Khatami is committed to social and political reform, and his very election was the result of the desire for social reform in Iran. Above all, he interprets Islam in terms of pluralism and openness. Protecting civil liberties and establishing the rule of law constitute two major pillars of his social and cultural agenda. Khatami's reform programs, while receiving popular support, came under fire from conservatives, who closed a number of liberal newspapers in early 1999. By early 2000, the Khatami government had enacted greater press freedom, and newspapers played a key role in the public debate on the role of religion in politics leading up to the parliamentary elections. Iran's hard-line Council of Guardians, however, has stymied many of Khatami's initiatives, and in 2001, the Council and its allies in the Judiciary began cracking down on liberal politicians and publications. Since being reelected in 2001, Khatami and the reformist Majlis have passed several laws that have been nullified by the Council, including one protecting foreign investment in Iran and one allowing women the right to study overseas. International observers see a deepening divide between reformers and hardliners and there is great uncertainty as to whether Khatami will be able to navigate the middle course between the two, avoiding a major political crisis. In the spring of 2001, reformers suffered a significant setback with the arrest of dozens of prominent political moderates, including two former members of parliament and a former mayor of Tehran.
Khatami's economic policies follow the previous government's commitment to industrialization. The government's first five-year plan was begun after the Persian Gulf War and was responsible for the creation of hundreds of industrial and infrastructure projects. Because his views are similar to those of the outgoing president, Ali Akbar Hashemi Rafsanjani, he initially had in Rafsanjani a powerful ally in his struggle against the conservatives. Rafsanjani ran for parliament in the 2000 election and was soundly defeated. Even after his defeat, Rafsanjani continued to hold the influential position of chairman of the Expediency Council.
Khatami advocates a modified version of the market-oriented economy, buttressed by domestic production. He has sought to address the problems of a rising cost of living, inflation, and a tight job market by curbing the power of state-supported monopolies and expanding economic ties with Western countries. In financing his development plans, Khatami faces the liability of Iran's dependence on oil revenues (which are subject to fluctuations in global prices) for about 80% of foreign exchange income. Corruption and bureaucratic hurdles are further challenges he needs to deal with in order to attract foreign and local investors. Khatami maintains that no country can achieve social justice without having a sound economic development plan.