economic system, while also changing the country's name from Persia to Iran.

Following World War II the new shah, Mohammed Reza, guided the economy through public planning, urbanization, industrialization, and investment in the infrastructure , and achieved sustained growth, all supported by substantial oil revenues. Compared with other third world countries during the period from 1960-77, Iran's annual real growth rate of nearly 9.6 percent was about double the average. Therefore, one explanation for the Islamic revolution of 1979 is that the modernization program imposed by the shah was too rapid for the Iranian people, who wished to hold on to their traditional values and ways. Another view suggests that in fact, the shah failed to modernize rapidly enough. The Iranian economic and social infrastructure was found increasingly inadequate to meet expectations, despite rising oil revenues that produced a superficial modernism. The standard of living did increase in Iran during the early 1970s, when per capita income rose from US$180 per year just before the massive oil price increase to US$810 in 1973-74, and up to an estimated US$1,521 just one year later. During the last years of the shah's reign, per capita income rose less rapidly and living costs soared. By 1978, the typical rent for a house in Esfahan had risen from about US$70 per month in 1973 to over US$500 a month, while a typical salary was still below US$2 per hour. In addition, corruption had become widespread.

In 1979 an Islamic revolution ousted Shah Mohammed Reza Pahlavi from power and placed the Shiite clergy in control of the government of the country. The revolution was followed by trade sanctions and the freezing of Iranian assets in the United States after radical Iranian students stormed the American embassy in Tehran and held embassy staff as hostages. These measures and the war which broke out between Iran and Iraq in September 1980 and lasted for 8 years harmed the development of the Iranian economy considerably. Since that conflict, efforts to resume broad economic development and diversification have been hindered by volatile world oil prices, by internal structural weaknesses and rampant inflation, and by persistent political tensions with the West, especially with the United States, which still considers Iran to be the most active state sponsor of terrorism, supporting extremist groups such as Lebanon-based Hezbullah and the Palestinian Hamas.

The most remarkable features of the post-revolutionary Iranian political and economic scene are the influence of the so-called bazaar and the bonyad. The bazaar refers to Iran's traditional import-export markets, the leaders of which wield considerable influence over economic policy. These leaders, known as bazaaris, showed their power in 1978 by calling a series of strikes, paralyzing Iran's economy and speeding up the departure of the shah. Since the revolution the bazaaris have enjoyed a close relationship with the Islamic regime, benefiting from lucrative business contracts in exchange for funding individual mosques and conservative parliamentary and presidential candidates. The bazaar also provides an informal banking service to the private sector and is responsible for much of the black-market trade in currency; as a result, bazaaris tend to oppose exchange-rate reunification. In broad terms, they also oppose wider economic reform, the reduction of tariff barriers, and the greater participation of foreign investors in the economy.

The bonyad (religious foundations) were created after the revolution to safeguard the Islamic Republic's revolutionary principles and to attend to the plight of the poor. While providing much-needed welfare support for the families of those killed or wounded in the Iran-Iraq war, the bonyad have exploited their position to become multi-billion dollar conglomerates controlling large portions of the Iranian economy, especially properties and businesses taken from the Pahlavi family and individuals associated with the monarchy. The larger bonyad, such as the Bonyad-e Mostazafan (Foundation of the Oppressed) and Bonyad-e Shahid (Foundation of the Martyrs), oppose better relations with the West and the liberalization of the economy, fearing that foreign investment in Iran could threaten their economic empires.

In the early 1990s, Iran faced a huge foreign debt and other serious economic dislocations stemming from the nearly decade-long Iran-Iraq war (1980-88), while its population continued to grow at a rapid pace. Most of the economic resources were allocated through the vast public sector , widespread price controls , extensive trade and exchange restrictions, heavily subsidized energy and petroleum products, and protective labor and business practices. With oil prices changing considerably during the 1980s, planning became difficult and resulted in inflation, since the government did not want to borrow on international markets, but financed war-related and other expenses through the central bank. Between 1981-82 and 1984-85, the real GDP had grown by about 8 percent annually, which reflected oil production and export recovery after the low-point during and in the immediate aftermath of the revolution. But when oil prices fell to a historic low in 1987-88, this drop was also reflected in the economy at large, and Iran witnessed a negative growth rate of 10 percent.

After the war, efforts were made to revive oil exports and to shift the economy onto a peacetime basis. Through the 1990s, attempts at privatizing public enterprises, liberalizing prices and the exchange system, removing tariff barriers, and lowering income taxes to encourage investment were made. During the First 5 Year Development Plan (1989-94), these measures worked well and the economy grew in real GDP terms at an average annual rate of 7 percent. While the First 5 Year Development Plan focused on infrastructure development and reconstruction programs, the Second 5 Year Development Plan (1994-99) concentrated on Iran's financial problems. The sharp drop of oil prices in 1998-99 forced the government to abandon structural reforms and brought about a budget deficit of US$2.1 billion, which was financed by monetary expansion, thus accelerating inflation from 17 percent in 1997-98 to 25 percent in 1998-99.

The reformist president Khatami, elected in 1997, has continued to follow the market reform plans of his predecessor, President Rafsanjani, and has indicated that he will pursue diversification of Iran's oil-reliant economy, although he has made little progress toward that goal so far, mainly because of Iran's dependence on oil and the decline in oil prices in the first 2 years of his government. A broad program of economic adjustment and reform was issued in August 1998 to form the Third 5 Year Development Plan (2000-05). It involves restoring market-based prices, reducing the size of the public sector and encouraging private sector investment. As a result, domestic petroleum prices were raised by 70 percent in 1999, and a more market-based official exchange rate was introduced on the Tehran Stock Exchange (TSE).

The recovery of oil prices during 1999-2000 significantly strengthened Iran's external and financial position. Although annual GDP growth remained weak at 2.4 percent and the inflation rate remained almost unchanged at 20 percent, the government incurred a large budget surplus of about US$4.7 billion and hurried to pay external debt , reducing outstanding debt to about 10 percent of the GDP. The Third 5 Year Development Plan aims at accelerating growth to an average annual rate of 6 percent in order to create sufficient employment opportunities for the rapidly growing labor force , which currently increases by an estimated 5 percent every year.

POLITICS, GOVERNMENT, AND TAXATION

The Islamic revolution of 1979, during which the monarch, Shah Mohammed Reza Pahlavi, was driven out of the country, brought the Shiite clergy to power with Ayatollah Ruhollah Khomeini as its charismatic leader. Following the revolution, Iran adopted a constitution based on Ayatollah Khomeini's theory of Islamic government. The constitution ratified by popular referendum established a theocratic (from ancient Greek, literally meaning "the rule of God") republic and declared as its purpose the establishment of institutions and a society based on Islamic principles and norms, adopting the shari'a (Islamic law) as the basis for the country's legal system. The Constitution of the Islamic Republic provided for a Vali-ye Faqih, a Supreme Leader of the Islamic Revolution. Since the death of Ayatollah Khomeini, in 1989, this office has been held by Ayatollah Ali Khamenei. The Supreme Leader still enjoys primary control of many organs of the state and has the right to appoint key officials such as heads of the judiciary, the broadcast media, the armed forces, and various revolutionary bodies, as well as the power to supervise the overall policies of the regime.

