Ata ŞahitAmong Middle Eastern countries, Iran has consistently remained at the centre of international media attention due to its nuclear programme and network of proxy forces.
What has gone under the radar is the hardships faced by the Shiite-majority nation on the economic front, with most welfare indicators falling to record lows.
Indeed, a review of Iran’s economic performance over the past two decades reveals a persistent pattern of decline.
This raises a critical question: What do these indicators reveal, and why has Iran been experiencing a progressively deteriorating economic trajectory?
What do macroeconomic indicators say?
According to the World Economic Outlook report published by the International Monetary Fund (IMF) in October 2024, Iran’s nominal Gross Domestic Product (GDP) was estimated at approximately USD 434.24 billion as of 2024.
However, when this figure is considered in light of the country’s population of nearly 90 million and various welfare indices, its significance diminishes considerably.
In fact, Iran has fallen to 117th place globally in terms of GDP per capita. Moreover, its position in the Legatum Prosperity Index—which offers a more nuanced assessment of the structural components of prosperity—further reflects the country’s unfavourable situation, ranking 126th out of 167 countries.
Other macroeconomic indicators related to the Iranian economy paint a similarly bleak picture.
In recent years, the Iranian rial has experienced a sharp depreciation against the US dollar, with the black-market exchange rate exceeding 920,000 rials per dollar in 2024.
The inflation rate surpassed 40 percent in the same period, while soaring food prices and diminishing access to basic necessities have significantly deteriorated living standards.
Official data indicate that, as of 2024, approximately 33 percent of the Iranian population lives below the poverty line; however, some sources suggest that this figure exceeds 50 percent.
Additionally, the youth unemployment rate has reached 19.4 percent, with half of men aged 25 to 40 being unemployed and not actively seeking work.
As of 2024, despite possessing substantial hydrocarbon reserves, Iran has been facing a severe energy crisis. The country has experienced an electricity shortfall of approximately 14,000 megawatts—an amount that represents a significant portion of its total generation capacity.
During the winter months, heightened demand led to a failure to meet roughly 25 percent of the nation’s daily natural gas requirements. This supply deficit has particularly impacted the industrial sector, resulting in production losses estimated between 30 to 40 percent.
At the same time, depletion of water resources has become increasingly evident, most notably in the capital, Tehran, where the major dam reservoirs have reached critically low levels.
In this context, the water volume in the city’s primary reservoirs has declined to as low as 7 percent of their full capacity.
In 2024, Iran grabbed global headlines multiple times. From tit-for-tat attacks with Israel to the assassination of a Hamas leader in Tehran and the death of its president in a helicopter crash. The country ends a tumultuous year as it continues to grapple with an economic crisis. This has been compounded by sanctions related to its nuclear program and regional policies. Reza Hatami reviews last year's events in this report from Tehran.
The most important problems
One of the most persistent macroeconomic challenges shaping Iran’s economy over the past two decades has been structurally entrenched high inflation.
This has not only undermined price stability but has also adversely affected income distribution, social welfare, and economic predictability.
Since 2007, a combination of fiscal indiscipline, unchecked monetary expansion, and failed subsidy reforms has rendered inflation a chronic issue.
In the 2010s, international sanctions further exacerbated this trend by triggering currency crises and exposing the vulnerabilities of Iran’s import-dependent economic structure.
Although the nuclear negotiations provided a brief period of relative economic stability, the absence of structural reforms prevented long-term recovery. Subsequent developments, such as the 2018 withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and the dismantling of the subsidy system, intensified inflationary pressures.
Despite the implementation of tight monetary policies in 2022 and 2023, inflation remained within the 40–50 percent range—indicating that its primary drivers are not demand-side pressures but rather fiscal imbalances and supply-side constraints.
The sharp increases in prices for essential goods and services—particularly food, housing, and energy—have significantly eroded purchasing power, thereby deepening socioeconomic inequality.
Consequently, the fight against inflation in Iran is a multidimensional issue that cannot be addressed through monetary policy alone. It requires comprehensive and institutionally grounded structural reforms.
Over the past two decades, one of the most pressing structural issues facing Iran has been its inability to generate sufficient employment opportunities, despite a young and growing population.
In a country where individuals aged 15 to 34 account for approximately 45 percent of the total population, the labour market has been unable to absorb this demographic pressure. While the population increased by 8.4 million, the number of people employed lagged far behind.
