A country with a substantial economic potential, Iran witnessed rapid economic growth during the reign of Shah Muhammad Reza Pahlavi. Development of its extensive agricultural, mineral, and power resources was financed through oil revenues. The traditional land tenure system, under which farmers were sharecroppers, was replaced through a land reform program inaugurated in 1962. In addition to carpets, Iran produced a variety of consumer goods and building materials. Oil, however, became the lifeblood of the economy. With the astonishing growth of its oil revenues, Iran became a major world economic power, whose investments helped several industrialized countries pay for their oil needs during the 1970s.
The economy changed drastically after 1979. The war with Iraq, which curtailed oil exports, coupled with the decrease in the price of oil, especially in 1986, sent oil revenues spiraling downward from $20.5 billion in 1979 to an estimated $5.3 billion in 1986. This forced annual GDP growth down from 15.2% in 1982 to 0.2% in 1984; GDP was estimated to have fallen by 8% in 1986. The war's drain on the state budget, the drop in oil prices, poor economic management, declining agricultural output, an estimated 1987 inflation rate of 30–50%, and large budget deficits combined to put enormous strains on the economy.
After Iran accepted a UN cease-fire resolution in 1988, it began reforming the economy with the implementation of the Islamic republic's first five-year social and economic development plan for the years 1989–l994. The plan emphasized revitalizing market mechanisms, deregulating the economy, and rebuilding basic infrastructure. These reforms led to economic growth and lowered budget deficits. GDP grew an average 7% a year in real terms over 1989–92. The general government deficit was reduced from 9% of GDP in 1988 to an estimated 2% in 1992. The inflation rate decreased from 29% in 1988 to around 10% in 1990, but had redoubled to 20% in 1991 and 1992.
Other impacts of the first plan included a growth in agricultural production of 5.6%; industrial production of 15%; water, gas and electricity of 18.9%; and transport of 11.9%. In 1991, the government adapted a structural adjustment program similar in nature to the kind the IMF imposes on developing nations in exchange for aid. Iran, however, did not need aid, but rather imposed the adjustments on itself in an effort to liberalize its economy, making it more market-oriented while still retaining an authoritarian regime. The structural adjustments advocated by then-president Rafsanjani included privatizations of state-owned enterprises, deregulation, cutting government subsidies, and encouraging foreign investment. While marginally well-intentioned, the Rafsanjani reforms have led to little economic improvement. Privatization was especially ineffective. Political corruption and rampant cronyism led to many enterprises ending up in the hands of a small clique of well-connected elites. By 1997, 86% of Iran's GDP came from state-owned businesses. Deregulation has also hit considerable snags. In 1996 alone, more than 250 regulations on imports and exports were issued by 24 ministries—many of them repetitive or contradictory.
In April of 1995, the United States imposed trade and investment sanctions against Iran, in reprisal for what the United States believed was Iran's continued support of international terrorism. This move, unduplicated even by the US's strongest allies, has had some economic impact—most notably a precipitous drop in the value of the rial, which the government was forced to prop up.
In 1994 the second five-year plan, running through 1999, was implemented. Its priorities were completion of infrastructure and development projects and an increase in social spending. By 1996, Iran's economy was growing rather steadily at about 4.2%. Inflation, however, continued to be a problem. In 1995 it was above 50% but by the next year it had been brought somewhat under control, having been cut nearly in half to 27%. In 1998, the inflation rate was reported at 24%, and the unemployment rate was at 30%. Annual GDP growth occurred at a rate of 4.7% between 1988 and 1998, but fell to 1.7% in 1998 alone, and was at 2.3% in 1999. The third five-year plan, implemented from 2000 to 2005, was to privatize at least six major state-owned enterprises such as communications and tobacco, and at least 2,000 smaller state-owned firms.