The 1979 constitution created an Islamic Consultative Assembly called the Majlis, Iran's most democratic legislature in its history. Its 290 members are elected by universal adult suffragemen and women from the age of 16 are eligible to voteand serve for 4-year terms. The Majlis develops and passes legislation that is reviewed for adherence to Islamic and constitutional principles by a Council of Guardians, which consists of 6 clerical members. These are appointed by the Supreme Leader and 6 jurists, who in turn are appointed by the head of the judiciary and approved by the Majlis. The constitution provides the Council of Guardians with the power to disqualify candidates for elective offices based on a set of requirements, including the candidates' ideological beliefs.

The country's president is elected by popular vote to a 4-year term and has the power to appoint a cabinet known as the Council of Ministers, with the approval of the legislature. Mohammad Khatami was elected in elections held on 3 August 1997.

Political parties, legalized in 1998 after a 13-year ban, are still at an early stage of development. Nevertheless, factions within the ruling hierarchy, particularly in the Majlis, are increasingly visible. While these are most often defined broadly as "reformist" or "conservative," political allegiances do exist based on patronage, loyalties, specific interests, and the exchange of favors.

Several agencies share responsibility for internal security, including the Ministry of Intelligence and Security, the Ministry of Interior, and the Revolutionary Guards, a military force that was established after the revolution. Paramilitary volunteer forces known as Basijis, and groupings, known as the Ansar-e Hezbollah (Helpers of the Party of God), who often are aligned with specific members of the leadership, act as watchdogs, intimidating and physically threatening demonstrators, journalists, and individuals suspected of counter revolutionary activities. According to Amnesty International and Human Rights Watch, both regular and paramilitary security forces committed numerous serious human rights abuses. Iranians also suffer from violations of freedom of expression. Iran's conservative-dominated judiciary waged an extensive campaign against the local reformist press, closing newspapers and prosecuting critical journalists throughout 2000.

HISTORICAL BACKGROUND.

Although briefly occupied during World War II by Soviet and British troops, Iran is 1 of only 2 countries in the Middle East that were never colonized (the other being Saudi Arabia). However, the country's geopolitical significanceIran has the longest Gulf shoreline and is a vital link between Asia, the Middle East and Europehas made it of central concern to the world's most powerful empires and a target for frequent political manipulation. Following the occupation of Iran by allied forces during World War II, Iran's Pahlavi ruler, Reza Shah, was forced to abdicate in favor of his son, Mohammed Reza.

Mohammed Reza Pahlavi sought to ally Iran closely with Western powers and particularly with the United States. However, growing nationalist sentiment in Iran forced him to appoint the nationalist Mohammed Mossadeq as prime minister in 1951. Prime Minister Mossadeq nationalized the Anglo-Iranian Oil Company (AIOC) the same year, sidelining the shah politically. Alarmed at the threat the nationalist leader posed to their position in the Gulf and the broader Middle East, the Western powers imposed an oil embargo on Iranian exports, crippling the government. This was followed in 1953 by support from the U.S. Central Intelligence Agency (CIA) and the British counter-intelligence agency, MI6, for a successful coup, which overthrew Mossadeq and returned authority to the shah. Mohammed Reza subsequently initiated a massive modernization program, known as the "white revolution," accompanied by a greater centralization of power and increased use of repression to subdue political dissent. In 1964 the government exiled the cleric Ayatollah Khomeini after a series of his speeches led to widespread rioting.

The oil price explosion of 1973-74 fueled rapid economic growth, but at the cost of increased volatility in the Iranian economy and high levels of inflation. Economic hardship, the growing dominance of Western culturewhich traditional Iranians found offensiveand the government's repressive security methods brought about an increasingly determined collection of opposition groups. Unifying into an anti-monarchist coalition with Ayatollah Khomeini as their figurehead, these activists organized nation-wide demonstrations and strikes, culminating in the overthrow of the Pahlavi dynasty in February 1979 and the return of Khomeini from exile. Following a popular vote, Iran became a self-styled "Islamic Republic" in March 1979.

International opinion turned strongly against the new government in November 1979, when militant students seized the U.S. embassy in Tehran and held 52 people hostage for more than a year. In September 1980, Iraqi forces invaded Iran, hoping for an easy victory that would allow the annexation of Iranian territory around the strategically important Shatt al-Arab waterway. While remaining neutral, the Western powers, together with many Arab states, assisted Iraq in order to suppress Khomeini's Islamic state. Until August 1988, when Iran finally accepted a U.N. cease-fire resolution, the 2 countries engaged in one of the bloodiest wars of the century, suffering widespread human and economic losses. Ayatollah Khomeini died in June 1989, and the Council of Experts, a clerical body empowered to choose the next Supreme Leader, selected Hojatoleslam Seyyed Ali Khamenei as Khomeini's successor, rapidly promoting him to the clerical rank of Ayatollah (literally: Sign of God). Hojatoleslam Ali Rafsanjani won the presidential election in August of the same year.

Since the amendment of the constitution in 1989 the president has appointed the government, though all ministers must be approved by the parliament before taking office. Iran's domestic politics have since evolved into an increasingly bitter power struggle between conservatives and reformers within the regime. From 1989 to 1997, President Rafsanjani sought to implement a program of gradual economic and political reform, but his more conservative rivals frequently blocked his policies. In 1997, the reform-orientated cleric, Mohammad Khatami, was elected to a 4-year term as president in a landslide victory and is set to stand a second term in June 2001 after winning the election with a great majority, almost 77 percent of the votes cast. Though with a turnout at the polls of only 65 percent of eligible voters, after 90 percent in the 1997 election, people seem to be disillusioned by politics and the pace of reform. Mohammed Khatami's reform-orientated supporters also defeated the conservatives in the parliamentary election held in February 2000, gaining majority control. Nevertheless, the power struggle with the conservatives continues. Through their control of various oversight institutions, the judiciary and state-run broadcasting, they manage to contain power.

INFRASTRUCTURE, POWER, AND COMMUNICATIONS

Iran's infrastructure is relatively poor and inadequate. Part of this stems from the fact that the vast country was never fully developed, but it also experienced considerable setbacks during the Iran-Iraq war of the 1980s, and restoration since then has been slow.

TRANSPORTATION.

Iran has a network of 140,200 kilometers (87,120 miles) of roads, of which 49,440 kilometers (30,722 miles) are paved. The 2,500-kilometer (1,553-mile) A1 highway runs from Bazargan on the Turkish border across Iran to the Afghan border in the east. The A2 runs from the Iraqi border to Mirjaveh on the Pakistani frontier. Tehran is linked to major cities in the vicinity by 470 kilometers (292 miles) of express-ways. A heavy expansion of car use has led to increased demand for fuel, severe overcrowding of roads in metropolitan areas, and mounting pollution problems. Government estimates put the average annual increase in domestic fuel consumption at 5.5 percent, well above the real economic growth rate. The government has sought to limit motor use by raising domestic fuel prices, but petroleum products in Iran remain heavily subsidized and among the cheapest in the world.