Particularly, millions of university graduates remain excluded from the labour force, representing an idle human capital that lies dormant outside the formal economy.
Despite substantial oil revenues, Iran has failed to develop productive sectors capable of creating sustainable employment, as public and private resources have largely been diverted toward consumption and imports.
The expansion of higher education, although significant in quantitative terms, has not been aligned with the qualitative needs of the labour market, thereby exacerbating the issue of educated unemployment.
A long-term analysis of Iran’s economic development trajectory also reveals a chronic structural weakness in the field of foreign trade.
In the 1980s and 1990s, the country pursued an ideologically driven policy of economic self-sufficiency and autonomy, which deprioritised integration with the global economy.
This inward-looking orientation was compounded in the 2010s by the imposition of international sanctions, which significantly constrained Iran’s foreign trade capacity.
As a result, the country’s influence in regional logistics and energy markets has diminished, while its industrial sector has remained largely excluded from international competition.
Consequently, Iran has missed out on opportunities for technological modernisation and foreign direct investment (FDI). The increasing reliance on a limited number of trading partners has further exacerbated economic vulnerability, constituting a structural risk to macroeconomic stability.
In this context, Iran’s trade-related challenges go well beyond the scope of technical sanctions alone. The effectiveness of any long-term development strategy will depend on the construction of a globally competitive and outwardly integrated economic architecture—one free from ideological constraints.
Historically, Iran’s relationship with the global economic system has been shaped primarily by trade, centred on crude oil exports and the importation of manufactured goods.
In effect, Iran has developed a largely short-term, trade-based external economic model reliant on petroleum exports. Its persistent inability to attract FDI has not only hindered integration into global capital flows but also exposed deeper structural deficiencies.
Government policies that aimed to prioritise the import of productive inputs over consumer goods have likewise fallen short of supporting a long-term, production-oriented capital structure.
While many emerging economies have leveraged FDI to drive export-led industrialisation and rapid growth, Iran has remained on the margins of this transformation—a situation compounded by a lack of transparency, weak property rights protections, and underdeveloped institutional infrastructure.
At a time when global capital flows are becoming increasingly diversified both geographically and sectorally, Iran remains systemically excluded and, despite its significant growth potential, has failed to present itself as an attractive market for international investors.
Why has Iran lagged behind?
The reasons behind Iran's economic underdevelopment are directly related not only to external factors but also to the weakness of internal dynamics.
The country's failure to achieve its development goals is rooted in unrealistic planning, structural deficiencies, political and economic uncertainties, and a lack of institutional capacity.
While Iran set ambitious goals, such as high growth rates and a transition to a non-oil economy within its 20-year development vision, it has been deprived of the strategic infrastructure needed to support these objectives.
In particular, its capacity to attract direct foreign investment, a key prerequisite for economic growth, has remained weak due to issues such as a lack of transparency, property rights concerns, restrictions on access to the international financial system, and political instability.
The Iranian economy still presents a largely oil-dependent, single-product structure, making it highly vulnerable to external shocks, such as fluctuations in global prices and sanctions.
While regional countries have advanced with an outward-facing model by increasing economic diversification and strengthening the private sector, privatisation processes in Iran have failed due to corruption, legal uncertainties, and management weaknesses.
The insecurity of the investment environment, exchange rate fluctuations, and chronic inflation have further weakened both domestic and foreign investors' interest in the country, narrowing the financial base for economic growth.
On the other hand, Iran has been unable to fully leverage its human capital. Due to quality issues in higher education and a mismatch with the labour market, a significant portion of its young, educated population has been lost, with brain drain becoming a major loss for the country.
The education system and R&D infrastructure have not been able to provide the necessary dynamism for technology production and innovation, creating another barrier to economic transformation.
International sanctions have significantly weakened Iran's integration with the global economy.
Excluded from the global trade and financial systems, Iran has lagged not only in accessing capital and technology but also in key areas such as reducing production costs, enhancing competitiveness, and gaining market access.
In this context, international isolation stands as one of the most important external reasons for Iran's inability to capitalise on its economic potential.
Iran’s share in global exports has decreased to 0.23 percent, and various welfare indices indicate that the country is facing poor conditions.
A close examination of Iran's economic underdevelopment reveals that it is rooted in multifaceted and structural causes.
Political stability, governance quality, legal transparency, and international cooperation emerge as the primary contributing factors.
For Iran to overcome this impasse, it requires deep reforms not only in the economic realm but also at the institutional and political levels.