An important transportation link is the railway constructed with great effort before World War II between the Caspian Sea, Tehran, and the Persian Gulf. Other rail links with neighboring countries already exist or are under

Communications
Country Newspapers Radios TV Sets a Cable subscribers a Mobile Phones a Fax Machines a Personal Computers a Internet Hosts b Internet Users b
1996 1997 1998 1998 1998 1998 1998 1999 1999
Iran 28 265 157 0.0 6 N/A 31.9 0.05 100
United States 215 2,146 847 244.3 256 78.4 458.6 1,508.77 74,100
Saudi Arabia 57 321 262 N/A 31 N/A 49.6 1.17 300
Iraq 19 229 83 N/A 0 N/A N/A 0.00 N/A
aData are from International Telecommunication Union, World Telecommunication Development Report 1999 and are per 1,000 people.
bData are from the Internet Software Consortium (http://www.isc.org) and are per 10,000 people.
SOURCE: World Bank. World Development Indicators 2000.

der construction. Recently the long-closed link to Van in Eastern Turkey reopened, enabling passengers and goods to travel from Tehran to Istanbul and on to Europe. Overall, the Iranian railway network covers 5,600 kilometers (3,480 miles).

The Shatt al-Arab, the main waterway shared by Iran and Iraq on the Persian Gulf, is navigable by maritime traffic for about 130 kilometers (81 miles). Ports include Abadan/Khorramshahr, which was largely destroyed in fighting during the Iran-Iraq war, and has been overtaken by Bandar Abbas as the country's major port. About 12 million tons of cargo pass through Iran's Gulf ports each year. Smaller ports at Bushehr, Bandar Lengeh, and Chah Bahar have also assumed new importance. The 1998 Lloyd's Register of Shipping lists 382 Iranian merchant vessels.

The 3 major international airports of Tehran, Bandar Abbas, and Abadan, have recently been joined by the international airports on the free-trade islands of Qeshm and Kish. Most domestic and international flights go through Mehrabad international airport in Tehran. The huge Imam Khomeini international airport to the south of Tehran, currently under construction, is going to take over operations in a few years with a projected capacity of 30 million passengers a year. The state-owned national carrier, Iran Air, serves 15 Iranian cities and runs scheduled routes in the Gulf, Asia, and Europe. In 1997 it carried 907,000 international and 6,240,000 domestic passengers.

POWER.

Electricity generation was severely restricted by Iraqi attacks on power stations during the Iran-Iraq War, reducing available capacity from 8,000 MW to 5,000 MW, according to estimates. In December 1988, the Ministry of Energy stated that the general capacity of the national grid was deficient by at least 2,500 MW, owing to war damage, lack of fuel, and inadequate rainfall. At the beginning of the 1990s, residential consumption accounted for about 40 percent of total consumption, and industry for about one-quarter. However, industrial demand rose dramatically and accounted for almost half of total consumption in 1998. Overall consumption reached 90 billion kilowatt hours (kWh) in 1998, up from 73.4 billion kWh in 1994. Installed power production capacity had reached about 24,000 MW, with another 4,600 MW coming from private generators.

Iran plans to increase this capacity to 96,000 MW by 2022. Power plants currently under construction, and due for completion by 2002, will add about 13,000 MW to the national grid. Some 8,000 MW of this will come from hydroelectric (turbines powered by water that generate electricity) dams, although the proportion of hydroelectricity will fall in subsequent years. The balance of 5,000 MW under construction comes from gas-fuelled plants and other facilities. Currently, some 89.5 percent of electricity is produced by thermal power plants (using fossil fuels like coal, oil, or gas) and the rest by hydro-electric stations. Recent years have seen Iran advancing on a nuclear power program of 3,000-5,000 MW. The United States stated that nuclear cooperation and the transfer of technology to Iran was dangerous, as it would accelerate a secret program to develop nuclear weapons. Nevertheless, Chinese and Russian officials have expressed their determination to proceed with deals aimed at selling nuclear reactors to Iran.

TELECOMMUNICATIONS.

As a result of heavy investment in the telephone services since 1994, the number of long-distance channels has grown substantially; many villages have been brought into the net. The number of main lines in the urban systems has approximately doubled since 1994, and the technical level of the system has been raised by the installation of thousands of digital switches. Countrywide, there were some 7 million lines in 1998. There is now also a mobile cellular system in place that was serving 265,000 subscribers in August 1998. This figure is up from under 60,000 in 1996 and has grown rapidly since.

Iran has radio relays to Turkey, Azerbaijan, Pakistan, Afghanistan, Turkmenistan, Syria, Kuwait, Tajikistan, and Uzbekistan. The fiber-optic Trans Asia Europe line runs through northern Iran, and the country is also connected to the Fiber-optic Link Around the Globe (FLAG) through a submarine fiber-optic cable link to the United Arab Emirates.

Internet access is increasing. However, price rather than official censorship remains the greatest hindrance to wider use. The state remains in control of terrestrial radio and television broadcasts, but the illegal use of satellite television receivers in urban areas continues to be widespread. There were 82 radio stations in 1998, and Iranians had 17 million radios. Television receivers numbered 4.9 million.

ECONOMIC SECTORS

Iran's economy clearly relies on its natural resources, and most importantly, oil. Agriculture still contributed 21 percent to the GDP in 1999, while industry accounted for 34 percent, and services for 45 percent. About one-third of the labor force is engaged in agriculture (33 percent); industry employs 25 percent of the workforce and 42 percent are occupied in services. Except for petroleum and petrochemical industries, Iran also has industrial production in steel, textiles, cement and other construction materials, food processing (especially sugar refining and vegetable oil production), metal fabricating, and armaments.

After the Islamic revolution in 1979, Iran nationalized all major industries, banks, and insurance companies. It committed itself to heavy investment in both the agricultural sector and selected industries, with the ultimate goal of economic independence, but unstable internal conditions and the war with Iraq made economic growth almost unattainable until the mid-1990s. The revival of oil production helped stabilize national finances, and free-market initiatives and reforms sparked a rise in domestic agricultural and industrial production.

AGRICULTURE

Iran is a mostly arid or semi-arid country, with a sub-tropical climate along the Caspian coast. Deforestation, desertification , overgrazing, and pollution from vehicle emissions and industrial operations have harmed the land over the last few decades and hampered production. Other significant problems include poor cultivation methods, lack of water, and limited access to markets. Iran's agricultural sector is especially dependent on changes in rainfall, and although the government has attempted to reduce this dependence through the construction of dams, irrigation and drainage networks, agriculture remains highly sensitive to climate developments. Still, the agricultural sector accounts for about one-fifth of the GDP and employs one-third of the workforce. The country's most important crops are wheat, rice, other grains, sugar beets, fruits, nuts, cotton, and tobacco. Iran also produces dairy products, wool, and a large amount of timber. Irrigated areas are fed from modern water-storage systems or from the ancient system of qanat. Qanat are underground water channels stretching up to 40 kilometers (26 mi) and first used at least 2000 years ago. Unfortunately, many of them have fallen into disrepair in recent years.

The centerpiece of the "white revolution," during which the shah pressed the modernization of Iran during the 1960s, was land reform. Until the 1950s, only about 5 percent of peasants owned sufficient land to maintain themselves. The dominant figures in rural areas were the landowners; it is estimated that about half of Iran's cultivated land was held by big landowners, those who controlled one or more villages, a typical holding being between 20 and 40 villages (there were some 70,000 villages altogether). These landowners were absentees and included members of the royal family, military officers, tribal shaykhs, religious dignitaries, and big merchants. The land reform, which began in 1961 and was not completed until 1971, had dramatic effects. The power and influence of large landowners was extinguished; smaller absentee landowners survived and in 1971 still owned half of all cultivated land. Seemingly, the benefits went to those 50 percent of peasants who had cultivation rights. By 1971, 90 percent of them were owners of land, though it turned out that for most of them acquired holdings were too small to support a family. Farm laborers remained without rights and holdings.

The traditional dominance of agriculture was eroded by oil and gas exploitation, which became the country's major source of export revenues as population growth made Iran a net importer of foodstuffs. The agricultural sector has nevertheless usually been the largest contributor to the GDP, its share falling only slightly in the 1990s, from 23.9 percent in 1992-93 to 19.7 percent in 1997-98, when it was overtaken by the industrial sector. In 1999-2000, real growth in the sector declined by 0.3 percent, production of cotton fell by 9 percent, and wheat and barley outputs declined by 27 percent and 39 percent, respectively. This came after the successful year of 1998-99, when a rise in rainfall led to sharp overall growth in the sector, achieving 9.5 percent growth. The government continues to gear efforts toward reducing its role in agriculture and encouraging private sector activities and the growth of cooperatives, while restricting itself to the provision of infrastructure. Subsidies have been reduced over the last few years, but agriculture remains favored with price guarantees and persisting subsidies, in particular for wheat.

The offshore fishing industry is important in Iran both for domestic consumption and for export, mainly of caviar. The total Iranian fish catch rose from 327,727 metric tons in the year 1991-92 to 385,200 tons in 1997-98, of which 244,000 tons came from the Persian Gulf and the Gulf of Oman, 76,200 tons from the Caspian Sea, and 65,000 tons from inland waters. The government remains committed to increasing the annual catch to at least 700,000 tons, principally by the development of fisheries in southern waters. The caviar industry, which enjoys a worldwide market, is by far the most developed field within Iran's fisheries sector. Iran, Russia, Azerbaijan, Kazakhstan, and Turkmenistan form a cartel to protect caviar prices and sturgeon stocks in the Caspian Sea, but over-fishing has begun to threaten the industry. Caviar exports averaged around US$30 million per year in the 1990s.

INDUSTRY

Petroleum and natural gas clearly dominate Iranian industry, which is mostly controlled by the state or run by one of the religious foundations, the bonyad. With the revolution came nationalization, and by the end of 1982, 130 nationalized industries were under the direct control of the 3 ministries that were authorized to conduct industrial policies, and 450 industrial units were placed under the control of the National Iranian Industrial Organization.

MINING/HYDROCARBONS.

Iranians became involved with oil before most of the rest of the world, granting their first exploration concession to British prospectors in 1901. After the discovery of commercially viable deposits at Masjid-e Suleiman in 1908, the reserves were worked by the newly formed Anglo-Persian Oil Company, which changed its name to the Anglo-Iranian Oil Company (AIOC) in 1935 and is now known as BP Amoco. The oil industry's pivotal position in modern Iranian society was demonstrated during the 1979 revolution, when a series of strikes at oil installations culminated in the strikers' refusal to resume exports until the shah left the country. Iran's petroleum industry suffered extensive damage to wells, refineries, and export terminals with the outbreak of the Iran-Iraq war in 1980. Crude oil production recovered to 3.2 million barrels per day (bpd) in 1990 and since 1994 has averaged around 3.6-3.7 million bpd. Proven oil reserves at the end of 1998 totaled 90 billion barrels, representing 8.7 percent of world reserves, and were expected to last about 70 years at current production rates. As of January 2000, Iran possessed 9 operational refineries with an aggregate capacity of 1.5 million bpd, the government's aim being to boost refining capacity to 2 million bpd during its Third 5 Year Development Plan (until 2005).

The dramatic decrease in world oil prices from late 1997, to below early 1973 levels in real terms, prompted the Organization of Petroleum Exporting Countries (OPEC, a cartel grouping together most significant oil producing countries to fix production quotas and attempt to stabilize prices) to decree that its members should reduce production from April 1998 in an effort to boost prices. In March 1999 Iran agreed to cut its output from the benchmark of an average production of 3.6 million bpd by 7.3 percent, to 3.36 million bpd. In their September meeting OPEC countries decided to retain reduced quotas despite the sharp rise in world oil prices. When in March 2000 OPEC responded to what was seen as a dangerously high world oil price of US$30 per barrel by increasing aggregate production quotas by 1.7 million bpd, only Iran declined to accept the plan proposed by Saudi Arabia, on the grounds that OPEC was buckling to U.S. pressure for lower oil prices. However, resistance was short, and the new Iranian production quota had increased to 3.84 million bpd by September 2000. As a result of the production cuts in 1999, exports fell by 10 percent from 1998-99 to 1999-2000, to 2.1 million bpd. Thanks to higher prices, however, oil export revenues increased by 63 percent to US$16.3 billion and are expected to hit the US$20 billion in 2000-01.

Iran's petroleum industry basically works as an extension of the government. The Minister of Petroleum serves as chairman of the 3 main companies, the National Iranian Oil Co. (NIOC), the National Iranian Gas Co. (NIGC), and the National Petrochemical Co. (NPC). The NIOC handles oil and gas exploration, production, refining, and oil transportation; NIGC manages gathering, processing, transmission, distribution, and exports of gas and gas liquids; and NPC handles petrochemical production, distribution, and exports. The majority of Iran's oilfields are concentrated in the southwest of the country, where 90 percent of Iran's total production of crude oil is produced. The state-owned gathering and distributing system for natural gas from Iran's enormous reservessecond in the world only to Russia'sis one of the largest in the Middle East. Other mineral resources are largely underdeveloped.

With proven natural gas reserves of 23 trillion cubic meters (at the end of 1999), Iran is the world's second richest country in gas resources after Russia, with some 15.7 percent of the global total and 46.4 percent of the Middle East regional total. Production increased from 12.2 billion cubic meters in 1989 to 29.5 billion cubic meters in 1993 and to 54 billion cubic meters in 1998, the bulk of which was consumed domestically in line with the government's policy of substituting gas for petroleum. Currently, natural gas accounts for about 40 percent of total domestic energy consumption. Iran plans to construct a 1000-kilometer (621-mile) onshore and 1200-kilometer (746-mile) offshore gas pipeline to India. In 1996, Iran signed an agreement worth US$20 billion to supply gas to Turkey over a 22-year period. With pipeline construction in its final stage, deliveries should begin in mid-2001. In April 2000, the discovery of the country's biggest onshore gas field to date, north of the city of Bushehr, was announced. It is estimated to contain 445,000 million cubic meters of gas not needing to be refined, as well as 240 million barrels of liquid gas. The field is to be brought to production by 2002 and is expected to yield revenue of US$16.5 billion over 20 years.

In addition to the enormous hydrocarbon reserves, Iran has considerable mineral resources. Around 80 million tons of minerals are quarried each year from some 1,500 non-metallic and 50 metallic mines in Iran, with the bulk coming from mines owned by the Bonyad-e Mostazafan (Foundation of the Oppressed). Minerals currently being worked include copper, lead-zinc, iron ore, bauxite, coal, strontium, gold, chromium, uranium, red oxide, turquoise, sulphur, and salt. Foreign investors have concentrated most on Iran's copper-extraction industry, which has taken the lead in moves towards privatization.

MANUFACTURING.

Iran's industrial sector is dominated by relatively few but large public enterprises accounting for approximately 70 percent of value added in manufacturing. Steel, petrochemicals, and copper remain the country's 3 basic industries. Other important branches are automobile manufacturing (mainly assembled under license from Western or Japanese manufacturers), construction material, textiles (mainly woven carpets, for which Iran has traditionally been famous), food processing, and pharmaceuticals. Despite large investments in the 1970s, problems persist to this day, including a shortage of skilled labor, insufficient raw materials and spare parts, and an inadequate infrastructure.

After the revolution in 1979, no clear policy was formulated for the industrial sector. Subsequently, then-president Bani-Sadr estimated a drop of at least 34 percent in industrial output in the first post-revolutionary year alone. The manufacturing industries' poor performance continued throughout the 1980s with many factories still operating at only 30 percent of their capacity at the end of the decade. Much of this downturn had to do with the emigration of industrial owners and a resulting shortage of managerial skills. The high degree of Iran's dependency on imports for raw materials, along with the economic sanctions imposed against the Islamic Republic, further increased the vulnerability of the manufacturing sector. Taken together, these factors resulted in inefficiency and low productivity.

The steel industry is one of the few exceptions to Iran's disappointing manufacturing scene. Development began lateIran's first steel mill was a joint venture with the Soviet Union in the 1960sand proceeded slowly, with output standing at just 1 million tons per year in 1979. Since the end of the Iran-Iraq war, however, a huge expansion has taken place. New plants have been commissioned in Khuzestan, Khorasan, and Azerbaijan provinces, and Iran has become the world's third largest steel producer, with an output of 6.7 million tons in 1997-98.

In recent years the government has placed great emphasis on expanding the petrochemical industry to generate products of higher value added and higher export earnings. In the medium term the petrochemical industry represents Iran's only chance of diversifying away from crude oil exports. Iranian petrochemical production has more than doubled in the last 5 years, making it the second largest producer in the region, after Saudi Arabia. Total petrochemical output was estimated at about 12 million tons in 1998, compared to 2.4 million tons in 1989. The government plans to triple the annual output to 30 million tons within 20 years, which requires investments of US$20 billion. Government predictions were that Iran's share of the world's petrochemical production would reach 2 percent by 2005 and that the value of exports would rise from US$500 million in 1999 to US$2 billion in 2005. Main petrochemical products are fertilizers, methanol, aromatics, and olefins.

The automotive sector is underdeveloped. The most common vehicle on Iran's roads is the Paykan, the locally produced version of a 1960s British model. The car's old-fashioned engineering makes it inefficient and one of the worst polluters in the country. Since 1989, the industry has enjoyed a modest recovery, as local plants have contracted to assemble Nissan, Peugeot, and Kia models under license. Some manufacturers, such as Iran Khodro, which held the rights to assemble General Motors vehicles until 1985, have begun to modernize and restructure . Local production of cars reached 245,556 units in 2000-01, compared to some 80,000 units in 1995-96, and up 23 percent from the previous year. However, poor access to finance and a shallow inventory suggest that there is further need for improvement.

In 1995, the Chamber of Commerce and Industry reported that Iran's textile mills were operating at an average of 56 percent of their capacity, owing to shortage of foreign exchange and raw material. The textiles industry is partly based on domestic supply of cotton. During the 1970s, European manufacturers purchased Iranian cotton, but as profits fell in the 1980s, most cotton was absorbed domestically. The government hopes to promote textile exports, and some public investment has been devoted to improving production quality. However, the results have been visible only in niche areas, and export earnings in 1997-98 remained below US$100 million per year. Revenues from exporting carpets dropped severely in the 1990s from US$2 billion in 1990 to US$570 million in 1998, rendering it a shaky business.

SERVICES

The services sector is the largest in the Iranian economy and contributed approximately 40 percent to the GDP during 1999-2000. The sector has seen the greatest long-term growth in terms of its share of the GDP, but currency-exchange restrictions, excessive bureaucracy, and the uncertainty of long-term planning have hindered further development.

FINANCIAL SERVICES.

The Iranian banking sector is dominated by 10 state-owned banks, including the 6 full-service commercial banks, and 4 sectorally specialized ones. In addition, 4 small private non-bank credit institutions have recently been licensed. The total number of state-owned bank branches was 14,518 in 1999, compared with 11,634 in 1995. Commercial banks engage mainly in short-term lending, primarily to the private sector and public non-bank financial enterprises, and act as agents of depositors in the investment of funds. The profits and losses from these investments are then distributed to depositors based on the duration and amount of their investment. Specialized banks lend mainly on a long-term basis (5 years or more) and have investments in various sectors of the economy.

After the revolution, 2 major changes were made in the banking system: one was nationalization and restructuring in the year immediately after the revolution, the other was the introduction of Islamic banking in 1983-84. Islamic banking is characterized by the prohibition of interest on loans, according to Islamic law. Interest on loans, or riba, was replaced by a commission of 4 percent a year compared with the traditional 14 percent, whereas interest on deposits was replaced with profits, estimated at a minimum of 7-8 percent a year. The banks would become temporary shareholders in major industrial enterprises to which they lent money. Unfortunately, the changes to the banking sector were made just when the public sector was relying heavily on the banking system to finance the large deficit, due to low oil revenues. Consequently, the inflation rate accelerated rapidly. While it amounted to only 4 percent in 1985-86, it surged to 21 percent the following year, and increased to 28 percent and 29 percent, respectively, during 1987-88 and 1988-89 and has since remained at a high level.

The Tehran Stock Exchange (TSE) benefitted from a wave of privatization during the early 1990s. Stock market capitalization of IR38 trillion at the end of 1999 corresponded to about 9 percent of the GDP, although relatively few of the shares are routinely available for purchase by the general public. The ownership of stocks is highly concentrated. The largest 5 shareholders account, together, for more than 82 percent of company shareholdings. A small handful of institutional investors dominate the market as a whole. These are all either government institutions or state-owned banks or their subsidiaries, but nevertheless operating on a market-oriented basis.

COMMERCE.

Iran has traditionally been an agricultural nation populated by traders. With the exception of the carpet industry and a tiny jewelry industry, the Iranian economy was essentially agrarian until the time of Reza Shah Pahlavi. Despite the crash industrialization program launched by the Pahlavi regime in the 1960s and 1970s and the necessity for self-sufficiency during Iran's 8-year war with Iraq, the country retains its preference for trade over production.

The merchant, or bazaar, classes had profited from the economic boom Iran experienced under the shah in the 1970s. Many had amassed fortunes in these years. Yet, the bazaar provided valuable support to the revolutionary movement, contributing generously to the clerical cause in the lead-up to the revolution. The bazaar merchants had several grievances against the shah, whose policies favored a new industrial and entrepreneurial elite, and import licenses made life difficult for the smaller merchants. The bazaar was relegated to secondary status, especially after some of the major industrial families started combining interests in industry with interests in banking, insurance, and trade by the mid-1970s; several of the largest trading companies developed alongside major industrial enterprises. These new trading companies threatened to drive the bazaar merchants out of wholesale trade, and then, by establishing new retail networks and outlets, out of retail trade as well.

After the revolution, the trading sector achieved positive growth, and this sector absorbed most of the new entrants into the job market. In the absence of a properly functioning banking system, demand for capital has been frequently met from moneylenders in the bazaar. Indeed, currency exchange and money lending has become a major source of business for the bazaar's traders in Iran's distorted economy. This further intensified a tendency among Iranians to invest in businesses with a cash-based return, such as constructing homes for the rental market or the import of consumer goods .

TOURISM.

Before the revolution Iran had begun to build a reputation as an exotic holiday destination; its ski resorts at Shemshak and Dizin, north of Tehran, attracted international celebrities. After 1979, the Islamic government discouraged tourism, leaving many renowned archaeological and historical sites, including Persepolis, Pasargard, and Esfahan, barely visited by foreigners. Although hardly a booming sector, visitor rates are beginning to rise. The government has begun to issue visas more freely to non-Muslim individuals and groups, and the country is appearing with greater frequency in tourism brochures, but still only around 320,000 foreign tourists actually visit, bringing in revenue of US$170 million. The bulk of tourism remains to be founded on Shia pilgrimage centers such as Mashhad and Qom. The Bonyad-e Mostazafan (Foundation of the Oppressed), which owns most of Iran's large hotels, plans to increase the number of hotel beds from the current 34,500 to 59,500 by 2002.

INTERNATIONAL TRADE

Following a strong balance of payments performance in 1996-97, mainly due to high oil prices, the period 1997-99 witnessed the deterioration of Iran's external accounts, triggered by tumbling oil prices and stagnant non-oil exports. Imports went down due to the resulting scarcity of foreign exchange, and Iran negotiated re-phasing part of its external debt in 1998 in order to alleviate financial pressure. When oil prices recovered during 1999-2000, and non-oil exports also grew by 9

Trade (expressed in billions of US$): Iran
Exports Imports
1975 7.963 10.343
1980 7.109 12.246
1985 13.328 11.635
1990 19.305 20.322
1995 18.360 13.882
1998 N/A N/A
SOURCE: International Monetary Fund. International Financial Statistics Yearbook 1999.

percent, the Islamic Republic's external position was enhanced considerably. Iran's trade balance had dropped from a surplus of US$2.8 billion in 1996-97 to a deficit of US$4 billion in 1997-98, although this was reversed again into a US$2 billion surplus in 1999-2000. The International Monetary Fund (IMF) in its 2000 country report on Iran estimated that exports during 1999-2000 totaled US$19.726 billion, while total imports that year amounted to US$13.511 billion. Changes in Iran's external balance are mainly dependent on oil prices. Thus, in 1999-2000, proceeds from crude oil exports rose by 60 percent, despite a decline in the export volume, reflecting the 77 percent increase in the average export price of Iranian crude oil.

Non-oil exports consist mainly of consumer goods (55 percent on average during 1997-2000), followed by raw materials and intermediate goods (about 38 percent). Carpets remain the single most exported Iranian non-oil product. Such exports have declined significantly over the second half of the 1990s, from US$2 billion in 1994 to US$570 million in 1998, which is attributed to competition from low-priced carpet-producing countries. Exports of fresh and dried fruits, at about US$600 million in 1998-99 (of which $416 million came from pistachios alone), have captured a larger share of the total. Chemicals are the most prominent export of raw materials and intermediate goods, hovering at about US$500 million during 1997-2000.

The direction of exports has also remained unchanged since the mid-1990s. While Japan and the United Kingdom are the largest importers of Iranian goods (absorbing about 16 percent and 17 percent of total exports, respectively), Germany and the United Arab Emirates (UAE) are the main destinations for non-oil exports, capturing 13 percent and 16 percent of these exports, respectively. Other important destinations for Iranian exports are Italy (6 percent of non-oil exports and 9 percent of total exports), Greece and South Korea (5 percent of total exports), and Turkey (5 percent of non-oil exports).

Iran imports mainly raw materials and intermediate and capital goods . Imports of consumer goods, at about US$2 billion per year, represent only 14 percent of total imports. Imports of machinery and tools average about US$4-5 billion, which cover the bulk of capital goods imports. Iran's imports of grains and derivatives fell drastically in 1998-99 from about US$1.8 billion the previous years to below US$900 million. Iran also imports a large quantity of chemical products, totaling about US$1.8-2 billion per annum. The most important sources of Iranian imports are Germany (12 percent), Japan (7 percent), and Italy (6 percent).

Since Iran's first application to join the World Trade Organization (WTO) in 1996, it has been constantly blocked by the United States. The application was blocked again in May of 2001, but the administration of U.S. President George W. Bush is thought to be considering dropping its objection now that Egypt has sponsored Iran's application. Iran is a founding member of the Asian Clearing Union (ACU), established in 1974 to provide a mechanism for the settlement of transactions among countries in the Asia-Pacific region. Members are Bangladesh, Burma, India, Nepal, Pakistan, Sri Lanka, and Bhutan. Iran undertakes only about 3 percent of its total trade within the ACU, with Bangladesh, India, Pakistan, and Sri Lanka importing oil and oil products, handicrafts, and machinery equipment. Iran's imports from these countries include machinery, spare parts, and spices from India, jute from Bangladesh, and rice and cotton from Pakistan.

MONEY

The Bank-e Merkazi-ye Jomhuri-ye Eslami-ye Iran, or Central Bank of the Islamic Republic of Iran, is the highest monetary authority in the country. Each year after the approval of the government's annual budget, the Central Bank presents a detailed monetary and credit policy. Short-term credit policies need to be approved by the

Exchange rates: Iran
Iranian rials (IR) per US$1
Jan 2001 1,754.71
2000 1,764.43
1999 1,725.93
1998 1,751.86
1997 1,752.92
1996 1,750.76
Note: Iran has three officially recognized exchange rates; the averages for 1999 are as follows: the official floating rate of 1,750 rials per US dollar, the "export" rate of 3,000 rials per US dollar, and the variable Tehran Stock Exchange rate, which averages 7,863 rials per US dollar; the market rate averages 8,615 rials per US dollar.
SOURCE: CIA World Factbook 2001 [ONLINE].

government and long-term credit policies have to be incorporated into the 5 Year Development Plan with Parliament's consent.

After the introduction of the Tehran Stock Exchange (TSE) rate in July 1997 and until March 2000, 2 officially recognized exchange rates coexisted in Iran. The official rate of the Iranian rial1,750 per U.S. dollarapplies to oil and gas export receipts, imports of essential goods and services, and repayment of external debt. The "export" rate, fixed at 3,000 rials per dollar since May 1995, applied to all other trade transactions, but mainly to capital goods imports of public enterprises. In order to ease pressure on exporters, the bank introduced a currency certificate system allowing exporters to trade certificates for hard currency on the Tehran Stock Exchange (TSE). This method finally replaced the fixed export rate in March 2000, and has since held steady at some IR8,500:US$1. There is an active black market in foreign exchange, but the development of the TSE rate and the ready availability of foreign exchange over 2000 narrowed the differential to as little as IR100 in mid-2000. The reunification of Iran's multi-tiered exchange-rate system, which has plagued Iran's non-oil exports and frustrated potential investors since the revolution, had been under discussion since a failed attempt in 1993 to operate a single, floating exchange rate . At the same time, as a step toward further liberalization and integration of foreign exchange markets, banks were allowed to deal relatively freely with foreign exchange. Despite this, foreign currency is still hard to get and even harder to keep for ordinary Iranians.

Given recent government decisions to allow banks to sell currency at free-market rates, together with the positive outlook for oil earnings, and the apparent willingness of new lenders, particularly European banks, to extend new credit lines to Iran, an attempt at reunification is likely to be made in 2001-02, at a rate of around IR9,000=US$1.

POVERTY AND WEALTH

Before the Islamic revolution, Iran had gradually been transformed from a largely farm-based economy to a modern society by ways of major changes in the traditional

GDP per Capita (US$)
Country 1975 1980 1985 1990 1998
Iran 1,611 1,129 1,208 1,056 1,275
United States 19,364 21,529 23,200 25,363 29,683
Saudi Arabia 9,658 11,553 7,437 7,100 6,516
Qatar N/A N/A N/A N/A N/A
SOURCE: United Nations. Human Development Report 2000; Trends in human development and per capita income.

socioeconomic order between 1946 and 1979. Under the shah, thanks to considerable outlays allocated to education and health, great strides were made in improving social welfare. Infant mortality, malnutrition, endemic diseases, and illiteracy were greatly reduced. Caloric intake, life expectancy, and school enrollment were all markedly increased. While rural-income gaps and income inequalities within the respective areas did not narrow, indicators showed that absolute poverty was reduced. Although elementary school enrollment during the 1970s quadrupled to more than 9 million, this was achieved in many cases only by running students through in 3 shifts and having teachers in the classroom 60 to 80 hours a week. About 90 percent of high school graduates were denied admission to college because of inadequate facilities. About 20 percent of Iran's institutions of higher education had no library facilities, nor were they likely to obtain them because, while the state budget set aside 5 percent for sports, it did not have any reserves for books and libraries.

It was thought and hoped that the new regime would remedy these faults. The Islamic government declared a policy of improving the lot of the poor for whom, after all, the revolution itself had been launched, but there has been little evidence of success. Nominal wages and salaries lagged behind inflation throughout the 1980s, which according to one Majlis deputy left more than 90 percent of public servants below the poverty line. According to the official line, the poor were better off after, rather than before, the revolution. This was undoubtedly true for certain groups of people who have been especially well positioned within the regime, such as members of the Revolutionary Guards, many families of the war dead, some among the subsidized urban proletariat, and others from extremely low-income households. It does not hold true, however, for the majority of the population. In 1972, some 44 percent of the population were living below the subsistence poverty line. During the 1979-85 period, absolute poverty increased by 40 percent; some reports indicated that absolute poverty had spread among as many as 65-75 percent of the population in 1988. According to the IMF, 53 percent of Iranians still live below the poverty line.

Health conditions outside major cities are poor. Many small towns and rural areas suffer from unsanitary conditions and a shortage of medical personnel and facilities. The infant mortality rate remains a serious problem; it is very high by world and Middle Eastern standards, although it has been reduced significantly (26 deaths per 1,000 live births in 1998, down from 91.6 during 1980-85 and 50 during 1991-95). Although primary education is compulsory for 5 years, many rural children never attend school because of either parental objection or a lack of facilities. The secondary-school system in Iran is relatively underdeveloped, and it serves for the most part to prepare small numbers of students for university-level education. In order to improve the situation for the poorest segments of Iranian society, the government is considering an anti-poverty program comprising expanded provision of food, clothing, health care, education, social security, and bank credits to these people.

WORKING CONDITIONS

The highly fluid nature of Iran's labor market and the large size of the informal services sector make accurate estimates of employment levels difficult. A census, conducted in 1991, recorded 25.2 percent of the 57.8 million population as economically active, and 22.3 percent as in employment, suggesting that around 11 percent of the workforce was unemployed. However, the census ignored the fact that most Iranian adults must hold 2 or even 3 jobs in order to provide for the rest of their family. The government put unemployment at 2 million in 1997-98, equivalent to 12.1 percent of the workforce and up sharply from the previous year's estimate of 9.1 percent. Given the rapid population growth experienced over the past 20 years, together with a real reduction of government resources aimed at job creation, it is likely that even this estimate is too conservative. According to the Economist Intelligence Unit (EIU), an accurate estimate for unemployment figures lies between 14 percent and 18 percent, while the IMF suggests it may be as high as 25 percent.

High inflation has been another characteristic of the Iranian economy since the early 1970s and played a crucial role in the industrial action that presaged the 1979 revolution. In recent years changes in the exchange rate, the gradual removal of subsidies, and the suppression of imports have all contributed to rising prices and eroded real wages . Some evidence indicates that inflation has dropped steadily since 1995, settling in a range of 22-30 percent, according to sources from the International Monetary Fund (IMF).

The Labor Code empowers the Supreme Labor Council to establish annual minimum wage levels for each sector and region. The minimum wage has been inadequate for some years by the government's own admission. Officially the minimum wage should be sufficient to meet the living expenses of a family and should take inflation into account. The daily minimum wage was raised in March 1997 to US$2.80 (8,500 rials). This wage apparently is not sufficient to provide a decent standard of living for a worker and family. Information on the percentage of the working population covered by minimum wage legislation is not available. Private-sector personnel in contrast are better off.

Formally, workers are granted the right to establish unions; however, the government does not allow independent unions to exist. A national organization known as the Worker's House, founded in 1982, is the sole authorized national labor organization. The leadership of the Worker's House coordinates activities with Islamic labor councils, which are made up of representatives of the workers and 1 representative of management in industrial, agricultural, and service organizations of more than 35 employees. These councils also function as instruments of government control, although they frequently have been able to block layoffs and dismissals. In 1993, the parliament passed a law that prohibits strikes by government workers. Nevertheless, strikes occur, apparently in increasing numbers. Reports over the last 2 years included strikes and protests by oil, textile, electrical manufacturing, and metal workers, and by the unemployed.

One unforeseen result of the revolutionary government's drive for gender segregation has been the improvement in women's education. As men and woman are expected to work separately, the demand for female professionals has risen markedly, boosting the number of female graduates. The war effort contributed to this process, as women took the places of men required for military service. In 2000, there were more women enrolled in universities than men. In tertiary education, vocational subjects such as computer studies and engineering are becoming increasingly popular, while the quality of language tuition is improving. These trends will undoubtedly improve the qualifications of the local population from the point of view of foreign investors, but they also present the government with higher demands for skilled job-creation and increase the pressure to cut bureaucratic and ideological obstacles to a free labor market.

COUNTRY HISTORY AND ECONOMIC DEVELOPMENT

4000 B.C. Ancient settlements develop in the Caspian region and on the Iranian plateau.

2000 B.C. Aryans arrive and split into the Medes and the Persians.

550 B.C. Cyrus the Great founds the Persian Empire.

200 A.D. After periods of Greek and Parthian rule, the Sassanids take power and rule until the Arab final victory in 641.

1502. The Safavid dynasty is established and continues to rule until 1736.

1904. The Qajar dynasty, founded by Fath Ali Shah, comes to an end.

1906-08. Iran's modern history begins when the Constitutional Movement achieves the declaration of a constitution and the establishment of a parliament in 1906 and when oil is discovered in 1908.

1919. The country is occupied by Russia and Great Britain during World War I; it signs a trade agreement with Great Britain in 1919, in which Britain formally re-affirms Iran's independence.

1921. After Iranian recognition of the USSR, the Soviet Union withdraws occupation forces from Iranian territory; Reza Khan, an army officer, establishes military rule and subsequently becomes shah in 1925 and founder of the new Pahlevi dynasty.

1941. Iran is occupied by British and Soviet forces at the start of World War II, prompting the shah to abdicate in favor of his son, Muhammad Reza Shah Pahlevi.

1943-46. Iran is formally guaranteed independence by the United States, Great Britain, and the Soviet Union in 1943; however, political instability delays the withdrawal of troops until 1946.

1951-53. The National Front Movement under Prime Minister Mossadeq nationalizes the oil business and forms the National Iranian Oil Company (NIOC); Mossadeq is subsequently ousted from power with the help of U.S. covert activity, and an international consortium operates Iran's oil facilities, with profits shared equally between Iran and the consortium.

1960-73. The shah's modernization programnamed the "white revolution"transforms the country and its economy, with a dramatic land reform, huge investments in infrastructure, and continued economic growth.

1973. The shah gives the NIOC full control over Iran's oil industry, placing the international consortium in an advisory capacity. Iran does not participate in the Arab oil embargo in September.

1979. After years of political repression and with a growing divide between rich and poor, popular protests oust the shah in the Islamic Revolution of 1979. Ayatollah Khomeini becomes the figurehead of the revolution and subsequently the Supreme Leader of the country until his death in 1989.

1980. On 22 September, Iraqi troops invade Iran, triggering a prolonged and devastating war that lasts until Khomeini accepts a UN-brokered cease-fire in July 1988.

1989. The Ayatollah Khomeini is succeeded by Iran's president, Ali Khamenei. Ali Akbar Rafsanjani becomes president and is re-elected in 1993. Iran begins to re-build its economy.

1997. Mohammed Khatami, a moderately liberal Muslim cleric, is elected president and becomes the figure-head for the country's reformist movement; economic reforms begun under Rafsanjani continue.

FUTURE TRENDS

The Iranian government has set itself the priority of achieving political reform, believing that its victory over conservative forces in the February 2000 parliamentary elections gives it the authority to deal with what President Khatami has described as Iran's "sick economy." Despite good intentions, President Mohammed Khatami has done little to change the overall pattern of Iran's macroeconomic policy. While many observers hoped that the new president would speed up the reform process, he has been bothered by entrenched political opposition in the Majlis (parliament) and pressure from the powerful bonyad (religious foundations) and by external debt repayments. Pending the outcome of the political battle, the government has to deal in the short term with a chronically weak currency, high unemployment, and the arrival of 800,000 young people on the job market every year. The lack of economic opportunities and social freedom has led to growing discontent, especially among young Iranians, and may result in extended civil unrest and an increase in emigration. Returns in the June 2001 presidential election gave President Khatami the thumping victory which is needed to revive the economic, political, and social reform process.

A key factor in Iran's economic prospects is whether the country will be able to break its international isolation which will have to be overcome in order to integrate the country into the world economy and to bring much-needed foreign investment into the Islamic Republic. This depends in particular on the lifting of U.S. sanctions. Signals show that Iran's rehabilitation is a desired U.S. objective if the reformists carry out their agenda. Iran's further international and domestic economic progress, therefore, depends in large part on the outcome of the political contest between reformers and conservatives in Tehran. Economic development will also depend on the success of privatizing enterprises in the inefficient state sector, to which about 60 percent of the current budget expenditure is allocated in subsidies and other support. Finally, to have the financial means to cope with needed reforms Iran will try to keep oil prices stable on a high level.

DEPENDENCIES

Iran has no territories or colonies.

BIBLIOGRAPHY

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Economist Intelligence Unit. Country Profile: Iran. London: Economist Intelligence Unit, 2001.

Esposito, John L., and R. K. Ramazani. Iran at the Crossroads. Basingstoke: Palgrave, 2001.

Iqbal, Zubair, et al. Iran: Recent Economic Developments. IMF Staff Country Report 00/120, September 2000.

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U.S. Central Intelligence Agency. World Factbook 2000. <http:// www.odci.gov/cia/publications/factbook/index.html>. Accessed August 2001.

Markus R. Bouillon

Ralph Stobwasser

CAPITAL:

Tehran.

MONETARY UNIT:

Iranian rial (IR). One Iranian rial equals 100 dinars. There are coins of 1, 5, 10, 20, and 50 rials and notes of 100, 200, 500, 1,000, 2,000, 5,000, and 10,000 rials.

CHIEF EXPORTS:

Petroleum (80 percent), carpets, fruits, nuts, hides, steel.

CHIEF IMPORTS:

Machinery, military supplies, metal works, foodstuffs, pharmaceuticals, technical services, refined oil products.

GROSS DOMESTIC PRODUCT:

US$347.6 billion (purchasing power parity, 1999 est.).

BALANCE OF TRADE:

Exports: US$12.2 billion (f.o.b., 1998). Imports: US$13.8 billion (f.o.b.,1998).